Overview of Business Performance - Investis

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Overview of Business Performance including ILIM, were 2.0% in 2007 (2006: 2.4%). The PVNBP margin is calculated as follows: 2007 2006 % % Life 2.9 3.1 Investment (ILIM) 0.7 1.1 2.0 2.4 The internal rate of return achieved on new business sales, excluding ILIM, was 13.3% which compares to 12.1% achieved in 2006. The average payback period 3 across the group’s life product set was 6 years. The consolidated internal rate of return achieved on new business sales, including ILIM, was 14.3% which compares to 13.2% achieved in 2006. In-force Business The expected in-force return represents the unwind of the risk discount rate and the growth in these profi ts refl ect very strong underlying growth in the portfolio. The expected return on the net worth, which relates to earnings on shareholder assets calculated by reference to the assumed long term rate of return on property and equities and the actual return on short term cash, increased to a29m from a26m mainly due to a higher yield achieved on cash assets as euro rates increased. Experience variances continue to be positive at a10m compared to a14m in 2006 with particularly strong risk experience achieved in both mortality and morbidity. Assumption changes, largely refl ecting continued unit cost productivity gains and good risk experience, were a positive a35m compared to a17m in 2006. Overall the assumptions underlying the embedded value continue to be prudent. Costs Costs within the life company continue to be tightly managed. Overall, costs grew 7% to a225m in 2007 from a210m with the principal driver of this growth being underlying salary infl ation. Banking Operating Review permanent tsb, the group’s banking division has a strategic objective of becoming the leading provider of personal banking services in Ireland. The bank continues to follow a multichannel distribution strategy incorporating a broadly based branch and agency network, a direct sales force and extensive broker support supplemented by telephone and internet banking facilities. A major focus for the bank in 2007 was the continued implementation of its ambition to make permanent tsb the largest retail bank in Ireland through aggressively targeting the current account market as part of its customer acquisition strategy. In 2007, the 3 Payback period is calculated as the number of years it takes to recover initial outlay. bank continued to increase the total customer base notwithstanding vigorous competition from other banks promoting similiar product offerings. 2007 also saw the bank defend its market share in the Irish mortgage market, protecting substantially all of the market share gains it won in 2006 notwithstanding the fi ercely competitive mortgage market place throughout 2007. Notwithstanding the slowdown in the Irish housing market in 2007 and the impact of credit market turbulence the group’s banking business performed extremely well with underlying pre-tax profi ts growing 14% before the exceptional provision of a11.7m in respect of solicitor fraud case previously noted. Although gross new lending declined by 3% to a12.4bln from the a12.9bln achieved in 2006 principally due to a reduction of 19% in new Irish residential mortgages, total asset balances grew 16% to a39.2bln (2006: a33.8bln). Lending Growth Total loans and receivables to customers increased 16% to a39.2bln (2006: a33.8bln) which represents a very strong performance given the economic backdrop. The growth in the balances over principal business lines was as follows: 2007 2006 Growth bbln abln % Mortgage lending ROI * 26.3 23.1 14 Consumer fi nance 2.3 2.0 15 Commercial lending 2.3 1.9 24 30.9 27.0 15 Mortgage lending - UK (£Stg)* 6.1 4.6 31 Total lending - am 39.2 33.8 16 * including securitised mortgages After ten years of spectacular growth the Irish housing market slowed in 2007. Overall, a total of over 78,000 new units were completed in 2007, a 16.5% reduction on the record levels achieved in 2006, while average house prices came back some 6% - 7% in the calendar year. Refl ecting this softening in the market, gross new Irish mortgages issued by the group at a7.0bln showed a reduction of 19% on the record levels of a8.7bln issued in 2006. Against this backdrop Irish residential mortgages outstanding increased 14% to a26.3bln compared to a23.1bln at year end 2006 with part of the increase in the portfolio being due to a reduction in the level of early redemption activity (notwithstanding some extremely aggressive switcher offerings from competitors), refl ecting management actions in this area. 19
20 Overview of Business Performance In the UK the buy to let sector, in which the group’s centralised mortgage lender Capital Home Loans principally operates, was extremely buoyant with new mortgages issued growing 51% to Stg£2.2bln from Stg£1.5bln in 2006. Refl ecting the strong growth in new issues the UK mortgage portfolio increased 31% to Stg£6.1bln from Stg£4.6bln in 2006. New consumer fi nance loans issued increased 15% to a1.3bln from a1.2bln in 2006 as a result of market share gains on the back of increased distribution reach in the new car fi nance arena. The portfolio grew 15% to a2.3bln (2006: a2.0bln). New commercial lending of a726m was in line with 2006 (a753m) and refl ects a slowdown in opportunities in this sector in the latter part of 2007 particularly in relation to geared property investment transactions. The portfolio grew 24% in 2007 to a2.3bln (2006: a1.9bln). Customer Acquisition Customer account balances at 31 December 2007 totalled a13.6bln (2006: a13.6bln). Throughout 2007 the bank continued to maintain its focus on the acquisition of new current accounts and the strategy in this area continued to be extremely successful with 69,000 new accounts opened during the year, following on from the 68,000 new accounts opened in 2006. Banking Financial Review The pre-tax results of the group’s banking business for the year ended 31 December 2007 are set out below: 2007 2006 bm am Net interest income 500 429 Other income 44 48 Trading income 5 12 549 489 Administrative expenses (302) (273) Impairment provisions (28) (14) Operating profi t before tax 219 202 Overall pre-tax profi ts in the group’s banking business increased 8% to a219m (2006: a202m). As noted previously the 2007 outcome includes a specifi c provision of a11.7m in respect of the fraudulent activities of a rogue solicitor and, excluding this once off item, underlying banking profi ts were ahead 14%. Net Interest Income & Margins Net interest income increased 17% to a500m from a429m due to strong underlying growth in loans and receivables to customers which were ahead 16% to a39.2bln (2006: a33.8bln). This balance sheet growth helped offset the impact of a reduction in the net interest margin to 117bps from 119bps in 2006. The key movements in the net interest margin in 2007 are set out below: Margin 2006 2007 BPS 119 Funding Mix & Basis Risk (5) Asset Re-pricing (6) Liquidity 4 Liability Margins 4 Treasury 1 Margin 2007 117 In addition to the ongoing impact of increasing wholesale funding levels in the balance sheet, which has been a feature of the business over the past number of years, the margin was negatively impacted by basis risk in the Irish mortgage portfolio as interest rates increased during the year. This basis risk impact was magnifi ed in the second half of the year due to the increased cost of wholesale funding as a result of the credit market crisis. The margin was further dampened by the decision in late 2006 to reduce the back book margins in certain products in response to competitor actions. These negative margin impacts were partially offset by the reduction of the quantum of liquid assets which the bank is required to hold to meet regulatory requirements in the fi rst half of 2007 following the introduction of a new cash fl ow based liquidity protocol and, by improved liability spreads as euro interest rates increased. Other Income Other income of a44m compares to a48m earned in 2006. The reduction of a4m principally refl ects growth in fees and commissions payable due to the costs of internal securitisation transactions designed to generate eligible collateral for the ECB repo facility. Given the nature of these transactions it was decided to write these costs off as incurred rather than amortising them over the life of transactions as permitted under the accounting standards. Other income excludes the contribution from Bancassurance sales generated through the bank which are included in the pre-tax profi t reported in the group’s life assurance activities. Sales of life and pensions products through the bank in 2007 were a105m, up from a88m in 2006, a 19% increase. The pre-tax profi t achieved on the Bancassurance book of life business was a64m in 2007 a 16% increase on the 2006 outturn of a56m. Trading income in 2007 was a positive a5m compared to a12m which arose in 2006. The trading result in both years principally arose due to the group pre-hedging
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Overview of Business Performance - Investis

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