Operating and Financial Review

Transcription

1 Operating and Financial Review Banking & Other Activities m m Net interest income Other operating income Administrative expenses (244.4) (205.3) Provision for bad and doubtful debts (13.3) (11.7) Pre-tax contribution The pre-tax contribution generated by the group s banking and other activities was 97.4m, an increase of 7% over 2001 ( 91.1m). Reflecting strong growth in new business, the contribution from retail banking operations increased by 14% to 89.9m (2001: 78.9m). This was offset by a reduction in the contribution (net of capital funding costs) from Treasury to 13.2m from 17.2m which reflected a higher average level of Tier 2 debt in Net interest income in the year increased by 16% to 325.2m from 280.4m in 2001, reflecting a full year contribution from the business of the TSB, (which was consolidated from April 2001, the date of acquisition), and strong underlying growth in lending due to robust new business growth and good underlying margins. Total loans and advances to customers* at 31 December 2002 increased by 13% to 14.6bln when compared to balances outstanding at 31 December 2001 of 12.9bln. Total gross new lending business increased by 25% to 4.5bln compared to 3.6bln issued in The growth in balances over the principal business lines is set out in the table below: The group s UK Banking operations, principally Capital Home Loans, had a very successful year with mortgage balances outstanding increasing by 18% to Stg 1.3bln (2001: Stg 1.1bln) and gross new mortgage issues increasing by 27% to Stg 441m (2001: Stg 346m). Due to the impact of exchange movements, the 18% growth in UK Stg residential mortgages, when translated into euro, reduces to a growth of 11% on 2001 levels. The consumer finance portfolio, which predominantly represents motor vehicle finance loans, grew by 2% to 1.3bln with new business issues growing by 17% to 657m from 560m in This was an extremely strong performance against the back drop of a 6% fall in the market for new car sales. Total Lending Growth m m % Mortgage lending ROI 10,087 8, Consumer finance 1,312 1,289 2 Commercial lending 1,255 1,169 7 Total lending ROI 12,654 11, Mortgage lending UK (Stg m) 1,286 1, Total lending - m 14,631 12, The net interest margin for the year was 1.78% which compares to a margin of 1.90% for the full year Declining euro interest rates during the year led to some downward pressure on margins due to the impact of deposit rate floors. In addition, the strong level of growth in asset balances and the resultant requirement to largely fund this growth in the wholesale markets diluted margins. In the Republic of Ireland, the underlying demand for residential mortgages remained strong throughout the year. Mortgage balances increased by 16% to 10.1bln (2001: 8.7bln). Total gross new mortgages issued for the year were 2.8bln, a 28% increase on the 2.2bln issued in 2001 and the group believes that it has maintained its market share at around 24%. The commercial loan portfolio grew by 7% to 1.3bln with new business issued ahead by 15% to 316m (2001: 274m). Resources continued to grow strongly with customer account balances outstanding increasing by 8% to 10.2bln compared to 9.5bln in Whilst growth in commercial deposits was strong, a significant part of this increase was driven * Unless otherwise indicated, all loans and advances balances include securitised mortgage assets. 12 Irish Life & Permanent plc Annual Report and Financial Statements 2002

2 by growth in credit balances in current accounts. Other operating income of 29.9m compares to 27.7m in Fees and commissions payable, which are offset against other income, increased by 32% to 27.4m from 20.7m in 2001 reflecting the increase in mortgage new business levels and the cost of mortgage indemnity guarantee bonds which, from the beginning of 2002, was borne by the bank. Excluding these items, other operating income increased by 18% to 57.3m from 48.4m in 2001, as a result of the full year consolidation of the business of the former TSB combined with strong demand for the group s fee based banking products. The revenue enhancement opportunities presented by the acquisition of TSB, together with an increase in productivity within the bancassurance channel, led to sales of life and pensions products in the banking division growing by 50% to 85.7m in 2002 from 57.1m in Included in this total, were 54m (2001: 24.7m) of sales of low margin SSIA accounts. In line with the group s accounting policies, earnings arising on bancassurance sales are reflected in the pretax contribution within the group s life assurance activities. The pre-tax contribution derived from the bancassurance book for the year ended 2002 was 39.8m, an increase of 26% over the 2001 level of 31.6m. Administrative expenses of 244.4m compare to 205.3m in 2001 with the increase being principally driven by the full year consolidation of the TSB acquisition. Excluding this impact, underlying cost growth in 2002 was 3% with synergies achieved on the integration of TSB permanent tsb s OnePlan product has revolutionised the mortgage market in Ireland. The mortgage with a chequebook has demonstrated the new bank's commitment to driving innovation in this sector. Irish Life & Permanent plc Annual Report and Financial Statements

3 Operating and Financial Review continued of 8m serving to reduce underlying cost growth. The charge for bad and doubtful debts of 13.3m represents an increase of 14% over the 2001 charge and is broadly in line with underlying asset growth. The group continues to apply conservative credit criteria in its lending policies and the quality of the loan portfolio remains high. Life Assurance Activities - Republic of Ireland/ UK Operations The pre-tax contribution from the group s ROI/UK life assurance activities for the year ended 31 December 2002 is summarised in the table below: assumptions. The principal reason for the increase in experience variances when compared to the prior year was that the 2001 variances of 23.9m included the negative impact of once-off costs associated with significant investment in point of sale technology within the retail and corporate businesses. The level of contribution achieved and new business generated by the group s banking division, permanent tsb, during 2002 was particularly impressive given the distraction necessarily encountered in the business due to the TSB integration programme and the launch of permanent tsb. The launch of the new bank was successfully completed during the year and the group s plans in relation to permanent tsb are progressing on target. ROI/UK Life Assurance Activities m m Contribution from in-force business Unwind of discount rate Experience variances Operating assumption changes Expected investment return Other income Pre-tax contribution New business contribution Total pre-tax contribution Total annualised cost savings achieved in the period to 31 December 2002 were 20m with savings of 8m being realised in the 2002 reported costs. In addition to its previously announced anticipated annualised cost savings of 27m and revenue synergies of 20m - 25m, the group has identified additional cost saving opportunities and now anticipates annualised cost savings of 29m. The group remains on track to deliver these benefits by the end of The pre-tax contribution from the group s ROI/UK life assurance activities increased by 13% from 195.2m in 2001 to 220m in The contribution from the group s in-force business increased by 18% to 158.9m from 134.8m in The unwind of the discount rate contributed 91.7m (2001: 83.1m) to this total with the 10% increase year on year arising due to growth in the in-force book reflecting strong growth in new business volumes. Experience variances in 2002 remained strongly positive at 31.7m as actual experience across all principal headings continued to outperform the embedded value Changes in operating assumptions led to a positive contribution of 22.2m in 2002 principally relating to changes in mortality assumptions reflecting ongoing positive experience. This compares with a positive contribution of 16.1m in 2001, principally relating to changes in persistency and expense assumptions. The assumptions underlying the embedded value continue to be conservatively based and it is anticipated that experience against assumptions will continue to be positive. 14 Irish Life & Permanent plc Annual Report and Financial Statements 2002

4 The expected investment return is calculated by reference to the embedded value assumption for the long-term investment return on equities and property combined with the actual earnings on short-term cash. The expected investment return in 2002 of 5.1m compares to 1.7m in 2001, the increase reflecting a higher level of short-term cash held in 2002 arising from the receipt of the proceeds of the sale of the Industrial Branch business in February The contribution from new business of 61.1m compares to 60.4m in 2001 and reflects strong growth in new business sales, which increased by 25% to 417.6m from 335m in 2001, the positive impact of which was offset by lower margins due to changes in the product mix, principally sales of SSIA products. Life new business margins for 2002 were 14.6% (2001:18.0%), made up as follows: Life New Business Margins % % Life Operations Investment Management Within the group s life operations, 2002 sales included a high volume of comparatively lower margin SSIA sales ( 101.7m in 2002 against 65.8m in 2001) which was the principal factor in the reduction in the reported margin. The investment management division achieved a number of large ticket but low margin sales in 2002 and this served to dilute the overall reported margin. Complementing its direct sales force and broker networks, Irish Life (Retail) has developed Onesource, a unique franchise distribution channel. During 2002, sixty franchisees joined the Onesource team with many more expected over the coming year. Irish Life & Permanent plc Annual Report and Financial Statements

5 Operating and Financial Review continued New life assurance business for the group s principal life businesses was as follows: Retail Business Within the Irish retail business, sales increased by 15%. This was a very strong outturn when viewed in the context of the continued very weak investment markets which prevailed throughout the year and which led to a significant decline in demand for single premium investment products. To put this performance into context, it is worthwhile noting that in the four years since 1998, retail life sales have increased by 2.5 times with market share increasing from 9% to over 18% in the same period. Sales, particularly in the first half of the year, were boosted by the SSIA scheme which generated sales of 101.7m (2001: 65.8m). Bancassurance sales, as noted previously, increased by 50% to 85.7m compared to 57.1m in 2001 which was a very successful outturn. The successful growth of our bancassurance business which now accounts for 38% of retail sales leaves the retail business enjoying a very comprehensive choice of distribution channels. Our direct sales force accounts for approximately a third of sales and with productivity on a par with the best in Europe. Life New Business Change m m % Retail business Corporate business Investment management Irish Life International (14) Ireland UK (8) Independent brokers account for 30% of sales and our commitment to this channel has recently been recognised by the award of the Overall Service Award by the Irish Brokers Association - the first time Irish Life has won this important accolade. During the year, the Irish retail business commenced implementation of the Horizon Project which is designed to fundamentally redesign the business processes within this division. The principal objective of this major programme is to streamline business processes in order to generate operational efficiencies and increase sales productivity through leveraged use of proven technology. The programme, which is scheduled for completion in 2004, is proceeding on target. Elements of the technology are already in use and generating benefits the first new business release on the new operating platform is expected by the end of March Corporate Business Sales in the corporate business division which sells our life and pensions products to groups and companies, increased by 11% to 90.8m from 81.8m. This was a particularly strong performance as the 2001 result benefited from a number of once-off factors which did not recur in The key driver of the 2002 performance was strong growth in scheme increments and risk sales. Throughout the year, the corporate business division continued with its rolling investment programme which is focused upon improved customer service both at the point of sale and in subsequent servicing of their ongoing needs. This investment programme will ensure that the corporate business division will remain to the fore as the premier provider of group defined contribution pension plans in Ireland. Investment Management Full value sales (including off balance sheet) were 972m in 2002, a 79% increase on the 542m achieved in Sales in 2002 included the benefit of a small number of very large ticket but low margin sales which led to a reduction in reported margins. While investment markets were difficult during the year the group s consensus funds continue to perform well, while the comparative performance of the group s actively managed funds has continued to improve. 16 Irish Life & Permanent plc Annual Report and Financial Statements 2002

6 Post Balance Sheet Event Disposal of US Business On 28 February 2003, the group announced that it had reached agreement on the sale of its remaining operating business in the US, Guarantee Reserve Life Insurance Company. This company, which is focused on the US final expense market is to be acquired by Reassure America Life Insurance Company a wholly owned subsidiary of Swiss Re Life & Health America Inc. The consideration, which is payable in cash, is $121m adjusted for any change in the capital and surplus of the company from 30 June 2002 to the date of completion of the transaction. This compares to a carrying value in the group s accounts of $176m at 31 December No tax is estimated to be payable on the disposal. The transaction, which is subject to US regulatory approval is expected to complete in the second quarter of In accordance with generally accepted accounting practice the financial outcome of this transaction will be reflected in the group interim and annual financial statements in The decision to dispose of this business is in line with the group s strategic focus on consolidating its leadership position in the Irish market. On completion of the transaction, the group will have no direct operational involvement in the US. Irish Life (Corporate Business) develops life and pensions products for companies and group schemes including major schemes for employees in the public sector. Irish Life & Permanent plc Annual Report and Financial Statements

7 Operating and Financial Review continued Capital and Dividends At 31 December 2002, the group continued to be well capitalised with a tier 1 and a total capital ratio of 10% (2001: 12%). The liquidity ratio within the group s banking operations was 26% (2001: 25%). The reduction in the capital ratios from the 31 December 2001 level principally reflects the completion of the group s share buyback programme which is discussed further below. The solvency margin in Irish Life Assurance plc, the group s principal life assurance company was covered 1.7 times by available assets, at 31 December 2002; the reduction from the level reported at 31 December 2001 (2.1 times cover) principally reflected the sale of the Industrial Branch business and the distribution of surpluses to the bank to support the share buyback programme. As part of our ongoing process of increasing the efficiency of our balance sheet, during the year ended 31 December 2002 the group repurchased 10.7m shares for a consideration of 150m. The average price paid for these shares, all of which were cancelled, was (excluding stamp duty and commission). This buyback activity brought the total number of shares repurchased under the group s rolling share buyback programme to 28.7m shares with a total value of 367.1m, at an average price per share of (excluding stamp duty and commission). Of these shares, 5.4m (value 66.9m) were reissued to the TSB Employee Share Ownership Trust as part of the final consideration for the acquisition of TSB during the year ended 31 December The remaining 23.3m shares have been cancelled. The directors have proposed a final dividend of 33.2 cent per share. Subject to shareholder approval, the dividend will be paid on 28 May 2003 to shareholders on the register as at 25 April This final dividend will bring the total dividend for the year to 47.5 cent per share, an increase of 10% on the 2001 total dividend of 43.0 cent. The dividend is covered 2.3 times by total earnings and represents an approximate yield of 5.0% on the basis of the share price at the beginning of March We are committed to maintaining a strong capital position and to following a progressive dividend policy. We are helped in these objectives by the low risk nature of the group s businesses. Within the life divisions, over 75% of the business is unit linked and carries no market exposure for shareholders whilst the non linked book is matched largely by sovereign bonds of appropriate duration. The level of guarantees, outside of guarantees in relation to tracker products which are hedged externally, is minimal. Within our banking business, 82% of our loan assets are residential mortgages whilst over 95% of the total loan book is secured. As set out later, our treasury policy is conservative and market positions permitted are modest. Treasury and Credit Risk Treasury and credit risk throughout the group is approved and managed in accordance with a set of clearly defined policy statements and limits which have been approved by the board. These policies and limits are designed to safeguard the group s assets while permitting sufficient operational flexibility to ensure that an appropriate level of return is generated for shareholders. Treasury Risk Management All treasury activities within the group s banking operations are centralised within the treasury division. The treasury division within the group s banking operations is subject to strict internal control and reporting procedures which are monitored by the group s Assets and Liabilities Committee. This committee, which operates under terms of reference which have been approved by the board, is chaired by the Group Finance Director and comprises members of senior management including the Group Chief Executive. All of Treasury s activities are subject to limits on the magnitude and the nature of exposures which may be undertaken. These limits are set by the board and regularly reviewed. Liquidity Management One of Treasury s primary responsibilities is the management of liquidity within the group. In carrying out this responsibility, Treasury s principal objective is to ensure 18 Irish Life & Permanent plc Annual Report and Financial Statements 2002

8 that the group has sufficient funding available, at an optimal cost, to meet the operational needs of the group and to adhere to regulatory and prudential requirements. In this regard, the group s liquidity ratio at 31 December 2002 was 26%. As a consequence of the high level of asset growth experienced by the group s banking operations in 2002, Treasury was particularly active, raising a total of 2.6bln in the wholesale funding markets and 0.9bln in the commercial deposit market. The range of funding sources utilised by the group, which includes medium-term note issuance, commercial paper and mortgage securitisation in addition to the short-term inter bank market, reflects a policy of strategic diversification to prevent over reliance on any individual market. The group continues to maintain high quality long-term senior debt ratings with a Moody s Investors Service rating of A1 and an equivalent rating from Standard and Poor s of A+. These high quality credit ratings help to increase the availability and reduce the cost of wholesale funds to the group. As part of its liquidity management responsibilities, Treasury is also charged with the optimal investment of the group s liquid assets. In carrying out this function, Treasury invests in a range of interest rate instruments subject to strict board approved limits. Irish Life Investment Managers (ILIM) is one of Ireland's largest and most successful fund management companies. The company has an outstanding reputation for innovation. Irish Life & Permanent plc Annual Report and Financial Statements

9 Operating and Financial Review continued Non Trading Book Exposure Management Treasury is also responsible for ensuring that the exposure to movements in interest and foreign currency exchange rates arising in the non trading book of the group s banking operations are maintained within limits set by the board. The non trading book comprises the bank s retail and corporate deposit books and its loan book combined with the interbank book, wholesale funding instruments and the liquid asset investment portfolio which is managed by Treasury. Interest rate risk arises due to the fact that, in both the retail and treasury areas, certain assets and liabilities carry fixed rates (e.g. fixed rate mortgage products). Foreign currency exchange risk arises due to the fact that the group s banking operations conduct business in a range of currencies, principally euro, Sterling and US Dollars. Interest and foreign currency exchange rate exposures arising in the non trading book are managed on a portfolio, or total book basis, using a range of conventional hedging instruments including interest rate and currency swaps and forward rate agreements. In managing the exposures arising in the non trading book, sensitivity analysis is used to measure and control interest rate risk. This analysis calculates the financial change in the market value of equity arising from quantified parallel movements, up and down, in yield curves across the entire portfolio of assets and liabilities. In carrying out the calculation, all relevant assets and liabilities (including off balance sheet instruments) in each currency are categorised according to the remaining term for which they attract a fixed rate of interest. The net present value of the change in the value of the assets and liabilities arising from specified percentage movements in interest rates at all maturities is calculated. The analysis is completed for each relevant currency book separately and the results aggregated. The bank s principal non trading book exposures are in euro, Sterling and US Dollars. The model used includes behavioural assumptions about the various types of assets and liabilities (particularly those arising from retail transactions) to which the bank is exposed. These assumptions are set under the guidance of the Assets and Liabilities Committee. Although the assumptions are based on past experience, such experience may not be reflected in the future. Furthermore, the results of the calculations cannot be simply extrapolated to estimate the impact of interest rate changes which are not quantified in the sensitivity analysis. For these reasons, the figures disclosed in note 46 to the financial statements need to be treated with a degree of caution. Within the non trading book, the group accepts a degree of interest rate and other market price risk, subject to the market value change arising from certain prescribed changes in rates as calculated using the sensitivity analysis remaining within limits which are set by the board. At 31 December 2002, the market value exposure of the group s bank non trading book to a parallel upward shift of one percent in euro, Sterling and US Dollar yield curves was 18.1m (2001: 11m). Further details of the exposures carried in the bank s non trading book are set out in note 46 to the financial statements. Foreign exchange exposures arise in the non trading book due to the fact that the bank conducts business in a range of currencies. All foreign currency positions arising in the non trading book are transferred to the trading book as they arise. Trading Book In addition to the responsibility for managing the liquidity and interest rate exposures arising in the banking operations non trading book, Treasury trades in liquid interest rate and foreign currency exchange rate instruments, and derivatives thereof, in order to profit from short-term changes in market values. Trading book exposures are subject to strict limits which have been approved by the board. Interest rate exposures within the trading book are measured using sensitivity analysis. The methodology employed is the same as that utilised in respect of the non trading book set out above. Foreign currency exposures are measured by reference to open positions (the sum of all 20 Irish Life & Permanent plc Annual Report and Financial Statements 2002

10 long and short positions). All financial instruments held for trading purposes are clearly designated and are held separately from other holdings and all trading positions are marked to market. Further details of the treasury trading activities are provided in note 46 to the financial statements. discretion limits are referred to business unit credit committees, the group credit department, Group Credit Committee or the board, as appropriate. The group credit department is responsible for monitoring overall credit quality and adherence to credit policy and carrying out regular portfolio analysis. Credit Risk Management Credit risk throughout the group is approved and managed in line with a set of clearly defined policy statements, which have been approved by the board. Credit activities are monitored and controlled by the Group Credit Committee which is chaired by the Chief Executive permanent tsb and comprises members of senior management including executive directors. The Group Credit Committee is responsible for developing and implementing credit policy within the context of the overall credit policy approved by the board. The group credit policy statement provides for tiered levels of discretion with regard to acceptance of credit exposures. All exposures above a certain level require the approval of either the board or the Group Credit Committee depending on the size of the exposure. Individual discretion limits are set by reference to the extent of the individual s experience, proven competence and the nature and scale of lending undertaken in the relevant business units. Lending proposals above individual Irish Life & Permanent plc Annual Report and Financial Statements