26.03.2007
Growing Profits at Standard Life Bank

Standard Life Bank Annual Results 2006

Standard Life Bank today is delighted to announce:

• Underlying profits¹ more than doubled in 2006 to £38m (2005 £18m)
  
  
• A substantial first ever dividend of £40m
  
  
• FSA approval for the Basel II advanced approach to credit risk, significantly reducing capital needs in future years
  
  whilst;
  
  
• Mortgage balances fell slightly to £10.4 billion
  
  
• Credit quality remained strong, with arrears running at less than one fifth of industry average.
  

Anne Gunther, CEO of Standard Life Bank, said:

“We have achieved a strong improvement in our financial performance in 2006.  Our strategy of concentrating on higher margin business has delivered strong growth in profitability.

“Our successful Basel II waiver application ensures that we will require less capital to drive profitable growth in the future.

“I’m also pleased to see that our responsible lending approach, using customer affordability as our key lending criteria, is continuing to drive a high quality book for the Bank, but equally importantly it is protecting customers from the worst impact of rising interest rates.”

Underlying Profits rose from £18m² to £38m due to a substantial increase in income and cost control, despite some one-off costs associated with IFRS and IPO conversion.

With our continuing focus on profitable lending, interest margin grew from 63 basis points in 2005 to 74 basis points in 2006 and underlying cost income ratio fell from 78% to 61%.

On 12 March 2007, the Bank paid its first ever dividend, £40m, a significant contribution to the group and an important milestone on its path to maturity.  

Gross lending in 2006 was similar to 2005 (£3.0bn for 2006 compared to £3.1bn for 2005), however Standard Life Bank's market share of gross lending for 2006 is expected to be 0.9%, lower than 2005 (1.1%) due to the growth in the size of the market.  Mortgages under management at Standard Life Bank were £10.4bn for 2006 (2005: £10.6bn), due to higher levels of mortgage attrition, primarily as a result of the increased numbers of customers coming to the end of tie-in periods driven by particularly high volumes of business written in 2004.

Total retail savings balances grew by £34m to £4.2bn, especially pleasing is the growth in SIPP cash deposits to £246m (2005: £82m), coming from Life and Pension customers.

On 2 March 2007 we received FSA approval for our advanced IRB (internal ratings based) approach to retail credit risk under Basel II.  We foresee significant reductions in our regulatory capital requirement for retail credit risk arising from this in future years, more properly reflecting the low risk nature of our lending.

The Bank’s strategy is to actively pursue sustained profitable growth by capitalising on Standard Life’s franchise and brand and by exploiting synergies with other businesses within the group.  Flexible product design and sophisticated mortgage underwriting support our aim of attracting financially astute customers from carefully selected demographic categories and establishing long-term relationships with them.

Standard Life Bank is committed to responsible lending based on affordability, which helps to ensure customers should be able to ride out any changes in interest rates, whilst still making their assets work hard.  This commitment is demonstrated by our arrears rate of 0.17% at the end of 2006, a fifth of the industry average of 0.95%.Standard Life Bank expects the economic environment to remain positive in 2007, providing support for the UK mortgage market.  Based on existing market conditions and the management strategies we have in place, we expect current levels of performance to continue to improve in 2007 and beyond.

Consolidated Income Statement
For the year ended 31 December 2006

	2006	2005
	£m	£m
Interest and similar income	640.5	623.4
Interest expense and similar charges	(552.3)	(550.9)
Net interest income	88.2	72.5
Fee and commission income	13.2	10.3
Fee and commission expense	(2.9)	(6.0)
Net fee and commission income	10.3	4.3
Net hedge ineffectiveness and other fair value gains and losses	3.9	10.9
Total income	102.4	87.7
Administrative expenses	(59.5)	(59.0)
Operating expenses	(59.5)	(59.0)
Impairment losses on loans and advances	(0.5)	(0.8)
Profit before taxation	42.4	27.9
Taxation	(12.7)	(7.7)
Profit for the year attributable to the equity holder of the parent company	29.7	20.2

¹ Underlying profit is defined as IFRS statutory profit minus unrealised gains or losses on derivative instruments, hedge accounting adjustments and foreign currency translation. Statutory profit before tax for 2006 was £42m (2005 : £28m)

² 2005 disclosed IFRS profits at SLB differ on a bank basis and a group basis due to timing differences associated with the transition to IFRS (SLB transitioned a year later)

For further information please contact:

Media:
Barry Cameron
0131 245 6165 / 07712 486 463

Debt Investors:
John Cummins
0131 245 5195

Andy Townsend
0131 245 7260

Notes to editors

Standard Life Bank was established in 1998 and is a member of the Standard Life group of companies, providing innovative mortgages and a wide range of savings products. Standard Life Bank entered the UK mortgage market in 1999 with its flexible mortgage, Freestyle®, and has since grown its mortgage book to over £10bn. It is now a mainstream UK mortgage lender with over 375,000 mortgage and savings customers

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