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Standard Life plc - Annual Report and Accounts 2007
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UK financial services - Banking

Standard Life Bank offers mortgage and retail saving products in the UK via intermediaries, and also direct to all customers through telephone and internet platforms. The focus for 2007 has been the control of costs in a difficult market environment.

Key performance indicators 2007 2006 Movement
Mortgages under management £11.3bn £10.4bn 9%
Gross lending £3.7bn £3.0bn 22%
Savings and deposits £4.6bn £4.2bn 10%
IFRS underlying profit before tax* £32m £38m (16%)
Return on equity after tax* 7% 9% (2% points)
Interest margin 60bps 74bps (14bps)
Cost income ratio 60% 59% (1% point)

* 2006 is shown on a pro forma basis.

Please refer to the basis of preparation section in the business review and the glossary.

New business

Gross lending, £3.1bn in 05, £3.0bn in 06, £3.7bn in 07In 2007, the UK mortgage market remained highly competitive. The second half of the year was dominated by the global liquidity crunch. This affected the whole banking industry and all lenders found it more challenging to maintain margins. Despite this, gross lending was up 22% to £3.7bn (2006: £3.0bn). Our market share of gross lending increased to 1.0% (2006: 0.9%), with mortgages under management increasing to £11.3bn for 2007 (2006: £10.4bn).

Retail savings balances increased by 10% to £4.6bn (2006: £4.2bn) with SIPP and Wrap cash balances growing to £630m (2006: £263m). Our savings business benefited due to competitive product offerings during the second half of 2007.

Funding

Banking remains well funded with access to a diverse range of funding. During the year we have not utilised any committed facilities. The liquidity ratio remains within our normal range.

Performance

IFRS underlying profit before tax decreased by 16% to £32m (2006: £38m), excluding the volatility in respect of non-qualifying economic hedges. In line with many of our competitors, net interest margin has come under pressure from a highly competitive market throughout the year, as well as the rising cost of funding as a result of the liquidity crisis in the second half of the year. Return on equity (RoE) in 2007 was 7% (2006: 9%). The achievement of the 15% target RoE in 2008 has been impacted by competitive market conditions and the liquidity crunch resulting in continued pressure on margins.

Our cost income ratio of 60% (2006: 59%) has remained relatively stable despite increased productivity gains resulting in reduced expenses. This was offset by the impact of the increased pressure on net interest margin. We reduced staff numbers by 30% during the year to 482 at 31 December 2007 (2006: 685) while maintaining our service standards. Continued development of our e-commerce capabilities has benefited the business and helped enhance our customer and distributor relationships through increased self service, allowing us to maintain our award winning service while improving operational efficiency.

We continue to maintain a high quality mortgage portfolio, with only 0.18% of total mortgages three or more months in arrears at the end of December 2007, compared with the Council of Mortgage Lenders industry average of 1.20%. This leaves us well positioned for any downturn in the market which may occur in the future.