2007 interim results
26 July 2007
Welcome
Steven Crawshaw
Group Chief Executive
2
Achieving our growth objective
Residential net Lending up 92% to £4.5bn Residential lending balances up 25% to £35.6bn Group net interest margin 1.14% Underlying costs up less than 3% Underlying Group profit before tax up 10% to £180.4m Underlying earnings per share up 10% to 20.4p £250m share buyback
3
Group performance
Chris Willford
Group Finance Director
4
Lending volumes
Residential Net Lending (£bn) Residential Net Lending (£bn)
4.5 2.4 0.7 2.7
Record half year gross and net lending gross lending up 51% net lending up 92% Continue to punch above our weight market share of stock c.3% market share of net lending c.9% Pipeline at new record level
5
1.9 2.6 1H07
0.9 1.8 2H06
1.7 1H06
Residential Gross Lending (£bn) Residential Gross Lending (£bn)
7.2 4.8
1.1 3.7
5.5
1.4 4.1
2.5
4.7
1H06
2H06
1H07
Organic
Acquired
Achieving our objective of volume growth Achieving our objective of volume growth
Balance sheet growth
Total Assets (£bn) Total Assets (£bn)
52.1 43.4
9.9 5.1 5.6
0.5 0.4
Total assets up 15% since year end Continued strong growth in our chosen specialist markets Back book decline offset by new standard loans
0.7 0.6
45.4
9.3 5.0 5.4 6.9
39.0
9.7 5.4 6.3 4.0 13.3
0.3
40.8
9.7 5.0 5.9 4.7
11.5 5.0 6.4 8.0
5.8
15.1
16.5
18.2
20.5
Commercial and Housing Association balances maintained in a tough operating environment Treasury assets increased to support strong balance sheet growth No exposure to unsecured lending
6
1H05
2H05
1H06
2H06
1H07
Buy-to-let Self-cert
Lifetime Other residential
Commercial & HA Treasury & Other
Excellent growth in fully secured assets Excellent growth in fully secured assets
Funding base
Total Liabilities and Capital (£bn) Total Liabilities and Capital (£bn)
52.1 43.4
3.4 3.7 4.4 13.4
Continued to broaden our funding base
8% 11% 17%
45.4
3.8 4.1 6.8 11.0
4.2 5.8 8.6
39.0
10% 3% 12%
3.7 1.3 4.7 12.2
40.8 3.4 1.3 4.4
14.0
Grown retail savings across all channels Retail savings growth supplemented by cost effective secured funding programmes £2.5bn master trust securitisation Euro 2.5bn covered bonds S&P upgrade to A1
7
13.0
25%
31%
44%
17.1
17.7
18.5
19.7
20.5
39%
1H05
2H05
1H06
2H06
1H07
Retail Securitised
Wholesale Covered Bond
Capital & other
Achieving our objective of a more balanced funding base Achieving our objective of a more balanced funding base
Net interest income
Group NII (£m) and NIM (%) Group NII (£m) and NIM (%)
Net interest income up 9%
0.029
295 285 275 265 255 245 235 225 215 205 1H05 224
1.19%
1.24%
1.20%
1.19%
1.14% 0.024
0.019 0.014
Average interest earning assets up 16% Growth accelerates margin decline to 1.14%
245
248
262
271
0.009 0.004 -0.001
2H05
1H06
2H06
1H07
Net Interest Income
Group Net Interest Margin
Strong asset growth driving increase in net interest income and margin dilution Strong asset growth driving increase in net interest income and margin dilution
8
Net interest margin dilution
Funding mix
-5bps Swap costs Earnings on reserves + 3bps
119bps
- 1bp
Asset mix -2bps
114bps
Dec 2006
June 2007
NIM dilution mainly due funding mix changes
9
Credit characteristics
Residential New Lending LTV (%) Residential New Lending LTV (%) LTV of Residential Lending Balances (%) LTV of Residential Lending Balances (%)
67%
68%
69%
70%
72%
48%
50%
53%
53%
54%
71%
74%
77%
76%
74%
1H05
2H05
1H06
2H06
1H07
1H05
2H05 1H06 Current LTV
2H06 1H07 Indexed LTV
Strong asset growth without dilution in credit quality Strong asset growth without dilution in credit quality
10
Arrears levels
Residential 3+ m Arrears (% of book) Residential 3+ m Arrears (% of book)
2.0%
Modest increase in arrears well within expectations
1 .5%
1 .0%
0.5%
Strong credit quality of book reflected in low credit losses
Jul 06 Aug 06 Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07
0.0%
Residential 3+ m Arrears (number of cases) Residential 3+ m Arrears (number of cases)
6,000 5,000 4,000 3,000 2,000 1 ,000 0
Possessions remain low at only 0.13% of the book
Stable impairment balance
Jun 06 Aug 06 Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07
Cases 3+ months in arrears
Cases in possession
Arrears and possessions remain well within expectations Arrears and possessions remain well within expectations
11
Capital Management
Capital Structure Organic Growth
Equity gearing T1/T2 balance
Capital Management
Funding Mix
Securitised vs Unsecuritised
Acquired Growth
Asset Mix
Residential Commercial Liquidity
Basel II standardised benefits will be largely achieved through asset growth Basel II standardised benefits will be largely achieved through asset growth
12
Prelims Basel II update
Risk Weighted Assets Risk Weighted Assets
£20.4bn 100% £15.4bn 35% 100% 20-25% 50% 35-40%
Basel I Dec 06
Basel II Dec 06 (Illustrative)
Mortgages/Housing
Commercial
Treasury
B&B benefits from standardised approach in 2007 with further benefits likely from IRB B&B benefits from standardised approach in 2007 with further benefits likely from IRB
13
Basel II Standardised
Residential Organic Lending NAB £1.3bn Commercial Lending/Other £0.1bn Basel II Benefit £5.1bn
£20.4bn
Treasury £0.8bn
Acquired Lending NAB £0.9bn
Basel I weightings
£18.4bn
Dec 2006 Basel I
June 2007 Basel II Standardised
Grown assets by £6.7bn since December with a RWA reduction of £2bn
14
Tier I capital structure
Tier I Capital (£m) Tier I Capital (£m)
8% 23% 35% 25%
£250m share buyback over next 12 months
Possible issue of non-equity tier 1
92% 77% 65% 75%
EPS accretive with slight reduction in margin and earnings
A&L Dec06 Equity
NRK Dec06
BBG Jun07
BBG Dec07 (Illustrative)
Interest bearing tier 1
Moving to a more efficient capital base Moving to a more efficient capital base
15
Basel II IRB
Impact of moving to Basel II Impact of moving to Basel II
Assets £52.1bn
11.4 2.8 2.2
Pillar I risk calculations in our waiver application support significant incremental benefit over standardised approach Self funding growth rate likely to be >20% Implies significant scope for further capital return in future
RWA Basel II Standardised
RWA Basel II IRB (Illustrative)
Commercial
35.6
£18.4bn*
3.4 2.8 0.8 11.5
June 07
June 07
June 07 Commercial Treasury
years … and improved return on equity
16
Residential Housing Association
Basel II IRB effective from mid 2008 - potential for significant further capital efficiency Basel II IRB effective from mid 2008 - potential for significant further capital efficiency
* Note: Based on the credit risk calculation of risk weighted assets under Pillar I of the Basel II Standardised approach
Dividends
Dividends (p) Dividends (p) 20.0 16.5 14.8 17.1 18.3
9.9
11.0
11.4
12.3
13.4
4.9 2002
5.5 2003
Interim
5.7 2004
6.0
6.6
6.7
2005
Final
2006
2007
Dividend equates to one-third of full-year 2006 dividend Dividend equates to one-third of full-year 2006 dividend
17
Steven Crawshaw
Group Chief Executive
18
Strong mortgage market
Mortgage Lending Activity Mortgage Lending Activity
35 30 200 25 20 15 10 50 5 0 0 150 250
Despite rising rate environment the mortgage market remains robust Some early signs of slight dampening in the housing market Very low risk of any slow down deteriorating into a property crash
100
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06
Monthly property transactions (rhs ‘000s)
Gross mortgage lending (lhs £bn)
Mortgage market will remain buoyant due to remortgaging activity Mortgage market will remain buoyant due to remortgaging activity
Source : CML Tables MM8, PT2
19
Strong rental market
Tenant Demand (%) Tenant Demand (%)
45 40 35 30 25 20 15 10 2002 2003 2004 2005 2006 2007
Demographics remain robust for the buy-to-let market Strong levels of migration to UK Lower average household size
Rental yields (%) Rental yields (%)
7.0% 6.0% 5.0%
ARLA B&B
Growing number of students High quality private rental stock Stable rental yields
4.0% 3.0%
Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07
Drivers of the UK rental market are very robust Drivers of the UK rental market are very robust
Source : ARLA, ONS
20
Landlords remain confident
Rent expectations over the next 6 months Rent expectations over the next 6 months Increase Stay the same Decrease Not stated 34% 62% 1% 3% Portfolio plans over next 6 months Portfolio plans over next 6 months Increase Stay the same Decrease Leave market Don’t know Not stated 51% 37% 3% 1% 6% 2%
Would you sell were house prices to fall ? Would you sell were house prices to fall ?
100% 80% 60% 40% 20% 0%
Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07
Average percentage of voids in year Average percentage of voids in year
9% 8% 7%
ARLA B&B
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
No
Yes
6%
2003 2004 2005 2006
2007
Buy-to-let landlords remain confident in rising rate environment Buy-to-let landlords remain confident in rising rate environment
Source : ARLA, ONS / B&B Buy-to-let confidence survey
21
Good buy-to-let lending performance
B&B Buy-to-let Lending Activity (£bn) B&B Buy-to-let Lending Activity (£bn)
21 19 17 15 13 11 9 7 5 3
7.2 11.4 9.2 12.6 15.1 13.3 16.5 20.5 18.2
2.2
2.6
2.7
3.0 2.0 1.4
2.6
3.0
3.6
Record gross lending of £3.6bn
4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9
B&B remains a major player in this market Excellent intermediary relationships Buy-to-let growth will continue in second half
1H03
2H03
1H04
2H04
1H05
2H05
1H06
2H06
1H07
Balances
Gross lending
B&B remains at the forefront of the buy-to-let market B&B remains at the forefront of the buy-to-let market
22
High retention rates
Residential Redemption Rates (annualised) Residential Redemption Rates (annualised)
30% 25%
Buy-to-let redemption rates remain low Redemption rate at only 14%
20% 15% 10%
compared to total market rate of c.23% Strong buy-to-let redemption
5% 0%
1H03 2H03 1H04 2H04 1H05 2H05 1H06 2H06 1H07
performance No reduction in loan duration
BBG Buy-to-let BBG Buy-to-let 5 year average
CML Buy-to-let CML Whole Market
Redemption rates in buy-to-let much lower than mainstream market Redemption rates in buy-to-let much lower than mainstream market
Source : CML Tables MM4, MM8 (1H07 CML Whole Market/BTL estimated)
23
Competition in buy-to-let
By Gross Advances - 2001 By Gross Advances - 2001 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Mortgage Express Barclays Woolwich Nationwide BS Bristol & West Birmingham Midshires Bank of Scotland Paragon Mortgage Business GMAC Brittanic 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. By Gross Advances - 2006 By Gross Advances - 2006 Birmingham Midshires (HBOS) Mortgage Express (BBG) Paragon Group GMAC Northern Rock (in since 2004) Mortgage Business Cheltenham & Gloucester (Lloyds) UCB Home Loans (Nationwide BS) Capital Home Loans (IPL) Bristol & West (BoI)
Main players in the buy-to-let market remain consistent Main players in the buy-to-let market remain consistent
Source : CML
24
Controlled self-cert performance
B&B Self-cert Lending Activity (£bn) B&B Self-cert Lending Activity (£bn)
9.5 9 8.5 8 7.5 7 6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
1.6 1.8 1.9
0.7
0.8
0.9
1.1 0.7
1.2
8.0 6.9 5.8 3.6 3.9 4.7
1.5
2.1
2.8
1H03 2H03 1H04 2H04 1H05 2H05 1H06 2H06 1H07
3 3 2 2 1 1 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 -6 -6 -7 -7
Controlled growth in our self-cert portfolio We rely on stringent underwriting Slightly higher risk offset by higher price NOT sub-prime customers Some lenders taking on self-cert loans as standard with ‘no questions asked’
Balances
Gross lending
Responsible approach to self-cert lending Responsible approach to self-cert lending
25
Mortgage portfolio acquisitions
Total Acquired Balances (£bn) Total Acquired Balances (£bn)
2.5 0.1
Good relationships with GMAC and Kensington Acquired portfolios performing exactly in line with expectations Arrears profile very similar to organic book
0.5 1H07
1.1
1.4 1.1 0.9 0.5
0.2 0.2 0.1 1H05 0.2 0.1 0.5 0.1 2H05 0.4 0.3 0.1 0.6 0.6 0.1 1H06 0.4 2H06
0.8
Buy-to-let Self-cert
Standard Sub prime
Acquisitions provide us with an additional distribution channel Acquisitions provide us with an additional distribution channel
26
Savings balances increasing
Savings Balances (£bn) Savings Balances (£bn)
19.7 17.1
2.2 2.3
Excellent savings balance growth
20.5
3.0
17.7
2.4 2.7
18.5
2.9 2.8 4.0
Branches continue to play a major role in funding asset growth Retail balances provide solid safe source of funds
4.2
3.1
12.6
12.6
12.6
12.8
13.3
New advertising campaign has been well received
1H05
2H05
1H06
2H06
1H07
Branch based Direct
Isle of Man
Our retail branches make an important contribution to the Group Our retail branches make an important contribution to the Group
27
Outlook
Positive prospects for specialist markets
Leading player in specialist markets
Strong growth momentum established
Further capital and funding flexibility
Bradford & Bingley on track to deliver Bradford & Bingley on track to deliver
28
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