2002 Hbos Ra

Cover Spread 13/3/03 3:04 pm Page 1
HBOS plc Annual Report and Accounts 2002
Annual Report and Accounts 2002
‘ EVEN IN TOUGH
MARKETS,THIS IS
THE STRATEGY THAT
DELIVERS
’
WS
GH INTERVIE
ROU
DAVID BOS CEO
THE H
HBOS plc
HX027_Rough Report_AWv2.qxd 26/3/03 2:55 pm Page 1
DAVID ROUGH INTERVIEWS

JAMES CROSBY. ROUGH’S
STYLE IS DIRECT, DISARMING
AND CRITICAL.
THE ‘ROUGH REPORT’
IS INFORMATIVE AND
VALUABLE READING FOR
ALL HBOS INVESTORS.
Howdo you make

the wheels don’t f
DAVID ROUGH: You’ve been JAMES CROSBY: Yes, our This underpins retail credit
growing this business strongly, investment businesses have generally but also the
how do you make sure the been hit by stock markets housing market.
wheels don’t fall off? because the stock market level
does drive revenues – it shows DAVID ROUGH: Yes,
JAMES CROSBY: With the
through this year again in a but aren’t people just
territory of growth comes a
significant reduction in profits overstretching themselves?
responsibility to ensure it
from our investment businesses
converts into solid earnings. JAMES CROSBY: Mortgage
because of “fluctuations due to
Our strategy demands tight short term investment returns” finance is much more
control of costs, stable margins – of course recovering markets, affordable today than it has
even though we’re delivering whenever they happen, will been for years – people are
more to our customers and spending 15% of their income
DAVID ROUGH sound credit quality. Even in
have the opposite effect.
on mortgage finance against
started work in the city in tough times we’re proving this a long term average of 22%.
1974 for Royal Insurance and is the strategy that delivers. DAVID ROUGH: And will you, like
There’s also a real shortage
many life companies, be fined for
moved to Legal & General at of housing – particularly in the
DAVID ROUGH: But what about mis-selling of endowments?
South East! We’re just not
the start of 1989 as Head of
credit quality, you’re not immune JAMES CROSBY: I don’t heading for a significant set
UK Equities. In 1991 he was from these tough times? expect so but when you make back in house prices.
appointed to the Legal & any comment like that, you
JAMES CROSBY: No we’re
General Board as Group always touch wood. DAVID ROUGH: But what about
not. One of our fastest growing
Director – Investments, and areas is mortgages, they’re lending volumes?
the highest quality assets in DAVID ROUGH: You appear relaxed
retired from the Board of JAMES CROSBY: We may
banking. Our strategy in other about the prospects for the
Legal & General at the end have seen a boom in prices
banking products is to offer housing market. How are you
but transaction volumes over
of 2001. He was Chairman value and simplicity to going to survive or protect yourself
the last five years have been
customers of our competitors. in an at best, stagnant market over
of the Investment Committee materially lower than they were
That really helps business the next two or three years?
of the ABI for 2 years in the late 80’s; in fact not
quality, generally it’s the better JAMES CROSBY: Whatever much above the trend for the
between 2000 and 2002. He quality customers who move deterioration we see in retail last thirty years. The housing
is currently a Non-executive for a current account that pays credit in the UK, it’s likely to market may well be slower in
Director of Land Securities interest and it’s the better be comparatively benign, terms of price, but still good in
quality customers who come first because interest rates terms of transaction volumes
Group PLC, EMAP plc, BBA to you to transfer the balances are so low and likely to stay with good credit experience.
Group and Xstrata plc. on their credit cards. so and second because we Quite probably there is as
will see only a small increase much if not the same
DAVID ROUGH: The same cannot in unemployment. opportunity to grow the
surely be said of Corporate credit?
JAMES CROSBY: No and as
we’d expect in any slowdown
our Corporate provisions have
risen. Equally, that makes this
an opportune time to lend,
margins are wider, competition
less intense and business
propositions are more realistic.
DAVID ROUGH: In terms of your

efficient, cheap and cheerful
approach to your investment
products – in falling equity
markets haven’t your profits
just been blown apart by the
halving of equity markets?
ke sure
THE ROUGH REPORT
fall off?
balance sheet as there has
been over the last two
or three years.
DAVID ROUGH: But what about the

buy to let market – the rents for
many parts of the South-East are
actually falling rather than rising!
Do you not see that house prices
are going to be under pressure as
the buy to let owners start having
to be net sellers?
JAMES CROSBY: We’ve
already seen what’s happened.
It’s well over a year now since
we saw a very significant fall in
rentals in London. Why hasn’t
that fed through to prices? It’s
unusual. In the UK we are so
hooked on owner occupation
and the rental sector is so
small that in practice we don’t
switch from owning to renting
because of price. You would
have to see rentals fall an
awful long way before they
really influenced people’s interest rate stress that we had
preferences. The fact is, in the late 80’s – and that’s just
rentals have fallen and people not going to happen!
have sold vacant properties
for a good profit. DAVID ROUGH: Last year you
started underwriting the creditor
DAVID ROUGH: And are you part insurance business yourself.
of the fraternity that are lending With a slowdown on the way
based on four times salary? wasn’t that awful timing?
JAMES CROSBY: Not as a JAMES CROSBY: No – in

general rule. Almost all lending fact it wasn’t that much of a
in the UK by mortgage lenders, change really – the nature of
not just us, is on the same the arrangement we and other
income multiples as were banks historically had with the
applied in the late 80’s. The insurers meant we were all
big difference is that on any but underwriting the business
scenario interest rates are less ourselves. So we don’t see
than half what they were then. that the move to actually
being the repayment insurer
has changed our risk profile.
DAVID ROUGH: But the housing It has just given us more
market is still surviving because control, a greater ability to
interest rates are incredibly low. design the product to fit into
God forbid that interest rates ever our sales processes; and as
go up; how do lenders survive then? a result we’ve achieved better
JAMES CROSBY: Interest sales. This is an important and
rates would have to move up profitable business, which is
very, very significantly to get performing well without having
us to anything like the same a higher risk profile.
Do you really think

yourSME business
WE HAVE TREMENDOUS DAVID ROUGH: You pay front line JAMES CROSBY: Yes it is
‘
OPPORTUNITIES IN
people very well, they appear to
have share options, are you sure
you’re not incentivising them to
sell the wrong products?
core to our strategy. We set
ourselves the ambition to be
if not number one, one of the
two or three biggest players
THE UK TO GROW THE JAMES CROSBY: Yes, they are
incentivised to sell but it’s not
in investment products, a
strategic imperative for an
BUSINESS IN EVERY just about sales; there are all

sorts of quality measures as
organisation that is already
number one in liquid savings.
PRODUCT LINE.
’
To be number one in investment
well. Remember also, our retail products you have to have
strategy is based on offering wide-ranging distribution,
customers simple products, in bancassurance, IFAs and
which offer value for money. upscale wealth management
That really does reduce the where St. James’s Place come
DAVID ROUGH: Is Intelligent chances of mis-selling because
Finance ever going to earn an into their own.
the customer is so much more
adequate return on capital for likely to really understand what
shareholders? Are you prepared DAVID ROUGH: On its
he or she is buying and why.
to give a decade for it? announcement in 2000 esure was
JAMES CROSBY: As a new responsible for a pound hike in
DAVID ROUGH: How much the then Halifax share price. Three
bank, Intelligent Finance has
done all the right things: built shareholder value destruction is years on what’s happening, has it
a brand, a very powerful represented by the purchase of measured up to all the early hype?
consumer brand, in a key part St. James’s Place Capital at the
top of the market? And are you JAMES CROSBY: It’s doing
of the market. We’ve built extraordinarily well, distributing
assets because you never going to do anything with the
through Halifax branches,
turn a new bank round to minority interest?
Sainsbury’s stores and direct
profitability without doing so, JAMES CROSBY: St. James’s using the esure brand which
that’s where the margin comes Place has a unique business has established itself as the
from and last year Intelligent model. It’s a wealth internet/telephone motor
Finance took an 8% share of management business that insurance brand for safe
net mortgage lending. We’re
actually does have real drivers. It has a great
now building the volume to
distribution, not just a nice opportunity to grow profitably
get to the required scale.
idea waiting for customers to in today’s insurance markets.
The challenge isn’t when we
break even, because I’m sure come to it. Inevitably, this sort
we’ll break even at the end of of business was going to DAVID ROUGH: Are you out of
2003. It’s the number of struggle in the third year of a with profits? If not, why not?
products per customer. Last bear market but as markets
year that grew from 1.9 to 2.2 recover and we see the JAMES CROSBY: Today with
which shows we are well on advent of a new depolarised profits products represent
the way to getting the number world, St. James’s Place will roughly 25% of all our
of products per customer to return to its traditional growth investment sales and yes,
the level that will deliver track. When we bought the it’s a market that currently
shareholder value. business we said it was right provides an inadequate return
for us to own a majority stake. for shareholders. We’ve said
The fact that management as much on a number of
DAVID ROUGH: But merely breaking occasions. But the bear market
even isn’t much of a goal? and the financial advisers in
has meant that capacity has
St. James’s Place own their
JAMES CROSBY: That’s why been destroyed in this market
own bits of the business is
I say breaking even at the end in a way which will never come
part of its uniqueness. We
of 2003 is not a particularly back. With fewer competitors,
think that’s still right today.
exciting ambition. We will there’s every chance that this
deliver it. But as I say, we’re market will support higher
much more focused already DAVID ROUGH: So is it an returns in the future. But if
on driving up the number of investment or a core part it doesn’t we’ll redeploy our
products per customer. of HBOS? capital elsewhere.
nk you can double

ss ın three years?
DAVID ROUGH: But if Sandler’s simplicity and value and if deals where we are in control
recommendations are implemented value means “free banking of the lending mandate and
won’t it make it impossible for you forever” so be it, we’ll still judgement to a very large
to earn higher returns and operate make excellent returns for extent. The truth is our MBO
within a 1% fee cap? our shareholders. portfolio is performing pretty
JAMES CROSBY: We’ll wait well in line with the rest of
and see if and how Sandler DAVID ROUGH: Going into a our book at this stage.
is implemented. There’s not market like this, are you not
a lot in Sandler that’s not going to get the poorer risks
already happening somewhere rather than the better risks
in the marketplace anyway. coming to you?
For example, the secret of our
JAMES CROSBY: No –
success in bancassurance is
that’s where having the
selling simple products with a
Bank of Scotland’s capability
single annual management fee
on the ground and being
which gives real value to the
involved from top to bottom
consumer. And yes, if the 1%
is so very important to us.
cap is applied to with profits
This isn’t a business Halifax
they won’t be part of the
could have built on its own.
simplified product offering
Halifax just didn’t have Bank
Sandler so wishes to promote!
of Scotland’s pedigree and
capability in business credit
DAVID ROUGH: Can’t you build a assessment. Equally, Bank
sensible SME business without of Scotland always lacked
giving the product away? Isn’t distribution power in England
that what “free banking forever” and Wales.
is all about?
JAMES CROSBY: We have DAVID ROUGH: Do you really
made a big investment in think you can double your SME
building the capability and business within three years?
infrastructure to go into
JAMES CROSBY: Yes, that’s
England and Wales precisely
our target, from 3% to 6%
as we said we would. But
market share and we’ll do it.
we’ve also made great
We’ve already moved much
progress in attracting new
faster in other banking
customers – up 36% on
products – products like
last year to 273,000. The
current accounts where we
established order in SME
were also told customers
banking has been operating in
wouldn’t move.
a cosy, frankly uncompetitive
world. The result is, highly
priced, confusing products DAVID ROUGH: Corporate banking
delivered through – much has been talked about
inefficient systems. by other banks it is alleged,
OUR STRATEGY...
‘
investing in quoted junk bonds.
Given the poor business climate
There is a great opportunity
for us in bringing together
Bank of Scotland’s market
in the UK, is not the Bank of
Scotland’s high exposure to highly
leveraged MBOs – not just the
IS TO OFFER VALUE
leading capability in Scotland
with Halifax’s distribution
same thing? AND SIMPLICITY
systems in England and Wales,
to really make a difference for
JAMES CROSBY: No. We
don’t invest in junk bonds,
we lend on a relationship
TO CUSTOMERS OF
OUR COMPETITORS.
’
SME customers – providing
a real choice; one based on basis on individually structured
Does HBOS fall fou

the Higgs recomm
have to devote a considerable companies. On each of the
HBOS PERFORMANCE amount of time, not just occasions the board elected
attending main board meetings Dennis Stevenson to be
DIVISIONAL PROFIT CONTRIBUTION
but working on the various chairman they did so full in
committees and getting close the knowledge that he also
to the business. We have six had the role as chairman of
Retail up 18%
main Audit and Risk Control Pearson. His appointment
Committees and all the other has served the shareholders
Insurance & Investment up 25%
committees you’d expect us extraordinarily well. So why on
Business, no change to have. But you are right. If earth would we change that?
Corporate up 30% 17 people got together once
a month and that was all they
Treasury up 37% DAVID ROUGH: Given the
did, it wouldn’t work.
complexity of your business, are
you and the senior management
DAVID ROUGH: Therefore their spending enough time ensuring
roles and responsibilities are that training and development
larger than you’d expect in most goes on at all levels of your staff?
DAVID ROUGH: Over the years, our exposure to riskier areas non-financial services companies
investors have watched Bank of such as office developments JAMES CROSBY: I believe
and therefore they get rewarded
Scotland consume capital like a in Central London. so. There are phases in any
sensibly?
thing possessed. With all this merger; the first six months
growth in Corporate it looks like JAMES CROSBY: Yes, our is putting people into jobs and
DAVID ROUGH: And in terms of non-executive directors do helping them to work with
business as usual now it’s HBOS?
“stakeholder pensions”, do you give substantially more time, each other. Then a year to
JAMES CROSBY: Our believe that stakeholder is the they get into the detail right 18 months on you really are
Corporate team made great panacea for either your savings across a complex business, immersed into all the
strides in 2002. They showed and investment market or for they probably do have more succession planning and
how returns in this business your clients? responsibility and, yes, development, which are so
can be increased even when hopefully the rewards are important for the future. One
JAMES CROSBY: No, there’s
we’re suffering provisions about right. of the most exciting things
a lot of evidence that you can
significantly above any through about our new organisation is
CAT mark products, you can
the cycle average. And the very high quality of people
remember, it’s returns that cap their charges and DAVID ROUGH: And will your
who are joining us. Internal
matter, Corporate only wins everything else and actually senior non-executive and other
development, succession
capital allocation inside HBOS it doesn’t influence what people non-executives be attending all
planning and attracting
by delivering RoE! buy. Today, most of savings your meetings with investors, as
top class talent into the
products that are or could be the Higgs report suggests?
organisation are all crucial
bought are CAT marked, but JAMES CROSBY: Probably not,
DAVID ROUGH: You have to our future.
very few mortgages are CAT but they’d be very welcome to
significant exposures to split marked. What does that tell
capital investment trusts and attend all hundred plus of them
you? It tells you the consumer DAVID ROUGH: And in terms of
property. Time to be scared or are that I do each year.
will engage with the bank succession planning the board
you still confident? or insurance company in the takes succession planning
product they really want or need DAVID ROUGH: Does HBOS fall seriously? And you’re being
JAMES CROSBY: Our
to buy regardless of whether foul of any of the Higgs challenged enough in your
investment trust lending has
or not it is CAT marked. recommendations? position?
halved as trusts have de-
geared into the bear market. JAMES CROSBY: No! JAMES CROSBY: Oh yes!
We’ve said we’ve made some DAVID ROUGH: Corporate Because the core principle of ...Definitely!
provisions in this area but not governance. My own personal Higgs is that it isn’t a set of
material. Our property interests view is that boards with over ten rules, it is a benchmark
DAVID ROUGH: Often, chief
are very well spread, ranging against which PLCs that differ
members do have real problems. executives make sure that the
from housing association should argue confidently as
How do you make a board of 17 next level down are open to
loans through to property to why their model is slightly
function in a satisfactory manner? challenge but avoid effective
development. We don’t foresee different. The one key area
JAMES CROSBY: Ours is a challenge to their own position?
a difficult cycle in commercial where we’ll be different is that
property but even so we’ve highly regulated and complex we have a chairman who JAMES CROSBY: If we’re
significantly managed down business. Our non-executives is chairman of two FTSE judged to have been
oul of any of
mmendations?
‘OVER THE NEXT FIVE

YEARS ARE YOU GOING TO
REMAIN A UK COMPANY?
’
What constitutes
strength at HBOS?
successful during my time as
chief executive, my greatest
ambition thereafter will be to
pick up the newspapers and
read about further success in
the organisation. So yes, there’s
plenty of challenge. I’ve got
outstanding colleagues;
colleagues who can take
over from me any time.
DAVID ROUGH: Did you

raise capital to maintain
your credit ratings? Are you
running this business so as
to maintain ratings?
JAMES CROSBY: You can’t
always sustain your credit
rating through all market
circumstances and you
shouldn’t obsessively manage
your business to do so. In our
case though we are number
one in liquid savings so financial
strength is unusually important
– it’s part of our brand.
DAVID ROUGH: Fine, but what

constitutes financial strength
at HBOS?
JAMES CROSBY: We would
argue that we have the best
balance of different businesses
amongst our peers, we’ve got
the capital we need to support
growth, very high quality
assets, two thirds of which
are mortgages and unrivalled
leverage capacity. So we’d be
disappointed if they weren’t
reflected in one of the best
credit ratings in the market,
as indeed they are.
IN OUR INVESTMENT
‘ BUSINESS, IT IS OUR
DAVID ROUGH: And in terms of
return on capital, your target in
2004 is for a 20% return on
equity? It seems to me that
DISTRIBUTION POWER investors simply don’t believe

you can get there?
WHICH MAKES THE JAMES CROSBY: Yes, but with

respect they’re wrong. Let me
DIFFERENCE.
’
tell you how we’re going to
achieve it. First of all we’ve just
s financial
S?
Simple business, you
drive revenue harder
than costs, you drive
up returns and the real
trick in this marketplace
today, you have to do it
without widening margins.
So we really do believe
we can do more than just
deliver our 20% RoE for
shareholders – we can at
the same time give better
increased our Group Target value to customers. That’s
Return on Equity by over one the nature of our ambition.
per cent in one year from
16.8% to 17.9%. And for the DAVID ROUGH: So over the next
future we’ve got a lot going for five years are you going to remain
us. We’ve got very significant a UK company?
merger synergies still to come of short term volatility in our DAVID ROUGH: And if in 2004/2005
through, around £600m. In JAMES CROSBY: We have share price. So the answer to you failed to make that RoE
2002 we were still sustaining tremendous opportunities in your question is clear – it’s no! target, will you consider it to be
substantial losses in Intelligent the UK to grow the business an act of God or would it be that
Finance which we will eliminate. in pretty well every product the management have failed
We will increase returns in a line. We’re no fans of DAVID ROUGH: And are there two
to perform?
number of divisions as we also expanding internationally for or three key financial measures
did in 2002. the sake of it and we will only which are in your control that you JAMES CROSBY: It’ll be
make a major international are happy to be measured by for exactly what our shareholders
move if it genuinely adds value the next three years? tell us it is! If we hit the target
But the key is Retail where we the shareholders will be
showed in 2002 how we can for our shareholders, and if it’s JAMES CROSBY: Yes we’ve
big enough to matter for them. delighted, if we don’t the
increase shareholder returns got lots of public targets, in
shareholders must sit in
whilst giving better value to In the meantime, where we can fact more than the rest of the
judgement, that is always their
customers. We’ve achieved we take our expertise abroad banking sector put together.
prerogative. I wouldn’t offer
that through the virtuous circle and add value for shareholders But the two financial ones that
any excuses but if they want
of better products producing as we do in Australia, in Bank loom largest for me are; the
to offer excuses that’s fine
more sales, higher productivity, of Scotland Corporate Banking return on equity for 2004 and
by me.
lower costs and so on. And in the US or indeed investment the tough cost targets we have
for us that circle has much products across Europe under for each division – targets
further to turn. So no shortage the Clerical Medical brand. which define what it is we
of reasons why we’ll hit 20% have to achieve to win
in 2004. DAVID ROUGH: Is there a share on costs.
price at which the board would
DAVID ROUGH: So presumably sanction buying your own DAVID ROUGH: And to deliver in
your costs have got to grow at 3 shares in? terms of revenue growth I take it?
or 4% less than your asset base JAMES CROSBY: You are JAMES CROSBY: Yes we
to enable you to achieve that really testing our own ability have market share targets in
virtuous circle? to invest retained earnings at lots of products but I wouldn’t
JAMES CROSBY: Yes, indeed a good return. We’ve grown necessarily call them financial
– look at last year, we had a our return on equity this year, targets. But yes, having simple
slight slippage in margins in we’ve got a target out there value for money products that
Retail but we still had a double to grow it over the next couple customers buy in great
figure percentage increase in of years. So it’s clear that we volumes is critical – because
revenue and we had just a 2% can deploy the capital we’re that’s what enables us to
increase in costs. And yes, we generating in the business deliver higher returns and
can keep that going, maybe very profitably for our lower costs without widening
not forever but for a few years. shareholders – regardless margins against the customer.
What really
motivates you?
DAVID ROUGH: Management often are right, it’s a really tough JAMES CROSBY: No. Frankly, David Rough asked that
benefit by backing economic environment in which to I think most of our deficits will in place of a fee for this
growth as if it’s all down to their convince people that’s the be eliminated as and when interview, a donation be
genius whereas when it’s an case! We can only deliver a markets recover. But even made to Childline and
economic downturn or somebody share price that does better if I’m wrong the members of The Salvation Army.
else’s fault it’s the world economy, than its peers and over the our schemes are young and, The interview was
it’s not their problem. last three years it has by as our FRS 17 data shows, recorded on Monday
25% plus, but obviously the long term costs of putting 20 January 2003.
JAMES CROSBY: You make
shareholders aren’t quite so right the deficits are eminently
running a major PLC sound
impressed when the market affordable for HBOS.
like being a politician! I’ve
been chief executive of a PLC has still dragged the share
for four years, three of them price down. DAVID ROUGH: Finally, what really
have been in the worst bear turns you on? What motivates you?
market since 1974. I believe DAVID ROUGH: Are you in denial Is it the returns to shareholders
that our business is forging a about the size of your pension and thus your pockets? Or
great future for itself. But you scheme deficits? destroying the competition?
JAMES CROSBY: Shareholders
are our owners, ultimately we
‘ ONE OF THE MOST

EXCITING THINGS ABOUT
really only exist to create
shareholder value. Sometimes
the best way to make money
for our shareholders is to make
OUR NEW ORGANISATION life tougher for our competitors’

shareholders. But that has
IS THE VERY HIGH always been the case. We

believe that in today’s markets
you can only achieve real
QUALITY OF PEOPLE WHO shareholder value in financial
services by being genuinely
ARE JOINING US.
’ different. For us in Retail that
means delivering value,
simplicity and transparency
to customers. There is no
misalignment between the
interests of shareholders and
customers and you see that in
our figures this year, very, very
clearly. It is volume growth and
profits growth on top of tight
cost management in pretty
well every business we’re in.
But none of this could be
achieved without the
enormous efforts of our other
stakeholders, my 60,000
colleagues. They’re the
ones who really deliver for
customers and shareholders.
Highlights
Profit* £3.06bn up 22%

Assets £355bn up 14%
Customers 22m up 10% *before tax and exceptional items.
Contents
1 Highlights 33 Financial Review and 64 Directors’ Accounting 73 Consolidated Statement
2 Chairman’s Statement Risk Management Responsibilities of Total Recognised Gains
4 Retail Banking 43 The Board 65 Independent Auditors’ and Losses
8 Insurance & Investment 45 Directors’ Report Report to the Members of 73 Consolidated Cash Flow
14 Business Banking 47 Report of the Board in HBOS plc Statement
18 Corporate Banking Relation to Remuneration 66 Accounting Policies 74 Notes on the Accounts
22 Treasury Policy and Practice 69 Consolidated Profit 114 Accounts in US Dollars
26 BankWest 62 Corporate Governance and Loss Account 115 Accounts in Euros
28 Corporate Responsibility Statement 70 Consolidated Balance Sheet 116 Shareholder Information
32 Five Year Summary 72 Company Balance Sheet
2 HBOS plc Annual Report & Accounts 2002
Last year’s Annual Report I am delighted to report that one year on,
HBOS has recorded a 22% rate of profit
Our general insurance business also
underlines the power of value and simplicity
marked the formation of growth and corresponding underlying with an acceleration in growth in customers,
HBOS plc from the merger earnings per share growth of 18%, the latter policies and profits; in household, repayment
held back by our share placing in March. and motor insurance. Here, sales growth
of Halifax and Bank of Last year we signalled our clear intention to of 25% pushed profits ahead by 15%.
Scotland. Its pages were full fund future growth from our own resources For the third year running weak equity
and increase dividend cover to 2.5 times. The
of ambition, enthusiasm and Board has therefore decided to recommend
markets ate away at capital resources
and undermined customer confidence
excitement at the prospects a final dividend of 19.6p, bringing the total in equity based saving. Customers remain
dividend per share to 29.4p, 5% higher than
for what we modestly last year but representing a much smaller
cautious and we have to assume that in the
foreseeable future the going will be tough.
described as “The new force.” proportion of earnings per share. Even so, inspired by exceptional growth in
Everywhere we are showing how genuinely bancassurance, sales of investment products
different strategies create competitive grew 11%. Despite all the doom and gloom
advantage and therefore shareholder value. our wealth management, broker and
My colleagues in HBOS simply refuse to bancassurance businesses have bright
accept the status quo. So in HBOS you find futures in which we must invest.
radical, but invariably simple ideas deployed
to win and retain customers; but most of all In Business Banking customers opening
to do so for the benefit of our shareholders. over 42,000 new current accounts have
actively chosen higher interest on their
In Retail Banking, the seemingly “unique” current accounts or free business banking
idea of simple value for money products forever, both denied them by the traditional
sold by enthusiastic, well motivated HBOS players. The investment phase of our SME
people has created a powerful momentum banking initiatives is now largely behind us
in earnings. That enthusiasm for performance and the growth phase upon us, as the new
and its rewards has its roots in the acceptance services are rolled out via Halifax branches
that existing customers matter every bit as in England and Wales.
much as the new customer. And so in Retail
we are able to report not only 18% profit Traditional bankers and fair weather
growth but market leading results in new competitors have also been noticeably less
mortgages, credit cards and bank accounts; active in our core Corporate Banking markets.
none of which has been achieved at the The fact is that there is business to be done
expense of credit quality and all of which on sound credit quality and higher margins
has been delivered from a cost base which for those who have a focus appropriate
rose by only 2%. to the economic conditions that currently
Chairman’s Statement Our results confirm HBOS’s ability to

convert volume growth into profitable growth
for shareholders
persist. Sticking to those sectors we know best achievements are many, his wit legendary and
and being prepared to continue supporting his contribution to banking appropriately
long term relationships has delivered good recognised by a knighthood
growth, increased returns and profits ahead in the New Year’s Honours list. We also bid
by 30%, all achieved without any increase in farewell to George Simpson who retired
our risk appetite. HBOS is a potent force in from the Board in 2002. The Board
the UK Corporate Banking arena precisely is grateful for his contribution.
because we stick to our knitting! We are delighted that Sir Ron Garrick
HBOS Treasury Services has delivered a steps up to Deputy Chairman and George
substantial 37% growth in pre-tax profits. Mitchell to Governor of Bank of Scotland.
It has done so by extracting benefits from Their combined experience and dedication
the merger but most of all by carefully will be of great assistance to all of us
exploiting the opportunities open to it in their new and additional roles.
merely from providing services to HBOS’s George Mitchell,
The Board’s thanks go to all HBOS colleagues Governor, Bank of Scotland
businesses and their customers. who have delivered these results. We have
Right across HBOS, strong sales, quality placed huge reliance on their energy and
lending and good profits growth are the key commitment and right across the Group not outstay my welcome or my energy levels
drivers of something much more important, the 60,000 people who are our greatest at either HBOS or Pearson, where I am also
shareholder value. advocates have once again exceeded all Chairman, both Boards have expressed their
our expectations. More than anything else enthusiasm for the status quo.
The profit potential of the merger, our it is their belief in our strategy, our products
track record of hitting tight cost targets, In a departure from the norm in Annual
and our services which will ensure that
the prospect of stable margins and the HBOS’s challenge to the established order Reports, the Chief Executive’s review
capital strength so recently reinforced will be both potent and enduring. takes the form of an interview with a
are the criteria that will continue to market practitioner. David Rough, the
shape our fortunes in the coming year. Standards in Corporate Governance have recently retired and highly respected
been re-defined in no small measure by former Director of Investments at Legal &
Weaker, or sometimes confusing, economic Derek Higgs’ and Sir Robert Smith’s “Revised General, challenges James Crosby in ‘the
data has frequently vied with adverse Combined Code”. It is the responsibility of Rough Report’. It highlights many of the
geo-political sentiment and the threat of large companies not only to behave properly challenges we face and it demonstrates
international instability to depress markets but to be seen to be behaving properly. the passion and belief that sustains
and create uncertainty. We serve our For that reason we welcome Derek Higgs’ the view that the “new force” can really
shareholders best in such times by calmly emphasis on “comply or explain”. We will achieve a huge amount, for customers
but firmly focusing on what we are good therefore embrace the new Combined Code and colleagues but most of all
at. We will continue to concentrate on in both letter and spirit. for shareholders.
strategies for delivering value. There will HBOS is already largely compliant
be no let up on cost control, no push for I am delighted that the conclusions
with the changes recommended for
the last hurrah of growth that can only be point to there being much more to do;
the Combined Code, and also Higgs’
delivered by compromising credit control. wider recommendations. Higgs also makes life would be dull were that not the case.
We have come too far and have too much a number of recommendations which we Dennis Stevenson
in train for shareholders to be oblivious to will embrace with alacrity because they will Chairman
the realities of difficult market conditions. improve our governance. Under this heading
As I look forward, it is hard to accept that fall greater clarification about the workings
we shall take HBOS onto another level of the Nominations Committee and further
of achievement without Peter Burt. In development of our training for Non-
27 years with Bank of Scotland, Peter made executive Directors. On the other hand,
major contributions in several senior roles; on occasion, as Higgs invites us to do,
becoming Chief Executive in 1996, Governor we will choose to explain why we do
in 2001 and following the merger, Executive not believe that compliance will be
in the interest of our shareholders.
Deputy Chairman. Together with Mike Ellis,
the Group Finance Director, Peter ensured There is of course the Higgs’ recommendation
that merger integration was largely complete that individuals should not be Chairman of
before electing to retire in January 2003. His more than one FTSE company. Whilst I will
+22% +18% +14%

£3,062m profit before tax 56.1p underlying earnings £355bn total assets
and exceptional items per share
Highlights
• Profits £1,426m (2001 £1,205m)
• ROE 20.4% (2001 18.8%)
• 29% market share of net
mortgage lending
• Estimated 27% of market
share of new and switchers
bank accounts
• Estimated 21% market share
of new credit card accounts
Andy Hornby, Stirling branch, Scotland. The first purpose built

Chief Executive, Retail Banking. Bank of Scotland and Halifax branch opened in
February 2003.
Retail Banking HBOS Retail Banking has beaten all

its published targets in 2002
Delivering for Shareholders and Customers against the published target for the year resulting in an estimated HBOS market share
Our commitment to deliver value, simplicity of 25%. Our five mortgage brands; Halifax, of 21%, ahead of our stated target. Balances
and transparency to consumers is delivering Bank of Scotland, the Mortgage Business, have grown strongly in 2002, up 26% to £3.9bn.
very good bottom line growth with profits Birmingham Midshires and Intelligent Finance The year on year growth in unsecured personal
before tax and exceptionals 18% higher at are a key strategic advantage in a competitive loans sales was 31%, with total gross lending
£1,426m and the post tax return on equity marketplace, allowing us to trade effectively up from £3.9bn in 2001 to £5.1bn in 2002.
increasing from 18.8% to 20.4%. We live by through all channels across the complete Growth has been driven through effective
simple rules that start with simple, transparently range of mortgage segments. Total gross use of the core Halifax and Bank of Scotland
priced value for money products. We believe mortgage lending rose by 42% to £57bn, brands together with strong performances
it is wrong that existing customers should whilst good retention performance enabled from partnership and affinity brands.
subsidise more attractive rates reserved the group to achieve net lending of £23bn.
The Number One Savings Business
for new customers and our proposition is The retail mortgage book now stands at
In savings our strong fixed rate portfolio
therefore to deliver outstanding products around £150bn of balances including £5bn
of products, including fixed rate ISAs, and
and services to both existing and new of securitised assets, an increase of around
Guaranteed Reserve, helped us to grow
customers alike. £23bn over 2001. Halifax was again rated
savings and banking credit balances by £7.0bn
5-star in the Financial Advisors Annual Awards
That customer proposition is we believe in 2002. This was achieved while record levels
for Mortgage Providers. The substantial
delivered by the most enthusiastic and of customer deposits were transferred into
investments made by Halifax in advanced
motivated colleagues in UK Retail Banking HBOS long-term savings products, reflecting
mortgage processing capability continues to
today. Being proud to work for HBOS, having the strategic value of the Savings and Long
provide, we believe, the shortest turnaround
great confidence in the products you sell Term Savings businesses working closely
times in the industry. These benefits will be together. This maintained our position as
to customers and having fun while you do,
rolled out to other HBOS brands during the the number one Savings Institution in the
make HBOS a very different place to be.
next 18 months. UK. Our commitment to providing outstanding
And the results delivered through our five
consumer brands, once again demonstrate Another Million Plus New Bank Accounts value products has been clearly illustrated in
that success is the reward for sticking Our market leading current account, combining market leading Cash ISAs and ‘Best buy’ Bank
to simple consumer led virtues. attractive interest and overdraft rates, backed of Scotland IASA’s which grew by 33% to
by aggressive populist marketing, has seen £3.7bn in balances in 2002. Our estimated
In 2002 HBOS Retail Banking has beaten
HBOS sustain its attack on the traditional overall market share of Household Sector
all its published targets:
incumbents in the UK banking market. The Liquid Assets has increased to 15.5% in 2002.
• Net mortgage lending share of 29% strong sales performance of 2001 has been On Track for Profits at Intelligent Finance
(target 25%) maintained with 1.3m new bank accounts Intelligent Finance (IF) continues to deliver
in 2002, compared with 1.2m in 2001 and growth in customer balances and improved
• 1.3m new bank accounts (target 1m)
an estimated 27% share of the growing “new financial performance. Strong growth in net
• 1.2m new credit card accounts (target 1m) and switchers” current account market. Our interest income was the key factor behind a
Automated Account Transfer Service is now £29m reduction in losses in the second half
• Bancassurance premium income up 66%
used by 17% of all applicants. Customers of 2002. Customer advances increased by
(target up 30%)
attracted by decent rates for current £7bn in 2002 as IF took a UK net mortgage
• Cost growth of 2.3% (target 3%) accounts have perhaps not surprisingly lending share in excess of 8%. Further
invested or transferred balances to their improvements in income generation, allied
This level of performance was delivered
HBOS bank accounts which have grown by to stability in operating costs and the
by colleagues who are motivated to succeed
35% in the year to £8.9bn. Debit balances
and rewarded by performance. A combination
have also grown by 17% to £0.8bn.
of an on target outcome, a share based
enhancement where part or all of the Exceptional Growth in Consumer Credit
bonus can be converted to shares and The HBOS credit card business continues
share options sees colleagues amongst to benefit from an extensive multi-branded
the most productive in UK banking today. product range coupled with the broadest
distribution base of any UK retail bank
The Measures of Success
(ranging from branches to direct mail and
Mortgage Balances Reach £150bn our broad collection of partnership and
Another year of extraordinary growth has affinity arrangements). We acquired 1.2m
seen the five HBOS retail mortgage brands new accounts (1.4m including those acquired
achieve a 29% share of net lending for 2002 through our joint venture partners) in 2002,
Howard introduces customers to our products and
services online via the ‘Howard’s Home’ microsite.
+42%
£57bn total gross mortgage
+26%
£3.9bn credit card balances
lending in the year
Prospects
Retail Banking has exceeded each
of the published targets set for 2002.
We have demonstrated that our strategy,
based on delivering value, simplicity and
transparency to consumers, allied to an
intense focus on cost control and asset
quality, is driving exceptional growth in
both sales and profitability.
2003 is the year when many of our
integration initiatives come to fruition,
further strengthening our capability to
deliver sales and profit growth in 2004
and beyond.
The key deliverables for Retail Banking
in 2003 will be:
• to achieve net mortgage lending
in excess of HBOS’s share of stock
• to confirm our position as the clear
No.1 bancassurer in the UK
Janice Geddes, Banking Advisor and Julie McKenzie,
Assistant Manager, Stirling branch.
• to deliver one million new current
accounts and one million new credit
card accounts
• for Intelligent Finance to break even
provisions charge will drive a significant Current account credit quality improved by the end of the year with average
reduction in losses in 2003, enabling IF to with provisions as a proportion of year products per customer reaching 2.5, and
meet the commitment to break even by the end advances decreasing from 4.85%
end of the year. in 2001 to 4.65% and non-performing assets • to once again restrict total cost growth
declining from 8.0% of year end advances to no more than 3%.
Our Financial Performance to 6.8% in 2002. Mortgage credit quality
Profit before tax and exceptionals also improved, as measured by arrears
accelerated to £1,426m with the second performance and closing provisions as a
half profit performance matching the 18% percentage of closing advances. Mortgage
growth achieved in the first half. Growth arrears declined from 1.49% to 1.08% and
in lending balances, improved acquisition total mortgage provisions as a percentage
spreads and broadly stable margins were of closing advances declined to 0.29% in
the key drivers behind an 11% increase in 2002 compared with 0.32% as at December
net interest income to £3,007m, while tight 2001. In the credit card portfolio, credit
cost control and the delivery of £62m of quality remains stable with provisions
merger-related synergies restricted growth declining as a percentage of balances at
in operating expenses to 2.3%. the year end to 5.52% from 5.74% in 2001
and NPAs stable at 8.4%. In personal lending,
Strong Credit Quality despite the significant growth in new
Overall asset quality improved still further advances, there has been no deterioration
as the year progressed with all lead quality in application credit quality, and all early
indicators showing either stable or improving warning indicators remain stable. Provisions
trends. Non-performing assets (‘NPAs’) as a proportion of year end balances have
decreased from 2.14% of total advances reduced from 8.26% in 2001 to 7.49%
to 1.84%, whilst the provisions charge in 2002. Non-performing assets declined
increased by £92m to £373m representing from 13.0% of year end balances in 2001
0.25% (2001 0.22%) of average advances. to 11.8% in 2002.
+7.2%
Retail Banking
continued
£103.8bn total Retail

deposit balances
Financial Performance The key movements in net interest margin are Intelligent Finance Year Year
(including Intelligent Finance) as follows: ended ended
Year Year 31.12.02 31.12.01
Movement in Margin Basis Points Profit and Loss Account £m £m
ended ended
31.12.02 31.12.01 Net interest margin for the year Net interest income 35 (22)
Restated ended 31 December 2001 215 Non-interest income (6) (2)
Profit and Loss Account £m £m Add:
Operating income 29 (24)
Net interest income 3,007 2,697 Credit Cards 3
Operating expenses (148) (118)
Non-interest income 721 677 Consumer Finance 2
Banking 1 Operating loss before
Mortgages & Savings 609 510 Capital Earnings 1 provisions (119) (142)
Banking 240 222 Less: Provisions for bad & doubtful debts
Personal Loans 33 19 Intelligent Finance (5) Specific (25) (10)
Credit Cards 151 124 Wholesale Funding (6) General (3) (2)
Other 47 43
Mortgages (3) Loss before tax (147) (154)
Fees and commissions receivable 1,080 918 Savings (4)
Fees and commissions payable (348) (243) Total Lending to Customers £12.4bn £5.4bn
Net interest margin for the year Total Customer Deposits £3.3bn £2.2bn
Profit on sale of investment
ended 31 December 2002 204 Total Risk Weighted Assets £6.7bn £2.8bn
securities – 5
Other operating income (11) (3)
Balance Sheet and As at As at
Operating income 3,728 3,374 Asset Quality 31.12.02 31.12.01
Operating expenses* (1,956) (1,912)
Loans & Advances to
Staff (794) (731) Customers** £157.9bn £135.4bn
Accommodation, repairs
and maintenance (62) (59) Bad Debt Provisions £m £m
Technology (75) (86) Specific 855 778
Marketing & communication (240) (263) General 312 301
Depreciation – Tangible fixed
assets (55) (46) Total 1,167 1,079
Other (180) (184) Provisions as % of Advances 0.74% 0.80%
Sub total (1,406) (1,369) Gross Loans & Advances
We are introducing new initiatives such as
Recharges: to Customers** £159.1bn £136.5bn online kiosks to advise customers on our
Technology (255) (241) % % products and services.
Accommodation (133) (127)
Other Shared Services (162) (175) Classification of advances**:
Home mortgages 91 92
Operating profit before Other personal lending:
provisions* 1,772 1,462 Secured 1 1
Provisions for bad & doubtful debts Unsecured 4 4
Specific (360) (266) Credit cards 3 2
General (13) (15) Banking 1 1
Share of profits of associates
and joint ventures 27 24 Total 100 100
Profit before tax * 1,426 1,205 Interest in suspense £70m £63m

Non-Performing Assets £2,899m £2,897m
Net interest margin 2.04% 2.15% Total Risk Weighted Assets £90.0bn £77.7bn
Net interest spread 1.89% 2.01% Total Customer Deposits £103.8bn £96.8bn
Cost:income ratio* 52.5% 56.7%
** After securitisation of £5.0bn (2001 £1.5bn)
Post tax return on equity* 20.4% 18.8%
of mortgage assets.
* Excluding exceptional items.
HX027_IID_p8-13_vAW5_new 13/3/03 2:55 pm Page 8
Highlights
• Profits £589m (2001 £472m)
• ROE 16.7% (2001 16.0%)
• Strong growth in Insurance
policies and premiums
• Investment sales up
in difficult year
• Insight Investment
Management launched
Phil Hodkinson, David MacKechnie, Personal Financial Advisor.

Chief Executive, Insurance & Investment.
Insurance & Investment Sales in the second half of 2002 exceeded

the strong performances of the first half
Insurance & Investment Repayment

The benefits of the HBOS multi- Sales of repayment insurance under the
channel/multi-brand distribution Halifax and third party brands increased
strategy were evident in 2002 with by 27% to £799m during 2002 as a result
general insurance sales up by 25% and of increased personal loan and credit card
total investment sales up by 11% despite volumes. Repayment insurance provides
tough trading conditions. Moreover, in customers with valuable protection in the
both cases, sales in the second half of 2002 event of accident, sickness or unemployment.
exceeded the strong performances of the It also helps protect the quality of these
first half year, underlining the diversity and assets on HBOS’s balance sheet. From the
resilience of these businesses. middle of 2003, all repayment insurance
Profit before tax and exceptionals offered to Group customers will Douglas Ferrans, Chief Executive, David Norman,
advanced by 25% to £589m, profits in both be underwritten by Halifax Insurance Managing Director - Retail and Ingrid Inverson,
the insurance and investment businesses Ireland and all third party business will Head of Emerging Market Debt - all of Insight
making good progress. Investment Management.
be underwritten by St. Andrew’s Insurance.
Operational Performance Motor
Insurance Business Sales of motor insurance underwritten by
Sales of insurance business increased 25% esure under the esure, Halifax and Sainsbury’s Investment Business
Bank brands increased by 79% to £125m in Sales of investment business increased
to £1,334m gross written premiums in 2002,
2002 as very good progress continues to be by 11% to £1,222m in 2002 as measured
good progress being made on all major
made since esure’s launch in 2001. Particularly by effective premium income (EPI) and total
product lines.
pleasing is the growing public awareness of new premiums increased by 14% to £8,887m,
Insurance Sales again underlining the growth credentials of
the esure brand, which is attracting greater
Gross Written Number of these businesses in the face of tough trading
sales not only via the telephone but also
Premiums In-force Policies conditions. Particularly impressive, despite
increasingly via the internet. the progressively worsening investment
2002 2001* 31.12.02 31.12.01*
£m £m 000’s 000’s Other conditions during 2002, was an 8% increase
In addition to legal protection policies in sales in the second half of 2002 relative
Household 374 341 2,319 2,086 sold in combination with other products, to the first half.
Repayment 799 631 3,394 2,734 the main business lines under this heading Total UK investment sales grew by 12%
Motor 125 70 443 236
are annual travel insurance, underwritten to £1,095m in 2002. Based on the new
Other 36 22 842 455
by St. Andrew’s Insurance and launched in business figures declared to date by other
Total 1,334 1,064 6,998 5,511 February 2002, and Bank of Scotland Business major companies, we believe that HBOS
Insurance, which was launched in October, has maintained its current position as the
* 2001 figures have been restated to include 3rd party providing commercial insurance brokerage third largest life, pensions and investment
repayment business and to report legal protection
policies sold in combination with other products services to Business Banking customers. provider to the UK market.
in the “Other” category.
Investment Sales
Household 2002 2002 2002 2002 2001 2001 2001 2001
Sales of household insurance under £m Single Annual Total EPI* Single Annual Total EPI*
the Halifax, Intelligent Finance, esure and
Sainsbury’s Bank brands increased by 10% to Life 5,239 91 5,330 615 5,118 86 5,204 598
£374m in 2002 largely as a result of increased Pensions 2,049 262 2,311 467 1,195 254 1,449 373
mortgage lending and improved cross-selling CIS 1,228 18 1,246 140 1,115 21 1,136 133
performance. In addition, the launch of a new Total 8,516 371 8,887 1,222 7,428 361 7,789 1,104
freestanding household insurance product sold
via bank and estate agency branches, via a Intermediary 3,399 221 3,620 561 3,724 221 3,945 593
new 200-seat call centre in Leeds and via Bancassurance 4,071 100 4,171 507 2,365 70 2,435 306
the internet, proved very successful. Almost Wealth management 1,046 50 1,096 154 1,339 70 1,409 205
1 in 10 of all households in the UK are today Total 8,516 371 8,887 1,222 7,428 361 7,789 1,104
covered by household policies arranged
by ourselves. * Effective premium income is annual premiums plus 10% of single premiums.
25%
growth in general
11%
growth in investment sales
insurance sales
Bancassurance to the £500m of capital allocated to the a separate investment house for specialist
Sales of investment business, distributed business at the start of 2003, the free asset intermediaries and the institutional market.
via Halifax Personal Financial Advisers (PFA), ratio before this allocation was estimated
As a result of falling markets, funds under
the Bank of Scotland Investment Service to be 7.1% as at 31 December 2002
management reduced by 13% to £57bn
(BOSIS) and Direct Offer, increased by 66% to (11.5% at 31 December 2001) expressed
at 31 December 2002. The acquisition
£507m during 2002, confirming our view that as a percentage of total liabilities, excluding
implicit items and before deduction of the of Rothschild Asset Management in January
HBOS is now the UK’s largest bancassurer
by market share. This excellent growth builds minimum solvency margin. Clerical Medical’s 2003, with £11bn under management, will
on similarly strong performances in the two insurer financial strength rating was also accelerate Insight’s ambition to become a
previous years and underlines the success of recently re-affirmed as “AA” by Standard & top player in the institutional fixed income
our customer champion strategy of offering Poor’s and the with profit fund (invested market. Total institutional funds now exceed
simple, transparent, value for money products: 48% equities, 12% property, and the balance £35bn.
cash and fixed interest at year end) produced Total Group assets under management,
• The number of in-branch PFAs rose by
an overall negative return of only 8.3% including assets managed by St. James’s Place,
114 to 801 at 31 December 2002 and
during 2002 compared to a 24% fall in the were £64bn at 31 December 2002 compared
annualised productivity improved to
FTSE 100. This display of financial strength to to £70bn the previous year. 2002 proved to be
£296,000 EPI per adviser.
both customers and shareholders reinforces another good year for short term performance
• The 249 BOSIS advisers delivered annualised Clerical Medical’s determination to remain as with 63% of funds above median. The long
productivity of £483,000 EPI per adviser, one of only a few leading UK intermediary term track record is as follows:
with roughly three quarters of sales being businesses.
new investments. % Funds Above Median
Wealth Management 3 Years 5 Years
• Sales quality was once again maintained Sales at St. James’s Place Capital (SJPC) were Life 60% 78%
at a high level and the average case size down 25% to £154m in 2002 as a result of Pension 78% 88%
was increased. the adverse impact of stock markets on the Collective Investments 61% 67%
The performance of our bancassurance confidence of higher net worth investors.
Partner numbers decreased by 20 to 1,101 All funds 64% 74%
business in the face of tough trading
conditions, especially in the second half as potential recruits await the outcome of
of 2002, highlights that we are progressively the polarisation reforms and SJPC pursued
leveraging HBOS’s strong savings franchise its policy of only retaining Partners likely
and, at the same time, increasingly attracting to be profitable in the medium term. The
higher net worth investors. diversification of non-investment wealth
management services continued with fees
Intermediary increasing by 134% to £11.7m in 2002, most
As reported at the half year, Clerical Medical’s notable being the success of St. James’s
strategy is to leverage its strong intermediary Place Bank, run by Intelligent Finance.
franchise by pricing with profit products for
improved returns and by increasing sales of The breadth of products and services
other product lines thus improving both now available to Partners, together with
profitability and capital efficiency. Even the strong multi-manager investment
though with profit product sales fell by performance track record, makes SJPC
21% as a consequence (now accounting for an attractive place for financial advisers
only 43% of UK intermediary business), sales considering their futures as a result of de-
of other UK products and in Europe increased, polarisation. These factors bode well for the
and total intermediary sales fell by only 5% prospects of the business as markets recover
to £561m EPI in 2002 following the strong and as the regulatory changes take effect.
performance in 2001 when sales grew by 68%.
Asset Management
As a result of this strategy, new business profits
During 2002, the asset management business
from the intermediary channel increased
was re-branded as Insight Investment,
in the year.
new talent was added to the investment
At the same time, existing policyholders management team and a new range of
continue to benefit from Clerical Medical’s products was launched. The objective
comparative financial strength. In addition of these moves is to establish Insight as
Colleagues at our General Insurance Sales Centre
in Lovell Park, Leeds, using their training and
development area.
7m
Insurance & Investment
continued
insurance policies
in-force, increased
by 27%
Financial Performance Year Year

Profit before tax and exceptionals ended ended
advanced by 25% to £589m, profits for the 31.12.02 31.12.01
Profit and Loss Account Restated
investment businesses being restated to take
(Insurance Business) £m £m
full account of stock market movements on
an unsmoothed basis in the year in keeping Net interest income 22 12
with other UK bancassurers. Non-interest income 546 493
Year Year Income from long term
ended ended assurance business 63 38
31.12.02 31.12.01 General insurance premium
Profit and Loss Account Restated income 320 265
(Insurance & Investment) £m £m Other fees and commissions
Alan Denholm, Institutional CIO Co-Head of Equities. receivable 317 310
Net interest income 50 18
Fees and commissions payable (156) (127)
Non-interest income* 831 733
As announced in December 2002, HBOS has Other operating income 2 7
Income from long term
adopted the now more generally accepted
assurance business 233 123 Operating income 568 505
approach to embedded value reporting for
General insurance premium Operating expenses* (76) (75)
its long term assurance business by using General insurance claims payable (79) (68)
income 320 265
unsmoothed asset values as the basis for
OEIC/Unit trust management
projecting future cashflows rather than Operating profit* 413 362
income 50 71 Share of profits of associates
smoothed values. The profit and loss
Fund management income 36 26 and joint ventures (13) (14)
account for the year ended 31 December
Other fees and commissions
2001 has been restated and a comparison Profit before tax* 400 348
receivable 352 367
of the revised and previous reporting bases
is shown below. The economic assumptions * Excluding exceptional items.
Other operating income 6 16
used for each set of results are set out in
Operating income* 881 751 the “embedded value basis” section overleaf. Investment Business
Operating expenses* (196) (194)
Reported profit before tax for the
Reporting Basis Comparison Investment Business increased by 52% to
Staff (72) (58) 2002 2001 £189m on the revised (i.e. unsmoothed) basis.
Accommodation, repairs and Profit Before Tax £m £m
Year Year
maintenance (13) (12) Previous reporting basis 736 792 ended ended
Technology (4) (1) Adjustment from smoothed 31.12.02 31.12.01
Marketing & communication (17) (12) to unsmoothed asset values (203) (320) Profit and Loss Account Restated
Depreciation – Tangible fixed Change to economic (Investment Business) £m £m
assets (6) (3) assumptions linked to Net interest income 28 6
Other (40) (60) accounting policy change 56 – Non-interest income* 285 240
Sub total (152) (146) Income from long term
Revised reporting basis 589 472
Recharges: assurance business* 170 85
Technology (20) (14) OEIC/Unit trust
Insurance Business
Accommodation (4) (3) management income 50 71
Reported profit before tax from the Insurance
Other Shared Services (20) (31) Fund management income 36 26
Business increased by 15% to £400m in 2002 as
Other fees and commissions
General insurance claims payable (79) (68) the business continues to perform exceptionally receivable 35 57
Amounts written off fixed well, primarily as a result of mortgage, loan Fees and commissions payable (10) (8)
asset investments (4) (3) and credit card growth in Retail Banking. Other operating income 4 9
Overall operating income for the Insurance
Operating profit* 602 486 Business grew by 12% to £568m, whilst Operating income* 313 246
Share of profits of associates expenses incurred grew by only 1% to £76m. Operating expenses* (120) (119)
and joint ventures (13) (14) Loss ratios on underwritten business remained Amounts written off fixed
stable throughout the year. In only its second asset investments (4) (3)
Profit before tax* 589 472
year of trading, esure continues to make good Profit before tax* 189 124
Post tax return on equity** 16.7% 16.0% progress towards a targeted breakeven
* Excluding exceptional items. position in 2004. * Excluding exceptional items.
** Before exceptional items and after adjusting for the
impact of short-term fluctuations in investment returns
and changes to economic assumptions.
UK’s third largest life, pensions and investment group

The underlying performance of the Investment Sources of Income from Long Term Economic Assumptions
Business was, however, dwarfed by the impact Assurance Business Revised Basis Previous Basis
of short term fluctuations in investment Year Year
returns. Profit based on long term assumptions, ended ended Year Year Year Year
31.12.0231.12.01* ended ended ended ended
calculated by eliminating the impact of short
Restated 31.12.02 31.12.01 31.12.02 31.12.01
term fluctuations in investment returns and £m £m % % % %
changes to economic assumptions, increased
by 32% to £511m in 2002. Contribution from Discount rate
Existing Business 366 281 (net of tax) 8.5 9.4 9.0 9.4
Investment Business Profits Based Contribution from New Business 120 55 Equity return
on Long Term Assumptions Investment Earnings using (net of tax credits) 7.5 7.5 7.5 7.5
2002 2001 Gilt return
long term assumptions 69 51
£m £m
Changes to economic (gross of tax) 5.0 5.0 5.0 5.0
Reported profit before tax 189 124 assumptions 90 60 Expense inflation 3.0 3.0 3.0 3.0
Effect of short term fluctuations Short term fluctuations in
in investment returns 412 324 investment earnings (412) (324) Modified Statutory Solvency Basis
Changes to economic assumptions (90) (60) As the name suggests, profits calculated
Income from long term using the modified statutory solvency basis
Profit based on long assurance business before tax* 233 123 (‘MSSB’) use the same long term assumptions
term assumptions 511 388 Comprising: as required to assess regulatory solvency
Investment Business 170 85 but with certain prescribed accounting
The key drivers behind this performance Insurance Business 63 38 adjustments, e.g. the deferral of acquisition
improvement were strong sales growth in expenses. Because of the conservative nature
recent years which has helped reduce unit of the current solvency regulations, a major
costs, improved new business product mix The embedded value of long term assurance failing of MSSB is that new business is
and favourable retention experience, relative business at 31 December 2002 was £3,544m normally reported as a loss in the year
to our embedded value basis. Dampening (2001: £3,065m) of which 51% was shareholder of sale. This depresses the MSSB result for
performance was a sharp fall in profits reported funds and the balance was the value of businesses enjoying healthy sales growth
by St. James’s Place, mainly due to £72m in-force business. and therefore does not accurately reflect
of losses in its non-core investments in the value of such new business.
Embedded Value Basis
LAHC and Nascent.
The economic assumptions used in the The consolidated MSSB result for our long
Long Term Assurance Business calculation of the embedded values on both term assurance business compared to the
As in previous years, we have reported the the revised and the previous reporting bases revised embedded value reporting basis is
income from long term assurance business are set out below. The reduction in discount set out below.
using the embedded value methodology in rate from 9.4% to 9.0% in the previous reporting
basis reflects our original intention to move Reporting Basis Comparison for Long Term
keeping with other major UK banks. Insurance
the basis progressively over time closer Assurance Business
groups, on the other hand, use the “Modified 2002 2001
Statutory Solvency Basis” as their primary towards that used by other UK bancassurers. £m £m
profit reporting basis whilst at the same time As announced in December, as part of the
typically providing supplementary information accounting policy change, on the revised Income reported on
using embedded values or achieved profits. reporting basis we moved the discount rate modified statutory
The following sections give more information further from 9.0% to 8.5%. All other aspects solvency basis before tax (133) (163)
about our results on each basis. of the basis remain unchanged. Income reported on revised
embedded value basis before tax 233 123
Embedded Value Profits
The main sources of income from long New Business Profitability
term assurance business on the revised Because of the passive approach to
(i.e. unsmoothed) embedded value reporting economic and experience assumptions
basis are set out below. The majority of adopted under the embedded value
the income arises in the core Investment reporting basis, the contribution of new
Business, but part also arises in the Insurance investment business to reported profits
Business where life assurance is offered in the year of sale does not reflect the
as integral part of repayment insurance. full lifetime value attributable to such
1in10
Insurance & Investment
continued
Almost
of all UK households are covered
by one of our household policies
new business. To gauge the impact of this market leading platform acquired from
and to aid comparison with competitors, The Equitable in 2001, is progressing well.
we have again calculated new business
In the event of a market recovery optimism
profitability on an achieved profits basis
about the prospects of recovery at SJPC as
using a discount rate of 8% per annum and
polarisation reforms come through, is well
active experience and expense assumptions.
founded. The fortunes of Insight Investment
On the achieved profits basis, new business are similarly linked in the near term to the
profitability for our Investment Business market but are protected longer term, in
increased to 22% of effective premium part, by an increasing reputation for fixed
income (EPI = annual premiums plus 10% income management.
of single premiums) in 2002 thus moving us
Market conditions in the early part of 2003
further towards our target of 25% EPI within Rachel Crossley, Director, Investor Responsibility
at Insight Investment Management. could hardly be tougher, but right across
3 years. The split of new business profitability
our insurance and investment businesses
by distribution channel is shown below, the
we have the brands, distribution, customers
key movements being in the main attributable A more reliable measure, especially and scale to provide maximum advantage for
to changes in product mix rather than changes for pricing new business, is Internal Rate
to product prices or underlying margins. our shareholders.
of Return (IRR). This is calculated using
New Business Profitability projected cash flows and specifically allows
for the equity capital required to support
2002 2001 sales. It therefore avoids the pitfalls of
EPI 2002 EPI 2001
the embedded value methodology. The
£m %EPI £m %EPI
IRR for new business in 2002 was 17% p.a.
Intermediary 561 15 593 11 after tax.
Bancassurance 507 24 306 31
• Within the Insurance Business, household
Wealth
insurance is underwritten by Royal & Sun
Management 154 41 205 35
Alliance and hence requires virtually no
Total 1,222 22 1,104 21 HBOS equity in support. Whilst this is
capital efficient, it does nonetheless mean
Return on Equity that ROE is not a helpful measure for this
The post tax Return on Equity (ROE) line of business.
achieved by the Insurance & Investment
Prospects
Division in 2002 was 16.7% (2001: 16.0%)
The outlook for our insurance and
before exceptional items and after adjusting
bancassurance businesses continues to
for the impact of short term fluctuations
be encouraging. The momentum of these
in investment returns and changes
businesses, linked as they are to the growth
to economic assumptions.
of HBOS’s core retail banking business, is
Whilst this result contributes to that of evident from their performance in 2002.
HBOS as a whole and indicates a healthy Their prospects are likely to be further
contribution from the Insurance & Investment advanced by the industry-wide regulatory
Division towards shareholder value creation reforms currently underway.
and the Group target ROE, it is, in our view,
In the intermediary market, Clerical Medical
of limited value in gauging the returns from
has embarked on a strategic course that only
specific businesses within the Division:
a few other large IFA offices can match. New
• In respect of long term assurance business profitability is on a sound footing
business, profits and equity are calculated and whilst in the near term competitors may
using the embedded value methodology win business at the expense of profitability, in
based on an assumed long term discount the medium term Clerical Medical’s approach
rate. All things being equal, ROE calculated is likely to generate greater returns for
in this way will trend over time towards shareholders. The establishment of a shared
the discount rate thus defeating its service organisation to support our life and
value as a measure of performance. pensions business processing, utilising the
Insight Investment Management’s objective is to achieve £100bn

of funds under management within 4 years
Highlights
• Profit £307m (2001 £306m)
• ROE 15.4% (2001 16.4%)
• 23% increase in advances
to £23.2bn
• NPAs as a % of advances falls
to 2.21% (2001 2.72%)
• Total UK business customer
numbers up by 73,000 to 273,000
Colin Matthew, Salim Janmohamed, a Business Banking customer

Chief Executive, Business Banking. and Burger King franchisee.
Business Banking The sales momentum across our business has

delivered strong lending growth of 23%
A Year of Achievement At the start of the year we began to Laying the Foundations for Growth
The last twelve months have seen work with the Halifax branch network We comfortably beat our target of opening
notable achievements recorded for to offer ground-breaking products, such in excess of 70,000 new customer accounts
Bank of Scotland Business Banking, as the interest bearing current account and increased total advances to £23.2bn,
culminating in the Business Finance and free banking forever. By the end with significant lending in Motor, Property
Awards when Business Banking gained of the year, 42,000 new customers had Investment and Hotels and Restaurants.
awards for “Business Bank of the Year” agreed with us that this was the best
In a highly competitive market Motor Finance
and “On-line Provider of the Year”. offering on the market. Overall, our total
provided nearly £2bn of new lending, and
This crowned a year when we made business customers in the UK increased
achieved a market share around 13% with
significant progress towards our key by 36% to 273,000.
over 540,000 customers, an increase of
goal of challenging the way that
During the year we completed one of the 11% over last year. In addition fleet growth
business banking is provided in the UK.
most ambitious recruitment programmes of 12% was recorded by our market-leading
Financially, we have made good progress ever seen in the industry. Over 1,500 people contract hire businesses and including our
in a year where the key focus has been with wide experience of the finance business Lex Vehicle Leasing and RFS joint ventures
on investment, including recruitment and decided to join us in sales, relationship this now gives us a fleet of 170,000 vehicles,
infrastructure expansion in England and management and customer services. The the largest in the UK.
Wales. The sales momentum across our level of business generated by our new
Whilst residual values across the industry
businesses, including our attack on the business teams on a face-to-face basis
have dropped lower than anticipated,
traditional providers of SME products, grew significantly ahead of plan. We have
impacting negatively on our results, recent
has seen lending growth of 23%. seen strong growth across many of our key
trends indicate a more stable market.
markets, including asset finance and our
Growth in deposits has been robust, at 15%.
thriving businesses in Ireland and Australia. Our overseas operations now account
Operating income rose 17% to £1.2bn and
for 22% of profit before tax. Following the
profit before tax and exceptional items was We have gained a wide variety of
integration of our two businesses in Ireland,
£307m including £25m profit on the disposal customers from other banks over the last
lending growth of 26% was achieved and
of our merchant services business (against twelve months. Our approach is to offer
we are continuing to make good progress
£306m in 2001). flexibility to customers and transparency of
towards our goal of becoming the number
choice in their banking arrangements. Our
This is a creditable result when seen one business bank in Ireland. In Australia
distribution strategy provides for internet
against a background not only of significant we have generated strong earnings from
and telephone banking, through the Direct
investment, but also the ground-breaking fees and commissions. Total growth in
Business Bank, including professional banking
introduction of credit interest on all overseas deposits was 38%.
advice. It also now provides business servicing
current accounts. through around 90 branches in England On top of the successes of the last
Challenging the Face of Business Banking and Wales and 263 in our traditional twelve months, our investment in people
Our strategy is to continue to challenge heartland of Scotland. We are currently and infrastructure is designed to provide a
the established view of business banking. strengthening our presence in Scotland, springboard for growth in 2003. In addition
Our track record of innovation produced with 165 additional business managers to our recruitment of over 1,500 banking
interest bearing current accounts and free being placed within local communities. professionals, we also have an infrastructure
banking forever even before the Competition These will complement the 235 people in the UK to support dramatic increases
Commission forced our competitors to already providing advice and support in in business, through branch, telephone,
do the same. And whilst other banks are business relationship roles in Scotland. internet, intermediary and face-to-face
reluctantly providing the minimum required channels.
under the Competition Commission report, Investment in a series of key strategic
we continue to go beyond what is required, IT systems has also strengthened our capability,
with innovations such as free cash-in-transit not only to process transactions and credit
service and a commercial offset mortgage. applications faster than ever and handle higher
customer volumes, but also to dramatically
The strength of our proposition
reduce our time-to-market for new products.
was highlighted by our award-winning
‘Money Man’ advertisements, which Working Together to Reach
challenged businesses to contrast the More Customers Than Ever
Bank of Scotland approach with the excess The basis of our expansion in England and
profit other banks were making from them. Wales is our partnership with the Halifax
Robert Hare accepting the ‘Business Bank of the
Year’ and ‘On-line Provider of the Year’ awards
at the Business Finance Gala Awards, 2002.
+23%
£23.2bn total lending
13%
market share with
to business customers over 540,000 Motor
Finance customers
branded branch network. We have a presence

in around 90 locations with plans for this
to increase, and the Direct Business Bank
has benefited from the enormous number
of referrals generated through the branch
network, from which 1 out of every 2
becomes a customer.
We are currently ahead of target for delivery
of synergy benefits arising from the merger
between Bank of Scotland and Halifax.
Recruitment of the staff for expansion into
England & Wales is completed, the cost base
is stable and revenue streams are increasing.
Overall synergy performance is 32% better
than expected.
Financial Performance
In a year of planned investment, profit
before tax and exceptionals was £307m
representing 10% of the Group’s profits.
Operating income grew strongly in the
year, up 17% to £1,204m driven by business
from both new and existing customers. Net
interest income rose by 14% to £628m and
customer advances rose 23% to £23.2bn.
Non-interest income rose by 21% to £576m.
Our operating expenses excluding operating
Kim Collins is our 1,000th Business Banking recruit
lease depreciation grew by 25% as we invested
in 2002.
in significant additional people and resources
and expanded our presence into around
90 locations throughout England and Wales. are in place in all key new business areas their bank. We will continue to recruit the
Notwithstanding the variable economic to support the acquisition and growth of best people in the industry. In all our business
climate, asset quality remains sound. deposits to ensure a healthy self-funding ratio. units and our overseas operations we seek to
The total provision charge as a percentage continue the growth in performance already
Our results have delivered a post tax return
of average customer lending was 0.70% on equity of 15.4% (2001 16.4%) which reflects seen, whilst at the same time containing cost
compared to 0.69% for 2001. Non Performing the impact of the strategic investment in the growth to produce progressive reductions in
Assets as a percentage of total lending have expansion into England and Wales. our cost:income ratio.
reduced substantially from 2.72% to 2.21%. In challenging the face of business banking,
Ready to Do Business
We continue to have a well spread portfolio we will bring significant benefits to both
With our innovative proposition and
of advances, and significant exposures are customers and shareholders.
focus on giving genuine benefit to all
regularly reviewed.
our customers, we have already broken the
Margins were impacted in the second half mould of business banking. The investment
of the year by asset mix considerations. in people and infrastructure that we have
Consequently, the margin declined by made in the last year gives us the platform
11bps in the second half but overall for to generate growth on a scale never seen
the year margins were stable at 3.04%. before in these markets.
Deposit growth in the year has been strong We will continue to reap the benefits of
at 15%, increasing from £10.7bn to £12.3bn our partnership with the Halifax Retail branch
which reflects our sustained focus on this network. We will both grow our market share
part of the funding mix. Dedicated teams and improve the deal that businesses get from
UK No1
Business Banking
continued
in Contract Hire and Vehicle

Management, with over
170,000 vehicles
Financial Performance Year Year

Year Year ended ended
ended ended 31.12.02 31.12.01
31.12.02 31.12.01
Net interest margin 3.04% 3.04%
Restated
Net interest spread 2.67% 2.56%
Profit and Loss Account £m £m
Bad debt charge as a %
Net interest income 628 550 of average advances 0.70% 0.69%
Non-interest income 576 476 Cost:income ratio** 55.7% 50.0%
Post tax return on equity* 15.4% 16.4%
Business Centres 136 116
Asset Finance 47 30 * Excluding exceptional items.
** Cost:income ratio has been calculated excluding
Motor Finance 39 39 exceptional items and after netting operating lease
Other 43 36 depreciation and amounts written off fixed asset
investments against operating income.
Fees and commission receivable 265 221
Fees and commissions payable (119) (110) Balance Sheet As at As at
Operating lease rental income 412 338 and Asset Quality 31.12.02 31.12.01
Profit on sale of investment
securities 7 11 Loans & Advances
to Customers £23.2bn £18.9bn
Other 11 16
Bad Debt Provisions
Operating income 1,204 1,026
Specific £195m £201m
General £148m £134m
Staff (245) (198)
Total £343m £335m
Accommodation, repairs and
maintenance (26) (20)
Provisions as a % of advances 1.48% 1.77%
Technology (22) (28)
Marketing & communication (23) (19) Gross Loans and Advances
Depreciation: to Customers £23.5bn £19.2bn
Tangible fixed assets (20) (17) % %
Operating lease assets (274) (201) Classification of advances
Other (85) (51) Agriculture, forestry and fishing 3 3
Sub total (695) (534) Energy – 1
Recharges: Manufacturing industry 9 10
Technology (51) (32) Construction and property 21 17
Accommodation (8) (2) Hotels, restaurants and wholesale
Other Shared Services (35) (46) and retail trade 17 15
Transport, storage and
Operating profit before communication 4 3
provisions* 415 412 Financial 12 13
Provisions for bad & doubtful debts Other services 22 26
Specific (135) (119) Other lending
General (12) (6) – Motor Finance 10 9
Amounts written off fixed asset Overseas Residents 2 3
investments (6) –
Total 100 100
and joint ventures 20 19 Non Performing Assets (NPAs) £513m £515m
Profit on disposal of Interest in suspense £44m £38m
business 25 – NPAs as a % of closing advances 2.21% 2.72%
Provisions including interest
in suspense as a % of NPAs 75% 72%
Total Risk Weighted Assets £26.7bn £21.5bn
Total Customer Deposits £12.3bn £10.7bn
Winning the award for “Business Bank of the Year” crowned a year when we
made significant in-roads in our key goal of challenging the way that business
banking is provided in the UK
Highlights
• Profits £681m (2001 £523m)
• ROE 19.4% (2001 17.8%)
• 25% increase in drawn advances
to £44.1bn
• NPAs as a % of advances falls
to 1.61% (2001 1.69%)
George Mitchell, Our Corporate Banking team was responsible for

Chief Executive, Corporate Banking. funding Philip Green in his bid for the Arcadia Group.
Corporate Banking Controlled growth, improved efficiency and a

dedicated focus on credit quality have delivered
a 30% increase in profits
Strong Franchise term profitable relationships, through good Credit Quality

The markets in which Corporate Banking times and bad, continues to deliver impressive Against an uncertain economic backdrop,
operates are large and diverse and have results. Controlled growth, increased returns, our overall credit quality has remained
the potential to deliver strong sustainable improved efficiency and a dedicated focus stable, albeit certain sectors are clearly
growth. We provide a range of products on credit quality, have resulted in a profit suffering more than others. Our specialised
and services, predominantly to an ever- before tax and exceptionals up 30% on the teams, dedicated to working proactively
growing number of mid-market corporates, prior year, notwithstanding a challenging with those customers experiencing problems,
principally in the United Kingdom, but economic backdrop. continue to help mitigate the impact of non-
also in appropriate overseas markets. performing assets, which have reduced from
Focusing on Returns 1.69%, in 2001 to 1.61% in 2002.
Our franchise now includes carefully We are not a follower of fashion, and
targeted profitable activities in Europe, continue to turn aside significant volumes We are committed to improving all
North America and Australia. Overall of business, which do not meet our strict aspects of our risk management. All
we operate from 22 Corporate Banking quality and return criteria. We do not individual credits are reviewed on an
locations in the UK and following the however adopt a retrenchment strategy in ongoing basis, whilst we also undertake
opening of our latest offices in Madrid, a harder economic climate as our experience regular research into, and reviews of,
a further 13 overseas. We believe there shows that when the economy slows business sectors as part of our credit
are real opportunities to expand selectively it is often a very good time to lend. underwriting processes. We operate a
elsewhere in Europe and also in the North sectoral “traffic light” system where our
In such climates deal structures are less risk appetite across 90 different sectors
American and Australian marketplaces
aggressive, management projections are is re-assessed and updated on a monthly
where we have an established presence
more realistic and asset values are generally basis. A higher level of lending sign-off is
and a proven track record.
more subdued. In addition, fair weather required for those sectors that are flagged
We continue to lead the market in many competition has conversely retrenched as red where from time to time we consider
areas. Our Structured Finance, Integrated and returns are therefore higher. the credit risk to have increased.
Finance and Joint Venture offerings, often
Drawn advances in 2002 increased by Our largest overall concentration is
incorporating a “one stop” mix of mezzanine
25% to £44.1bn whilst total Risk Weighted to construction and property which
and equity in addition to traditional senior
Assets increased by 30% to £53.5bn. Growth represents over 30% of our advances.
debt and working capital, continue to attract
in the second half was positively impacted This comprises ten different and very
significant new volumes of business whilst at
by a number of high value, high profile distinct sectors with differing risk profiles
the same time optimising return on capital.
transactions, including the public to such as property investment, property
In the public/private partnership arena, private transactions involving Green development and residential backed
we continue to work with the Government Property Company plc and Arcadia plc lending, including Housing Associations.
in the provision of a social and economic and the acquisition of Littlewoods plc Each of these can itself be further divided
infrastructure. We are proud to have helped by L.W. Investments. into various sub-sectors such as retail,
deliver over 160,000 new school places and office and industrial. We have a clearly
The scale of these transactions was outside
over 7,000 new hospital beds. defined policy as to the type and quality
the reach of either Bank of Scotland or
We continue to challenge, consolidate Halifax as stand alone banks prior to the of transaction we will consider under
and redesign our back office operations merger. As such they are clear evidence of each heading. Our office related property
to improve customer service, increase the value the enlarged Corporate Banking development exposure to the Greater
cross-sales and drive down costs. Central to Division is generating as part of HBOS. London market amounts to only £34m.
this is the ongoing rollout and development The strategy of syndicating deals of this Our total exposure to the Investment
of best of breed systems solutions. 2002 saw type will see a significant sell down Trust sector currently stands at £1,121m, a
the successful introduction of Core Banking of these large deals in early 2003. reduction of over £1,059m from the position
System, our new real-time relationship twelve months ago. Of that £1,121m, only
Like for like asset growth, taking into account
banking system, whilst 2003 will see the £76m is regarded as non-performing which
the timing impact of such syndication, was
delivery of our enhanced internet-enabled comprises 9 individual credits against which
22%, a significant and targeted reduction
electronic banking platform. we have provided £26m.
from the levels seen in 2001. As we move up
Our Performance the value chain post-merger, we continue to Country Risk Exposure
Corporate Banking’s proven ability to invest in and develop our loan distribution 85% of our exposures are in the UK, 6%
create innovative, customised and added value and syndication capabilities to support in the USA, 6% in mainland Europe, 2% in
solutions, which help build and sustain long- our activities in this area. Australia and 1% in the rest of the world,
We are proud to have helped deliver over 160,000

new school places and over 7,000 new hospital beds
little changed from the position as

at 31 December 2001. Our key focus is
on areas of the world that enjoy a stable
political, economic and legal environment.
Profit before tax and exceptionals grew
strongly, increasing by 30% to £681m.
Operating income advanced by 35%
to £1,182m underpinned by a solid mix
of increased activity across the existing
customer base as well as a continued
good flow of attractive new business. Net
interest income rose by 35% compared to
a 25% growth in lending, reflecting a further
significant improvement in margins. The
upward trend in lending margins evident
since the beginning of 2001 has continued,
with our overall net margin increasing from
1.69% to 1.83% over the last twelve months.
Non-interest income also continued to grow
strongly, up 34% to £445m, with significant Graeme Shankland and his Corporate team,
increases in fees and commissions again well responsible for the Arcadia deal.
spread across all areas. Investment gains also
picked up significantly in the second half,
we cannot expect to be immune from the The Division’s post tax return on equity
totalling £23m for the year. This was
difficulties being seen in certain sectors, has also been disclosed for the first time.
achieved in a difficult exit environment.
we have largely avoided the worst of the The increase from 17.8% to 19.4% clearly
Operating lease rental income also grew
high profile corporate collapses seen in the shows that it is possible to make excellent
strongly to £56m, a direct reflection of
last eighteen months. Indeed the five largest returns from Corporate Banking, even in
the success of our asset finance operation.
provisions amount to £60m. The provisioning tough times when provisions are at a higher
Operating expenses rose by 24% over profile is as follows: level than the through-the-cycle average.
the year albeit the rate of growth slowed
• Total charge in 2002 was £295m, Prospects
in the second half. Whilst we continue
equivalent to 0.74% of average advances. We expect the positive trends evident
to recruit selectively, we now have in place
This compares with £196m and 0.65% in 2002 in terms of controlled growth,
the necessary staff and infrastructure to fully
in 2001. improved returns and increased efficiency
exploit the increased opportunities available
to continue in 2003 and we will continue
to us. Encouragingly, expense growth was • Non-performing assets as a % of loans
to focus sharply on credit quality whilst
significantly slower than the rate of income outstanding at December 2002 were
not losing sight of the opportunities
growth, leading to yet a further improvement 1.61%. Encouragingly, this represented
which are available to us. Our reputation
in the Division’s cost:income ratio, down a slight improvement over the 2001
is excellent and we have a highly talented
from 17.1% to 15.5%. equivalent position.
and experienced group of colleagues focused
Such cost efficiency is a cornerstone of our Deposits grew by 23% to £14.1bn. Whilst on the return potential of this business. Our
operating philosophy and will be maintained. the Division remains predominantly asset work in progress in all areas of the Division
We will exit markets where we cannot focused, dedicated Corporate deposit teams remains at a high level underpinning
establish a competitive edge, reallocating target this important element of the funding confidence for the year ahead.
resource to more remunerative areas. mix utilising a range of specialised products
combining competitive rates, ease of use
The continuing economic slowdown
and service excellence. A key focus in 2003
has inevitably resulted in an increase in
will be to improve our self-funding ratio.
provisions. We do not consider this in any
way unexpected or disappointing at this Merger synergy benefits continue to run
stage of the economic cycle. Whilst well ahead of expectations.
+24.6%
Corporate Banking
continued
£44.1bn total lending to

customers (post securitisation)
Financial Performance Year Year Year Year Balance Sheet As at As at

ended ended ended ended and Asset Quality 31.12.02 31.12.01
31.12.02 31.12.01
31.12.02 31.12.01
Loans & Advances
Restated Net interest margin 1.83% 1.69% to Customers*** £44.1bn £35.4bn
Profit and Loss Account £m £m Net interest spread 1.52% 1.38% Bad Debt Provisions
Bad debt charge as a %
Net interest income 737 544 Specific £249m £110m
of average advances 0.74% 0.65%
Non-interest income 445 333 General £211m £201m
Cost:income ratio** 15.5% 17.1%
Arrangement fees 230 169 Post tax return on equity* 19.4% 17.8% Total £460m £311m
Commitment fees 50 36
Net Interest Margin Provisions as a % of advances 1.04% 0.88%
Guarantee fees 19 14
The key movements in net interest margin are
Redemption fees 27 12 Gross Loans and Advances
as follows:
International services 10 8 to Customers £44.6bn £35.7bn
Transaction fees 12 13 Movement in Margin Basis Points % %
Other 21 26 Net Interest margin for the year Classification of advances***
Fees and commissions ended December 2001 169 Energy 3 3
receivable 369 278 Add: Manufacturing industry 8 11
Fees and commissions payable (14) (8) Improved lending margins 9 Construction and property:
Profit on sale of investment Improved capital earnings 1 Property Investment 15 11
securities 23 28 Increased contribution from Housing Associations 6 6
Operating lease rental income 56 31 deposit base 1 Housebuilding 3 3
Dividend income from Lower net funding cost of non Other Property 8 8
equity shares 11 4 performing assets 3 Hotels, restaurants and
Net interest margin for the year wholesale and retail trade 10 8
Operating income 1,182 877 Transport, storage and
ended December 2002 183
Operating expenses* (194) (156) communication 9 12
Staff (95) (71) * Excluding exceptional items. Financial 6 8
Accommodation, repairs ** Cost:income ratio has been calculated excluding Other services etc 15 12
exceptional items and after netting operating lease Overseas Residents 17 18
and maintenance (10) (9) depreciation and amounts written off fixed asset
Technology (5) (6) investments against operating income. Total 100 100
Marketing and communication (4) (3)
Depreciation: Non Performing Assets (NPAs) £709m £598m
Tangible fixed assets (2) (2) Interest held in suspense £19m £18m
Operating lease assets (15) (9) NPAs as a % of closing advances 1.61% 1.69%
Other (27) (21) Provisions including interest
in suspense as a % of NPAs 68% 55%
Subtotal (158) (121) Total Risk Weighted Assets £53.5bn £41.3bn
Recharges: Total Customer Deposits £14.1bn £11.5bn
Technology (11) (7)
*** Net of £1.4bn of securitised corporate loans.
Accommodation (4) (1)
Other Shared Services (21) (27)
Operating profit before
provisions* 988 721
Provisions for bad & doubtful debts
Specific (285) (166)
General (10) (30)
Amounts written off fixed
asset investments (13) (9)
and joint ventures 1 7
Highlights
• Profits £231m (2001 £169m)
• ROE 21.3% (2001 15.9%)
• HBOS Treasury Services plc launched
• Increased customer sales
contribute to strong profit growth
• High quality investment portfolio
Gordon McQueen, Mark J Smith, Head of Institutional Sales, USA.

Chief Executive, Treasury.
Treasury HBOS Treasury Services plc launched as profits grow

by 37% to £231m
Banking on Treasury The business is now managed on an Securitisation

For Treasury, 2002 was a year of major integrated basis both within the various Securitisation is an important technique
achievement. Financial performance was operating functions and also from a risk which enables the Group to diversify funding
very strong, with profit before tax and management and reporting standpoint. sources and manage its capital resources and
exceptionals up 37% on last year to £231m, in June, Treasury arranged an issue of £3.5bn
and, in a complex integration project, Until May we continued to trade in
of mortgage backed securities denominated
substantially all of the Halifax and Bank both the Halifax and Bank of Scotland
in US dollars, euros and sterling. The mortgages
of Scotland treasury businesses were Treasury Services plc names. However,
were originated by Halifax plc in the UK.
successfully combined into a single at the end of May substantially all of the
At the time this was the largest global UK
entity, HBOS Treasury Services plc. two businesses were successfully combined
Mortgage Backed Securities transaction and
in Bank of Scotland Treasury Services plc
Our Performance it achieved a finer blended average spread
using the banking business transfer provisions
over LIBOR than any previous comparable
Business Overview of part VII of the Financial Services and
issue. This securitisation has since been
Treasury provides wholesale multi-currency Markets Act 2000. The transfer of the Halifax
awarded “European Deal of the Year”
funding and manages prudential and regulatory treasury business represented one of the first
by International Securitisation Report.
liquidity for the HBOS Group. It is also transfers under this new legislation. In mid
responsible for arranging the Group’s debt June the opportunity was taken to re-brand Customer Service
capital issuance and asset securitisation the combined UK treasury business as HBOS Combining the two treasury businesses into
programmes. Additionally, a range of Treasury Services plc reflecting Treasury’s HBOS Treasury Services plc and operating as
treasury services is provided to SMEs central role as a provider of treasury services a fully integrated team with one name in the
and large corporate customers of the both to other parts of the HBOS Group market place achieves a number of merger
Business and Corporate Banking Divisions. and to customers. synergies. This has achieved economies of
The sales function within Treasury works scale and enables us to redirect more of
This transfer of assets together with the our energies towards improved customer
directly with customers to build risk
management solutions tailored to their re-branding as HBOS Treasury Services plc services, increased product coverage and
specific requirements. Similarly, a range involved a significant communications maximising opportunities arising from
of treasury services and product solutions programme to our customers and the business growth in other divisions. An
is available to intra-group customers. counterparties. Both the transfer and efficient way of doing this is the continuous
the re-branding were highly successful
Treasury seeks to maximise opportunities development of our e-business capabilities
and have been positively received by both
from the underlying flows generated by through our website, which has been re-
the wholesale markets and our customers.
the Group’s operations but trades on its branded to www.HBOSdeal.com, where
own account in the world’s foreign exchange, HBOS Treasury Services plc is a single our customers can now place deposits
money markets, derivatives, debt and capital integrated business which blends together and deal in foreign exchange online.
markets. The Treasury Division also maintains the strengths of both the Bank of Scotland
Throughout the year we have seen an increase
a high quality investment portfolio of asset and Halifax treasury businesses. Within the
in the flow of business from other divisions
backed securities. HBOS Group it sits as a wholly owned and
in the Group and their customers to whom
fully guaranteed subsidiary of Bank of Scotland.
The Division’s overriding focus is on high we have provided a wide range of product
quality business generated primarily from Since the transfer of business and re-branding offerings such as interest rate derivatives
customer flows, both internal and external, we have been concentrating on further and foreign exchange.
and on achieving the Group’s targeted return integrating processes and systems and also
Expansion of Funding
on equity. expanding our product range for both our
Treasury provides wholesale funding
internal and external customers.
Business Integration and liquidity for the Group. In order
Further excellent progress on integration Systems Integration to meet the continuing growth in Group
has been made during the year. Since the The final ‘internal’ stage of the Treasury wholesale funding, the opportunity was
merger of Bank of Scotland and Halifax to integration involves a phased approach to taken to rationalise the Group’s Medium Term
form HBOS in September 2001 our focus consolidate fully and develop further our Note (‘MTN’) and Commercial Paper (‘CP’)
has been on successfully integrating the systems. Considerable progress has been Programmes. The combined size of the US
Bank of Scotland and Halifax treasury made during the last 12 months and we and Euro MTN Programmes was increased
operations and infrastructure. We have expect to achieve this by the end of the from US$25bn to US$40bn. In addition
consolidated our operations from four to second quarter 2003. Implementing the the US CP Programme was increased
two sites, the main one at 33 Old Broad remaining systems changes is key to ensuring from US$1bn to US$15bn. The Euro CP
Street, London and the other in Glasgow. that we achieve our targeted synergy savings. and Certificate of Deposit Programme
£3.5bn
successful UK Mortgage Backed
Securitisation transaction
was increased to €15bn and the C$1bn Our Financial Performance Quality of Earnings
Halifax plc CP programme was cancelled and The intra-group arrangements that drive
Interest Income
re-launched in the new name and increased almost half of Treasury’s total profits also
Net interest income was £200m (2001
to C$2bn. All three CP programmes are now ensure that these earnings are of particularly
£206m). After adjusting for non recurring
established in the name of HBOS Treasury high quality in the HBOS Group.
profits from the sale of fixed income
Services plc.
securities earned in the prior year and Around 19% of the Division’s total revenues
In support of the Group’s growth other adjustments, underlying growth arose from the provision of wholesale funding
a number of major senior funding issues was strong. The strong volume growth to the Group’s banking divisions and the
were undertaken by Treasury under the MTN in providing funding to our businesses management of liquidity on behalf of the
programmes. Transactions included a US$2bn through our money market activities Group. The quality of earnings from funding
issue into the US, a €1bn issue into Europe was the principal driver in the revenue is high as the growth in revenues matches the
and a three tranche issue totalling US$1.75bn growth, with margins enhanced through growth in the aggregate of the three banking
which was targeted primarily at the Asian successful positioning in the favourable divisions’ net funding requirements, driven
market. This last deal won the International interest rate environment also contributing by their respective asset growth. The quality
Financing Review’s Financial Bond (Senior Debt) to the underlying year on year growth. of earnings from liquidity management is also
of the Year award. These issues reflect Overall margins remained stable after very high because the quantum of liquidity
our commitment to diversify further adjusting for non recurring profits from grows in direct proportion to overall Group
our investor base. the sale of fixed income securities balance sheet growth. Furthermore, because
mentioned above. the credit quality of Treasury’s liquid asset
Treasury is also responsible for co-ordinating
and executing the issue of subordinated debt Non-Interest Income portfolio is so high, the volatility of Treasury’s
by HBOS plc, Bank of Scotland and Halifax plc. Non-interest income for the year earnings arising from credit risk is inherently low.
During the year HBOS plc issued Upper more than doubled to £125m (2001 Around another 29% of the Division’s total
Tier 2 capital of £500m of 5.75 per cent £55m). As foreshadowed in the interim revenues in 2002 arose from the provision
Undated Subordinated Step-up Notes and report, dealing profits in the second of treasury products to other divisions or
Bank of Scotland issued Lower Tier 2 capital of half of the year, though still strong, to their customers. Again, this represents
€750m of Subordinated Fixed Rate Notes due were lower than the outstanding first an extremely high quality stream of earnings
October 2012 and US$450m of Subordinated half performance. The large year on year because revenues will either match the
Floating Rate Notes due November 2012. increase benefited from volume growth natural growth of the other divisions and
In Euroweek’s Review of the Year 2002 and favourable positioning in interest their customer business or exceed this growth
survey of wholesale borrowers, voted for rate related products. rate, particularly where Treasury division, in
by top houses in the International Markets, Customer sales remained strong and line with its core strategy, increases its sales
HBOS was voted the “most impressive continued to grow throughout the year, penetration of the captive external customer
Financial Institution”. with the business leveraging the enhanced bases and adds to its product portfolio.
customer potential which has arisen as a Furthermore, the counterparty credit risk in
result of the merger. Development of the respect of treasury product sales to external
division’s customer flow income remains a non-bank customers is borne by the banking
key strategic priority and progress has been division with the customer relationship.
made in the year through increased penetration Consequently, in this growing strand of
of the Corporate customer base, extending Treasury’s business, the Group’s policy
the product range and leveraging the enhanced framework insulates its earnings from
potential which has arisen as a result of the volatility arising from external non-bank
merger. Indeed some 62% of the dealing counterparty credit risk.
profits arose from activity related to Asset Quality
customer sales. As a matter of policy, we continue to avoid
Costs sub-investment grade investments. This is
Overall operating expenses were £89m demonstrated by the high credit quality of
(2001 £83m). The increase arose principally the investment portfolio whose assets total
from higher performance related bonus £16.5bn. Of these, 87.9% are rated AAA and
payments resulting from strong trading 99.7% are rated single A or above. A small
performance. Excluding this, underlying investment write off of £1m (2001 £9m)
expenses showed a small decrease. against a single portfolio investment was
Tony Main, Head of Funding & Liquidity, Stephanie
Hassell, Senior Dealer – Euro Money Markets and
Stephen Lorimer, Director – Debt Capital Markets.
99.7%
Treasury
continued
of investment portfolio
assets are credit rated single
A or above
Year Year
ended ended
31.12.02 31.12.01
Profit and Loss Account £m £m

Non-interest income 125 55
Dealing Profits 145 77
Fees Payable (21) (22)
Other income 1
Philip Duncombe, Senior Foreign Exchange Trader. Operating income 325 261
taken during the second half of the year. Staff (47) (41)
A specific provision of £4m (2001 nil) was Accommodation, repairs
also recognised in respect of a discontinued and maintenance (6) (9)
strategic investment. Technology (6) (7)
Depreciation
Prospects Tangible fixed assets (1) (1)
Building upon the progress made last year we Other (12) (16)
have continued to integrate the business and
the launch of HBOS Treasury Services plc in Subtotal (72) (74)
June as the single integrated treasury for the Recharges:
HBOS Group underlines the progress we have Technology (11) (11)
made. Throughout the merger process we Accommodation (1)
continue to focus strongly on ensuring that Other Shared Services (6) 3
we meet the needs and expectations of Operating profit
our customers. before provisions* 236 178
Treasury’s key goals remain unchanged. These Provisions for bad & doubtful debts
are to become the preferred or sole provider Specific (4)
of treasury services to the other divisions of Amounts written off fixed
HBOS and the predominant provider of treasury asset investments (1) (9)
services to Business and Corporate Banking Profit before tax* 231 169
customers. We also aim to generate at least
75% of our revenues from flow business Net interest margin (bp)** 17 21
generated by our customers – thus establishing Cost:income ratio*** 27.5% 32.9%
a high quality and sustainable profit stream. Post tax return on equity* 21.3% 15.9%
This predominantly internal focus As at As at

31.12.02 31.12.01
generates high quality earnings for Treasury.
Furthermore our structural and strategic Total Risk Weighted Assets £11.0bn £11.8bn
linkage to the rest of the Group will enable * Excluding exceptional items.
Treasury to continue to benefit from the ** Net interest margin has been calculated as net interest
growth potential of each of the Group’s income divided by average interest earning assets
banking divisions in 2003 and beyond. excluding securities classified as trading assets.
*** Cost:income ratio has been calculated excluding
exceptional items and after netting amounts written
off fixed asset investments against operating income.
Highlights
• Profits A$213m (2001 A$226m)
• ROE 13.8% (2001 16.2%)
• 22.8% growth in mortgage balances
• 16.9% growth in deposit balances
• 20 Neighbourhood Banks opened
Terry Budge, Business Development Officer Mirella Addison in

Group Managing Director, BankWest. BankWest’s Whitford Customer Service Centre.
BankWest Strong growth in housing lending

BankWest Foundations for Growth Financial Performance

BankWest is an Australian bank, The Bank has continued to generate Year Year
headquartered in Perth which offers a full revenue through existing lines of business ended ended
range of banking products and services in and this year introduced an important new 31.12.02 31.12.01
both the domestic and business markets. source of future revenues with the nationwide Profit and Loss Account A$m A$m
HBOS plc held 56.8% of BankWest’s share rollout of its small business initiative Business
capital as at 31 December 2002, and is one Express with encouraging early results.
Also during the year the Bank expanded its Non-interest income 239 218
of 69,000 shareholders. BankWest’s shares
national agribusiness operations by opening Operating income 655 637
are listed on the Australian stock exchange. new locations in rural New South Wales and Operating expenses (404) (393)
The bank is strategically organised into Queensland. Business lending growth which
two line-of-business operating divisions; was constrained by a low level of business Staff (198) (183)
BankWest Business Solutions, which aims to investment early in the year was marginal. Accommodation, repairs
establish a national niche business bank and In addition to a continued programme and maintenance (26) (26)
BankWest Consumer Solutions, which aims to upgrade existing branches to improve Technology (5) (6)
to add value to the existing dominant customer facing services, 20 Neighbourhood Marketing & communication (31) (28)
Western Australia consumer franchise. Banks were opened in Western Australia, Depreciation – Tangible
increasing the level of face-to-face banking fixed assets (24) (23)
Our Performance in direct response to customer demand for
Operating income has grown by 2.8% from Fees and commissions payable (11) (11)
this type of service. These banking centres Other (109) (116)
A$637m to A$655m driven by growth of 9.6% are located within existing shops and provide
in non-interest income. This was a result of a cost effective way of servicing customers. Operating profit before
a significant increase in customer fees and provisions 251 244
commissions in Customer Solutions, offset The buoyant housing market contributed to
the success of consumer banking where the Provisions for bad & doubtful debts
to a degree by a reduction in software Specific (33) (11)
mortgage book continued to grow strongly,
consulting and maintenance income from
up, 22.8% to A$11.5bn before securitisation General (5) (7)
HBOS. In a year of significant investment in from this time last year.
both infrastructure and recruitment of sales Profit before tax 213 226
personnel to support future growth plans, Developments in online lending are also
underway to further support mortgage Net interest margin** 2.13% 2.20%
operating expenses experienced growth
lending growth as the bank continues Cost:income ratio** 60.7% 60.6%
of 2.8% increasing from A$393m to A$404m
to offer a range of direct channels that Post tax return on equity 13.8% 16.2%
and the cost income:ratio increased to 60.7%,
marginally above the 2002 level of 60.6%. include internet and telephone banking.
Balance Sheet and As at As at
Success in the buoyant low margin housing Total customer deposit balances have also and Asset Quality 31.12.02 31.12.01
increased, up 16.9% to A$10.4bn and form
lending environment has exerted downward an integral part of our funding mix. The retail Total Lending
pressure on the net interest margin, but is deposit ratio of 46.8% has strengthened from to Customers* A$20.4bn A$18.8bn
partially offset by higher margins in the 44.1% a year earlier.
business banking sector resulting in a net Bad Debt Provisions A$m A$m
interest margin of 2.13% at 31 December During the past twelve months the Bank made
progress with its strategy to expand nationally Specific 53 39
2002 compared to 2.20% in 2001.
in niche markets. Interstate markets now account General 93 89
Provisions for bad and doubtful debts for 45.8% (31 December 2001 42.2%) of the
increased from A$18m to A$38m, reflecting Bank’s lending. National market share totalled Total 146 128
the impact of a difficult business lending 3.6% at November 2002. Total Customer Deposits A$10.4bn A$8.9bn
environment. The increase in the charge for Improving Returns Total Risk Weighted Assets A$15.7bn A$14.9bn
specific provisions was marginally offset by The Bank now enters a period of capitalising * After securitisation.
a lower general provisioning charge, resulting on the investments made in infrastructure ** Including income representing the fully tax equivalent
partly from an A$1bn securitisation of and people, improving efficiency in terms gross up of A$11m (2001 A$12m).
housing loans in July 2002. of controlled growth in expenses whilst
striving for growth in key markets in both The above tables have been prepared under
Profit before tax was A$213m. Although
the consumer and business divisions. Australian GAAP, as reported by BankWest.
less than last year, it reflects a year of
consolidation following restructuring In addition, the Bank will look to benefit The figures reported in the ‘Financial Review
and investment in expansion into new from HBOS’s successes in the UK and adapt and Risk Management’ section on page 33
markets in order to sustain future growth. them to the Australian market. reflect the sterling equivalent under UK GAAP.
A$20.4bn
total lending to customers
HBOS’s investment in energy saving measures

has been recognised by the Carbon Trust Energy
Efficiency Accreditation Scheme.
Corporate Corporate Responsibility is an integral part of

Responsibility the way we do business
Our Responsibilities We are determined to treat all current and of sign language interpreters. Induction loops
The creation of HBOS gave us an important potential colleagues and customers fairly and are already installed in over 800 locations
new opportunity to build on the strong with respect. We aim to recruit, develop and as part of a continuous programme.
record of social responsibility which retain the best people through the use of
is a widely recognised characteristic Ethnicity
leading edge policies and practices. We will
of both Halifax and Bank of Scotland. Our Retail Division has increased its ethnic
ensure that each customer and colleague is
minority representation from 4% in 1998
Our aim is to add shareholder value treated as an individual – and we will value
to over 7% in 2002. There have also been
within a responsibility agenda, covering them for their contribution to the business.
some significant local increases – within
critical issues like governance, equality To drive our equality vision a Diversity Halifax branch, for example, we have seen
and diversity, community relations, Leadership Group has been set up, led by ethnic minority representation increase
environmental protection, business James Crosby, Chief Executive, with a Diversity from nearly 7% to over 30%.
transparency and fair dealing. Taskforce in each of the HBOS divisions.
Environment
HBOS adopted a new corporate responsibility Our commitment to equality and diversity We support the principles of sustainable
(CR) policy in April 2002, when the Board has been recognised and verified through development – our environmental
established a CR Forum under the leadership high profile awards such as Queen Elizabeth’s management programmes aim to create
of Phil Hodkinson, Chief Executive of the Foundation EASE award, Opportunity Now, long-term shareholder value by carefully
Insurance & Investment Division. The Forum Personnel Today and New Impact’s British managing the environmental impact of
draws together senior managers from across Diversity awards. our activities.
the Group to co-ordinate our activities, share
best practice, and learn about this rapidly We were awarded the Gold Standard in As part of our policy, environmental
growing topic. It is supported by a small Business in the Community’s Opportunity stewardship is considered in all areas of
team of specialists in HBOS Group Now Benchmarking Survey 2002, and HBOS our business. One recent example is Insight
Communications. has been confirmed as one of the top ten Investment’s Global Business Principles,
private sector companies in BitC’s Race for which signalled the launch of the HBOS
Phil Hodkinson also chairs the Business Impact
Opportunity Benchmarking Survey 2002. responsible investment approach.
Task Force for Business in the Community, and
is an acknowledged leader in the corporate Work-life Balance We work with a number of organisations,
responsibility field. Our range of equality and diversity policies including Forum for the Future, the Carbon
form an important part of our inclusive and Trust, Global Action Plan and the British
A second key event in 2002 was the formation
supportive culture. We want our colleagues Bankers Association, to ensure that we
of a Responsible Investment team, and the
launch of the Global Business Principles to achieve the work-life balance that is right incorporate environmental issues into
initiative, by Insight Investment, the asset for them. the core of our business.
management business within HBOS Group. Options include part-time or term-time work Our environment policy demonstrates
Insight has acknowledged its responsibility and other flexible work patterns, as well as our commitment to the environment,
to engage with the companies in which it homeworking, job share and career breaks. and sets out the positive steps we are
invests in support of good governance practice. Our policies offer enhanced maternity, taking to reduce our environmental impact.
A new Investor Responsibility Service makes it paternity and adoption provisions, plus We have spent £1.2m on energy-saving
easier for pension funds and other institutional supportive options such as parental, equipment in the past four years, saving
investors to demonstrate a commitment to compassionate and emergency leave. over £2.2m and 17,000 tonnes of carbon
addressing corporate responsibility issues, There is a clear link between equality dioxide (CO2) emissions.
without compromising their financial objectives. and diversity, and business excellence. Halifax corporate and retail sites were
The HBOS corporate responsibility strategy Engaging in the wider community ahead of target in achieving a 10% reduction
is developing rapidly, and good progress has increases loyalty from colleagues and in energy consumption per square metre.
been made in three key areas of diversity, customers and enhances our reputation. In 2002, a two-year renewal of our energy
environment and community. It can also open up new markets through contract included the supply of 10GWh
a better understanding of our diverse of green energy to Halifax corporate sites.
Equality & Diversity customer base.
The diversity of our people, products and This complements the existing supply
services is at the heart of our mission to be We have also made significant improvements of new renewable electricity to Bank
the new force in banking. We are committed to access provisions for customers who have of Scotland sites, and is equivalent to
to equality of opportunity in all areas a disability, including use of large print and a reduction in HBOS CO2 emissions
of employment and business. Braille, textphones and Typetalk, and a network of around 8,500 tonnes per annum.
£20m £2.2m
commitment to voluntary savings in energy costs over
and community groups over four years
five years
Initiatives are in place to minimise employee

commuting by car. These include successful
car-sharing schemes in Copley and Leeds.
Redundant Bank of Scotland banknotes
are composted, and we have introduced
new waste management procedures at our
Birmingham Midshires and HECM subsidiaries.
We have been working with the
environmental charity Global Action Plan
since 1999 to raise colleague and customer
awareness of environmental issues both at
work and at home. In 2002, waste awareness
campaigns were run in Birmingham Midshires,
Halifax Direct, and HECM.
As a lender, we are committed to
assisting our customers by adopting an
open and constructive approach to high-
profile issues. Through this, we can achieve
a better environment both for business
and for the whole community.
We aim to lend responsibly and apply In 2002, Bank of Scotland sponsored the Scottish Team to enable them to take part
the highest principles of business, and in the Commonwealth Games and promoted the event in Manchester.
to deal with customers who share that
aim. We appreciate that there is often a of renewable energy, enough to power the award for ‘Most Impressive Community
wider social and environmental interest 1.1m households and save 4.25m tonnes Banking Service’ at the Institute of Financial
in our financial relationships. We do not of CO2 per year. Services Financial Innovation Awards, 2001.
deal with organisations that we know
are engaged in illegal operations. HBOS Business Banking Division is working We have signed Europe’s first Community
with the Carbon Trust in a project to raise Banking Agreement (CBA) in March 2001
Credit decisions are based on a thorough awareness of the commercial and other long- with the community of Wester Hailes in
understanding of the customer’s business, term benefits of managing environmental Edinburgh. Its aim is to improve access to
management and sector. Our comprehensive impact in smaller companies, and in large market finance in a disadvantaged community,
lending and leasing policies, and our training businesses like HBOS. It focuses, in particular, enabling individuals to access finance and
and awareness initiatives, ensure that lending on energy efficiency and waste minimisation. develop new businesses. We expect to
terms for business customers are up to date roll out the project to new areas soon.
with potential risk and opportunities. Community Relations
We are keen to strengthen and invigorate We also agreed an £800,000 four-year
We maintain a detailed internal guide to the local communities that drive our committed overdraft with One Plus, a
environmental risks associated with lending business success. charity that provides services for lone
and leasing to help our lenders identify parents in the West of Scotland. This will
relevant environmental issues, address Over the last five years, Halifax and Bank
help ease cashflow problems as the group
the risks with customers and, where of Scotland have invested nearly £40m
waits for European Social Funds to arrive.
appropriate, direct customers to sources to benefit thousands of local community
of specialist assistance. initiatives and charitable organisations. We made bank accounts available to Big
Through our charity Visa cards, more than Issue vendors in Glasgow. In the first nine
Bank of Scotland has joined a pan-European £15m has been directed to British Heart months of operation, 190 accounts were
consortium (Aeolus), contributing to a £1bn Foundation, Imperial Cancer Research, opened, representing 90% of the potential
fund for large renewable energy projects, Mencap and many other medical charities Glasgow customer base. In July 2002, we
such as offshore wind farms, primarily in since 1988. won a Business in the Community Award for
the UK and Ireland. Excellence for our work with The Big Issue.
We are at the forefront in the financial
Proposed UK projects are estimated to have services sector in tackling financial exclusion, In social banking, HBOS is market leader.
the potential to generate over 1600 MW and our Community Banking team collected Together Halifax Cardcash and Bank
£3m
Corporate
Responsibility
continued
invested to encourage
excellence and participation
in sport
of Scotland Easycash make up over 80% winning and long-standing sponsorship of and Soccer Sight in association with the
of the UK’s social bank accounts market. the Bank of Scotland Children’s Festival. Royal National Institute for the Blind.
The HBOS Foundation Sport Future Plans
We are committed to making a genuine, In 2002, we invested over £3m to encourage HBOS believes that CR is not something that
tangible difference to the communities excellence and participation in sport. As a can be pursued separately from our business
in which we operate. That’s why we have result more than 20,000 young people took goals. It is an integral part of the way we do
created the HBOS Foundation, a charitable part in sporting events made possible with business. It is also a major factor in our drive
trust that supports local and national charities our support. to increase employee advocacy for the
and voluntary organisations throughout the UK. organisation and its products and services.
We have youth development programmes
The Foundation has made a commitment which encourage participation and excellence HBOS aims to be a leader in CR, and we are
of at least £20m to be made available to in sport such as our Learn to Swim and putting a new framework in place across the
voluntary and community groups over Talented Young Athletes initiatives. Group to achieve this objective.
the next five years.
In 2002, we sponsored the Scottish Team
The focus is on two key areas: which competed at the Commonwealth
• Providing financial advice and improving Games in Manchester 2002. Our support
financial literacy went specifically towards team preparation,
and resulted in the team more than doubling
• Developing and improving local communities their medal count from the previous Games.
Colleague Involvement In March 1999 Bank of Scotland became the
Money and gifts are welcomed by community first title sponsor of the newly formed Bank of
organisations, but for many our most valuable Scotland Premierleague. We recently extended
contribution is in giving our time and skills. the sponsorship for a further three years and,
We encourage our colleagues to get with millions of spectators watching, it is our
involved directly and, as a further incentive, highest-profile sports sponsorship.
we also match the money they raise for charity.
We are also involved in many football-related
Our Matched Funding Scheme, which was
initiatives which benefit the community,
launched in October 2002, benefits hundreds
including our support for Schools Football
of good causes.
Sponsorship
We have been involved in sponsorship for
over 50 years. In 2002 we invested over £8m
in sponsorship projects across the country,
creating long-term partnerships that meet
business objectives and are of real value to
our partner organisations.
HBOS, through Halifax and Bank of Scotland,
is one of the country’s largest sponsors
of the Arts and youth sport.
Our aim is to strengthen the economic and
cultural vitality of our local communities,
and to encourage diversity and excellence
in sport and the Arts.
In 2002 over £3m was invested to support
the development of the Arts throughout
the country, increasing access to the Arts,
developing the potential of young people
and promoting excellence.
We encourage children to recognise the
importance of the Arts through our award-
The HBOS foundation sponsors the
environmental area at Eureka Children’s
Science Museum in Halifax.
We are committed to equality in all areas

of employment and business
Five Year Summary

For the years ended 31 December
2002 2001^ 2000 1999* 1998*

£m £m £m £m £m
Profit and Loss Account

Net operating income Ø 7,546 6,507 6,244 5,666 5,313
Operating expenses Ø 3,609 3,331 2,858 2,531 2,384
Provisions for bad and doubtful debts 832 608 471 440 364
Underlying profit before tax Ø 3,062 2,515 2,925 2,719 2,555
Balance Sheet
Total assets 355,080 312,071 266,143 233,891 204,370
Total assets (excluding long-term assurance
assets attributable to policyholders) 317,749 274,470 235,085 209,656 185,238
Subordinated liabilities 9,127 7,923 5,985 5,140 3,626
Share capital 1,346 1,292 1,278 1,162 1,197
Reserves 12,423 10,121 9,260 8,482 8,923
% % % % %
Performance Ratios
Post-tax return on mean equity Ø 16.3 15.1 19.5 19.1 17.5
Cost:income ratio † 45.2 49.2 43.3 44.4 44.9
Net interest margin†† 1.71 1.74 1.95 2.17 2.32
per ordinary share
pence pence pence pence pence
Shareholder Information
Dividends 29.4 28.0 22.4 20.2 17.3
Underlying earnings excluding exceptional items
and goodwill amortisation 56.1 47.7 55.6 51.5 45.2
^ 2001 numbers are restated to reflect the use of unsmoothed asset values for the purposes of determining the income from long-term assurance business, the implementation of
FRS19 ‘Deferred Tax’ and UITF33 ‘Obligations in capital instruments’.
* The HBOS Group figures for 1998 and 1999 are an aggregate of, or calculation based on, the Halifax Group accounts for the year ended 31 December, and Bank of Scotland Group
accounts for the year ended 28 February following.
ø Excluding exceptional items.
† The cost:income ratio is calculated excluding exceptional items, goodwill amortisation and after netting operating lease depreciation, amounts written off fixed asset investments and
general insurance claims against operating income.
†† The net interest margin excluding trading assets was 1.86% in 2002 (2001 1.87%).
Financial Review and Risk Management
Overview of Results
Group profit before tax increased by £547m to £3,062m before charging exceptional costs
of £153m, as shown below:
2002 2001
Restated
£m £m
Group profit before tax 2,909 2,292

Add back:
– Merger costs 76
– Merger integration costs 153 132
– Other 15
Mike Ellis,
Group Finance Director Group profit before tax and exceptional items 3,062 2,515
Divisional financial performance is aggregated within the following table:
Retail Insurance & Business Corporate Bank Group

Banking Investment Banking Banking Treasury West Items Total
Year ended 31 December 2002 £m £m £m £m £m £m £m £m
Net interest income 3,007 50 628 737 200 148 4,770

Non-interest income 721 831 576 445 125 78 2,776
Net Operating income 3,728 881 1,204 1,182 325 226 7,546
Operating expenses* (1,956) (196) (789) (194) (89) (138) (247) (3,609)
General insurance claims (79) (79)
Amounts written off fixed asset investments (4) (6) (13) (1) (24)
Operating profit
before provisions* 1,772 602 409 975 235 88 (247) 3,834
Provisions for bad &
doubtful debts
Specific (360) (135) (285) (4) (11) (795)
General (13) (12) (10) (2) (37)
Share of profits of associates and joint ventures 27 (13) 20 1 35
Profit on disposal of business 25 25
Profit before tax* 1,426 589 307 681 231 75 (247) 3,062
2001 Profit before tax* 1,205 472 306 523 169 80 (240) 2,515
Group operating profit before provisions times and 1.7 times respectively in 2001.
and exceptional items at £3,834m is 24% Our stated policy is to increase underlying
higher than a year ago. Strong, asset led, net dividend cover progressively to 2.5 times.
interest earnings and broadly stable margins If approved at the Annual General Meeting,
as described in the Divisional Reviews, together the final dividend will be paid on 23 May
with non-interest income, 18% higher than a 2003 to shareholders on the register at
year ago, and underlying operating expenses the close of business on 14 March 2003.
contained at 6% growth, all contribute to the
Ordinary shareholders are again being
strong result. Merger synergies contributed
offered the choice of electing under the
£209m of the increase.
Share Dividend Plan to receive the whole
Underlying earnings per share before of their dividends in new ordinary shares
exceptional items and goodwill amortisation credited as fully paid instead of cash in
rose 18% to 56.1p (2001 restated 47.7p) and respect of the proposed final dividend
the proposed final dividend is 19.6p, 5% higher for the year ended 31 December 2002.
than the previous financial year. The basic Key dates in respect of the new shares
dividend cover is 1.7 times and 1.9 times to be allotted to shareholders who elect
on an underlying basis, up from 1.4 to join the Plan can be found on page 116.
Financial Review and Risk Management continued
Group Post Tax Return on Mean Equity Divisional post tax return on mean equity The variation in the net interest margin is
Group post tax return on mean equity is shown below: analysed by Division in the table below, with
increased from 15.1% to 16.3%. 2002 2001 further analysis in the Divisional Reviews.
Post Tax Post Tax
Group post tax return on mean equity Return Return Basis Points
is calculated by dividing profit attributable on Mean on Mean
equity equity Retail Banking (5)
to ordinary shareholders before exceptional % % Business Banking
items by mean equity shareholders’ funds
Retail Banking 20.4 18.8 Corporate Banking 3
as shown below:
Insurance & Investment 16.7 16.0 Treasury (1)
2002 2001 Business Banking 15.4 16.4 BankWest
Restated
Corporate Banking 19.4 17.8
£m £m (3)
Treasury 21.3 15.9
Post tax return BankWest 13.8 16.2
Profit attributable to Future reporting will focus on average interest
18.6 17.4 earning assets excluding trading assets.
ordinary shareholders 1,879 1,431
Amortisation of goodwill (0.7) (0.6)
Exceptional items 112 182 Non-Interest Income
Subtotal 17.9 16.8
1,991 1,613 Non-interest income increased by
Short term fluctuations in
investment returns and changes
18% to £2,776m. Net fees and commissions
Mean Equity
to economic assumptions (1.6) (1.7) increased by 6% whilst dealing profits benefited
Opening equity shareholders’
from increased customer sales and favourable
funds 11,013 10,291 Total 16.3 15.1
Closing equity shareholders’
positioning. Income from long term assurance
funds 13,369 11,013 business, calculated using unsmoothed asset
Post tax return on mean equity increased for values, is 89% higher than the restated position
12,191 10,652 each division, with the exception of Business in 2001. General insurance premium income
Banking and BankWest, the former due to the
Group post tax return on increased by 21%.
investment made in 2002 to expand business
mean equity 16.3% 15.1% in England and Wales. 2002 2001
Restated
Before exceptional items and after adjusting Group Net Interest Income £m £m
for the impact of short term fluctuations in Group net interest income increased by
investment returns and changes to economic 15% to £4,770m. Group margins were fairly Fees and commissions receivable 2,157 1,921
assumptions relating to the life business, our stable and the growth in net interest income Fees and commissions payable (672) (517)
target ROE increased from 16.8% to 17.9%. reflects primarily strong asset growth. Dealing profits 154 82
2002 2001 Profit on sale of investment
Mean equity is allocated to divisions on Restated securities 33 45
the basis of Shareholders’ funds invested £m £m Other Operating Income
in Insurance & Investment, Treasury and Income from long term
BankWest and for other divisions, primarily Interest receivable 16,691 16,115
assurance business* 233 123
proportionate to their share of group risk Interest payable (11,921) (11,960)
General insurance premium
weighted assets. The profit before tax and Net interest income 4,770 4,155 income 320 265
exceptional items reported for each Division Operating lease rental income 468 369
is adjusted for allocated group items (excluding Average balances
(including trading assets) Other 83 64
the amortisation of goodwill), dividends on
preference shares and innovative securities Interest earning assets: Total 2,776 2,352
– Loans and advances* 229,451 184,854
and equity minority interests, short term
– Securities and other * Excluding exceptional income in 2001 of £27m within
fluctuations in investment returns and changes
liquid assets 50,229 53,912 St. James’s Place Capital.
to economic assumptions and tax at the
Group’s effective tax rate. 279,680 238,766 The increase in non-interest income
Average balances attributable to the various divisions is noted
(excluding trading assets) below and further analysis of the growth is
Interest earning assets: provided in the Divisional Reviews.
– Loans and advances* 223,092 175,112
– Securities and other £m % increase
liquid assets 32,678 47,549 Retail Banking 44 6
255,770 222,661 Insurance & Investment 98 13
Net interest margin Business Banking 100 21
(including trading assets) 1.71% 1.74% Corporate Banking 112 34
Net interest margin Treasury 70 127
(excluding trading assets) 1.86% 1.87% BankWest
Total 424 18
* Net of securitisation.
Operating Expenses employed by the Group, which during the option plans and save-as-you-earn plans.
Underlying operating expenses excluding year was full time 48,180 (2001 47,979) and In addition to the share option plans,
exceptional items, goodwill amortisation part time 15,802 (2001 14,869), but also due share grants are provided to colleagues.
and operating lease depreciation, increased to increases in the amount of performance These include incentive plans, which require
by 6%, thus achieving the overall Group related bonuses. certain performance criteria to be met over
target. The Group cost:income ratio, after a three year period before the shares are
2002 2001
the above adjustments and after deducting Restated released, and the ‘sharekicker’ facility. The
operating lease depreciation, amounts £m £m sharekicker facility enables colleagues who
written off fixed asset investments and have elected to take their annual incentive
general insurance claims from net operating Staff 1,552 1,425 in shares rather than cash to enhance by
income, improved from 49.2% to 45.2%. Accommodation, repairs 50% the number of shares if the shares
& maintenance 348 298 are held for at least three years.
2002 2001
Technology 382 364
Restated Under existing UK GAAP the cost of
£m £m Marketing & communication 374 360
Depreciation:
shares to be released under the share
Operating expenses 3,762 3,505 Tangible fixed assets 259 260
grants is recognised as an expense in the
Exceptional items (153) (174) profit and loss account over the three year
Operating lease assets 289 210
performance period of these schemes. The
3,609 3,331 Goodwill amortisation 86 68
total expense recorded in 2002 in respect
Goodwill amortisation (86) (68) Other 319 346
of such schemes was £24m (2001 £24m).
Operating lease depreciation (289) (210) Total* 3,609 3,331 In respect of share option plans, existing UK
Underlying operating expenses 3,234 3,053 GAAP only requires an expense to be recorded
* Excluding exceptional items of £153m (2001 £174m).
where the exercise price is set at a discount to
Net operating income 7,546 6,534
Group Items the market price at the date the share option
Exceptional items (27)
Group items, which comprise costs incurred is granted. The save-as-you-earn plans are the
Amounts written off fixed
in the management of the Group as a whole only plans where such a discount is provided
asset investments (24) (21)
and the amortisation of goodwill, are and the Group relies on the exemption under
General insurance claims (79) (68) UITF Abstract 17. Accordingly no cost has
Operating lease depreciation (289) (210) analysed below:
been recognised in the profit and loss account
2002 2001 in respect of the share option plans.
Underlying operating income 7,154 6,208
Restated*
Cost:income ratio 45.2% 49.2% £m £m In November 2002, the Accounting Standards
Board issued FRED 31 ‘Share Based Payments’.
Staff 232 260 The principles set out in this exposure draft
Retail costs increased in line with inflation, Accommodation, repairs
less than their 3% target. Corporate Banking require the fair value of the share option
& maintenance 221 179 granted to be recorded as an expense. It
and Treasury saw improvements in their
Technology 268 223 is estimated that the adoption of FRED 31
cost:income ratios. The significant increase
in Business Banking expenses reflects the
Marketing & communication 86 56 would result in a total charge for all share
investment made in expanding the business Depreciation 166 184 grant and option schemes to the profit and
in England and Wales. The overall increase Goodwill amortisation 86 68 loss account of £72m in 2002, £57m in 2001
Other (71) (15) and cumulative prior years of £45m.
in expenses (excluding exceptional items) was
8% and can be analysed by Division as follows: Subtotal 988 955 Retirement Benefits
£m % increase Less Recharges1 Under SSAP 24, £92m has been charged
Technology (348) (305) to the profit and loss account in respect of
Retail Banking 44 2 Accommodation, repairs retirement benefits (2001 £73m). This charge
Insurance & Investment 2 1 & maintenance (149) (134) is likely to increase in 2003 following the
Business Banking 175 29 Other Shared Services (244) (276)
triennial valuation of the Halifax Retirement
Corporate Banking 38 24 Fund at 31 March 2003 reflecting, inter alia,
Treasury 6 7 Total 247 240 deterioration in stock market conditions.
BankWest 6 5 Under the transitional arrangement of FRS 17,
Group Items 7 3
1
Shown under the operating expenses analysis for the Group continues to account for retirement
each division. benefits in accordance with SSAP 24. Had FRS
Total 278 8 * Where appropriate, the analysis between direct
and recharge expenses has been adjusted to reflect
17 been implemented in 2002, the charge
structural changes in 2002. to the profit and loss account in respect of
The increase in goodwill amortisation retirement benefits would have been £122m
is mainly attributable to the increased Share Based Compensation and is forecast to rise to around £150m in
acquisition cost in the year of the operating The Group believes that share ownership 2003. The deficit on all Group schemes would
assets, sales force and unit linked and non by colleagues throughout the Group enhances have been £1,136m but taking into account
profit business of The Equitable. Employee the alignment of their interests with those of a deferred tax asset, the net pension liability
costs account for 43% of total expenses and shareholders. Accordingly, the Group operates for all schemes would have been £795m.
increased by 8.9% partly as a result of the certain share option plans, including Inland Further details are set out in Note 9 to the
increase in the average number of persons Revenue approved and unapproved share accounts on pages 76 to 79.
Balance Sheet Analysis

As at 31 December 2002
Retail Insurance & Business Corporate Bank Total Total
Banking Investment Banking Banking Treasury West 2002 2001
£bn £bn £bn £bn £bn £bn £bn £bn
Loans & Advances to Customers* 157.9 23.2 44.1 1.9 7.2 234.3 197.9
Bad Debt Provisions including interest
in suspense
Specific 0.9 0.2 0.3 0.1 1.5 1.2
General 0.3 0.2 0.2 0.7 0.7
Gross Loans & Advances to Customers* 159.1 23.6 44.6 1.9 7.3 236.5 199.8
Total Risk Weighted Assets 90.0 0.4 26.7 53.5 11.0 5.5 187.1 157.5
Total Customer Deposits 103.8 12.3 14.1 16.4 3.6 150.2 140.5
* Net of securitisation.
The mix of the Group’s gross lending portfolio at the year end is summarised in the following table:
Classification of advances* Bad Debt Provisions & The cumulative provisions and interest in
2002 2001 Non-Performing Assets suspense, which are deducted from advances
% % Specific General Total in the balance sheet, together with their
£m £m £m percentage cover of NPAs are as follows:
Agriculture, forestry and fishing 1
Energy 1 1 At 1 January 2002 1,102 667 1,769 2002 2001
Manufacturing industry 3 3 Amounts written off
As % of As % of
Construction & property 9 8 during the year (618) (618)
£m NPAs £m NPAs
Hotels, restaurants and Charge for the year 795 37 832
wholesale and retail trade 4 3 Recoveries of amounts Specific Provisions 1,321 31 1,102 27
Transport, storage and previously written off 38 38 General Provisions 703 17 667 16
communication 2 2 Exchange movements 4 (1) 3 Interest in Suspense 141 3 123 3
Financial 3 3
At 31 December 2002 1,321 703 2,024 Total 2,165 51 1,892 46
Other services 5 5
Individuals:
The total charge for bad and doubtful debts of which:
Residential Mortgages 62 64
against Group profits was £832m (2001 £608m) UK residential
Other Personal 7 7
and represents 0.38% of average customer mortgages 389 23 380 21
Overseas residents 4 3
lending (2001 0.33%). Within this the charge Other advances 1,776 71 1,512 68
Total 100 100 for specific provisions increased 43% to
Total 2,165 51 1,892 46
£795m (2001 £556m), representing 0.37% of
* After securitisation. average customer lending (2001 0.30%). The
Share of Operating Profit/(Loss)
Loans and advances to customers increased general provision charge amounted to £37m
in Associates and Joint Ventures
by 18% to £234.3bn after securitisations of (2001 £52m).
Included within the share of operating
£3.5bn in the year. Within Retail Banking, Closing provisions as a percentage of period profit/(loss) in associates and joint
net mortgage lending was £23bn. Credit cards end customer advances are analysed in the ventures are the following items:
and personal loans also grew strongly. following table: 2002 2001
Corporate advances grew 25% to £44.1bn £m £m
whilst Business Banking achieved 23% growth 2002 2001
to £23.2bn. As stated in the Divisional Reviews, As % of As % of Lex Vehicle Leasing* 13 12
this growth has been achieved without customer customer Centrica Personal Finance 18 17
compromising on asset quality. £m advances £m advances RFS 3 9
esure (13) (14)
Customer deposits grew by 7% to £150.2bn Specific Provisions 1,321 0.56 1,102 0.56 Sainsbury’s Bank 11 8
and wholesale funding by 26% to £126.4bn. General Provisions 703 0.30 667 0.34 Other 3 4
Total 2,024 0.86 1,769 0.90 Total 35 36
Non-performing assets (NPAs) amounted * After charging goodwill amortisation.

to 1.80% of year end customer advances Taxation
(2001 2.06%). NPAs in respect of UK residential The tax charge for the year of £835m
mortgages amounted to 1.17% of year end (2001 £663m) represents 28.7% (2001 28.9%)
advances (2001 1.47%) and NPAs in respect of profit before tax compared with a UK
of other advances amounted to 2.81% (2001 corporation tax rate applicable to the year
3.09%). The amount of NPAs increased to of 30% (2001 30%). The effective rate is
£4,206m (2001 £4,072m) of which £1,697m lower than the UK corporation tax rate
(2001 £1,851m) were in respect of UK mainly due to the net effect of lower tax
residential mortgages and £2,509m (2001 rates overseas and interest deductible
£2,221m) were in respect of other advances. on Innovative Tier 1 Securities.
Capital Structure Supervisory deductions mainly reflect Retail synergies are a mix of revenue
2001 investments in subsidiary undertakings benefits and cost savings that arise mainly
2002 Restated that are not within the banking group for from savings in central and support costs.
Regulatory Capital £m £m regulatory purposes. Deductions are made The negative net revenue benefits
Risk Weighted Assets for the investments in Clerical Medical, for Insurance & Investment and Business
On balance sheet 173,534 147,119 St. James’s Place Capital and St. Andrew’s Banking reflect costs incurred in expanding
Off balance sheet 13,608 10,413
Group. Total deductions increased from operations in order to achieve revenue
£3,357m to £4,064m. synergies. Corporate Banking synergies are
Total Risk Weighted Assets 187,142 157,532 attributable to transactions leveraging off
Tier 1
The Tier 1 ratio is 7.9% at 31 December 2002
and the risk asset ratio is 10.4%. the strength of the HBOS balance sheet.
Share capital 1,346 1,292 Cost savings from Group Services arise across
Less: own shares (17) (5) In July 2002, the Group injected £600m support functions and IT.
into its Insurance & Investment Division for
1,329 1,287
investment in its life businesses and since One off costs of £153m, associated and
Eligible reserves 12,620 10,148
31 December 2002, additional capital of necessary in achieving the synergies and
Minority interests (equity) 626 530
£500m has been provided to Clerical Medical. benefits, were charged in 2002. £132m was
Minority and other interests charged in 2001 and in total, by end 2004
(non-equity): Credit Rating we expect to have incurred costs of £450m.
Preferred securities 1,802 1,789 In June 2002 Standard & Poor’s revised its
outlook on HBOS plc and related entities The estimated profit and loss impact of
Preference shares 198 198
to stable from negative. At the same time total cost savings and revenue benefits
Less: goodwill (1,787) (1,537)
all ratings on all Group entities were (excluding one off costs) in each financial
Total tier 1 capital 14,788 12,415 reaffirmed. As Standard & Poor’s stated in year are shown below.
Tier 2 their announcement of 12 June, “The rating Annual Profit from Synergies £m
Undated subordinated debt 2,942 2,464
action reflects the continued strength of
HBOS plc’s balance sheet, underpinned by 2001 (actual) 22
Dated subordinated debt 5,209 4,614 2002 (actual) 209
General provisions 652 622
a significant equity placement in March 2002,
despite rapid growth in business volumes”. 2003 470
Total tier 2 capital 8,803 7,700 2004 770
However, in January 2003 Standard & Poor’s 2005 800
Supervisory deductions: reversed the decision on the outlook,
Unconsolidated investments re-instating a negative view reflecting From the end of 2004, cost savings and net
– Life (3,503) (2,704) “pressure on HBOS’ balance sheet caused revenue benefits are estimated to total at least
Unconsolidated investments by a combination of an ambitious growth £800m per annum. Cost savings will contribute
– Other (309) (298) strategy and the impact of equity market £385m and net revenue benefits £415m.
Investments in other banks weakness on its life assurance subsidiaries”. An analysis by division is provided below.
and other deductions (252) (355) In November 2002, Moody’s Investor Services Expected Run Rate Benefit from
Total supervisory deductions (4,064) (3,357) confirmed HBOS plc and related entities January 2005
rating outlook as stable. Moody’s stated that Net
Total regulatory capital 19,527 16,758 “the outlook also factored in the uncertainty Revenue Cost
Tier 1 capital ratio (%) 7.9 7.9 surrounding the medium term prospects for Benefits Savings Total
Risk asset ratio (%) 10.4 10.6 the UK economy and the domestic housing £m £m £m
market” and that “the diversity of the bank’s
Retail Banking 70 140 210
Total regulatory capital increased during business is another key factor in driving
Insurance & Investment 55 10 65
2002, from £16,758m to £19,527m. the ratings”.
Corporate Banking 150 150
£1,258m (net of expenses) of Tier 1 capital The Group’s credit ratings at operating bank Business Banking 120 120
was raised between 5 and 7 March 2002, level remain at AA with Standard & Poor’s, Treasury 20 25 45
through a placing in the market of 172.5m Aa2 with Moody’s and AA+ with Fitch. Group Services 210 210
new Ordinary Shares. In addition, £283m of Merger Cost Synergies and 415 385 800
Tier 1 capital was generated as a consequence Revenue Benefits
of certain shareholders electing to receive Total merger synergies of £209m, which are December 2001 Comparative Figures
their 2001 final dividend and 2002 interim analysed by division below, are included in the The comparative figures for the year
dividend in the form of shares under the 2002 Group profit before tax and exceptional ended 31 December 2001 have been
Share Dividend Plan on 31 May and 25 items (cost savings of £137m and net revenue restated primarily to reflect changes
October 2002. Tier 1 capital was further synergies of £72m). The run rate from the end in accounting policies arising from the
strengthened by internally generated of 2002 is estimated at £305m. adoption of FRS 19 ‘Deferred Tax’, UITF 33
capital from retained profits net ‘Obligations in capital instruments’ and
of additional goodwill. Profit and Loss impact for Year to 2002
the adoption of unsmoothed asset values
Net for purposes of projecting cash flows in
In June 2002, £3,479m of mortgage loans
Revenue Cost
were securitised. A further £349m of mortgage determining income from the life assurance
Benefits Savings Total
loans were securitised in July 2002. These £m £m £m
businesses attributable to shareholders.
securitised loans are not included within Previously, a smoothed approach was
risk weighted assets. Retail Banking 28 62 90 adopted by HBOS. The new methodology
Insurance & Investment (12) 3 (9) is consistent with that adopted by
Tier 2 capital was increased during the year Corporate Banking 73 1 74 other bancassurers.
by undated subordinated debt issues of Business Banking (21) 2 (19)
£500m in November 2002, and dated Treasury 4 10 14
subordinated debt issues of €750m over Group Services 59 59
October and November 2002 and US$450m
72 137 209
in November 2002.
The effect of these changes on the reported results for 2001 are:
As As
Reported Adjustments Restated
£m £m £m
Net operating income 6,872 6,534

Operating profit 2,670 2,332
Profit before tax and exceptional items 2,853 2,515
Profit before tax 2,630 2,292
All adjusted by:
Effect of changing to unsmoothed asset values in embedded value calculations (320)
Implementation of UITF 33 (18)
Profit after tax 1,865 1,629
Adjusted by:
Aggregate adjustments noted above (338)
Tax there on 92
Implementation of FRS 19 10
Profit attributable to shareholders 1,676 1,468
Adjusted by:
Post tax adjustments as above (236)
Impact of post tax adjustments on equity and non equity minority interests 28
Shareholders’ funds 11,468 11,413
Adjustments to 2001 profits as above (208)
Adjustments to earlier years profits – FRS 19 125
– EV profits 28
Total assets 312,275 312,071
Total assets excluding long term assurance assets 274,674 274,470
Both adjusted by:
Effects of changing to unsmoothed asset values in embedded value calculations (200)
FRS 19 impact on interest in associates and joint ventures (4)
Key ratios:
Post tax return on mean equity (%) 18.2 15.1
Cost:income ratio (%) 44.7 49.2
Underlying earnings (pence) 56.6 47.7
Basic earnings (pence) 46.4 40.5
Tier 1 capital ratio (%) 7.9 7.9
Total capital ratio (%) 10.6 10.6
European Economic and The uncertainty that exists around the Internal Control
Monetary Union (EMU) Government’s intentions and timings is The Board has overall responsibility for the
The Government has confirmed that it such that it is not possible to make an Group’s system of internal control and for
will make a decision on UK entry to the single accurate assessment of the total costs reviewing its effectiveness. This system has
currency within 2 years of commencement that would be involved in the euro been in place throughout the period to the
of the current parliament i.e. by June 2003. changeover programme. date of approval of the Annual Report and
The Group continues to monitor Government Accounts. It is regularly reviewed by the
The Group’s Operating Controls Board and accords with the Turnbull
developments and remains actively involved This section reviews the Group’s approach
in discussions within the Banking industry guidance on internal control.
to risk management by describing:
and other sectors of the economy to help In addition the Board has reviewed the
assess the implications for the Group and • general principles for internal control effectiveness of the system of internal
its customers. The Group has undertaken an and operating practices; control specifically for the purposes
assessment of the potential impact arising of this statement.
from UK entry to the single currency and • the governance structure for the
what such a programme of work would Group’s controls; The system of internal control provides
entail. This work is being undertaken • the Group Risk functions which oversee for a documented and auditable trail
under the direction of the Group’s Euro risk management activities; and of accountability and applies across
Preparations Task Force, comprising senior the Group’s operations. It covers strategic,
representatives of the Group’s UK business • the major types of risks to which the financial, regulatory and operational risks
areas and support functions. Group is subject. and provides for assurances to successive
levels of management and, ultimately, throughout the Group. The Group’s Audit market risk appetite, policy and guidelines
to the Board. Committee also acts as the audit committee to the Board. It is supported by GFR, which
for Bank of Scotland and Halifax plc, monitors compliance with Group policies,
The system is designed to manage, rather
and is supported by five divisional Risk standards and limits and aggregates market
than eliminate, the risk of failure to achieve
Control Committees and the BankWest risks to monitor the overall Group position
business objectives, and can provide only
Audit Committee. independently from the business divisions.
reasonable – and not absolute – assurance
against material misstatement or loss. The Audit Committee, which meets at least Group Insurance and
quarterly, inter alia reviews management’s Investment Risk Committee
Operating Principles and Practices
procedures for: The Group Insurance and Investment
The Group seeks to maintain high
Risk Committee (GIIRC) is responsible
standards of business conduct across • identifying business risks and controlling
for the implementation and maintenance
all of its operations. their financial impact;
of the overall risk management framework
The risk appetite of the Group is set • preventing or detecting fraud; relating to investment, credit, market and
by the Board. The strategy for managing insurance risks, together with asset and
• ensuring compliance with regulatory and
risk is formulated by the Executive and liability management, within the Insurance
legal requirements; and
recommended to the Board for approval. and Investment Division of the Group.
The Group Management Board also reviews • monitoring the operational effectiveness It recommends policy limits and
the effectiveness of the risk management of policies and systems. guidelines to the Board.
systems through reports from management
The Audit Committee, which summarises It is supported by GFR, which monitors
and from the Group risk committees.
its findings to the Board, obtains assurance compliance with the relevant Group policies,
Management has the prime responsibility about the internal control and risk management standards and limits and aggregates certain
for identifying and evaluating significant environment through regular reports from risks to monitor the overall Group position.
risks to the business and for designing GFR and GAROR and consideration of
Group Operational and
and operating suitable controls. Internal external auditors’ reports and review of
Regulatory Risk Committee
and external risks are regularly assessed, the minutes and work of divisional Risk
The Group Operational and Regulatory
including control breakdowns, disruption Control Committees.
Risk Committee (GORRC) is responsible
of information systems, competition
The divisional Risk Control Committees for the overall operational and regulatory
and regulatory requirements.
(which are described under ‘Divisional risk management framework across the Group.
The assessment process is consistent across Level Controls’ below) and the BankWest It recommends policy and guidelines to the
the Divisions and Group Functions and uses Audit Committee operate under delegated Board. It is supported by Group Regulatory
an iterative challenge process to provide authority from the Audit Committee Risk and Group Operational Risk, which
successive assurances to ascending levels and the planning and co-ordination of recommend and monitor compliance
of management up to the Board. their activities is reviewed by the Audit with Group policies and standards.
Committee. The divisional Risk Control
In judging the effectiveness of the Group Risk
Committees review, on behalf of the
Group’s controls, the Board reviews the Group Risk consists of two functions,
Audit Committee, the adequacy of the
reports of the Audit Committee and GFR and GAROR, both of which report
five business divisions’ systems of internal
management. It also considers key to the Group Finance Director. The Chief
control (including financial, regulatory
performance indicators and reviews Financial Risk Officer, Head of GAROR,
and operational risk management).
monthly financial and business performance Head of Group Internal Audit, Head of
showing variances against budgets. Group Credit Risk Committee Group Regulatory Risk and Head of Group
The Group Credit Risk Committee (GCRC) Operational Risk all have direct access
Group Level Control
is responsible for assisting the Board to to the Chairman of the Audit Committee
The Group committee structure considers
formulate the Group’s risk appetite, policies and the Chief Executive.
risks and risk management from the Group’s
and strategies for managing the credit risk
perspective and is supported by the Group The Group Risk areas provide functional
facing the Group.
Risk functions, namely Group Financial Risk leadership for specialist personnel throughout
(GFR) and Group Audit, Regulatory and It is also responsible for the implementation the Group’s business areas and oversee risk
Operational Risk (GAROR). Together they and maintenance of the Group’s Credit Risk management activities across the Group
provide central oversight by reviewing Management framework. It is supported to ensure minimum standards are met and
and challenging the work of the business by GFR, which monitors compliance with monitor aggregate risk data at Groupwide
divisions’ own risk committees and by Group policies, standards and limits and and cross-divisional regulated entity levels.
providing functional leadership in the aggregates credit risks to monitor the
GFR has three main areas of focus:
development and implementation of risk overall Group position independently
management techniques. from the business divisions. • Group Asset and Liability Management
monitors compliance with Group policies,
Audit Committee Group Asset and Liability Committee
standards and limits and aggregates market
Without diminishing its own accountability, The Group Asset and Liability
risks to monitor the overall Group position.
the Board has delegated certain Committee (GALCO) is responsible for
responsibilities to the Audit Committee the implementation and maintenance of the • Group Credit Risk monitors compliance
including ensuring that there is regular overall risk management framework relating to with Group policies, standards and
review of the adequacy and efficiency of balance sheet structure, market risks, trading, limits and aggregates all credit risks
the internal control procedures and that funding and liquidity management across the to monitor the overall Group position.
there is a proper compliance structure Group’s banking business. It recommends In addition, specified Group Credit
Risk colleagues have the authority to the regulators, when requested, on certain Group Wholesale Credit Committee,
to sanction specific transactions. aspects of internal controls and other matters. a sub-committee of GCRC.
The findings of those reports are also considered
• Group Insurance and Investment Risk The controls applied to lending assessment
by the appropriate divisional Risk Control
monitors compliance with the relevant processes consider environmental risk and
Committees, Audit Committees and Boards.
Group policies, standards and limits and the potential impact this may have on the
aggregates certain risks to monitor the Mapping and Managing Risk value of the underlying security.
overall Group position. The Group is subject to risks, inherent
Insurance and Investment Risk
in financial services activity. The Group’s
GAROR has three main areas of focus: Insurance risk is the potential for loss arising
principal activities are the provision of
• Group Internal Audit supports the retail, business and corporate banking from poor experience in relation to insurance
Audit Committee, divisional Risk Control services, investment management and contract pricing parameters (for both life and
Committees and senior management by insurance. It consequently makes loans general insurance products). Investment risk
reviewing independently and objectively to and takes deposits from customers is the potential for financial loss arising from
the effectiveness of the control and and wholesale counterparties while the the risks associated with the fund management
risk environment. activities of Insurance and Investment activities of the Group. This includes both the
Division carry investment management assets where the Group retains the primary
• Group Regulatory Risk supports the risk and those assets where it is retained
and insurance underwriting risks.
GORRC to recommend policies and by third parties, including policyholders.
standards on regulatory risk and cultural Credit Risk
issues for approval by the Board. It is also This is the risk of financial loss from Day to day management of such risk
responsible for oversight of the Group’s a customer’s failure to settle financial is undertaken both by line management
adherence to regulatory requirements obligations as they fall due. GCRC, and by specialist teams within the Insurance
and for oversight of communications which was chaired until his retirement and Investment Division. Full use is made
with regulators on a Group-wide basis, by the Executive Deputy Chairman, and of the statutory Appointed Actuary and
with direct responsibility for relations thereafter by the Group Finance Director, (Pension) Scheme Actuary roles, both to
with the Financial Services Authority and is comprised of senior executives, meets ensure regulatory compliance (in respect
(FSA), the Group’s principal regulator. monthly (in general) and reviews the Group’s of the authorised insurance companies in the
lending portfolio to ensure a Group-wide Group) and to meet HBOS control standards.
• Group Operational Risk supports the
understanding and control of credit risk. GIIRC receives regular reports on specified
GORRC to recommend policies and
standards on operational risk for approval Day to day management of credit risk aggregate risks across the division.
by the Board, providing operational risk is undertaken by specialist credit teams Regulatory Risk
oversight of the implementation of those working within each business area in This is the risk that the Group, or any
policies and standards. compliance with policies approved by part of it, fails to meet the requirements
the Board. A specialist support function or expectations of regulatory authorities
Divisional Level Controls
within GFR provides centralised expertise or supervisors responsible for enforcing
Divisional Chief Executives have responsibility
in the area of credit risk measurement legislation, codes, or regulations governing
for managing strategic, market, credit,
and management techniques. Performance the way that the Group’s business activities
regulatory and operational issues affecting
of each portfolio is reported to GCRC. are conducted within the UK or elsewhere.
their own operations within the parameters
of the Group policies set by the Board. In Retail Banking use is made, where it is Regulatory risk can also arise where the
All business divisions have divisional Risk practical to do so, of software technology Group fails to anticipate and manage
Control Committees which comprise at least in credit scoring new applications and regulatory change adequately.
two independent Non-executive Directors and current account overdraft extensions. Day to day management of regulatory risk
an Executive Director, independent of that In addition, behavioural scoring is used. is undertaken both by line management
division, to provide objective assurance on Collections activity for credit card and and specialist teams of compliance experts
the effectiveness of the division’s internal current accounts, and for personal loans, working within business areas. Reports on
control and risk management. These is centralised for the various products, and regulatory risk management are made by
committees meet regularly to review software systems are used to prioritise action. business areas and divisions to their Risk
the significant risks facing their division’s Mortgage collection is conducted through a Control Committee and individual company
business and the techniques used to identify, number of payment collection departments. Audit Committee. Group Regulatory Risk
assess and manage them. Each business
Within Business Banking, small business provides a high level assessment to the
division also has its own risk management
customers may be rated using scorecards Audit Committee.
committee or committees, which relevant
in a similar manner to retail customers.
Group Risk personnel attend. Operational Risk
Larger SME (small to medium enterprises)
HBOS has adopted the industry standard
Regulatory Controls customers are typically rated in the same
Basel Committee on Banking Supervision
The Group’s business areas are regulated by way as corporate customers. Corporate
definition of operational risk:
a range of authorities including the FSA, the Banking conduct a full credit assessment
Group’s principal regulatory authority, and of the financial strength of each potential “The risk of loss resulting from inadequate or
regulators in overseas jurisdictions in which transaction and/or customer, awarding failed internal processes, people and systems
the Group operates. an internal risk rating. Internal ratings are or from external events.”
reviewed regularly.
The Group’s activities are monitored by The management of operational risk is an
the regulators through periodic reviews For HBOS Treasury Services, policies intrinsic part of every business manager’s
and inspections. External auditors report are established and reviewed by the role. HBOS’s approach is to ensure business
managers identify, assess, prioritise and instruments – typically resulting from The principal areas of market risk taken are
manage all substantial risks in a cost movements in interest rates (interest rate interest rate (outright positioning, basis, spread
effective and consistent manner. risk), equity or other indices, and foreign and volatility risk), and foreign exchange
exchange rates (foreign exchange risk). Overall risk. There is no material commodity or
To this end HBOS uses a combination
accountability for the management of market equity exposure.
of risk self assessment, risk event and key
risk and responsibility for allocating limits for
risk indicator analysis, appropriate insurance The current methodology for providing an
banking activities, within the parameters set
cover and contingency arrangements, together aggregated VaR for the business uses very
by the Board, lies with GALCO.
with sound control procedures and systems. conservative assumptions. In order to assess
This approach is entirely consistent with the Interest Rate Risk the effectiveness of VaR the Group uses
current requirements under the new Basel The primary market risk faced by the a technique known as backtesting which
Capital Accord. Group is interest rate risk. Interest rate risk compares the daily profit and loss from
exists where the Group’s financial assets trading activities to the VaR estimate for
Each division and Group function and liabilities have interest rates set under that day. Backtesting results show that the
is required half yearly to compile an different bases or reset at different times. VaR measure calculated for each day was
operational risk profile which sets out never exceeded by profit and loss volatility
the internal assessment of risk and controls The Group assumes interest rate
during 2002. Daily standard deviation of
against consistent categories as a form risk from dealings with customers,
trading profit and loss was £1.7m.
of self certification. These profiles are through fixed term lending, deposit
presented to the Risk Control Committees, taking or derivative contracts. This risk The Group recognises that the VaR
the Audit Committee and the Board and is monitored by Group and divisional methodology cannot guarantee the
are subject to independent review by the Asset and Liability Management within maximum loss that may be suffered in any
relevant risk teams. They are also validated a framework determined by GALCO. trading period, particularly in the event
by Group Internal Audit during the course Trading activity is undertaken by HBOS of market turmoil. Therefore, stress testing
of their work. Treasury Services. is used to simulate the effect of selected
adverse market movements.
In addition a number of specialist support The effect of interest rate movements is
functions provide centralised expertise in assessed using sensitivity analysis and other The Group’s trading market risk exposure
operational risk areas such as information modelling techniques. Sensitivity to interest for the year ended 31 December 2002
security, fraud, corporate insurance and rate movements is shown in Note 44 to is analysed in Note 45 on page 106 of
business continuity planning. the Accounts on pages 105 and 106 which the Accounts.
provides the year end repricing profile for
Liquidity Risk Derivatives
the Group’s financial assets and liabilities
Liquidity risk is the risk that the Group will In the normal course of banking business,
in the non-trading book, which includes
be unable to meet financial commitments the Group uses a limited range of derivative
lending, funding and liquidity activities.
arising from the cashflows generated by instruments for both trading and non-trading
its business activities. This risk can arise Foreign Exchange Risk purposes. The principal derivative instruments
from mismatches in the timing of cashflows Structural foreign exchange exposures, which used are interest rate swaps, interest rate options,
relating to assets, liabilities and off-balance are set out in Note 46 of the Accounts on cross currency swaps, forward rate agreements,
sheet instruments. page 107, arise from the Group’s investments forward foreign exchange contracts and futures.
in overseas subsidiaries, branches and The Group uses derivatives primarily as a risk
The Group’s UK liquidity is managed by other investments. management tool for hedging interest rate
HBOS Treasury Services. It operates within and foreign exchange rate risk.
a framework and policies determined by Foreign exchange exposures in Treasury
GALCO which ensures that the Group’s Services, which arise in the normal course The table over the page provides an
funding requirements can be met at all of business, are transferred to the trading illustration of the traditional banking
times and that a stock of high quality book where they are managed within services and activities which can give rise
liquid assets is maintained in a form GALCO approved limits. to market risk exposures and the way in
and at a level which reflects prudent which this can be managed and mitigated
Trading
banking practice. by using derivatives.
The Group’s market risk trading activities
A further objective is to raise funding are principally conducted by HBOS Treasury
as cost effectively as possible whilst Services in the UK. The regulatory capital
ensuring that no significant unintended charge for market risk trading exposures
represents less than 1.58% of the Group’s
mismatches arise between loans and
capital base.
deposits. Close control is exercised
over both volume and quality of The Group employs several complementary
short-term deposits, with the sources techniques to measure and control trading
and maturities being managed to avoid activities including: Value at Risk (VaR), sensitivity
a concentration of funding requirements analysis, stress testing and position limits.
at any one time from any one source. The VaR model used forecasts the Group’s
The framework ensures that the Group exposure to market risk within an estimated
meets regulatory authority requirements. level of confidence over a defined time period.
Market Risk The average VaR value in 2002 was £11.1m.
This is the risk of financial loss from The calculation is based upon a confidence
changes in market prices of financial interval of 99% with a one day holding period.
Activity Risk Type of Derivative
Management of the investment of reserves and Sensitivity to falls in interest rates Receive fixed interest rate swaps
other non-interest bearing liabilities Purchase of interest rate floors
Fixed and capped rate mortgage lending Sensitivity to increases in interest rates Pay fixed interest rate swaps
Purchase of interest rate caps
Fixed rate savings products Sensitivity to falls in interest rates Receive fixed interest rate swaps
Fixed rate funding Sensitivity to falls in interest rates Receive fixed interest rate swaps
Fixed rate asset investments Sensitivity to increases in interest rates Pay fixed interest rate swaps
Investment and funding in non-sterling Sensitivity to changes in foreign exchange rates Cross currency interest rate swaps
currencies and interest rates Foreign exchange contracts
Investment in assets/issuance Sensitivity to changes in underlying rates and Interest rate swaps, caps and floors
with embedded options rate volatility Matched swaps with embedded options
The Group’s activity in derivatives is controlled • Pillar 1: Minimum Capital Requirements:

within risk management limits set by GALCO. Formula driven risk based capital
This framework recognises the principal risks requirements to motivate banks to
including credit, operational, liquidity and improve risk management and risk
market risk associated with derivatives. Details measurement capabilities.
of derivative contracts outstanding at the
year end are included in Note 41 of the • Pillar 2: Supervision: Creating a
Accounts on pages 101 and 102. supervisory framework and providing
the regulators with powers to set
The Basel Capital Accord capital requirements.
The new Basel Capital Accord (BIS II) will
radically amend the established standards • Pillar 3: Market Discipline: Requiring
for capital adequacy in banks. It aims to: banks to disclose capital structure, risk
exposures and capital adequacy in a
• Ensure banks’ regulatory capital
detailed, transparent manner.
requirement more accurately reflects
their risk profile The expected date for implementation
• Separate operational risk from credit of BIS II is 1 January 2007, following a one
risk and provide capital charges for each year parallel running phase with BIS I, the
current framework.
• More closely match regulatory and
economic capital, and The Group has a strategic programme to
prepare for BIS II, which is part of wider
• Encourage the use of internal ratings systems investment in the development of risk
to derive regulatory capital requirements. management and reporting systems. This
BIS II is based on three ‘pillars’, designed is being overseen by the Risk Management
to ensure that banks have an adequate Development Forum, which is chaired by
investment in the effective monitoring the Chief Financial Risk Officer. A Basel
and implementation of risk management programme office co-ordinates activities
models, practices and systems. across the Group.
The Board
Chairman Executive Directors appointed to the Bank of Scotland’s

Management Board as General Manager with
Dennis Stevenson Mike Ellis
responsibility for Bank of Scotland Treasury
Age 57, Dennis was appointed a Director of Age 51, Mike joined Halifax Building Society
Services plc. In April 1999, Colin became a
Halifax in May 1999 and became Chairman in June 1987 as Treasurer after holding several
member of Bank of Scotland’s Group
in July of that year. Following the merger of appointments in the local government sector.
Management Board and was appointed
Bank of Scotland and Halifax in September He became Group Treasurer in June 1989,
Divisional Chief Executive of Business Banking
2001, Dennis became Chairman of HBOS plc. General Manager, Treasury and European
before being appointed a Director of Bank of
He is also Chairman of Pearson plc and a Operations in August 1992 and Managing
Scotland in May 2000. Following the merger
Non-executive Director of Manpower Inc, Director, Treasury and Overseas Operations
of Bank of Scotland and Halifax in September
Chairman of the House of Lords in August 1995. In December 1996, he became
2001, Colin became Chief Executive of the
Appointments Commission and Chancellor Banking and Savings Director and in January
Business Banking Division of HBOS plc.
of the London Institute. 1999, became Retail Financial Services Director
Colin is a Fellow of The Chartered Institute
with responsibility for Mortgages and Savings,
of Bankers in Scotland.
Chief Executive Banking and Consumer Credit, General Insurance,
Long Term Savings and Marketing, with Gordon McQueen
James Crosby
additional Board responsibility for Distribution. Age 56, prior to joining the Bank of
Age 46, James joined Scottish Amicable in
In October 1999, Mike was appointed Chief Scotland in 1976, Gordon was with Ivory
1977 and spent 10 years as a fund manager
Operating Officer of Halifax and following and Sime as an Equity Portfolio Manager
followed by senior positions in IT, marketing,
the merger of Bank of Scotland and Halifax from 1973 to 1975 and spent a year with
finance and corporate development. He led
in September 2001, became Group Finance Hendry Widnell & Stewart Limited as Chief
the establishment of the joint venture with
Director of HBOS plc. Mike is a Fellow of the Accountant. He joined the International
J Rothschild Assurance (1991) of which he
Chartered Institute of Bankers in Scotland Division of Bank of Scotland where he
was a Director until 1994. In 1994 he joined
and of the Association of Corporate Treasurers. held a variety of posts, culminating in his
Halifax Building Society as Managing Director,
He is also a member of the Chartered Institute appointment as General Manager of the
Halifax Life and following the acquisition of
of Public Finance and Accountancy. Division in 1989 when he also became
Clerical Medical in 1996 he became Financial
Services and Insurance Director of Halifax plc. Phil Hodkinson a member of Bank of Scotland’s Group
On 1 January 1999 James was appointed Age 44, Phil joined Allied Dunbar in 1984 and Management Board. In 1990 he became
Chief Executive of Halifax and also became became Managing Director before moving to General Manager of Treasury Division
a Director of St. James’s Place Capital plc Eagle Star Life as Chief Executive. Phil has run and in 1993 became General Manager,
in June 2000. In September 2001, following the UK life business of Zurich Financial Services UK Banking-England, based in London. In
the merger of Bank of Scotland and Halifax, and was the founder of Zurich’s UK Enterprise April 1999, Gordon became Divisional Chief
James became Chief Executive of HBOS plc. portfolio of new insurance, banking and Executive, Group Treasury and Finance and
On 26 November 2002 he was appointed e-commerce operations. He was appointed Chief Executive of Bank of Scotland Treasury
a Non-executive Director of Granada plc. Chief Executive of the Insurance & Investment Services plc. He was appointed a Director of
James is a Fellow of the Faculty of Actuaries. Division of HBOS plc in September 2001 and Bank of Scotland in May 2000 and following
is also Chairman of the HBOS Foundation. the merger of Bank of Scotland and Halifax in
Phil is a Fellow of the Institute of Actuaries. September 2001, he became Chief Executive
of the Treasury Division of HBOS plc. Gordon
Andy Hornby
is a Member of the Institute of Chartered
Age 36, after graduating from Oxford Andy
Accountants of Scotland.
joined the Boston Consulting Group where
he spent three years working on a range of George Mitchell
projects, principally in the media and retail Age 52, George joined Bank of Scotland in
sectors. He then went to Harvard, where he 1966 and became an Associate of the Institute
obtained his MBA. On his return, Andy joined of Bankers in Scotland in 1971 and a Fellow
Blue Circle, where he held a number of senior in 1993. He has worked in a wide range of
line management roles. He moved to ASDA business areas and a number of locations
in 1996 and held numerous roles including including London, New York and Hong Kong.
Director of Corporate Development, Retail In February 1994 George returned to
Managing Director and finally Managing Edinburgh as General Manager with
Director of George, ASDA’s clothing business. responsibility for the Bank’s Centrebank
Andy joined Halifax on 1 November 1999 Division and was also appointed to Bank of
as Chief Executive, Halifax Retail and was Scotland’s Group Management Board. In May
appointed to the Board on 18 November 2000 he was appointed a Director of Bank of
1999. Following the merger of Bank of Scotland and he also became Treasurer and
Scotland and Halifax in September 2001, Managing Director of Bank of Scotland in
he became Chief Executive of the Retail June 2001. In September 2001, following
Division of HBOS plc. the merger of Bank of Scotland and Halifax,
Colin Matthew George became Chief Executive of the
Age 52, Colin joined Bank of Scotland in 1966 Corporate Banking Division of HBOS plc.
and in 1991 was appointed Divisional General On 6 January 2003 he was appointed
Manager, UK Banking-England. In 1994 he was Governor of the Bank of Scotland.
The Board
Non-executive Directors a Non-executive Director of HBOS plc. Brian Louis Sherwood

is Chairman of the Remuneration Committee. Age 61, Louis is Chairman of Govett
Charles Dunstone
Brian is a Fellow of the Royal Society of Arts European Technology and Income Trust
Age 38, Charles is Chief Executive Officer
and the Royal Society of Edinburgh. He is PLC and is also a Non-executive Director
of The Carphone Warehouse Group PLC,
also a Freeman of the City of London and a of ASW Holdings PLC, ROK Property Solutions
Europe’s largest independent retailer of
Companion of the Institute of Management plc and Wessex Water Services Limited. In
mobile communications equipment, which
and used to serve as a member of the 1988 he became Chairman and Chief Executive
he founded in 1989. In February 2000 he
Scottish Economic Council. of Gateway Foodmarkets until the takeover
was appointed as a Non-executive Director
of Gateway Corporation in 1989. Louis was
of Halifax and following the merger of Bank John Maclean
formerly Chairman of HTV Group plc between
of Scotland and Halifax in September 2001, Age 59, John is a Non-executive Director
1991 and 1997. He joined the Board of Halifax
Charles was appointed as a Non-executive of Scottish Value Trust PLC and a number
in 1997 as a Non-executive Director and was
Director of HBOS plc. of unlisted companies. He was a Founder
Chairman of Clerical Medical Investment
and Director of Kelvin Shipholdings Limited,
Deputy Chairman Sir Ronald Garrick Group from 2000 to 2001. Following the
a company involved in the ownership and
Age 62, Sir Ronald was Chairman of the trading of vessels in the dry bulk shipping merger of Bank of Scotland and Halifax
Weir Group PLC between January 1999 and market. John was appointed a Non-executive in September 2001, he became a Non-
June 2002, having been Chief Executive since Director of Bank of Scotland in 1995 and executive Director of HBOS plc. Louis gained
1982, joining as a graduate trainee in 1962. following the merger of Bank of Scotland and an MBA at the Stanford Graduate School of
Sir Ronald was awarded the CBE in 1986 and Halifax in September 2001, was appointed Business and an MA at Oxford.
a Knighthood in 1994 for services to industry a Non-executive Director of HBOS plc. Philip Yea
and public life in Scotland. He was Deputy
Coline McConville Age 48, Philip held several senior
Chairman of Scottish Enterprise from 1992
Age 38, Coline is the Chief Executive Officer, business and financial positions before
to 1996 and is a former Director of Shell UK
Europe of Clear Channel International Limited. being appointed Finance Director of
and Scottish Power plc. In September 2001,
She was previously with McKinsey & Co. Guinness plc in December 1993. Following
following the merger of Bank of Scotland
Limited Management Consultants and the merger with Grand Metropolitan to form
and Halifax, Sir Ronald was appointed a
The L E K Partnership, the German based Diageo he was Group Finance Director of the
Non-executive Director of HBOS plc and in
Management Consultant. She started her career enlarged Group until the end of June 1999.
January 2003, he became Deputy Chairman
working for the Australian Consolidated Press He then joined Investcorp the international
of HBOS plc. Sir Ronald is a Chartered
in Sydney, Australia. Coline was appointed investment group. He is also a Non-executive
Engineer and was appointed a Fellow of
to the Board of Halifax in February 2000 Director of Manchester United PLC. Philip
the Royal Academy of Engineering in 1984.
and in September 2001, following the was appointed a Non-executive Director
Anthony Hobson merger of Bank of Scotland and Halifax, of Halifax in October 1999 and appointed
Age 55, Anthony is Deputy Chairman of she was appointed a Non-executive a Non-executive Director of HBOS plc
Northern Foods plc and a Non-executive Director of HBOS plc. following the merger of Bank of Scotland
Director of Glas Cymru Cyfyngedig and and Halifax in September 2001. Philip
Jardine Lloyd Thompson Group plc. A Sir Bob Reid is a Fellow of the Chartered Institute
Chartered Accountant, he was Group Age 68, Sir Bob was Chairman and Chief of Management Accountants.
Finance Director of Legal & General Executive of Shell UK Limited until 1990
Group plc for fourteen years, retiring and Chairman of British Railways Board
in February 2001. He was the Senior between 1990 and 1995. He is Non-executive
Independent Director of Thames Water Chairman of the International Petroleum
plc. Anthony joined the board of Halifax Exchange of London, Chairman of the Kings
in May 2001 and, following the merger of Cross Partnership, Non-executive Director
Bank of Scotland and Halifax in September of Sun Life Assurance Company of Canada,
2001, he was appointed a Non-executive Siemens Holdings plc, Avis Europe plc, The
Director of HBOS plc and is also Chairman Merchants Trust plc and Sondex Limited.
of the Audit Committee. He is also Chairman of the Foundation for
Management Education and a Trustee of
Brian Ivory the Foundation for Young Musicians, the
Age 53, Brian was formerly Chairman Civic Trust and The IPE Charitable Trust. Sir
of Highland Distillers plc, having been Bob was appointed to the Board of Bank of
a Director since 1978. In 1988 he was Scotland in 1987 and was appointed Deputy
appointed Managing Director of Highland Governor in 1997. Following the merger of
Distillers and was Group Chief Executive Bank of Scotland and Halifax in September
from 1994 to 1997. He was also Chairman 2001, Sir Bob was appointed the Senior
of Macallan-Glenlivet plc from 1996 to Non-executive Director of HBOS plc.
1999 and Treasurer of the Scotch Whisky Sir Bob is a Companion of the Institute
Association. Brian is Chairman of The Scottish of Management and was awarded an
American Investment Company PLC and a Honourary Degree as a Doctor of Laws
Director of Remy Cointreau S.A. and is also from both St. Andrews and Aberdeen
Chairman of the National Galleries of Scotland. Universities in 1987 and 1988 respectively.
In February 1998, Brian was appointed a Non- In 1990 he was awarded an Honorary
executive Director of Bank of Scotland and Degree as a Doctor of Science from Salford
following the merger of Bank of Scotland and University. He is Chancellor of Robert
Halifax in September 2001, he was appointed Gordon University.
Directors’ Report
The Directors have pleasure in presenting Employees Scotland had trade creditors outstanding
the Report and Accounts of HBOS plc for The Group encourages applications for at 31 December 2002 representing 22 days
the year ended 31 December 2002. employment from disabled people and gives of purchases for each company.
full consideration to such applicants based
Principal Activities on their skills and abilities. In the event of The Company itself owed no amounts
HBOS plc is the holding company of the an existing employee becoming disabled, to trade creditors at 31 December 2002.
HBOS Group. The principal activities of the the Group provides counselling and training Share Capital
Group are the provision of banking and other support and seeks to provide a suitable Full details of the movements in the
financial services in the UK and overseas. The alternative position within the Group if the authorised and issued share capital of the
Group’s existing business and future prospects individual is unable to continue in their Company during the year are provided in
are reviewed by the Chairman on pages 2 previous role. The Group offers training and Note 36 to the Accounts on page 98.
and 3 and the Chief Executive as set out career development for all disabled staff.
in ‘The Rough Report’ and in the Divisional The views of colleagues with a disability are On 27 February 2002 the Company
Reviews on pages 4 to 27. Financial aspects sought through disability forums to ensure announced a placing of its ordinary shares.
are covered in the Financial Review and Risk that the Group’s policies continue to recognise 172.5 million shares were issued between
Management report on pages 33 to 42. A list their requirements. 5 and 7 March 2002 at a price of 740p per
of the main subsidiary undertakings, and the share, raising proceeds (net of expenses) of
Employee communication issues are
nature of each company’s business, is given £1,258 million. The proceeds of the placing
reviewed on page 29.
in Note 55 to the Accounts on page 112. were used for general business purposes.
Charitable and Political Donations
Results and Dividends On 12 June 2002 the Company purchased
During the year the Group made charitable
The Group profit attributable to donations in the UK of £4.5 million. 14,626,075 ordinary shares (representing
shareholders for the year ended Additionally £2.2 million in total has been 0.4% of the issued ordinary share capital)
31 December 2002, as shown in the made available to charities as a result of from Halifax QUEST Trustees Limited for a
Consolidated Profit and Loss Account, was their affinity to the Visa Charity credit cards consideration of £1,000. On the same day
£1,916 million. An interim dividend of 9.8p offered by Halifax plc and Bank of Scotland. these shares were cancelled and the Company
per Ordinary Share was paid on 25 October issued the same number of ordinary shares, at
Payment Policy their nominal value of 25p per share, to HBOS
2002. The Directors propose a final dividend
For the forthcoming period the Group’s QUEST Limited. The transaction, which was
of 19.6p per Ordinary Share to be paid on
policy for the payment of suppliers will approved by shareholders at the 2002 Annual
23 May 2003 to shareholders on the register
be as follows:
at the close of business on 14 March 2003, General Meeting, resolved an outstanding
subject to approval at the Annual General • Payment terms will be agreed at the start matter from the corporate restructuring of
Meeting. Shareholders will be offered the of the relationship with the supplier and Halifax plc in 1999 and the subsequent merger
choice of receiving additional ordinary shares will only be changed by agreement; of Halifax and Bank of Scotland in 2001. The
rather than cash in respect of this dividend. shares issued to HBOS QUEST Limited will be
• Standard payment terms to suppliers of
used to satisfy entitlements of employees of
Directors goods and services will be 30 days from
Halifax plc arising on the exercise of options
Details of the present Directors are given receipt of a correct invoice for satisfactory
under the sharesave schemes operated by
goods or services which have been ordered
on pages 43 and 44. Lord Simpson retired as the Company.
and received unless other terms are agreed
a Director at the conclusion of the Annual
in a contract; The Company has authority to purchase
General Meeting on 15 May 2002. Sir Peter
Burt retired on 6 January 2003. Following • Payment will be made in accordance with up to 356,656,709 of its ordinary shares.
Peter Burt’s retiral Sir Ronald Garrick was the agreed terms or in accordance with the The authority remains valid until the Annual
appointed Deputy Chairman of the Group law if no agreement has been made; and General Meeting in 2003 or, if earlier,
15 August 2003. A resolution will be put to
with effect from 6 January 2003. Sir Ronald • Suppliers will be advised without delay shareholders to renew the authority at the
Garrick, Anthony Hobson, Andy Hornby, when an invoice is contested and disputes Annual General Meeting.
Coline McConville, George Mitchell and will be settled as quickly as possible.
Philip Yea, retire by rotation and resolutions At the date of this report there is
for their re-election will be proposed at the HBOS plc complies with the Better Payment
a disclosable interest in the issued
Annual General Meeting. Particulars of Practice Code. Information regarding this
share capital notified to the Company
Code and its purpose can be obtained from
Directors’ remuneration and interests in in accordance with sections 198 to 208
the Better Payment Practice Group’s website
shares of the Company are given in the of the Companies Act 1985, by Barclays PLC
at www.payontime.co.uk.
Report of the Board in relation to on 3 December 2002, in respect of 114,385,495
remuneration policy and practice The Company’s main trading subsidiary ordinary shares being 3.02% of the current
on pages 47 to 61. undertakings, Halifax plc and Bank of issued ordinary share capital.
Directors’ Report continued
Post Balance Sheet Events

On 31 January 2003, Insight Investment
Management Ltd, a subsidiary of HBOS plc,
acquired Rothschild Asset Management for
consideration of £61 million.
Properties
The Directors are of the opinion that
the current market value of the Group’s
properties is not significantly different from
the amount at which they are included in
the balance sheet.
Auditors
A resolution to re-appoint KPMG Audit Plc
as auditors will be put to shareholders at
the Annual General Meeting.
On behalf of the Board
H F Baines
Company Secretary
24 February 2003
Report of the Board in relation to remuneration policy and practice
Brian Ivory
Chairman, Remuneration Committee
Letter from the Remuneration Committee
As you will see in the pages that follow, this report provides comprehensive information on reward in HBOS, particularly in relation to Directors.
Legislation now requires more disclosure on current reward than ever before and the Committee and Board support that principle. Just as
importantly, however, we have very clear views on reward policy and practice; on colleague motivation through financial reward and by other
means; and on the alignment of shareholder and colleague interests.
We think that it is important, therefore, that we set out to shareholders our general reward policy – so that there is context to the
specific reward practice covered later in this report.
For almost all colleagues in HBOS, from the most junior to the most senior, there are four common reward principles.
1 Salary. Salary policy is modelled around a median position in the UK financial services market, taking account of the general and specific
knowledge requirements of each role, the skills needed to undertake it and the accountabilities it carries. Salary practice also takes account
of the talents which an individual brings to a role, the value of the outputs which that individual delivers and the individual’s marketability and
future potential.
2 Short-term incentives. Short-term (annual) incentives are linked to the delivery of our annual operating plans; are usually team based;
and are, wherever possible, focused on ‘line of sight’ issues – namely the elements of the operating plans for which the team has prime or
major accountability.
The outcomes of these incentive plans can be taken in cash, or the cash can be used to buy HBOS shares which are then enhanced in number by
50% if the shares are held for at least three years. We call this ‘sharekicker’. We believe that all our colleagues should be shareholders in HBOS
and this is one way in which we encourage this behaviour.
3 Long-term incentives. Long-term (generally three year or five year) incentives are all share-based and are linked directly to the creation
of shareholder value.
In HBOS’s first full year of operation, the vast majority of colleagues – although not our most senior team – were granted share options so as to
create a commonality of interest with shareholders. In addition, we launched a ‘sharesave’ scheme through which colleagues can buy HBOS shares
by saving over three year or five year periods.
For our 140 most senior colleagues, the long-term incentive is focussed on share grants. Outcomes are determined by whether HBOS creates
more value for shareholders than the average created by its key competitors. We compare HBOS total shareholder return (‘TSR’) with the weighted
average TSR of our eight key competitors. No grants are released if we match, or if we are worse than, our competitors, taken collectively. If our
performance is better than that of our competitors, then colleagues get a proportion of that added value.
We know that many organisations pay out something for average performance and then make higher payments depending on where they finish
in a ‘league table’ of competitors. We believe that our scheme is more aligned with shareholder interests in that it pays ‘nothing for average’ and
‘a share of added value’ for better performance, relative to our competitors.
In 2002, in terms of TSR, HBOS’s performance was significantly better than the weighted average performance of our competitors. Participants are
not rewarded for this on the basis of that one year performance in isolation. We have to sustain outperformance over at least a three year period
before participants receive anything under the share grant scheme.
Whilst our current long-term incentive arrangements can operate until 2011, we recognise that these schemes, as a part of our total reward
proposition, seek most closely to align the interests of participants and shareholders. We therefore undertake actively to consult with
shareholders on this issue every three years so that these designs continue to be relevant to both parties.
Report of the Board in relation to remuneration policy and practice continued
4 Benefits. The final key component in our reward package is benefits, of which the prime component is pensions. We make provision for good
pensions on retirement at age 60; for options to take those pensions on appropriate terms as individuals move towards that age; and for excellent
protection for individuals and their families in the event of permanent ill-health or death. This report gives full details of the benefits we provide
for Executive Directors and the costs of doing so. HBOS provides a comprehensive range of benefits and Group product offerings for all
colleagues and, increasingly, is doing so through a flexible scheme which allows colleagues to choose from a menu of benefits to meet their
personal circumstances.
Although we have talked here about the four key components of reward, we regard total reward as the ultimate remuneration measure for
colleagues – in much the same way as we regard total shareholder return as the ultimate measure for shareholders. In total reward, we
consider not only the aggregate reward opportunity but also what elements should be guaranteed or variable, what elements should be cash
or shares, and what elements should be immediate or deferred. For Executive Directors, for example, for every £100 of total expected reward –
namely the level of reward we expect them to receive for on-target performance – about £52 is guaranteed. The rest is variable. The variable part
could be as little as £0 or as much as £107 – based on the outcomes of short-term and long-term incentive schemes each of which, as we said
earlier, ultimately focus on the creation of shareholder value.
Finally, we would like to comment on merger bonuses. A small number of colleagues – but not Executive Directors – received payments for
extraordinary workloads at around the time of the merger in the second half of 2001. We have not paid, nor will we be paying, any ‘merger
transaction’ bonuses. But we will reward colleagues for making the merger a successful one. In 2002, the senior team was given the additional
remit of making merger synergy savings of £130m. In practice, we delivered synergy savings of £209m. As a result, those in the senior team of 620
who delivered those savings and also delivered their own operational objectives will receive additional incentives of £5.6m (equivalent to 10% of
base salaries) – with the option to invest such incentive in shares through our sharekicker facility.
We hope that this letter helps you understand our reward policy and practice and gives context to the specific details which appear later. The
detail of our reward practice is inevitably complex but the principles are simple. They are right for colleagues and right for shareholders.
We hope that you will support them at our AGM.
Remuneration Committee.
1. Introduction
1.1 Composition and Operation of the Remuneration Committee
The remit of the Committee is given on page 62 in the Corporate Governance Statement. The Committee’s members, who are all independent
Non-executive Directors, are Brian Ivory (Chairman), Sir Ronald Garrick, Coline McConville and Philip Yea. The Group Chairman, Group Chief
Executive, Group Services Director and Head of Group Reward and Recognition attend meetings at the Committee’s request.
The Board determines overall remuneration policy for all Directors and other senior colleagues. The Committee determines the actual
remuneration arrangements of the Group Chairman and the Executive Directors. The Group Chairman and the Executive Directors determine
the actual remuneration arrangements of the Non-executive Directors. No Director is present when his or her own remuneration or contractual
terms are being discussed.
The Committee has access to independent and external advice on remuneration matters. The Committee does not retain advisers but uses
organisations best suited to undertake specific projects from time to time. For example, during 2002, the Committee took advice, directly
or indirectly, from:
• Watson Wyatt, in relation to pension issues for Executive Directors; this organisation also advises the Group and the trustees of various
Group pension plans on a range of pension issues;
• Herbert Smith, in relation to contracts for Executive Directors;
• Hay Group Management and Towers Perrin, in relation to reward issues for Directors; these organisations also advise the Group on a range
of reward issues; and
• New Bridge Street Consultants, in relation to various policy issues for Directors and in relation to the preparation of this report; this
organisation also provides independent performance measurement results for grants under the long-term incentive plan which applies
to most senior colleagues.
1.2 Compliance
Full details of the Group’s approach to corporate governance, including compliance with the Combined Code appended to the Listing
Requirements of the UK Listing Authority, are included in the Corporate Governance Statement on pages 62 and 63.
The Board has followed the Combined Code as well as the new legislation contained in the Directors’ Remuneration Report Regulations in
preparing this Report and in designing performance-related incentive plans for senior colleagues.
1.3 Service Contracts

In June 2002, the arrangements relating to the provision of the services of the Chairman were extended for a second three year term to
June 2005. If the contract is terminated by the Group prior to the expiry of the term, compensation up to the equivalent of one year’s fees
may be payable.
The Executive Directors have service contracts which can be terminated by the Group on not less than one year’s notice and by the Director on
not less than six months’ notice. If any contract is terminated prior to the expiry of the term, contractual compensation up to the equivalent of
one year’s base salary may be payable. There is no contractual compensation entitlement for any of the Directors beyond this. The Committee
determines any discretionary payments made in such circumstances. Executive Directors are expected to make reasonable efforts to mitigate
for loss arising from early termination of their contracts.
In normal circumstances, it is the Committee’s policy to design service contracts for any newly recruited Executive Directors in a similar form to
the contracts of existing Executive Directors. The Committee believes this policy is appropriate as it maximises potential value for shareholders.
The Non-executive Directors do not have service contracts.
1.4 External Appointments

The Group recognises that Executive Directors may be invited to become Non-executive Directors of other companies and that such
appointments can broaden their knowledge and experience, to the benefit of the Group. Provided that it does not impact on their executive
duties, Executive Directors are generally encouraged to accept one such appointment. They may retain any resulting fee.
1.5 Share Ownership

The Group believes that share ownership by colleagues throughout the Group enhances their alignment with shareholders’ interests. Therefore
colleagues in the Group are able to own shares through:-
• the sharesave plan;
• short-term incentive plans. All colleagues can opt to take the whole or part of their annual incentive in shares rather than in cash, with those
who take their annual incentive in shares and retain them for three years receiving a 50% enhancement of their shareholding;
• long-term incentive plans. Share grants of varying percentages of salaries were made to the 140 most senior colleagues effective from the
start of 2002. Share options equivalent to 20% of salary were made to all colleagues other than the 40 most senior early in 2002; and
• personal purchase using the Group’s sharedealing facility.

These plans assist the vast majority of colleagues throughout the Group to own shares. They form a key element in the Group’s commitment
to creating a competitive, flexible and performance-oriented reward structure.
The Group expects all of its Directors (including the Chairman and the Non-executive Directors), together with other senior colleagues, to own
significant numbers of shares relative to base salaries or fees. In the case of the Directors the shareholding is expected to be at least 100% of
base salary or fee within three years of appointment or by 1 January 2006 whichever is the later.
2. Remuneration Policy for Senior Colleagues

2.1 General Policy
To deliver its objective of creating real increases in shareholder value relative to the finance sector, the Group needs to attract and retain the
most capable and committed people and create the right employment conditions and reward opportunities for them.
The remuneration policy for Executive Directors and their most senior colleagues is aligned with this objective. Accordingly, the focus of
remuneration policy is not primarily on salary but is on incentive plans that are closely aligned with the delivery of both operating plans and
shareholder value.
Therefore, for 2003, as was the case for 2002:-
• salary policy is set at around market median;
• short-term incentive plans are based on the delivery of annual operating plans; and
• long-term incentive plans are focussed on share grants. Participants do not receive any of these shares unless the Group’s total shareholder
return is above that of the finance sector as measured using the weighted average total shareholder return of a comparator group of
companies. This long-term plan is highly geared so that average performance generates no reward but outstanding performance generates
relatively high levels of reward.
For remuneration purposes, roles in HBOS fall into one of eight Levels, 1-8. This report covers Directors and other senior colleagues who fall
into Levels 7 and 8, 140 colleagues in all.
2.2 Salary
Salary benchmarks are reviewed annually, taking account of information from independent sources on salary rates for comparable jobs in the
finance industry and in other selected major public companies. Actual salaries are normally reviewed annually but can be reviewed at any time.
There is no automatic annual salary increase.
Current base salaries or fees of the Chairman and the Executive Directors after the most recent review in May 2002 (July 2002 in the case of
the aggregate fees payable in respect of the Chairman) are:-
Dennis Stevenson £495,000, James Crosby £660,000, Mike Ellis £490,000, Phil Hodkinson £375,000, Andy Hornby £450,000, Gordon McQueen
£395,000, Colin Matthew £375,000, George Mitchell £490,000.
At the date of his retirement, Sir Peter Burt’s base salary was £632,500.
2.3 Incentive Plans

The purpose of the incentive plans is to provide a direct link between each individual’s remuneration and his or her performance, that of the
business he or she works in and that of the Group, both annually and over the longer term.
All Executive Directors and a substantial majority of other senior colleagues participate in incentive plans which are Group-wide. Performance
targets and levels of participation differ in order to align overall individual remuneration with the Group’s policy objectives outlined earlier.
Different, market-appropriate, arrangements exist for a small number of senior colleagues within the Group.
Payment of incentives, for Executive Directors and certain other individuals, is subject to the approval of the Committee. Except in
circumstances in respect of initial periods of employment, no Executive Director has a contractual right to an incentive.
Incentive arrangements to apply during 2003 are set out below.
2.3.1 Short-term Incentive Plans

The levels of incentive payments are dependent, generally, on the extent to which participants achieve their operating plan objectives. In 2003,
for Executive Directors, payment of target incentive will require the achievement of targets which include earnings per share (‘EPS’) and return
on equity (‘ROE’) and the attainment of a certain level of profit before tax (‘PBT’). Examples of benchmark payment levels which apply for 2003
are as follows:-
Category Incentive as a % of salary
Target Maximum
Executive Directors 40 60
Level 8 35 52.5
Level 7 30 45
EPS, ROE and PBT outcomes are reviewed by the Audit Committee for the purposes of determining outcomes under the plan.
All participants are able to opt to take their annual incentive in shares rather than in cash. Those who do and retain their shares for three years
and remain in employment or rank as a qualifying leaver receive a 50% enhancement of their shareholding. As outlined in the letter from the
Remuneration Committee at the start of this report, the Committee believes that this feature clearly aligns the interests of participants and
shareholders by encouraging participants to be both long-term colleagues and long-term shareholders, having first achieved stretching
performance targets in relation to their operating plans.
There is no short-term incentive plan for the Chairman or the Non-executive Directors.
2.3.2 Long-term Incentive Plans

There are two plans. Participation is determined by an individual’s Level.
Participants in the first plan are granted conditional shares shortly after the start of the financial year equal to the number of shares secured by
a percentage of the participant’s salary and based on the price of the Group’s shares, using the average market price in the last ten business days
of the previous financial year. For awards in 2003, grant levels will be as follows:-
Conditional share grant
Category as a % of salary (1)
Executive Directors and Chairman 100

Level 8 66.67
Level 7 33.33
(1) or aggregate annual fees payable in respect of the services of the Chairman, in the case of the Chairman.
The number of shares ultimately released to participants under the plan is dependent on the Group’s annualised total shareholder return (‘TSR’)
(defined as the gross overall return on ordinary shares of HBOS after all adjustments for capital actions and re-investment of dividends or other
income) over three year periods, compared to the annualised weighted average TSR of a basket of comparator companies – Abbey National,
Barclays, Lloyds TSB, Royal Bank of Scotland, Aviva, Legal & General, Prudential and Royal & Sun Alliance – over equivalent periods, as follows:-
Group’s relative Amount released as
TSR performance a % of share grant
0% p.a. (or below) 0

+3% p.a. 100
+6% p.a. (or above) 200
Intermediate positions are determined by interpolation.
For technical reasons Dennis Stevenson will become entitled to the cash value of the relevant shares on release. This value will, subject to any
withholdings for tax or National Insurance, be applied in acquiring shares on his behalf.
Participants can choose to take any shares released after three years or can continue to participate in the plan for a further two years and
take shares at that point based on the better of the three year and the five year performance outcome. The performance test over five years
is significantly more demanding than that over three years because participants have to sustain the same level of annual outperformance for
a longer period. This design feature seeks to motivate participants continually to sustain strong performance or to improve lesser performance
for their benefit and for the benefit of shareholders. As outlined in the letter from the Remuneration Committee at the start of this report, the
Committee believes that this feature clearly aligns the interests of participants and shareholders by only rewarding participants for producing
above average shareholder performance.
Calculations of TSR performance are performed independently of the Group by New Bridge Street Consultants for the purposes of determining
outcomes under the plan.
Participants in the second plan are granted share options shortly after the start of the financial year equal to the number of shares secured by
a percentage of the participant’s salary and based on the price of the Group’s shares using the average market price around the date of grant.
Grant levels are dependent on the performance of the Group over the previous financial year and over the longer term. For awards in 2003,
grant levels will be as follows:-
Category Share option as a % of salary (1)
Executive Directors and Chairman nil

Level 8 nil
Level 7 20
(1) or aggregate annual fees payable in respect of the services of the Chairman, in the case of the Chairman.
Participants can exercise their options after three years but not more than six years.
There is no long-term incentive plan for the Non-executive Directors.

2.4 Benefits
Each senior colleague is provided with benefits, which principally comprise a company car, pension arrangements, paid leave, healthcare cover
and preferential terms for Group products.
Individuals are generally eligible for membership of tax-approved final salary pension arrangements and, for certain individuals who joined
the Group after 1989, for membership of separate final salary pension arrangements. These arrangements, taken together, provide a personal
pension benefit based on salary only, with a maximum pension of two thirds of final salary (in broad terms, the last 12 months’ salary) at normal
retirement age (age 60), subject to the necessary pensionable service. The arrangements also provide a lump sum life assurance benefit of four
times salary and pension benefits for spouses/dependants and qualifying children. All tax-approved benefits are subject to Inland Revenue
limits. Pension entitlement is based on salary only.
There are no benefits for the Chairman or the Non-executive Directors.
3. Directors’ Remuneration for the Year Ended 31 December 2002

3.1 Directors’ Emoluments
Table 1 below has been prepared in accordance with regulatory requirements in respect of Directors’ remuneration for the year ended
31 December 2002:-
Table 1
Fees
and Total Comparative
Annual further year total year
Taxable cash remu- ended ended
Salary benefits incentive neration 31.12.02 31.12.01
Notes £000 £000 £000 £000 £000 £000
Chairman
Dennis Stevenson 3 – – – 473 473 363
Executive Deputy Chairman
Sir Peter Burt 1,2 633 11 347 – 991 994
Executive Directors
James Crosby 1,5 640 24 363 – 1,027 1,073
Mike Ellis 1 477 13 269 – 759 801
Phil Hodkinson 1 367 8 206 – 581 226
Andy Hornby 1 422 11 247 – 680 647
Gordon McQueen 1 386 28 217 – 631 592
Colin Matthew 1 371 9 206 – 586 574
George Mitchell 1 475 12 269 – 756 678
Non-executive Directors
Charles Dunstone 4 – – – 46 46 36
Sir Ronald Garrick 4 – – – 55 55 48
Anthony Hobson 4 – – – 110 110 73
Brian Ivory 4 – – – 83 83 54
Coline McConville 4 – – – 49 49 44
John Maclean 4 – – – 74 74 73
Sir Bob Reid 4 – – – 42 42 128
Louis Sherwood 4 – – – 107 107 99
Lord Simpson 2,4 – – – 22 22 33
Philip Yea 4 – – – 46 46 45
Total 3,771 116 2,124 1,107 7,118 6,581
Notes to Table 1
Note 1:
The annual cash incentive amounts, approved by the Committee, relate to performance under the short-term incentive plan in 2002 against
targets for earnings per share and return on equity and the attainment of a certain level of profit before tax. The target incentive was 40% of
salary and the maximum incentive was 60% of salary.
Additionally, in 2002, a special additional incentive of 10% of salary applied if the Group delivered its target merger synergies where individuals
also delivered their own operational objectives.
Annual cash incentive figures exclude potential ‘sharekicker’ enhancements for any element of the incentive taken in shares. Details of potential
‘sharekicker’ enhancements from earlier years can be found in Table 5.
Note 2:
Lord Simpson retired as a Director on 15 May 2002. Sir Peter Burt retired as Executive Deputy Chairman on 6 January 2003. No termination
payments were made. As was the general practice in relation to early retirement under the Bank of Scotland 1976 Pension Scheme, Sir Peter
Burt’s pension was based on his accrued benefit with no actuarial reduction for early payment. The cost of waiving the actuarial reduction
was £614,000.
Note 3:
The fee payment to Dennis Stevenson comprises payments made to him personally and to Cloaca Maxima (of which company Dennis Stevenson
is a director) in respect of the provision of his services as Chairman of the Group of £472,500 (2001 – £350,000) and payments made in respect
of his services as a Director of St. James’s Place Capital of £nil (2001 – £12,500) where his directorship ended on 21 February 2002.
Note 4:
From 1 May 2002 the fee payable to Non-executive Directors was at a rate of £35,000 p.a. The fee previously payable to Non-executive
Directors in 2001 and in the first four months of 2002 was at a rate of £30,750 p.a. These fees cover the full range of duties and responsibilities
associated with non-executive directorship, including Board meetings and the Annual General Meeting. Further remuneration is paid to
Non-executive Directors for the responsibilities associated with Board committees and subsidiary boards and joint ventures.
Note 5:
The salary shown for James Crosby is the amount of salary he would have received had he not given up £2,965 as an additional pension
contribution. Short-term incentives and long-term incentives have been calculated by reference to salary prior to the reduction for additional
pension contribution.
3.2 Pension Benefits as at 31 December 2002

Details of each Executive Director’s pension and lump sum life assurance entitlement, and the costs of providing those benefits, are as follows:-
Table 2
Lump sum
Pension as life assurance Cost of
a % of as a multiple benefits as
final salary of salary a % of salary
Sir Peter Burt 55.0 4 31

James Crosby 66.7 4 49
Mike Ellis 66.7 4 53
Phil Hodkinson 55.3 4 50
Andy Hornby 66.7 4 44
Gordon McQueen 50.0 4 28
Colin Matthew 66.7 4 28
George Mitchell 66.7 4 28
Notes to Table 2
Note 1:
Pension is generally based on retirement from service at normal retirement age (age 60) and is based on final salary, disregarding, where relevant,
the earnings cap as defined in the Finance Act 1989. The pension shown generally accrues over the full period of employment with the Group
but in any event at an accrual rate no greater than one thirtieth of salary for each year of service. Pension and lump sum life assurance is
provided from the Bank of Scotland 1976 Pension Scheme (the ‘Scheme’) and from the Halifax Retirement Fund (the ‘Fund’) to the extent
permitted by legislation, and otherwise from separate arrangements with the Group.
Note 2:
Costs are based on estimates, by the actuaries to the Scheme and to the Fund, of the costs to the Group over the future service periods of
the Executive Directors. Costs are calculated on funding assumptions adopted for actuarial valuations of the Scheme and the Fund and do not
distinguish between the costs of providing benefits from the Scheme and the Fund and the costs of providing benefits from separate unfunded
arrangements. The costs exclude those covered by personal contributions from Executive Directors.
Note 3:
On death after retirement or after leaving service, a spouse’s pension equal to 50% of the member’s pension for the Scheme and 66.7% of the
member’s pension for the Fund may be payable. Children’s benefits may also be payable.
Under the Scheme, Executive Directors require the consent of the Company before retiring early. Under the Fund, Executive Directors have
a contractual right to retire at age 55 or above with a non-reduced pension.
Pension increases after retirement are a mixture of guaranteed and discretionary. Scheme pensions in respect of service before 6 April 1997
are not guaranteed to increase. Scheme pensions in respect of service after 5 April 1997 are guaranteed to increase in line with the Retail Prices
Index, subject to a maximum of 5% per annum. The Fund guarantees to increase pensions in line with the Retail Prices Index, subject to a
maximum of 5% per annum and a minimum of 3% per annum. There is an established policy of reviewing pensions on a discretionary basis
taking account of increases in the Retail Prices Index.
Allowance is made in transfer values on leaving in respect of the guaranteed and discretionary increases outlined above.
The pension entitlements of the Executive Directors are set out in the table below:
Table 3
Accrued Increase in Increase in
pension accrued Transfer value at transfer value
at 31 pension less
December during 31 December 31 December Director’s
2002 2002 2001 2002 contributions
Name Age £000 p.a. £000 p.a. £000 £000 £000
Sir Peter Burt 58 334 38 [33] 5,006 5,469 463 [525]

James Crosby 46 349 65 [60] 3,881 3,847 (58) [636]
Mike Ellis 51 285 49 [45] 3,843 4,327 466 [675]
Phil Hodkinson 44 16 13 [13] 39 147 94 [103]
Andy Hornby 35 53 23 [22] 254 336 66 [123]
Gordon McQueen 56 167 23 [21] 1,939 2,078 139 [257]
Colin Matthew 52 225 29 [26] 2,559 2,427 (132) [273]
George Mitchell 52 286 61 [57] 2,144 2,093 (51) [411]
Notes to Table 3
Note 1:
The accrued pension at 31 December 2002 is the pension which the Director would have been entitled to receive based on his completed
pensionable service, had he left on 31 December 2002, payable from normal retirement age (age 60) and subject to revaluation increases
between leaving and retirement.
Note 2:
The increase in accrued pension is the accrued pension at 31 December 2002 less the accrued pension at 31 December 2001.
The amount shown in square brackets is calculated on the basis of the disclosure methodology which applied last year under the requirements
of the Listing Requirements of the UK Listing Authority.
Note 3:
The transfer values are based on the accrued pensions at 31 December 2001 and at 31 December 2002 and are calculated as at 31 December
2001 and 31 December 2002 respectively based on factors supplied by the actuaries of the relevant pension schemes.
The transfer values are the lump sums which would have been paid to another pension scheme for the benefit of the Director had he left
service at the respective dates. It is not possible for a transfer value to be paid directly to the Director personally.
The amount shown in square brackets is calculated on the basis of the disclosure methodology which applied last year under the requirements
of the Listing Requirements of the UK Listing Authority.
Note 4:
The Director’s contribution is the personal contribution required under the terms of the Fund. No personal contribution is required under the
terms of the Scheme. The contribution for James Crosby is an aggregate of the personal contribution required under the terms of the Fund,
subject to the statutory limit, together with the amount of salary he gave up as an additional pension contribution as outlined in Note 5 to
Table 1. Members of the Group’s pension schemes have the option to pay additional voluntary contributions; neither the contributions nor
the resulting benefits are included in the above table.
There were no contributions by the Group to any money purchase pension arrangements in respect of any Director during 2002.
3.3 Directors’ Share Interests

3.3.1 Shares
The beneficial interests of the Directors and their immediate families in the ordinary shares of the Group are set out below:-
Table 4
Number Number
of shares of shares
at 31.12.02 at 31.12.01
Chairman
Dennis Stevenson 97,096 118,303
Executive Deputy Chairman
Sir Peter Burt 529,414 508,615
Executive Directors
James Crosby 96,969 55,299
Mike Ellis 73,514 39,638
Phil Hodkinson 10,524 197
Andy Hornby 40,781 17,228
Gordon McQueen 54,709 54,445
Colin Matthew 54,084 41,348
George Mitchell 48,092 32,833
Non-executive Directors
Charles Dunstone 100,000 100,000
Sir Ronald Garrick 9,799 3,773
Anthony Hobson 2,000 1,000
Brian Ivory 11,000 11,000
Coline McConville 2,070 2,070
John Maclean 5,036 5,030
Sir Bob Reid 28,195 27,160
Louis Sherwood 2,000 10,000
Philip Yea 9,529 6,185
Notes to Table 4
Note 1:
James Crosby, Brian Ivory, John Maclean, George Mitchell and Sir Bob Reid all have a non-beneficial interest as at 31 December 2002 over
7,830,342 ordinary shares (2001 – 7,723,565) as Trustees of the Bank of Scotland Profit Sharing Stock Ownership Scheme.
Brian Ivory has a non-beneficial interest over 4,500 ordinary shares (2001 – 4,500).
Dennis Stevenson has a non-beneficial interest in nil ordinary shares of 15 pence each (2001 – 120,000) of St. James’s Place Capital. Dennis
Stevenson ceased to have a beneficial interest in 21,614 ordinary shares of the Group and ceased to have a non-beneficial interest in 120,000
ordinary shares of St. James’s Place Capital during the year. These interests were previously included in Dennis Stevenson’s overall interests in
relation to a connected person (within the meaning of the Companies Act) who, during the year, ceased to be classed as a connected person.
Note 2:
Certain Directors will receive further interests in the ordinary shares of the Group arising out of the short-term incentive plans and, potentially,
the long-term incentive plans as set out in Tables 5, 6 and 7.
Note 3:
Except as disclosed no Director had any interest in the preference shares of HBOS or in the loan or share capital of any Group undertaking at
the beginning or end of the financial year. No options to subscribe for shares in other Group companies are granted to Directors of the Group.
3.3.2 Short-term Incentive Plan – HBOS Directors and former Halifax Directors
Certain Executive Directors have conditional entitlements to shares arising from the annual incentive ‘sharekicker’. Where the annual incentive
for 2000 and/or 2001 was taken in shares and these shares are retained in trust for three years, the following shares will also be transferred to
the Directors:-
Table 5
Grant Shares
effective as at
from 31.12.02
Sir Peter Burt March 2002 9,863

James Crosby March 2001 9,710
March 2002 19,335
Mike Ellis March 2001 7,308
March 2002 14,501
Phil Hodkinson March 2002 5,163
Andy Hornby March 2001 5,533
March 2002 11,762
Colin Matthew March 2002 5,692
George Mitchell March 2002 7,017
Notes to Table 5
The shares, which relate to the 2000 and 2001 operations of the short-term incentive plan, were granted at £6.752 and £7.68, respectively.
These shares will be released after three years, subject to the incentive shares still being held and subject to the participant still being in the
Group’s employment at that time or being a qualifying leaver.
3.3.3 Long-term Incentive Plan and Special Long-term Incentive Plan – HBOS Directors and former Halifax Directors
Details of the shares which have been conditionally awarded to Directors under the plans are set out below. The performance conditions
relating to these conditional awards are set out in the notes below the table.
Table 6
Granted (G)
Grant lapsed (L) or
effective At exercised (E) At
from 31.12.01 in year 31.12.02
James Crosby January 2000 62,684 – 62,684

January 2001 70,992 – 70,992
January 2002 – 75,000 (G) 75,000
133,676 75,000 208,676
Mike Ellis January 2000 47,935 – 47,935
January 2001 53,435 – 53,435
January 2002 – 56,250 (G) 56,250
101,370 56,250 157,620
Andy Hornby January 2000 80,752 – 80,752
January 2001 40,458 – 40,458
January 2002 – 45,625 (G) 45,625
121,210 45,625 166,835
Phil Hodkinson January 2001 53,435 – 53,435
January 2002 – 87,500 (G) 87,500
53,435 87,500 140,935
Gordon McQueen January 2002 – 45,625 (G) 45,625
– 45,625 45,625
Colin Matthew January 2002 – 45,625 (G) 45,625
– 45,625 45,625
George Mitchell January 2002 – 56,250 (G) 56,250
– 56,250 56,250
Dennis Stevenson July 1999 15,853 – 15,853
January 2000 36,873 – 36,873
January 2001 38,168 – 38,168
January 2002 – 56,250 (G) 56,250
90,894 56,250 147,144
Notes to Table 6
Note 1:
Shares under these plans were granted using the average market price in the ten business days ending at the previous year or period end, as
follows:-
Share grant price
Plan £
July 1999 – December 2002 7.885

January 2000 – December 2002 6.78
January 2001 – December 2003 6.55
January 2002 – December 2004/06 8.00
Note 2:
The grant effective from January 2000 for Andy Hornby includes 44,248 shares which are related to his joining arrangements.
The grants effective from January 2001 and January 2002 for Phil Hodkinson include 53,435 shares and 43,750 shares, respectively, which are
related to his joining arrangements.
Note 3:
Awards are not pensionable.
Note 4:
Subject to performance and subject also to a minimum release of 60% of the grant, as agreed by Halifax shareholders at the time of the merger,
shares granted under the long-term plans effective from January 2000 and January 2001 will be released to most individuals shortly after the
three-year anniversary (three and a half-year anniversary in respect of the grant effective from July 1999) of the relevant effective grant date.
However, shares receivable by Executive Directors and the Chairman from those grants will be retained by them or on their behalves for at least
an additional two years.
For the 2002 grant, all participants can choose to take any shares released after three years or can continue to participate in the scheme for
a further two years and take shares at that point based on the better of the three year and the five year performance outcome. This design
feature seeks to motivate participants continually to sustain strong performance or to improve lesser performance for their benefit and the
benefit of shareholders.
Note 5:
In the case of Dennis Stevenson the grants are awards of notional shares. For technical reasons he will become entitled to the cash value of the
relevant shares on vesting. This value will, subject to any withholdings for tax or National Insurance, be applied in acquiring shares on his behalf.
Note 6:
The number of shares to be released to participants is dependent on the Group’s TSR over a three year (three and a half-year in respect of
the grant effective from July 1999) period, compared to the annualised weighted average TSR of a basket of comparator companies over an
equivalent period. This basket of companies comprises:-
• For the July 1999 and January 2000 grants: Abbey National, Alliance & Leicester, Bank of Scotland*, Barclays, Britannic Assurance, Legal &
General, Lloyds TSB, NatWest*, Northern Rock, Norwich Union*, Prudential, Royal & Sun Alliance, Royal Bank of Scotland and Woolwich*;
• For the January 2001 grants: Abbey National, Alliance & Leicester, Bank of Scotland*, Barclays, Britannic Assurance, Legal & General,
Lloyds TSB, Northern Rock, Prudential, Royal & Sun Alliance and Royal Bank of Scotland;
• For the January 2002 grants: Abbey National, Aviva, Barclays, Legal & General, Lloyds TSB, Prudential, Royal & Sun Alliance and Royal Bank
of Scotland.
* For the periods for which they were independent entities.
Shares will be released as follows:

Group’s relative Amount released as a
TSR performance % of share grant
1999-2001 grants
+4% p.a. 100
+8% p.a. (or above) 200
2002 grant
+3% p.a. 100
+6% p.a. (or above) 200
Intermediate positions are determined by interpolation.
Note 7:
The performance period for the July 1999 grant ended on 31 December 2002. HBOS’s (and previously Halifax’s) TSR over the performance period
exceeded the weighted average of the comparator group by 5.55% p.a. so 138.75% of the share grant will be released to the grant recipient,
subject to Notes 4 and 5 above.
The performance period for the January 2000 grant ended on 31 December 2002. As illustrated in Chart 1 below, HBOS’s (and previously
Halifax’s) TSR over the performance period exceeded the weighted average of the comparator group by 9.02% p.a. so 200% of share grants will
be released to grant recipients, subject to Note 4 above.
Full details concerning these shares, which will be released to the Chairman and Executive Directors subject to Notes 4 and 5 above no earlier
than 2003, will be contained in the 2003 Report & Accounts.
Chart 1
Performance of Halifax/HBOS for January 2000 awards
50%
Chart 1 graphs the TSR
40% performance of Halifax/HBOS
30% against the weighted average
Cumulative movement in TSR
TSR of its comparator group

over performance period
20%
over the performance period
10% of the January 2000 awards.
0%
-10%
-20%
31 Dec '99 31 Dec '00 31 Dec '01 31 Dec '02

Halifax/HBOS Weighted Average of Comparator group
Source: Datastream
3.3.4 Long-term Incentive Plan – Former Bank of Scotland Directors

Share options granted between 1995 and 2000 under Bank of Scotland’s plans were subject to a performance pre-condition on exercise that
options were not capable of being exercised unless growth in diluted earnings per share (‘EPS’) exceeded the growth in the Retail Prices Index
over a period of at least three consecutive financial years by not less than 2% per annum.
No performance target will apply in respect of unapproved share options following the third anniversary of grant, as agreed by Bank of Scotland
stockholders at the time of the merger.
The performance target in respect of approved share options has now been satisfied for all grants (EPS performance for the most recent grants
is illustrated in Chart 2 opposite) and consequently all approved options become exercisable in accordance with the rules of the plans.
No further grants will be made under any of these plans.

Details of the shares which have been conditionally awarded to Directors under the plans are set out below.
Table 7
Granted (G), Share
Grant exercised (E) Option
effective At or lapsed (L) At Price
from 31.12.01 in year 31.12.02 £ Exercisable
Sir Peter Burt May 2000 75,000 – 75,000 5.5150 2003

October 2000 90,000 – 90,000 6.1000 2003
165,000 – 165,000
Gordon McQueen October 1995 48,000 – 48,000 2.5983 2003-2005
October 1996 45,000 – 45,000 2.7367 2003-2006
October 1997 32,000 – 32,000 5.3533 2003-2007
October 1998 5,223 – 5,223 5.7433 2003-2008
October 1998 29,777 – 29,777 5.8350 2003-2008
May 2000 35,000 – 35,000 5.5150 2003-2010
October 2000 40,000 – 40,000 6.1000 2003-2010
235,000 – 235,000
Colin Matthew October 1995 48,000 – 48,000 2.5983 2003-2005
October 1996 50,000 – 50,000 2.7367 2003-2006
October 1997 28,000 – 28,000 5.3533 2003-2007
October 1998 5,223 – 5,223 5.7433 2003-2008
October 1998 29,777 – 29,777 5.8350 2003-2008
May 2000 40,000 – 40,000 5.5150 2003-2010
October 2000 40,000 – 40,000 6.1000 2003-2010
241,000 – 241,000
George Mitchell October 1996 50,000 – 50,000 2.7367 2003-2006
October 1997 35,000 – 35,000 5.3533 2003-2007
October 1998 40,000 – 40,000 5.8350 2003-2008
May 2000 5,572 – 5,572 5.3833 2003-2010
May 2000 39,428 – 39,428 5.5150 2003-2010
October 2000 50,000 – 50,000 6.1000 2003-2010
220,000 – 220,000
Notes to Table 7
No Directors’ share options lapsed in the period 1 January 2003 to 24 February 2003, the date of approval of this Annual Report and Accounts.
Chart 2
Performance of Bank of Scotland for options granted in 2000
20%
Chart 2 graphs the Earnings per
Cumulative movement in EPS and RPI
target over performance period
15% Share (EPS) performance of

10% Bank of Scotland against the target
of RPI+2%p.a. over the performance
5% period for options granted in 2000.
0%
31 Dec '99 31 Dec '00 31 Dec '01 31 Dec '02
Bank of Scotland EPS RPI+2% p.a.
3.3.5 Sharesave Plan

The sharesave plan is available to nearly all colleagues.
The plan allows colleagues to save a fixed amount of money on a monthly basis. At the end of a pre-determined period, of three, five or seven
years, colleagues have the right, if they so choose, to use the funds accumulated to purchase shares in the Group at a fixed price.
Certain Executive Directors have taken up membership of the plan and the projected numbers of shares which they would be entitled to
purchase at the end of the relevant pre-determined periods are set out below:
Table 8
Granted (G),
Grant lapsed (L) or Initial
effective At exercised (E) At exercise Expiry
from 31.12.01 in year 31.12.02 date date
James Crosby Sep 1997 2,980 2,980 (E) – Sep 2002 Mar 2003
Sep 2002 – 2,748 (G) 2,748 Jan 2008 Jun 2008
Mike Ellis Sep 1997 2,980 2,980 (E) – Sep 2002 Mar 2003
Phil Hodkinson Sep 2002 – 2,970 (G) 2,970 Jan 2010 Jun 2010
Andy Hornby Oct 2000 2,362 – 2,362 Oct 2003 Apr 2004
Gordon McQueen Nov 2000 3,571 – 3,571 Dec 2005 Jun 2006
George Mitchell Oct 2001 1,723 – 1,723 Jan 2005 Jun 2005
Notes to Table 8
Note 1:
Options under these plans were granted using middle market prices shortly before the dates of the grants, discounted by 20%, as follows:-
Effective date of grant Share option price
£
September 1997 5.7879

October 2000 4.10
November 2000 4.7253
October 2001 5.62
September 2002 5.975
Note 2:
Sharesave options for James Crosby and Mike Ellis were exercised in October 2002 and December 2002, respectively, and each has bought
the number of shares under option. The market prices on the dates of exercise were £5.65 and £6.265 respectively. There were no such exercises
in 2001.
3.3.6 Interest in Shares under Trusts

Certain Executive Directors, together with certain other colleagues, are deemed to have or have had an interest or a potential interest as
potential discretionary beneficiaries under:-
• the Group’s Employee Share Ownership Trust. As such, they were each treated as at 31 December 2002 as being interested in the 8,606,603
ordinary shares (31 December 2001 – 2,100,617 ordinary shares) held by the trustee of this Trust. The shares held in the Trust will be used to
satisfy share awards under the former Halifax Short-term and Long-term Incentive Plans. The relevant Executive Directors’ specific individual
interests are shown in Tables 5 and 6;
• the Group’s Qualifying Employee Share Ownership Trust (previously the Halifax plc Qualifying Employee Share Ownership Trust). As such, they
were each treated as at 31 December 2001 as having been interested in the 14,626,075 ordinary shares held by the trustee of this Trust. The
shares held in the Trust were available to satisfy the exercise of rights granted under the former Halifax Sharesave Scheme. On 12 June 2002
HBOS plc purchased those shares for a consideration of £1,000 and on the same day HBOS plc issued the same number of ordinary shares,
at their nominal value of 25p per share, to the Group’s Qualifying Employee Share Ownership Trust. The transaction, which was approved by
shareholders at the 2002 Annual General Meeting, resolved an outstanding matter from the corporate restructuring of Halifax plc in 1999 and
the subsequent merger of Halifax Group plc and Bank of Scotland in 2001. The relevant Executive Directors’ specific individual interests are
shown in Table 8;
• the Group’s Qualifying Employee Share Ownership Trust (previously the Bank of Scotland Qualifying Employee Share Ownership Trust).
However, as the Trust was not pre-funded, they were each treated as at 31 December 2001 and 31 December 2002 as having no interest as a
consequence of this Trust. The Trust was established to satisfy the exercise of rights granted under the former Bank of Scotland S.A.Y.E. Stock
Option Schemes. The relevant Executive Directors’ specific individual interests are shown in Table 8; and
• the Group’s Qualifying Employee Share Ownership Trust. However, as the Trust was originally not pre-funded, they were each treated as at
31 December 2001 as having no interest as a consequence of this Trust. As outlined above, shares were issued to this Trust on 12 June 2002
and, as a result, the interest as a consequence of this Trust is now in relation to 14,626,075 ordinary shares. The Trust was established to satisfy
the exercise of rights granted under the HBOS Sharesave Scheme and will now also be used to satisfy entitlements of employees of Halifax plc
arising on the exercise of options under the sharesave schemes operated by HBOS plc. The relevant Executive Directors’ specific individual
interests are shown in Table 8.
3.3.7 General
The market price of the Group’s ordinary shares at 31 December 2002 was £6.55. The market price of the Group’s ordinary shares at
31 December 2001 was £7.96. The range during the year was £5.565 to £8.83.
The register of Directors’ interests, which is open to inspection, contains full particulars of the Directors’ shareholdings and options to
subscribe for shares in the Group.
There has been no change in the Directors’ interest in shares or options granted by the Group and its subsidiaries between the end of the
financial year and 24 February 2003, the date of approval of this Annual Report & Accounts.
3.3.8 Statutory Performance Graph

In accordance with new legislation, this report is required to include a graph of the Group’s Total Shareholder Return (‘TSR’) performance
compared to that of a ‘broad equity market index’ since the Group’s inception on 10 September 2001. As HBOS has been a constituent of
the FTSE 100 since inception and as performance against sector companies is illustrated in Chart 1, the Group believes that the FTSE 100
is a suitable comparator index to use for the purposes of this graph to satisfy regulatory requirements.
Chart 3
Total Shareholder Return
120 Chart 3 graphs the value of £100

invested in HBOS since inception
100
on 10 September 2001 compared
with the value of £100 invested in
80
the FTSE 100 Index from the same
Value (£)
60 date. To produce a "fair value" each

point is a 30 day average of the
40 return index.
20
10 Sept '01 31 Dec '01 30 Apr '02 31 Aug '02 31 Dec '02
HBOS FSTE 100 Index
Source: Datastream
Signed on behalf of the Board of Directors
Brian Ivory
Chairman, Remuneration Committee
Corporate Governance Statement
Standards in Corporate Governance have Directors appointed to the Board undergo consultancy work. For 2002, this limit was
been redefined by Derek Higgs and Sir an induction programme tailored to their 50% of the fees paid to KPMG as auditors
Robert Smith’s draft Revised Combined Code own specific requirements to ensure that or reporting accountants for that year. The
on Corporate Governance. The Board of they are conversant with their obligations external auditors also report regularly to the
HBOS welcomes this review of best practice as a Director of a public company operating Committee on the actions that they have
in the boardroom and its guiding principle of in the financial services sector. taken to comply with professional and
‘comply or explain’. The Board has reviewed regulatory requirements and current best
Board Committees
the existing provisions of the Combined practice in order to maintain their
The principal Board committees, their
Code on Corporate Governance (‘the Code’) independence. This includes the rotation
composition and outline Terms of
as issued by the UK Listing Authority. This of key audit team members.
Reference are:
report explains HBOS plc’s governance The Committee reviews the auditors’
structure and how it applies the principles Audit Committee
independence annually and an audit tender
set out in the Code. It also reports on Anthony Hobson (Chairman)
process will be undertaken every five years,
compliance with the Code’s detailed John Maclean
commencing in 2005.
provisions during the year. Louis Sherwood
Remuneration Committee
Applying the Principles of the Code This Committee consists entirely of
Brian Ivory (Chairman)
The Code sets out principles of good Non-executive Directors. It is supported by
Sir Ronald Garrick
governance under four headings and these Risk Control Committees for each division,
Coline McConville
are reviewed below: comprising Non-executive and Executive
Philip Yea
Directors. The Terms of Reference of the
Directors Committee include all matters indicated by This Committee also consists solely of
The Board meets regularly (normally ten the Combined Code. Non-executive Directors. It considers
times per year) to determine the strategic remuneration policy for Executive Directors
direction of the Group and review its During the past twelve months the
and other senior colleagues and decides the
operating and financial performance. Committee met seven times. It meets with
remuneration arrangements for each
The Board has a formal schedule of matters Executive Directors and management, as well
Executive Director including the operation of
specifically reserved to it, which can only as privately with both the external and internal
auditors, to:- the incentive schemes, service contracts and
be amended by the Board itself. compensation payments. It also decides the
In addition to the Chairman and prior • review and advise the Board on the Group’s remuneration arrangements for the Chairman.
to the retirement of Peter Burt, the Board interim and annual financial statements, its
accounting policies and on the control of its Nomination Committee
comprised eight Executive Directors and nine Dennis Stevenson (Chairman)
Non-executive Directors. All of the Non- financial and business risks;
James Crosby
executive Directors are considered to be • review the nature and scope of the work to Brian Ivory
independent of management and free from be performed by the external and internal Sir Bob Reid
any business or other relationship which auditors, the results of this audit work and
could materially interfere with the exercise of the response of management; This Committee meets from time to time, and
of their independent judgement. Their at least annually, to review the composition
• make recommendations on the appointment of the Board and considers new appointments,
remuneration consists only of fees. The roles
and remuneration of the external auditors making recommendations on suitable
of the Chairman and Chief Executive are
and to monitor the performance of the
separate, and Sir Bob Reid is the Senior candidates to the Board. It also considers the
auditors; and
Independent Director. composition of the committees of the Board
• review the non-audit services provided to and succession planning for the most senior
The Articles of Association provide for all
the Group by the external auditors to executive positions, within the Group.
Directors to stand for re-election at intervals
monitor the independence of the auditors.
of no more than three years. Sir Ronald Special Committee
Garrick, Anthony Hobson, Andy Hornby, Both the Board and the external auditors have Comprising four Directors of whom one
Coline McConville, George Mitchell and safeguards in place to prevent the compromise must be the Chairman, Senior Independent
Philip Yea, retire by rotation and resolutions of the auditors’ independence and objectivity. Director, or another Non-executive Director,
for their re-election will be proposed at Each year the Audit Committee establishes this committee can make decisions on
the Annual General Meeting to be held a limit on the fees that can be paid to the matters of urgency which cannot await the
on 29 April 2003. external auditors in respect of advisory and next meeting of the Board. It can only act
by unanimous decision: where this is not first time highlights of the Annual General
reached the matter must be referred to the Meeting were available by Webcast. A
full Board. telephone helpline is also available from
Shareholder Services on 0870 702 0102
A Board Control Manual defines the terms of
providing a contact point for shareholders on
reference of these committees and also of the
issues such as dividends and announcements.
main management committees, including the
Group Management Board, which comprises Accountability and Audit
the executive management team, and the The Board has overall responsibility
various risk management committees, and for the Group’s system of internal control
the relationship between HBOS plc and its and for reviewing its effectiveness. The
subsidiaries and joint ventures. implementation and maintenance of the risk
management and internal control systems are
Directors’ Remuneration
the responsibility of the Executive Directors
The report on remuneration policy and
and senior management. The system is
practice is set out on pages 47 to 61.
designed to manage, rather than eliminate,
Relations with Shareholders the risk of failure to achieve business
The Company communicates with objectives, and can provide only reasonable
institutional shareholders through a – and not absolute – assurance against
combination of analysts’ briefings, both at material misstatement or loss.
the interim and year end results stage, site The Group has mechanisms for monitoring at
visits and individual discussions with key executive level the risk management practices
members of the management team, co- approved and adopted by individual business
ordinated by Investor Relations. This regular areas for strategic, financial, regulatory and
dialogue helps to ensure that the Company’s operational risk. Information on these
strategy is understood and that any issues are mechanisms and on the Group’s compliance
addressed in a constructive way. with ‘Internal Control: Guidance for Directors
The Company keeps its almost three million on the Combined Code’ (‘the Turnbull
shareholders informed of progress using Guidance’) is provided in the Financial Review
a range of media. Each year they receive and Risk Management report (on pages 33
the Annual Review and Summary Financial to 42).
Statement or, at the choice of the Compliance with the Combined Code
shareholder, the Annual Report and The Board supports the principles of good
Accounts. The Annual General Meeting, at governance and code of best practice set
which shareholders are invited to approve out in the Combined Code. The Company
the Report and Accounts, allows the Group’s has complied with all provisions of the Code
performance and the Directors’ stewardship throughout the year.
to be presented to shareholders and
reviewed in an open manner. The Chairmen
of the Audit and Remuneration Committees
attend the meeting along with other
Directors and are available to answer
shareholders’ questions on the activities
of their own committees.
During the year shareholders can receive

up-to-date information through the
corporate website, www.hbosplc.com. This
provides share price information, financial
results, analyst presentations and answers to
frequently asked questions. In 2002 for the
Directors’ Accounting Responsibilities
The following statement, which should be • State whether applicable accounting

read in conjunction with the Independent standards have been followed, subject
Auditors’ Report on page 65, enables to any material departures disclosed and
shareholders to distinguish the respective explained in the accounts;
responsibilities of the Directors and the • Prepare the accounts on the going concern
Auditors in relation to the accounts. basis unless it is inappropriate to presume
Company law requires the Directors to that the Company and the Group will
prepare accounts for each financial year continue in business.
which give a true and fair view of the state The Directors are responsible for keeping
of affairs of the Company and of the Group proper accounting records which disclose with
and of the profit or loss for that period. In reasonable accuracy at any time the financial
preparing those accounts, the Directors are position of the Company and to enable them
required to: to ensure that the accounts comply with the
Companies Act 1985. They have general
• Select suitable accounting policies and
responsibility for taking such steps as are
then apply them consistently;
reasonably open to them to safeguard the
• Make judgements and estimates that are assets of the Group and to prevent and
reasonable and prudent; detect fraud and other irregularities.
Independent Auditors’ Report to the Members of HBOS plc
We have audited the accounts on pages 66 directors’ report is not consistent with the and judgements made by the directors in the
to 113. We have also audited the information accounts, if the Company has not kept preparation of the accounts, and of whether
in Section 3 of the Report of the Board in proper accounting records, if we have not the accounting policies are appropriate to
relation to remuneration policy and practice. received all the information and explanations the Group’s circumstances, consistently
we require for our audit, or if information applied and adequately disclosed.
This report is made solely to the Company’s
specified by law regarding directors’
members, as a body, in accordance with We planned and performed our audit so as
remuneration and transactions with the
section 235 of the Companies Act 1985. Our to obtain all the information and explanations
Group is not disclosed.
audit work has been undertaken so that we which we considered necessary in order to
might state to the Company’s members those We review whether the statement on pages provide us with sufficient evidence to give
matters we are required to state to them in 62 and 63 reflects the Company’s compliance reasonable assurance that the accounts
an auditor’s report and for no other purpose. with the seven provisions of the Combined and the part of the Report of the Board in
To the fullest extent permitted by law, we Code specified for our review by the Listing relation to remuneration policy and practice
do not accept or assume responsibility to Rules, and we report if it does not. We are to be audited are free from material
anyone other than the Company and the not required to consider whether the Board’s misstatement, whether caused by fraud
Company’s members as a body, for our audit statements on internal control cover all risks or other irregularity or error. In forming
work, for this report, or for the opinions we and controls, or form an opinion on the our opinion we also evaluated the overall
have formed. effectiveness of the Group’s corporate adequacy of the presentation of information
governance procedures or its risk and in the accounts and the part of the Report of
Respective responsibilities of directors
control procedures. the Board in relation to remuneration policy
and auditors
and practice to be audited.
The directors are responsible for preparing We read the other information contained in
the Annual Report and Accounts and the the Annual Report and Accounts, including Opinion
Report of the Board in relation to remuneration the corporate governance statement and the In our opinion:
policy and practice. As described on page 64, unaudited part of the Report of the Board in
• the accounts give a true and fair view of
this includes responsibility for preparing the relation to remuneration policy and practice,
the state of affairs of the Company and the
accounts in accordance with applicable United and consider whether it is consistent with
Group as at 31 December 2002 and of the
Kingdom law and accounting standards. Our the audited accounts. We consider the
profit of the Group for the year then
responsibilities, as independent auditors, are implications for our report if we become
ended; and
established in the United Kingdom by statute, aware of any apparent misstatements or
the Auditing Practices Board, the Listing material inconsistencies with the accounts. • the accounts and the part of the Report
Rules of the Financial Services Authority, and of the Board in relation to remuneration
Basis of audit opinion
by our profession’s ethical guidance. policy and practice to be audited have
We conducted our audit in accordance with
been properly prepared in accordance
We report to you our opinion as to whether Auditing Standards issued by the Auditing
with the Companies Act 1985.
the accounts give a true and fair view and Practices Board. An audit includes
whether the accounts and the part of the examination, on a test basis, of evidence
Report of the Board in relation to relevant to the amounts and disclosures in KPMG Audit Plc
remuneration policy and practice to be the accounts and the part of the Report of Chartered Accountants
audited have been properly prepared in the Board in relation to remuneration policy Registered Auditor
accordance with the Companies Act 1985. and practice to be audited. It also includes Edinburgh
We also report to you if, in our opinion, the an assessment of the significant estimates 24 February 2003
Accounting Policies
Accounting Convention standard was to reduce the taxation on in which the Group has a long-term interest
The accounts have been prepared under profit on ordinary activities by £11 million and shares control under a contractual
the historical cost convention in compliance (2001 – £10 million), increase the profit on agreement with other parties are accounted
with the special provisions of Part VII of the ordinary activities after taxation by £11 for using the gross equity method.
Companies Act 1985 applicable to banking million (2001 – £10 million) and increase the
iv. Goodwill
groups modified by the revaluation of items value of the Group’s reserves at 31 December
The excess of the fair value of purchase
held for trading purposes and the revaluation 2001 by £135 million (2000 – £125 million).
consideration over the fair value of net
of investment properties. The accounts have This is mainly due to the recognition in full
assets at the date of acquisition of subsidiary
been prepared in accordance with applicable of a deferred tax asset on the general
undertakings, associated undertakings, joint
accounting standards and pronouncements provision for bad and doubtful debts.
ventures and other businesses arising on
of the Urgent Issues Task Force (“UITF”) and
UITF 33 “Obligations in capital acquisitions after 31 December 1997 is
in accordance with applicable Statements of
instruments” was also implemented in the capitalised. This goodwill is amortised by
Recommended Practice being those issued
current year. This required reclassification equal instalments over its estimated useful
by the British Bankers’ Association and the
of certain capital instruments from minority life, normally 20 years.
Finance and Leasing Association.
and other interests (non-equity) to undated
Goodwill arising on acquisitions prior to
Accounting policies are reviewed regularly to loan capital. The impact was to re-classify
1 January 1998 was written off to reserves
ensure they are the most appropriate to the £297 million (2001 – £297 million) of
circumstances of the Group for the purposes perpetual securities within the in the year in which it arose and has not been
of giving a true and fair view. consolidated balance sheet from capital reinstated, as permitted by FRS 10 “Goodwill
and reserves to liabilities. Within the and Intangible Assets”. On the disposal of
Changes in Accounting Policy subsidiary undertakings and other businesses
consolidated profit and loss account £22
In accordance with the approach now any related goodwill charged directly to
million (2001 – £18 million) of interest on
adopted by other banking groups, the Group reserves prior to 1 January 1998 is reinstated
preferred securities was recognised as
is using unsmoothed asset values (market and included in the calculation of the profit
interest payable rather than minority
value at 31 December) for the purposes or loss on disposal.
interests (non-equity).
of projecting future cash flows attributable
to the shareholder in respect to long-term Basis of Consolidation Goodwill carried in the consolidated balance
assurance business. Previously, these i. Basis of Preparation sheet is subject to impairment review when
projections were based on smoothed asset The merger of Bank of Scotland Group events or changes in circumstances indicate
values. The cumulative impact of this change and Halifax Group was completed on that the carrying amount may not be
of policy relating to previous years has been 10 September 2001 and was accounted for recoverable and is written down by the
recognised in the accounts as a prior year using the merger accounting principles set amount of any impairment loss identified
adjustment and, accordingly, the prior year out in FRS 6 “Acquisitions and Mergers”. The in the year. Impairment charges, if any, are
results have been restated. 2001 results were presented as if the Group included within goodwill amortisation.
had been established throughout that Long-term Assurance Business
The cumulative impact of this change of
accounting period. The Group accounts for the income from
accounting policy was to reduce income
from long-term assurance business and ii. Consolidation its long-term assurance business using
profit before tax by £203 million (2001 – The Group’s accounts include the audited the embedded value basis. The income
£320 million) partially offset by an increase results of the Company and its subsidiary represents the change in the surplus
of £56 million (2001 – £nil) resulting from undertakings. The accounts of all principal attributable to the Group, including
a reduction in the risk discount rate from subsidiary undertakings are made up to minority interests, and the net present
9% to 8.5%. The taxation charge reduced 31 December. The value of the long-term value of the in-force business. The value
by £49 million (2001 – £92 million) partially assurance business attributable to is a prudent estimate of the net present
offset by the tax effect on the risk discount shareholders and the assets and liabilities value of future cash flows attributable
rate of £15 million (2001 – £nil). The value attributable to policyholders are presented to the shareholders, based on the market
of the Group’s reserves reduced in total separately on the consolidated balance value of the assets at 31 December, using
at 31 December 2001 by £190 million and sheet from those of other businesses in assumptions which reflect experience and
minority interests (equity) by £10 million order to reflect the different nature of a long term outlook for the economy and
(2000 – increase of £28 million to the the shareholders’ and policyholders’ then discounting at an appropriate risk
Group’s reserves). The effect of this change interests therein. discount rate.
in accounting policy is disclosed in Note 29.
iii. Associated Undertakings and Joint Ventures General Insurance Business
In the current year, the Group implemented The Group’s share in associated undertakings The Group both underwrites and acts as
Financial Reporting Standard (“FRS”) 19 is stated in the consolidated balance sheet at intermediary in the sale of general insurance
“Deferred Tax”. The cumulative impact on the Group’s share of their net tangible assets products. For each general insurance policy
the taxation charge relating to previous plus attributable goodwill. The attributable underwritten, premiums net of refunds are
years has been recognised in the accounts share of results of associated undertakings, credited to other operating income over the
as a prior period adjustment and the prior generally based on audited accounts, is duration of the insurance policy. Premiums
year results have been restated. The effect included in consolidated profit using the received relating to future accounting
of implementing this new accounting equity method of accounting. Joint ventures periods are deferred as accruals and
deferred income and credited to other Finance Leases, Instalment Credit and sheet where the Group retains substantially
operating income when earned. Operating Leases all of the risks and rewards of ownership.
Assets leased to customers which transfer Funds received under these arrangements
The cost of claims notified but not settled
substantially all the risks and rewards of are included within deposits by banks or
and claims incurred but not reported at the
ownership to the customer are classified as customer accounts. Conversely, debt
balance sheet date are estimated and provided
finance leases and, together with instalment securities acquired under commitments
for. Estimates are based upon an assessment
credit agreements, are recorded within loans to resell are not recognised in the balance
of the likely costs taking account of all known and advances to customers or loans and sheet as debt securities where substantially
facts. Where the outcome of outstanding advances to banks. The net investment in all the risks and rewards do not pass to the
cases is unclear, statistical techniques are used finance leases and instalment credit Group. In this case, the purchase price is
which take into account the cost of recent agreements represents total minimum included within loans and advances to banks
similar claim settlements. Claims equalisation payments less gross earnings allocated to or loans and advances to customers. The
provisions are calculated in accordance with future periods. Obligations under leases difference between sale and repurchase
relevant legislation and guidance. with third party finance lessors are included prices for such transactions is reflected in
Where the Group acts as intermediary, in customer accounts. the profit and loss account over the lives
commission income net of a provision for All other assets leased to customers are of the transactions, within interest payable
expected future policy cancellations is classified as operating leases. These assets or interest receivable as appropriate.
credited to fees and commissions at the are separately disclosed in the balance sheet Equity Shares
commencement of each insurance policy. and are recorded at cost less aggregate Equity shares are stated at cost less amounts
Loans and Advances depreciation. written off. Income from listed equity shares
Loans and advances are held at cost Income from finance leases and instalment is credited to other operating income on the
less provisions. credit agreements is credited to interest ex-dividend date and from unlisted equity
receivable using an actuarial method to give shares on an equivalent basis.
Specific provisions are made for advances that
a constant periodic return on the net cash
are recognised to be bad or doubtful. Specific Investment Properties
investment. Operating lease rentals are
provisions are assessed on a case by case Investment properties are accounted for
recognised in the profit and loss account on
basis or, where this is not practical, as part in accordance with Statement of Standard
a straight line basis with depreciation charged
of a portfolio of similar advances using loan Accounting Practice (“SSAP”) 19, “Accounting
using an actuarial method to give a constant
loss estimation models. A general provision, for Investment Properties” and are revalued
periodic return on the net cash investment.
to cover advances that are latently bad or annually to open market value. Changes in
doubtful, but not yet identified as such, is Unguaranteed residual values in respect of market value are reflected in the revaluation
also maintained based on loan loss estimation both finance lease and operating lease assets reserve except when an impairment is deemed
models. The models reflect the historical are reviewed regularly and any impairments to be permanent, when the loss is charged
loan loss experience relevant to the particular identified are charged to operating expenses. directly against the current year’s profit.
market segment or product and include
Debt Securities No depreciation is provided in respect of
adjustments for economic and business
(i) Debt securities and other fixed interest investment properties. This treatment is a
climate factors and management experience. securities held for trading are included at departure from the requirements of the
Provisions made during the year are charged to market value with gains or losses included in Companies Act 1985 which requires all
the profit and loss account, net of recoveries. dealing profits. The difference between the properties to be depreciated. However, the
If the collection of interest is considered cost and market value of securities held for Directors consider that these properties are
doubtful, it is suspended and excluded from trading is not disclosed as its determination not held for consumption but for investment
interest income in the profit and loss is not practicable. and that to depreciate them would not give a
account. Provisions and suspended interest (ii) Debt securities and other fixed interest true and fair view. The amount of depreciation
are written off to the extent that there is no securities held for the longer term are which might otherwise have been charged
longer any realistic prospect of recovery. included at cost less amounts written off and cannot be separately identified or quantified
adjusted for the amortisation of premiums or as it is not practical to assess the estimated
Securitisation
discounts arising on purchase of investments useful lives for investment properties.
Loans and advances to customers include
advances that are subject to non-returnable redeemable at fixed dates. Such premiums or Tangible Fixed Assets and Depreciation
finance arrangements following securitisation discounts are taken to interest receivable on Freehold land is not depreciated. Freehold
a straight line basis over the period to
of portfolios of mortgages and other advances. and leasehold property, other than freehold
redemption. The use of a straight line basis
The principal benefits of these advances were investment properties, is stated at cost and
does not result in a material difference to
acquired from the Group by special purpose depreciated over 50 years or the length of
the amount of amortisation taken to interest
securitisation companies which fund their the lease term if shorter. Improvements to
receivable compared to the amortisation had
purchase primarily through the issue of leasehold properties with unexpired lease
a level gross yield basis been used. Gains or
floating rate notes. In accordance with FRS 5, terms of 50 years or less are stated at cost
losses on realisation are recorded in net
“Reporting the Substance of Transactions”, and are depreciated in equal instalments over
operating income as they arise.
the proceeds of these note issues are shown the lesser of the remaining life of the lease
deducted from the securitised assets on the (iii) Debt securities sold subject to repurchase or eight years. Premiums are amortised over
face of the balance sheet. agreements are retained within the balance the period of the lease.
Accounting Policies continued
The cost of equipment, including fixtures accounts are translated at the rates of not recognised until the exposure that is
and fittings, vehicles and computer hardware, exchange ruling on the balance sheet date or being hedged is itself recognised. Where a
less estimated residual value, is written off at the forward exchange rate, as appropriate. hedge transaction is terminated early, any
in equal instalments over the expected lives Exchange differences arising on the profit or loss is spread over the remaining life
of the assets, generally between three and translation of foreign equity investments are of the underlying asset or liability being
fifteen years. Software development costs taken to reserves except to the extent that hedged. In other circumstances, where the
which lead to the creation of a definable they are offset by corresponding differences underlying item subject to the hedge is
software asset, subject to a de minimis limit, arising on the translation of related extinguished, the hedge transaction is
are capitalised and depreciated over their borrowing. All other exchange differences measured at fair value and any profit or loss
expected lives, generally four years. are included in dealing profits. is recognised immediately.
Provision is made for the diminution in value Collateral and Netting

of any tangible fixed asset where impairment The Group nets loans, deposits and derivative
is identified. The resulting net book value transactions where it enters into master
of the asset is written off over its remaining agreements (occasionally collateralised) with
expected economic life. Impairment charges counterparties to ensure that if an event of
are included within operating expenses. default occurs all amounts outstanding with
these counterparties will be settled on a net
Taxation
basis. Where the master agreements are
Deferred tax is recognised, without
collateralised, the collateral will take the form
discounting, in respect of all timing
of a lien over the counterparty’s assets thereby
differences between the treatment of certain
enabling the Group to claim on these assets
items for taxation and accounting purposes
in respect of existing and future liabilities.
which have arisen but not reversed by the
balance sheet date, except as otherwise Derivatives
required by FRS 19. Derivative financial instruments used for
trading and non-trading purposes include
Dated and Undated Loan Capital
interest rate swaps, cross currency swaps,
Dated and undated loan capital is included
futures, options, forward rate agreements
at the nominal value adjusted for premiums,
and caps, floors and collars.
discounts and expenses, all of which are
amortised evenly over the period to (i) Trading derivatives, which include customer
redemption or reset. This does not result driven and proprietary transactions and
in a material difference to the amount of hedges thereof, are carried in the accounts
amortisation had a level gross yield basis at fair value with gains or losses included in
been used. dealing profits. The fair value is based on
quoted market prices. Where representative
Fees and Commissions Receivable
market prices are not available, the fair value
Arrangement fees and commissions
is determined from appropriate financial
receivable for the continuing servicing of
models using the actual or modelled cash
loans and advances are recognised on the
flows. Fair value adjustments are made where
basis of work done. Those receivables in
appropriate, to cover credit risk, liquidity risk
respect of bearing risk, including premiums
and future administrative costs.
received by the Group on high loan to value
mortgages, are recognised on a straight (ii) Non-trading derivatives, which are used
line basis over the expected period of the primarily as a risk management tool for
advance or risk exposure. Other fees are hedging interest rate and foreign exchange
recognised when receivable. rate risk arising on on-balance sheet assets
and liabilities, are accounted for on an
Mortgage Incentives
accruals basis reflecting the treatment of
All costs associated with mortgage incentive
the underlying items being hedged.
schemes are charged in full in the year in
which the expense is incurred. In order to qualify as a hedge, a derivative
must effectively reduce any risk inherent in
Retirement Benefits
the hedged item from potential movements
The cost of providing retirement pensions
in interest rates, exchange rates and market
and related benefits is charged against profits
values. Changes in the market value of the
on a systematic basis over the employees’
derivative must be highly correlated with
service lives in accordance with SSAP 24
changes in the market value of the
“Accounting for pension costs”.
underlying hedged item over the life of
Foreign Currencies the hedge contract. Gains and losses on
Assets and liabilities and profit and loss instruments used for hedging purposes are
Consolidated Profit and Loss Account

For the year ended 31 December 2002
2001
2002 Restated
Notes £ million £ million
Interest receivable
Interest receivable and similar income arising from debt securities 882 1,426
Other interest receivable and similar income 15,809 14,689
16,691 16,115
Interest payable (11,921) (11,960)
Net interest income 4,770 4,155
Fees and commissions receivable 2,157 1,921
Dealing profits 1 154 82
Income from long-term assurance business 3(iii), 29 233 150
Other operating income 904 743
Net operating income (all from continuing operations) 1 7,546 6,534
Administrative expenses 2, 3(i) (3,128) (2,967)
Depreciation and amortisation
Tangible fixed assets (259) (260)
Operating lease assets (289) (210)
Goodwill amortisation (86) (68)
(634) (538)
Operating expenses (3,762) (3,505)
General insurance claims (79) (68)
Provisions for bad and doubtful debts 18 (832) (608)
Amounts written off fixed asset investments 19, 20 (24) (21)
Operating profit (all from continuing operations) 2,849 2,332
Before exceptional items 3,002 2,479
Exceptional items 3 (153) (147)
Share of operating profits of joint ventures 8 20
Share of operating profits of associated undertakings 27 16
Merger costs – exceptional 3(ii) (76)
Profit on ordinary activities before taxation 2,909 2,292
Tax on profit on ordinary activities 10 (835) (663)
Profit on ordinary activities after taxation 2,074 1,629
Minority interests (equity) (35) (67)
(non-equity) (123) (94)
Dividends 11
Ordinary 1,140 993
Preference 37 37
1,177 1,030
Retained profit of the year 12 739 438
Underlying earnings per share 13 56.1p 47.7p
Basic earnings per share 13 50.6p 40.5p
Diluted earnings per share 13 50.2p 40.1p
It is estimated that Group profit on ordinary activities before taxation and retained profit of the year calculated solely on a historical cost basis
would not differ materially from those stated in the Consolidated Profit and Loss Account above.
The statement of accounting policies on pages 66 to 68 and the notes on pages 74 to 113 form part of these accounts.
Consolidated Balance Sheet

2001
2002 Restated
Assets
Cash and balances at central banks 1,373 1,150
Items in course of collection 1,093 983
Treasury bills and other eligible bills 14 5,964 4,071
Loans and advances to banks 15 11,838 12,929
Loans and advances to customers 240,879 201,034
Less: non-returnable finance 16 (6,564) (3,141)
16 234,315 197,893
Debt securities 19 44,324 42,449
Equity shares 20 223 224
Interest in joint ventures 21(i)
Share of gross assets 3,674 2,214
Share of gross liabilities (3,393) (2,002)
281 212
Interest in associated undertakings 21(ii) 172 134
Intangible fixed assets 23 1,434 1,245
Tangible fixed assets 24 1,671 1,627
Operating lease assets 25 2,625 2,042
Other assets 26 7,434 4,205
Prepayments and accrued income 1,458 2,241
Long-term assurance business attributable to shareholders 29 3,544 3,065
317,749 274,470
Long-term assurance assets attributable to policyholders 29 37,331 37,601
Total Assets 355,080 312,071
Liabilities
Deposits by banks 30 45,637 30,449
Customer accounts 31 150,221 140,516
Debt securities in issue 32 80,771 69,528
Notes in circulation 821 737
Corporate taxation 232 69
Dividends payable 11 754 679
Other liabilities 33 8,912 5,153
Accruals and deferred income 4,486 5,167
Provisions for liabilities and charges
Deferred taxation 34(i) 648 489
Other provisions 34(ii) 232 252
880 741
Subordinated liabilities 35
Dated loan capital 5,690 4,966
Undated loan capital 3,437 2,957
9,127 7,923
301,841 260,962
Capital and Reserves
Called up share capital 36
Ordinary shares 946 892
Preference shares (non-equity) 400 400
1,346 1,292
Share premium account 37 1,292 27
Other reserves 37 496 492
Profit and loss account 37 10,635 9,602
Shareholders’ funds (including non-equity interests) 38 13,769 11,413
Minority interests (equity) 436 405
Minority and other interests (non-equity) 39 1,703 1,690
15,908 13,508
317,749 274,470
Long-term assurance liabilities attributable to policyholders 37,331 37,601
Total Liabilities 355,080 312,071
Consolidated Balance Sheet

2002 2001
Memorandum Items 40
Contingent liabilities
Acceptances and endorsements 157 202
Guarantees and assets pledged as collateral security 2,672 2,133
2,829 2,335
Commitments
Other commitments 49,024 37,272
Approved by the Board on 24 February 2003 and signed on its behalf by:
Lord Stevenson A J Hobson J R Crosby M H Ellis
Chairman Chairman of Audit Committee Chief Executive Group Finance Director
Company Balance Sheet

2002 2001
Fixed Assets
Investments
Shares in Group undertakings 22 10,040 1,301
Own shares 27 17 5
10,057 1,306
Current Assets
Debtors
Amounts owed by Group undertakings 4,910 974
Dividends receivable 3,821 679
Other debtors 40 7
8,771 1,660
Current Liabilities
Creditors: Amounts falling due within one year
Amounts owed to Group undertakings 8,657 27
Dividends payable 11 754 679
Accruals 13 2
Other liabilities 33 322 4
9,746 712
Net Current (Liabilities)/Assets (975) 948
Total Assets Less Current Liabilities 9,082 2,254
Creditors: Amounts falling due after more than one year
Subordinated liabilities 35
Dated loan capital 515
Undated loan capital 2,131 902
2,646 902
Net Assets 6,436 1,352

Called up share capital 36
Ordinary shares 946 892
Preference shares (non-equity) 400 400
1,346 1,292
Share premium account 37 1,292 27
Profit and loss account 37 3,798 33
Shareholders’ Funds 38 6,436 1,352
Approved by the Board on 24 February 2003 and signed on its behalf by:
Lord Stevenson A J Hobson J R Crosby M H Ellis
Chairman Chairman of Audit Committee Chief Executive Group Finance Director
Consolidated Statement of Total Recognised Gains and Losses

2001
2002 Restated
£ million £ million

Exchange translation 4 (6)
Total recognised gains and losses in the year 1,920 1,462
Prior year adjustment on the implementation of FRS 19 135
Prior year adjustment in respect of the use of unsmoothed asset values (190)
Total recognised gains and losses since last annual report 1,865
Consolidated Cash Flow Statement

2001
2002 Restated
Net cash (outflow)/inflow from operating activities 48 (994) 635

Merger costs – exceptional (76)
Dividends received from joint ventures 48 16
Dividends received from associated undertakings 2
Returns on investments and servicing of finance 49(i) (700) (638)
Taxation (445) (860)
Capital expenditure and financial investment 49(ii) 2,199 (1,076)
Acquisitions and disposals 49(iii) (114) (738)
Equity dividends paid (782) (837)
Net cash outflow before financing (786) (3,574)
Financing 49(iv) 2,543 2,697
Increase/(decrease) in cash 51 1,757 (877)
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 74
Notes on the Accounts
1. Net Operating Income

2001
2002 Restated
Net operating income includes:

Mortgage incentives (1,106) (1,027)
Interest payable on subordinated liabilities (518) (485)
Dealing profits
Foreign exchange 59 44
Interest related 95 154 38 82
Finance lease rental income 726 671
Operating lease rental income 468 369
General insurance premium income 320 265
Profit on sale of investment securities 37 92
Dividend income from equity shares 6 7
Dealing profits arise from the Group’s trading book. The types of instrument in which the Group trade are as set out in Note 41.
2. Administrative Expenses
2002 2001
Administrative expenses (excluding exceptional items) includes:

Staff costs 5 1,552 1,425
Property rentals 128 135
Hire of equipment 25 24
The Group operates Inland Revenue approved Savings-Related Share Option Schemes and relies on the exemption under UITF Abstract 17 and
accordingly no cost has been recognised on the grant of Savings-Related Share Options.
3. Exceptional Items
Exceptional items include the following:
(i) Included within administrative expenses, exceptional costs have been charged as follows:-
2002 2001
HBOS merger integration costs (a) (153) (132)

Equitable Life integration costs (b) (42)
(153) (174)
Tax effect 41 49
(a) The HBOS merger integration costs cover the costs of integrating and reorganising Bank of Scotland Group and Halifax Group following
the merger.
(b) The Equitable Life integration costs relate to expenses incurred during the integration of The Equitable sales force, acquired on
1 March 2001 into the new Halifax Equitable structure together with other ancillary integration costs associated with the transaction.
(ii) Merger costs of £76 million (tax £nil) in 2001 comprise the deal costs incurred in connection with the merger of Bank of Scotland Group and
Halifax Group.
(iii) Included within income from long-term assurance business in 2001 is an exceptional credit of £27 million (tax £8 million) arising from
St. James’s Place Capital plc’s share of profits from an arrangement to transfer Life Assurance Holding Corporation Ltd’s (“LAHC”) investment
management business to Aberdeen Asset Management plc. LAHC is an associated undertaking of St. James’s Place Capital plc.
4. Profit on Disposal of Business
On 27 November 2002, the Bank of Scotland, a subsidiary undertaking of HBOS plc, disposed of its merchant services business for £25 million,
generating a gain of £25 million.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 75
5. Staff
2002 2001
Number Number
The average number of persons employed by the Group during the year was:-
Full time 48,180 47,979
Part time 15,802 14,869
63,982 62,848
2002 2001
The aggregate remuneration payable to those employees comprises:-

Wages and salaries 1,531 1,432
Social security costs 126 112
Other pension costs (Note 9) 92 73
Other post retirement benefits (Note 9) 2 2
1,751 1,619
Less: long-term assurance business staff costs (199) (194)
Staff costs charged to administrative expenses 1,552 1,425
Staff costs in respect of long-term assurance business are not charged to administrative expenses but are taken into account in determining the
increase in the net present value of the in-force long-term assurance business.
6. Directors’ Remuneration
2002 2001
£000 £000
Total emoluments 7,118 6,581

Total potential pre-tax gains on share options exercised 1 1,195
Highest paid Director – emoluments 1,027 994
– potential pre-tax gains on share options exercised Nil 1,195
– accrued pension entitlement per annum 349 296
Retirement benefits accrued to 8 Directors under pension schemes in the year to 31 December 2002.
The figures for the year to 31 December 2001 include the emoluments of the Directors of Bank of Scotland and Halifax Group plc who were
appointed to the Board of HBOS plc.
A detailed analysis of Directors’ emoluments, pension entitlements, share interests and share options is given on pages 47 to 61 in the Report
of the Board in relation to remuneration policy and practice.
7. Auditors’ Remuneration
The aggregate remuneration of KPMG Audit Plc and its associates for audit and other services (excluding VAT) is analysed below. KPMG Audit Plc
were the auditors of both Halifax Group and Bank of Scotland Group for 2002 and 2001, and since 5 June 2001 have been the auditors of HBOS plc.
2002 2001
Within UK Outwith UK Total Within UK Outwith UK Total
£ million £ million £ million £ million £ million £ million
Group
Statutory audits 3.1 0.6 3.7 2.9 0.5 3.4
As auditors or reporting accountants 3.3 0.3 3.6 3.4 0.1 3.5
6.4 0.9 7.3 6.3 0.6 6.9
Accounting, advisory and consultancy 2.8 0.1 2.9 6.6 0.6 7.2
Tax advisory 0.8 0.2 1.0 0.5 0.3 0.8
Merger and acquisitions 0.5 0.5 8.1 8.1
10.5 1.2 11.7 21.5 1.5 23.0
In respect of the Company, statutory audit fees include £10,000 (2001 – £10,000), fees as auditors or reporting accountants were £181,000
(2001 – nil) and fees in respect of the merger were £76,000 (2001 – nil). All fees are within the UK.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 76
Notes on the Accounts continued
7. Auditors’ Remuneration continued

Non-audit fees include £0.7 million which has been capitalised by the Group in the year ended 31 December 2002 (2001 – £2.0 million).
The level of fees were greater in 2001 primarily reflecting work conducted in connection with the merger of Bank of Scotland Group and
Halifax Group and the acquisition of the operating assets, salesforce and unit-linked and certain non-profit business of The Equitable.
The Group’s policy in relation to the appointment of the external auditors for other work is explained in the Corporate Governance Statement
on pages 62 and 63.
8. Operating Leases
Group
2002 2002 2001 2001

Property Other Property Other
£ million £ million £ million £ million
There are commitments to make payments

in the following year in respect of non-cancellable
operating leases which expire:-
within 1 year 3 2 3 3
between 1 and 5 years 19 35 18 13
after 5 years 106 2 106 3
128 39 127 19
9. Pension Costs
The Group operates several pension schemes. The principal schemes are the Halifax Retirement Fund and the Bank of Scotland
1976 Pension Scheme (together, “the Schemes”), which are funded schemes. These Schemes cover 76 per cent of the Group’s pensionable
employees, and provide defined benefits based on final pensionable salary. The assets of the Schemes are held in Trust Funds which are
independent of the Group’s own assets.
In determining the level of contributions required to be made to the Schemes and the relevant charges to the Group’s profit and loss account,
the Group has been advised by Watson Wyatt LLP, Actuaries and Consultants. The most recently published formal valuation of the Halifax
Retirement Fund took place as at 31 March 2000; a formal valuation of the Bank of Scotland 1976 Pension Scheme was carried out as at
31 December 2001. The financial assumptions are derived based upon the economic conditions prevailing at the date of valuation. The different
assumptions between the two Schemes are as a consequence of their differing valuation dates. The main financial assumptions adopted for
these calculations were as follows:-
Bank of Scotland
Halifax Retirement Fund 1976 Pension Scheme
Rates per annum Rates per annum
Future price inflation 3.00 per cent 2.50 per cent

Return on new investments 7.25 per cent 6.60 per cent
Return on existing investments 5.75 per cent 6.00 per cent
Increases in earnings1 4.50 per cent 3.50 per cent
Increases in pensions2 3.00 per cent 2.50 per cent
Notes:-
1. In addition to the general assumed rate of salary increases, there is a separate assumed salary scale of increases due to promotions and increasing seniority.
2. The pension increase is on the excess over the Guaranteed Minimum Pension.
The pension costs for accounting purposes have been calculated using the same assumptions as those adopted for the formal valuations.
The following disclosures are based on these assumptions using the projected unit method of valuation:-
Bank of Scotland
Halifax Retirement Fund 1976 Pension Scheme
Effective date of valuation 31/3/2000 31/12/2001

Market value of assets £2,148m £1,409m
Asset cover level 119 per cent 98 per cent
Regular pension charge 16.75 per cent 15.90 per cent
(as a percentage of pensionable salaries)
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 77
9. Pension Costs continued
The asset cover levels disclosed in the previous table represent the ratios of the respective Schemes’ assets to the value of the benefits that
had accrued to members and pensioners at the valuation dates after allowing for expected future increases in earnings and pensions.
The regular pension charge for the Halifax Retirement Fund is inclusive of employee contributions which were increased from 3% to 4% of
pensionable salaries from 1 May 2002. These charges have been adjusted by spreading surplus assets or shortfalls in each of the Schemes over
the average future working lifetimes of the memberships (15 years for the Halifax Retirement Fund and 16 years for the Bank of Scotland 1976
Pension Scheme) by fixed capital instalments plus interest on the reducing balances. These elements, together with interest on the opening
balance sheet positions result in a charge of £12 million (2001 – £15 million) in respect of the Halifax Retirement Fund and £54 million (2001 –
£30 million) in respect of the Bank of Scotland 1976 Pension Scheme. Included within the Bank of Scotland 1976 Pension Scheme charge is an
exceptional charge of £1 million.
Contributions to the Schemes of £72 million were paid over the period. As contributions differed from the amount charged in the Profit and
Loss Account a pension prepayment of £35 million (2001 – £25 million) in respect of the Halifax Retirement Fund and a provision of £82 million
(2001 – £78 million) for future contributions in respect of the Bank of Scotland 1976 Pension Scheme is included in the Balance Sheet. This leads
to a net provision of £47 million (2001 – £53 million). The Group currently contributes to the Halifax Retirement Fund at a rate of 4% of
pensionable salaries, and to the Bank of Scotland 1976 Pension Scheme at a rate of 16.6% of pensionable salaries.
The current pension cost for the Halifax Retirement Fund under SSAP 24 is likely to increase in 2003, when the next formal triennial valuation
is performed, reflecting, inter alia, a deterioration in stock market conditions.
The Bank of Scotland 1976 Pension Scheme was closed to new members on 30 September 2002. With effect from 1 October 2002 all new
members of staff will be eligible to join The HBOS Group Money Purchase Scheme.
The pension costs charged in the Profit and Loss Account include £27 million (2001 – £28 million) relating to schemes other than the Schemes.
These costs are net of an amount of £7 million in respect of The Equitable Pension and Life Assurance Scheme (‘The Equitable Pension Scheme’)
which The Equitable is obliged to reimburse to the Group.
Other Post-Retirement Benefits

The Group also provides post-retirement health care benefits and concessionary rate mortgages for certain pensioners and dependent spouses.
An independent actuarial review as at 31 December 2002 estimated the present value of the accumulated other post-retirement benefit
obligations at £38 million for the Group (2001 – £37 million). The main additional financial assumption used was that over the long-term the
rate of increase in health care costs would be 7.25% per annum, being 4.25% per annum higher than the rate of inflation. The charge for the year
ended 31 December 2002 for other post-retirement benefits was £2 million (2001 – £2 million). Included in provisions for liabilities and charges
is £35 million (2001 – £33 million) which represents the accrued amount for other post-retirement benefits.
FRS 17
Under the transitional arrangements of FRS 17 the Group continues to account for retirement benefits in accordance with SSAP 24 as detailed
above. The following additional disclosures under FRS 17 are required by way of narrative only.
The actuarial valuations used in assessing the FRS 17 disclosures are:-
• the Halifax Retirement Fund valuation as at 31 March 2000
• the Bank of Scotland 1976 Pension Scheme valuation as at 31 December 2001
These are the principal schemes for the Group but additional FRS 17 disclosure has been provided for all other defined benefit schemes within
the Group. These are detailed below under the heading “Other Schemes”.
For the Schemes and Other Schemes, each actuarial valuation is updated by qualified actuaries, principally Watson Wyatt LLP, to take account
of the requirements of FRS 17 and to assess the assets and liabilities of the schemes as at 31 December 2002. Scheme assets are stated at their
market value at 31 December 2002.
The liabilities of the Schemes under FRS 17 were calculated using the Projected Unit method using the following financial assumptions:-
31 December 2001 31 December 2002

Discount rate 6.0 per cent 5.8 per cent
Increases in earnings1 3.5 per cent 3.4 per cent
Increases in pensions2 2.5 per cent 2.4 per cent
Notes:-
1. In addition to the general assumed rate of salary increases, there is a separate assumed salary scale of increases due to promotions and increasing seniority.
2. The pension increase is on the excess over the Guaranteed Minimum Pension. Pensions which are guaranteed to increase at a rate of 3.0 per cent per annum have been assumed to increase
at 3.0 per cent.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 78
The Schemes are closed to new entrants. Under the Projected Unit method, the current service cost will increase as members of the Schemes
approach retirement.
The liabilities of the Other Schemes under FRS 17 were calculated using the Projected Unit method using the following financial assumptions:-
31 December 2001 31 December 2002

Discount rate 6.0 per cent 5.8 per cent
Increases in earnings 3.5 per cent 3.4 per cent
Increases in pensions 2.5 per cent 2.4 per cent
The above rates apply to all Other Schemes with the exception of the schemes within Bank of Scotland (Ireland) Ltd, which are not significant.
The assets of the Schemes and the expected rates of return were:-
Long-term expected Value at Long-term expected Value at
rate of return per annum 31 December 2001 rate of return per annum 31 December 2002
at 31 December 2001 £ million at 31 December 2002 £ million
Equities 7.75 per cent 2,715 8.50 per cent 2,157

Bonds 5.25 per cent 305 5.00 per cent 269
Property 6.50 per cent 88 6.80 per cent 82
Cash 4.50 per cent 88 3.80 per cent 84
Total market value of assets 3,196 2,592
Present value of liabilities of the Schemes 3,194 3,546
Surplus/(Deficit) in the Schemes 2 (954)
Deferred tax asset 286
Net pension asset/(liability) 2 (668)
The assets of the Other Schemes and the expected rates of return were:-
Long-term expected Value at Long-term expected Value at
rate of return per annum 31 December 2001 rate of return per annum 31 December 2002
at 31 December 2001 £ million at 31 December 2002 £ million
Equities 7.75 per cent 365 8.50 per cent 314

With-profits investments 6.25 per cent 114 5.80 per cent 79
Bonds 5.25 per cent 76 5.00 per cent 124
Property 6.50 per cent 13 6.80 per cent 19
Cash 4.50 per cent 12 3.80 per cent 33
Total market value of assets 580 569
Present value of liabilities of the Other Schemes 607 751
Deficit in the Other Schemes (27) (182)
Deferred tax asset 8 55
Net pension liability (19) (127)
The above rates apply to all Other Schemes with the exception of the schemes within Bank of Scotland (Ireland) Ltd, which are not significant.
The movement in the surplus/(deficit) in the Schemes and Other Schemes (“Group Schemes”) during the year can be analysed as follows:-
Year ended 31 December 2002
The Other
Schemes Schemes Total
£ million £ million £ million
Surplus/(Deficit) in the Group Schemes at beginning of year 2 (27) (25)

Contributions paid 72 42 114
Current service cost (128) (22) (150)
Past service cost (16) (6) (22)
Other finance income 46 4 50
Actuarial loss (930) (173) (1,103)
Deficit in the Group Schemes at end of year (954) (182) (1,136)
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 79
Components of defined benefit cost for the year 2002

Analysis of amount that would be charged to operating profit Year ended 31 December 2002
The Other
Current service cost 128 22 150

Past service cost 16 6 22
Total that would be charged to operating profit 144 28 172
Analysis of amount that would be credited to other finance income
Interest on pension scheme liabilities 188 36 224

Expected return on assets in pension scheme (234) (40) (274)
Net amount that would be credited to other finance income (46) (4) (50)
Total potential profit and loss charge before deduction for tax 98 24 122
Analysis of amounts that would be recognised in Statement of Total Recognised Gains and Losses (STRGL) Year ended 31 December 2002
The Other
Loss on assets 829 163 992

Experience loss/(gain) on liabilities 7 (8) (1)
Loss on change of assumptions (financial and demographic) 94 18 112
Total potential loss recognised in STRGL before tax 930 173 1,103
History of experience gains and losses Year ended 31 December 2002
The Other
Loss on scheme assets

Amount (£ million) 829 163 992
% of scheme assets at end of year 32% 29% 31%
Experience loss/(gain) on scheme liabilities
Amount (£ million) 7 (8) (1)
% of scheme liabilities at end of year 0% 1% 0%
Total potential loss recognised in STRGL before tax
Amount (£ million) 930 173 1,103
% of scheme liabilities at end of year 26% 23% 26%
Included within Other Schemes is The Equitable Pension Scheme. At 31 December 2002, under FRS 17, a deficit of £51 million and a profit and
loss charge of £14 million would arise. The Equitable is, however, obliged to reimburse the Group for certain excess costs of funding this
scheme. The contributions to Other Schemes referred to above are those paid by the Group and do not take account of amounts to be
reimbursed by The Equitable.
Other Post-Retirement Benefits

An independent actuarial review as at 31 December 2002 estimated the present value of the accumulated other post-retirement benefit
obligations under FRS 17 at £40 million (2001 – £40 million) for the Group. There are no assets backing these obligations, and hence the notional
balance sheet provision under FRS 17 is also £40 million (2001 – £40 million). The notional charge in relation to these benefits amounted to
£3 million. The main additional financial assumption used was that over the long-term the rate of increase in health care costs would be 5.8%
per annum, which is in line with the discount rate.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 80
10. Taxation
2001
2002 Restated
UK Corporation Tax at 30 per cent (2001 – 30 per cent) 519 429

Relief for overseas taxation (17) (12)
502 417
Tax relating to change in value of long-term assurance business (Note 29) 51 23
553 440
Overseas taxation 107 97
Share of joint ventures’ taxation 12 11
Share of associated undertakings’ taxation 5 4
Total current corporation tax 677 552
Deferred taxation (Note 34(i)) 158 111
Tax on profit on ordinary activities 835 663
The tax assessed for the year is lower than the standard rate of corporation tax in the UK (30 per cent). The differences are explained below:-
2001
2002 Restated

Profit on ordinary activities multiplied by standard rate of corporation tax in the
UK of 30 per cent (2001 – 30 per cent) 873 688
Effects of:-
Expenses not deductible for tax purposes 50 69
Capital allowances in excess of depreciation (154) (139)
Net effect of differing tax rates overseas (28) (9)
Book gains covered by capital losses/indexation (5) (8)
Deductible interest on innovative tier 1 capital (33) (23)
Differing tax rates for life assurance business (3) (9)
Expenditure qualifying for capital allowances 6 16
Amounts written off fixed asset investments 10 3
Tax deductible contributions to Qualifying Employee Share Trust (4) (9)
Other timing differences (18) (13)
Adjustments in respect of previous periods (15) (6)
Others (2) (8)
Current corporation tax charge for year 677 552
11. Dividends
2002 2001
Preference dividends paid 25 25

payable 12 12
37 37
Ordinary dividend
Interim dividend of 9.80p per ordinary share (2001 – 9.30p) 370 330
Proposed final dividend of 19.60p per ordinary share (2001 – 18.70p) 742 667
Adjustments 28 (4)
1,140 993
1,177 1,030
Of the adjustment in 2002, £32 million results from the 2001 final dividend payable in respect of the 172.5 million ordinary shares issued by
means of a share placing which took place subsequent to the dividends being accrued but before the ex-dividend date.
The other adjustment in 2002 of £4 million (2001 – £2 million) results from the waiver of dividends by the QUEST (Note 27(b)) which took place
subsequent to the dividends being accrued but before the ex-dividend date.
The remaining adjustment in 2001 of £2 million reflects a credit for dividends declared on unclaimed Halifax Group plc ordinary shares that
were sold by Halifax Group plc in 2001. The dividends accrued on these shares were not required to be paid.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 81
12. Retained Profit

2001
2002 Restated
The profit of the Group has been retained by

HBOS plc 3,494 43
Subsidiary undertakings (2,723) 390
771 433
Associated undertakings and joint ventures (32) 5
739 438
By virtue of the exemption contained within Section 230 of the Companies Act 1985, the Profit and Loss Account of the Company is not presented.
Following the transfer of certain Halifax Group plc subsidiary undertakings, a dividend of £3.2 billion was payable from Halifax Group plc to HBOS plc.
13. Earnings per Ordinary Share
Basic and diluted earnings per Ordinary Share are based upon Group profit attributable to Ordinary Shareholders of £1,879 million
(2001 restated – £1,431 million). The underlying earnings per Ordinary Share are based upon Group profit attributable to Ordinary Shareholders
(before exceptional items and goodwill amortisation but after tax) of £2,083 million (2001 restated – £1,687 million). For the basic and
underlying earnings per Ordinary Share the weighted average number of 25p Ordinary Shares of 3,716 million (2001 – 3,536 million) is used and
for the diluted earnings per Ordinary Share the weighted average number of actual and potential 25p Ordinary Shares of 3,743 million (2001 –
3,568 million) is used. Group profit attributable to Ordinary Shareholders equals profit attributable to shareholders of £1,916 million (2001
restated – £1,468 million) less preference dividends of £37 million (2001 – £37 million). The weighted average number of actual and potential
Ordinary Shares in issue is detailed below:-
2002 2001
Number Number
million million
Actual weighted average number of shares in issue 3,716 3,536

Adjustment for weighted average number of shares on which options
have been granted but not yet exercised 27 32
Potential weighted average number of shares in issue 3,743 3,568
The calculation of the underlying earnings per Ordinary Share, noted below, has been included to enable shareholders to assess the underlying
trading performance.
2001
2002 Restated
pence pence
Basic earnings per share 50.6 40.5

Exceptional items 3.0 5.1
Goodwill amortisation 2.5 2.1
Underlying earnings per share 56.1 47.7
14. Treasury Bills and Other Eligible Bills

Group
2002 2001
Book Value Market Value Book Value Market Value
Investment securities
Treasury bills and similar securities 3,704 3,707 2,602 2,600
Other eligible bills 302 303 448 451
4,006 4,010 3,050 3,051
Other securities
Treasury bills and similar securities 1,118 1,118 57 57
Other eligible bills 840 840 964 964
1,958 1,958 1,021 1,021
5,964 5,968 4,071 4,072
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 82
14. Treasury Bills and Other Eligible Bills continued
The movement on treasury bills and other eligible bills held for investment purposes was as follows:-
£ million
At 1 January 2002 3,050

Exchange translation 28
Additions 12,615
Disposals (11,750)
Amortisation 63
At 31 December 2002 4,006
Aggregate unamortised discounts net of premiums at 31 December 2002 30
15. Loans and Advances to Banks

Group
2002 2001
Repayable on demand or at short notice 3,159 1,625

Other loans and advances repayable
in 3 months or less excluding on demand or at short notice 6,551 9,191
1 year or less but over 3 months 1,776 1,741
5 years or less but over 1 year 282 185
over 5 years 70 187
11,838 12,929
16. Loans and Advances to Customers

Group
2002 2001
Repayable on demand or at short notice 18,469 16,679

Other loans and advances repayable
in 3 months or less excluding on demand or at short notice 24,008 18,296
5 years or less but over 1 year 34,613 27,582
over 5 years 147,876 127,171
Gross loans and advances to customers* 236,480 199,785
Provisions for bad and doubtful debts (Note 18) (2,024) (1,769)
Interest in suspense (141) (123)
Loans and advances to customers 234,315 197,893
* Net of securitised loans and advances to customers.
At 31 December 2002, there were gross loans and advances to customers of £4,588 million (2001 – £3,280 million) outstanding from associated
undertakings and joint ventures.
Loans and advances to customers include finance lease receivables of £4,287 million (2001 – £3,900 million). Assets acquired in the year for
letting under finance leases amounted to £1,047 million (2001 – £1,005 million).
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 83
16. Loans and Advances to Customers continued
The Group’s gross lending exposure is analysed below.

2002 2001
Agriculture, forestry and fishing 1,096 1,038

Energy 1,591 1,598
Manufacturing industry 5,836 5,654
Construction and property 20,591 15,053
Hotels, restaurants and wholesale and retail trade 8,410 5,930
Transport, storage and communication 5,107 4,736
Financial 6,867 6,716
Other services 12,788 9,850
Individuals
Home mortgages 147,470 127,636
Other personal lending 16,560 13,874
Overseas residents 10,164 7,700
Gross loans and advances to customers* 236,480 199,785
* Net of securitised loans and advances to customers.
Loans and advances to customers which have been securitised are shown below. These meet the criteria set out in FRS 5 “Reporting the
Substance of Transactions”, for a linked presentation format.
At 31 December 2002 At 31 December 2001
Non- Non-
Gross assets returnable Gross assets returnable
Assets securitised finance securitised finance
securitised £ million £ million £ million £ million
SWAN Trust Mortgages 150 150 204 204

Mound Financing (No 1) PLC Mortgages 750 748 750 748
Mound Financing (No 2) PLC Mortgages 750 748 750 748
Melrose Financing No 1 plc Corporate Loans 1,500 1,444 1,500 1,441
Permanent Financing (No 1) PLC Mortgages 3,479 3,474
6,629 6,564 3,204 3,141
These special purpose companies, all of which are ultimately beneficially owned by charitable trusts, have been funded primarily through
the issue of floating rate notes. Neither HBOS plc nor its subsidiary undertakings will support any losses that may be suffered by the
noteholders in accordance with the terms of the notes. When all liabilities to the noteholders have been discharged, any proceeds from
assets in addition to the non-returnable amounts already received in the securitisation companies accrue to HBOS plc or its subsidiary undertakings.
Neither HBOS plc nor its subsidiary undertakings have the right or obligation to repurchase any securitised advance unless it has been
in breach of warranty.
The HBOS Group undertakings and third parties have entered into a number of interest rate swaps with the securitisation undertakings, the
intention of which is to swap all or part of the interest flows from customers into variable rate interest flows to match the variable rate interest
payable to the noteholders.
In June 2002, £3,479 million of mortgage loans were securitised through Permanent Financing (No 1) PLC.
In aggregate the securitisation undertakings had net interest income of £8.8 million (2001 – £3.7 million); operating expenses of £6.3 million
(2001 – £1.5 million); provisions for bad and doubtful debts of £2.5 million (2001 – £0.2 million); resulting in a profit for the year of £nil
(2001 – £2.0 million).
17. Non-performing Assets

The aggregate gross non-performing loans and advances is £4,206 million (2001 – £4,072 million) including £1,192 million (2001 – £1,125 million)
of advances on which interest is being held in suspense. Net of provisions and interest in suspense, non-performing loans and advances amount
to £2,041 million (2001 – £2,180 million).
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 84
18. Provisions for Bad and Doubtful Debts

Group
Specific General Total
At 1 January 2002 1,102 667 1,769

New provisions less releases 833 37 870
Amounts written off (618) (618)
Exchange movements 4 (1) 3
Cumulative provisions as at 31 December 2002 1,321 703 2,024
New provisions less releases 833 37 870
Recoveries of amounts previously written off (38) (38)
Net charge to profit and loss account 795 37 832
19. Debt Securities

2002 2001
Issued by Issued by
Public Issued by Market Public Issued by Market
Bodies Others Total Value Bodies Others Total Value
£ million £ million £ million £ million £ million £ million £ million £ million
Group
Investment securities
Listed
British Government Securities 521 521 524 378 378 384
Others 1,318 14,086 15,404 15,402 2,096 10,992 13,088 13,144
Unlisted
Certificates of deposit issued
by banks and building societies 1,962 1,962 1,963 5,138 5,138 5,152
Others 266 7,015 7,281 7,207 1,221 9,395 10,616 10,623
Total investment securities 2,105 23,063 25,168 25,096 3,695 25,525 29,220 29,303
Other securities
Listed 486 1,826 2,312 2,312 1,454 397 1,851 1,851
Unlisted 16,844 16,844 16,844 229 11,149 11,378 11,378
2,591 41,733 44,324 44,252 5,378 37,071 42,449 42,532
of which:-
maturing within 1 year 21,426 22,189
1 year and over 22,898 20,260
44,324 42,449
The movement on debt securities held as investment securities is as follows:- Group
Aggregate
Amortised amount Book
Cost written off Value
At 1 January 2002 29,243 (23) 29,220

Exchange translation (379) (379)
Additions 19,676 19,676
Amortisation 6 6
Disposals (23,352) (23,352)
Amount written off (3) (3)
At 31 December 2002 25,194 (26) 25,168
Aggregate unamortised premium at 31 December 2002 6 6
Debt securities include securities with a market value of £662 million (2001 – £1,077 million) for the Group sold subject to agreement to repurchase.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 85
19. Debt Securities continued
Debt securities include securities pledged as collateral of £12,416 million (2001 – £7,323 million).
Debt securities include asset backed securities of £9,320 million (2001 – £7,670 million) which have been sold by subsidiaries of the Company to
bankruptcy remote special purpose vehicles, funded by the issue of commercial paper on terms whereby the rewards and some of the risks of
the portfolio have been retained by HBOS Treasury Services plc. The securitisation does not qualify for linked presentation under FRS 5 and the
asset backed securities have therefore been retained on the Group balance sheet with commercial paper being included within debt securities
in issue (Note 32).
20. Equity Shares

Listed Unlisted
Aggregate Aggregate Total

amount Book amount Book Book
Cost written off Value Cost written off Value Value
Investment Securities £ million £ million £ million £ million £ million £ million £ million
Group
At 1 January 2002 64 64 171 (11) 160 224
Exchange translation 1 1 (1) (1)
Fair value adjustments (10) (10) (10)
Additions 11 11 58 58 69
Disposals (7) (7) (32) (32) (39)
Amounts written off (2) (2) (19) (19) (21)
At 31 December 2002 59 (2) 57 196 (30) 166 223
The total value of investments as at 31 December 2002 for the Group was £274 million (2001 – £285 million) including £96 million (2001 – £114
million) in respect of listed equity shares.
21. Interests in Joint Ventures and Associated Undertakings

(i) Joint Ventures Group
Acquired Share of
Book Equity Net Tangible Book
Value Adjustments Assets Goodwill Value
£ million £ million £ million £ million £ million
At 1 January 2002 – Restated 151 (49) 102 110 212

Acquisitions and subscriptions of capital 120 120 120
Disposals 1 1 1
Equity accounting adjustments (46) (46) (6) (52)
At 31 December 2002 271 (94) 177 104 281
Interests in joint ventures have been restated to reflect the impact of the joint venture entities adopting FRS 19. The effect has been to increase
equity adjustments and reduce book value at 1 January 2002 by £4 million.
(ii) Associated Undertakings Group
Acquired Share of
Book Equity Net Tangible Book
Value Adjustments Assets Goodwill Value
At 1 January 2002 127 7 134 134

Acquisitions and subscriptions of capital 21 21 21
Disposals (3) (3) (3)
Equity accounting adjustments 20 20 20
At 31 December 2002 145 27 172 172
All the interests in joint ventures and associated undertakings are unlisted.
The main joint ventures and associated undertakings are listed in Note 54 on page 111.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 86
22. Shares in Group Undertakings

Banks Others Total
At cost at 1 January 2002 734 567 1,301

Subscriptions of capital 1,250 600 1,850
Transfers from Group Undertakings 2,570 4,319 6,889
At cost at 31 December 2002 4,554 5,486 10,040
With effect from 1 January 2002, Halifax Group plc’s insurance and investment subsidiary undertakings were transferred to an intermediate
insurance holding company, HBOS Insurance & Investment Group Limited (“HBOS IIG”). On 1 July 2002, all Halifax Group plc’s subsidiary
undertakings comprising, inter alia, Halifax plc, HBOS IIG and Halifax Share Dealing Limited, were transferred at book value to HBOS plc.
The main subsidiary undertakings of HBOS plc are listed in Note 55 on page 112.
23. Intangible Fixed Assets

Goodwill
£ million
Cost
At 1 January 2002 1,372
Fair value adjustments (Note 50) 22
Additions (Note 50) 259
Other movements (7)
Amortisation and provisions for impairment
At 1 January 2002 127
Amortisation charged in year 86
At 31 December 2002 213
Net Book Value
Goodwill on acquisitions is capitalised and amortised by equal instalments over its estimated useful life, which, for all material acquisitions,
is 20 years.
Other movements relate to cash distributions from the acquisition of the business of Birmingham Midshires Building Society in April 1999 which
have not been claimed and reverted back to Halifax plc in July 2002 under the terms of the transfer document. This is a reduction in the cost of
investment.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 87
24. Tangible Fixed Assets

Group
Cost or Book
Valuation Depreciation Value
Property
At 1 January 2002 1,303 (418) 885
Additions 93 93
Disposals (86) 11 (75)
Depreciation for year (46) (46)
At 31 December 2002 1,309 (453) 856
of which:-
Investment properties at valuation:-
Freehold 39
Other properties at cost less depreciation:-
Freehold 673
Long leasehold 49
Short leasehold 95
856
Occupied for own activities 689
Equipment
At 1 January 2002 1,726 (984) 742
Additions 298 298
Disposals (57) 46 (11)
Depreciation for year (213) (213)
At 31 December 2002 1,966 (1,151) 815
Total tangible fixed assets at 31 December 2002 3,275 (1,604) 1,671
Total tangible fixed assets at 31 December 2001 3,029 (1,402) 1,627
Equipment includes amounts acquired under finance leases 32 (31) 1
Included within Group tangible fixed assets are assets in the course of construction amounting to £87 million (2001 – £89 million) which are
not depreciated until the assets are brought into use.
The investment properties were valued by C B Hillier Parker, Chartered Surveyors, as at 31 December 2002, on the basis of open market value in
accordance with the Appraisal and Valuation Manual of The Royal Institution of Chartered Surveyors. The valuation amount equated to the
original historic cost as at 31 December 2002. The Group had no investment properties as at 31 December 2001.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 88
25. Operating Lease Assets
Assets leased to customers include the following amounts in respect of operating lease assets:-
Group
£ million
Cost
At 1 January 2002 2,486
Additions 1,287
Disposals (578)
Aggregate depreciation
At 1 January 2002 (444)
Charge for the year (289)
Disposals 163
At 31 December 2002 (570)
Net Book Value at 31 December 2002 2,625
Net Book Value at 31 December 2001 2,042
The Group’s unguaranteed residual value exposure in respect of operating lease assets, assuming disposal at the end of the lease term, is as follows:-
Group
2002 2001
On operating lease assets where the unguaranteed residual value is expected to be recovered in:-
1 year or less 14 17
5 years or less but over 2 years 73 79
over 5 years 346 330
441 433
26. Other Assets

Group
2002 2001
Own shares (Note 27) 17 5

Positive market values of trading derivative contracts 6,014 2,813
Other assets 1,403 1,387
7,434 4,205
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 89
27. Own Shares
Included in other assets are own shares held as follows:-
(a) No.1 Employee Share Ownership Trust

The No.1 Employee Share Ownership Trust administers shares conditionally granted to Executive Directors and other executives under the
HBOS plc Long-term Executive Bonus Plan and to former Halifax Executive Directors and other former Halifax executives under the Halifax
Group plc Long-term Executive Bonus Scheme. The Trust also administers shares which have been conditionally granted to Executive Directors,
other executives and employees under the HBOS plc Annual Bonus Plan and the former Halifax Group plc Annual Bonus Plan.
Interest free loans have been provided by HBOS plc to the Trust to allow shares to be purchased in the market to satisfy these share
grants. The cost of the shares conditionally awarded is being charged to the profit and loss account on a straight line basis over the
performance period.
At 31 December 2002, 8.6 million HBOS plc ordinary shares (2001 – 2.1 million) were held by the Trustee and included in the balance sheet
of HBOS plc. The shares, with a nominal value of 25p each, had a total market value at that date of £56 million (2001 – £17 million). Under
the terms of the Trust, dividends on these shares are waived. At 31 December 2002 all these shares had been conditionally granted.
(b) HBOS plc Qualifying Employee Share Ownership Trust (the “HBOS QUEST”)
The HBOS QUEST operates in conjunction with the HBOS Sharesave Scheme and the former savings-related share schemes operated by
Bank of Scotland and Halifax Group plc.
Halifax QUEST held 14,626,075 HBOS ordinary shares and on 12 June 2002, HBOS plc purchased these ordinary shares from the Trustees
of the Halifax QUEST for a consideration of £1,000. On that date, these shares were cancelled and HBOS plc issued the same number of
ordinary shares, at their nominal value of 25p per share, to the HBOS QUEST. These ordinary shares held by the HBOS QUEST are included
within own shares in the balance sheet at nil value.
At 31 December 2002, the HBOS QUEST held 13.5 million HBOS plc ordinary shares (2001 – 14.6 million) with a market value of £89 million
(2001 – £116 million).
Under the terms of the Trust Deed, dividends are required to be waived on the shares held by the HBOS QUEST.
28. Capital and Other Commitments

Group
2002 2001
Commitments in respect of capital expenditure on fixed assets, authorised but not

provided for in the accounts, for which contracts have been entered into 17 25
Included in other liabilities are net
obligations under finance leases payable as follows:-
1 year or less 7 8
Commitments for which contracts have been placed in relation to operating lease assets were £161 million (2001 – £251 million).
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 90
29. Long-term Assurance Business
The Group has now adopted the more generally accepted approach of using unsmoothed asset values for the purposes of determining the net
present value of in-force business. Previously, smoothed asset values were used. The cumulative impact of this change of accounting policy
relating to previous years has been recognised in the accounts as a prior year adjustment and accordingly, the prior year results have been
restated. The effect of this change of policy on this year’s results and the prior year comparative is disclosed below.
Revised Previous
accounting basis accounting basis*
2001
2002 Restated 2002 2001
£m £m £m £m
Consolidated Profit and Loss Account:-

Income from long-term assurance business 233 150 380 470
Profit on ordinary activities before taxation 2,909 2,292 3,056 2,612
Tax on profit on ordinary activities (835) (663) (869) (755)
Profit on ordinary activities after taxation 2,074 1,629 2,187 1,857
Consolidated Balance Sheet:-
Long term assurance business attributable to shareholders 3,544 3,065 3,857 3,265
* The balances shown under the previous accounting basis for 2002 are based on a risk discount rate of 9%.
The principal economic assumptions are reviewed annually and are as follows:-
2002 2001
% %
Risk discount rate (net of tax) 8.5 9.4

Return on equities (net of tax credits) 7.5 7.5
Return on Gilts (gross of tax) 5.0 5.0
Expense inflation 3.0 3.0
In-force business is defined as all live policies where the first premium has been paid. For traditional with profits business, the surplus
attributable to the Group equates to one ninth of the bonuses declared in any year. The level of assumed future bonuses is calculated by
projecting the portfolio of with profits business forward and applying reversionary and terminal bonus rates so as to exhaust the projected
surplus of assets attributable to with profit policyholders. For all other business, the entire surplus is attributable to the Group.
The income from long-term assurance business is calculated as follows:-

2001
2002 Restated
Closing value of Group’s interest in long-term assurance business including minority interests 3,544 3,065
Opening value of Group’s interest in long-term assurance business including minority interests (3,065) (2,428)
Increase in value of long-term assurance business 479 637
Transfers to long-term assurance business (309) (254)
Acquisitions
Long-term assurance business of The Equitable (Note 50(a)) 12 (277)
Long-term assurance business of St. James’s Place Capital plc 21
Income after tax from long-term assurance business 182 127
Tax relating to long-term assurance business (Note 10) 51 23
Income before tax from long-term assurance business 233 150
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 91
29. Long-term Assurance Business continued
Income before tax from long-term assurance business may be analysed as follows:-
2001
2002 Restated
Contribution from new business 120 55

Contribution from existing business 366 308
Investment earnings 69 51
Income before tax from long-term assurance business based on long term assumptions 555 414
Changes to economic assumptions 90 60
Short-term fluctuations in investment returns (412) (324)
Income before tax from long-term assurance business 233 150
The long-term assurance assets comprise:-

2001
2002 Restated
Investments attributable to policyholders

Fixed interest securities 5,893 5,334
Stocks, shares and collective investments 9,420 10,935
Properties 2,191 2,103
Assets held to cover linked liabilities 16,267 16,566
Mortgages and loans 12 16
Deposits 3,308 2,658
Total investments attributable to policyholders 37,091 37,612
Net assets attributable to shareholders 1,823 1,421
Value of in-force policies 1,721 1,644
Other policyholder net current assets/(liabilities) 240 (11)
Total long-term assurance assets 40,875 40,666
Long-term assurance business attributable to shareholders 3,544 3,065
Long-term assurance assets attributable to policyholders 37,331 37,601
40,875 40,666
The figures for 2001 in the tables above have been restated to reflect the change in accounting policy for long-term assurance business.
Derivatives (options and futures) are used for efficient portfolio management of the long-term assurance business and to match obligations to
policyholders. These derivatives are included within investments above at market value.
Insurance companies and insurance groups report their income from long-term assurance business on the “Modified Statutory Solvency Basis”
(“MSSB”) in accordance with the Statement of Recommended Practice issued by the Association of British Insurers which is only applicable to
the accounts of such companies and groups. Under this approach, the profit reported is the surplus or deficit calculated for statutory solvency
purposes with prescribed adjustments to technical provisions and the deferral of certain costs of acquiring business.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 92
The Group’s income from long-term assurance business under this alternative basis is set out below:-
2002 2001
Premiums 8,924 8,251

Reinsurance premiums from The Equitable unit-linked and non-profit business 4,106
Investment income 1,139 1,211
Other income 21 206
10,084 13,774
Claims (4,354) (3,378)
Change in technical provisions (1,546) (3,167)
Change in technical provisions from The Equitable unit-linked and non-profit business (4,106)
Expenses (1,178) (990)
Unrealised losses on investments (4,814) (4,213)
Other charges (29) (44)
Tax attributable to long-term business 157 199
Transfer from the fund for future appropriations 1,605 1,803
Balance on the technical account – long-term business (75) (122)
Tax credit/(charge) attributable to balance on the technical account – long-term business 5 (22)
Income in shareholders’ fund (44) 14
Expenses in shareholders’ fund (19) (33)
Deficit before tax from long-term assurance business on a modified statutory solvency basis (133) (163)
Tax (6) 35
Deficit after tax from long-term assurance business on a modified statutory solvency basis (139) (128)
The balance sheet in respect of long-term assurance business prepared on a modified statutory solvency basis can be summarised as follows:-
2002 2001
Assets
Investments 22,713 23,199
Assets held to cover linked liabilities 16,267 16,566
Other assets 1,739 1,507
Total Assets 40,719 41,272
Liabilities
Shareholders’ funds 2,498 2,410
Fund for future appropriations 2,009
Linked liabilities 16,267 16,566
Other technical provisions 21,064 19,526
Other creditors 890 761
Long-term assurance assets attributable to shareholders on a modified statutory solvency basis 2,498 2,410
Long-term assurance assets attributable to policyholders on a modified statutory solvency basis 38,221 38,862
40,719 41,272
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 93
The embedded value of the Group’s interest in long-term assurance business can be reconciled to the long-term assurance assets attributable to
shareholders on a modified statutory solvency basis as follows:-
2001
2002 Restated
Embedded value of long-term assurance business 3,544 3,065

Value of in-force business (1,141) (1,047)
Other differences:-
Deferred acquisition costs 596 646
Adjustments to net asset values (331) (254)
Short-term fluctuations in investment returns (170)
Long-term assurance assets attributable to shareholders on a modified statutory solvency basis 2,498 2,410
Profits calculated using MSSB use the same long-term assumptions as required to assess the regulatory solvency but with certain prescribed
accounting adjustments. Because of the conservative nature of the current solvency regulations, a major failing of MSSB is that new business is
normally reported as a loss in the year of sale.
30. Deposits by Banks

Group
2002 2001
Repayable on demand 14,704 8,440

Repayable
3 months or less but not repayable on demand 22,066 16,267
over 5 years 79 66
45,637 30,449
Amounts above include:-
Associated undertakings 352 444
31. Customer Accounts

Group
2002 2001
Repayable on demand 123,262 116,715

Repayable
3 months or less but not repayable on demand 19,022 18,961
5 years or less but over 1 year 1,371 876
over 5 years 240 47
150,221 140,516
Amounts above include:-
Joint ventures 72 29
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 94
32. Debt Securities in Issue

Group
2002 2001
Bonds and Medium Term Notes

Repayable
1 year or less, or on demand 4,120 8,668
2 years or less but over 1 year 8,230 3,552
5 years or less but over 2 years 6,530 3,699
over 5 years 2,733 2,546
21,613 18,465
Other Debt Securities
Repayable
3 months or less 47,339 38,584
5 years or less but over 2 years 67
over 5 years 4 4
59,158 51,063
Total Debt Securities in Issue 80,771 69,528
Bonds and Medium Term Notes includes £303 million (2001 – £320 million) secured on advances to customers and certain other assets of the Group.
Other Debt Securities includes £9,286 million (2001 – £7,711 million) in respect of commercial paper issued to fund the purchase of asset
backed securities by special purpose vehicles (Note 19). During 2002, the Group securitised a portfolio of mortgage advances which, under FRS
5 “Reporting the Substance of Transactions” is not available for linked presentation and therefore the funding from this securitisation of £300
million is included in Bonds and Medium Term Notes. The portfolio of mortgage advances continues to be reported in Loans and Advances to
Customers (Note 16).
33. Other Liabilities
Group Company
2002 2001 2002 2001
Negative market values of trading derivative contracts 6,263 2,580

Unclaimed shares 279 286 279
Short positions in government debt securities 615
Other liabilities 2,370 1,672 43 4
8,912 5,153 322 4
Unclaimed shares comprise the net sale proceeds of certain Halifax Group plc ordinary shares which, following the Halifax Group restructuring
which took effect on 1 June 1999, represented Halifax plc ordinary shares. These shares were issued to meet claims for Halifax plc ordinary
shares from qualifying members of Halifax Building Society and others following the transfer of business from Halifax Building Society to Halifax
plc in 1997. This liability also includes the related unclaimed dividends up to the date of sale and the unclaimed capital payments arising from
the Halifax Group restructuring in 1999. These amounts are being held on behalf of the persons who would have been entitled to claim the
shares before they were sold. Following the internal reorganisation on 1 July 2002, responsibility for these balances was assumed by HBOS plc.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 95
34. Provisions for Liabilities and Charges

Group
2002
(i) Deferred Taxation £ million
At 1 January 2002 as previously stated 628

Prior year adjustment (139)
At 1 January 2002 – Restated 489
Charge in year (Note 10) 158
Other movements 1
At 31 December 2002 648
2002 2001
Provided Full
Provided Full for in Potential
for in Potential Accounts Liability
Accounts Liability Restated Restated
Deferred taxation comprises:- £ million £ million £ million £ million
Group
Capital allowances:-
on assets leased to customers 718 718 574 574
on other assets 50 50 37 37
General provisions (196) (196) (185) (185)
Other timing differences 76 76 63 63
648 648 489 489
Group
Pensions Pensions and HBOS
Review Other similar Integration Other
Provision Obligations Provision Provisions Total
(ii) Other Provisions £ million £ million £ million £ million £ million
At 1 January 2002 23 138 65 26 252

Charge for year 63 153 216
Utilised in year (11) (54) (170) (1) (236)
At 31 December 2002 12 147 48 25 232
The pensions review provision has been established to cover estimated administrative costs and compensation payable in connection with Phases 1
and 2 of the Pensions Review and the FSAVC Review. In 2001 a £41 million provision to cover direct and indirect costs arising from the Pensions
Review was included in the long-term assurance liabilities attributable to policyholders.
Of the provision for pensions and other similar obligations, £35 million relates to post-retirement benefits (2001 – £33 million).
Other provisions include property related costs on surplus leased space.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 96
35. Subordinated Liabilities

Group Company
2002 2001 2002

Dated Loan Capital

€51.1 million 8.30% Notes 2002 31
US$300 million 8.80% Notes 2004 186 207
£400 million 8.75% Subordinated Notes 2006 400 400
US$150 million 8.85% Notes 2006 93 103
£75 million 9.125% Subordinated Notes 2006 75 75
£60 million 9.00% Instruments 2006 60 60
A$100 million Callable Notes 2007 35
€650 million 4.75% Subordinated bonds 2009 423 397
US$500 million Floating rate subordinated step-up callable notes 2009 310 345
€500 million 5.50% Instruments 2009 325 305
£75 million Floating rate subordinated notes 2009 75 75
US$500 million Notes 2010 310 344
£75 million Floating Rate Instruments 2010 75 75
US$150 million Notes 2011 93 103
€7 million Floating Rate Notes 2011 5 4
€750 million Subordinated Fixed Rate Notes 2012 488
US$450 million Subordinated Floating Rate Notes 2012 279
£200 million Floating rate step-up callable subordinated notes 2012 200 200
€12.8 million 6.25% Instruments 2012 8 8
A$75 million Callable Notes 2012 26
€1,000 million Subordinated callable fixed/floating rate instruments 2013 651 611
€325 million 6.125% Notes 2013 212 198
£250 million 11% Subordinated bonds 2014 250 250
£150 million 10.5% Subordinated bonds 2018 150 150
£250 million 6.375% Instruments 2019 250 250
£500 million 9.375% Subordinated bonds 2021 500 500
€400 million 6.45% Eurodated Floating subordinated guaranteed bonds 2023 261 251
£245 million 7.881% Subordinated Extendable Maturity Notes 2048 245
€415 million Fixed to Floating Rate Subordinated Extendable Maturity Notes 2048 270
Unamortised Premiums, Discounts and Issue Costs (15) (11)
5,690 4,966 515
Repayable:-
in 1 year or less 31
in more than 1 year but not more than 5 years 814 845
in more than 5 years 4,876 4,090 515
5,690 4,966 515
No repayment, for whatever reason, of dated loan capital prior to its stated maturity and no purchase by the relevant subsidiary
undertaking of its loan capital may be made without the consent of the Financial Services Authority. On a winding up of the relevant company,
the claims of the holders of dated loan capital shall be subordinated in right of payment to the claims of all depositors and creditors of that
company other than creditors whose claims are expressed to rank pari passu with or junior to the claims of the holders of the dated
loan capital.
On 29 October 2002, Bank of Scotland issued €600 million Subordinated Fixed Rate Notes 2012 at an issue price of 99.812% of the principal
amount. The Notes bear interest at a fixed rate 5.5% per annum. On 25 November 2002 Bank of Scotland issued a further €150 million at an
issue price of 101.611% of the principal amount plus €610,274 representing 27 days accrued interest for the period from and including
29 October 2002 to 25 November 2002.
On 22 November 2002, Bank of Scotland issued US$450 million Subordinated Floating Rate Notes 2012 at an issue price of 99.663% of the
principal amount. The Notes bear interest at 3 months US$-LIBOR-BBA plus 0.50% per annum until 22 November 2007 at which time the
interest rate becomes 3 month US$-LIBOR-BBA plus 1.00% per annum. Bank of Scotland has the option to redeem these Notes on
23 November 2007.
On 10 December 2002, a subsidiary of the Company issued A$75 million Callable Notes 2012. The Notes bear interest at the three month
Australian bank bill rate plus 0.75% per annum. The issuer has the option to redeem the Notes at par after 10 December 2007.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 97
35. Subordinated Liabilities continued
The £245 million 7.881% Subordinated Extendable Maturity Notes 2048 and the €415 million Fixed to Floating Rate Extendable Maturity Notes
2048 were issued to HBOS Sterling Finance (Jersey) L.P. (formerly Halifax Group Sterling Finance (Jersey) L.P.) and HBOS Euro Finance (Jersey) L.P.
(formerly Halifax Group Euro Finance (Jersey) L.P.) respectively by Halifax Group plc as subordinated notes. HBOS Sterling Finance (Jersey) L.P. and
HBOS Euro Finance (Jersey) L.P. have issued preferred securities of equivalent amount. Halifax Group plc, HBOS plc and the Trustee for the
holders of the Notes agreed with the consent of the holders of the Notes, to enter into supplemental trust deeds that have, inter alia, made
both issues of Notes the obligation of HBOS plc effective on 1 July 2002. These are included in minority and other interests (non-equity) in the
Consolidated Balance Sheet (Note 39).
Group Company
2001
2002 Restated 2002 2001
Undated Loan Capital

£600 million Fixed to Floating Rate Undated Subordinated Notes 600 600
€500 million Fixed to Floating Rate Undated Subordinated Notes 325 305 325 305
£300 million Perpetual Regulatory tier One Securities 300 300
£300 million 7.5% Undated Subordinated Step-up Notes 300 300 300
JPY 42.5 billion 3.50% Undated Subordinated Yen Step-up Notes 222 223 222
US$300 million Reset Notes 186 207
£200 million Perpetual Notes 200 200
£200 million 7.375% Undated Subordinated Guaranteed Bonds 200 200
€300 million Floating Rate Undated Subordinated Step-up Notes 195 183 195
US$250 million Floating Rate Primary Capital Notes 155 172
£150 million Instruments 150 150
JPY 17 billion Instruments 99 110
£100 million 12% Perpetual Subordinated Bonds 100 100
£100 million 8.75% Perpetual Subordinated Bonds 100 100
JPY 9 billion Instruments 47 47
£500 million 5.75% Undated Subordinated Step-up Notes 500 500
Unamortised Premiums, Discounts and Issue Costs (17) (15) (11) (3)
3,437 2,957 2,131 902
No exercise of any redemption option or purchase by the relevant company of any of its undated loan capital may be made without the
consent of the Financial Services Authority. On a winding up of the Company or subsidiary undertaking, the claims of the holders of undated
loan capital shall be subordinated in right of payment to the claims of all depositors and creditors of the Company or subsidiary undertaking
other than creditors whose claims are expressed to rank pari passu with or junior to the claims of the holders of the undated loan capital.
The undated loan capital is junior in point of subordination to the dated loan capital referred to above.
On 28 November 2002, HBOS plc issued £500 million Undated Subordinated Step-up Notes at an issue price of 99.415% of their principal
amount. The Notes bear interest at 5.75% per annum annually in arrear to 28 November 2025 and thereafter at a rate per annum equal to the
sum of the 5 year benchmark Gilt rate.
The £600 million Fixed to Floating Rate Undated Subordinated Notes were issued to HBOS Capital Funding LP by the Company. HBOS Capital
Funding LP has issued preferred securities of equivalent amount. These are included in minority and other interests (non-equity) in the
Consolidated Balance Sheet (Note 39).
On 28 February 2001, £300 million Perpetual Regulatory tier One Securities were issued through Bank of Scotland. These qualify as Tier 1
regulatory capital. A £150 million Series A Issue has a fixed coupon of 7.286% to 2016 and a Series B Issue of £150 million has a fixed coupon of
7.281% to 2026. Thereafter, if not redeemed on their respective dates, for each Issue the coupon will be reset and will be further reset at five
yearly intervals. There is an option to settle the coupon payment through the issue of Ordinary Shares. Coupon payments may be deferred but
the Bank of Scotland may not declare or pay dividends on any of its Ordinary Shares whilst any coupon payments are deferred. UITF 33 was
implemented during 2002 which required these securities to be reclassified from minority and other interests (non-equity) to undated loan
capital. Comparative amounts have been restated to reflect this change.
The £300 million 7.5% Undated Subordinated Step-up Notes, were issued by Halifax Group plc on 26 May 2000. Halifax Group plc, HBOS plc and the
Trustee for the holders of the Notes agreed, with the consent of the holders of the Notes, to enter into a supplemental trust deed that has, inter alia,
made the Notes the obligation of HBOS plc effective on 1 July 2002. Interest on these Notes is payable annually in arrears on 26 May until 2016 at
the rate of 7.5% per annum and, for each period of five years thereafter, annually in arrears on 26 May at the rate per annum equal to the sum of the
five year benchmark Gilt rate plus 3.45%. HBOS plc has the option to redeem these Notes on 26 May 2016 and on each fifth anniversary thereafter.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 98
35. Subordinated Liabilities continued
The JPY 42.5 billion 3.50% Undated Subordinated Yen Step-up Notes, were issued by Halifax Group plc on 28 February 2001. Halifax Group plc,
HBOS plc and the Trustee for the holders of the Notes agreed, with the consent of the holders of the Notes to enter into a supplemental trust
deed that has, inter alia, made the Notes the obligation of HBOS plc effective on 1 July 2002. Interest on these Notes is payable half yearly in
arrear on 28 February and 28 August until 28 February 2031 at the rate of 3.50% per annum and thereafter at the rate of 6 month JPY LIBOR plus
a margin of 2.09% per annum. HBOS plc has the option to redeem these Notes on 28 February 2011, on 28 February 2031 and on each coupon
payment date thereafter.
The €300 million Floating Rate Undated Subordinated Step-up Notes, were issued by Halifax Group plc on 26 May 2000. Halifax Group plc,
HBOS plc and the Trustee for the holders of the Notes agreed, with the consent of the holders of the Notes, to enter into a supplemental trust
deed that has, inter alia, made the Notes the obligation of HBOS plc effective on 1 July 2002. Interest on these Notes is payable on 26 May,
26 August, 26 November and 26 February each year until 26 August 2010 at the rate of 3 month EURIBOR plus a margin of 1.20% per annum and
from and including 26 August 2010 at the rate of 3 month EURIBOR plus a margin of 2.30% per annum. HBOS plc has the option to redeem
these Notes on 26 August 2010 and on each interest payment date thereafter.
36. Share Capital

91⁄4% Non- 93⁄4% Non-
Cumulative Cumulative
Irredeemable Irredeemable
Other
Ordinary Preference Preference Preference Shares
Shares Shares Shares
25p each £1 each £1 each Sterling Euro
£ million £ million £ million £ million € million
Authorised
At 31 December 2002 and 31 December 2001 1,185 375 125 1,204 1,500
Allotted, called up and fully paid
At 1 January 2002 892 300 100
Issued by means of a share placing 43
Issued under employee share schemes and in lieu of dividends 11
At 31 December 2002 946 300 100
Other sterling preference shares include 200 million 6.125 per cent. Non-Cumulative Redeemable Preference Shares of £1 each, 1,000 million Sterling
Preference Shares of £1 each, 250,000 8.117 per cent. Non-Cumulative Perpetual Preference Shares Class A of £10 each and 150,000 7.754 per cent.
Non-Cumulative Perpetual Preference Shares Class B of £10 each.
Between 5 and 7 March 2002, 172.5 million Ordinary Shares of 25p each were issued at a price of £7.40 per share, raising proceeds (net of expenses) of
£1,258 million.
The Group operates a number of share option plans and savings-related share option plans for both executives and employees.
At 31 December 2002, options to acquire 40.6 million ordinary shares were outstanding under HBOS plc option plans and former Halifax option
plans. These options are exercisable at a range of prices from £6.68 to £8.28 at various dates up to 14 April 2008. At 31 December 2002, options
to acquire 6.2 million ordinary shares were outstanding under the former Bank of Scotland executive stock option schemes. These options are
exercisable at a range of prices from £1.89 to £7.13 at various dates up to 16 October 2010.
At 31 December 2002, options to acquire 51.5 million ordinary shares were outstanding under savings-related share option plans. These options
are exercisable at a range of prices from £2.08 to £5.98 at various dates up to 31 December 2010.
During the year, a total of 8.0 million shares were issued on the exercise of options for a consideration of £39 million.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 99
37. Reserves
Profit
Share Other and Loss
Premium Reserves Account
Group
At 1 January 2002 as previously stated 27 492 9,657
Prior year adjustments (55)
At 1 January 2002 – Restated 27 492 9,602
Reserves capitalised (9)
Premium arising on the issue of new shares 1,251
Dividends retained on account of share dividends 283
Contribution to Employee Share Trust 23 (12)
Release of employee options granted under Company share ownership plans 23
Retained profit 739
At 31 December 2002 1,292 496 10,635
Company
At 1 January 2002 27 33
Reserves capitalised (9)
Premium arising on the issue of new shares 1,251
Dividends retained on account of share dividends 283
Contribution to Employee Share Trust 23 (12)
Retained profit 3,494
At 31 December 2002 1,292 3,798
The Group profit and loss account reserve at 31 December 2002 includes £589 million (2001 restated – £566 million) not presently available
for distribution. This represents mainly the excess of retained profits on an embedded value basis over those available for distribution.
The cumulative amount of positive goodwill on acquisitions of subsidiary undertakings written off in the Group reserves is £574 million
(2001 – £574 million) and in respect of joint ventures and associated undertakings £nil (2001 – £nil).
The Share Dividend Plan, which was offered as an alternative to the cash dividend to shareholders, resulted in £267 million relating to the
December 2001 final dividend and £16 million relating to the June 2002 interim dividend being retained by HBOS plc and added to reserves.
38. Reconciliation of Shareholders’ Funds

Group Company
2001
2002 Restated 2002 2001
Profit attributable to shareholders 1,916 1,468 4,671 1,073

Dividends (1,177) (1,030) (1,177) (1,030)
Other recognised gains and losses 4 (6)
Dividends retained on account of share/stock dividends 283 24 283
Contribution to Employee Share Trust (12) (30) (12) (10)
Release/(charge) of employee options granted under company share ownership plans 23 (36)
Ordinary capital subscribed 1,319 309 1,319 919
Preference capital subscribed 400
Reserve arising on sale of unallocated shares 23
2,356 722 5,084 1,352
Shareholders’ Funds at 1 January as previously stated 11,468 10,538 1,352
Prior year adjustments (55) 153
Shareholders’ Funds at 1 January – Restated 11,413 10,691 1,352
Shareholders’ Funds at 31 December 13,769 11,413 6,436 1,352
of which:-
Attributable to non-equity interests 400 400 400 400
Attributable to equity interests 13,369 11,013 6,036 952
13,769 11,413 6,436 1,352
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 100
39. Minority and Other Interests (Non-equity)

The principal minority and other interests (non-equity) are set out below.
2001
2002 Restated
£600 million preferred securities 600 600

€415 million preferred securities 270 257
£198 million non-cumulative preference shares 198 198
1,713 1,700
Less: unamortised issue costs (10) (10)
1,703 1,690
On 28 November 2001, £600 million Guaranteed Non-voting Non-cumulative Perpetual Preferred Securities Series A were issued through HBOS
Capital Funding LP. These qualify as Tier 1 regulatory capital. These are perpetual securities and are not subject to any mandatory redemption
provisions. They are redeemable in 2018, or each fifth anniversary thereafter, at the option of the general partner. The securities have a fixed
coupon of 6.461% to 2018. Thereafter, if not redeemed, the coupon will be reset.
During 2000, the £250 million and £150 million preferred securities were issued by a subsidiary undertaking of Bank of Scotland.
During 1999, the £245 million and €415 million Guaranteed Non-voting Non-cumulative Preferred Securities were issued by subsidiary
undertakings of the Halifax Group.
During 1999, non-cumulative preference shares were issued by Halifax plc, as part of the consideration to acquire the business of the
Birmingham Midshires Building Society.
40. Memorandum Items
The contract amounts noted below indicate the volume of business outstanding at the balance sheet date in respect of contingent liabilities
and commitments undertaken for customers. They do not reflect the underlying credit and other risks, which are significantly lower.
2002 2001
Contract Contract
Amount Amount
Group
Contingent Liabilities
Acceptances and endorsements 157 202
Guarantees and assets pledged as collateral security
Guarantees and irrevocable letters of credit 2,672 2,133
2,829 2,335
Commitments
Other commitments
Short-term trade related transactions 129 202
Undrawn formal standby facilities, credit lines and other commitments to lend
up to and including 1 year 35,634 26,298
over 1 year 13,261 10,772
49,024 37,272
Company
Contingent Liabilities
Guarantees and assets pledged as collateral security
Guarantees provided to subsidiary companies 525
525
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 101
41. Derivatives
The Group uses interest rate swaps, forward foreign exchange contracts and other derivative instruments to hedge and reduce the interest rate
and currency exposures that are inherent in any banking business. Trading transactions are either customer driven and generally matched or are
carried out for proprietary trading purposes within limits approved by the Board.
The Group has entered into derivative contracts as noted below. The notional principal amounts and fair values of these derivatives (excluding
internal trades) are analysed between non-trading and trading activity. Fair value is the amount at which instruments could be exchanged in an
arm’s-length transaction.
2002 2001
Notional Notional
Principal Year End Fair Value Principal Year End Fair Value
Amount Asset Liability Amount Asset Liability
Group
Non-Trading
Exchange Rate Related Contracts
Forward foreign exchange 411 8 11 1,653 24 12
Cross currency swaps 32,414 556 843 13,264 450 513
32,825 564 854 14,917 474 525
Interest Rate Related Contracts
Interest rate swaps 28,980 979 598 62,447 1,076 987
Forward rate agreements 734 1
Options 558 4 1 183 6 3
Futures 2,678 1 1 2,838 4
32,216 984 600 66,202 1,082 995
Equity and Commodity Related Contracts
Options and swaps 535 10 31 520 21 14
Total Non-Trading Derivatives 65,576 1,558 1,485 81,639 1,577 1,534
The Company held non-trading derivatives with a notional principal amount of £2,420 million (2001 – £nil). The Company’s non-trading derivatives
with a positive fair value was an asset of £118 million (2001 – £nil) and with a negative fair value was a liability of £7 million (2001 – £nil).
2002 2001
Notional Notional
Principal Year End Fair Value Principal Year End Fair Value
Amount Asset Liability Amount Asset Liability
Group
Trading
Exchange Rate Related Contracts
Forward foreign exchange 49,471 682 1,674 49,887 327 441
Cross currency swaps 142 5 7 78 1 1
Options 12,728 9 9 483 3 3
62,341 696 1,690 50,448 331 445
Interest Rate Related Contracts
Interest rate swaps 214,096 3,168 3,390 184,125 1,415 1,508
Forward rate agreements 9,856 2 2 6,323 3 3
Options 45,840 130 185 31,364 89 61
Futures 190,017 49 74 80,591 22 60
459,809 3,349 3,651 302,403 1,529 1,632
Equity and Commodity Related Contracts
Options and swaps 563 37 28 323 11 5
Total Trading Derivatives 522,713 4,082 5,369 353,174 1,871 2,082
Total Group Derivatives 588,289 5,640 6,854 434,813 3,448 3,616
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 102
41. Derivatives continued
The residual maturity of ‘over the counter’ (OTC) and non-margined exchange traded contracts was as follows:-
2002 2001
Notional Replace- Notional Replace-

Principal ment Principal ment
Amount Cost Amount Cost
Group
Contracts maturing:-
in 1 year or less 198,933 1,239 223,122 1,724
in more than 1 year but not more than 5 years 128,890 1,727 91,187 782
in more than 5 years 67,771 2,624 37,075 920
395,594 5,590 351,384 3,426
Credit Risk Analyses

Counterparties of the Group’s derivative transactions are primarily financial institutions. An institutional and geographical analysis of
replacement cost, based on the location of the office writing the business, is shown below:-
Group
2002 2001
Institutional
Financial Institutions 4,516 3,094
Non-financial Institutions 1,074 332
5,590 3,426
Geographical
UK 5,411 3,190
Rest of World 179 236
5,590 3,426
The Group’s objectives and policies in managing the risks that arise in connection with the use of financial instruments are set out on pages 38
to 42 of the Financial Review and Risk Management report.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 103
42. Fair Value of Financial Assets and Financial Liabilities
Fair values of financial assets and financial liabilities are based on market prices where available, or are estimated using other valuation
techniques. Where they are short-term in nature or reprice frequently, fair value approximates to carrying value.
Derivatives held for trading purposes as disclosed in Note 41 are carried at fair values. Derivatives held for non-trading purposes are accounted
for in the same way as the underlying transaction being hedged. Fair values are based on market prices where available, or are estimated using
other valuation techniques.
The following table shows the carrying amount and the fair values of financial assets and liabilities analysed between trading and non-trading:-
2002 2001 Restated
Assets Liabilities Assets Liabilities
Carrying Carrying Carrying Carrying

Amount Fair Value Amount Fair Value Amount Fair Value Amount Fair Value
Group
Non-Trading
Treasury bills and
other eligible bills 4,006 4,010 3,050 3,051
Debt securities 25,168 25,096 29,220 29,303
Equity shares 223 274 224 285
Debt securities in issue 80,524 81,130 69,162 66,961
Dated loan capital 5,690 6,436 4,966 5,709
Undated loan capital 3,437 3,937 2,957 3,027
Preference shares 400 571 400 577
Minority and other interests
(non-equity) 1,703 1,918 1,690 1,902
Derivatives 302 1,558 299 1,485 1,298 1,577 979 1,534
Total Non-Trading 29,699 30,938 92,053 95,477 33,792 34,216 80,154 79,710
Trading
Treasury bills and
other eligible bills 1,958 1,958 1,021 1,021
Loans and advances to banks 1,348 1,348 463 463
Loans and advances to
customers 709 709 480 480
Debt securities 19,156 19,156 13,229 13,229
Other assets 63 63 165 165
Debt securities in issue 247 247 366 366
Deposits by banks 11,650 11,650 6,649 6,649
Customer accounts 2,309 2,309 1,991 1,991
Other liabilities 66 66 946 946
Derivatives 4,082 4,082 5,369 5,369 1,871 1,871 2,082 2,082
Total Trading 27,316 27,316 19,641 19,641 17,229 17,229 12,034 12,034
Fair values in respect of non-trading financial assets and liabilities are disclosed only where there is a liquid and active market.
Fair value information is not provided for items that do not meet the definition of a financial instrument or for certain other financial
instruments, including sundry short-term debtors and creditors. The fair value information presented does not therefore represent the fair value
of the Group as a going concern at 31 December 2002.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 104
43. Hedges
Gains and losses on instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised. Unrecognised
gains and losses on instruments used for hedging, and the movements therein, are as follows:-
2002
Total Net
Gains Losses Gains/(Losses)
Group
Unrecognised gains and losses on hedges at 1 January 2002 825 1,101 (276)
Gains and losses arising in previous years that were
recognised in the year ended 31 December 2002 263 744 (481)
Gains and losses arising before 1 January 2002 that were
not recognised in the year ended 31 December 2002 562 357 205
Gains and losses arising in the year ended 31 December 2002
that were not recognised in that year 719 854 (135)
Unrecognised gains and losses on hedges at 31 December 2002 1,281 1,211 70
of which:-
Gains and losses expected to be recognised
in the year ended 31 December 2003 336 603 (267)
Gains and losses expected to be recognised after 31 December 2003 945 608 337
2001
Total Net
Gains Losses Gains/(Losses)
Group
Unrecognised gains and losses on hedges at 1 January 2001 877 1,262 (385)
Gains and losses arising in previous years that were
recognised in the year ended 31 December 2001 421 771 (350)
Gains and losses arising before 1 January 2001 that were
not recognised in the year ended 31 December 2001 456 491 (35)
Gains and losses arising in the year ended 31 December 2001
that were not recognised in that year 369 610 (241)
Unrecognised gains and losses on hedges at 31 December 2001 825 1,101 (276)
of which:-
Gains and losses expected to be recognised
in the year ended 31 December 2002 233 663 (430)
Gains and losses expected to be recognised after 31 December 2002 592 438 154
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 105
44. Interest Rate Sensitivity Gap
The tables below summarise the repricing profiles of the Group’s assets and liabilities.
Over Over
Not more 3 months 6 months Over 1 year
than but not over but not over but not over Over Non-interest
3 months 6 months 1 year 5 years 5 years bearing Trading Total
Assets
Treasury bills and other eligible bills 3,803 78 14 111 1,958 5,964
Loans and advances to banks 8,870 742 217 83 77 501 1,348 11,838
Loans and advances to customers 187,012 6,784 8,351 25,979 4,503 977 709 234,315
Debt securities and equity shares 20,132 1,399 547 1,740 1,054 519 19,156 44,547
Other assets 1,283 122 203 482 232 18,700 63 21,085
221,100 9,125 9,332 28,395 5,866 20,697 23,234 317,749
Liabilities
Deposits by banks 32,012 (16) 1,890 23 10 68 11,650 45,637
Customer accounts 132,961 3,701 3,715 5,789 207 1,539 2,309 150,221
Debt securities in issue 60,406 13,542 4,066 955 1,553 2 247 80,771
Other liabilities 99 1 13 8 15,898 66 16,085
Subordinated liabilities 1,594 155 940 6,438 9,127
Minority interests and
shareholders’ funds 1,702 14,206 15,908
Internal funding of trading business (4,467) (2,822) (1,865) (150) 342 8,962
222,605 14,560 7,807 7,570 10,260 31,713 23,234 317,749
On-balance sheet gap (1,505) (5,435) 1,525 20,825 (4,394) (11,016)
Non-trading derivatives 2,996 7,683 (3,484) (10,886) 3,691
Net interest rate repricing gap 2002 1,491 2,248 (1,959) 9,939 (703) (11,016)
Cumulative gap 2002 1,491 3,739 1,780 11,719 11,016
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 106
44. Interest Rate Sensitivity Gap continued

Restated
Over Over
Not more 3 months 6 months Over 1 year
than but not over but not over but not over Over Non-interest
3 months 6 months 1 year 5 years 5 years bearing Trading Total
Assets
Treasury bills and other eligible bills 2,001 948 9 92 1,021 4,071
Loans and advances to banks 9,772 1,542 462 169 26 495 463 12,929
Loans and advances to customers 150,282 5,732 4,110 27,040 9,893 356 480 197,893
Debt securities and equity shares 19,550 5,023 1,589 2,102 729 451 13,229 42,673
Other assets 224 221 215 589 684 11,993 2,978 16,904
181,829 13,466 6,385 29,992 11,332 13,295 18,171 274,470
Liabilities
Deposits by banks 19,943 1,951 1,196 27 18 665 6,649 30,449
Customer accounts 127,404 2,465 2,840 3,779 150 1,887 1,991 140,516
Debt securities in issue 52,011 9,435 4,317 1,441 1,952 6 366 69,528
Other liabilities 1 20 8,999 3,526 12,546
Subordinated liabilities 1,268 203 785 5,667 7,923
Minority interests and
shareholders’ funds 13,508 13,508
Internal funding of trading business (5,639) 5,639
194,987 14,054 8,354 6,052 7,787 25,065 18,171 274,470
On-balance sheet gap (13,158) (588) (1,969) 23,940 3,545 (11,770)
Non-trading derivatives 6,598 (746) (1,372) (9,305) 4,825
Net interest rate repricing gap 2001 (6,560) (1,334) (3,341) 14,635 8,370 (11,770)
Cumulative gap 2001 (6,560) (7,894) (11,235) 3,400 11,770
All derivative instruments which alter the interest bases of the non-trading portfolio of assets and liabilities are reflected in the above tables.
45. Trading Value at Risk
The Group’s Value at Risk (VaR) methodology of estimating potential losses arising from the Group’s exposure to market risk is explained on page
41 of the Financial Review and Risk Management report. The Group’s trading market risk exposure for the year ended 31 December 2002 is analysed
below.
Exposure
As at As at
Average Highest Lowest
31 December 31 December
2002 2001 2002 2001 2002 2001 2002 2001
Total Value at Risk 7.9 13.8 11.1 8.0 14.8 21.4 7.4 0.8
For all significant exposures VaR has been calculated on a daily basis.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 107
46. Non-trading Currency Exposure
Structural currency exposures arise from the Group’s investments in overseas subsidiaries, branches and other investments and are noted in the
table below.
2002 2001
Net Borrowing Remaining Net Borrowing Remaining
investments taken out to structural investments taken out to structural
in overseas hedge the net currency in overseas hedge the net currency
operations investments exposure operations investments exposure
Functional currency of the operation £ million £ million £ million £ million £ million £ million
US Dollar 222 185 37 114 85 29

Euro 304 190 114 212 56 156
Australian Dollar 371 315 56 307 281 26
Other 2 2 2 2
Total 899 692 207 635 424 211
As at 31 December 2002 and 31 December 2001 there are no material net currency exposures in the non-trading book relating to transactional
(or non-structural) positions that would give rise to net currency gains or losses for the reason set out on page 41 of the Financial Review and
Risk Management report.
47. Assets and Liabilities in Foreign Currencies

Group
2002 2001
The aggregate amounts of assets and liabilities denominated in currencies other than sterling were:-
Assets 73,420 59,932
Liabilities 115,484 82,912
The above figures do not reflect the Group’s exposure to foreign exchange, which is significantly lower as it is hedged by off-balance
sheet instruments.
48. Reconciliation of Operating Profit to Net Cash (Outflow)/Inflow from Operating Activities
2001
2002 Restated
Group operating profit 2,849 2,332

Decrease in accrued income and prepayments 806 395
Decrease in accruals and deferred income (684) (876)
Provision for bad and doubtful debts 832 608
Depreciation and goodwill amortisation 634 538
Amortisation of (discounts)/premiums on debt securities (6) 51
Income from long-term assurance business (233) (150)
Interest on subordinated liabilities 518 485
Profit on sale of investment securities (37) (92)
Gain on sale of fixed assets (14) (7)
Provisions for liabilities and charges 216 171
Provisions utilised (236) (93)
Provisions against debt securities and equity shares 24 21
Exchange differences 384 (194)
Other non-cash movements 14
Net cash inflow from trading activities 5,053 3,203
Net increase in notes in circulation 84 84
Net increase in items in course of collection (110) (229)
Net increase in treasury and other eligible bills (1,893) (875)
Net increase in loans and advances to banks and customers (34,879) (21,979)
Net increase in deposits by banks and customer accounts 24,893 16,370
Net increase in debt securities in issue 11,243 15,850
Net increase in other assets (3,217) (1,320)
Net increase in other liabilities 3,759 2,233
Net increase in other debt securities (5,927) (12,702)
Net cash (outflow)/inflow from operating activities (994) 635
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 108
49. Gross Cash Flows

2001
2002 Restated
(i) Returns on investments and servicing of finance

Interest paid on subordinated liabilities (515) (474)
Preference dividends paid (37) (37)
Dividends paid to minority shareholders in subsidiary undertakings (148) (127)
(700) (638)
(ii) Capital expenditure and financial investment
Transfers to long-term assurance business (309) (254)
Purchase of investment securities (19,745) (64,169)
Sale and maturity of investment securities 23,428 64,370
Purchase of property and equipment (391) (390)
Sale of property and equipment 100 99
Movement in own shares (12) 1
Purchase of operating lease assets (1,287) (1,305)
Sale of operating lease assets 415 572
2,199 (1,076)
(iii) Acquisitions and disposals
Investment in subsidiary undertakings (700)
Investment in associated undertakings, joint ventures and business interests (141) (69)
Disposal of associated undertakings, joint ventures and business interests 27 31
(114) (738)
(iv) Financing
Issue of ordinary shares 52 1,319 275
Issue of subordinated liabilities 52 1,287 1,892
Issue of preferred securities 594
Minority interest acquired 24 4
Minority interest disposed (9) (5)
Repayments of subordinated liabilities 52 (66) (33)
Contribution to Employee Share Trust (12) (30)
2,543 2,697
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 109
50. Acquisitions and Disposals
(a) Equitable Life Assurance Society (“The Equitable”)

On 1 March 2001, the Halifax Group acquired the operating assets, sales force and unit-linked and non-profit business of The Equitable for
£508 million (including costs of acquisition of £8 million). Net assets with a preliminary fair value of £341 million were acquired, creating a balance
of goodwill on the acquisition of £167 million.
The acquisition method of accounting has been adopted and the results of the acquired operations have been consolidated in full from that date.
On 11 January 2002, The Equitable’s guaranteed annuity rate and non-guaranteed annuity rate policyholders voted in favour of a scheme of
arrangement to compromise their respective claims against the with-profits fund. Following Court approval the scheme became effective
on 8 February 2002. As a result of this, in accordance with the terms of the acquisition, Halifax plc (a subsidiary of HBOS plc) agreed to waive
unconditionally the repayment of £250 million of loans advanced by it to The Equitable under a fully collateralised loan facility of £251 million,
which was granted in 2001. The amount waived has been treated as additional goodwill.
As a result of the compromise scheme having become effective prior to 1 March 2002, in accordance with the terms of the acquisition, the
HBOS Group is obliged to pay up to a further £250 million depending on the extent to which certain new business sales and profitability targets
are achieved in 2003 and 2004 by the distribution channel acquired from The Equitable. No provision has been made at 31 December 2002 for
this contingent consideration because it is not currently expected that any payment will be made.
In accordance with FRS 7, “Fair Values in Acquisition Accounting”, preliminary fair value adjustments were made and were disclosed in the
accounts for the year ended 31 December 2001. The principal adjustment required reflects the fact that, as a mutual life assurance society,
The Equitable did not prepare accounts on an embedded value basis. A preliminary fair value adjustment for £277 million was therefore
made, being an estimate of the value of acquired in-force business. Following a review of the preliminary fair value adjustments, the value of
acquired in-force business has been adjusted from £277 million to £265 million. This revised value is reflected in the table below. As a result
of this, the preliminary fair value of net assets acquired has been reduced by £12 million to £329 million and the balance of goodwill on
acquisition has increased to £429 million. The other accounting policy and revaluation adjustments are not individually material.
The following table summarises the effects of this acquisition:-

Accounting Total Fair
Acquired Revaluation policy fair value value to
book value adjustments adjustments adjustments the Group
Long-term assurance business attributable to shareholders 265 265 265

Other assets 149 10 10 159
Total assets 4,255 275 275 4,530
Other liabilities 84 12 (1) 11 95
Total liabilities 4,190 12 (1) 11 4,201
Net assets 65 (12) 276 264 329
Goodwill 429
Consideration 758
Satisfied by:-
Cash 500
Waiver of loan 250
Acquisition costs 8
758
The goodwill arising on acquisition, prior to the waiver of the loans referred to above, is being amortised over a period of 20 years to reflect the
strategic rationale of the acquisition and the period over which the economic benefits associated with the goodwill are expected to arise. The
additional goodwill arising in 2002 is being amortised over a period equivalent to the balance of the period of 20 years over which the original
goodwill is being amortised.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 110
50. Acquisitions and Disposals continued
(b) On 16 February 2001, Bank of Scotland acquired 99.99% of the share capital of ICC Bank plc, which is based in Ireland. The remaining equity
was acquired during that year. The consideration of £227 million inclusive of fees and expenses was satisfied partly in cash raised from the
proceeds of a placing of Bank of Scotland stock and partly by stock issued. Net assets with a preliminary fair value of £163 million were
acquired, creating a balance of goodwill on the acquisition of £64 million.
In accordance with FRS 7, preliminary fair value adjustments were made and disclosed in the accounts for the year ended 31 December 2001.
The principal fair value adjustment reflects the revaluation of debt securities and equity shares to market value. A preliminary fair value
adjustment for £33 million was therefore made. Following a review of the preliminary fair value adjustment, the value of net assets acquired has
been adjusted from £163 million to £153 million. This revised value is reflected in the table below. As a result of this, the balance of goodwill on
acquisition has increased to £74 million. The other accounting policy and revaluation adjustments are not individually material.
The following table summarises the effects of this acquisition:-

Accounting Total Fair
Acquired Revaluation policy fair value value to
book value adjustments adjustments adjustments the Group
Loans and advances to banks and customers 2,239 (4) (4) 2,235
Debt securities and equity shares 233 29 29 262
Other assets, prepayments and accrued income 41 (1) (1) 40
Total assets 2,513 25 (1) 24 2,537
Deposits by banks, customer accounts and debt securities in issue 2,255 2,255
Other liabilities, accruals and deferred income and other provisions 48 48
Subordinated liabilities 78 1 1 79
Minority interests 2 2
Total liabilities 2,383 1 1 2,384
Net assets 130 24 (1) 23 153
Goodwill 74
Consideration 227
Satisfied by:-
Cash 193
Shares issued at fair value 34
227
(c) During the year a further £8 million of goodwill arose from the acquisition of minorities (2001 – £26 million including fair value
adjustments to previous acquisitions).
(d) There were no material disposals in the years to 31 December 2002 or 2001 other than disclosed in Note 4.
51. Analysis of the Balances of Cash as shown in the Balance Sheet

As at As at 31 As at As at 31
1 January December 1 January December
2002 Cashflow 2002 2001 Cashflow 2001
Cash and balances at central banks 1,150 223 1,373 1,252 (102) 1,150
Loans and advances to other banks
repayable on demand 1,625 1,534 3,159 2,400 (775) 1,625
2,775 1,757 4,532 3,652 (877) 2,775
The Group maintains balances with the Bank of England which, at 31 December 2002, amounted to £881 million (2001 – £732 million).
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 111
52. Analysis of the Changes in Financing During the Year

2002 2001
Share Capital Share Capital Loan
(including Loan (including Capital
Premium) Capital Premium) Restated
At 1 January 1,319 7,923 1,278 5,985

Effect of foreign exchange differences (17)
Acquisitions 79
Shares issued as part payment for the acquisition of ICC Bank plc 34
Proceeds of capital issues (including premium) – ordinary shares 1,319 275
Issue of subordinated liabilities 1,287 1,892
Repayments of subordinated liabilities (66) (33)
Non-cash movement
Transfer of share premium to other reserves (268)
At 31 December 2,638 9,127 1,319 7,923
53. Related Party Transactions
In the year ended 31 December 2002, the Group provided both administration and processing services to Sainsbury’s Bank plc. The amounts
in respect of administration and processing services payable to the Group during the year were £28 million (2001 – £19 million), of which
£4 million was outstanding at the year end (2001 – £6 million).
During the year, IBM United Kingdom (Systems Operations) Limited, a non consolidated subsidiary, provided to the Group systems operations
services. The amounts in respect of these services payable by the Group during the year were £147 million (2001 – £116 million), of which £5
million was outstanding at the year end (2001 – £11 million). On 19 August 2002 the Group served notice of contract severance to IBM United
Kingdom (Systems Operations) Limited. There is a one year notice period contained in the contract.
54. Main Joint Ventures and Associated Undertakings

Statutory Principal
Nature of Group’s Accounts Area of
Business Issued Share and Loan Capital Interest Made up to Operations
Incorporated in the UK
Joint Ventures:-
Centrica Personal Finance Finance ordinary £3,000,002 50.0% December 2002 UK
Limited loan £4,500,000 50.0%
RFS Limited Finance ordinary £6,000,006 50.0% December 2002 UK
Lex Vehicle Leasing (Holdings) Ltd
and its subsidiaries Vehicle Leasing ordinary £16,900,002 50.0% December 2002 UK
Halifax Cetelem Credit Ltd Consumer Credit ordinary £34,000,000 50.0% December 2002 UK
esure Holdings Ltd
and its subsidiaries Insurance ordinary £3,330,000 70.0% December 2002 UK
Associated Undertaking:-
Sainsbury’s Bank plc Banking ordinary £130,000,000 45.0% February 2002* UK
loan £25,000,000 45.0%
* The accounts of Sainsbury’s Bank plc have been equity accounted in the Group’s consolidated accounts on the basis of accounts prepared for the year to 31 December 2002.
All the above are held by subsidiary undertakings.
The Group also holds 100% of the preference shares issued by esure Holdings Ltd and 50% of the preference shares issued by Lex Vehicle
Leasing (Holdings) Ltd.
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 112
55. Main Subsidiary Undertakings

Company’s Interest
in Ordinary
Share Capital and
Voting Rights Principal Business Incorporated
The Governor and Company of the Bank of Scotland 100%† Banking, financial and related services UK
and subsidiaries, including
HBOS Treasury Services PLC 100% Banking UK
Bank of Western Australia Ltd 56.8% Retail and commercial banking Australia
CAPITAL BANK plc 100%* Banking and personal finance UK
Halifax plc 100%Ø Banking UK
Halifax Share Dealing Ltd 100% Execution only stockbroking UK
HBOS Insurance & Investment Group Ltd 100% Investment holding UK
and subsidiaries, including
Halifax General Insurance Services Ltd 100% General insurance brokerage UK
Clerical Medical Investment Group Ltd 100% Life assurance UK
Halifax Financial Services Ltd 100% Financial services UK
Halifax Investment Funds Management Ltd 100% OEIC management UK
Insight Investment Management Ltd 100% Investment management UK
Halifax Unit Trust Management Ltd 100% Unit trust management UK
St. James’s Place Capital plc 60% Financial services UK
† HBOS plc holds 100% of the issued preference share capital.
* Bank of Scotland holds 100% of the issued preference share capital.
ø HBOS plc holds 75% of the issued preference share capital.
56. Transactions with Directors, Officers and Connected Persons
The aggregate amounts outstanding at 31 December 2002 in respect of loans and credit cards which were made available by the Group for
persons who are, or were during the year, Directors and officers of HBOS plc and their connected persons were:-
Aggregate
amount
outstanding
Number £000
Loans 11 2,377
Credit card accounts 12 49
57. Segmental Analysis
Business Sector
The Group reports through five divisions: Retail, Insurance & Investment, Business, Corporate, Treasury, plus BankWest and Group Items.
Profit before
Profit before Tax and 2001
Tax and 2002 Exceptional Profit
Exceptional Exceptional Profit items Exceptional before Tax
items items before Tax Restated items Restated
Retail 1,426 (28) 1,398 1,205 (25) 1,180

Insurance & Investment 589 (6) 583 472 (22) 450
Business 307 (16) 291 306 (9) 297
Corporate 681 681 523 (1) 522
Treasury 231 (9) 222 169 (2) 167
BankWest 75 75 80 80
Group Items (247) (94) (341) (240) (164) (404)
3,062 (153) 2,909 2,515 (223) 2,292
HX027 74_113_AW_v3 13/3/03 2:03 pm Page 113
57. Segmental Analysis continued

Net Assets Total Assets
2001 2001
2002 Restated 2002 Restated
Retail 4,959 4,250 161,470 138,887

Insurance & Investment 3,900 2,753 43,491 42,759
Business 1,294 1,176 26,694 21,954
Corporate 2,590 2,259 50,889 38,823
Treasury 784 764 64,000 61,866
BankWest 242 211 8,536 7,782
13,769 11,413 355,080 312,071
Geographical
The table below analyses the Group results and assets by the geographical area in which the business is generated. The geographical analysis is
prepared in accordance with the location of the relevant company or branch.
2002 2001
Rest Group
Rest Group UK of World Total
UK of World Total Restated Restated Restated
Interest receivable 15,444 1,247 16,691 14,961 1,154 16,115

Fees and commissions receivable 1,988 169 2,157 1,789 132 1,921
Dealing profits 146 8 154 77 5 82
Income from long-term assurance business 131 102 233 89 61 150
Other operating income 700 204 904 720 23 743
Gross income 18,409 1,730 20,139 17,636 1,375 19,011
Operating profit before exceptional items 2,552 450 3,002 2,195 284 2,479
Share of operating profits of joint ventures 19 (11) 8 25 (5) 20
Share of operating profits of associated undertakings 19 8 27 13 3 16
Exceptional items (153) (153) (223) (223)
Group profit before taxation 2,462 447 2,909 2,010 282 2,292
Total assets 326,949 27,678 354,627 289,233 22,492 311,725
Joint ventures 281 212
Group total assets 355,080 312,071
Net assets (excluding minority interests) 12,226 1,543 13,769 10,306 1,107 11,413
58. Post Balance Sheet Events
On 31 January 2003, Insight Investment Management Ltd, a subsidiary of HBOS plc, acquired Rothschild Asset Management for consideration of
£61 million. A review of the preliminary fair values of the net assets acquired is currently being undertaken.
Accounts in US Dollars
at $1.6119 to the £ (2001 – $1.4517 to the £)
Summary of Consolidated Balance Sheet

2001
2002 Restated
US$ million US$ million
Assets
Items in course of collection 1,762 1,427
Bills, debt securities and equity shares 81,419 67,858
Loans, advances and other accounts 415,337 318,374
Interest in associated undertakings and joint ventures 730 502
Intangible and tangible fixed assets 5,005 4,170
Total Assets 572,353 453,033
Liabilities
Deposits by banks, customers and debt securities in issue 445,898 349,125
Notes in circulation 1,323 1,070
Proposed dividends 1,215 986
Deferred taxation 1,045 710
Other liabilities and provisions 22,344 15,448
Subordinated liabilities – Dated loan capital 9,172 7,210
– Undated loan capital 5,540 4,292
546,711 433,425
Called up share capital
Ordinary shares 1,525 1,294
Reserves 20,024 14,692
Minority interests 3,448 3,041
25,642 19,608
Summary of Consolidated Profit and Loss Account

2001
2002 Restated
US$ million US$ million
Operating profit before provisions 5,933 4,268

Provisions for bad and doubtful debts (1,341) (883)
Dividends:
Preference 60 53
Ordinary 1,837 1,441
Retained profit 1,191 637
Underlying earnings per share 90.4c 69.2c
Dividends per 25p Ordinary Share 47.4c 40.6c
Accounts in Euros
at €1.5367 to the £ (2001 – €1.6380 to the £)
Summary of Consolidated Balance Sheet

2001
2002 Restated
€ million € million
Assets
Items in course of collection 1,680 1,611
Bills, debt securities and equity shares 77,620 76,566
Loans, advances and other accounts 395,962 359,231
Interest in associated undertakings and joint ventures 696 567
Intangible and tangible fixed assets 4,771 4,705
Total Assets 545,652 511,170
Liabilities
Deposits by banks, customers and debt securities in issue 425,096 393,930
Notes in circulation 1,262 1,207
Proposed dividends 1,159 1,113
Deferred taxation 996 801
Other liabilities and provisions 21,300 17,426
Subordinated liabilities – Dated loan capital 8,744 8,135
– Undated loan capital 5,282 4,844
521,206 489,046
Ordinary shares 1,454 1,461
Reserves 19,090 16,577
Minority interests 3,287 3,431
24,446 22,124
Summary of Consolidated Profit and Loss Account

2001
2002 Restated
€ million € million
Operating profit before provisions 5,657 4,816

Provisions for bad and doubtful debts (1,279) (996)
Dividends:
Preference 57 60
Ordinary 1,752 1,626
Retained profit 1,135 719
Underlying earnings per share 86.2c 78.1c
Dividends per 25p Ordinary Share 45.2c 45.9c
Shareholder Information
Financial Calendar 2003
25 Feb 2003 Final Results Announcement 2002 23 May 2003 Final Ordinary dividend 2002 payment date. CREST
12 Mar 2003 Ordinary Shares ex-dividend date accounts credited and first day of dealing in new
12-18 Mar 2003 Reference Price calculation period* Ordinary Shares
14 Mar 2003 Ordinary Shares record date 2 Jun 2003 Preference Shares dividend payment date
24 Apr 2003 Return date for receipt of Mandate Forms for the 31 Jul 2003 Interim Results Announcement 2003
Share Dividend Alternative for the final dividend 13 Aug 2003 Ordinary Shares ex-dividend date
2002 and future dividends 15 Aug 2003 Ordinary Shares record date
29 Apr 2003 Annual General Meeting 17 Oct 2003 Interim Ordinary dividend 2003 payment date
7 May 2003 Preference Shares ex-dividend date 5 Nov 2003 Preference Shares ex-dividend date
9 May 2003 Preference Shares record date 7 Nov 2003 Preference Shares record date
22 May 2003 New Ordinary Share certificates or CREST 1 Dec 2003 Preference Shares dividend payment date
entitlement statements posted
* The Reference Price of the new Ordinary Shares will be available from Wednesday 19 March 2003 on our website (www.HBOS plc.com) or by telephoning our Registrars on 0870 702 0102.
Share Dividend Alternative

Shareholders who have already completed a Mandate Form to receive their entitlement to dividends in new Ordinary Shares need take no action
as they will automatically receive new Ordinary Shares in respect of the final dividend of 19.6p per Ordinary Share for the year ended
31 December 2002. Shareholders who have not already completed a Mandate Form and also wish to participate in the Share Dividend Plan in
respect of the final dividend (and for future dividends) are required to complete and return a Mandate Form to our Registrars – Computershare
Investor Services PLC, PO Box 1910, The Pavilions, Bridgwater Road, Bristol BS99 7DZ. A Mandate Form and a copy of the Rules of the HBOS plc
Share Dividend Plan can be obtained from our Registrars by telephoning 0870 702 0102.
Share Price
For the current share price call the Halifax Share Dealing Price Line on 0901 4700 007. Calls are charged at 60p per minute at all times and
should last no longer than one minute.
Halifax Share Dealing Limited (HSDL)

To buy or sell HBOS plc shares call HSDL on 08705 711 117. If you wish to open a self select mini or maxi stocks and shares ISA with HSDL
please call 08457 22 55 25. HSDL is regulated by the Financial Services Authority, and is a member of the London Stock Exchange and is an
Inland Revenue approved PEP and ISA Manager.
Internet
Visit our home page at www.HBOSplc.com
Registered Office
HBOS plc, The Mound, Edinburgh, EH1 1YZ
Registered Number
SC218813
Share Register Analysis at 31 December 2002

Size of shareholding Number of shareholders % Number of ordinary shares %
1 – 200 1,126,572 41.85 197,034,171 5.21

201 – 1,000 1,423,788 52.90 560,051,559 14.79
1,001 – 5,000 130,996 4.87 178,622,288 4.72
5,001 – 10,000 4,729 0.18 33,850,436 0.89
10,001 – 50,000 3,679 0.14 71,926,390 1.90
50,001 – 100,000 480 0.02 33,978,249 0.90
over 100,000 1,192 0.04 2,710,180,147 71.59
Total 2,691,436 100 3,785,643,240 100
Useful Contacts
For general enquiries about your shares, call our Registrars on 0870 702 0102 or write to Computershare Investor Services PLC, PO Box 1909,
The Pavilions, Bridgwater Road, Bristol BS99 7DS.
For Investor Relations enquiries please contact either Charles Wycks on 0131 243 5509 (e-mail – CharlesWycks@HBOSplc.com), or John Hope
on 0131 243 5508 (e-mail – JohnHope@HBOSplc.com).
Cover Spread 13/3/03 2:50 pm Page 1
HBOS plc Annual Report and Accounts 2002

Annual Report and A
HBOS plc
HBOS plc
The Mound
Edinburgh
EH1 1YZ
www.HBOSplc.com ‘EVEN
MARK
THE S
DELIV
1/338143-0 HBOS

2002 Hbos Ra

Uploaded by

Copyright:

Available Formats

2002 Hbos Ra

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2002 Hbos Ra

Uploaded by

Copyright:

Available Formats

Cover Spread 13/3/03 3:04 pm Page 1

HBOS plc Annual Report and Accounts 2002

Annual Report and Accounts 2002

DAVID ROUGH INTERVIEWS

Howdo you make

DAVID ROUGH: In terms of your

DAVID ROUGH: But what about the

JAMES CROSBY: Not as a JAMES CROSBY: No – in

Do you really think

BUSINESS IN EVERY just about sales; there are all

nk you can double

Does HBOS fall fou

‘OVER THE NEXT FIVE

DAVID ROUGH: Did you

DAVID ROUGH: Fine, but what

DISTRIBUTION POWER investors simply don’t believe

WHICH MAKES THE JAMES CROSBY: Yes, but with

‘ ONE OF THE MOST

OUR NEW ORGANISATION life tougher for our competitors’

IS THE VERY HIGH always been the case. We

Profit* £3.06bn up 22%

Chairman’s Statement Our results confirm HBOS’s ability to

+22% +18% +14%

Andy Hornby, Stirling branch, Scotland. The first purpose built

Retail Banking HBOS Retail Banking has beaten all

£103.8bn total Retail

Profit before tax * 1,426 1,205 Interest in suspense £70m £63m

8 HBOS plc Annual Report & Accounts 2002

Phil Hodkinson, David MacKechnie, Personal Financial Advisor.

Insurance & Investment Sales in the second half of 2002 exceeded

9 HBOS plc Annual Report & Accounts 2002

Insurance & Investment Repayment

Financial Performance Year Year

UK’s third largest life, pensions and investment group

12 HBOS plc Annual Report & Accounts 2002

Insight Investment Management’s objective is to achieve £100bn

Colin Matthew, Salim Janmohamed, a Business Banking customer

Business Banking The sales momentum across our business has

branded branch network. We have a presence

in Contract Hire and Vehicle

Financial Performance Year Year

George Mitchell, Our Corporate Banking team was responsible for

Corporate Banking Controlled growth, improved efficiency and a

Strong Franchise term profitable relationships, through good Credit Quality

We are proud to have helped deliver over 160,000

little changed from the position as

£44.1bn total lending to

Financial Performance Year Year Year Year Balance Sheet As at As at

Gordon McQueen, Mark J Smith, Head of Institutional Sales, USA.

Treasury HBOS Treasury Services plc launched as profits grow

Banking on Treasury The business is now managed on an Securitisation

Net interest income 200 206

This predominantly internal focus As at As at

Terry Budge, Business Development Officer Mirella Addison in

BankWest Strong growth in housing lending

BankWest Foundations for Growth Financial Performance

HBOS’s investment in energy saving measures

Corporate Corporate Responsibility is an integral part of