EGG PLC
 
Overview of Group Results
 
Summary Income Statement by quarter (adopted IFRS basis) (unaudited)
 
 Q1 2005 Q4 2004 Q3 2004 Q2 2004 Q1 2004
UK  £m £m £m £m £m
 
Net Interest Income 70.8 73.3 70.4 70.1 74.0
Other Operating Income 53.8 66.3 48.3  49.9 44.7
Egg UK Operating Income 124.6 139.6 118.7 120.0 118.7
Operational and Administrative Expenses (37.1) (40.7) (39.2) (37.7) (40.6)
Brand and Marketing Costs (8.1) (12.4) (9.0) (10.6) (9.6)
Development Costs (3.7) (6.2) (5.2) (4.7) (5.9)
Depreciation and Amortisation (6.9) (7.1) (4.3) (5.6) (5.9)
Impairment Losses on Loans and Advances (58.9) (52.8) (47.1) (41.3) (41.0)
to Customers
Egg UK Operating Profit 9.9 20.4 13.9 20.1 15.7
France
Net Interest Income (0.3) 0.8 1.8 2.1 1.6
Other Operating Income 1.3 (7.0) 0.9 (0.1) -
Egg France Operating Income 1.0 (6.2) 2.7 2.0 1.6
Operational and Administrative Expenses (9.0) (10.1) (8.5) (9.9) (9.1)
Brand and Marketing Costs -  - - (0.9) (1.6)
Development Costs - - - (0.2) (0.4)
Depreciation and Amortisation - (0.4) (3.1) (1.7) (1.0)
Impairment Losses on Loans and Advances (0.3) (5.8) (3.9) (5.5) (5.1)
to Customers
Utilisation of Exit Cost Provision 9.6 15.8 10.1 - -
Egg France Operating Profit/(Loss) 1.3 (6.7) (2.7) (16.2) (15.6)
Subsidiaries/Associates/JV's (3.4) (17.6) (1.0) (0.6) (0.4)
Transaction Costs - (2.7)  (1.1) (1.3) (1.3)
Provision for France Exit Costs 3.5 - (112.8) - -
Restructuring Costs (6.3) (3.0) - 0.2 (2.3)
Group Profit/(Loss) Before Tax 5.0 (9.6) (103.7) 2.2 (3.9)
 
 
 
Note: All comparatives for 2004 have been restated to adopted IFRS basis
(excluding the impact of IAS 32 and IAS 39, which only came into effect from 1
January 2005).
Commentary on Summary Income Statement
 
 
 
Egg UK
 
 
 
Revenues
 
 
 
Net interest income in Q1 2005 was £71 million (Q4 2004: £73 million). Most of
the decrease reflects the adoption of IAS 39. The revised accounting for
incentive offers on the credit card portfolio will mean lower interest income in
periods of strong acquisition of incentive balances similar to that we have seen
in Q1. In addition the margin has been negatively affected by higher funding
costs arising from the increase in savings balances at bonus rates.
 
 
 
Non-interest income in Q1 2005 was £54 million (Q4 2004: £66 million). As we
explained in our preliminary results in February the performance in Q4 2004 was
exceptionally strong, with the previous quarterly run-rate last year averaging
£48 million. We remain confident that non-interest income for the full year
2005 will exceed that of last year.
 
 
 
Included in the Q1 2005 operating income figure is £1 million of unrealised
losses on derivatives arising from the adoption of fair value accounting under
IAS 39 which is purely a timing difference given no gain or loss is expected
over the life of the derivatives as they are economic hedges and will not be
traded.
 
 
 
The two other main factors in the £12 million reduction from Q4 2004 are the £6
million profit on disposal of investment securities that was not repeated in Q1
2005 and the reduction in commission earned on associated insurances resulting
from the lower personal loan volumes compared to the record high in Q4 2004.
Given the lower loans sales reflects our tightening of lending criteria we are
now acquiring a higher credit quality loan book and these customers have a
relatively lower propensity to buy associated insurances and therefore our
penetration rate has also reduced from 59% in 2004 to 51% in the first quarter.
 
 
 
Costs
 
 
 
Operational and administrative costs at £37 million for the quarter have reduced
by 9% over Q4 2004. In part this reduction reflects some immediate benefit from
the restructuring begun this quarter, which has been mainly targeted at the
overhead base. In addition we have been tightly managing operational
expenditure and ensuring it is focused on the core business.
 
 
 
Brand and marketing costs were £8 million (Q4 2004: £12 million). 139,000 new
Visa card accounts were opened in the quarter (Q4 2004: 119,000). This
represented an excellent performance with unit marketing acquisition costs on
Visa cards reducing to £32 each compared to £36 in Q4 2004 and £39 in the
equivalent period last year. The tactical investment in marketing bonus savings
accounts and insurance products in Q4 2004 was not repeated.
 
 
 
Development costs were £4 million for the quarter, a significant decrease from
Q4 2004 (£6 million). The decrease reflects the fact that the majority of the
investment in systems and processes in preparation for IFRS, Basel 2 and other
regulatory changes is now complete.
 
 
 
Depreciation and amortisation at £7 million is in line with expectations (Q4
2004: £7 million).
 
 
 
This strong overall cost performance has contributed to an improvement in the
cost/income ratio this quarter to 45% (Q4 2004: 48%). Moving forward we expect
to achieve further operational economies of scale as we focus on our core UK
business. The restructuring exercise is expected to deliver total annual
savings of £12 million in our overheads when finalised.
 
 
 
Impairment for Losses on Loans and Advances to Customers
 
 
 
The Q1 charge for impairment of £59 million was in line with our expectations
given the strong growth in card balances in the quarter, the stage in life cycle
of the loan book and IFRS accounting changes in the treatment of suspended
interest which increases both impairment and interest income compared to UK
GAAP. The impairment charge as a percentage of 12 month lagged assets in the
overall unsecured portfolio remained consistent at 3.9% (Q4 2004: 3.8%). Moving
forward we expect the impact of our decision to tighten lending criteria, allied
to the fact that the personal loan book will have matured further, should see
both the absolute charge and the charge as a percentage of lagged assets start
to reduce over the second half of the year.
 
 
 
At the period end, impairment provisions on the balance sheet represented 3.3%
of assets compared to 3.2% in December 2004.
 
 
 
 
 
Egg France and Provision for Exit Costs
 
 
 
 
 
We now expect the final costs of exiting our French business to be lower than
the £113 million (€170 million) provision made in July 2004. £106 million (€159
million) of this provision has now been utilised and the updated estimate of
total closure costs is £110 million (€165m). We are therefore releasing £3.5
million (€5 million) of the provision this quarter.
 
 
 
The IFRS accounts include a £6.7 million loss in Q4 2004 and £1.3 million profit
in Q1 2005 within other income in respect of foreign exchange gains and losses
on translation of the French balance sheet and profit and loss account (which
previously were accounted for through reserves). These did not form part of the
exit costs provision.
 
 
 
 
 
Subsidiaries/Associates/JV's
 
 
 
The £3.4 million net loss in Q1 primarily reflects the exit costs provision in
respect of Funds Direct.
 
 
 
Restructuring Costs
 
 
 
As previously indicated, we are close to completing our review of our total cost
base, and in particular the overhead functions, in light of our exit from France
and the renewed focus on our core UK business. This review is almost complete
and by the end of the first quarter £6.3 million of costs had been incurred or
accrued in respect of people who have exited the business.
 
 
 
We have now almost completed the review, which has included the Executive
structures at Egg and resulted in the Board changes announced separately today.
We expect the additional restructuring costs, which will be recognised in Q2
2005, will amount to approximately £3.5 million.
 
 
 
The estimated annual savings resulting from this reorganisation is £12 million
of which approximately £7 million will benefit the 2005 income statement.
 
 
 
 
 
 
Egg UK
 
 
 
Product Information
 
 
 
 
 31 Mar 31 Mar 31 Dec
 
  2005 2004 2004
 
 
Product balances £m £m £m
 
Egg Card  3,783 3,010 3,578
Egg Personal Loans 2,690 2,015 2,618
Total Unsecured Lending 6,473 5,025 6,196
 
Egg Mortgages 1,132 1,181 1,102
Prudential Mortgages 561 738 591
Total Secured Lending  1,693 1,919 1,693
 
 Egg Savings 6,554 6,117 6,215
 Prudential Savings 124  161 121
 Total Retail Liabilities 6,678 6,278 6,336
 
 
 
 
Unsecured Lending
 
 
 
Net lending balance growth was £277 million (Q1 2004: £238 million). Credit
card balance growth was a £205 million (5.7%) net increase in the first quarter,
a strong result when compared with the same period last year when balances
reduced by £5m. It is also encouraging against the background of industry
balances reducing by 0.6% in January and February. 154,000 new card accounts
were opened of which nearly 15,000 were MasterCard.
 
 
 
Personal loan disbursements were £442m in the quarter. This is a solid
performance, but as expected, is a reduction on the record loan volumes achieved
in 2004 and reflects our decision, indicated in our preliminary results
announcement to tighten lending criteria.
 
 
 
 
Savings
 
 
 
Q1 2005 saw a strong net inflow on Egg deposits of £339 million as compared with
an outflow of £47m in the same period last year. This was driven by the success
of Egg's latest bonus account offering. Retail liabilities are an important
element to Egg's overall funding strategy and the success in Q1 means that we
now have a strong liquidity position and we expect margins to increase over the
remainder of the year as the impact of the bonus rates unwinds.
 
 
 
Other Products
 
 
 
Customers are continuing to show demand for a broad range of Egg branded
products. In the period from end Q1 2004 to end Q1 2005, the total number of
these products (other than our main acquisition product, the Visa card) sold by
Egg has increased by 34%. This represents an increase in the number of these
products held as a proportion of Visa card accounts from 50% to 58% over the
period. The vast majority of these additional Egg products are cross-sold to
existing customers. If we also include cross-sales of associated insurances on
loans and cards the percentage of other products as a proportion of Visa cards
rises to 97%. These figures demonstrate the increasing ability to cross sell,
the propensity of existing customers to take additional products and the
continuing attractiveness of Egg's brand.
 
 
 
Capital
 
 
 
Egg's total capital ratio was 12.9% as at 31 March 2005 (31 December 2004:
12.5%). The increase in the ratio over the year end position primarily reflects
a further £250 million of credit card securitisation in the quarter.
 
 
Independent review report by KPMG Audit plc to Egg plc
 
 
 
Introduction
 
We have been engaged by the Group to review the financial information set out on
pages 12 to 58 for the three months ended 31 March 2005, and we have read the
other information contained in the interim report and considered whether it
contains any apparent misstatements or material inconsistencies with the
financial information.
 
This report is made solely to the Company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the Company
for our review work, for this report, or for the conclusions we have reached.
 
Directors' responsibilities
 
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules which require that the accounting policies and presentation applied to the
interim figures should be consistent with those applied in preparing the
preceding annual accounts except where any changes, and the reasons for them,
are disclosed.
 
The next annual financial statements of the Group will be prepared in accordance
with those IFRSs adopted for use by the European Union.
 
The accounting policies that have been adopted in preparing the financial
information are consistent with those that the directors currently intend to use
in those next annual financial statements.
 
Review work performed
 
We conducted our review in accordance with guidance contained in Bulletin 1999/4
Review of interim financial information issued by the Auditing Practices Board
for use in the United Kingdom. A review consists principally of making
enquiries of management and applying analytical procedures to the financial
information and underlying financial data and based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review is substantially less in scope than an audit
performed in accordance with Auditing Standards and therefore provides a lower
level of assurance than an audit. Accordingly, we do not express an audit
opinion on the financial information.
 
 
 
 
 
Emphasis of matter
 
Without qualifying our review conclusion, we draw your attention to the
following matter. As the basis of preparation note to the financial information
explains there is a possibility that the directors may determine that some
changes to these accounting policies are necessary when it prepares the full
annual financial statements for the first time in accordance those IFRSs adopted
for use by the European Union.
 
 
 
Review conclusion
 
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the three months
ended 31 March 2005.
 
KPMG Audit Plc
 
Chartered Accountants
 
 
 
 
27 April 2005
 
 
 
 
 
 
FINANCIAL INFORMATION
 
 
 
Financial results prepared in accordance with International Financial Reporting
Standards adopted for use in the European Union for the three months ended 31
March 2005 and for the year ended 31 December 2004.
 
 
 
Introduction
 
 
 
Following the adoption of IAS Regulation EC 1606/2002 on the 19 July 2002 by the
European Parliament, Egg plc ('the Group'), along with all other European listed
entities, will be required to prepare consolidated financial statements in
accordance with International Financial Reporting Standards ('IFRS') as endorsed
by the European Union ('EU') for years beginning 1 January 2005.
 
 
 
The Group will apply IFRS for the year ended 31 December 2005, and will prepare
one year's of comparative figures under IFRS. Accordingly, the Group's date of
transition to IFRS is 1 January 2004 and its first reporting period under IFRS
is for the three months ended 31 March 2005. This report therefore contains the
consolidated financial results for the 3 months ended 31 March 2005 on the basis
of IFRS, and comparatives for the 3 months ended 31 March 2004 and for the year
ended 31 December 2004 restated to IFRS.
 
 
 
To assist with the understanding of the impact of transition from UK GAAP to
IFRS, the Group has presented the Consolidated Statement of Changes in Equity on
pages 19 and 20 and further reconciliations in Appendix 1.
 
 
 
Basis of preparation
 
 
 
EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidated
financial statements of the Group for the year ended 31 December 2005 be
prepared in accordance with IFRS adopted by the EU (adopted IFRS).
 
The financial information has been prepared on the basis of recognition and
measurement requirements of IFRS in issue that are either endorsed by the EU and
effective, or are expected to be endorsed and effective at 31 December 2005, the
Group's first annual reporting date at which they are required to use adopted
IFRS. Based on these adopted and unadopted IFRSs, the Directors have made
assumptions about the accounting policies to be applied, as detailed in the
description of accounting policies set out below.
 
In particular the directors have assumed that the amendment to IAS 19 'Employee
Benefits - Actuarial Gains and Losses' issued by the IASB will be fully adopted
by the EU and therefore available for use in the annual IFRS Financial
Statements for the year ended 31 December 2005.
 
In respect of financial instruments, the Group's policy has been to adopt IAS 32
'Financial Instruments: Disclosure and Presentation' and 39 'Financial
Instruments: Recognition and Measurement' from 1 January 2005, except as
restricted by the European Commissions Accounting Regulatory Committee.
Comparatives for 2004 have not been restated to reflect the requirements of IAS
32 and IAS 39 and, as permitted by IFRS 1, are accounted for under UK GAAP in
accordance with the accounting policies set out in the annual financial
statements for the year ended 31 December 2004.
 
In addition, the adopted IFRSs that will be effective or available for voluntary
early adoption in the annual financial statements for the year ended 31 December
2005 are still subject to change and to the issue of additional interpretations
and therefore cannot be determined with certainty. Accordingly, the accounting
policies for the annual period that are relevant to this interim financial
information will be determined only when the annual financial statements are
prepared for the year ended 31 December 2005.
 
The comparative figures for the financial year ended 31 December 2004 are not
the Group's statutory accounts for that financial year. Those accounts, which
were prepared under UK GAAP in accordance with the Companies Act 1985, have been
reported on by the Company's auditors and delivered to the registrar of
companies. The report of the auditors was unqualified and did not contain
statements under section 237(2) or (3) of the Companies Act 1985.
 
 
 
Transitional arrangements
 
 
 
On transition to IFRS, an entity is generally required to apply IFRS
retrospectively, except where an exemption is available under IFRS 1 'First-time
Adoption of International Financial Reporting Standards'. The following is a
summary of the key elections from IFRS 1 that were made by the Group:
 
 
 
 • The Group has elected to adopt the IFRS 1 exemption in relation to
 business combinations and will only apply IFRS 3 'Business Combinations'
 prospectively from 1 January 2004. As a result, the balance of goodwill
 under UK GAAP as 31 December 2003 will be deemed the cost of goodwill at 1
 January 2004.
 • The Group has elected to adopt the IFRS 1 option to reset foreign currency
 cumulative translation reserves to zero on transition to IFRS.
 
 
 
Furthermore, the Group has adopted the exemption in IFRS 1 to not prepare
comparative information in accordance with IAS 32 'Financial Instruments:
Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and
Measurement'. These standards will therefore only apply from 1 January 2005 and
in the comparative figures for the year ended 31 December 2004, financial
instruments will continue to be accounted for on a UK GAAP basis. The Group has
also elected to adopt IFRS 5 'Non-current Assets Held for Sale and Discontinued
Operations' from 1 January 2005.
 
 
 
 
 
 
Consolidated income statement (unaudited)
 Three months Three months ended Year ended 31
  ended 31 March 31 March 2004 December 2004
 2005
 Notes £m £m £m
Continuing operations:
 
Interest income 252.2 211.8 902.8
Interest expense (181.4) (137.8) (615.4)
Net interest income 70.8 74.0 287.4
Fee and commission income 54.4 52.1 220.7
Fee and commission expense  (4.2) (9.9) (25.2)
Net fee and commission income 50.2 42.2 195.5
Net trading income  2.9 - -
Other operating income 0.7 2.5 14.7
Operating income 124.6 118.7  497.6
Administrative expenses
 - personnel expenses (24.3) (22.4) (92.7)
- depreciation and amortisation (6.9) (5.9) (22.2)
 - other administrative expenses (30.9) (35.7) (139.3)
 (62.1) (64.0) (254.2)
Impairment losses on loans and advances to
customers 2 (58.9) (41.0) (182.4)
 
Operating profit 3.6 13.7 61.0
Share of operating (loss)/profit of joint venture (0.1) 0.3 0.3
 
 
Share of associate losses - (0.1) (0.4)
Profit on continuing ordinary activities before
tax 3.5 13.9 60.9
 
Tax charge on profit on continuing ordinary
activities 3 (0.3)  (5.7) (24.7)
 
Profit on continuing ordinary activities after
tax 3.2 8.2 36.2
 
Discontinued operations:
Profit/(loss) on discontinued ordinary activities
after tax 4 5.0 (12.9) (137.2)
 
Retained profit/(loss) for the period 8.2 (4.7) (101.0)
 
 
Consolidated income statement (continued) (unaudited)
 
 
 Three months Three months ended Year ended 31
 ended 31 March 31 March 2004 December 2004
 2005
 Notes £m £m £m
Attributable to:
 
Equity holders of the parent  9.0 (4.6) (99.7)
Minority interests (0.8) (0.1) (1.3)
 
 
 Pence per share Pence per share Pence per share
Consolidated earnings/(loss) per share
 
Basic 5 1.1 (0.6) (11.3)
Diluted 5  1.1 (0.6) (11.3)
Continuing earnings per share
Basic 5 0.4 1.0 4.6
Diluted 5  0.4 1.0 4.6
 
 
Consolidated balance sheet (unaudited)
 
 
 31 March 31 March 31 December
  2005 2004 2004
 £m £m £m
Assets
Cash and balances with central banks 14.3  13.2 14.0
Loans and advances to banks 483.7 268.6 615.9
Securities purchased under agreement to resell 321.5
 
  - 319.4
Investment securities 3,298.8 3,557.6 3,119.7
Derivative financial instruments 48.9  10.3 16.0
Loans and advances to customers 7,917.3 6,864.0 7,642.0
Prepayments and accrued income 10.5 64.0 58.3
Investments in joint venture and associate 9.9
 6.5 6.3
Property, plant and equipment 48.0  56.1 48.0
 
 
 
Intangible assets 44.5 44.9 49.0
Deferred tax 35.6 23.9  28.9
Other assets 98.6 326.4 130.6
Total assets 12,331.6 11,235.5 12,048.1
 
 
Consolidated balance sheet (unaudited) (continued)
 
 
 31 March 31 March 31 December
 
 2005 2004 2004
  £m £m £m
Liabilities
 
Deposits by banks 2,548.8 1,613.5 2,352.0
Securities sold under agreements to repurchase -
 
 239.2 130.5
Customer accounts 6,839.8 6,408.8  6,607.4
Investment securities in issue 1,605.6 1,581.6 1,806.5
Derivative financial instruments 57.2 11.2 17.5
Other liabilities  385.4 347.6 110.5
Accruals and deferred income 87.9 147.5 215.0
Provisions for liabilities and charges  4.9 - 16.8
Subordinated liabilities
 - Dated loan capital 459.9 450.8 450.8
Total liabilities 11,989.5 10,800.2 11,707.0
Shareholders' equity
Called up share capital 412.2 411.8 412.2
Share premium account 111.0  110.4 111.0
Capital reserve 359.7 359.7 359.7
Other reserves 5.6 0.2 (0.5)
Accumulated losses (545.5) (447.9) (541.2)
Total equity attributable to the equity holders 343.0
of the parent
  434.2 341.2
Minority interests (equity) (0.9) 1.1 (0.1)
Total equity 342.1 435.3  341.1
Total equity and liabilities 12,331.6 11,235.5 12,048.1
 
 
Consolidated statement of changes in equity (unaudited)
 
 
 Attributable to equity holders of the Group Minority Total
 Called up Share Capital Other Accumulated interest
 share premium reserve reserves losses
  capital account
 Note £m £m £m £m £m £m £m
 
Changes in equity for the
three months ended 31 March
2004:
 
Balance at 1 January 2004 as
previously reported under UK
GAAP 410.3 107.5 359.7 - (445.1) 1.2 433.6
 
 
Changes upon transition to - - - - 0.5(1) - 0.5
IFRS
 
Restated balance under IFRS 410.3 107.5 359.7 - (444.6) 1.2 434.1
 
Exchange differences on
foreign currency translations - - - 0.2 -  - 0.2
 
Net gain recognised directly
in equity - - - 0.2 - - 0.2
 
Loss for the period - - - - (4.6) (0.1) (4.7)
 
Total recognised income and
expense for the period - - - 0.2 (4.6) (0.1) (4.5)
 
Increase in share capital 1.5 - - -  - - 1.5
 
Increase in share premium - 2.9 - - - - 2.9
 
Share-based payment
adjustment to reserves - - - -  0.4 - 0.4
 
Awards under incentive - - - - 0.9 - 0.9
schemes
 
Balance at 31 March 2004 411.8 110.4 359.7 0.2 (447.9)  1.1 435.3
 
 
Changes in equity for the
year ended 31 December 2004:
 
Balance at 1 January 2004 as
restated under IFRS 410.3 107.5 359.7 - (444.6) 1.2 434.1
 
Exchange differences on
foreign currency translations - - - (0.5) - - (0.5)
 
Net loss recognised directly
in equity - - - (0.5) - - (0.5)
 
Loss for the year - - - - (99.7) (1.3) (101.0)
 
Total recognised expense for
the year - - - (0.5) (99.7) (1.3) (101.5)
 
Increase in share capital 1.9 - - - - - 1.9
 
Increase in share premium - 3.5 - - - - 3.5
 
Share-based payment
adjustment to reserves - - - - 2.3 - 2.3
 
Awards under incentive - - - - 0.8 - 0.8
schemes
 
Balance at 31 December 2004 412.2 111.0 359.7 (0.5) (541.2) (0.1) 341.1
 
 
Consolidated statement of changes in equity (unaudited) (continued)
 
 
 Attributable to equity holders of the Group Minority Total
 Called up Share Capital Other Accumulated interest
 share premium reserve reserves losses
  capital account
 Note £m £m £m £m £m £m £m
Changes in equity for the
three months ended 31 March
2005:
 
Balance at 31 December 2004  412.2 111.0 359.7 (0.5) (541.2) (0.1) 341.1
 
Changes in accounting policy
(adoption of IAS 32 and IAS
39) Appendix 2 - - - (0.9) (14.4) - (15.3)
 
Restated balance 412.2 111.0 359.7 (1.4) (555.6) (0.1) 325.8
 
Available-for-sale
investments: - - - 3.2 - - 3.2
 
Valuation gains taken to
equity
Cash flow hedges:
 
Gains taken to equity - - - 2.9 - - 2.9
 
Exchange differences on
foreign currency translations - -  - 0.9 - - 0.9
 
Net income recognised
directly in equity - - - 7.0 - - 7.0
 
Profit/(loss) for the period - -  - - 9.0 (0.8) 8.2
 
Total recognised income and
expense for the period - - - 7.0 9.0 (0.8) 15.2
 
Share-based payment
adjustment to reserves  - - - - 1.1 - 1.1
 
Balance at 31 March 2005 412.2 111.0 359.7 5.6 (545.5) (0.9) 342.1
 
 
Consolidated cash flow statement (unaudited)
 
 
  Three months ended Three months ended Year ended 31
 31 March 2005 31 March 2004 December 2004
  Note £m £m £m
Cash flows from operating activities
Continuing operations:
 
Operating profit before taxation 3.6 13.7 61.0
 
Adjusted for:
 
Depreciation, impairment and amortisation 7.1 8.5 28.4
 
Impairment losses on loans and advances to
customers 13.0 16.6  70.1
 
Gain on sale of investment securities - (1.5) (7.5)
 
Net (increase)/decrease in operating
assets:
 
Loans and advances to banks (189.0)  (47.7) 54.8
 
Derivative financial instruments (16.0) - -
 
Loans and advances to customers (266.8) (110.2) (1,115.6)
 
Securities purchased under agreement to (1.3) - (319.4)
resell
 
Accrued income and prepayments 0.1 10.8 16.9
 
Other assets  70.0 (35.6) 99.4
 
Net increase/(decrease) in operating
liabilities:
 
Deposits by banks 237.6 (45.7) 772.3
 
Securities sold under agreements to (131.0) (590.0) (698.7)
repurchase
 
Customer accounts 414.5 (34.5) (53.0)
 
Investment securities in issue (209.5) 158.7 383.6
 
Accruals and deferred income (14.4) (5.3) 29.6
 
Derivative financial instruments  7.2 - -
 
Other liabilities 226.4 28.9 (133.6)
 
Subordinated liabilities 6.7  - -
 
Group relief/(taxation paid) 2.7 (1.8) 14.1
 
Net cash inflow/(outflow) from continuing
operating activities 160.9 (635.1) (797.6)
 
Discontinued operations:
 
Net cash (outflow)/inflow from discontinued
operating activities (168.5) 12.1 76.2
 
Total net cash inflow/(outflow) from
operating activities 22.1 (623.0) (721.4)
 
 
 
Consolidated cash flow statement (unaudited) (continued)
 
 
 Three months ended Three months ended Year ended 31
 31 March 2005 31 March 2004 December 2004
 Note £m £m £m
Cash flows from investing activities
Continuing operations:
 
Purchase of property, plant and equipment (3.3) (6.2) (13.1)
Disposal of property, plant and equipment -  (1.2) -
Purchase of software intangibles (3.4) (0.6) (37.7)
Purchase of investment securities (3,481.0) (1,377.6) (6,447.5)
Disposal of investment securities 3,307.2 1,941.1 7,435.3
Net cash (outflow)/inflow from continuing
investing activities (180.5) 555.5 937.0
 
Discontinued operations:
 
Net cash inflow from discontinued investing
activities 19.4 1.1 90.6
 
Total net cash (outflow)/inflow from
investing activities  (161.1) 556.6 1,027.6
 
 
 
Cash flows from financing activities
Continuing operations:
 
Proceeds from issue of share capital - 4.4 5.4
Net cash inflow from continuing financing
activities - 4.4 5.4
 
Discontinued operations:
 
Net cash inflow from discontinued financing
activities  - - -
 
Total net cash inflow from financing
activities - 4.4 5.4
 
(Decrease)/increase in cash and cash
equivalents in the period (168.7) (62.0) 311.6
 
Cash and cash equivalents at the beginning
of the period 6 627.7 322.9  322.9
 
Exchange adjustments 1.6 1.8 (6.9)
Cash and cash equivalents at the end of the
period 6 460.6  262.7 627.6
 
 
NOTES TO THE FINANCIAL INFORMATION
 
 
 
1. Significant accounting policies
 
 
 
The following is a list of the Group's key accounting policies under IFRS. As a
result of the Group's decision to adopt the IFRS 1 exemption and not restate
comparatives for IAS 32 and IAS 39, certain accounting policies will only apply
from 1 January 2005 and not to the 2004 comparatives. These policies have been
denoted with an asterisk.
 
 
 
Basis of consolidation
 
The financial information of the Group incorporates the assets, liabilities, and
results of the Company and its subsidiary undertakings (including Special
Purpose Entities) to 31 March 2005. Subsidiary undertakings are all entities
over which the Group has the power to govern its financial and operating
policies so as to obtain benefits from their activities. Inter-company
transactions and balances are eliminated upon consolidation.
 
 
 
Associated undertakings and joint ventures
 
An associate is an entity that is neither a subsidiary nor a joint venture, in
which the Group has the power to exercise significant influence regarding the
financial and operating policy decisions of the investee. A joint venture is a
long term contractual arrangement between the Group and one or more other
parties to undertake an economic activity in which the investing parties
exercise joint control.
 
 
 
The Group's share of the profits net of losses of associates and of joint
ventures are included in the consolidated income statement on an equity
accounting basis and its interest in their net assets is included in investments
in the consolidated balance sheet by reference to its equity holdings. When the
Group's share of losses exceeds its interest in an associate or joint venture,
the Group's carrying amount is reduced to nil and recognition of further losses
is discontinued.
 
 
 
Financial instruments *
 
The Group classifies its financial assets (excluding derivatives) as either
loans and receivables or available-for-sale. Other than derivatives, the Group
does not classify any of its financial assets as fair value through profit or
loss or held-to-maturity.
 
 
 
The Group measures all of its financial liabilities at amortised cost, other
than those derivative financial instruments which have been designated as part
of a hedging relationship (see below).
 
 
 
a) Loans and receivables and financial liabilities at amortised cost
 
The Group's loans and advances to customers are classified as loans and
receivables. Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active market, and
whose recoverability is based solely on the credit risk of the issuer. The
Group measures both its loans and receivables and financial liabilities (other
than derivatives designated as part of a hedging relationship) at amortised
cost, whereby the principal balance is the amount at initial recognition, less
any principal repayments and impairment and adjusted for the cumulative
amortisation calculated using the effective interest method. The effective
interest method is a method whereby estimated future cash payments or receipts
are discounted through the expected life of the financial instrument.
 
 
 
b) Available-for-sale financial assets
 
Available-for-sale financial assets are non-derivative assets, principally but
not exclusively investment securities, intended to be held for an indefinite
period of time. The Group measures these assets at fair value, with subsequent
changes in fair value being recognised in equity except for impairment losses
and foreign exchange gains and losses which are recognised in the income
statement. Upon derecognition of the asset, or where there is objective
evidence that the investment security is impaired, the cumulative gains and
losses recognised in equity are removed from equity and recycled to the income
statement.
 
 
 
Impairment losses on loans and advances to customers *
 
The Group assesses its financial assets or groups of financial assets for
objective evidence of impairment at each balance sheet date. An impairment loss
is recognised if, and only if, there is a loss event (or events) that has
occurred after initial recognition and has a reliably measurable impact on the
estimated future cash flows of the financial assets or groups of financial
assets.
 
 
 
a) Assets held at amortised cost
 
Where the financial asset(s) is carried at amortised cost, the Group measures
the amount of the impairment loss by comparing the carrying amount of the asset
with the present value of its estimated future cash flows.
 
 
 
In estimating the future cash flows, the Group looks at the expected cash flows
of the assets and applies historical loss experience of assets with similar
credit risks which have been adjusted for conditions in the historical loss
experience which no longer exist. The estimated future cash flows are
discounted using the financial asset's original or variable effective interest
rate and exclude credit losses that have not yet been incurred.
 
 
 
The amount of the impairment loss is recognised immediately through the income
statement and a corresponding reduction in the value of the financial asset is
recognised through the use of an allowance account.
 
 
 
b) Available-for-sale financial assets
 
For available-for-sale financial assets, the Group assesses at each balance
sheet date whether there is objective evidence that a financial asset or group
of financial assets are impaired. The amount of the loss is measured as the
difference between the asset's carrying amount and the present value of
estimated future cash flows. The rate used to discount the cash flows is the
original effective interest rate on the available-for-sale financial asset(s).
The amount of the impairment loss is recognised in the income statement. This
includes cumulative gains and losses previously recognised in equity which are
now recycled from equity to the income statement.
 
 
 
Derivative financial instruments and hedge accounting *
 
a) Derivative financial instruments
 
The Group undertakes transactions in derivative financial instruments, which
include currency swaps, interest rate swaps, interest rate caps, forward rate
agreements, options, credit derivatives and similar instruments, for non-trading
purposes.
 
 
 
The Group's derivative activities are entered into for the purpose of matching
or eliminating risk from potential movements in interest rates inherent in the
Group's assets, liabilities and positions or for the purpose of reducing credit
risk inherent in the Group's balance sheet. All derivative transactions
(including foreign exchange and credit) are for economic hedging purposes and so
it is therefore decided at the outset which position the derivative will be
hedging. Derivatives are reviewed regularly for their effectiveness as hedges
and corrective action taken, if appropriate.
 
 
 
Where the derivative has not been designated as a hedge or does not qualify for
a hedging relationship in accordance with IAS 39, the derivative is initially
measured at fair value, and re-measured at fair value at each balance sheet
date, with the changes in the fair value of the derivative being recognised
through the income statement. Fair values are based on quoted market prices in
active markets, and where these are not available, using valuation techniques
such as discounted cash flow models.
 
 
 
Where the fair value of the derivative is positive, the derivative is recognised
on balance sheet as a financial asset. Conversely, where its fair value is
negative, the derivative is recognised on balance sheet as a financial
liability.
 
 
 
b) Cash flow hedges
 
Where relevant, the Group has elected to designate its derivatives as hedges
against the exposure to variability in cash flows of its recognised assets and
liabilities, with the effective part of any gain or loss on the derivative
financial instrument recognised directly in equity. At inception, the Group
formally designates the hedge, documenting the nature of the hedging
relationship, the risk management objective and the strategy for undertaking the
hedge.
 
 
 
Derivatives designated as hedges are tested for effectiveness on inception of
the hedge relationship and on an ongoing basis. The ineffective part of any gain
or loss is recognised in the income statement immediately. Any gain or loss
arising from changes in the time value of the derivative is excluded from the
measurement of the hedge effectiveness and is recognised in the income
statement.
 
 
 
Cumulative amounts recognised through equity are taken to the income statement
in the period in which the underlying hedged item matures and its associated
gain or loss affects the income statement. Cumulative amounts recognised
through equity are also taken to the income statement in the period in which the
hedging relationship is broken or the hedge becomes ineffective.
 
 
 
The Group has not designated its derivatives as any other type of hedge in
accordance with IAS 39.
 
 
 
c) Embedded derivatives
 
Certain derivatives are embedded within other non-derivative host financial
instruments to create a hybrid instrument. Where the economic characteristics
and risks of the embedded derivatives are not closely related to the economic
characteristics and risk of the host instrument, and where the hybrid instrument
is not measured at fair value, the Group separates the embedded derivative from
the host instrument and measures it at fair value with the changes in fair value
recognised in the income statement. Depending on the classification of the host
instrument, the host is then measured in accordance with the relevant
requirements of IAS 39.
 
 
 
Offsetting financial instruments *
 
Financial assets and their related liabilities are presented gross within the
relevant headings in the Group balance sheet, unless there is a legally
enforceable right to offset and there is an intention to settle net in which
case the assets and liabilities are presented net.
 
 
 
Derecognition of financial assets and liabilities *
 
The Group's policy is to derecognise financial assets only when the contractual
right to the cash flows from the financial asset expire. The Group also
derecognises financial assets that it transfers to another party provided the
transfer of the asset also transfers the right to receive the cash flows of the
financial asset. Where the transfer does not result in the Group transferring
the right to receive the cash flows of the financial assets, but it does result
in the Group assuming a corresponding obligation to pay the cash flows to
another recipient, the financial assets are also accordingly derecognised.
 
 
 
The Group derecognises financial liabilities only when the obligation specified
in the contract is discharged, cancelled or has expired.
 
 
 
Investment securities *
 
On initial recognition, debt issued is measured at its fair value net of
transaction costs directly attributable to the debt issued, in accordance with
IAS 39. Subsequent measurement is at amortised cost using the effective
interest rate method to amortise incremental attributable issue and transaction
costs over the life of the instrument.
 
 
 
Interest income and expense recognition *
 
Interest income and interest expense on loans and receivables and liabilities
held at amortised cost are recognised on an effective yield basis, inclusive of
transactions costs and fees, and discounts and premiums where appropriate. As
previously described, the effective interest method is a method whereby
estimated future cash payments or receipts are discounted over the expected life
of the financial instrument.
 
 
 
 
 
Share-based payments
 
Share-based payments are accounted for on a fair value basis. The Group
measures the fair values of the Save-As-You-Earn schemes using the Black-Scholes
model and the fair value of all other share-based payment schemes including the
Restricted Share Plans (RSPs) using a Present Economic Value (binomial) model.
The fair value is then recognised in the income statement over the relevant
vesting period and adjusted for lapses, with the number of shares expected to
lapse estimated at each balance sheet prior to the vesting date, with the
corresponding increase recognised in equity. The only exception is where the
share-based payment has vesting outcomes attached to market based performance
conditions such as in the case of some of the RSPs. Under these circumstances,
additional modelling is required to take into account these market based
performance conditions which effectively estimate the number of shares expected
to vest. No subsequent adjustment is then made to the fair value charge for
shares that do not vest in the event that these performance conditions are not
met.
 
 
 
In accordance with the transitional provisions of IFRS 2 'Share-based Payments',
the Group has only applied the requirements of the standard to share-based
payments granted after 7 November 2002.
 
 
 
Property, plant and equipment
 
Buildings, leasehold improvements, fixtures and fittings, plant and equipment,
computer equipment and other tangible assets are stated at cost, less any
accumulated depreciation. The Group recognises in the carrying amount of an
item of property, plant and equipment the cost of replacing part of such an item
when that cost is incurred if it is probable that the future economic benefits
embodied with the item will flow to the Group and the cost of the item can be
measured reliably. All other costs are recognised in the income statement as an
expense as incurred.
 
 
 
Costs capitalised are depreciated to their estimated residual values in equal
annual instalments over their estimated useful lives, as follows:
 
 
 
Buildings 25 to 50 years
 
Leasehold improvements 10 years
 
Fixtures and fittings 10 years
 
Plant and equipment 3 - 10 years
 
Computer equipment 3 to 5 years
 
Land is stated at cost and is not depreciated. Assets under construction are
not depreciated until they are brought into commercial use.
 
 
 
Intangible assets
 
a) Goodwill
 
Goodwill is stated at cost less any accumulated impairment losses. On
acquisition of a business, goodwill arises where the consideration given exceeds
the fair values attributed to the net assets acquired. The goodwill is
capitalised and is subject to an annual impairment review and also when there
are indications of impairment.
 
 
 
Prior to 31 December 2003, purchased goodwill was capitalised and amortised on a
straight-line basis, over the investment's estimated useful life, assessed on an
individual basis. Impairment reviews were carried out only as was appropriate.
Amortisation of goodwill ceased from 1 January 2004.
 
 
 
b) Computer software
 
Costs incurred in the development of computer software for internal use are
capitalised as intangible assets where the software leads to the creation of an
identifiable non-monetary asset and it is probable that the expected future
economic benefits that are attributable to the asset will flow to the Group.
The software is classified as an intangible asset where it is not an integral
part of the related hardware and amortised over its estimated useful life which
is generally 3 to 5 years.
 
 
 
Cash and cash equivalents
 
For the purposes of the cash flow statement, cash and cash equivalents comprise
balances with less than three months' maturity from the date of acquisition,
including cash and non-restricted balances with central banks.
 
 
 
Provisions
 
The Group recognises a provision when there is a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation,
and the amount has been reliably estimated.
 
 
 
 
Taxation
 
Income tax payable is charged on all taxable profits arising in the accounting
period.
 
 
 
Deferred tax is calculated on all taxable temporary differences arising on the
differences between the tax bases of assets and liabilities and their carrying
amounts in the consolidated financial statements. Deferred tax assets and
liabilities are recognised at gross on the balance sheet and deferred tax assets
are recognised only to the extent that it is probable that future taxable
profits will be available against which the temporary differences can be
utilised. Deferred taxes are determined using the rates enacted or
substantively enacted at the balance sheet date.
 
 
 
The deferred tax charge or credit is recognised in the income statement unless
the deferred tax relates to fair value adjustments for available-for-sale
investments, effective elements of cash flow hedges and other amounts taken
directly to equity. In these circumstances the deferred tax charge or credit
will also be recognised in equity and recycled to the income statement at the
same time as when the originating entry is recycled from equity to the income
statement. Group relief receivable from the parent company is included in
other assets.
 
 
 
Foreign currency translation
 
Foreign currency monetary assets and liabilities are translated at the rates of
exchange ruling on the balance sheet date and foreign currency non-monetary
items measured in terms of historical cost are translated using the exchange
rate at the date of the transaction. Exchange differences on monetary items are
dealt with in the income statement. Exchange differences on non-monetary items
are recognised in line with whether the gain or loss on the non-monetary item
itself is recognised in the income statement or in equity.
 
 
 
The balance sheets of overseas branches are translated into sterling at the
rates of exchange ruling at the balance sheet date and their income statements
are translated at the average rates of exchange for the period from 1 January to
the balance sheet date. All exchange differences relating to the translation of
an overseas branch are recognised through a separate component of other
reserves.
 
 
 
Upon the disposal of a foreign operation, the cumulative foreign currency
translation reserves which relate to the operation being disposed of is taken to
the income statement when the gain or loss on disposal is recognised.
 
 
 
From 1 January 2005, foreign exchange gains or losses on available-for-sale debt
securities will be recognised in the income statement.
 
 
 
Employee benefits
 
The Group accounts for its pension schemes and other non share-based employee
benefits under IAS 19 'Employee Benefits'.
 
 
 
The Group's main pension scheme, which covers 81% of the Group's employees who
have taken up their right to contribute to a pension scheme, is a defined
contribution scheme. For this scheme the cost is charged to the income
statement as contributions become due. The assets of the Scheme are held in a
separately administered fund.
 
 
 
Certain employees are members of the Prudential plc's defined benefit scheme ('
Prudential Scheme'). In line with paragraph 34A of the amendment to IAS 19 '
Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures',
even though the Prudential Scheme is a defined benefit scheme, as there is no
contractual agreement or stated policy for charging the net defined benefit cost
of the plan as a whole measured in accordance with IAS 19 to individual group
entities, the net defined benefit cost of the plan has only been recognised in
the financial statements of Prudential plc as it is the legal sponsor employer
of the plan. Therefore, in accordance with IAS 19, the Group recognises a cost
on the basis of its contributions payable to the plan for the period.
 
 
 
Further details of the Prudential Scheme are shown in the group financial
statements of Prudential plc.
 
 
 
Other employee benefits are recognised in the income statement as incurred.
 
 
 
Leased assets
 
Leases are classified as operating leases where the risks and rewards of
ownership are retained by the lessor. Operating lease rentals are expensed to
the income statement on a straight line basis.
 
 
 
The Group does not undertake any material financing leases as either lessee or
lessor.
 
 
 
Profit share from creditor insurance policies
 
Profit share from creditor insurance policies are recognised on an accruals
basis.
 
Brand development costs
 
Brand development costs are written off as incurred.
 
 
 
Treasury shares
 
Share capital in the Company purchased by the Group is recognised as a reduction
in shareholders' equity.
 
 
 
 
2. Impairment losses on loans and advances to customers
 
 
 
Group operating loss is stated after charging impairment losses on loans and
advances to customers of £59.2 million (31 March 2004 on a UK GAAP basis: £46.1
million). The impairment losses on loans and advances to customers at 31 March
2005 have been calculated on the basis of IAS 39 as explained in the significant
accounting policies in note 1. The balances at 31 March 2004 and 31 December
2004 were calculated on the basis of UK GAAP as explained in the principal
accounting policies in the 2004 annual report.
 
 
 Continuing Discontinued  Total
 £m £m £m
 
Balance at 31 December 2004 under UK GAAP 249.4 0.9 250.3
IAS 39 transition adjustments (3.3) - (3.3)
IFRS reclassification 7.7 - 7.7
Revised balance at 1 January 2005 under IFRS  253.8 0.9 254.7
Amounts written off (45.9) (1.2) (47.1)
New and additional allowances 58.9 0.3 59.2
Net charge against allowances 13.0 (0.9) 12.1
Balance at 31 March 2005 266.8 - 266.8
 
 
 
Allowances at 31 March 2005 were 3.27% of advances to customers (31 March 2004:
3.01%).
 
 
 
3. Tax
 
 
 
The taxation charge assumes a UK corporation tax rate of 30% (2004: 30%) and
comprises:
 
 
 Three months ended Three months ended Year ended 31
 31 March 2005 31 March 2004 December 2004
 £m £m £m
Tax charge on profit on continuing
ordinary activities 0.3 5.7 24.7
 
 
4. Discontinued operations
 
The following is an analysis of the loss on ordinary activities after tax for
discontinued operations (represented by Egg France and Funds Direct).
 
 
 Three months Three months ended Year ended 31
 ended 31 March 31 March 2004 December 2004
  2005
 £m £m £m
 
Net interest (expense)/income (0.5) 1.6 6.4
Other operating income/(expense) 1.4 - (6.0)
Operating income 0.9 1.6 0.4
Administrative expenses (8.9) (13.3) (45.6)
Depreciation and amortisation - (1.0) (7.1)
Impairment of goodwill and fixed assets re
Funds Direct -  - (16.6)
 
Impairment losses on loans and advances to
customers (0.3) (5.1) (20.1)
 
Utilisation of provision for loss on
termination of discontinued operations  9.6 - 25.9
 
Operating profit/(loss) 1.3 (17.8) (63.1)
 
Release/(provision) for loss on
termination of discontinued operations 0.2 - (112.8)
 
Profit/(loss) on discontinued ordinary
activities before tax 1.5 (17.8) (175.9)
 
Tax credit on loss on ordinary activities 3.5  4.9 38.7
 
 
Retained profit/(loss) attributable to
discontinued operations 5.0 (12.9) (137.2)
 
 
 
5. Earnings/(loss) per share
 
 
 
The consolidated earnings per share is calculated by dividing the retained
profit attributable to the Group for the financial period by the weighted
average of ordinary shares in issue during the period. The continuing earnings
per share was calculated by dividing the profit after tax attributable to
continuing operations for the financial period by the weighted average of
ordinary shares in issue during the period.
 
 
 
The discontinued earnings/(loss) per share for the three months ended 31 March
2005 is as follows:
 
 
  Three months Three months Year ended 31
 ended 31 March ended 31 March December 2004
 2005 2004
Discontinued operations:
Basic earnings/(loss) per share (pence) 0.7 (1.6) (15.9)
Diluted earnings/(loss) per share (pence) 0.7 (1.6) (15.9)
 
 
 
The discontinued earnings per share was calculated by dividing the retained loss
attributable to discontinued operations for the financial period by the weighted
average of ordinary shares in issue during the period.
 
 
 
 
 
 
6. Cash and cash equivalents
  As at 1 January Cash flow(2) As at 31 March
 2005 2005
 £m  £m £m
 
Cash 14.0 0.3 14.3
Loans and advances to other banks payable
on demand 344.2 (100.5)  243.7
 
Cash equivalents 269.4 (66.8) 202.6
 
 627.6 (167.0) 460.6
 
 
  As at 1 January Cash flow As at 31 March
 2004 2004
 £m £m  £m
 
Cash 13.3 (0.1) 13.2
Loans and advances to other banks payable
on demand 146.6 48.8 195.4
 
Cash equivalents 163.0 (108.9) 54.1
 
 322.9 (60.2) 262.7
 
 
 As at 1 January Cash flow As at 31 December
 2004 2004
 £m £m £m
Cash 13.3 0.7 14.0
Loans and advances to other banks payable
on demand 146.6 197.6 344.2
 
Cash equivalents 163.0 106.4 269.4
 
 322.9 304.7 627.6
 
The cash balance at 31 March 2005, 31 December 2004 and 31 March 2004 relates
solely to a cash ratio deposit, held with the Bank of England.
 
 
 
7. Segmental information
 
 
 
The Group is organised into two main business segments:
 
 
 
(i) Retail Financial Services ('Retail') - is responsible for all customer
focused products and services. It includes credit cards, consumer loans,
mortgages, savings and insurance products.
 
 
 
(ii) Treasury and Balance Sheet Management ('Wholesale') - is responsible for
asset and liability management across the Group's overall balance sheet. In
particular it manages the Group's capital and liquidity positions as well as
managing market and currency risks.
 
 
 
In determining how to allocate income and costs between these two segments, the
Group uses a transfer pricing methodology.
 
 
 
Given its responsibility for management of the overall balance sheet, capital
and liquidity the Wholesale segment effectively charges or pays a net transfer
price depending on whether it is funding or investing the net balance
transferred from the Retail balance sheet each day. This net transfer price is
market based and adjusted firstly to take account of liquidity requirements and
secondly for derivatives used to manage the interest rate risk within the Retail
balance sheet.
 
 
 
The cost of the debt capital held by the Group is split between Retail and
Wholesale according to the proportion of risk weighted assets held within each
segment. The balance of the risk weighted assets is currently calculated
according to the Basel 1 definitions.
 
 
 
The net return on investing the equity capital including the costs of the
various capital management techniques currently in use by the Group including
credit card securitisation and credit default swaps is earned by Treasury and
for segmental reporting purposes is also split between Retail and Wholesale
according to the proportion of risk weighted assets held within each segment .
 
 
7. Segmental information (continued)
 
 
 
All external customer revenues and expenses are allocated to Retail as are the
majority of the Group's operating costs and the investment in brand and
marketing. The costs allocated to the Wholesale segment are directly
attributable to its lines of business.
 
 
 
As the Group has disposed of its French business, it no longer considers
disclosure along geographical segmentation lines to be appropriate. The
results, cash flows, assets and liabilities relating to the French business are
included within discontinued operations.
 
 
 Retail Wholesale Total
 
 £m £m £m
Three months ended 31 March 2005
 
Continuing operations:
 
Net interest income 69.3  1.5 70.8
Operating profit 2.0 1.6 3.6
Discontinued operations:
Net interest expense (0.5) - (0.5)
Operating profit 1.3 - 1.3
Year ended 31 December 2004
Continuing operations:
Net interest income 280.3 7.1  287.4
Operating profit 55.5 5.5 61.0
Discontinued operations:
Net interest income 6.4 - 6.4
Operating loss  (63.1) - (63.1)
Three months ended 31 March 2004
Continuing operations:
Net interest income 72.1 1.9 74.0
Operating profit 12.5 1.2 13.7
Discontinued operations:
Net interest income 1.6 - 1.6
Operating loss  (17.8) - (17.8)