Annual Report
and Accounts 2008

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• Financial summary
• Amounts in accordance with IFRS
• Exchange rates
• Economic and monetary environment
• Supervision
• Regulatory reviews and developments
• Description of property and equipment
• Major shareholders
• Material contracts
• FSA Listing Rules disclosure

Amounts in accordance with IFRS

Summary consolidated income statement – IFRS	2008 $m	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Net interest income	27,301	18,675	12,069	10,596	9,918	9,071
Non-interest income (1)	10,515	7,193	18,297	17,406	15,984	14,320
Total income	37,816	25,868	30,366	28,002	25,902	23,391
Operating expenses (2, 3, 4, 5, 6)	78,991	54,033	13,942	12,480	11,946	10,362
(Loss)/profit before other operating charges and impairment losses	(41,175)	(28,165)	16,424	15,522	13,956	13,029
Insurance net claims	6,476	4,430	4,624	4,458	4,313	4,260
Impairment	11,800	8,072	1,968	1,878	1,707	1,485
Operating (loss)/profit before tax	(59,451)	(40,667)	9,832	9,186	7,936	7,284
Tax	(3,396)	(2,323)	2,044	2,689	2,378	1,995
(Loss)/profit from continuing operations	(56,055)	(38,344)	7,788	6,497	5,558	5,289
Profit/(loss) from discontinued operations, net of tax	5,805	3,971	(76)	—	—	—
(Loss)/profit for the year	(50,250)	(34,373)	7,712	6,497	5,558	5,289
(Loss)/profit attributable to:
Minority interests	(15,835)	(10,832)	163	104	57	177
Other owners	871	596	246	191	109	256
Ordinary shareholders	(35,286)	(24,137)	7,303	6,202	5,392	4,856

Notes:

(1)

Includes gain on sale of strategic investment of £333 million in 2005.

(2)

Includes loss on sale of subsidiaries of £93 million in 2005.

(3)

Includes integration expenditure of £1,050 million in 2008 (2007 – £108 million; 2006 – £134 million; 2005 – £458 million; 2004 – £520 million).

(4)

Includes purchased intangibles amortisation of £919 million in 2008 (2007 – £234 million; 2006 – £94 million; 2005 – £97 million; 2004 – £45 million).

(5)

Includes restructuring expenditure of £307 million in 2008.

(6)

Includes write-down of goodwill and other intangibles assets of £32,581 million in 2008.

Summary consolidated balance sheet – IFRS	2008 $m	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Loans and advances (1)	1,480,786	1,012,919	1,047,998	549,499	487,813	408,324
Debt securities and equity shares	429,622	293,879	347,682	146,246	135,804	104,741
Derivatives and settlement balances (2)	1,477,091	1,010,391	293,991	109,506	89,470	15,193
Other assets (1)	123,476	84,463	151,158	51,581	51,542	51,575
Total assets	3,510,975	2,401,652	1,840,829	856,832	764,629	579,833
Owners' equity	86,075	58,879	53,038	40,227	35,435	33,905
Minority interests	31,605	21,619	38,388	5,263	2,109	3,492
Subordinated liabilities (1)	71,858	49,154	38,043	27,654	28,274	20,366
Deposits (1)	1,312,137	897,556	994,657	516,365	453,274	383,198
Derivatives, settlement balances and short positions (2)	1,499,385	1,025,641	363,073	152,988	128,228	43,577
Other liabilities (1)	509,915	348,803	353,630	114,335	117,309	95,295
Total liabilities and equity	3,510,975	2,401,652	1,840,829	856,832	764,629	579,833

Notes:

(1)

2007 comparative data have been restated following finalisation of the ABN AMRO acquisition accounting.

(2)

2007 to 2004 comparative amounts have been restated for the netting of certain derivative asset and derivative liability balances with the London Clearing House.

The per share data in the table below have been restated for the effect of the rights issue in June 2008 and the capitalisation issue in September 2008.

Other financial data based upon IFRS	2008	2007	2006	2005	2004
Earnings per ordinary share – pence	(145.7)	64.0	54.4	47.3	43.9
Diluted earnings per ordinary share – pence (1)	(145.7)	63.4	53.9	47.0	43.5
Adjusted earnings per ordinary share – pence	(12.9)	63.3	55.8	49.1	47.5
Dividends per ordinary share – pence	19.3	27.0	21.6	17.0	14.7
Dividend payout ratio (2)	—	43%	45%	41%	35%
Share price per ordinary share at year end – £	0.494	3.72	5.56	4.90	4.89
Market capitalisation at year end – £bn	19.5	44.4	62.8	56.1	55.6
Net asset value per ordinary share – £	1.15	3.74	3.24	2.83	2.59
Return on average total assets (3)	(1.18%)	0.65%	0.74%	0.73%	0.94%
Return on average ordinary shareholders' equity (4)	(50.0%)	18.8%	18.5%	17.5%	18.3%
Adjusted return on average ordinary shareholders' equity (5)	(4.7%)	18.6%	19.0%	18.2%	18.9%
Average owners' equity as a percentage of average total assets	2.9%	3.9%	4.4%	4.5%	5.9%
Risk asset ratio – Tier 1	10.0%	7.3%	7.5%	7.6%	7.0%
Risk asset ratio – Total	14.1%	11.2%	11.7%	11.7%	11.7%
Ratio of earnings to combined fixed charges and preference share dividends (6)
– including interest on deposits	(0.29)	1.45	1.62	1.67	1.88
– excluding interest on deposits	(11.96)	5.73	6.12	6.05	7.43
Ratio of earnings to fixed charges only (6)
– including interest on deposits	(0.30)	1.47	1.64	1.69	1.94
– excluding interest on deposits	(14.71)	6.53	6.87	6.50	9.70

(1)

None of the convertible preference shares had a dilutive effect in 2008. All the convertible preference shares had a dilutive effect in 2007, 2006 and 2005 and as such were included in the computation of diluted earnings per share. In 2004, $1,500 million of convertible preference shares was not included in the computation of diluted earnings per share as their effect was anti-dilutive.

(2)

Dividend payout ratio represents the interim dividend paid and current year final dividend proposed as a percentage of profit attributable to ordinary shareholders before discontinued operations, integration costs, amortisation of purchased intangibles and net gain on sale of strategic investments and subsidiaries (net of tax).

(3)

Return on average total assets represents profit attributable to ordinary shareholders as a percentage of average total assets.

(4)

Return on average ordinary shareholders' equity represents profit attributable to ordinary shareholders expressed as a percentage of average ordinary shareholders' equity.

(5)

Adjusted return on average ordinary shareholders' equity represents profit attributable to ordinary shareholders before discontinued operations, credit market write-downs and one-off items, integration costs, restructuring costs, amortisation of purchased intangibles, write-downs of goodwill and other intangible assets and net gain on sale of strategic investments and subsidiaries expressed as a percentage of average ordinary shareholders' equity.

(6)

For this purpose, earnings consist of income before tax and minority interests, plus fixed charges less the unremitted income of associated undertakings (share of profits less dividends received). Fixed charges consist of total interest expense, including or excluding interest on deposits and debt securities in issue, as appropriate, and the proportion of rental expense deemed representative of the interest factor (one third of total rental expenses).

Analysis of loans and advances to customers – IFRS

The following table analyses loans and advances to customers before provisions by remaining maturity, geographical area and type of customer.

	Within 1 year £m	After 1 but within 5 years £m	After 5 years £m	2008 Total £m	2007 £m	2006 £m	2005 £m	2004 £m
UK
Central and local government	2,760	27	304	3,091	3,135	6,732	3,340	1,866
Manufacturing	8,615	4,552	1,907	15,074	13,452	11,051	11,615	6,292
Construction	6,465	2,482	1,224	10,171	10,202	8,251	7,274	5,024
Finance	35,055	3,547	3,830	42,432	70,006	25,017	27,091	24,638
Service industries and business activities	25,763	13,076	19,799	58,638	53,965	43,887	40,687	30,867
Agriculture, forestry and fishing	1,361	302	1,309	2,972	2,473	2,767	2,645	2,481
Property	19,231	15,251	17,645	52,127	50,051	39,296	32,899	26,448
Individuals – home mortgages	19,005	1,672	60,290	80,967	73,916	70,884	65,286	57,535
– other	20,027	3,337	3,625	26,989	28,186	27,922	26,323	26,459
Finance leases and instalment credit	2,705	6,666	7,992	17,363	15,632	14,218	13,909	13,044
Accrued interest	2,348	29	86	2,463	2,344	1,497	1,250	—
Total domestic	143,335	50,941	118,011	312,287	323,362	251,522	232,319	194,654
Overseas residents	60,415	36,570	22,671	119,656	98,845	69,242	52,234	48,183
Total UK offices	203,750	87,511	140,682	431,943	422,207	320,764	284,553	242,837
Overseas
US	38,706	42,123	45,448	126,277	135,059	92,166	90,606	74,027
Rest of the World	107,184	66,794	153,413	327,391	277,721	57,896	45,951	34,555
Total Overseas offices	145,890	108,917	198,861	453,668	412,780	150,062	136,557	108,582
Loans and advances to customers – gross	349,640	196,428	339,543	885,611	834,987	470,826	421,110	351,419
Loan impairment provisions				(10,889)	(6,449)	(3,933)	(3,884)	(4,168)
Loans and advances to customers – net				874,722	828,538	466,893	417,226	347,251
Fixed rate	57,671	46,487	79,536	183,693	351,336	115,240	100,748	101,227
Variable rate	291,969	149,941	260,007	701,918	483,651	355,586	320,362	250,192
Loans and advances to customers – gross	349,640	196,428	339,543	885,611	834,987	470,826	421,110	351,419

Cross border exposures

Cross border exposures are defined as loans to banks and customers (including finance lease and instalment credit receivables) and other monetary assets, including non-local currency claims of overseas offices on local residents.

The Group monitors the geographical breakdown of these exposures based on the country of domicile of the borrower or guarantor of ultimate risk.

The table below sets out the Group's cross border outstandings in excess of 0.75% of Group total assets (including acceptances), which totalled £2,401.7 billion at 31 December 2008 (2007 – £1,840.8 billion; 2006 – £856.8 billion). None of these countries has experienced repayment difficulties that have required refinancing of outstanding debt.

	2008 £m	2007 £m	2006 £m
United States	91,544	91,653	43,718
France	58,251	65,430	18,136
Germany	40,812	51,123	20,130
Spain	36,441	31,651	9,341
Netherlands	34,283	27,707	12,407
Republic of Ireland	18,662	17,736	8,530
Cayman Islands	18,126	17,099	9,063
Japan	*	31,922	7,725
Italy	*	23,925	7,506
Norway	*	*	7,768
Switzerland	*	*	7,262
China	*	*	6,574

* Less than 0.75% of Group total assets.

Loan impairment provisions

For a discussion of the factors considered in determining the amount of the provisions, see 'Impairment' and 'Critical accounting policies – Loan impairment provisions' .

The following table shows the elements of loan impairment provisions.

			IFRS
	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Provisions at the beginning of the year
Domestic	3,258	3,037	2,759	2,675	2,408
Foreign	3,194	898	1,128	1,470	1,477
	6,452	3,935	3,887	4,145	3,885
Transfer to disposal groups
Domestic	—	—	—	—	—
Foreign	(767)	—	—	—	—
	(767)	—	—	—	—
Currency translation and other adjustments
Domestic	107	5	(17)	(7)	(8)
Foreign	1,334	178	(44)	58	(90)
	1,441	183	(61)	51	(98)
(Disposals)/acquisitions of businesses
Domestic	(108)	10	—	—	2
Foreign	(70)	2,211	—	—	288
	(178)	2,221	—	—	290
Amounts written-off
Domestic	(1,446)	(1,222)	(1,360)	(1,252)	(901)
Foreign	(1,702)	(789)	(481)	(788)	(548)
	(3,148)	(2,011)	(1,841)	(2,040)	(1,449)
Recoveries of amounts written-off in previous years
Domestic	116	158	119	97	85
Foreign	203	184	96	75	59
	319	342	215	172	144
Charged to income statement
Domestic	2,698	1,420	1,663	1,376	960
Foreign	4,393	526	214	327	442
	7,091	1,946	1,877	1,703	1,402
Unwind of discount
Domestic	(151)	(150)	(127)	(130)	—
Foreign	(43)	(14)	(15)	(14)	—
	(194)	(164)	(142)	(144)	—
Provisions at the end of the year (1)
Domestic	4,474	3,258	3,037	2,759	2,546
Foreign	6,542	3,194	898	1,128	1,628
	11,016	6,452	3,935	3,887	4,174
Gross loans and advances to customers
Domestic	312,287	323,362	251,522	232,319	194,654
Foreign	573,324	511,625	219,304	188,791	156,765
	885,611	834,987	470,826	421,110	351,419
Closing customer provisions as a % of gross loans and advances to customers (2)
Domestic	1.43%	1.01%	1.21%	1.19%	1.31%
Foreign	1.12%	0.62%	0.41%	0.60%	1.04%
Total	1.23%	0.77%	0.84%	0.92%	1.19%
Customer charge to income statement as a % of gross loans and advances to customers
Domestic	0.86%	0.44%	0.66%	0.59%	0.49%
Foreign	0.75%	0.10%	0.10%	0.17%	0.28%
Total	0.79%	0.23%	0.40%	0.40%	0.40%

Notes:

(1)

Includes closing provisions against loans and advances to banks of £127 million (2007 – £3 million; 2006 – £2 million; 2005 – £3 million; 2004 – £6 million).

(2)

Closing customer provisions exclude closing provisions against loans and advances to banks.

The following table shows additional information in respect of the loan impairment provisions.

			IFRS
	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Loan impairment provisions at end of year:
– customers	10,889	6,449	3,933	3,884
– banks	127	3	2	3
Specific provisions
– customers					3,607
– banks					6
General provision					561
	11,016	6,452	3,935	3,887	4,174
Average loans and advances to customers (gross)	858,333	567,900	445,766	402,473	299,430
As a % of average loans and advances to customers during the year:
Total customer provisions charged to income statement	0.81%	0.34%	0.42%	0.42%	0.47%
Amounts written-off (net of recoveries) – customers	0.33%	0.29%	0.36%	0.46%	0.44%

Analysis of closing loan impairment provisions

The following table analyses customer loan impairment provisions by geographical area and type of domestic customer.

	IFRS
	2008		2007		2006		2005		2004
	Closing provision	% of loans to total loans	Closing provision	% of loans to total loans	Closing provision	% of loans to total loans	Closing provision	% of loans to total loans	Closing provision	% of loans to total loans
	£m	%	£m	%	£m	%	£m	%	£m	%
Domestic
Central and local government	—	0.3	—	0.4	—	1.4	—	0.8	—	0.6
Manufacturing	127	1.7	93	1.6	94	2.4	138	2.8	127	1.8
Construction	254	1.1	75	1.2	63	1.8	74	1.7	71	1.4
Finance	67	4.8	52	8.4	33	5.3	104	6.4	54	7.0
Service industries and business activities	778	6.6	562	6.5	647	9.3	647	9.7	516	8.8
Agriculture, forestry and fishing	19	0.3	21	0.3	25	0.6	26	0.6	23	0.7
Property	490	5.9	85	6.0	70	8.3	63	7.8	64	7.5
Individuals – home mortgages	36	9.1	36	8.8	37	15.1	36	15.5	32	16.4
– other	2,235	3.0	2,054	3.4	1,826	5.9	1,513	6.3	1,277	7.5
Finance leases and instalment credit	194	2.0	132	1.9	103	3.0	88	3.3	122	3.7
Accrued interest	—	0.3	—	0.3	—	0.3	—	0.3
Total domestic	4,200	35.1	3,110	38.8	2,898	53.4	2,689	55.2	2,286	55.4
Foreign	4,745	64.9	2,289	61.2	442	46.6	652	44.8	1,321	44.6
Impaired book provisions	8,945	100.0	5,399	100.0	3,340	100.0	3,341	100.0		100.0
Latent book provisions	1,944		1,050		593		543
Specific provisions									3,607
General provision									561
Total provisions	10,889		6,449		3,933		3,884		4,168

Analysis of write-offs

The following table analyses amounts written-off by geographical area and type of domestic customer.

	IFRS
	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Domestic
Manufacturing	61	29	41	40	55
Construction	51	21	29	17	12
Finance	31	47	17	21	19
Service industries and business activities	299	190	212	176	163
Agriculture, forestry and fishing	5	4	5	4	9
Property	34	9	6	25	33
Individuals – home mortgages	1	—	5	4	4
– others	938	909	1,021	950	516
Finance leases and instalment credit	26	13	24	15	90
Total domestic	1,446	1,222	1,360	1,252	901
Foreign	1,702	789	481	788	548
Total write‑offs (1)	3,148	2,011	1,841	2,040	1,449

Note:

(1)

Excludes £2 million written-off in respect of loans and advances to banks in 2005.

Analysis of recoveries

The following table analyses recoveries of amounts written-off by geographical area and type of domestic customer.

	IFRS
	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Domestic
Manufacturing	2	—	—	1	1
Construction	—	—	—	1	—
Finance	2	—	—	—	2
Service industries and business activities	12	7	5	2	1
Property	—	—	1	2	—
Individuals
– home mortgages	—	—	—	—	1
– others	96	143	101	84	78
Finance leases and instalment credit	4	8	12	7	2
Total domestic	116	158	119	97	85
Foreign	203	184	96	75	59
Total recoveries	319	342	215	172	144

Risk elements in lending and potential problem loans

The Group's loan control and review procedures do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the SEC in the US. The following table shows the estimated amount of loans that would be reported using the SEC's classifications. The figures are stated before deducting the value of security held or related provisions.

IFRS require interest to be recognised on a financial asset (or a group of financial assets) after impairment at the rate of interest used to discount recoveries when measuring the impairment loss. Thus, interest on impaired financial assets is credited to profit or loss as the discount on expected recoveries unwinds. Despite this, such assets are not considered performing. All loans that have an impairment provision are classified as non-accrual. This is a change from practice in 2004 and earlier years where certain loans with provisions were classified as past due 90 days or potential problem loans (and interest accrued on them).

	IFRS
	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Loans accounted for on a non-accrual basis (2):
Domestic	8,588	5,599	5,420	4,977	3,658
Foreign	10,891	4,763	812	949	1,075
Total	19,479	10,362	6,232	5,926	4,733
Accruing loans which are contractually overdue 90 days or more as to principal or interest (3):
Domestic	1,201	217	81	2	634
Foreign	581	152	24	7	79
Total	1,782	369	105	9	713
Loans not included above which are classified as 'troubled debt restructurings' by the SEC:
Domestic	—	—	—	2	14
Foreign	—	—	—	—	10
Total	—	—	—	2	24
Total risk elements in lending	21,261	10,731	6,337	5,937	5,470
Potential problem loans (4)
Domestic	218	63	47	14	173
Foreign	8	608	5	5	107
Total potential problem loans	226	671	52	19	280
Closing provisions for impairment as a % of total risk elements in lending	52%	60%	62%	65%	76%
Closing provisions for impairment as a % of total risk elements in lending and potential problem loans	51%	57%	62%	65%	72%
Risk elements in lending as a % of gross lending to customers excluding reverse repos	2.51%	1.55%	1.55%	1.60%	1.83%

Notes:

(1)

For the analysis above, 'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group's transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions.

(2)

All loans against which an impairment provision is held are reported in the non-accrual category.

(3)

Loans where an impairment event has taken place but no impairment recognised. This category is used for fully collateralised non-revolving credit facilities.

(4)

Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for fully collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible.

	IFRS
	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Gross income not recognised but which would have been recognised under the original terms of non-accrual and restructured loans:
Domestic	393	390	370	334	235
Foreign	342	155	77	62	58
	735	545	447	396	293
Interest on non-accrual and restructured loans included in net interest income:
Domestic	150	165	142	130	58
Foreign	43	16	15	14	7
	193	181	157	144	65

Analysis of deposits – product analysis

The following table shows the distribution of the Group's deposits by type and geographical area.

	IFRS
	2008 £m	2007 £m	2006 £m
UK
Domestic:
Demand deposits
– interest-free	43,376	43,721	39,149
– interest-bearing	107,159	121,343	118,315
Time deposits
– savings	88,434	41,185	31,656
– other	130,951	207,263	80,496
Overseas residents:
Demand deposits
– interest-free	907	563	573
– interest-bearing	16,320	25,129	37,729
Time deposits
– savings	1,819	605	1,122
– other	67,477	87,437	51,568
Total UK offices	456,443	527,246	360,608
Overseas
Demand deposits
– interest-free	29,253	27,959	12,173
– interest-bearing	92,354	70,758	27,441
Time deposits
– savings	68,014	52,381	19,049
– other	251,492	316,313	97,094
Total overseas offices	441,113	467,411	155,757
Total deposits	897,556	994,657	516,365
Held-for-trading	137,080	125,917	104,249
Designated as at fair value through profit or loss	8,054	7,505	3,922
Amortised cost	752,422	861,235	408,194
Total deposits	897,556	994,657	516,365
Overseas
US	153,163	152,324	115,121
Rest of the World	287,950	315,087	40,636
Total overseas offices	441,113	467,411	155,757

Short term borrowings

	IFRS
	2008 £m	2007 £m	2006 £m
Commercial paper
Outstanding at year end	78,581	78,612	12,675
Maximum outstanding at any month end during the year	111,108	81,187	14,402
Approximate average amount during the year	98,150	32,498	13,225
Approximate weighted average interest rate during the year	3.3%	4.8%	4.9%
Approximate weighted average interest rate at year end	3.0%	5.5%	5.0%
Other short term borrowings
Outstanding at year end	194,346	280,526	122,576
Maximum outstanding at any month end during the year	395,132	312,557	130,867
Approximate average amount during the year	299,513	188,326	112,008
Approximate weighted average interest rate during the year	3.2%	4.6%	4.5%
Approximate weighted average interest rate at year end	2.5%	4.1%	4.5%

Average interest rates during the year are computed by dividing total interest expense by the average amount borrowed. Average interest rates at year end are average rates for a single day and as such may reflect one-day market distortions which may not be indicative of generally prevailing rates. Original maturities of commercial paper are not in excess of one year. 'Other short-term borrowings' consist principally of borrowings in the money markets included within 'Deposits by banks' and 'Customer accounts' in the financial statements, and generally have original maturities of one year or less.

Certificates of deposit and other time deposits

The following table shows details of the Group's certificates of deposit and other time deposits over $100,000 or equivalent by remaining maturity.

	Within 3 months £m	Over 3 months but within 6 months £m	Over 6 months but within 12 months £m	Over 12 months £m	2008 Total £m
UK based companies and branches
Certificates of deposit	23,076	7,475	9,236	13	39,800
Other time deposits	62,623	7,665	5,939	12,359	88,586
Overseas based companies and branches
Certificates of deposit	32,263	1,666	1,316	—	35,245
Other time deposits	111,542	13,498	7,983	15,641	148,664
	229,504	30,304	24,474	28,013	312,295

Other contractual cash obligations

The table below summarises the Group's other contractual cash obligations by payment date.

	Group
2008	0-3 months £m	3-12 months £m	1-3 years £m	3-5 years £m	5-10 years £m	10-20 years £m
Operating leases	146	433	976	751	1,448	1,851
Contractual obligations to purchase goods or services	237	892	486	208	303	1
	383	1,325	1,462	959	1,751	1,852

2007
Operating leases	90	268	655	569	1,060	1,958
Contractual obligations to purchase goods or services	441	1,007	748	199	5	2
	531	1,275	1,403	768	1,065	1,960

The Group's undrawn formal facilities, credit lines and other commitments to lend were £352,398 million (2007 – £332,811 million). While the Group has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the counterparty. The Group does not expect all facilities to be drawn, and some may lapse before drawdown.

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