Directors' report

Chairman and Chief Executive's introduction - Underlying trading

Despite the diversion caused by market events, and as a direct result of the fortitude of our colleagues throughout the Group, we achieved a great amount during the year. We grew underlying profit before tax by 5% to £351.6m (2006: £335.9m) and underlying earnings per share increased by 6% to 40.2 pence (2006: 38.1 pence). Statutory profit before tax was £126.0m (2006: £246.7m) and earnings per share 14.9 pence (2006: 28.2 pence). The difference between underlying and statutory profits arises due to the exclusion of certain strategic, external and fair value items from underlying profits. These are set out in the income statement table.

We made good progress against our objective of growing residential lending, adding a record £8.3bn to our balances, an increase of 27%, to take our total residential balances at the year end to £39.4bn.

The savings business made an excellent contribution during the year, with an additional £1.6bn being raised through our traditional branch network. Retail Savings are a very valuable part of the business, attracting new customers to the Group and providing a stable source of funding. Total retail savings deposits were £21.0bn (2006: £19.7bn) and at the end of the year, total customer deposits of £24.2bn funded 60% of customer loans (2006: 61%).

The condition of our lending book is very important to us and we continue to have great belief in the quality and prospects for buy-to-let lending. Tenant demand remains very strong and is driven by robust fundamentals. We took the decision early in 2007 to reduce our appetite for self-cert lending to preserve business quality. We have not relaxed our credit criteria across any of our products and have focused on higher quality loans, using risk-based pricing to ensure we cover any incremental risk with a higher price. The credit performance of all our portfolios has been in line with expectations. Arrears levels have increased during the year, reflecting rising interest rates in the UK.