Directors' report

Chairman and Chief Executive's introduction - Liquidity and funding

We have been pleased with the way we dealt with the extreme liquidity problems which emerged in the wholesale markets in the second half of 2007.

In general terms, we were well placed for such difficulties. We had been careful to retain our conservative approach to our funding and, in particular, had continued to invest in our branch network and build up the amount of our retail deposits. We had also pursued the policy of prefunding our net new lending and of holding sufficient liquidity for at least four months without recourse to wholesale money markets.

In response to the unfolding liquidity crunch, we took a number of steps to reduce our funding needs. We increased our mortgage pricing to contain volumes and protect margins; raised our savings pricing to attract additional customer deposits; reduced the level of mortgage portfolio acquisitions; and increased our focus on lower risk lending. For many years we have worked hard at diversifying our funding base and building strong relationships. This proved very beneficial when we raised £2.5bn in private funding transactions in September and October when the public wholesale markets were effectively closed.

At the time of these results, we had made good progress towards agreeing a range of secured standby facilities with our key relationship banks, at sensible margins, to take advantage of any particularly attractive growth opportunities.

In April 2007, the Board took the strategic decision to sell some commercial lending and housing association mortgage assets in order to focus on the higher-margin, high growth, specialist mortgage market. Market events protracted the sales process but we were pleased to complete the disposal in November 2007 of £4.0bn of loans for a net consideration £44.7m below book value. In addition, £13.3m of transaction and restructuring costs were incurred.