Directors' report

Business review - Our 2007 performance

Balance sheet, capital and non financial measures

Despite market conditions and relatively slower growth in the second half of the year, the Group's total assets increased by 15% to £52.0bn (2006: £45.4bn), this includes the impact of the sale of commercial property and housing association loans. Gross new mortgage advances were £9.7bn (2006: £7.7bn) and the Group purchased a further £4.3bn (2006: £2.5bn) of mortgage assets. Our share of the net increase in UK mortgages was 7.7%, comfortably exceeding our share of outstanding balances of 3.3%, demonstrating the strength and resilience our business.

The mix of new loans by product, and on our balance sheet, reflects our focus on the specialist areas of the mortgage market and the success of our Mortgage Express brand in building this business. Buy-to-let has continued to be the most significant product representing 55% of new loans (2006: 54%) and 59% of residential balances (2006: 58%).

We have increased wholesale assets to £9.6bn (2006: £8.8bn) in order to build liquidity and insulate the business against wholesale money market uncertainties. During the liquidity crisis, we closely monitored our liquidity position and assessed

Balance Sheet summary

At 31 December	2007 £m	2006 £m
Loans and advances to customers
- Residential mortgages	39,422.3	31,134.7
- Commercial and other secured loans	1,022.2	4,997.0
Wholesale assets	9,565.0	8,803.9
Fair value adjustments on portfolio hedging	(53.8)	(70.4)
Derivative financial instruments	1,175.4	291.0
Fixed and other assets	853.5	198.0
Total assets	51,984.6	45,354.2
Retail deposits	20,988.0	19,674.6
Non-retail deposits	27,547.1	21,880.1
Fair value adjustments on portfolio hedging	(5.9)	-
Derivative financial instruments	498.6	493.4
Other liabilities	330.7	474.0
Interest bearing capital	1,415.3	1,412.2
Equity	1210.8	1,419.9
Total liabilities and equity	51,984.6	45,354.2

this against emerging and potentially extreme funding conditions. Consequently, we maintained our liquidity levels well above our own internal liquidity policy limit and those established by our regulator, the FSA. Therefore, the rate of increase in mortgages in the latter part of the year was deliberately curtailed. We continue with our conservative balance sheet management approach of identifying and securing funding sources prior to committing to new lending.

Total funding increased, corresponding to the growth in asset balances, and amounted to £48.5bn (2006: £41.6bn). Retail deposits have performed strongly and increased by £1.3bn (2006: £2.0bn) to £21.0bn (2006: £19.7bn) and make up 40% (2006: 43%) of total liabilities. Given the position of wholesale markets, we successfully quickened the pace of retail deposit growth during the second half of the year. Despite market conditions, we also raised significant new finance in secured funding markets with our securitised and covered bond programmes issuing £3.7bn (2006: £3.4bn) and £2.8bn (2006: £2.7bn) respectively.

The liquidity crisis in wholesale markets, and the balance growth we achieved in 2007, has placed even greater emphasis on our new funding programmes. We have been active in the retail and wholesale markets. In particular, our wide range of savings products have contributed to our funding needs. The Group aims to have balance sheet diversity, always maintaining a number of available funding sources, even during conditions of market distress. This approach has proved invaluable during 2007 and gives us confidence in the future sustainability of the business.

Capital

A share buy-back began in July 2007 as part of a plan to rebalance the mix of our capital, by changing the proportions of equity and interest bearing tier 1 capital on our balance sheet. As market conditions deteriorated, it became clear that it would be inappropriate to raise interest bearing capital at the extreme pricing levels that developed in the second half of the year. After purchasing 16.75m shares at a cost of £58.6m, we suspended our buy-back programme until greater stability returns. Bradford & Bingley remains very well capitalised with a Tier 1 ratio of 8.6% (2006: 7.6%), and total capital ratio of 15.1% (2006: 13.2%).

The Group continues to operate under the Basel II standardised regime. Work with the FSA on developing an internal-ratings-based approach for our specialist mortgage assets is now proceeding more slowly, reflecting the impact of recent market turmoil on the priorities of banks and regulators.

Capital structure

At 31 December 2007	2007 £m	2006 £m
Share capital and reserves	1,210.8	1,419.9
Adjustments	81.3	(74.4)
Net pension deficit	(4.0)	50.8
Innovative tier 1	148.8	148.8
Total tier 1 capital	1,436.9	1,545.1
Upper tier 2 capital	580.1	583.8
Lower tier 2 capital	647.0	671.7
Total tier 2 capital	1,227.1	1,255.5
Deductions	(146.7)	(97.2)
Total capital	2,517.3	2,703.4
Risk weighted assets	16,655	20,419
Tier 1 ratio (%)	8.6	7.6
Total capital ratio (%)	15.1	13.2

Non-financial measures

Our continuing success is attributable largely to the quality and commitment of our staff. We measure their commitment and satisfaction regularly. It is encouraging to record that our overall measure increased to 79% (2006: 78%), maintaining the high level attained the previous year, despite the turbulence in our industry in 2007.

Other major factors in the success of Bradford & Bingley are our customers, those individuals who select our products and services, and the mortgage intermediaries who introduce the vast majority of our new mortgage customers. We have measured the satisfaction of these key contributors to the Group's success and have refined and improved these measures in 2007.