Interim Results - Part 1

Woolwich PLC
2 August 2000




Part 1

WOOLWICH PLC

RESULTS ANNOUNCEMENT FOR THE HALF-YEAR ENDED 30 JUNE 2000


CONTENTS


Interim results highlights

Summary of results

Chief Executive's review

Summarised profit and loss account

Segmental profit and loss account

Profit before tax and interest on capital

Net interest income

Non-interest income

Operating expenses

Taxation

Loans and advances to customers

Capital expenditure

Deferred mortgage incentives costs

Capital structure

Basis of preparation

Consolidated profit and loss account

Earnings per share

Consolidated balance sheet

Statement of consolidated total recognised gains and losses

Reconciliation of movements in shareholders' funds

Dividends per share

Summarised consolidated cash flow statement

Segmental balance sheet

Shareholder information

Independent review report

Financial calendar and contacts



WOOLWICH PLC: 2000 INTERIM RESULTS HIGHLIGHTS

YEAR OF DELIVERY

- Open Plan numbers significantly ahead of target at 290,000

- Number of products held by Open Plan customers exceeds 750,000

- Open Plan Offset, the UK's first offset mortgage launched on
1 June now 36% of applications

- Mortgage processing productivity doubles at GHL joint venture

- Joint venture announced to sell Open Plan banking products to
AXA UK customer base

- Profit before tax £232.3m reflecting Open Plan investment of
£30.8m

- Total mortgage net lending up by 50% and exceeds £1.5bn for
first time

- UK mortgage market share of net lending reaches 6.2% and
exceeds natural market share of 5.3%

- Customer balances increase by £1.5bn during first half

- Net interest margin maintained at 2.08%

- Non-interest income up 13.7% to £155.4m

- Interim dividend up by 12.8% to 4.4p per share


Commenting on the results, Woolwich Group Chief Executive, John
Stewart said:

'Our  strategy is delivering, Open Plan is powering ahead. We've
already  got 290,000 customers but more importantly, on average,
they are using nearly twice as many Woolwich products.'

'Customer  response  since we launched  the  UK's  first  offset
mortgage  just eight weeks ago convinces us that these  products
will transform the market.'

SUMMARY OF RESULTS

                                   Half Year to 30   Year to 31
                                              June     December

                                    2000  1999 (2)     1999 (2)
Financial Performance                                          
(1)
Profit before tax (3)     (£m)     232.3     253.7        538.7
Profit before tax and     (£m)     174.4     192.3        420.6
interest on capital (3)
Earnings per share (3)    (p)       10.4      11.0         23.3
Basic earnings per share  (p)       11.8      11.0         22.9
Post-tax return on        (%)       17.6      19.7         20.6
average equity (3)
Post-tax return on        (%)       1.83      2.17         2.24
average risk weighted
assets (3)
Net interest margin on    (%)       1.95      2.00         1.98
total assets
Net interest margin on    (%)       2.08      2.10         2.09
interest earning assets
Net interest spread       (%)       1.79      1.79         1.78
Customer spread           (%)       2.10      2.06         2.11
Non-interest income       (£m)     155.4     136.7        320.8
Cost to income ratio (3)  (%)       48.0      42.6         41.7
                                                               
Dividend                                                       
Dividends per ordinary    (p)        4.4       3.9         12.0
share
                                                               
Customer lending                                               
UK gross lending          (£m)   3,783.2   3,117.3      6,819.9
UK net lending            (£m)   1,418.0   1,024.7      2,013.6
Continental gross         (£m)     495.7     454.4        917.8
lending
Continental net lending   (£m)     352.1     287.3        569.3
Market share UK gross     (%)        5.8       5.4          5.3
mortgage lending
Market share UK net       (%)        6.2       5.0          4.1
mortgage lending
Asset share UK mortgages  (%)        5.3       5.4          5.3
                                                               
Retail savings                                                 
Customer balances         (£m)  21,521.0  21,102.8     20,061.3
Funds under management    (£m)     2,883     2,582        2,859
Market share retail       (%)        3.1       3.3          3.1
deposit balances (4)
                                                               
Risk asset ratios                                              
Total capital ratio       (%)       13.6      14.3         14.3
Tier 1 ratio              (%)        9.9      10.8         10.3

(1) With the exception of basic earnings per share, financial
performance indicators for the half year to 30 June 2000 exclude
£22m tax relief on conversion costs

(2) Figures restated for change of accounting policy for
commissions payable to introducers of certain lending business.
Full details are set out under Basis of Preparation below

(3) Excludes costs of restructuring in second half of 1999

(4) Total market share for half year to 30 June 2000 estimated



CHIEF EXECUTIVE'S REVIEW

Summary

The Woolwich is the only UK retail bank to have successfully
implemented a multi-channel, multi-product integrated banking
service. Open Plan currently has more than 290,000 customers,
holding some 750,000 positive margin products and we are on
track to achieve our target of 500,000 customers by the year
end. This has been achievable only as a result of our investment
in building, testing and piloting our technology and customer
propositions before launching them.

The impact of this investment together with incremental
marketing and fulfilment totalling £30.8m reduced first half
profit before tax to 8.4% lower than for the corresponding
period of 1999, at £232.3m.

Traditional business areas also performed strongly. Total net
mortgage lending rose by 50% on the first half of 1999,
exceeding £1.5bn for the first time and UK net mortgage lending
rose by 60%. This will be reinforced from the second half of
this year by the Open Plan Offset mortgage, launched at the
beginning of June. This accounted for 36% of new mortgage
applications in July. Retail deposits performed strongly with
Woolwich achieving a 6% market share in the personal savings
market and overall customer balances rose by £1.5bn. In non-
interest income a 13.7% growth in revenues was recorded as
strong equity and retail banking sales offset the effects of
competition and a change in consumer preferences in general
insurance. The successful balancing of competitive conventional
products and innovative new ideas enabled net interest margin to
be maintained at 2.08%.

The company has declared an interim dividend of 4.4 pence per
share, an increase of 12.8% over 1999. The dividend will be paid
on 9 October 2000 to shareholders on the register at 25 August
2000.

Strategy

The Woolwich's strategy, which was mapped out some two years ago
and remains well on track, is to integrate the emerging channels
of distribution into its core business and existing distribution
systems. This enhances our well established and valuable brand
by offering customers tangible benefits from increasing the
depth of their relationship with the bank. This, we believe, is
the most effective route to achieve lasting customer
relationships and increased product penetration which will lead
to sustainable profit growth.

In implementing our strategy, we have fundamentally changed the
structure of the organisation from one that was built around
individual product groups to one which focuses on customer
segments and develops and markets products tailored to these. We
have also transformed our processing functions, outsourcing
those that can be undertaken more effectively by specialist
third party suppliers and enhancing those that we have retained
through better management, training and incentivisation
programmes.

Open Plan

We have now recruited more than 290,000 Open Plan customers in
more than 260,000 hub accounts with three quarters of a million
products earning positive margins. Applications are continuing
at a high rate. Against the background of a market average of
one and a half products per customer we have succeeded in
maintaining the product holding level achieved in the early
pilot and for those who have joined Open Plan the average
product holding level has risen to some 3.7 products overall.
The conversion of 128,000 existing customers, in a programme
designed to protect the Woolwich customer base, resulted in a
short term dilution in the average product holding to 2.9. This
will be rapidly increased by post-conversion sales of additional
products. As the customer base begins to mature, we are seeing
trends towards higher savings balances and greater utilisation
of borrowing facilities.

Providing our customers with the ability to manage their money
using the channel of their own preference, including the branch,
is the key differentiator between Open Plan and those services
that confine customers to the telephone or internet. In this, we
have a clear lead. We have offered transactional internet
banking for well over a year, are still the only UK bank to have
WAP technology fully operational with customers able to see
balances, pay bills and transfer money between accounts in a
fully secure environment, and will, in a matter of weeks, launch
a fully-functional banking service on interactive digital
television. In addition, we have invested in further branch
automation, including the introduction of internet terminals for
customer use, to increase the efficiency of customer service and
the productivity of branch sales teams.

During the first half we continued to introduce innovative
products into the Open Plan family, all of which offer good
margins for the company and significant benefit to our
customers. The most recent is the Offset mortgage which provides
the customer with the opportunity to significantly reduce
mortgage costs by offsetting current account and savings
balances against the mortgage debt. This can provide the
equivalent to an 11.25% rate of return on their savings for
higher rate tax payers. Open Plan Offset is already accounting
for 36% of UK mortgage applications as well as a significant
increase in new savings balances. Our experience so far is that
branch sales are proving to be the most successful distribution
channel and that 58% of Offset customers have no previous
relationship with the Woolwich. We have also found that Offset
mortgage values are higher and of better credit quality than the
existing customer base. This product demonstrated its ability to
change the market place in Australia, where it quickly came to
dominate product design and pricing. It shows that outstanding
value to the customer can be reconciled with sustainable and
fair returns to the company.

AXA

Contracts have been signed with the AXA Group for a strategic
marketing agreement under which The Woolwich will provide AXA's
customers with its Open Plan integrated banking service, via
AXA's internet-based portal. The service, to be branded 'AXA
Open Plan from The Woolwich', will provide banking services from
The Woolwich, including current account, savings, credit cards
and lending products, integrated with investment and insurance
products provided by AXA. It is intended that in due course all
will appear on one monthly statement and the links between the
two companies' products will be seamless. AXA will continue to
offer its products and services through existing distribution
channels.

In addition to the internet, the service will be made available
through ATMs and via call centres. The service will subsequently
be accessible to all AXA's portal customers via WAP-enabled
mobile phones and interactive digital television. The agreement
will provide AXA's customers with an extended range of quality
banking services that will form part of the core of its portal,
which is expected to be launched around the end of this year.
Customers of the AXA portal will also be able to access
information and advice as well as buy products and services from
a selection of other partners. AXA Sun Life will provide core
savings and investment products, while AXA Insurance and PPP
Healthcare will supply general and health insurance services.
DLJ Direct will underwrite an on-line share dealing facility.
The Woolwich will benefit from access to segments of an
additional customer base of some 8 million people.

Global Home Loans (GHL)

GHL's progress in introducing US standards of service to the UK
mortgage market contributed materially to our ability to
increase mortgage market share in the last half year. Since
October 1999 when all staff involved in the origination of new
mortgages were transferred to GHL, we have seen an almost
doubling of employee origination productivity and a 15%
reduction in the cost of each mortgage processed. Following a
successful pilot phase, GHL's mortgage origination system was
rolled out to seven processing centres in early July and further
enhancements are at present in user testing. The Woolwich's
entire mortgage portfolio has now been converted onto the
customer service applications of GHL's servicing system, while
Woolwich's existing accounts systems will continue to operate
over the September mortgage year end as the accounting
functionality of GHL's service system completes its development
and testing. We anticipate that there will be further efficiency
gains combined with customer service improvements as these
facilities become fully integrated.

UK Mortgage Lending

In the UK mortgage market Woolwich achieved a 60% increase in
net advances over the comparable period of 1999 and a 6.2% net
lending market share - higher than our natural 5.3% share of the
market. The ratio of redemptions and repayments to advances was
cut from 72% to 63%. This improvement results from an active
customer retention programme and the increasing effect of added
value products reducing the commoditisation experienced by the
market in general. The flexible credit facilities associated
with Open Plan borrowing have been effective in reducing re-
mortgaging away from us while the increasing proportion of the
book that this product represents enables positive margins to be
earned on a sustainable basis.

UK Consumer Credit

Personal net lending was similar to the level of the second half
of 1999 at £55.2m in spite of increasing advances at the gross
level as the lending book becomes increasingly mature and
redemptions rise. The results of FirstPlus continue to
demonstrate strong net lending volumes, up 26% on the comparable
period of 1999 at £110m, with exceptionally low levels of
arrears whilst margins remain firm at above 7%. This business
has performed outstandingly well and has proved a successful
acquisition both in terms of new lending and credit quality.
There is also potential to offer FirstPlus customers access to
mainstream Woolwich mortgage products as their loan to value
ratios decrease towards levels that meet normal lending
criteria.

Improved Credit Quality

The percentage of UK mortgages in arrears reduced from 1.75% to
1.63% over the period and the number of UK properties in
possession further declined from 339 to 303. The quality of the
mortgage business written has been excellent, with an increase
in the average loan size and a reduction in the average loan to
value ratio. This development, which has been taking place over
the last two and a half years, reflects the appeal of Open Plan
borrowing to good quality customers. The introduction of Offset
will strengthen this trend.

Quality of credit in the rapidly growing Continental European
mortgage book is also showing further improvement with mortgages
in arrears dropping from 1.84% to 1.56% over the period in
France and from 1.32% to 1.23% in Italy. Woolwich continues to
provide prudently for its Continental European operations.

The rapid growth in Open Plan and the consequent rise in volumes
in overdrafts and credit cards requires a prudent increase in
provisioning. Within the UK consumer credit market, total
provisions have risen by 26%, reflecting the growth in lending
of 24% over the period.

FirstPlus continues to experience exceptionally low arrears.
Given the immaturity of the book the provisioning continues to
be on a prudent basis, with its growth driven by the growth of
FirstPlus balances.

Cash-based Savings

Commitment to maintaining our franchise in the cash-based
savings market resulted in growth in customer balances of
£1.5bn, following a reduction of £1.8bn in 1999. In 2000 we
experienced a lower level of fixed rate maturities and achieved
improved sales of cash-based savings products. This has been
boosted by the trend of customers entering Open Plan to increase
savings balances as they consolidate their savings held
elsewhere. Fee income from cash-based savings rose by 29% to
£26.4m based on strong growth in current account balances and
earnings from card-based accounts.

Continental Europe

Strong growth in the Continental European businesses overall was
primarily driven by Italian net lending which rose 94% in local
currency terms over the similar period in 1999. Overall
Continental European lending increased by 22% over the same
period in the previous year. Exchange differences increased the
value of these balances as the decline of foreign currencies
against sterling over recent years has begun to reverse.

In Italy gross lending was strong, up 85% in local currency
terms. Woolwich's market share of balances outstanding has risen
rapidly to 2% of this growing market and our share of new net
lending is higher still. Although asset margins on existing
business continued to decline due to competitive pressures
spreads on new business have now remained stable over the last
year. Total income grew 36% over the same period last year while
pre-tax profits remained broadly flat due to the cost effects of
the rapid growth of the business. In order to protect sales
through its indirect distribution network the Group has acquired
a 20% holding in Banca Woolwich's principal introducer, Gabetti
Holding SpA. Two additional representative offices and one new
branch were opened while the proportion of direct business from
Woolwich's own sources has risen to 15%.

In France the property market was less buoyant and strong
competition in the mortgage sector exerted a downward pressure
on margins. Again new business margins have remained flat over
the past year while the margin on old business declined. Volume
growth was also affected by competition and the remaining run-
off of the Midland Bank mortgage book, with the result that
France achieved a volume growth of loans of only 7% in the half
year on its estimated 1.5% share of the overall market.

Independent Financial Advice

Woolwich Independent Financial Advisory Services (WIFAS) has
focused on further development of its existing customer base
with the result that income from existing customer reviews and
third party relationships now accounts for almost a third of
total income. This has enabled it to maintain the high level of
income that it attained in the first half of 1999 while the
increase in competitive deposit based savings products and the
concentration on Open Plan, together with subdued equity markets
and lower endowment sales reduced income earned from branch
referrals.

The acquisition of the 50% stake in Sedgwick Independent
Financial Consultants (SIFC) at the end of 1999 was a welcome
addition to The Woolwich's IFA activity with the company
generating income of £11m over the period. Sedgwick's strength
in the corporate area extends the range of Woolwich coverage in
the IFA market and work to increase efficiency through sharing
backup systems with WIFAS is progressing well.

Long Term Savings

Life assurance income rose from £21.1m to £30.2m. This was
achieved through increases in sales of mortgage protection, life
protection and pensions, offsetting a reduction in mortgage
endowment policy sales. The administration and processing in the
life business is being brought in house, with The Woolwich
purchasing the remaining 10% of Woolwich Life currently held by
Royal & Sun Alliance. This resulted in an additional £8m in
embedded value, included within the total income.

In the unit trust and ISA/PEP business, funds under management
were broadly neutral reflecting the offsetting effect of stock
market performance against sales of new funds. In spite of this
income rose by 22% to £19m primarily driven by a shift in
product mix from bonds to equity products as well as the
increasing effect of annual management charges.

General Insurance

As a result of the shift of mix in our mortgage business with a
higher proportion of introduced business, together with the
growth of the proportion of the re-mortgage business attracted
from other lenders, there were reduced opportunities to sell
mortgage related house insurance. The effect of last year's move
to a more competitive pricing structure across all of our
housing products to improve retention also meant a lower level
of income per case. As a result, income fell by 10% to £14.5m.

Littlewoods

The Littlewoods joint venture is progressing well and is
expected to move into profit during the second half of this
year. It has now acquired over 7,000 new customers with the
principal sources of income being lending on credit cards and
personal loans together with payment protection insurance. In
July, a dedicated call centre was opened in Sunderland.

Costs

Operating expenses increased to £237.4m, up 20% over the
equivalent period in the previous year, driven primarily by an
incremental expenditure of £30.8m on the marketing, fulfilment
and technology spend for the accelerated Open Plan roll out
during the first half. Without this expenditure the increase in
existing costs would have been £8m, an increase of 4%. The
existing cost structure increase of £8m was partly driven by
increased volumes of processing and partly due to transitional
costs arising during the conversion of Woolwich mortgages to GHL
processing during 2000. Excluding the incremental costs
associated with the Open Plan roll out, the cost income ratio
was 41.8%, slightly below the first half of 1999 level of 42.6%.
A number of initiatives commenced during the period to drive
down costs and gain the full benefits available from the GHL
transfer which are expected to become effective during the
second half of the year.

Treasury Services

Treasury net interest income contribution in the first half of
2000 increased to £18.3m from £16.7m before the gilt portfolio
profit of £4.8m realised in 1999. A high quality term asset
portfolio was constructed which, together with a successful
stance on market interest rate expectations, produced the
majority of this outperformance. As banker to the Group,
Treasury continues to expand the investor base for the Woolwich
name, specifically launching its first Euro denominated senior
debt issue, in addition to issues of £400m and a US$ issue of
$300m, all at attractive margins.

Unclaimed Shares

On 10 July 2000, The Woolwich gave notice of its intention to
dispose of those shares remaining unclaimed following the
transfer of the business of Woolwich Building Society to
Woolwich plc on 7 July 1997. As at 10 July 2000, there were
approximately 23m unclaimed shares. Under the terms of the
agreement which dealt with the transfer of business, if those
persons entitled to unclaimed shares have not provided
satisfactory evidence of their entitlement within three months
after the giving of notice, the Woolwich is required to sell the
shares. The net sale proceeds together with interest accruing
will be retained within the business, although The Woolwich has
announced its intention to set up a charitable trust which will
be funded from the interest earned on the sale proceeds. Those
persons entitled to the unclaimed shares have a period of nine
years from the date of sale in which to prove their entitlement
to their share of the net sale proceeds together with all
dividends accrued to the date of sale. The Woolwich will retain
a creditor for this period in respect of the outstanding
liability. Where it is established that shares were originally
issued in error, the net proceeds of the sale of those shares
will be credited to non-distributable reserves.

Capital

During the period Woolwich purchased 19.1m shares for
cancellation at a cost of £58.3m. During 1999 share buybacks
amounted to £120.6m and during 1998 £104.1m. In total Woolwich
share repurchases have amounted to £283m and together with
special dividends a total of £622.5m has been returned to
shareholders since flotation. The return of capital, partially
offset by higher interest rates during the period resulted in
income on capital being £3m less than in the equivalent period
of 1999.

Woolwich's success in lending growth led to an increase of risk
weighted assets by 10.8% over the past year and combined with
return of capital to shareholders resulted in a reduction in the
Tier 1 ratio to 9.9% in line with expectations.

Tax

On 17 July 2000 the Inland Revenue gave notice that it does not
intend to appeal the decision of the Special Commissioners of
Income Tax that the costs of converting from Woolwich Building
Society to Woolwich plc in 1997, with the exception of the
statutory cash bonus, are fully deductible for tax purposes.
Those costs amounted to £69m in 1996 and 1997. As a result, the
accounts of Woolwich plc include a £22m exceptional tax credit.

Outlook

We said in February that we see 2000 as a watershed year for
banking in which winners and losers will emerge depending on how
well they deal with change. This process has already started and
those banks that have not yet begun to deliver on their
strategies for technology may experience increasing difficulty
in doing so. Most of the strategies that have been announced so
far rely on achieving significant growth in customer numbers.
Collectively, the market cannot sustain these figures and it is
inevitable that some will fail to achieve their targets,
particularly if these can only be achieved by offering loss
leading products in the hope that these will be converted into
profitable relationships over time.

The strength of Woolwich's strategy is that it inherently builds
relationships with its customers which extend and deepen over
time. We do this by attracting customers through offering
innovative, market-changing products such as the Offset
mortgage. We develop that relationship with the customer using
sophisticated predictive data modelling. We then retain them
with sustainable low pricing and good service at a fair rate of
return. We can continue to achieve this because, in the past two
years, we have built, tested, piloted and then successfully
implemented a platform which is fully integrated across the bank
and delivers its services consistently across all channels. Open
Plan is not a concept, it is reality - designed, developed,
delivered and operating successfully.

This year is, therefore, the year of delivery for The Woolwich.

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