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6 February 2008

Excellent results in a year of two halves

Chelsea, the UK’s fifth largest building society, is pleased to announce its financial results for the year ended 31 December 2007.

2007 was undoubtedly a year of two halves. The optimism felt early in the year was shaken in August when the money markets first experienced the unprecedented turbulence that became known as ‘the credit crunch’. As a building society, Chelsea’s predominant focus on retail savings meant we were in a strong position to weather these difficult conditions. The robust results announced today are clear evidence of Chelsea’s continuing strength as we enter 2008.  

Business Highlights

• Total group assets increased by 17.5% to £13.1bn (2006 £11.1bn)
  
  
• Profit after tax increased by 10.7% to £45.4m (2006 £41.0m)
  
  
• Significant improvements in efficiency; costs-to-mean assets ratios down from 0.59% to 0.56% (group) and 0.59% to 0.53% (society)
  
  
• Gross lending £3.13bn (2006 £2.95bn)
  
  
• Net mortgage lending £1.35bn (2006 £1.35bn)
  
  
• Asset quality remains high with mortgage arrears substantially below industry average
  
  
• Savers balances increased by 7.7% to £8.4bn (2006 £7.8bn)
  
  
• Liquid assets increased to £3.1bn, 25% of total funds (2006 £2.4bn, 23%)
  

Richard Hornbrook, Director and Chief Executive commented on the results: -

‘2007 started very positively, with the mortgage and housing markets buoyant. It was a year of two halves however, with the second half bringing many challenges. July’s interest rate rise took Bank Base Rate to a point not seen since February 2001 and consumer confidence began to wane. By September ‘the credit crunch’ was hitting the headlines and testing the resilience and business models of everyone operating in the financial markets.

Despite these challenges, our performance in 2007 was strong and, in changing market conditions, we consistently punched above our weight. We saw our assets grow to over £13 billion, and our new lending was well above our proportional share of the building societies’ sector. Our savers continued to enjoy excellent value products, with an average savings rate 0.43% better than the average for the building societies’ sector as a whole. Driving down relative costs is one of our strategies and once again we expect to be one of the most cost efficient societies. Combined with our strong capital, increased liquidity and good quality assets, we have demonstrated the strength of our business model and the fact that we are well placed to meet the challenges of a changing market.  

Exceptional, motivated staff continue to be a pivotal factor in our success and these strong financial results are a credit to everyone who works for us. Their determination, commitment and enthusiasm in a challenging year cannot be overstated and I would like to take this opportunity of thanking them for their outstanding contribution.

The outlook for 2008 remains uncertain, with the demand for residential mortgages expected to fall. Obtaining funds, whether from savers or from the wholesale markets, is likely to prove increasingly competitive and relatively costly. Chelsea however, is well placed to meet these challenges with a strong business model, good reputation and robust levels of liquidity and capital. I am confident that, despite current market conditions, we remain on track to meet our objectives for 2008 and to continue to deliver first class value and service to our members.’

Review of the year

Mortgage Lending

Chelsea’s gross new lending amounted to £3.13 billion, 119% of proportional building societies’ market share1. Net lending of £1.35 billion was the same as in 2006, and represented 144% of proportional building societies’ market share.

As in previous years, much effort was focused on retaining borrowers coming to the end of a fixed or discount period. In 2007 more than £1.2 billion of existing mortgages were transferred to follow-on mortgage products.

Buy to let lending increased by 64% to £1.1 billion, reflecting the continuing investment appeal of the UK property market. Undoubtedly, rising interest rates and tighter credit criteria did act to cool the interest of the buy to let investor in the second half of 2007.  Nevertheless, total buy to let mortgage balances rose by 78% to £2.2 billion, and now represent 22.4% of total mortgage assets. 

Lending to first time buyers fell to £0.5 billion, reflecting affordability difficulties. The potential for reduced interest rates, and stabilisation of house prices, may start to ease these pressures.

Chelsea continues to offer the Prospect range of mortgages for borrowers who have had minor credit problems in the past. Lending to such borrowers amounted to £0.2 billion and represented 7.2% of total lending. Total Prospect mortgages have now reached £0.6 billion, and represent 5.7% of total mortgage assets.

Savings

In 2007, Chelsea’s retail depositors enjoyed an average savings rate of around 5.35%, 0.43% better than the average rate for the building societies sector as a whole. Total savings balances increased by 7.7% to £8,405 million.

Liquidity

Liquid assets in the form of short term marketable financial instruments and deposits rose to over
£3 billion, representing 25% of total funds and providing a substantial cash cushion to counter the prospect that tight credit conditions will continue to dominate the market for at least the first quarter of 2008.

Efficiency
                                       
Our ability to compete in the UK mortgage and retail deposit markets is, to a large degree, dependent on being able to operate with relatively low costs. In 2007, the group’s costs-to-assets ratio fell from 0.59% to 0.56% and the society’s costs-to-assets ratio fell further from 0.59% to 0.53%. These ratios are likely to be some of the lowest in the building societies’ sector and reflect the benefits that are beginning to materialise from our ongoing review of the efficiency of our processes.

Profit

The net interest margin, essentially the difference between the average interest rate charged to borrowers and the average interest rate paid to savers, fell to 0.91% reflecting the highly competitive UK financial services marketplace. Increases in other income earnings and improvements in efficiency helped profits increase by 10.7% to £45.4m after tax.

Opportunities

Strong competition continues to squeeze the net interest margin. While this is good news for members, it requires us to generate additional earnings from other sources if we are to maintain a level of profit consistent with our business development aspirations.

In February 2007, we acquired Britannia Capital Securities LLP, a small loans broker based in Swindon.
In October 2007, our subsidiary company Chelsea Mortgage Services Limited entered into an agreement with New Life Mortgages Limited to purchase a small portfolio of equity release mortgages. Both acquisitions are already contributing to group earnings.

Customers

We believe that it is the customer experience that differentiates Chelsea from its competitors. We will continue to review our processes from the customer perspective and research the views of our members with the aim of providing the best products and services. A member of our senior management team is specifically responsible for the customer experience and for ensuring that we adopt best practice when it comes to ‘treating customers fairly’. We continue to work closely with the FSA’s guidance in this area and we remain confident of meeting all relevant compliance targets and of delivering a first class service to members.

Notes

• Natural market share of mortgage lending is based upon the mortgage lending figures for all building societies published by the Building Societies Association and is calculated using the ratio of Chelsea’s total mortgage assets to the aggregate total mortgage assets for all building societies.

For further information please contact

CHELSEA BUILDING SOCIETY
GROUP FINANCIAL RESULTS 2007
5 YEARS’ PERFORMANCE SUMMARY 2003 – 2007

*Comparatives as published in Report and Accounts 2005 as adjusted for IFRS with the exception of IA 32 and IAS 39

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