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Britannia Building Society preliminary results announcement for the 12 months ended 31st December 2003.

• Educated consumers the best way to ensure fair market, says top ten lender
• Compulsory financial education the way forward
• Britannia gross lending up 18% to record £5.8 billion
• Operating profit £134.3 million, mutual benefits top £100 million
• Cost efficiency improves for sixth year running

Britannia, one of the UK's top ten mortgage lenders, today reported another set of strong results and called for the introduction of compulsory financial education in the national curriculum.

Universal financial education is the best way to ensure savings and mortgage markets work fairly, as well as improving prospects for future financial well being, says leading mutual.

Group Chief Executive, Neville Richardson, reported record lending, increased operating profits, cost efficiency improvements and a £100 million benefit to Members last year from the Society's mutual status.

He believes the nation would benefit from financial education. "Financial services companies have a duty to ensure transparency of product terms and conditions and regulators must ensure a level playing field, but active, informed consumers are the best way to ensure a fair market.

"Ensuring school leavers have basic numeracy skills, with an understanding of interest rates and how savings, mortgages, insurance and pensions work, will help them plan for their needs and be less reliant on State intervention and support.

"Proposals from the Financial Services Authority go a long way towards achieving this, but financial education remains optional," noted Mr Richardson. "It should be a compulsory part of the curriculum, and Britannia would be happy to work with the Government and FSA to help deliver it.

"Better education would help borrowers understand the commitment they were making when buying a mortgage," said Mr Richardson. Ensuring borrowers did not over stretch themselves is a key part of Britannia's mutual philosophy - its prudent approach to lending means nearly all its borrowers have loans within the normal 3.5 times salary standard.

This approach, coupled with a comprehensive range of offers and keen pricing, led to record lending for the Britannia Group in 2003, with sales up 18% to £5.8 billion.

Britannia's Members are reaping the benefit of the Group's unique business model, running the Membership business separately from the Britannia Capital Investment Group (BCIG) subsidiaries. Operating profit, before Britannia Membership Reward, was on target at £134.3 million, of which £76.0 million came from BCIG, reflecting the Group's commitment to return maximum value to Members while maintaining financial strength.

This strong performance enabled the Group to pay £42 million (2002 : £37.3 million) to Members through its unique Britannia Membership Reward, making a total of over £330 million paid in eight years.

In total, Members received more than £100 million of benefits as a result of Britannia's mutual ownership, including better rates on savings and mortgages, the Membership Reward and the cost of maintaining a bigger branch network than comparable plc mortgage banks.

Britannia Group Chief Executive Neville Richardson commented: "These are good results for our Members. We are competing effectively in a highly competitive market and are delivering real value for Members through our competitive savings and mortgages and through the returns generated from our subsidiaries. Profits were on target - in the Membership business we aim to make only enough profit to stay financially strong and to reinvest in service to provide value for our Members. The Britannia Capital Investment Group continues to show strong growth, proving the value of investing in these businesses in order to provide real returns for Members."

The Britannia strategy

Britannia launched a new corporate strategy at the beginning of the year. This is based on a number of 'givens' or foundation stones - remaining mutual, being financially strong, being a great place to work, grow and develop; and striving to be a model of compliance. The strategy commits Britannia to maintaining an extensive branch network and rewarding Members' loyalty with the Britannia Membership Reward.

The strategy also outlines the values to which the Society aspires - putting customers first, being easy to do business with, being excellent at communication, taking personal responsibility and striving to be faster, cheaper, better in all that we do.

Financially strong

Financial strength is a cornerstone of Britannia's strategy. Operating profit, before Britannia Membership Reward, was on target at £134.3 million (2002: £132.4 million). Of this, £76.0 million came from the Britannia Capital Investment Group (BCIG) companies (2002: £61.9 million).

Group interest margin was maintained at 1.10% (2002: 1.11%). The Society margin was 0.94% - among the lowest in the industry.

Britannia has focused on tight cost control in recent years. In 2003 we achieved 18% growth in our gross lending whilst at the same time holding our running costs flat.

Group cost/asset under management ratio (before amortisation of goodwill and including costs allocated to the securitisation vehicles) was reduced to 0.81% (2002 : 0.87%). The cost/income ratio (before amortisation of goodwill and including costs allocated to the securitisation vehicles) fell to 52.9% (2002 : 53.4%), reflecting the value offered to Members through lower interest margins.

Group capital and reserves increased by 5% to £1,453 million (2002 : £1,387 million), maintaining the security of Members' savings.

Sales performance

Gross lending for the Group totalled £5.8 billion - up 18 per cent - a good performance in a competitive market. Lending would have been even stronger, but flows of new business were restricted during the first half of the year to allow new systems to be brought on line.

There were strong and increasing levels of residential mortgage business into both BCIG and the Membership business during the third and fourth quarters, and the Group has a healthy flow of new business into 2004. There were continued strong retail savings inflows of £709 million (2002 : £600 million).

Within BCIG, the Commercial Lending department took a lower profile in the social housing market due to much lower margins being available in the market than in recent years, focusing instead on the retail and commercial sectors, which continue to provide healthy returns. Deposits continue to grow at offshore deposit taker Britannia International, although the low interest rate environment limited profitability.

Britannia Treasury Services (BTS) continued its successful asset management performance, buying mortgage books in bulk and selling non-membership mortgage assets at a premium. BTS also successfully completed two securitisations of mortgage assets totalling £742 million - bringing the total value of assets securitised since 1997 to more than £2 billion.

Putting our customers first

In addition to beneficial rates, Britannia Members receive the unique Membership Reward. Some £42 million (2002 : £37.3 million) was shared with Members this year. More than £330 million has now been returned to Members in the eight years since the scheme was introduced - clear proof of the ongoing benefits of mutual ownership. The average amount paid out in that time now totals £312, with potential maximum payouts totalling £4,000.

The merger of specialist lending subsidiaries Verso and Platform Home Loans early in the year created a 'one stop shop' for intermediaries offering a full range of mortgages. Platform's offer of one product range, one point of contact and one application process has been an instant success, with sales volumes exceeding target for the year.

There is strong demand from many smaller building societies for our help and expertise with some of the more complex and expensive back office and regulatory tasks, and we now have in place a team to manage these relationships directly.

Easy to do business with

The £60 million core systems replacement programme in the Membership business is nearing completion. New integrated mortgage systems went live during 2003 and the new investments system goes live in March 2004. This will deliver a 'one touch' service - we only ask for information from our customers once, and make it available across all our channels.

While branches remain key to our strategy, providing our face on the High Street, we have seen continued growth in business through our direct channels, with one third of all mortgage applications coming via the contact centre and our website. The mortgage application on our website www.britannia.co.uk is one of the quickest in the industry and offers borrowers an immediate lending decision.

New, user-friendly accounts such as EasySaver - which provides instant access 12 times a year - were developed in direct response to customer feedback, and have proved very popular.

Faster, cheaper, better

Most of our core mortgages and savings range is developed in-house, ensuring it meets the particular needs of Britannia Members. During 2003 we developed and launched a new offset mortgage in just a few weeks.

Our highly-experienced treasury team enabled us to take advantage of fluctuations in money market rates during the year, enabling us to offer highly competitive bonds and mortgages.

Excellent communications

Britannia is one of the few financial services companies to write to all of its customers when savings or mortgage rates change. Investment in new systems means that customers now only receive one letter, irrespective of how many products they hold. Our unique Member Council augmented our other Member communication activities. The council met four times during the year, giving us the opportunity to discuss issues in depth with an informed group of Members who challenge, ask questions and suggest alternatives.

We have invested significantly in internal communications to help our people live the values of the organisation. A series of 35 roadshows gave every employee the opportunity to discuss the new strategy with the Chief Executive and other Directors, and an improved monthly cascade briefing process ensures all of our people are kept up to speed.

Taking personal responsibility

Our success in delivering our strategy is assessed through 24 measures, which, importantly, include customer satisfaction. A major contributor to customer satisfaction is for Britannia's people to take personal responsibility to deliver the necessary standards of service. All employees are therefore assessed against this at their annual appraisal, and any performance bonus is dependent on successful delivery in this area.

Commentary

Britannia Group Chief Executive Neville Richardson said:

2003 was a year of achievement across the Britannia Group, as our success in winning a hatful of awards demonstrates - among other awards won, Britannia was voted best direct lender in the Your Mortgage awards and Platform was voted best non-conforming credit lender.

The biggest challenge for the business has been the market in which we operate. The prime sector in which the Membership business competes has been more competitive than ever before, placing real pressure on margins in the marketplace. This is good news for our Members provided the business is managed efficiently. That we were able to meet our targets, despite a slow start to the year, is testimony to the hard work and commitment of all of Britannia's people and shows the value of our mutual status, which does not require us to raise the Membership business profits which would be necessary to pay shareholder dividends.

Our success is underpinned by our financial strength, realised through careful management of our assets and control of costs. We continue to prosper through a strategy of prudent lending - our concentration on quality lending will minimise the risk of increased arrears and bad debts should the economic picture change going forward.

Looking forward, we will look to consolidate on our performance in 2003. We saw record sales in the second half of 2003 and will look to continue this pace. We will leverage the maximum benefits for our Members from our investment in new systems. It will continue to be a highly competitive market in mortgages, savings and investments. We will be assessing our approach to sales of regulated products as we approach depolarisation - the changes in legislation that will allow us to sell a range of regulated products from different providers. We will continue to invest in our people so that they are able to live the values of the Society and put our Members first.

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