Chelsea Building Society results to 31 December 2008

Record receipts from savers

Solid underlying performance in an unprecedented year.

A year of unprecedented events 2008 provided an unprecedented set of challenges.

The housing and mortgage markets deteriorated rapidly, the markets witnessed extreme events and the UK economy entered recession.

Several financial organisations across the world failed.

These included a number of deposit-taking banks operating in the UK, triggering the Financial Services Compensation Scheme.

A shortage of wholesale market funds, both in terms of volume and duration, led to an increase in the cost of wholesale and retail funds.

Business overview 2008 was a record year for retail savings with net receipts in excess of ?830 million as people sought the safety and security of a trusted building society.

Total savings balances increased by ?1,154 million (or 13.7%) and the number of savings accounts increased by 79,000 to over 563,000.

Total new lending in the year was ?2,230 million (2007 ?3,168 million) and net lending (new lending less repayments and redemptions) was ?723 million (2007 ?1,354 million).

Lending volumes were deliberately constrained as the housing market deteriorated.

Net mortgage lending was funded entirely from retail deposits.

Liquid assets were raised above ?3.6 billion, representing 27% of total funds (2007 25%).

Total assets increased by 12% to andpound;14.7 billion (with 5% of this growth attributable to the increase in liquidity).

The group costs-to-mean assets ratio fell from 0.56% to 0.50% and the society costs-to-mean assets ratio fell from 0.53% to 0.47%.

Profitability and capital On 10 October 2008, Chelsea announced that it had an exposure of ?55 million to two failed Icelandic banks.

A provision of ?44.3 million has been set aside against the potential non-recovery of these monies.

As a consequence of this and other exceptional items referred to below, the Chelsea group has made a loss after tax of ?29.2 million, which has been transferred to general reserves.

This compares to the retained profit of ?45.4 million added to reserves in 2007.

The Society has made a profit after tax of ?7.0 million (2007 ?35.1 million).

The board believes that underlying profit is a clearer representation of the group's performance.Underlying profit for the year before tax was ?41.1 million (2007 ?68.8 million).

Underlying profit is the reported result from the income statement, adjusted for net gains/losses on financial instruments and exceptional 'credit crunch' related items.

This reduction in underlying profitability is attributable to increased funding costs (both retail and wholesale), the holding of higher levels of liquidity in response to current market conditions and a higher charge for mortgage losses (recognising that arrears are rising as more borrowers struggle to keep up their payments at the same time as house prices are falling).

The difference between the reported result and the underlying profit for the year includes a charge for net losses on financial instruments amounting to ?10.5 million (2007 ?5.8 million).

In addition, the one-off exceptional 'credit crunch' items referred to above are: the provision of ?44.3 million made against the exposures to the failed Icelandic banks; a provision of ?10.2 million to meet future levies from the Financial Services Compensation Scheme to support the failure of a number of banking institutions operating in the UK; and the write-off of goodwill of ?15.4 million arising on the acquisition of BCS Loans and Mortgages following the severe contraction of the markets in which the company operates.

Capital ratios remain strong: the core Tier 1 ratio stands at 9.0% (2007 8.7%) and the total capital (solvency) ratio is 13.2% (2007 12.8%).

Balance sheet: Emphasis continues to be placed on attracting funds from retail savers.

The proportion of funds raised from wholesale sources was 30.1% (2007 31.4%).

The absolute level of liquidity held was increased to 27% of total funds (2007 25%) in response to market conditions.

We have diversified our funding sources with the completion of a covered bond programme.

Following the announcement made by the Chancellor on 8 October 2008 about the government's recapitalisation scheme, the society applied for and received an Institutional Certificate under the government's Credit Guarantee Scheme and is accordingly eligible to apply in respect of debt instruments issued by the society.

Total residential mortgage balances amounted to ?10.3 billion (2007 ?9.8 billion).

The number of serious payment arrears continues to be lower than the equivalent average for the UK mortgage lending industry as a whole.

Total commercial mortgage balances amounted to ?158.3 million (2007 ?10.8 million), none of which was in arrears at the end of the year.

Chelsea has now ceased lending in this sector of the market.

Strategic development Our merger with Catholic Building Society successfully completed on 30 December 2008, increasing our branch network to 35 and welcoming Catholic's 4,600 members to Chelsea.

Richard Hornbrook, chief executive and director at Chelsea said: andnbsp;"2008 was a challenging year which saw financial markets around the world contract and competition for retail savings increase as a result of difficult wholesale funding conditions".

"The banking sector continued to struggle with a lack of available funding and there were a number of institutional failures, including deposit-taking banks in the UK.

Rising fuel, energy and food costs saw inflation rise and consumer confidence was dented".

"Against this backdrop, Chelsea demonstrated the strength of its brand by attracting funds in both the retail and wholesale markets".

"Although our underlying profit remained solid at andpound;41.1 million, we have regrettably been impacted by a number of one-off exceptional items that mean we are reporting a loss for the year".

"This is clearly a very disappointing outcome, made all the more so by the fact that it would not have happened but for the failure of a number of banks operating in the UK.

Our trading position remains positive, our capital is strong, our business model is robust and our proposition for customers is attractive".

"It is noteworthy that in 2008, we had a record year for retail savings inflow with net receipts in excess of ?830 million, as savers saw a safe haven.

We expect the current difficult trading conditions to persist throughout 2009, with the demand for mortgage loans remaining low, funds from wholesale sources remaining scarce and competition for retail savings remaining fierce.

Firms will increasingly be expected to maintain relatively high levels of liquidity and to keep much of that liquidity in high quality, low yielding investments.

All this will act to put pressure on profitability and limit the appetite of lenders to lend.

However, as a building society, Chelsea is comparatively well positioned to deal with these conditions.

We have an established business model, based on efficient operations and low costs; we have robust levels of capital (with a strong Tier 1 element) and liquidity; and we have strong savings operations to enable us to raise more funds from savers and so reduce our reliance on the unsecured money markets.

I remain confident that, despite the difficulties of 2008 and the current adverse trading conditions, Chelsea will continue to adapt well and deliver first class value and service to members.

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