FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

Securities Exchange Act of 1934

For the month of February 2004

ABBEY NATIONAL PLC
(Translation of registrant’s name into English)

Abbey National House, 2 Triton Square
London NW1 3AN, England
(Address of principal executive offices)

        Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

        Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes . . . . . . . No . . .X. . . .

⁽¹⁾ 2002 statutory loss before tax has been restated by £37 million, reflecting the change in accounting policy in relation to Employee Share Option Plans, explained in the "Basis of results presentation".

⁽²⁾ The PFS loss per share was (2.4) pence; PBU loss per share of (50.0) pence.

⁽³⁾ In deriving the trading results, certain charges in relation to the cost programme and strategic restructuring process are excluded, as are investment variances and other specific life-related adjustments, and goodwill charges. Section 2.4 provides a breakdown of the items excluded to arrive at the 'trading performance' definition by profit and loss line.

⁽⁴⁾ Calculated based on the trading profit before tax, assuming a 30% tax rate (2002: 30%), and after a minority interest charge of £55 million (2002: £62 million) and preference share dividend of £56 million (2002: £62 million), which excludes £4 million (2002: £nil) of redemption premium and issue cost write-downs. The statutory loss per share calculation includes the full preference dividend and actual effective tax rate.

⁽⁵⁾ If adjusted for expenses accounted for as part of embedded value, the ratio would be 59.2% (2002: 55.7%).

⁽⁶⁾ A detailed working of the notional equity release is contained in Section 4.1.

At our 2002 results presentation a year ago, Abbey set out the scale of financial threats and business challenges it faced and the need for a fundamental change in strategy. The new strategy was announced, to focus solely on personal financial services (PFS) in the UK, and sell or wind down its other activities.

It has been a tough year for Abbey, but we've made a lot of progress in reducing risk, selling certain assets, re-organising the PFS business and putting foundations in place to allow Abbey to grow in the future. One year into our three-year change programme, we are on track and have met the priorities we set out 12 months ago. The task is challenging, however, as the 2003 financial results show. We are reporting a loss before tax of £686 million, albeit substantially due to the speed and success of asset and business sales in the Portfolio Business Unit (PBU).

Summary of the financial results for 2003:

• PFS trading profit before tax of £1,021 million (2002: £1,219 million); in line with guidance given at the third quarter statement in October, with the exception of a provision of £50 million described below;
  

• an overall Group pre-tax loss of £(686) million (2002: loss of £(947) million), consisting of:

• PFS trading profit (as above); less
  

• PFS 'non-trading' charges of £786 million (2002: £1,398 million). These include a £373 million life assurance provision largely relating to the pending introduction of new FSA regulations in this sector on "realistic" balance sheet reporting and related matters (as flagged in the third quarter statement); and
  

• Portfolio Business Unit (PBU) losses of £(921) million (2002: £(768) million); reflecting successful and rapid reduction of assets, and write-down of certain remaining assets to estimated sale values.

Other financial and business highlights include:

• an 80% reduction in PBU assets, from £60.0 billion to £12.3 billion, well ahead of plan. By the year-end, the reduction in risk weighted assets and associated losses equated to a notional equity release of approximately £1.0 billion, with an overall improvement in loan and securities loss estimates of £344 million versus the mark to market disclosures given at the start of 2003;
  

• the PFS banking spread narrowed to 1.81% (2002: 2.03%), with the Abbey retail spread falling from 1.79% to 1.55%, in line with previous guidance;
  

• gross and net mortgage lending up 32% and 40% respectively. Second half net lending market share was 10.4%, with the full year of 9.9% our highest market share in 9 years;
  

• further improvements in credit quality, with a 39% reduction in 3-month-plus mortgage arrears cases in 2003, with the position now better than the Council of Mortgage Lenders average;
  

• PFS trading costs, including costs reported as part of embedded value, down £22 million, with underlying inflation, increased pension costs, investment and business re-launch spend being offset by £126 million of cost savings in the year (£165 million on an annualised basis);
  

• an Equity Tier 1 ratio of 6.9% (2002: 6.4%) and Tier 1 ratio of 10.1% (2002: 9.2%), with the improvement largely due to PBU capital release. However, we are increasingly cautious about the prospects for a 'one-off' capital return to shareholders in the light of the ongoing regulatory and accounting developments as highlighted in previous statements; and
  

• a proposed final dividend of 16.67 pence, to give a full year dividend for 2003 of 25 pence per share, the same as the payment for 2002.

In 2004, Abbey expects a substantial recovery in total Group statutory results reflecting the anticipated reduction in PBU losses. We aim to report the first improvement in PFS revenues during the second half of 2004, but remain cautious about full year PFS trading profits. Growth prospects are expected to be held back by reduced profitability in the mortgage book as the impact of the lending mix of recent years combines with continuing redemptions to lower margins further. Since the business re-launch, steps are being taken to offset this trend, but these will take time to have a material impact. We remain confident that the major changes we are making will improve Abbey's PFS business and produce a stronger business with better potential for growth.

PFS trading profit before tax of £1,021 million (2002: £1,219 million) was down 16%, and equated to a trading earnings per share of 41.7 pence. The main drivers of the fall were:

• reduced earnings from the life assurance business, largely due to a £142 million negative swing in experience and assumption changes;
  

• a fall in Banking and Savings trading profit of 9% to £876 million (2002: £962 million), with lower net interest income, largely due to spread reduction;
  

• lower general insurance earnings of £73 million (2002: £92 million); offset by
  

• a smaller loss in Group Infrastructure of £(307) million (2002: £(355) million) due to earnings on increased capital held centrally and lower expenses, offset by a provision of £50 million relating to uncertainty about the regulatory environment for product mis-selling.

PFS statutory profit before tax was £235 million (2002: loss of £(179) million), affected by the following material charges in 2003:

• embedded value charges and rebasing in the life assurance business of £(443) million (2002: £(553) million). This includes a charge of £80 million relating to tax law changes affecting the structure of the Scottish Provident acquisition; adverse investment variances and the effects of the adoption of active embedded value accounting of £118 million; and a £373 million provision largely relating to the pending introduction of new FSA regulations in the sector on "realistic" reporting and related matters. The final impact of regulatory change on our life companies is still unclear, with scope for the final charge to be significantly higher or lower, than the provision made.
  

• re-organisation costs of £315 million compared to £34 million in 2002, reflecting expenses in relation to cost reduction as well as smaller one-off expenses associated with the new PFS strategy. Also included are asset write-downs of £141 million, including £69 million in the second half of the year, following the completion of the mortgage processing and general insurance joint venture reviews. The write-down has substantially reduced the amount of previously capitalised development costs in relation to these joint ventures, down to £6 million.

In terms of PFS new business flows, the highlights include:

• full year gross mortgage lending of £29.1 billion (2002: £22.1 billion) representing a market share of 10.7%, with the second half volumes up 26% on the first half. With capital repayments still slightly below natural stock share, net lending of £9.4 billion was 40% higher than 2002 (£6.7 billion), equating to a market share of 9.9%;
  

• total retail deposit inflows of £1.2 billion, lower than the £1.9 billion in 2002;
  

• bank account openings totalling 396,000 (2002: 444,000), with a total stock of accounts nearing 3.8 million and Abbey-branded in-credit balances up 23% to £4.3 billion (2002: £3.5 billion);
  

• growth in unsecured lending balances, which includes credit card (cahoot only), unsecured personal loans and overdrafts, by 12% to £2.9 billion (2002: £2.6 billion);
  

•  investment product sales of £184 million (annualised equivalent) 43% lower than 2002, reflecting subdued market demand and the Abbey-specific impacts of our withdrawal from the with-profit bond market, declaration last year of a zero bonus for with-profits policyholders, and the need to substantially restructure our investment product ranges, branding and distribution. These changes are now underway;
  

• protection sales 12% higher than 2002 at £125 million (annualised equivalent); and
  

• general insurance new policy sales of 452,000, down 11% on 2002.

These new business flows are creditable given the current demands of the change programme on front line staff, but are below our future aspirations.

Abbey has made significant progress against the priorities set out in February 2003.

We have introduced a new functional structure based around the customer, in addition to which, major organisational changes implemented include:

• completing the Executive Director team, with the appointment of Priscilla Vacassin (Human Resources Director), Angus Porter (Customer Propositions Director) and Tony Wyatt (Customer Operations Director); creating a Customer Board, attended by Vittorio Radice and Waheed Ali; and appointing Gerry Murphy and Geoff Cooper as Non-Executive directors, with effect from 1 January 2004;
  

• reviewing the next layer of management, reducing the size of this group and filling the majority of resulting vacancies including the external recruitment of new heads of advertising, compliance, risk, general insurance, corporate strategy, internal audit and branch distribution;
  

• undertaking a wide-ranging review of our operational activities, which has concluded to date that we will plan our operations activities around 5 key UK locations, and move work from smaller sites to larger centres. In 2003, we closed 6 operational UK sites, with a further 4 site closures already announced for this year. We have also announced the transfer of a range of administrative activities to a new site in India;
  

• closing the majority of our in-house active fund management business and the transfer of funds to multi-manager, aiming to deliver superior investment performance and choice for our customers; and
  

• reaching ongoing annualised gross cost savings of £165 million.

We have also been investing in and upgrading our IT to support the people who deal directly with customers, giving them better tools to do their job, including:

• installing new customer relationship management software, with more than 8,000 staff trained and online. By the end of the second quarter of 2004, 11,000 customer-facing staff will be using the system; and
  

• the replacement and upgrading of IT in the branches, covering 40,000 pieces of IT equipment (which will be complete by June 2004), putting a new telecommunications platform in our branch network, head office sites and call centres, which is faster and easier to use.

At this time last year, we highlighted the need to address recruitment and retention in some areas of the business, as well as improving and increasing numbers of customer-facing staff. To date we have:

• introduced a number of new recruitment and induction measures, with new joiner turnover in our branches and telephone centres now running significantly lower than a year ago;
  

• fundamentally re-organised the staffing and management of our branches. 400 customer advisers have been recruited, and the number of staff qualified to give mortgage advice has been increased by 27% over the year;
  

• tackled service standards in certain areas, partly through recruiting 150 staff in our banking and savings contact centres - they are now consistently achieving industry standard service levels and aiming for further improvements;
  

• increased training days by 38% from 2002 levels, including almost 130,000 training days in the second half of 2003 alone - double the amount in the first half; and
  

• launched our outreach programme, with 60 staff now actively making calls, and plans to increase capacity further in the first half of 2004.

On 24 September, we re-launched the business, clearly signalling our intent to deliver a distinctive experience to our customers, and laying out for our people the ways to make this happen. The re-launch also involved:

• a commitment to simplify and increase consistency in our core banking, mortgages and savings ranges. This has already included replacing six different current accounts with just one, grouping similar mortgages and savings accounts together, making it easier for customers to choose the right account, and the withdrawal from sale of some low paying savings accounts;
  

• reducing the number of brands we will use in future, uniting under the Abbey brand in most business areas. In 2004 this will mean replacing the Scottish Mutual and Scottish Provident brands for new business;
  

• a commitment to communicate in plain, everyday language, including a rewrite of more than 7,000 customer letters. As at 31 December, over 2,000 have been completed, covering most of our banking, savings and mortgage letters; and
  

• the first phase of a new advertising campaign rolled out.

The second half of the year also saw Abbey launching new and innovative products and services, including a wrap service for intermediaries, and offering all customers a multi-manager investment service both direct and through IFAs.

Total PBU assets of £12.3 billion are 80% lower than at the start of the year, with a corresponding decrease in risk weighted assets of 72%.

A key priority for 2003 was to tackle the level and concentration of risk in the portfolio, while bearing in mind the need to extract maximum value for our shareholders. Excellent progress has been made, partly through improvement in capital markets, but also through a well-managed disposal process. A variety of approaches have been adopted, ranging from business and asset sales to closure and wind-downs. Overall, the losses to date on the loan and debt securities portfolios have been lower than the unrealised mark to market losses reported at the outset by approximately £344 million.

The progress made gives us confidence that we can achieve a fair price in the market and complete the remainder of the plan.

Excluded from the December year end figures are agreements for the sale of a further £1.0 billion of assets, which include:

• an agreement to sell Royal Saint Georges Banque to GE Capital Bank France (GE), which has mortgage assets of £381 million; and
  

• an agreement to sell 77% of the remaining private equity portfolio to Coller Capital, representing £289 million of assets (net of provisions) and undrawn commitments of £162 million. No further loss is expected upon completion as the assets were written down to net realisable value prior to agreement.

In total, by the end of 2004 we hope to have reduced the portfolio down to around 10% of the original £60 billion balance. We expect most of the remaining assets at that stage to be either in workout phase, or be of a moderate credit risk.

Capital ratios have improved strongly, reflecting the reduction in PBU risk weighted assets, to give a Tier 1 ratio of 10.1% and Equity Tier 1 of 6.9% (2002: 9.2% and 6.4% respectively).

The final dividend of 16.67 pence gives a full year dividend of 25 pence, the same as the full year 2002 payment. As previously communicated, the future level of payment will be targeted to reflect the cash earnings of the ongoing PFS business. The flat payment takes into account the pressure on earnings in 2003, the early stages of the transformation process and our view of the remaining execution challenges in PFS.

Capital release from the wind-down of the PBU is emerging ahead of our expectations as described above. As highlighted previously, the amount of capital needed by the ongoing PFS businesses will be influenced significantly by the need to retain a robust credit standing and the prospective impact of International Accounting Standards, Basel II, CP 195 and related regulatory and accounting issues.

It is our view that whilst the current ratios may appear high in relation to the PFS business as stated under existing regulatory and accounting regimes, the net effect of all regulatory and accounting changes could be meaningfully negative, leaving us increasingly cautious about the prospects for a one-off capital return to shareholders. The Life assurance charges in 2003 illustrate one of these concerns.

The rapid rate of change will continue, and the rollout of many initiatives started in 2003 will start to have a positive impact in the second half of 2004. We intend to make a positive impact on sales and customer retention from further improvements to accounts and services, and better marketing. Other priorities include:

• introducing the advice model, subject to FSA approval, to all our sales channels and completing the initial re-training of our customer-facing people;
  

• completing the installation of the new customer relationship management software, and continuing to invest in outreach operations;
  

• making strong progress with the rationalisation of operations and sales servicing, including the relocation of UK functions to larger sites in the UK and India;
  

• more customer communications written in the new style of language;
  

• completing the re-branding of branch fascias, and beginning a full branch refurbishment programme from mid-year;
  

• securing further cost savings; and
  

• further risk reduction and release of capital from the PBU.

We've made good progress to date, without a significant deterioration in new business and service standards, which is testament to the strength of the customer franchise and the response from our people. However, as a substantial amount of change remains to be completed, so the risk of an adverse effect on business performance remains, particularly through the first half of 2004.

We believe Abbey can stand out as different in UK personal financial services, and rebuild value for our shareholders. 

The picture we faced just 12 months ago was troubling in many respects. The immediate priority we addressed was to improve risk management, and reduce credit and equity exposures to place the company on a secure basis. For PFS, 2003 has been about putting the foundations in place, and fundamentally re-engineering the business. We have to reverse years of underinvestment; we need to deal with margin pressure in the existing book; and we need to build a solid, efficient platform from which we would hope to deliver growth from the second half of 2004.

There is still a lot to do, and significant challenges to overcome. We do take comfort from the progress we have made so far. We have exceeded expectations in the pace we are exiting the PBU, with a much-needed release of capital to the company to strengthen our position. We are already three quarters of the way to exceeding the £200 million annualised cost savings target; we now expect to surpass this amount comfortably, allowing trading costs to be held broadly flat at the 2002 level over the 3 year plan period. To achieve this, we will work hard to ensure that inflationary pressures and reinvestment cost can be offset by benefits from the cost programme. If we need to reinvest beyond our current plans, we would intend this cost to be offset by targeted revenue improvements.

Given the upheaval the business has had to cope with, the trading results reported today are resilient and encouraging for the future. We are achieving record levels of mortgage new business, benefiting from further improvements in credit quality and getting to grips with the cost base.

At the same time our business is being asked to cope with an unprecedented level of regulatory change. The principles of customer fairness, transparency and protection that are central to the customer-driven regulatory agenda are entirely consistent with, and have helped to shape, Abbey's strategy, business model and brand positioning.  However, the impact on the industry and on Abbey could be significant.

One year into our three year plan we are confident and on track.  While it is difficult to predict accurately the timing and trajectory of our turnaround, we are entering the middle phase of our transformation, with the foundations substantially laid, but the results not yet visible.

Our current view does factor in further downward pressure on trading results in the first six months of 2004, largely relating to pressures in our mortgage business, whilst targeting enough success from our efforts to allow Abbey to return to growth in our PFS operations in the second half of the year. And by the end of 2004, we expect to be able to demonstrate a significant improvement to the all-round customer experience -starting to set us apart from the other banks.

Following the significant strategic change announced at the 2002 full year results presentation, this report reflects the split of Abbey between the ongoing Personal Financial Services (PFS) businesses, and those being managed for exit in the Portfolio Business Unit (PBU).

Given the scale of change involved and the charges that result from restructuring, management believe that it is helpful to present the results of the ongoing PFS business on both a statutory and a 'Trading Performance' basis.

In arriving at 'Trading Performance', the impact of the following are excluded:

• embedded value charges and rebasing (including investment variances and specific life-related adjustments - refer to Section 2.4.1 for detailed analysis);
  

• expenses relating to the re-organisation of the PFS business (including cost programme implementation, costs associated with implementing the new strategy, and certain asset write-downs); and
  

• goodwill charges.

The statutory profit and loss account, which includes the above items, is provided in Section 1.1, with reconciliations between the views included throughout the report as appropriate.

This approach has been adopted to enable the reader to discern the underlying performance and trends in the ongoing PFS business, with significant items disclosed separately. It should be noted that Abbey was not managed on this basis prior to 2003, thereby reducing the usefulness of aspects of the comparisons used.

Shares purchased through Employee Share Option Plans (ESOPs) are now taken as a deduction at cost from shareholders' equity in accordance with UITF 38, Accounting for ESOP Trusts. Previously, these were accounted for as other assets at the lower of cost and net realisable value, with any impairments being taken to the profit and loss account.

The profit and loss impact of this change in accounting policy was to decrease 2002 loss before tax by £37 million (2001: nil impact). There was no profit and loss impact in 2003.

During the year, the basis by which embedded value is calculated was changed from a passive to an active economic basis. This new approach involves applying actual asset mix to economic assumptions (e.g. rates of investment returns, inflation) set with reference to market conditions at the valuation date, generally resulting in more regular changes to the assumptions. Previously, long-term economic and asset allocation assumptions were set and reviewed on a less frequent basis. This complements the change 12 months ago to reporting unsmoothed results.

As this is a change in estimates, a restatement of prior periods' results is not required.

In 2003, the US Securities and Exchange Commission (SEC) adopted Regulation G. This imposes restrictions on the presentation of financial information using headings or terms that are not in accordance with the definitions in the Generally Accepted Accounting Principles (GAAP) of the issuer's accounting jurisdiction.

As noted above the 2003 Preliminary Full Year Results has been prepared using a 'Trading Performance' basis, as well as clearly disclosing the relevant GAAP measures.

Abbey, as a foreign private issuer in the US, must comply with all SEC regulations as they apply to financial data incorporated in published documents targeted at US investors.

This trading performance basis has also been used, where appropriate, in the Annual Report and Accounts on Form 20-F. This is in line with the requirements of Regulation G, which require the Management Discussion and Analysis to be prepared on the same basis as is used for internal reporting. There is however a number of circumstances where the presentation in this document is not in accordance with Regulation G, and the presentation in the Annual Report and Accounts on Form 20-F have been adjusted accordingly.

⁽¹⁾ A detailed calculation is provided in Section 4.1.

Total loss before tax of £(686) million compared to £(947) million in 2002. Material movements by line include:

• net interest income of £2,148 million (2002: £2,689 million) down 20%, with lower average asset balances reflecting accelerated PBU disposals;
  

• non-interest income of £284 million (2002: £811 million), down 65% as a result of increased loss realisations driven from PBU asset sales;
  

• administrative expenses of £2,126 million (2002: £1,955 million) up 9% driven by re-organisation expenses including asset write-downs, partly offset by savings from the cost programme;
  

• goodwill of £38 million relates primarily to amortisation of remaining Scottish Provident goodwill, and is significantly lower than the charge in 2002 that was driven by goodwill impairments of £1,138 million;
  

• provisions for bad and doubtful debts of £474 million (2002: £514 million), down 8% benefiting from lower PBU related provisions given reduced asset balances;
  

• provisions for contingent liabilities and commitments up to £104 million (2002: £50 million) following a £50 million provision for product mis-selling exposures; and
  

• lower amounts written off fixed asset investments of £193 million (2002: £511 million) reflecting provisioning raised in 2002 arising from specific counterparty deterioration in the PBU, and consistent with the significant reduction in asset balances during 2003.

PFS trading profit before tax of £1,021 million (2002: £1,219 million) was down 16%, largely reflecting reduced earnings from the life assurance businesses and a fall in net interest income in Banking and Savings.

By business, material movements include:

• Banking and Savings trading profit before tax decreased by 9% to £876 million (2002: £962 million). This is largely attributable to a fall in the interest spread, albeit this has been partially offset by increased mortgage volumes, combined with a lower provisions charge and the £10 million improvement in cahoot results;
  

• Investment and Protection trading profit before tax decreased to £239 million (2002: £372 million) largely due to a £142 million adverse swing in experience and assumption changes to £(58) million (2002: £84 million). Despite relatively stable margins, contribution from new business was down 15% reflecting the drop in investment business volumes. The intermediary protection business delivered a solid performance, though the 2003 result was boosted by a £25 million favourable experience variance;
  

• General Insurance trading profit before tax of £73 million was £19 million lower than 2002, primarily due to a reduction in retail margin following an increase in the risk premiums payable to the principal underwriter;
  

• trading profit before tax of Treasury Services was down 5% to £140 million (2002: £148 million), with a significantly weaker second half performance reflecting less favourable markets. The result nevertheless is strong, given the narrower PFS focus of this business than in previous years;
  

• Group Infrastructure trading loss before tax improved by £48 million to £(307) million (2002: £(355) million) due to increased earnings on capital held centrally and lower expenses. This has been partly offset by a provision of £50 million relating to potential product mis-selling; and
  

• non-trading charges totalled £(786) million (2002: £(1,398) million), comprising embedded value charges and rebasing of £(443) million (2002: £(553) million), re-organisation expenses of £(315) million (2002: £(34) million) and goodwill charges of £(28) million (2002: £(811) million). These are explained in detail in Section 2.4.

Note, the table excludes assets of the international life assurance businesses of £299 million (2002: £308 million), since they do not have an RWA equivalent.

• Total PBU assets of £12.3 billion were 80% lower than the £60.0 billion at December 2002, with a 72% reduction in risk weighted assets to £9.0 billion (2002: £32.7 billion). The accelerated wind down and sale of PBU assets has impacted earnings through early crystallisation of losses on sale, as well as reducing the pre-provision contribution to profit across all of the businesses.
  

• The outstanding unrealised mark to market deficit (net of provisions) on the debt securities portfolio is now nil (2002: £664 million), with the equivalent figure on the loan portfolio of £66 million (2002: £491 million). Of the improvement in the deficits since the third quarter statement, circa £152 million relates to execution and market improvements in actual or expected value, £101 million due to losses incurred on disposal and £53 million due to increased provisioning in moving certain asset values to current estimates of realisable values.
  

• The deficits do not cover portfolios such as leasing (including aircraft and Porterbrook) or private equity, although aircraft leasing and private equity have now been provided down to management's estimate of realisable value, including further provisions of £127 million in the fourth quarter.
  

• Subsequent to 31 December 2003, we reached an agreement with Coller Capital to sell 77% of the remaining private equity portfolio. The sale is subject to the approval of the general partners of the funds involved, and represents £289 million of assets (net of provisions) and undrawn commitments of £162 million. No further loss is expected on completion as the assets were written down to realisable value prior to agreement.
  

• The First National loss before tax reflects restructuring costs and provisioning, in particular in relation to Motor Finance that is in wind down. Losses in the international life business relate to non-recurring rationalisation costs and changes in assumptions used in the calculation of embedded value, whilst growth in profit before tax in the European banking businesses relates largely to the sale premium received for Abbey National Bank Italy. In December, an agreement (subject to approval) to sell Royal Saint Georges Banque to GE Capital Bank France (GE) was announced, relating to total mortgage assets of £381 million.

⁽¹⁾ Mortgage data has been adjusted for all periods to remove the impact of the disposed First National business.

⁽²⁾ Deposit inflows and stock have been defined to include all (both retail household and non-household) deposits made through the branch network and remote channels in our retail orientated businesses, which are predominantly UK-based. For market share purposes only personal deposits have been used to calculate the share of 'Outstanding Household Deposits', in terms of both stock and flow, using a market size estimated from Office of National Statistics data.

⁽³⁾ Unsecured lending asset comprises the sum of unsecured personal loans, credit cards (cahoot only) and overdrafts.

⁽⁴⁾ Includes sales of the Prudential Bond for which only commission income is earned, totalling £54 million (2002: £11 million). These sales do not have an annualised equivalent.

⁽⁵⁾ Includes Paymentcare and Unsecured Creditor products.

⁽⁶⁾ Includes Accidental Death and Personal Accident products.

Full year gross mortgage lending of £29.1 billion (2002: £22.1 billion) was up 32% and represented a market share of 10.7%, with the second half up 26% on the first half. With re-mortgage activity remaining significant through the year, capital repayments increased to £19.7 billion (2002: £15.4 billion), but were still slightly below natural stock share, and a lower share in the second half of the year.

Net lending of £9.4 billion was 40% higher than 2002 (£6.7 billion), equating to a market share of 9.9%. Net lending in the second half was up 47% on the first half, and equated to around 10.4% market share.

Credit quality remains excellent, with the increased new business levels being delivered without any relaxation of lending criteria.

Total retail deposit inflows of £1.2 billion were lower than the £1.9 billion in 2002, with the estimated market share of total household deposit flows also deteriorating to 1.6% from 2.2%. Inflows into Abbey-branded accounts were £0.4 billion (2002: £1.0 billion), reflecting positive inflows into the personal and business bank account ranges. In relation to savings accounts, outflows from remote access accounts have been partially offset by inflows into branch-based Flexible Saver and Branch Saver. Cash ISA sales were £1.3 billion (2002: £1.3 billion), in line with last year.

The remainder of the inflows include Abbey National Offshore, £0.5 billion, and cahoot, £0.3 billion.

Bank account openings totalled 396,000 (2002: 444,000), with a total stock of accounts nearing 3.8 million. Abbey-branded openings of 344,000 were broadly flat on 2002, with a higher proportion of youth segment openings following the re-launch of the Abbey account in September. Abbey-branded in-credit balances were up 23% to £4.3 billion (2002: £3.5 billion). Openings in cahoot and other businesses were 42% lower at 52,000 (2002: 90,000) largely due to an increased number of customers opening the cahoot savings accounts rather than the current account.

Unsecured lending balances, which incorporates credit card (cahoot only), unsecured personal loans and overdrafts, increased by 12% to £2.9 billion (2002: £2.6 billion) driven in particular by growth in cahoot unsecured personal loans. Gross unsecured personal loan new business of £1.7 billion was up 13% on 2002.

Openings of SME accounts exceeded 38,000, up 6% on 2002 levels, with balances in excess of £3 billion. Over 50% of customers now use the e-banking service, which was recently voted best small business website in a poll by "Business Money". Our estimated share of the SME market is now 4%.

Credit card openings of 251,000 were down 5% on 2002. However, total credit card stock has grown 21% and is now in excess of 1 million.

Total life assurance investment new business premiums of £1.4 billion were down 41% (2002: £2.4 billion), reflecting in part a general decline in demand due to investor nervousness about stock market conditions.

The impact on our new business flows has been more marked as a result of a previous dependence on with-profits, and subsequent withdrawal from this market and declaration of a zero bonus for with profit policyholders in 2003. In addition, in the second half of the year both our branch-based advisor and intermediary salesforces have been substantially restructured and retrained behind new offerings, with both programmes well advanced. The combination of the salesforce restructuring and the need to bring new products on line has also contributed to the year-on-year decline.

By product, the main movements include a significant fall in sales of single premium pension products in Scottish Mutual and Scottish Provident (£(0.4) billion), falls in single premium structured ISA and investment bond sales in Abbey National Life (£(0.4) billion), and the withdrawal from the with-profit bond market (£(0.2) billion).

Sales of protection products continued to grow, up 12% to £125 million (2002: £112 million).

General Insurance policy sales of 452,000 were down 11% on 2002, with a fall in household policy sales, only partially offset by increased sales of personal accident and accidental death policies.

The decline in household policy sales in part reflects the high proportion of mortgage lending through intermediaries, resulting in lower cross sales.

The following measures are intended to give helpful information on key customer metrics for Abbey. In future, these will be presented semi-annually. The data at present only includes Abbey-branded products but will be extended to include the other PFS brands during 2004.

As a first step, we have presented some basic customer metrics that over time will demonstrate the impact of our new strategy. Specifically:

• to create more active customer relationships;
  
• to broaden and deepen these relationships; and
  
• to increase levels of customer satisfaction.

⁽¹⁾ The definitions of "active" depends on the nature of the product as follows:

• Mortgages, loans, investment and insurance policies, which are open;
  

• Savings accounts - balance of over £100 or transaction in last 6 months; and
  

• Abbey accounts and credit cards - balance of more than £50 or transaction in the last 3 months.

⁽²⁾ Abbey-branded revenues (net of credit costs) divided by active customers.

⁽³⁾ Trading costs of Abbey-branded PFS operations (including a proportion of Group Infrastructure costs, and grossed up for relevant expenses accounted for as part of embedded value) divided by active customers.

⁽⁴⁾ Utilising Abbey's monthly customer tracking survey, undertaken by independent consultants. This represents the mean score measured on a 7-point scale where 1 is "completely dissatisfied" and 7 is "completely satisfied".

⁽¹⁾ The £363 million embedded value charges and rebasing does not include £80 million relating to the impact of tax law changes on the Scottish Provident acquisition structure, which are reported as provisions for bad and doubtful debts for statutory purposes.

Banking and Savings trading income was £83 million lower at £2,147 million (2002: £2,230 million). A fall in net interest income was largely due to high levels of mortgage redemptions being replaced by lower margin new business. This also contributed to a lower overall standard variable rate (SVR) asset, and more than offset the strong volume growth. Volume-driven growth in cahoot was offset by reduced income in Cater Allen and Offshore, reflecting the transfer of debt securities to the PBU in 2002 (£(12) million) and changes to the internal transfer pricing with Abbey retail (£(12) million).

Investment and Protection trading income of £297 million was 30% lower than 2002 (£425 million). The main contributor to this decrease has been the impact of experience variances and assumption changes on the life assurance businesses, which have moved from £84 million favourable in 2002 to £58 million unfavourable in 2003. This is discussed in more detail in Section 2.1.4.

In General Insurance trading income fell to £121 million (2002: £146 million) primarily reflecting an increase in the risk premiums payable to the principal underwriter, combined with a fall in policies in force.

Treasury Services trading income fell by £9 million to £249 million (2002: £258 million), largely due to the impact of reduced business opportunities resulting from the narrower PFS mandate following the PBU disposal process.

Group Infrastructure trading loss of £(25) million (2002: £(69) million) improved by £44 million, with net interest income benefiting from earnings on surplus capital arising from the continued PBU disposal process, and the non-recurrence of charges relating to intercompany funding arrangements in 2002. Trading non-interest income was negatively impacted by the non-recurrence of some disposal gains in 2002.

A breakdown of the non-trading items is provided in Section 2.4.

Excluding Abbey retail, which is analysed below, net interest income improved marginally. This was driven by a reduction in Abbey National Offshore, following the sale of debt securities to the PBU, and lower earnings in Treasury Services being more than offset by higher earnings in cahoot and increased earnings on surplus capital in Group Infrastructure following the reduction in PBU assets.

The PFS Banking spread has been included to show the spread of all the PFS lending and savings operations. The largest component part is Abbey retail, but it also includes Abbey-branded unsecured loans, Abbey Business, cahoot, Cater Allen Private Bank and Abbey National Offshore.

The PFS Banking spread for 2003 was 1.81%, 26 basis points higher than the Abbey retail spread, reflecting the increased proportion of higher margin unsecured lending and a higher overall proportion of deposit based funding rather than wholesale. The Abbey retail spread is effectively diluted by funding provided by subsidiaries such as Cater Allen and cahoot for which a base rate linked transfer price is paid.

The PFS Banking spread fell by 22 basis points during 2003, impacted by the trends in the Abbey retail spread outlined below, offset by growth in cahoot and Abbey Business.

Note: Abbey retail spread and margin calculations exclude the impact of unsecured personal loans, Abbey Business and Housing Association lending.

⁽¹⁾ Average spread is defined as interest received (mortgage and overdraft interest less suspended interest) over average interest earning assets, less interest payable (savings and in-credit bank accounts) over interest bearing liabilities (including an element of wholesale funding).

⁽²⁾ Asset and liability spreads are calculated using the third party interest payments (such as mortgage interest receivable or savings interest payable) net of relevant hedging.

⁽³⁾ Average margin is defined as net interest income (less suspended interest but including a recapitalisation adjustment that equates to earnings on regulatory capital) divided by the average interest earning assets.

The Abbey retail spread of 155 basis points is 24 basis points lower than last year, with the second half spread of 150 basis points down 11 basis points on the first half of 2003. The full year fall was driven by record gross lending over the last 18 months, combined with increased redemption activity resulting in a change in the mix of the mortgage book. In addition, asset growth is being funded at higher marginal rates, in large part from wholesale sources. A narrowing of the margin of the Standard Variable Rate (SVR) asset through 2002 and 2003 has also contributed, as has the low, relatively stable base rates in terms of retail liability spread compression.

Abbey retail net interest income of £1,599 million was down 4% (2002: £1,661 million), primarily reflecting a fall in the average mortgage book margin, with high levels of redemptions and incentive period maturities being replaced by lower margin lending. The absolute fall in the level of SVR asset, combined with a narrowing of the SVR margin to realign pricing to the peer group, has also had an adverse impact. Redemption fees of £193 million (2002: £198 million), reflect lower average penalties per customer.

In 2004, a further drop in net interest income is expected. Whilst product redemption charges through the second half of 2003 were more robust than expected, a further more material decline is forecast for 2004. This reflects a higher proportion of redemptions being penalty free, as well as a further reduction in average penalties per customer given rising interest rates.

In addition, an increased proportion of mortgage incentive period maturities will revert to base-rate linked margins as opposed to a higher SVR rate - contributing to a more material fall in the absolute level of SVR asset. In contrast to our main competitors, no margin widening has been put in place (to offset the underlying mix deterioration) following the last two base rate changes. This has largely allowed realignment in our mortgage and savings pricing compared to our peer group.

⁽¹⁾ Quoted mortgage asset excludes £3.1 billion (2002: £2.7 billion; 2001: £2.2 billion) of Housing Association lending, consistent with the methodology used to calculate the Abbey retail spread.

A revised breakdown of the mortgage asset has been provided to allow a better understanding of the asset mix, lending trends and contractual arrangements post incentive period.

As at year end, free to go SVR of £15 billion represents 18% of the total asset. The absolute balance reduced through 2003, but in particular during the latter months as from September 2003 an increased proportion of incentive based customer loans started to mature onto base rate linked reversion products. This latter segment is broadly restricted to lending undertaken between April 2001 and August 2002.

The spread on the SVR asset to base rate at end December 2003 was 200 basis points, but on average was 7 basis points lower than in 2002.

£29 billion of the incentive period mortgage asset is now tied in to products where rates are linked directly to base rates, up from £19 billion at the previous year-end. Of the base rate linked asset still in the incentive period, approximately 40% reverts to SVR after the introductory period, a percentage that will increase in future periods given the structuring of new product lending since the second half of 2002.

⁽¹⁾ The split is different to that in Section 1.4 due to the treatment of Abbey Business. For consistency purposes (with the basis of calculating the Abbey retail spread), Abbey Business is excluded from Abbey-branded.

Overall, branch-based deposits have remained broadly stable at £15.3 billion. As at 31 December 2003, the average spread against base rates was 247 basis points, compared to 258 basis points at December 2002, and is largely due to margin compression as rates have fallen. In addition, changes in mix reflecting modest outflows from older branch-based accounts, offset by positive flows into new lower but still positive margin, branch-based offerings, such as Flexible Saver and Branch Saver. Current account growth has also contributed positively to the stability of branch-based balances.

Remote savings balances, including internet and postal, have reduced to £12.2 billion (2002: £13.2 billion) reflecting falls in Postal and Direct Saver. Fixed term and tax-free savings balances fell modestly, with ISA inflows partially offsetting bond and TESSA maturities.

Growth in balances outside Abbey retail relate primarily to cahoot and Abbey National Offshore.

Wholesale funding, including securitisation, now represents around 33% of the PFS funding requirement, compared to around 27% at the end of 2002. The increase in wholesale funding to support growth in mortgage lending has contributed to the narrowing of the liability spread.

⁽¹⁾ A reconciliation to statutory non-interest income is contained in Section 2.4.4.

Total mortgage non-interest income has increased by £12 million to £163 million (2002: £151 million). Record new business levels have contributed positively, as has the mix of new business and revised charges on specific products. Remortgage activity has also increased survey fees. These improvements have been offset by reduced fee income on high loan-to-value lending, due primarily to lower levels of new business with LTV greater than 90%, and increased introducer fees payable reflecting overall lending volumes.

Savings non-interest income of £47 million (2002: £67 million) was down 30%, resulting from a fall in commissions earned on lower sales of life assurance policies.

Banking related non-interest income was £4 million higher at £217 million. Fees and commissions receivable were higher, attributable to improved credit card income, increased volumes of cahoot flexible loans and higher fees resulting from debit card transactions by Abbey customers.

Investment and Protection trading non-interest income is analysed in Section 2.1.4.

General insurance income has fallen to £126 million (2002: £149 million). Buildings and contents income has been impacted by an increase in the costs payable to the principal insurer of £18 million not passed on to customers. Reduced new business and, to a lesser extent, lower renewals have also contributed to the overall reduction in income.

Treasury Services non-interest income increased 9% to £137 million (2002: £126 million). Dealing profits were £131 million (2002: £103 million), reflecting an improvement in global trading conditions.

In Group Infrastructure, non-interest income of £90 million (2002: £106 million) fell by £16 million, reflecting the non-recurrence of one-off gains in 2002.

⁽¹⁾ ANUTM represents Abbey National Unit Trust Managers, while ANPIM represents Abbey National PEP and ISA Managers.

⁽²⁾ New business margin is calculated as new business contribution to EV, divided by related annualised equivalent premiums for Life contracts.

For 2003, a change has been made to the method for setting the assumptions used in determining the value of future profits from a passive basis, whereby assumptions are based on management's assessment of long-term investment trends and intentions for asset mix, to an active basis, whereby assumptions are based on actual period-end market conditions and asset mix. The effects of this change on the current year have been included in embedded value charges and rebasing. No adjustment has been made to prior year comparatives.

The decrease in Abbey National Life new business contribution is due to reduced sales of investment products, particularly with-profits bonds together with reduced profitability from protection business as a result of increased reassurance charges. Reduced sales of investment products also contributed to a reduction in new business contribution from Scottish Mutual although this is largely offset by reductions in low margin pension business. The increase from Scottish Provident is due to the increase in protection volumes partly offset by reduced profitability in the first half of the year due to increased reassurance rates.

Expected return represents the unwind of the discount on the discounted value of future profits (DVFP), together with the return on shareholder's funds held in the long-term business fund. Overall, the expected return of £215 million (2002: £171 million) was up £44 million.

In terms of the unwind of the discount, the EV rebasing including the move to an unsmoothed methodology in 2002, involved the restating of the year end balances of the DVFP for prior years. The impact of lower balances on the unwind of the discount in 2003 was around £70 million negative, compared to £30 million negative in 2002. In 2003, this negative impact was broadly offset by new business written in 2002 increasing the opening DVFP.

The balance of the year on year increase largely relates to increased earnings on capital injections made into the long-term business fund, totalling £825 million made in Scottish Mutual in the latter half of 2002 and in early 2003 £220 million was injected into Scottish Provident.

In 2004, the underlying trends in the expected return will be adversely impacted by a lower risk discount rate, together with the impact of embedded value charges in 2003.

The reduction in ANUTM and ANPIM contribution is due to lower sales volumes together with a lower margin sales mix.

Experience variances and changes in assumptions capture the effect in both the current year and on the discounted value of future profits, of the difference between actual experience and the assumptions built into the models for calculating the new business contribution and the expected return. However, investment variances and other one-off items are excluded. Taxation adjustments affect profit before tax as profit is calculated on a post-tax rate and then grossed up at the rate applicable to the company and type of business in question.

Experience variances and assumption changes of £(58) million (2002: £84 million) have deteriorated as follows:

Mortality and morbidity experience and assumption changes of £10 million were lower than the £42 million benefit in 2002 as a result of adverse experience in the Scottish Mutual "Pegasus" products range where recent analysis has shown morbidity rates higher than assumed rates. However this has been partially offset by an improvement in mortality experience for both Scottish Provident and Abbey National Life, whereby future assumptions have been changed accordingly. 2002 included a more significant change in mortality assumptions in Abbey National Life.

Lapse experience and assumption changes of £(47) million were worse than the £(14) million in 2002 due to a general increase in lapse rates across all life companies.

Expense (over) / under run is a measure of efficiency of cost management within the funds and is impacted by sales volumes, sales mix and actual costs versus assumed. Overall the expense variance across all funds improved from a £(6) million overrun in 2002 to a £4 million underrun in 2003. This included a £21 million under run in Scottish Provident principally in relation to growth in Scottish Provident new protection business offset by a £(16) million overrun in Scottish Mutual reflecting the significant reduction in sales.

Taxation experience and assumption changes principally relate to the impact of changes to the policyholder tax rate from 22% to 20% which in effect increased the cost to the shareholder, countered by regular tax credits and the release of prior year provisions. The 2002 results included a one-off benefit in Scottish Mutual in relation to tax settlements from prior years.

Changes to reserving and modelling methodology and other relate to the impact on returns following refinements to the reserving methodology, modelling changes and the movement in provisions for any unmodelled business.

Embedded value charges and rebasing remain high at £(443) million (2002: £(553) million). A split of this charge by type and business is contained in Section 2.4.1.

The table below shows the Abbey National Asset Managers' funds under management by company (including related PBU entities), and split by type of business:

⁽¹⁾ Total funds under management are split £25.9 billion in Personal Financial Services, and £3.2 billion managed on behalf of entities within the Portfolio Business Unit.

⁽¹⁾ The quoted operating expenses for the Life Assurance businesses exclude operating expenses that are accounted for as part of embedded value and reported as non-interest income. These totalled £179 million (2002: £201 million) and are included in an analysis of expense movement in Section 2.2.3.

Banking and Savings trading expenses were up £24 million to £1,132 million (2002: £1,108 million). Increased employment costs reflected wage inflation, increased customer-facing headcount, and increased national insurance and pension costs. This, combined with marketing spend associated with the business re-launch, has more than offset cost savings in Abbey retail.

Investment and protection expenses were up £5 million to £58 million (2002: £53 million), reflecting the cost of rolling out multi-manager in Scottish Mutual, and some additional spend to support the expansion of James Hay.

General Insurance expenses of £48 million (2002: £54 million) were down £6 million largely due to a significant reduction in headcount as part of the cost reduction programme.

Trading expenses in the Treasury Services business of £109 million were flat, reflecting an increase in performance-related pay back up to market levels, offset by savings from the cost reduction programme.

In Group Infrastructure trading expenses were down 9% to £230 million (2002: £252 million) largely as a result of benefits associated with the cost reduction programme, offset by inflation and pension contribution increases, and the non-recurrence of project spend incurred in the second half of 2002.

A breakdown of the non-trading items is provided in Section 2.4.

⁽¹⁾ Pension costs relate to PFS only, and do not include £12 million (2002: £11 million; 2001: £9 million) relating to the life businesses accounted for on an embedded value basis.

Total employment costs were up 6% to £814 million (2002: £770 million) comprising:

• salaries and other compensation costs broadly flat, with normal salary inflation, and recruitment into customer-facing roles in the branches and call centres being offset by headcount savings from the cost programme;
  

• social security costs up 6% in total, reflecting the increase in employer's contribution rate effective from April 2002; and
  

• an increase in pension costs of £40 million to £121 million (2002: £81 million) largely due to increased charges resulting from the pension fund deficit, as previously announced. A detailed analysis of the pension fund deficit is included in Appendix 3.

Bank, legal, marketing and professional expenses of £182 million were down 9% on last year, largely due to the non-recurrence of project spend incurred in the second half of 2002. Advertising and marketing spend was broadly flat, with a reduction in non-Abbey-branded spend being offset by increased Abbey related advertising. Expenditure on the business re-launch was £11 million covering the customer catalogue and increased communications spend. A further £6 million has been included as a non-trading charge, largely relating to day one TV and press advertising, and to a lesser extent agency fees.

Software, computer and administration expenses of £295 million (2002: £333 million) were down 11%, largely reflecting the benefits of the cost reduction programme.

Premises and equipment depreciation expenses of £97 million increased by 5%, due to increased IT costs in relation to upgrading our telecoms network, customer relationship management software and upgrades to the branch IT infrastructure.

Other property and equipment expenses were broadly flat at £189 million (2002: £183 million).

Pre the impact of the cost programme, trading expenses increased by £91 million, explained by:

⁽¹⁾ Represents costs in relation to joint venture projects incurred in 2003, previously being capitalised.

⁽²⁾ 2002 non-recurring costs include head office relocation costs, corporate advisory fees, and integration spend relating to Scottish Provident. In addition, 2002 included 4 months relating to First National Vehicle Holdings prior to sale.

Of the estimated £126 million of savings reported in the period, streamlining and process re-engineering accounted for approximately £51 million, procurement related improvements £40 million, £14 million related to centralisation and £14 million of marketing and sales de-duplication savings. In total, over 1,850 roles have been removed since the start of the programme in mid-2002, with c.1,000 redundancy 'leavers' in 2003.

Total annualised savings from actions already taken are estimated to be £165 million, up from £35 million at the start of the year. The implied saving in the fourth quarter of £44 million includes approximately £8 million of savings relating to annual rebates or prior periods. Timing of recognition of these savings results in a higher fourth quarter implied run-rate than the annual £165 million run-rate achieved to date.

Cumulative implementation spend specifically relating to the cost programme to date, amounts to £182 million, including an element of empty premises provisions. The ratio of cost reduction implementation to savings is in line with previous guidance, but may increase slightly above the current run-rate due to the higher investment required to deliver remaining initiatives.

Trading costs include £23 million of reinvestment spend, £11 million relating to the business re-launch, including the customer catalogue and increased campaign and communication costs across all channels. The IT rollout costs include employment costs in relation to the new CRM software and upgrade of branch IT. The customer-facing headcount costs relate to the 400 hires in the branches, 150 in call centres, and the establishment of the Outreach team.

This analysis is included to assist the reader in understanding the cost base in the new functional divisions. The expense base includes trading expenses and embedded value expenses relating to life assurance businesses reported as part of non-interest income.

Overall PFS headcount levels have fallen slightly, with over 1,000 redundancy leavers in the period offset by recruitment into customer-facing roles as part of the re-organisation programme, including around 400 roles into the branch network and 150 into call centres. Further, we have recruited to support the launch of the outreach programme, and on a temporary basis to ensure the smooth transition in certain areas given the IT, location and structural changes being implemented. There has also been an increased focus on recruitment and retention to ensure the right staffing levels across the business, thereby improving service standards.

The headcount reported under Customer Operations includes 1,404 FTE employed as part of the EDS joint venture. Excluded from the above FTE are circa 90 roles (not on our payroll) transferred to outsourcing arrangements in India.

In the PBU, headcount was 1,083 FTE as at 31 December 2003, compared to 2,913 at the start of the year, reflecting the wind down and exit from these businesses and portfolios.

⁽¹⁾ Charge relates to the impact of tax law changes on the structure of the Scottish Provident acquisition.

⁽²⁾ Includes empty premises provisions arising from the review of site locations and certain asset write-downs.

In total PFS trading provisions fell by 2% to £191 million (2002: £194 million).

PFS provisions for bad and doubtful debts of £130 million fell 13% (2002: £150 million).

The mortgage provisions charge of £8 million (2002: £17 million) benefited from an improvement in arrears, while provisions relating to unsecured personal loans grew by £14 million to £61 million due to the continued asset growth, particularly in cahoot. Banking provisions decreased to £39 million (2002: £68 million) with improved credit quality and operational controls impacting positively on arrears levels and write-offs.

Provisions for contingent liabilities and commitments of £61 million (2002: £46 million) includes £50 million relating to potential product mis-selling exposures, principally endowments.

A breakdown of the non-trading items is provided in Section 2.4.