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 July 2004

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

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

 Yes . . . . . . . No . . .X. . . .

2004 Interim Financial Results

A detailed description of the basis of results presentation is included in Section 2.4.5, including a detailed explanation of the main differences between 'statutory' and 'trading' results disclosed.

⁽¹⁾ The Abbey earnings per share comprises PFS earnings per share of 12.4p and PBU earnings per share of 0.6p. Tax rates used are contained in Section 6.7.

⁽²⁾ As set out in detail in Section 2.4.5, 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.

⁽³⁾ Calculated based on the trading profit before tax, assuming a 30% tax rate (2003 30%), and after a minority interest charge of £24m (Half 1 2003: £28 m; Half 2 2003: £27m) and preference share dividends of £24m (Half 1 2003: £28m; Half 2 2003: £28m) with a reconciliation to the statutory data in Section 2.4.4.

⁽⁴⁾ If adjusted for expenses accounted for as part of embedded value, the ratio would be 61.8% (Half 1 2003: 56.6%; Half 2 2003: 61.9%).

⁽⁵⁾ A detailed working of the notional equity release is contained in Section 4.1.

We are nearly halfway through our three year transformation, and have moved back into overall profit for the first time in two years, reporting a statutory profit before tax of £350m (Half 1 2003: loss of £144m) and PFS trading profit before tax of £468m (Half 1 2003: £588m).

Summary of the financial results for the first half of 2004:

> PFS trading profit before tax of £468m (Half 1 2003: £588m), but up 8% on the second half of 2003 and better than expected, with an improved profit before tax in the second quarter;

> an overall Group profit before tax of £350m (Half 1 2003: loss of £144m), consisting of:

> PFS trading profit (as above); less

> PFS 'non-trading' charges of £128m (Half 1 2003: £237m), largely comprising investment variances in our life companies, re-organisation expenses in relation to the cost reduction initiatives and the one-off cost of complying with new regulatory requirements; and

> Portfolio Business Unit (PBU) profit before tax of £10m (Half 1 2003: loss of £495m), together with continued success in asset sales, with a further 33% reduction in overall asset balances, including a 54% reduction in sub-investment grade assets.

> an Equity Tier 1 ratio of 7.5% (December 2003: 6.9%) and Tier 1 ratio of 10.9% (December 2003: 10.1%), with the improvement due to a return to profit on a group basis and a further capital release from the PBU. The proposed interim dividend is 8.33 pence, in line with the interim payment made in 2003.

Our PFS businesses continue to face competitive markets and a challenging trading environment for investment sales. There is also a degree of ongoing disruption from the transformation programme, including the lead-time before new people, technology and continued high levels of training begin to have a positive impact. However, we are now seeing positive lead indicators in a number of areas.

In the PBU, the mark-to-market deficit on debt securities and loans has been reduced to nil. In line with the year to date position, the remaining disposals targeted for 2004 are expected at levels consistent with net book value in aggregate.

PFS trading profit before tax of £468m was down 20% on the corresponding period (Half 1 2003: £588m), but better than expected and up on Half 2 of 2003 as a result of:

> a fall in net interest income of £51m driven by Banking and Savings. This reflected the narrowing of the spread to 1.58% (Half 2 2003: 1.75%), in line with expectations, largely due to SVR re-pricing and other pressures on mortgage margins. The spread decline is expected to moderate substantially in the second half;

> a decrease of £4m in non-interest income, largely attributable to a lower contribution from Investment and Protection reflecting the lower earnings from the in-force business as a result of 2003 write-downs and changes in the discount rate;

> trading costs (including expenses reported as part of embedded value) of £867m down 4% on the second half of 2003, with underlying inflation continuing to be offset by incremental cost programme savings, and a more even phasing of marketing spend. The annualised benefits of the cost programme are now running at £183m, up £18m to date in 2004, and overall the cost base is expected to be held broadly flat for the year; and

> a lower provisions charge, reflecting non-recurrence of a provision of £50m for product mis-selling raised in 2003, and a further improvement in mortgage credit quality more than offsetting volume related growth in unsecured lending provisions and fraud write-offs in relation to bank accounts.

On a trading basis earnings per share of 19.2 pence, were up from 17.2 pence in the second half of 2003.

PFS statutory profit before tax was £340m (Half 2 2003: loss of £116m), with the improvement largely attributable to lower re-organisation costs, as well as a lower charge in relation to the life assurance business. In total, non-trading charges were £128m (Half 2 2003: £549m).

As expected, PFS new business flows in the first half followed recent trends overall, though the extent of business change being implemented has had an adverse impact. We had previously flagged that this could happen, and this has been noticeable both in our direct and intermediary channels, in particular in mortgages. Notwithstanding this, the franchise remains strong and customer lead indicators have begun to turn up. There have been some creditable performances, and where we have faced challenges, we have started to make headway.

In summary, the new business flows include:

> total retail deposit flows turned around positively in the second quarter, with an inflow of £0.2bn compared to an outflow of £1.2bn in the first three months. The improvement reflects the first fruits of action taken, including new product launches and marketing campaigns, changes to pricing and a focus on profitable branch-based accounts. Importantly, outflows from back-book branch accounts were offset by new branch-based accounts such as Flexible Saver. We are aiming to build on the second quarter performance with continuing net inflows targeted for the remainder of the year;

> gross mortgage lending share slipped to 9.0% from 10.5% in Half 2 2003. This was almost entirely due to a reduced share of the remortgage market, which is comparatively easier to regain and typically of low profitability. Our combined share of the more loyal and profitable first time buyer and home mover segment has remained in the range 10 - 12%;

> overall net lending was £3.2bn, an estimated market share of 6.1%, with share of capital repayments again below our stock share. We have managed to sustain a c10bps widening of average new business pricing which, we are confident has not had an adverse impact on gross lending. We have taken many steps to improve the fundamentals of mortgage sales, in some cases at short-term cost. Additionally, processing backlogs in the intermediary channel have now been addressed, a new fast track process for lending with LTV less than 60% introduced, and some selective best buy products have been introduced to the range. As a result, mortgage applications have started to move sharply up again in recent weeks. In recent months, our extensive customer tracking survey has shown customer willingness to consider Abbey as their mortgage provider improving, with our rank versus direct peers improving from 4th to joint 1st, and closing a 10 point gap with HBOS that existed at the time of the business relaunch;

> credit quality remains excellent, with a 16% reduction in 3-month-plus mortgage arrears cases in 2004; and

> in other areas, we achieved new bank account openings of 191,000, with Abbey branded in credit balances up 5% to £4.5bn in the first half alone, and a 10% increase in unsecured lending balances with new unsecured personal loan business up 22%.

The period of greatest disruption is now behind us, and our new people in key pricing and product design, marketing and distribution roles are now becoming increasingly effective. In the areas of mortgages and savings we have taken corrective action and remain optimistic about the outlook and our strength in these markets.

17 months ago there were three areas of serious risk that threatened Abbey's future. These risks have been well documented, with high levels of disclosure provided over this period to allow investors to understand the size of the challenges. Mitigating these risks was our greatest immediate priority. At the half way stage of our transformation, these risks (outlined below) have substantially been removed.

> a further 33% reduction in PBU assets, including a 54% reduction in sub-investment grade assets, with the PBU reporting an overall profit before tax in the first half;

> current PBU asset balance of £8.3bn, down 86% from the £60.0bn opening position;

> all remaining debt securities and loan portfolios provisioned to reflect our best estimates of realisable market value and the remaining unrealised deficit of £66m at the year-end eliminated;

> the disposal of the majority of the remaining assets is well advanced; and

> £1.2bn of capital has been released to the centre to date, with the final result in 2004 likely to be significantly better than current market expectations.

> completion of an extensive review of the with profits funds, undertaken over many months, including agreement with the Financial Services Authority (FSA), and increased clarity for policyholders;

> provisions previously raised in relation to realistic deficits were adequate to offset the required usage of shareholder monies in the with profits funds. There is no adverse charge to capital or profit as a result of the agreement. A substantial improvement in quality and transparency of the capital invested in the Life companies has been reported;

> ongoing risks in the business have been minimised, through extensive hedging, reassurance of a high proportion of annuity and mortality risk, and no ongoing investment business being written with guarantees underpinned by the shareholder; and

> by addressing this issue we can start to rebuild relationships in the IFA community, and move forward with more confidence in the investment market in the latter part of 2004 and into 2005.

> extensive changes at senior management level in the risk and compliance functions including several new external hires;

> improved systems and controls now in place;

> new anti-money laundering unit up and running; and

> introduced significant improvements to how we identify customers opening new accounts, with all front-line employees trained in the new procedures and all account applications and supporting literature rewritten.

There are further regulatory challenges ahead, in particular the introduction of new mortgage regulations from November this year. This is intensive work but the changes we have made to our systems and controls mean we are much better equipped for the future.

A return to profitability on a group basis and the continued success in disposing of PBU assets has resulted in an improvement to the capital ratios, with a Tier 1 ratio of 10.9% and Equity Tier 1 of 7.5% (December 2003: 10.1% and 6.9% respectively).

An interim dividend of 8.33p has been declared, consistent with the same point in 2003. The dividend takes into account our view of the remaining execution challenges and opportunities surrounding the PFS transformation programme.

The amount of capital required by the ongoing PFS businesses must be consistent with retaining a robust credit rating. Clarity on this is now dependent on the turnaround of the PFS business and resolution of remaining uncertainty surrounding the impact of International Accounting Standards, Basel II, and other regulatory and accounting issues. Although some of the impacts appear more positive than we had feared at the year-end, it remains too early to be certain about the prospects for or the potential size of any capital surplus.

In addition to tackling the risks facing Abbey, we have made significant progress in a complete overhaul of the PFS business. In the last 17 months we have restructured the company, improved the management quality, invested in our people and the tools they need to do their jobs, and improved the range of products we offer to our customers. At the same time, we are streamlining our operations to improve customer service and reduce costs. In September of last year, we relaunched the business, fundamentally changing our approach to customers.

Since the start of the cost programme, we have taken over £180m of costs out of the business, keeping costs flat after inflation and reinvestment.

The speed of change has been maintained in the first half of 2004, with notable progress including:

> the population of management below Board level has been reduced by 20% since September last year. We are bringing in new talent to the company with 40% of this group new to Abbey, of which 16 have joined since January. The effectiveness of this key group is now building fast;

> in total, the level of training being delivered has continued at the high levels reported in the second half of last year, focusing on the new Customer Relationship Management (CRM) software, advice model and supporting people moving into new roles. An increased level of business as usual training is also continuing, including induction training that has contributed to a fall in new joiner turnover; and

> since the start of 2004 we have increased the customer-facing staffing levels in our customer sales division by approaching 400 full-time equivalents.

The rollout of our new CRM system (One on One) is fully on track.

> we have increased the number of staff using the One on One system from 8,000 at year end to 11,000 at the end of June 2004; and

> the system itself is best in class, providing our people with a complete view of customers across all channels, as well as being able to deliver sales prompts.

A wider programme of upgrading IT capability has also continued at pace in the first half.

> of 40,000 pieces of equipment to be upgraded, at the end of June we had installed 32,000 - with the remaining upgrades expected to be completed in the third quarter of this year; and

> completed the upgrade of the telecommunications platform in the branches, which is one of the largest voice-over-IP networks of its kind in UK PFS.

This includes the relocation of UK functions to larger sites in the UK and India. We have made good progress following the announcement of the closure of three major sites in January.

> we have continued to transfer roles to our service centres in India, bringing the total to 380, working on bank account service calls and protection new business processing. We expect more than 600 roles will be operating from India by the end of 2004;

> service and complaints levels to date have been comparable, if not better, than the UK equivalent - reflecting our careful approach in planning, training and handovers;

> in the UK we have transferred more than 1,000 roles from offices in Edinburgh to existing sites in Glasgow and will have completed the closure of our Derby and Warrington sites by the year end; and

> a further 17 smaller offices have also been closed since the beginning of the year with more closures planned for the second half of the year.

In January, we also announced a change in our approach to fund management to deliver better investment performance and choice at affordable cost. As a result, we closed a large part of our in-house fund management operation whilst retaining specialist functions where we have a proven track record and skills in customer profiling, asset allocation, manager selection and administration. We have adopted a multi-manager philosophy for fund management, which we believe perfectly suits our customer positioning, incorporating both the highest probability of long-term sustainable performance as well as choice.

Following the relaunch of the business last year, the initial positive response has been consolidated through the year to date.

> staff morale and reaction to the goals and aspirations of the business remains positive; and

> we have continued to change the way we communicate with our customers, through our people, literature, letters, advertising and all round appearance.

Most of the work that we have done to support the advice model is now in place, and the new approach to customers is being embedded across our sales and operational channels.

> the re-organisation of the sales force is well progressed with 850 Customer Managers already transferred into the new role of Personal Financial Consultant (PFC). The new PFC role allows the individual to give advice on a wider range of unregulated products (including banking, savings, insurance and unsecured loans), providing customers with more seamless service and reducing waiting times to obtain an interview and we have also already increased capacity to provide mortgage advice compared to 12 months ago;

> lending and savings decision trees are now in place to help identify customers' needs; and

> the extent to which the PFC role will be extended in the future to provide guidance on an appropriate range of investment products is currently under review, and will be influenced by ongoing Sandler and FSA reviews.

Over the last nine months we have undertaken a fundamental review of our retail estate - focusing on the reach and location of our branch network, as well the design and pilot of new branch layouts and retail formats. The review is one of the most extensive undertaken, and the first complete review undertaken by Abbey since the late 1980s. With only 5% of the network benefiting from adequate levels of investment and attention over the last five years, it is important to be clear on where investment is most needed.

The review matches our current network against the changing retailing map of the UK, customer demographics, customer demand and level of competition. Initial findings suggest that the overall number of branches is about right although they might not all be in the right place, or have the right level of facilities such as till positions, ATMs, or customer interview desks.

We are launching a trial of a number of new physical formats, including kiosks, columns and new style branches, with more to follow by the end of the year. Across the branch network as a whole, there will be differing levels of refurbishment based on our assessment of commercial return, which should allow visible progress in the first year of the programme.

Difficulties in design and planning in relation to fascias and signage, which reduced the impact on the high street and delayed rollout, have now been overcome and we are accelerating the remaining re-branding work.

When we began the transformation of Abbey, we based the new personal financial services business on an agenda of consumer fairness, anticipating the growing importance of consumer rights in financial services. We reinforced this in our business relaunch in September last year. This approach drives the fundamental way we deal with customers, from greeting them in branches to new product design.

The industry's recognition of consumer rights has happened more quickly than we expected. Competitors and regulators are reflecting this in their own recent moves. We are already some way down the track, and although there is much yet to do, Abbey customers are already reaping the benefits, from fairer charges to better service standards.

> we have significantly increased the customer tracking research undertaken and used within the business; and

> in terms of overall satisfaction, Abbey is still in the middle of the peer group, but has seen a relative improvement in recent months, which is a positive result given the short-term disruption of our change programme.

> completed the realignment of the SVR pricing to the peer group in November of last year, in total equating to 35bps over a 12 month period; and

> removal of Instant Saver from sale, with all customers now mailed and advised of alternative options, with over 300,000 customers subsequently transferred to alternative Abbey products.

> in the mortgage market we are moving from plain, rate-led offers to a range of options that meet customer needs more fully. These are presented in easy to understand groups to make sure customers make the right choice, and are not swayed by headline rates alone. This has included the launch of 'deal for life' late in 2003, the 'reward mortgage' earlier this year, and generally upgrading our range of flexible mortgages. There is more to do, but we have made a good start and feedback from new mortgage customers is positive;

> we have relaunched Flexible Saver in the second quarter - a product that we would claim to be 'best in the high street' and consistent with our focus on profitable branch-based accounts. We have added a passbook, removed differential channel pricing, and introduced a new base rate guarantee and special bonus for all customers. We have also moved our pricing on e-saver to make it more competitive, with cahoot also offering competitive rates and attracting new customers to Abbey;

> in Scottish Provident we have a market leading protection product - which has won a number of industry awards including, in recent months, 'Protection Provider of the Year' at the Financial Adviser awards. In multi-manager we have an excellent product that offers customers access to the best fund managers at an affordable price;

> for our banking customers we have simplified our account range and charging structure, making it fairer and easier to understand, and less harsh on occasional slips over agreed limits;

> we have vastly improved the Abbey e-banking site, using what we have learnt from cahoot. Customer satisfaction with the e-banking service has increased from 65% in April of last year to 75% currently, with the number of regular users up by 28%. We now have around a quarter of a million regular users of the Abbey e-banking service, and around half a million cahoot customers; and

> we are continuing to change the way we communicate with customers, removing jargon and sticking to plain English. As part of this we have reduced the number of letters by 40% from over 9,000 to around 5,500, all of which have been re-written.

In the last year we have made excellent progress in addressing service issues. In 2003, we closed much of the gap that had opened up between Abbey and our peers, and have since built on that progress. Inevitably, the extent of change that we are asking our people to cope with means that business issues that put pressure on performance still arise. This was evident in the first half, particularly in relation to mortgage processing in the intermediary channel. It is a significant achievement in itself that there have not been more examples, and we are undoubtedly ahead of where we expected to be at this point in the transformation:

> internal mystery shopping research across the branches has seen the proportion of branches reaching our internal targets for service increase from 82% to 97% - and we have recently increased the target standard as part of our push to go beyond normal banking standards;

> in our telephone operations we have added extra people and have continued to upgrade the infrastructure and software capability. We have invested in call recording technology, removed unnecessary administration and have formalised feedback and coaching for staff on service performance - with added real time tracking capability being rolled out later in the year. From an unacceptable starting point, we have raised most of our telephone centres up to industry standards;

> our banking and savings service centres are now answering nearly 50% more calls within 20 seconds compared to a year ago. Calls taken from India are of a comparable service standard and with fewer complaints;

> in our sales operations we have halved the number of abandoned calls, and are now consistently answering over 80% of calls within 20 seconds;

> in overall terms, the percentage of Abbey's customers that rate the telephone service as 'good or better' is up to 81% from 70% a year ago;

> we have reviewed our lending policy, reducing the extent of paperwork and form filling that is required, as well as introducing a fast track service. Even after these changes we remain at the conservative end of market practice, but have simplified the process from a customer and staff viewpoint and increased service levels; and

> building on the successful introducer internet platform for mortgages, we have added straight through processing functionality for both general insurance and protection products. 45% of all protection applications are now being received online, and intermediaries are able to get instant quotes direct online from Scottish Provident, speeding up the process and reducing administration.

The majority of the investment in people, products, pricing, service and systems is done. The challenge now is to ensure we are making the most of this investment, by deeply ingraining the new ways of dealing with customers, promoting our products even more effectively, and ensuring new systems are used with maximum efficiency.

There is more training to be done to bring this about, and this will continue to put short-term pressures on the drive to improve business performance.

The final element of our investment programme will be addressed in the autumn, when we will have the full results of our review of branch locations and formats. We will continue our revamp of our product range, particularly in mortgages and savings. New products will be designed on the guiding principles of the brand, such as fairness and transparency, and priced attractively to secure good levels of new business. They will be promoted more aggressively than in the past.

With the bulk of major changes to the business behind us, we continue to target an improved second half in the PFS business.

⁽¹⁾ A detailed calculation for 2004 is provided in Section 4.1.

⁽²⁾ Note, from the first half of 2004, within Abbey Financial Markets (previously named Treasury Services) there has been a presentational change such that accrued interest on mark-to-market securities and money market instruments is now classified within dealing profits (in non-interest income) rather than in net interest income. This has no impact on profit. In the 6 months to 30 June 2003 this change resulted in reclassification of £66m from net interest income to non-interest income and the comparatives for that period have been amended to reflect this change. Under the previous presentation net interest income in 2003 in PFS and in total was £926m and £1,116m respectively and non-interest income £462m and £246m respectively.

Total profit before tax of £350m compared to a loss of £144m in 2003. Material movements by line include:

> net interest income of £830m (Half 1 2003: £1,100m) down 25%, reflecting lower average interest earning assets in the PBU and spread compression in the PFS;

> non-interest income of £528m (Half 1 2003: £312m), up 69% as a result of the non-recurrence of certain embedded value rebasing charges that impacted life assurance earnings in 2003, in addition to lower loss realisations from PBU asset sales in 2004;

> administrative expenses of £904m (Half 1 2003: £1,037m) down 13%. PFS expenses were lower than the same period last year due to savings from the cost programme and reduced re-organisation expenses, more than offsetting underlying business inflation. PBU expenses fell due to the reduced size of the operations;

> goodwill of £10m relates primarily to amortisation of the remaining Scottish Provident goodwill;

> provisions for bad and doubtful debts of £58m (Half 1 2003: £226m), down 74% benefiting from lower PBU provisions and the non-recurrence of provisions in relation to the Scottish Provident contingent loan;

> provisions for contingent liabilities and commitments down to £3m (Half 1 2003: £20m) following the non-recurrence of PBU provisions made in 2003 ; and

> a release of amounts written off fixed asset investments of £6m (Half 1 2003: £155m charge) reflecting the disposal of PBU assets for amounts in excess of their existing written down value.

⁽¹⁾ Includes cahoot, Cater Allen and Abbey International (previously named Abbey National Offshore).

⁽²⁾ The non-trading items are described in Section 2.4.

PFS trading profit before tax of £468m was down 20% on the first half of last year (Half 1 2003: £588m) but up 8% on the second half.

> Banking and Savings trading profit before tax decreased by 26% to £353m (Half 1 2003: £475m). This is largely attributable to the reduction in the PFS Banking spread partly offset by asset growth, with a modest rise in the expense base reflecting increased customer-facing staffing levels;

> Investment and Protection trading profit before tax increased to £115m (Half 1 2003: £106m). The contribution from new business was up reflecting the re-establishment of protection margins after an increase in reassurance costs in 2003, with a lower charge for experience variance and changes in assumptions;

> General Insurance trading profit before tax of £36m was £7m higher than Half 1 2003. Revenue has remained stable due to margin increases in the second half of 2003, with lower costs largely attributable to reduced volumes and property costs following consolidation of sites;

> Trading profit before tax of Abbey Financial Markets was £75m (Half 1 2003: £98m), representing a strong performance given the smaller ongoing remit of the business, but lower than the equivalent period last year that benefited from favourable trading opportunities and conditions; and

> Group Infrastructure trading loss before tax of £111m decreased by £9m (Half 1 2003: loss of £120m) due partly to the allocation of more net interest cost, to reflect current gearing, to the businesses.

> Banking and Savings trading profit before tax decreased by 12% to £353m (Half 2 2003: £401m) reflecting the fall in the PFS Banking spread driven entirely by the asset spread, with a full period of SVR repricing, reduced product redemption charges and a lower free-to-go standard variable rate asset as a result of product maturities;

> Investment and Protection trading profit before tax of £115m is down on Half 2 2003 of £133m largely due to a decrease in the expected return following a reduction in the risk discount rate and the impact of 2003 embedded value charges and rebasing. The contribution from new business was lower reflecting the drop in investment business volumes, while the intermediary protection business continued to perform well, with the new business contribution in Scottish Provident up 12%;

> General Insurance trading profit fell 18% to £36m (Half 2 2003 £44m), largely due to a fall in new business volumes and policies in force;

> Trading profit before tax of Abbey Financial Markets was £75m (Half 2 2003: £42m), reflecting improved trading flows in the first half of 2004, specifically in equity and credit derivatives; and

> Group Infrastructure trading loss before tax fell by £76m to £111m (Half 2 2003: loss of £187m) largely due to the non-recurrence of the £50m mis-selling provision raised in the second half of 2003, and partly to a full allocation of interest expense to the business in line with the current debt-to-equity funding mix.

Note, the table excludes shareholder net assets of the international life assurance businesses of £208m (December 2003: £207m), since they do not have an RWA equivalent.

> Total PBU assets of £8.3bn were 33% lower than the £12.3bn at December 2003, with a 34% reduction in risk weighted assets to £5.9bn (December 2003: £9.0bn). Overall, the PBU reported a small profit before tax, with a £52m profit in the Wholesale Banking portfolios being partly offset by continued provisioning and restructuring costs associated with the wind down of the remaining Motor Finance and Litigation Funding businesses;

> The improved performance in the Wholesale Banking portfolios reflects the significantly lower absolute level of asset disposals, and the provisioning to market realisable values taken at the 2003 year-end. The majority of the balance of profit before tax in the first six months relates to Porterbrook;

> Credit quality has improved significantly following the reduction of over 50% in sub-investment grade and equity exposure. This includes disposals of all the remaining aircraft ABS portfolio and the majority of the project finance portfolio;

> The outstanding mark to market deficit (net of provisions) on the debt securities portfolio remains zero, with the equivalent figure on the loan portfolio now reduced to zero (December 2003: £66m). The improvement in the loan portfolio deficit since the year-end reflects improved asset sales (actual and expected). The deficits do not cover the leasing portfolio, although aircraft leasing was written down to management's estimate of realisable value at the 2003 year-end and the finance leasing sales to date have been profitable. The market value of Porterbrook has not yet been confirmed by a sales process and therefore may differ significantly from the holding value; and

> The Motor Finance and Litigation Funding loss before tax relates predominantly to additional provisioning required particularly in Litigation Funding as part of the wind down of these businesses, with a small profit reported in the international life businesses and loss in the European Banking operations.

Across the PBU as a whole, a majority of the remaining assets are well progressed in terms of the disposal process. No further meaningful net losses, on asset sales in aggregate, are expected in 2004.

⁽¹⁾ Mortgage data has been adjusted for all periods to remove the impact of the disposed First National business. In addition, the market shares for quoted 2003 periods have been restated following the increase in the Bank of England definition of the market to include 'Other Specialist Lenders'.

⁽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 stock, 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 £2m (Half 1 2003: £41m; Half 2 2003: £13m). These sales do not have an annualised equivalent.

⁽⁵⁾ Includes Paymentcare and Unsecured Creditor products.

Gross mortgage lending of £13.0bn (Half 1 2003: £12.9bn) was ahead of the same period last year but lower than the stronger second half. The gross lending in the first half represented a reduced market share of 9.0%. With remortgage activity remaining significant in the market, capital repayments increased to £9.8bn (Half 1 2003: £9.1bn), lower than in the second half of 2003. Net lending of £3.2bn was 16% lower than the same period last year (Half 1 2003: £3.8bn), but down more markedly on the second half, and equating to a market share of 6.1%.

The weaker than anticipated results, particularly in the second quarter, reflect lower gross lending almost entirely due to a reduced share of the remortgage market, which is comparatively easier to regain and typically low profitability. In addition, new business sales and service levels have suffered from the extent of change being implemented across all of our sales channels. Notwithstanding this, new business margins have been widened by c10 bps, and on average by c15 bps across our range of retention products. Our combined share of the more profitable first time buyer and home mover segments has remained in the 10 to 12% range.

The service issues, particularly in the intermediary channel, have now been addressed, in addition to which a fast-track service for customers with LTV<60% has been introduced following a review of our self-certification policy earlier in the year. We are now complementing our "deal for life" and "reward mortgage" offering with other selective best buy products. In recent months, our extensive customer tracking survey has shown customer willingness to consider Abbey as their mortgage provider improving, with our rank versus our direct peers improving from 4th to joint 1st.

We are targeting an improved gross lending share during the second half, although the second quarter impact will continue to adversely impact completions in the third quarter, with improvements hopefully showing through thereafter.

Credit quality of the book and new lending continues to remain excellent with very limited exposure to certain segments of the market such as buy to let, sub prime and high loan-to-value.

Total retail deposit outflows of £1.0bn compared to an inflow of £1.5bn in the first half of 2003.

The first quarter outflow of £1.2bn has successfully been reversed, with an inflow of £0.2bn in the second quarter. The first quarter result reflected elements of business disruption together with a lower funding requirement following the repayment of over £50bn of wholesale funding in relation to the PBU over the last 18 months, significantly improving the funding mix and maturity profile. Within the Abbey brand, outflows were largely attributable to remote accounts, typically rate led propositions.

The improvement in the second quarter reflects actions taken, including product improvements, marketing campaigns and changes to pricing. We have shifted our focus to profitable branch based accounts such as flexible saver, and in the second quarter inflows into the new range offset attrition from the low rate "back book".

We are aiming to build on the second quarter performance and are targeting net inflows for the remainder of the year.

Bank account openings totalled 191,000 (Half 1 2003 : 206,000), with a total stock of accounts just short of 3.9m. Abbey-branded openings of 165,000 were slightly down on Half 1 2003, with a higher proportion of youth segment openings in part offsetting the fall in adult account openings attributable to reduced direct promotional activity in 2004. Despite this, Abbey-branded in-credit balances were up 5% at £4.5bn (Half 2 December 2003: £4.3bn).

Unsecured lending balances, which incorporate credit card (cahoot only), unsecured personal loans and overdrafts, increased by 10% in the period compared to the second half of 2003 with strong gross lending in both cahoot and the Abbey brand, up 39% in total on the same period last year. New lending through the Abbey branch network was trebled in the period supported by the "managing your borrowing campaign", offset by repayment profiles resulting in a stable net asset balance.

Credit card openings of 89,000 were down 41% on the same period last year, and 11% on the second half of 2003 reflecting intense competition in this market.

Total life assurance investment annualised premium equivalent (APE) sales of £58m were down 39% (Half 1 2003: £95m).

The new business flows continue to be impacted by our declaration of a zero bonus for with profit policyholders in 2004. In addition, the process of restructuring and retraining our sales force - both branch-based advisors and intermediary sales forces - has continued to impact sales capacity, and therefore the customer experience.

With completion of the retraining programme, and resolution of discussions with the FSA relating to policyholder reasonable expectations and capital structure of the with profit businesses, we are now in a better position from which to grow with first signs of this expected later in the year, but increasing in 2005.

APE sales of protection products were down at £56m (Half 1 2003: £61m), with margins materially improved, and representing an estimated market share of 26% through the intermediary channel in the first quarter.

General Insurance policy sales of 191,000 were down 16% on Half 1 2003. The decline in Household and Secured Creditor sales has been because of the launch of new systems and processes, which have taken time to embed during a period of major change for the business. This has resulted in lower conversion of cross-sale opportunities but indications are that these changes are starting to have a positive impact across all distribution channels. In addition, household sales have been written at increased margins in part offsetting the reduction in volume.

In addition, we have exited the travel market, reducing policy volumes by 6,000 year on year.

The following measures are intended to give helpful information on key customer metrics for the PFS business. The data for 2004 has been expanded to include all personal customers, which consists of Abbey retail, Scottish Provident, Scottish Mutual Assurance, cahoot, Inscape, Cater Allen and James Hay.

Based on Abbey-branded products only, and consistent with the information provided in the 2003 Full Year Financial Results:

Customer volumes have remained largely flat over the first half of 2004. Abbey's customer satisfaction has maintained its position slightly ahead of the average for its five key competitors.

⁽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 six months;

> Abbey accounts and credit cards - balance of more than £50 or transaction in the last three months; and

> cahoot account balance >£0

⁽²⁾ Trading revenues (net of credit costs) divided by active customers.

⁽³⁾ Trading costs (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 three month average mean score measured on a 7-point scale where 1 is "completely dissatisfied" and 7 is "completely satisfied", key competitors are Halifax, LTSB, HSBC, Natwest, Barclays. In the most recent quarter, Abbey's rating has started to improve relative to the peer group.

⁽¹⁾ A breakdown of the non-trading items is provided in Section 2.4.

⁽²⁾ The £22m embedded value charges and rebasing in Half 1 2003 does not include £80m 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 £111m lower at £975m (Half 1 2003: £1,086m), largely attributable to the reduction in the PFS Banking spread, partly offset by asset growth.

Investment and Protection trading income of £152m up on the same period last year (Half 1 2003: £133m). The contribution from new business was up reflecting improvements in protection margins, with experience variances and assumption changes, though unfavourable at £10m, improved on the prior year (Half 1 2003: unfavourable £32m).

In General Insurance trading income was flat at £56m (Half 1 2003: £56m), with increases in margins offset by reduced new policy sales and lower renewals business.

Abbey Financial Markets trading income of £128m was £30m lower (Half 1 2003: £158m), largely due to reduced business opportunities within the narrower PFS mandate, and less favourable market conditions.

Group Infrastructure trading income of £8m (Half 1 2003: £(18)m) rose by £26m due to interest rate hedge rebalancing and allocation of more interest cost to the business areas.

Banking and Savings trading income was £86m lower at £975m (Half 2 2003 £1,061m). This reflects the reduction in spread as a result of a further reduction in the free-to-go standard variable rate mortgage asset, combined with lower product redemption charges of £65m (Half 2 2003: £95m).

Investment and protection trading income fell by 7% to £152m (Half 2 2003: £164m) reflecting a decrease in expected return following a reduction in the risk discount rate and embedded value charges and rebasing in 2003. New business contribution was lower, despite an improvement in margins, reflecting the drop in investment business volumes. These decreases were partly offset by a £16m improvement in experience variances and assumptions changes.

In General Insurance trading income fell 14% to £56m (Half 2 2003 £65m), reflecting lower new policy sales as a result of weaker mortgage volumes, combined with the withdrawal from the travel market.

Abbey Financial Markets trading income of £128m was £37m higher (Half 2 2003 £91m), reflecting improved trading flows in the first half of 2004, specifically in equity and credit derivatives.

Group Infrastructure trading income of £8m (Half 2 2003 £(7)m ) rose by £15m due to interest rate hedge rebalancing and allocation of more interest cost to the business areas.

Excluding Banking and Savings (analysed below), net interest income increased by £22m compared to Half 1 2003 and was up by £21m on Half 2 2003. As a result of the change in accounting presentation described in Section 1.1. The comparatives for net interest income in Abbey Financial Markets for the 6 months to 31 December 2003 and six months to 30 June 2003 have been reduced by £20m and £66m respectively.

⁽¹⁾ Banking and Savings net interest income includes income associated with the Housing Association asset, however the PFS Banking spread excludes Housing Association.

⁽²⁾ Average spread is defined as interest received (mortgage, unsecured personal loans and overdraft interest less suspended interest) over average interest earning assets, less interest payable (savings, in-credit bank accounts) over interest bearing liabilities (including an element of wholesale funding).

⁽³⁾ 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 compared to an internal transfer price of average base rate plus 15 bps.

⁽⁴⁾ 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 PFS Banking spread includes all the PFS lending and savings operations. The largest component part was previously reported as Abbey retail spread, which was 1.33% in the first half (Half 1 2003: 1.61%; Half 2 2003: 1.50%) but it also includes the impact of Abbey-branded unsecured loans, Abbey Business, cahoot, Cater Allen Private Bank and Abbey International.

The PFS Banking spread for the first half was 1.58%, 17 basis points lower than the second half of last year with pressure on the asset spread being entirely responsible for the decline. Strong gross lending over the last 18 months and continued redemption activity has resulted in a change in the mix of the mortgage book, including an overall reduction in the free-to-go SVR asset. In addition, lower product redemption charges (PRCs) have contributed circa 11bps of the decline.

Relative to the peer group a 35 bps differential in the pricing of our SVR asset was closed over a 12 month period to November 2003, and explains in part the more marked decline in spread reported by Abbey.

The liability spread improved in the first half of the year to 0.79% (Half 2 2003: 0.69%), with the benefit of rising base interest rates more than offsetting the dilution impact of the increased wholesale funding required.

As previously flagged, the PFS Banking spread is expected to decline further in the second half, but the rate of decline will moderate substantially. The slowing decline reflects the benefits from rising base rates, the positive impact of improved new business margins, and the stabilisation of PRC income.

The differential between spread and margin has narrowed, as a result of lower earnings on the Group's capital as a result of maturing interest rate hedges, and an increased allocation of the Group's subordinated debt interest cost.

The main drivers of the fall in the PFS Banking spread are detailed below:

Banking and Savings net interest income of £782m was down 10% (Half 1 2003: £866m), in part reflecting a sharp reduction in product redemption charges to £65m (Half 1 2003: £93m), with a higher proportion of redemptions being penalty free, as well as a further reduction in average penalties per customer.

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. Back book SVR asset of £13bn is £2bn lower than the same point last year, in part because an increased proportion of mortgage incentive period maturities are currently reverting to base-rate linked margins. New business written since the latter part of 2002 typically reverts to standard variable rate after the incentive period, and will therefore start to replenish the SVR asset at the end of the incentive period.

Earnings from deposits in the first six months were relatively stable, benefiting from reduced compression as base rates have increased, and with some limited margin widening effected following the most recent Bank of England rate changes.

The fall in net interest income in the first half of 2004 was more marked than the relative stability through 2003. This reflects the sharp decline in product redemption charges discussed above, combined with the full period impact of the reduction in the SVR asset. The negative impact of higher Libor versus base rates had an offset in the first half of 2004 through positive interest rate hedge income.

⁽¹⁾ Quoted mortgage asset excludes £3.1bn (December 2003: £3.1bn) of Housing Association lending, consistent with the methodology used to calculate the PFS Banking spread. In addition, the split of the asset has been restated in prior periods to correct misclassifications, increasing the amount of fixed rate asset, offset by reducing the SVR linked and Base rate linked incentive period values.

At 30 June 2004, free to go SVR of £13bn represents 15% of the total asset. The absolute balance has reduced over the last 18 months, but the reduction has accelerated since the latter part of last year, 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.

£31bn of the incentive period mortgage asset is now tied in to products where rates are linked directly to base rates. Of the base rate linked asset still in the incentive period, approximately 70% 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.

Overall, branch-based deposits have declined to £14.9bn. Changes in mix reflect attrition from older branch-based accounts, partly offset by positive flows into new lower but still positive margin, branch-based offerings, such as Flexible Saver and Branch Saver.

Remote savings balances, including internet and postal, have reduced to £11.1bn (December 2003: £12.2bn) reflecting falls in e-saver, Postal and Direct Saver. Fixed term and tax-free savings balances increased, with ISA inflows offsetting bond and TESSA maturities.

Modest outflows from balances outside Abbey retail relate to primarily Cater Allen and Abbey International.

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

Total mortgage non-interest income has decreased by £17m to £64m (Half 1 2003: £81m), driven by a combination of lower levels of high loan-to-value lending and higher fees paid to introducers reflecting the level of introduced lending.

Savings non-interest income of £17m (Half 1 2003: £26m) largely relates to commissions on sale of Abbey National Life investment products, which were down on last year.

Banking related non-interest income was broadly flat at £112m (Half 1 2003: £113m). Improved collections of fees and a reduction in defaults have been offset by more competitive fee pricing.

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

General insurance non-interest income of £57m (Half 1 2003: £59m) was broadly in line with the equivalent period in 2003, with lower new business volumes, renewals, and an exit from the travel business largely offset by the impact of Half 2 2003 margin increases.

Abbey Financial Markets non-interest income decreased 21% to £113m (Half 1 2003 £143m), largely due to reduced business opportunities within the narrower PFS mandate, and less favourable market conditions. In addition as a result of the change of accounting presentation described in Section 1.1 the comparatives for trading non-interest income have been increased for the six months to 30 June 2003 by £66m.

In Group Infrastructure, non-interest income of £54m (Half 1 2003: £43m) increased by £11m, reflecting higher interest charges allocated to the life assurance companies in line with the group's gearing ratio. For life companies this is accounted for as non-interest income.

Total mortgage non-interest income fell by £18m to £64m (Half 2 2003: £82m) reflecting the lower levels of new mortgage business written compared to the strong second half of 2003, including a lower proportion of high loan-to-value business and a higher proportion of introduced business.

Savings commissions fell in line with the lower new business levels written in the life assurance business, impacted by the continued negative news flow including zero bonus declarations.

Banking related non-interest income was £8m higher at £112m (Half 2 2003 £104m) mainly due to an increase in collections of fees and a reduction in defaults.

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

General Insurance trading income fell £10m to £57m (Half 2 2003 £67m), largely due to a fall in new business, impacted by declining mortgage business and the impact of exiting the travel business.

Abbey Financial Markets non-interest income increased 41% to £113m (Half 2 2003: £80m), reflecting increased trading flow particularly in equity derivatives. In addition, as a result of the change in accounting presentation described in Section 1.1 the comparatives for trading non-interest income have been increased for the six months to 31 December 2003 by £20m.

In Group Infrastructure, non-interest income of £54m (Half 2 2003: £47m) increased by £7m, reflecting higher interest charges allocated to the life assurance companies.

⁽¹⁾ ANUTM represents Abbey National Unit Trust Managers, while ANPIM represents Abbey National PEP and ISA Managers. The fee income disclosed is reported as non-interest income for statutory purposes.

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

New business contribution to embedded value has increased 47% from £17m to £25m. In Abbey National Life the decrease reflects a combination of a reduction in new business sales and a small fall in the profitability of branch based protection products. In Scottish Mutual, the fall is the result of reduced new business volumes and changes in the sales mix, in addition to a significant drop in the profitability of the Pegasus protection products. Scottish Provident experienced a significant increase in new business contribution since the first half of 2003 when the contribution was impacted by margin pressure following changes in reassurance rates.

New business contribution to embedded value fell by £3m compared to the second half of last year driven by Scottish Mutual which has been impacted by reduced volumes, changes in the product mix of sales and drop in profitability of the Pegasus protection products.

The expected return in the first half of 2004 was in line with that of the first half of 2003. The Abbey National Life decrease was primarily driven by the reduction in discount rate, while in Scottish Mutual and Scottish Provident this impact was more than offset by changes to assumptions and the unwind of new business recognised in 2003.

6 months to 30 June 2004 versus 6 months to 31 December 2003:

The expected return was down 19% to £96m compared to the second half of 2003. This was largely attributable to the effects of changing the risk discount rate from 8.5% to 7.5% at the end of December 2003, when we moved to an active embedded value management basis and the impact of the 2003 embedded value charges and rebasing. In Scottish Mutual the £23m fall was mainly due to the reduction in risk discount rate, with a lower expected cash return on retained surpluses included in 2004. Expected return in Scottish Provident was higher due to the increase in policies in force resulting from strong new business volumes during 2003.

ANUTM and ANPIM non-interest income of £19m were lower than both Half 1 and Half 2 2003 of £20m and £23m respectively. The fall has been driven by a reduction in new business.

Experience variances and assumption changes of £(10)m (Half 1 2003: £(32)m; Half 2 2003: £(26)m) are analysed as follows:

Mortality and morbidity experience variances and assumption changes remained in line overall. The change in Scottish Mutual compared to Half 2 2003 was due to an assumption change in Pegasus morbidity assumptions at the end of 2003. In Scottish Provident mortality and morbidity experience was significantly lower following an amendment to the assumptions in December 2003.

Lapse experience have improved significantly from Half 2 2003 levels. Both Scottish Mutual and Scottish Provident experienced a large number of surrenders of unitised with profit contracts in 2003 following the announcement of the cut in bonus rates. Lapse rates in the with profits funds have remained high during the first half of 2004 reflecting policyholder uncertainty over future payouts during the review into the fund positions which has now been concluded.

The trading expenses under-run in the second half of 2003 has continued into the first half of 2004, particularly in Scottish Provident where strong new business volumes coupled with higher initial expense loadings have led to a cost under-run of £12m. The life businesses are currently undergoing significant restructuring and organisational changes in order to drive this under-run position further.

The taxation adjustment in 2004 principally represents the movement in the deferred tax asset on prior year available losses carried forward. The tax experience adjustments in Scottish Mutual and Abbey National Life largely relate to one-off differences between the actual tax payable over the period and that assumed as part of the expected return calculation. In Scottish Provident the variance of £15m represents the movement in deferred tax asset driven by anticipated future tax relief on prior year losses.

Other experience variances cover a number of smaller items which are aggregated for reporting purposes. These are mainly the effect of differences from the expected level in terms of revenue impacts, such as commissions. These have produced a charge in 2004 rather than the gain recognised in the first half of 2003.

Assumption changes and other comprises the impact of changing non economic assumptions such as lapse rates and annuitant mortality along with other items that are not classified as new business, expected return or experience variances. This includes such items as reductions in reassurance default reserves, maturing pensions business electing to use guaranteed annuity options and the impact of reassuring the immediate annuity business of Scottish Provident.

Embedded value charges and rebasing were £(24)m (Half 1 2003: £(102)m; Half 2 2003 £(341)m).

The embedded value charges and rebasing are disclosed in detail in Section 2.4.1 in three main categories. Firstly the impact of investment markets over the period differing from expectations on revenue profits. This includes actual less expected interest on surpluses retained in the funds and the difference between actual and expected management charges on unit funds over the period. Secondly, the impact of closing market levels being different than expected on the future profits item. This includes items such as changes to the active economic basis, changes in asset mix and the impact of higher or lower unit values on the stream of future management charges. Lastly, other non-trading items are included here such as changes in provisioning and impacts of stabilising the with profits funds.

The table below shows the total funds under management by company (including related PBU entities), and split by type of business:

⁽¹⁾ Total funds under management are split £25bn in Personal Financial Services, and £2bn managed on behalf of entities within the Portfolio Business Unit.

Note: The funds under management disclosed in the table above have been largely outsourced in 2004.