HBOS plc, Half Year financial report

FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the
business, strategy and plans of HBOS plc, its current goals and expectations
relating to its future financial condition and performance. By their
nature,forward looking statements involve risk and uncertainty because they
relate to events and depend on circumstances that will occur in the future.
HBOS Group's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a result of a
variety of factors, including UK domestic and global economic and business
conditions, the ability to derive cost savings and other benefits as well as to
mitigate exposures from the integration with the Lloyds Banking Group, risks
concerning borrower credit quality, market related trends and developments,
changing demographic trends, changes in customer preferences,changes to
regulation, the policies and actions of Governmental and regulatory authorities
in the UK or jurisdictions outside the UK, including other European countries
and the US, exposure to regulatory scrutiny, legal 
proceedings or complaints, competition and other factors. Please refer to the
latest Lloyds Banking Group plc annual report on Form 20-F filed with the US
Securities and Exchange Commission for a discussion of such factors. The
forward looking statements contained in this announcement are made as at the
date of this announcement, and HBOS Group undertakes no obligation to update
any of its forward looking statements. 

FINANCIAL REVIEW
Results
The consolidated income statement of HBOS plc on page 5 shows a loss before tax
of £9,492 million and a loss attributable to equity shareholders for the six
month period ended 30 June 2009 of £7,080 million. 
Principal activities
HBOS plc (the Company) and its subsidiaries (together the Group) provide a
range of banking and financial services through branches and offices in the UK
and overseas. 
The Group's revenue is earned through interest and fees on a broad range of
financial services products including current and savings accounts, personal
loans, credit cards and mortgages within the retail market; loans and capital
market products to commercial, corporate and asset finance customers; life,
pensions and investment 
products; and private banking and asset management.
Review of results
The loss before tax of £9,492 million for the half-year ended 30 June 2009
compares to a profit before tax of £848 million for the corresponding half-year
to 30 June 2008. The decrease in profit arises principally as a result of an
increase in the impairment charge, which reflects the recent credit environment
and current economic conditions. 
Net interest income decreased by 43 per cent to £2,266 million. During the
period, the Group reviewed its effective interest rate methodology (see note 2)
and as a result recognised an additional charge of £945 million. 
Excluding this charge, net interest income decreased by £774 million, or 19 per
cent, as both interest income and interest expense fell in response to the
historically low interest rate environment that has prevailed throughout the
first half of the current year. Declines in fee and commission income and
expense reflect lower volumes of new 
business. The net trading income loss, which includes the impact of changes in
value of financial instruments held at fair value, decreased by £3,193 million
compared with the corresponding period. Insurance premium income increased by
12 per cent despite the sale of the Group's Australian insurance operation, St.
Andrews in the last 
quarter of 2008. Other operating income increased by £1,945 million and the
half-year to 30 June 2009 includes £2,085 million of gains arising on the
repurchase of own debt. Accordingly, total income increased by £3,433 million
to £5,824 million from £2,391 million. 
Operating expenses decreased 7 per cent or £215 million from £3,177 million to
£2,962 million, as administrative expenses fell by £135 million and
depreciation charges decreased by £107 million of which £83 million is
attributable to operating lease assets. The Group's share of losses from its
joint ventures increased to £508 million from £24 million and an additional
loss of £96 million was booked during the period in respect of the disposal of
the Australian businesses, BankWest and St. Andrews. This arose from variations
in the consideration arising from certain conditions incorporated into the sale
contract. No further adjustments are anticipated. 
Impairment losses increased by £9,922 million to £11,377 million in the period
to 30 June 2009 from £1,455 million in the corresponding period last year. The
increase includes £8,743 million in respect of loans and advances to customers
and £1,174 million for losses on debt securities classified as loans and
receivables and the impairment of available-for-sale financial assets and
reflects the substantial deterioration in the credit environment between the
first half of last year and the current period. 

Loans and receivables have decreased by 1 per cent to £500,945 million from
£506,270 million at 31 December 2008; loans and advances to customers (before
impairment provisions) fell by £17,271 million, loans and advances to banks
increased by £21,639 million with deposits from banks increasing by £18,505
million. 
Customer deposits grew by £27,154 million from £237,449 million to £264,603
million at 30 June 2009. Debt securities in issue decreased by £53,120 million
of which £26,976 million reflects a reduction in certificates of deposit in
issue and £13,360 million is attributable to the net repayment of secured notes
under the Group's securitisation and covered bond programmes. The volume of
medium-term notes in issue decreased by £9,846 million. The balance sheet
changes since December 2008 reflect improved conditions in the funding and
liquidity markets as well as the impact of the acquisition of the Group by
Lloyds Banking Group that has also enabled the acquisition of own debt
reflected in the reduction of £9,145 million in subordinated liabilities. 
Shareholders' equity has increased following the capital injections of £16,339
million made by the UK Government and Lloyds Banking Group. During the period
the Government's shareholdings and the Group's other preference shares have
been replaced by shares issued to Lloyds Banking Group. 

PRINCIPAL RISKS AND UNCERTAINTIES
The most significant risks likely to be faced by the Group in the second half
of the year are: 
Economy: The economy continues to be an important driver of the Group's
financial performance. The downturn in late 2008 and early 2009 was worse than
predicted and this has impacted the Group's business in the first half of 2009.
However, economic forecasts are now, for the first time in a year, being
revised upwards, and the risk of 
a severe and prolonged downturn is receding. It appears likely that during the
next 18 months there will be a gradual return to economic growth. Nevertheless,
the Group remains cautious on the outlook. The Group also expects to see prices
for residential and commercial property stabilise during this time. 
Intended participation in the Government Asset Protection Scheme: The Group is
working with HM Treasury to finalise the detailed terms and conditions and the
operational mechanics of its intended participation in the Government Asset
Protection Scheme (GAPS). The operation of the scheme and its impact on the
Group's business (and the consequential impact on its lending and the wider
economy) is complex. The Group expects to conclude these discussions and agree
terms and conditions which are in the interest of shareholders. 
State aid: As a result of the placing and open offer completed in January 2009,
which is considered to constitute state aid under EU rules, the Group is
required to submit a restructuring plan to the European Commission. 
Although the state aid process is formally one between HM Treasury and the
Commission, both prior to and since the submission of the plan on 15 July 2009,
the Group has been working closely with HM Treasury and this will continue
throughout the process in order to reach an agreement which is acceptable to
all parties. 
Credit: Over the last six months the banking crisis has continued to impact the
financial services industry resulting in high profile losses and write-downs.
This market dislocation has also been accompanied by recessionary conditions
and adverse trends in many economies throughout the world, including the United
Kingdom. The 
Group is impacted by the economic downturn and a further worsening of the
business environment could adversely impact earnings during the next six
months. This poses a major risk to the Group and its lending businesses where
rising unemployment impacts the ability of customers to meet repayment dates on
unsecured lending and leads to a consequent increase in arrears; the downturn
in the housing market reduces collateral 
values for residential property and this impacts upon the quality of secured
lending and increases impairment losses; and companies are facing increasingly
difficult conditions, resulting in corporate default levels rising and leading
to increases in corporate impairment. 
Liquidity and funding risk: liquidity risk arises to the extent that the Lloyds
Banking Group is unable to attract and retain traditional sources of funding
such as retail and wholesale deposits or issue debt securities. Throughout the
last six months the Lloyds Banking Group, including HBOS plc has maintained a
satisfactory liquidity position reinforced by actively participating in the
support initiative of the Bank of England, other central banking and HM
Treasury. A reduction in the availability of these sources could materially
adversely affect the Group ability to meet its financial obligations as they
fall due. 
Legal and Regulatory risk: The Group is subject to stringent regulation in the
UK, including a recent increase in the level of government intervention in the
sector due to the declining market environment. The Turner Review, published by
the FSA in March 2009, indicates that banks can also expect a shift from a
‘light touch' principles 
based regime to an intensive and interventionist regime and considers a wide
range of proposals to address the severe financial problems experienced by
banks at the end of 2008. Future changes in regulation, fiscal or other
policies are unpredictable, beyond the control of the Group and could
materially adversely affect Group business. 
Recently proposed changes to capital and liquidity requirements could have a
substantial impact on the scale of bank's business models. Changes to the
regulatory regimes in other jurisdictions where the Group has a presence are
expected and may have an impact on the Group's operations. 
The Group is also subject to legal or regulatory proceedings or other
complaints brought against it in the High Court, elsewhere, or in jurisdictions
outside the UK, including other EU countries and the US. For example, a major
focus of US governmental policy relating to financial institutions in recent
years has been combating money 
laundering and terrorist financing and enforcing compliance with US economic
sanctions. The outcome of any proceeding or complaint is inherently uncertain
and could have a material adverse effect on the Group's operations and/or
financial condition, especially to the extent the scope of any such proceeding
expands beyond its original focus. Failure to manage these risks adequately
could impact the Group adversely, both financially and reputationally through
an adverse impact on the Group's brands.

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