Bank of Scotland, Half Year financial report

This announcement contains forward looking statements with respect to the
business, strategy and plans of Bank of Scotland 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. 

Bank of Scotland 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 ernmental 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 the Bank of Scotland Group undertakes no obligation to update any of its
forward looking statements. 

FINANCIAL REVIEW
The consolidated income statement of Bank of Scotland plc on page 5 shows a
loss before tax of £11,523 million and a loss attributable to equity
shareholders for the six month period ended 30 June 2009 of £8,976 million. 
Principal activities Bank of Scotland plc (the Bank)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; loans and capital markets products to
commercial, corporate and asset finance customers; and private banking and
asset management. 

Review of results The loss before tax of £11,523 million for the half-year
ended 30 June 2009 compares to a profit before tax of £1,081 million for the
corresponding half-year to 30 June 2008. The decrease in profit is principally
as a result of  an increase in impairment charges and a decline in total
income, both of which reflect the current economic  environment. 
Net interest income decreased by 44 per cent to £2,300 million. During the
period, the Group reviewed its effective interest rate methodology 
and as a result recognised an additional charge of £945 million. 

Excluding this charge, net interest income decreased by £890 million, or 22 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. Net trading income which
includes the impact of changes in value of financial instruments held at fair
value fell by £260 million compared with the corresponding period. The
insurance premium income and claims  reported in the prior period were
generated in the Group's Australian insurance operation, St. Andrews, which was
sold in the last quarter of 2008. 

Other operating income increased by £197 million and the half year to 30 June
2009 includes £63 million of gains arising on the redemption of own debt. Total
income net of insurance claims decreased by £2,291 million from £5,285 million
to £2,994 million. Operating expenses decreased 6 per cent, or £171 million,
from £2,713 million to £2,542 million with £130 million of this attributable to
reduced depreciation charges particularly in relation to operating lease
assets. 

The Group's share of losses from its joint ventures increased to £502 million
from £36 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 adjustments to the consideration arising from
certain conditions incorporated  into the sale agreement. No further
adjustments are anticipated. 

Impairment losses increased by £9,922 million to £11,377 million in the six
month period to 30 June 2009 compared to £1,455 million in the corresponding
period. 
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 £534,782 million from
£539,536 million at 31 December 2008; loans and advances to customers (before
impairment provisions) fell by £16,810 million, loans and advances to banks
increased by £21,748 million with deposits from banks increasing by £18,498
million. 
 
Customer deposits grew by £23,476 million from £277,399 million to £300,875
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 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 its
funding and liquidity, principally as a result of the acquisition of the Group
by Lloyds Banking Group. This has also enabled the Bank to repurchase its own
debt, reflected in the reduction of £1,349 million in subordinated liabilities. 

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: rising
unemployment impacts the ability of customers to meet repayment dates on
unsecured and secured 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 Bank of Scotland plc, has
maintained a atisfactory 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 Groups' 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. 

For details, please see attached PDF.