The mortgage lender posted solid interim numbers, with its cautious stance on lending ensuring credit quality remains well within its targets. Its 2006 buyback programme has been extended to 1bn.

Interim pretax profits rose 17% to £2,654m as underlying operating income increased 11% to £5.8bn. The group cost:income ratio improved to 40.9% from 42.2%.

Margin trends across the group were encouraging, with net interest margin broadly stable in the first half of the year at 179 basis points (bps) versus 181 bps in the second half of 2005 and 180bps last time.

Share buybacks totalled £502m as at 30 June, with an average share price of £9.57. The 2006 buyback programme has been extended to up to £1bn.

Aided by the buyback programme, interim underlying earnings per share increased 15% to 47.0p. The interim dividend meanwhile has been hiked 15% to 13.5p.

Across the group, underlying pretax profits in retail rose 4%, with its gross share of the mortgage market estimated to have increased to 22% from 21%.

The bank views the unsecured personal loans market in pricing terms as generally unattractive so has kept its exposure to this market under tight control, leading to balances being unchanged. Unsecured impairments as a percentage of closing advances increased to 13% versus 11.5% at the end of its 2005-year.

Corporate banking delivered a 14% improvement in pretax profit with margins strengthened considerably to 234bps from 218bps last time. The group continues to be selective with its lending in this area too and against this backdrop, credit performance improved again, with impaired loans as a percentage of closing advances falling to 1.34% from 1.41% at the end of 2005.

The insurance & investment business increased underlying pretax profits by 17%. The group believes prospects for the business are particularly strong.

There was a good performance by its international business too, with underlying pretax profits increasing by 27%. Australia put in an especially good performance with underlying profits increased by 36%. Credit quality remained good with impairment losses as a percentage of average advances at 0.13% versus 0.10% last time.

HBOS assures that, overall, credit quality performance was very much as expected and in line with previously reported trends. In retail, the rise in impairments for its unsecured book is in line with the general trends in the sector, it says.

Overall, as a percentage of closing customer advances, group impaired loans actually decreased to 2.32% from 2.37% at the end of 2005. Impairment losses were £864m, up from £753m at the end of 2005, representing 0.24% of average customer advances.

On outlook, HBOS notes retail sales, house prices and the economy are all performing better than expected, fuelling calls for a rise in UK interest rates. However, it believes the impact of such a move on its prospects would 'more than likely be modest' thanks to its diverse offerings which mean it is not overly dependent on any one product line or customer segment.

HBOS plc shares came in for a bit of profit taking in early trade as they slipped 5.5p to 969p, giving a forward PER of 10.3 and a prospective yield of 4%.

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