Royal Bank of Scotland Group PLC
19 February 2004
Annual Results 2003
Preliminary Announcement
of 2003 Annual Results
THE ROYAL BANK OF SCOTLAND GROUP plc
CONTENTS Page
Results summary 2
2003 Highlights 3
Group Chief Executive's review 4
Financial review 8
Summary consolidated profit and loss account 11
Divisional performance 12
Corporate Banking and Financial Markets 13
Retail Banking 15
Retail Direct 17
Manufacturing 18
Wealth Management 19
RBS Insurance 20
Ulster Bank 22
Citizens 23
Central items 25
Average balance sheet 26
Average interest rates, yields, spreads and margins 27
Statutory consolidated profit and loss account 28
Consolidated balance sheet 29
Overview of consolidated balance sheet 30
Statement of consolidated total recognised gains and losses 32
Reconciliation of movements in consolidated shareholders' funds 32
Consolidated cash flow statement 33
Notes 34
Additional analysis of income, expenses and provisions 40
Asset quality 41
Analysis of loans and advances to customers 41
Cross border outstandings 42
Selected country exposures 42
Risk elements in lending 43
Provisions for bad and doubtful debts 44
Market risk 46
Regulatory ratios and other information 47
Additional financial data for US investors 48
Forward-looking statements 49
Contacts 50
THE ROYAL BANK OF SCOTLAND GROUP plc
RESULTS SUMMARY
2003 2002 Increase
£m £m £m %
Total income 19,229 16,815 2,414 14%
--------- --------- -------
Operating expenses* 8,389 7,669 720 9%
-------- ------- -----
Operating profit before provisions* 8,645 7,796 849 11%
-------- ------- -----
Profit before tax, goodwill amortisation and integration costs 7,151 6,451 700 11%
-------- -------- -----
Profit before tax 6,159 4,763 1,396 29%
-------- -------- -------
Cost:income ratio** 42.0% 44.0%
--------- ---------
Basic earnings per ordinary share 79.0p 68.4p 10.6p 15%
-------- -------- -------
Adjusted earnings per ordinary share 159.3p 144.1p 15.2p 11%
--------- --------- -------
Dividends per ordinary share 50.3p 43.7p 6.6p 15%
-------- -------- ------
* excluding goodwill amortisation and integration costs.
** the cost:income ratio is based on operating expenses excluding goodwill
amortisation and integration costs, and after netting operating lease
depreciation against rental income.
Sir George Mathewson, Chairman of The Royal Bank of Scotland Group plc, said:
'Our 2003 results demonstrate a consistency of performance matched by few major
UK groups. We have again delivered a double-digit rise in profit before tax, a
performance that has been matched in each of the last ten years, and a 15%
increase in dividend - which is the same rate of increase as for each of the
past 11 years. Income growth remains strong in all our businesses and key
geographies - the UK, the US and Europe. December 2003 saw the final AVS payment
to shareholders and together with the payment of ordinary dividend, we
distributed £3 billion to shareholders in 2003.'
Fred Goodwin, Group Chief Executive, said:
'A recurring theme of our results in recent years has been the strength of
organic growth within our businesses and our performance in 2003 continued that
trend. It is our ability to maintain strong organic growth whilst making
acquisitions that gives us additional options for future growth. Whilst the
Churchill and First Active acquisitions are not in themselves transformational
for the RBS Group, they are potentially transformational for both Direct Line
and Ulster Bank; in the same way as the Mellon acquisition was for Citizens.
2003 saw the completion of all the elements of the NatWest acquisition, the
originally expected revenue and cost benefits were exceeded and all the AVS
payments made. I am particularly pleased that in 2003 we have maintained the
momentum that has been evident in our results over the last three years. Since
the acquisition of NatWest, the enlarged Group's income has grown by £8.2
billion, operating profit by £3.8 billion and adjusted earnings per share by
103%.'
THE ROYAL BANK OF SCOTLAND GROUP plc
2003 HIGHLIGHTS
• Profit before tax, goodwill amortisation and integration costs up £700
million, 11% to £7,151 million.
• Profit before tax up 29% to £6,159 million.
• Income up 14% to £19,229 million.
• Operating expenses up 9% to £8,389 million.
• Staff profit sharing of £189 million.
• Customer growth in all divisions.
• Average loans and advances to customers up 12%.
• Average customer deposits up 8%.
• Net interest margin consistent with the interim at 3.0%.
• Further efficiency gains - cost:income ratio 42.0%, improved from 44.0%.
• Credit quality remains strong and problem loan metrics continue to
improve.
• Basic earnings per share up 15%.
• Adjusted earnings per share up 11%.
• Total dividend 50.3p per ordinary share, up 15%.
• Total distribution to shareholders (including AVS dividend) of £2,953
million.
• Strong capital ratios, Tier 1 7.4%, Total capital 11.8%.
THE ROYAL BANK OF SCOTLAND GROUP plc
GROUP CHIEF EXECUTIVE'S REVIEW
In 2003 we continued to focus on delivering strong organic growth and through
acquisitions. Profit before tax, goodwill amortisation and integration costs
increased by 11%, adjusted earnings per share by 11%, and dividend per share by
15%. Customer numbers rose across all of our divisions. Our cost:income ratio -
a key measure of our efficiency - improved to 42.0%.
The combination of strong income growth, improved efficiency and a stable credit
environment contributed to an increase in profit of £700 million, or 11%, to
£7,151 million. All aspects of the NatWest integration were completed in the
early part of 2003, with revenue benefits and cost synergies achieved
significantly ahead of the original plan. As a result, costs associated with the
integration and charged in arriving at profit before tax were much lower in
2003, which together with growth in operating profit resulted in an increase in
profit before tax of 29% to £6,159 million.
In 2003 we have again demonstrated our ability to deliver strong organic growth
and, at the same time, make acquisitions that strengthen our market position and
increase our opportunity for future growth. During 2003 income across the Group
grew by £2,414 million, an increase of 14%, the majority of which comes from
organic growth. This growth has again been well spread across the Group.
It is a great tribute to our people that we have been able to continue to
deliver strong growth in income and profit in a year that contained several
adverse external factors, notably the cost of implementing the outcome of the
Competition Commission inquiry into small business banking in the UK and the
decline of the US dollar. Moreover, these results follow what was a very strong
performance for us in 2002 and in the two years prior to that. Since 1999, our
income has grown by £8,164 million, operating profit by £3,792 million, and
adjusted earnings per share by 103%.
Diversity of business mix is a key contributor to the level of consistency in
our performance and diversity of income type is also an important feature.
Non-interest income, for example, now represents 57% of our total income as our
fee earning and insurance businesses grow strongly, spread across a number of
different business units and brands.
Volumes in our businesses that contribute net interest income have also been
strong with loans and advances to customers increasing by 13% and deposits up
8%. As in the first half of the year, net interest margin was impacted by the
Competition Commission inquiry following which we offered interest on current
account balances for small businesses in the UK, affecting net interest income
in our Retail and Corporate Banking businesses. In addition, the low interest
rate environment reduced income earned from, in particular, non-interest paying
deposits.
The second half of 2003, however, saw net interest margin slightly above the
anticipated level, assisted by the increase in the UK interest rates in
November. As a result, we were able to maintain net interest margin at 3.0%,
which other than the 3.1% reported in 2002 and 2001, represents the same level
that has been achieved by the Group for the last eight years.
Operating efficiency improved further in 2003, leading to a cost:income ratio of
42.0% (2002 - 44.0%) even after costs associated with the first part of a
programme of initiatives that will improve efficiency across the Group. We are
confident that these initiatives will improve the operating efficiency of our
businesses in 2004 and again in 2005.
Credit metrics indicate continued strong credit quality and ratios relating to
risk elements in lending and potential problem loans continue to improve. Risk
elements in lending represent 2.01% of loans and advances to customers compared
with 2.14% at 31 December 2002. Risk elements in lending and potential problem
loans saw a reduction of 5% from the position reported at 31 December 2002. The
charge for provisions for 2003 amounted to £1,494 million with lower growth in
the year on year charge in the second half of the year. Provision coverage of
risk elements in lending and potential problem loans increased from 65% at
December 2002 to 68% at December 2003.
THE ROYAL BANK OF SCOTLAND GROUP plc
GROUP CHIEF EXECUTIVE'S REVIEW (continued)
Internal capital generation remains extremely strong such that even after
payment of the final AVS dividend in December 2003, a mechanism that has
returned some £2.7 billion to shareholders over the last three years, we ended
2003 in a strong position with tier 1 capital at 7.4% and total capital at
11.8%.
REVIEW OF DIVISIONS
Corporate Banking and Financial Markets ('CBFM') increased its income by 11% and
contribution by 11% to £3,620 million (2002 - £3,261 million). CBFM continues to
see good growth in traditional commercial banking and financial market products.
In addition, we are now seeing the benefit of investment over recent years in
our debt capital markets capability and the expansion of our franchise in Europe
and the United States.
Loan growth remained strong and lending margins were maintained. Demand for
large corporate borrowing remains subdued as a consequence of continued low
levels of corporate investment spend and increased bond market issuance. CBFM
has been well positioned to benefit from the increased bond issuance by
corporates and has achieved significantly improved standings in the Sterling and
Euro capital market league tables.
Customer demand for other financial market products, principally interest and
currency rate protection and securitisation, was also strong. As previously
reported, the first half performance was particularly good given the unusually
high levels of demand for mortgage backed securities in the US. Dealing revenues
in the second half were up 10% on the prior year period, in line with the growth
in income for the division as a whole.
Retail Banking achieved strong volume growth across all personal product areas
and small business banking. Total customers in the year increased by 3%. Average
non-mortgage lending increased by 9%, average mortgages increased by 12% and
average deposit balances increased by 6%. Both income and contribution were
reduced in the year by the outcome of the Competition Commission inquiry into
SME banking, which has the largest impact on the Retail Banking division, and by
the effect of lower interest rates on income from deposits. Despite these
significant negative factors, the division increased its income by 5% and
contribution by 4% to £3,126 million (2002 - £3,019 million).
Retail Direct increased its income by 15% and contribution by 25% to £873
million (2002 - £701 million). Retail Direct increased its customer accounts in
the UK by 1.2 million, while expanding balances and fee income associated with
these accounts. In July 2003, the credit card and personal loans portfolios of
Santander Direkt Bank were acquired, which added over 460,000 customer accounts
in Germany. On 3 February 2004 we announced the acquisition of the credit card
business of People's Bank in the United States which will extend our credit card
capability in the UK and Europe to the large and important US market.
Manufacturing costs increased by 6% to £1,875 million (2002 - £1,762 million).
Business as usual operating costs increased by around 3% despite the division
supporting double digit volume and income growth across the Group, demonstrating
again the efficiency of the manufacturing model that the Group has adopted. In
addition, a specific improvement programme commenced during 2003 which has a
short term impact on, in particular, technology costs but which will lead to
improved efficiency for the Group as a whole through the elimination of
duplicated activities and streamlining internal and customer facing processes.
Wealth Management's income declined by 3% and contribution declined by 4% to
£438 million (2002 - £454 million) reflecting difficult stock market conditions,
particularly in the first half of the year. In the second half, improved market
conditions led to growth in both income and profit over the same period last
year. In November 2003, Coutts completed the acquisition of Bank von Ernst which
significantly enhances our position in private banking in Switzerland.
THE ROYAL BANK OF SCOTLAND GROUP plc
GROUP CHIEF EXECUTIVE'S REVIEW (continued)
RBS Insurance (formerly Direct Line Group) increased its income by 52% and
contribution by 32% to £468 million (2002 - £355 million) with continued strong
growth in the Direct Line businesses in the UK and Europe together with the
contribution from Churchill which was acquired on 1 September 2003. As a result,
RBS Insurance now has 19.3 million policyholders in the United Kingdom and 1.4
million in Continental Europe and is now the second largest general insurer in
the UK.
Ulster Bank increased its income by 12% and its contribution by 12% to £273
million (2002 - £244 million). This performance has been driven by strong volume
growth. The number of customers increased by 36,000 in the year. In January
2004, we completed the acquisition of First Active plc, which will significantly
expand Ulster Bank's customer base and range of products, and creates major
positions in key markets in the Republic of Ireland.
Citizens increased its US dollar income by 16% and contribution by 22% to $1,401
million (2002 - $1,151 million) with very strong customer volumes more than
offsetting the impact of lower interest rates on deposits and investment
margins. In sterling terms, Citizens contribution grew 12% to £857 million (2002
- £766 million). The number of personal customers increased by 376,000 and
business customers by 36,000 due to growth through both traditional branches and
supermarket branches, and through acquisitions. Citizens completed the
acquisition of Commonwealth Bancorp, Inc Pennsylvania in January 2003, Port
Financial Corp., Massachusetts in July 2003 and Community Bancorp, Inc.,
Massachusetts in October 2003. In September 2003, Citizens announced the
acquisition of Thistle Group Holdings, Co., the holding company for Roxborough
Manayunk Bank, Pennsylvania which was completed in January 2004.
Acquisitions
We announced eight acquisitions during 2003. Some of these concentrated on
product areas where we saw considerable scope for both growth and efficiency
improvement. In two instances they resulted in a transformational advance for
the relevant divisions. The acquisition of Churchill completed in September 2003
made RBS Insurance the UK's second largest general insurer. The purchase of
First Active plc by Ulster Bank Group, completed in January 2004, has greatly
strengthened our presence in financial services across Ireland. Other
acquisitions reinforced the geographic reach of the Group in Europe and the US,
our two key regions outside the UK. Citizens announced three more acquisitions,
making it the 13th largest commercial banking organisation by deposits in the
US, while the purchase of the credit card and personal loans portfolios of
Santander Direkt in Germany expanded our European consumer finance operation.
Coutts moved into the top ten banks in international wealth management with the
acquisition of Bank von Ernst in Switzerland.
Our customers
It has been particularly pleasing to see, again, good growth in customer numbers
across all of our businesses. We are especially proud of the large numbers of
awards our businesses have won this year for both products and service. Customer
service remains a key focus for the Group. We have retained many of the
successful cross-business teams established during the NatWest integration. With
the skills we built up during the process, they have now turned their attention
to improving our service to customers and our efficiency. We have invested in
branch telephony staff and systems and are now the only bank in the UK to allow
our customers to call their local branch directly. We are therefore able to
offer our customers the choice between contacting their branch, communicating
via the internet or speaking to one of our customer service advisors who,
although not necessarily in their local branch, will be based at a location
close to the communities that we serve.
THE ROYAL BANK OF SCOTLAND GROUP plc
GROUP CHIEF EXECUTIVE'S REVIEW (continued)
Our people
Our people have delivered everything that has been asked of them and more,
particularly during the integration of NatWest, and we are committed to
retaining their trust and loyalty. We are also committed to meeting our people's
development needs and are complementing the extensive range of training that is
available with new and enhanced leadership programmes. We believe our staff are
the key to our success and that they should share in the success they have
helped to create and we have again set the staff profit share at 10% of basic
salaries. As a result of growing volumes across our businesses, we have
increased our staff numbers again this year.
Our shareholders
Our strategy is to continue to deliver superior sustainable returns for our
shareholders and the scale, strength and diversity of our business provides a
strong platform for this. Our underlying capital generation continues to be
strong and is sufficient to support the organic growth of our existing
businesses and to make acquisitions of the size and type as those we announced
in the last twelve months. We are committed to managing our capital base and
therefore in the event that suitable acquisition opportunities do not arise we
fully intend to return surplus capital to shareholders.
Outlook
The three main economies in which we operate, the UK, US and Europe are better
positioned than for some time. This along with the fundamental strength of our
businesses and our focus on efficiency gives us the confidence that we can
maintain superior growth for the benefit of shareholders, staff and the
communities in which we operate.
Fred Goodwin
Group Chief Executive
THE ROYAL BANK OF SCOTLAND GROUP plc
FINANCIAL REVIEW
Profit
Profit before tax, goodwill amortisation and integration costs increased by 11%
or £700 million, from £6,451 million to £7,151 million.
Profit before tax was up 29%, from £4,763 million to £6,159 million.
Total income
The Group achieved strong growth in income during 2003. Total income was up 14%
or £2,414 million to £19,229 million. Non-interest income now accounts for 57%
of total income. Excluding acquisitions, total income rose by 10%.
Net interest income increased by 6% to £8,301 million and represents 43% of
total income (2002 - 47%). Average loans and advances to customers and average
customer deposits grew by 12% and 8% respectively. The benefit of this growth
has more than offset the impact on net interest income of the Competition
Commission inquiry into SME banking in the UK and the lower interest rate
environment in the UK and the US which have reduced income earned from deposits
and investments.
Non-interest income increased by 22% to £10,928 million and represents 57% of
total income (2002 - 53%). Fees receivable were up 8% with good growth in
lending, transmission and card related fees reflecting higher volumes. General
insurance premium income grew strongly, reflecting volume growth in both motor
and home insurance products, and the acquisition of Churchill. In addition,
volumes in financial markets were up strongly in both the UK and the US
reflecting growth in customer-driven activity in interest rate protection,
mortgage securitisation and foreign exchange. Income from rental assets grew by
17% to £1,088 million, reflecting the growth in operating leases and investment
properties.
Net interest margin
The Group's net interest margin at 3.0% was, in line with the first half, down
from 3.1% in 2002 due to a reduced benefit from interest-free funds arising from
the lower interest rate environment, and the outcome of the Competition
Commission inquiry into SME banking.
Operating expenses
Operating expenses, excluding goodwill amortisation and integration costs, rose
by 9% to £8,389 million. Excluding acquisitions, operating expenses were up 7%
or £521 million in support of higher business volumes and 10% income growth.
Cost:income ratio
The strong growth in income together with tight cost management resulted in a
further improvement in the Group's ratio of operating expenses (excluding
goodwill amortisation and integration costs and after netting operating lease
depreciation against rental income) to total income, to 42.0% from 44.0%.
Excluding the effect of acquisitions, the cost:income ratio improved to 42.5%.
Net insurance claims
General insurance claims, after reinsurance, increased by 63% to £2,195 million.
Excluding Churchill, the increase was 29%, consistent with volume growth in the
component parts of the insurance division.
Provisions
The profit and loss charge for bad debts and amounts written off fixed asset
investments was £1,494 million compared with £1,345 million in 2002. The profit
and loss charge is in line with the growth in loans and advances.
THE ROYAL BANK OF SCOTLAND GROUP plc
Financial Review (continued)
Credit quality
There has been no material change during the year in the distribution by grade
of the Group's total risk assets.
The ratio of risk elements in lending to gross loans and advances to customers
at 2.01% at 31 December 2003 showed an improving trend (31 December 2002 -
2.14%).
Risk elements in lending and potential problem loans represented 2.24% of gross
loans and advances to customers compared with 2.66% at 31 December 2002.
Integration
Integration costs in the year were £229 million, of which, £143 million related
to the final elements of the NatWest integration and £86 million related to
other acquisitions, including Citizens' acquisitions and Churchill.
All integration initiatives in relation to NatWest have been implemented. The
programme benefits, comprising £890 million annual revenue benefits and £1,440
million annual cost savings, were fully implemented less than three years after
the acquisition of NatWest. Total costs for the integration programme were £2.3
billion. Since 6 March 2000 the integration initiatives have contributed a
cumulative £5.6 billion to the Group.
Earnings and dividends
Basic earnings per ordinary share increased by 15%, from 68.4p to 79.0p.
Earnings per ordinary share, adjusted for goodwill amortisation, integration
costs and the dividend on Additional Value Shares ('AVS'), increased by 11%,
from 144.1p to 159.3p.
The final dividend of 55p per share amounting to £1.5 billion was paid on 1
December 2003 to the holders of the AVS issued in connection with the
acquisition of NatWest. A total of £1 per AVS amounting to £2.7 billion in
aggregate has been paid over three years to shareholders in accordance with the
original schedule.
A final dividend of 35.7p per ordinary share is recommended, making a total for
the year of 50.3p per share, an increase of 15%. If approved, the final dividend
will be paid on 4 June 2004 to shareholders registered on 12 March 2004. The
total dividend is covered 3.1 times by earnings before goodwill amortisation,
integration costs and the AVS dividend.
Balance sheet
Total assets were £455 billion at 31 December 2003, 11% higher than total assets
of £412 billion at 31 December 2002.
Lending to customers, excluding repurchase agreements and stock borrowing
('reverse repos'), increased by 13% or £27 billion to £228 billion. Customer
deposits, excluding repurchase agreements and stock lending ('repos'), grew by
8% or £16 billion to £210 billion.
Capital ratios at 31 December 2003 were 7.4% (tier 1) and 11.8% (total), against
7.3% (tier 1) and 11.7% (total) at 31 December 2002.
Profitability
The adjusted after-tax return on ordinary equity was 18.7% compared with 17.6%
for 2002. This is based on profit attributable to ordinary shareholders before
goodwill amortisation and integration costs, and average ordinary equity.
THE ROYAL BANK OF SCOTLAND GROUP plc
Financial Review (continued)
Acquisitions
In January 2003, Citizens completed the acquisition of Pennsylvania-based
commercial bank, Commonwealth Bancorp, Inc. for a cash consideration of US$450
million.
In April 2003, Citizens announced the acquisition of Port Financial Corp., the
holding company of the Massachusetts savings bank, CambridgePort Bank for a cash
consideration of US$285 million. This transaction was completed on 31 July 2003.
In May 2003, RBS announced the acquisition of Nordisk Renting AB, a Swedish
leasing company, for a cash consideration of €104 million. This transaction was
completed on 2 June 2003.
In May 2003, RBS announced the acquisition of the credit card and personal loans
portfolios of Frankfurt-based Santander Direkt Bank for a cash consideration of
€486 million. This transaction was completed on 31 July 2003.
In June 2003, RBS announced the acquisition of Churchill Insurance Group PLC for
a cash consideration of £1.1 billion. This transaction was completed on 1
September 2003.
In July 2003, Citizens announced the acquisition of Community Bancorp, Inc., the
holding company for Community National Bank, for a cash consideration of US$116
million. This transaction was completed on 31 October 2003.
In September 2003, Citizens announced the acquisition of Thistle Group Holdings,
Co., the holding company for Roxborough Manayunk Bank, for a cash consideration
of US$136 million. This transaction was completed on 5 January 2004.
In October 2003, Coutts Bank (Switzerland) Limited announced the acquisition of
a Swiss private bank, Bank von Ernst & Cie AG, for a cash consideration of Swiss
Francs 500 million. This transaction was completed on 28 November 2003.
In October 2003, RBS announced that it had agreed terms for a recommended
acquisition of First Active plc, for a cash consideration of €887 million. This
transaction was completed on 5 January 2004.
On 3 February 2004, RBS announced that it had agreed terms with People's Bank of
Connecticut to purchase their credit card portfolio. This transaction is subject
to regulatory approval and is expected to complete by the end of March 2004.
Disposals
In May 2003, RBS announced the sale of the Miami-based Latin American private
banking operations of Coutts Group to Santander Central Hispano. The cash
consideration was US$81 million. This transaction was completed on 31 July 2003.
THE ROYAL BANK OF SCOTLAND GROUP plc
SUMMARY CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2003
In the profit and loss account set out below goodwill amortisation and
integration costs are shown separately. In the statutory profit and loss account
on page 28, these items are included in the captions prescribed by the Companies
Act 1985.
2003 2002
£m £m
Net interest income 8,301 7,849
------- -------
Non-interest income (excluding general insurance) 7,867 7,072
General insurance net premium income 3,061 1,894
-------- -------
Non-interest income 10,928 8,966
--------- -------
Total income 19,229 16,815
Operating expenses 8,389 7,669
------- -------
Profit before other operating charges 10,840 9,146
General insurance net claims 2,195 1,350
------- -------
Operating profit before provisions 8,645 7,796
Provisions 1,494 1,345
------- -------
Profit before tax, goodwill amortisation and integration costs 7,151 6,451
Goodwill amortisation 763 731
Integration costs 229 957
------- -------
Profit before tax 6,159 4,763
Tax 1,910 1,556
------- -------
Profit after tax 4,249 3,207
Minority interests (including non-equity) 210 133
Preference dividends 261 305
------- -------
3,778 2,769
Additional Value Shares dividend 1,463 798
------- -------
Profit attributable to ordinary shareholders 2,315 1,971
Ordinary dividends 1,490 1,267
-------- -------
Retained profit 825 704
-------- -------
Basic earnings per ordinary share (Note 4) 79.0p 68.4p
-------- -------
Adjusted earnings per ordinary share (Note 4) 159.3p 144.1p
--------- ---------
THE ROYAL BANK OF SCOTLAND GROUP plc
DIVISIONAL PERFORMANCE
The contribution of each division before goodwill amortisation and integration
costs and, where appropriate, Manufacturing costs is detailed below.
2003 2002
£m £m
Corporate Banking and Financial Markets* 3,620 3,261
Retail Banking 3,126 3,019
Retail Direct 873 701
Manufacturing* (1,875) (1,762)
Wealth Management* 438 454
RBS Insurance 468 355
Ulster Bank 273 244
Citizens 857 766
Central items (629) (587)
------- -------
Profit before goodwill amortisation and integration costs 7,151 6,451
------- -------
* the prior year has been restated to reflect the transfer in 2003 of certain
activities from Corporate Banking and Financial Markets and Wealth Management to
Manufacturing.
THE ROYAL BANK OF SCOTLAND GROUP plc
CORPORATE BANKING AND FINANCIAL MARKETS
2003 2002
(restated*)
£m £m
Net interest income excluding funding costs of rental assets 2,653 2,631
Funding cost of rental assets (329) (282)
------- -------
Net interest income 2,324 2,349
------- -------
Fees and commissions receivable 1,537 1,394
Fees and commissions payable (220) (157)
Dealing profits (before associated direct costs) 1,661 1,338
Income on rental assets 1,088 931
Other operating income 307 197
------- -------
Non-interest income 4,373 3,703
------- -------
Total income 6,697 6,052
------- -------
Direct expenses
- staff costs 1,410 1,230
- other 394 375
- operating lease depreciation 518 461
------- -------
2,322 2,066
------- -------
Contribution before provisions 4,375 3,986
Provisions 755 725
------- -------
Contribution 3,620 3,261
------- -------
* the prior year has been restated following the transfer of certain activities
to Manufacturing.
£bn £bn
Total assets** 219.0 203.4
Loans and advances to customers** - gross
- banking book 99.3 92.1
- trading book 5.0 3.6
Rental assets 10.1 7.0
Customer deposits** 68.6 62.2
Weighted risk assets - banking 140.0 125.2
- trading 12.6 11.3
** excluding repos and reverse repos
Corporate Banking and Financial Markets ('CBFM') is the largest provider of
banking services and structured financing to medium and large businesses in the
UK and a growing provider of debt financing and risk management solutions to
large businesses in Europe and North America. It provides an integrated range of
products and services to mid-sized and large corporate and institutional
customers in the UK and overseas, including corporate and commercial banking,
treasury and capital markets products, structured and acquisition finance, trade
finance, leasing and factoring. Treasury and capital markets products are
provided through Financial Markets, which is a leading provider of debt, foreign
exchange and derivatives products. In June 2003, CBFM completed the acquisition
of Nordisk Renting AB, a Swedish leasing company.
THE ROYAL BANK OF SCOTLAND GROUP plc
CORPORATE BANKING AND FINANCIAL MARKETS (continued)
Contribution increased by 11% or £359 million to £3,620 million. As well as in
the UK, the division also achieved good growth in Europe and North America.
Total income was up 11% or £645 million to £6,697 million with strong growth
across all business areas.
Average loans and advances to customers of the banking business increased by 9%
or £7.5 billion to £94.3 billion. Lending margin was maintained. Average
customer deposits within the banking businesses increased by 7% or £4.1 billion
to £61.0 billion; however, the lower interest rate environment adversely
affected deposit margins as it reduced the benefit of interest free funds. Net
interest income was further impacted by the effect of implementing from 1
January 2003 the pricing remedies agreed following the Competition Commission
inquiry into SME banking and by lower money market income, due to less
favourable market conditions.
The asset rental business comprising operating leases and investment properties,
grew strongly. Average rental assets increased to £8.1 billion and net income
after deducting funding costs and operating lease depreciation increased by 28%,
£53 million to £241 million.
Fees receivable rose by £143 million, 10% to £1,537 million due to growth in
fees related to lending and from the expansion and success of capital markets
activities. Fees payable including brokerage were up £63 million to £220 million
due to higher volumes in Financial Markets.
Dealing profits which is income before associated direct costs from our role in
servicing customer demand for interest and currency rate protection and mortgage
backed securitisation rose by 24% to £1,661 million providing incremental profit
contribution of some £170 million. There has been steady growth in underlying
customer volumes in all product areas. While first half performance was
particularly strong given the unusually high levels of demand for mortgage
backed securities in the United States, dealing revenues in the second half were
up 10% on the prior year period, in line with the growth in income for the
division as a whole.
Other operating income was up £110 million, 56% to £307 million partially due to
the full year effect of the inclusion of Dixon Motors' gross profit.
Direct expenses increased by 12% or £256 million to £2,322 million. Excluding
the effect of the acquisition of Nordisk Renting and Dixon Motors and operating
lease depreciation, operating expenses were up 10%, £161 million. This was due
to performance related costs associated with the strong growth in trading
revenues, expansion in all business areas and continued investment in capital
market activities and in the growing overseas franchise.
The charge for provisions for bad debts and amounts written off fixed asset
investments amounted to £755 million, an increase of £30 million. The charge in
the second half of the year was £351 million, 13% lower than the first half. The
increase in provisions of 4% over last year was less than the growth in lending
of 9%, reflecting an improvement in credit quality and the economic environment
during 2003.
THE ROYAL BANK OF SCOTLAND GROUP plc
RETAIL BANKING
2003 2002
£m £m
Net interest income 2,951 2,840
Non-interest income 1,452 1,353
------- -------
Total income 4,403 4,193
Direct expenses
- staff costs 777 707
- other 227 254
------- -------
1,004 961
------- -------
Contribution before provisions 3,399 3,232
Provisions 273 213
------- -------
Contribution 3,126 3,019
------- -------
£bn £bn
Total banking assets 63.8 57.4
Loans and advances to customers - gross
- mortgages 36.6 32.1
- other 25.2 23.5
Customer deposits 66.3 61.7
Weighted risk assets 42.9 38.8
Retail Banking comprises both The Royal Bank of Scotland and NatWest retail
brands. It offers a full range of banking products and related financial
services to the personal, premium and small business markets through a network
of branches, telephone, ATM's and the internet.
The division achieved strong volume growth across all personal product areas -
current accounts, mortgages and loans and savings. Despite lower interest rates
and the adverse effect of the pricing remedies agreed following the Competition
Commission inquiry into SME banking which were implemented from 1 January 2003,
income increased by 5% or £210 million to £4,403 million, and contribution by 4%
or £107 million to £3,126 million.
Net interest income rose by 4% or £111 million to £2,951 million, reflecting the
continued strong growth in customer advances and deposits which was partially
offset by the implementation of the Competition Commission pricing remedies and
the impact of a lower interest rate environment. Excluding the effect of the
Competition Commission the increase was 8%. Average loans to customers,
excluding mortgages, grew by 9% or £1.9 billion to £23.7 billion. Average
mortgage lending grew by 12% or £3.6 billion to £33.7 billion. Average customer
deposits increased by 6% or £3.7 billion to £60.9 billion.
Non-interest income rose by 7% or £99 million to £1,452 million. This reflected
further growth in the customer base and a 15% growth in general insurance income
to £301 million. Embedded value profits of the life assurance business increased
by 14%, or £7 million to £57 million.
Direct expenses increased by 4% or £43 million to £1,004 million. Staff expenses
increased 10% or £70 million to £777 million reflecting further investment in
customer facing staff.
Other expenses decreased 11% or £27 million to £227 million, as a result of our
rigorous approach to management of non-staff costs.
THE ROYAL BANK OF SCOTLAND GROUP plc
RETAIL BANKING (continued)
The charge for provisions for bad debts increased by £60 million to £273
million. The overall quality of the loan portfolio remains stable and the
increased charge reflects growth in lending over recent years particularly in
NatWest since its acquisition.
THE ROYAL BANK OF SCOTLAND GROUP plc
RETAIL DIRECT
2003 2002
£m £m
Net interest income 849 749
Non-interest income 986 841
------- -------
Total income 1,835 1,590
Direct expenses
- staff costs 211 190
- other 454 418
------- -----
665 608
------- -----
Contribution before provisions 1,170 982
Provisions 297 281
------- -----
Contribution 873 701
------- -----
£bn £bn
Total assets 21.9 19.4
Loans and advances to customers - gross
- mortgages 8.2 7.0
- other 13.8 12.4
Customer deposits 4.4 4.4
Weighted risk assets 16.8 14.4
Retail Direct issues a comprehensive range of credit, charge and debit cards to
personal and corporate customers and engages in merchant acquisition and
processing facilities for retail businesses. It also includes: Tesco Personal
Finance ('TPF'), The One account, Direct Line Financial Services ('DLFS'),
Lombard Direct, WorldPay Limited, the Group's internet banking platform, the
Primeline brand, and in Europe, the Comfort Card businesses, all of them
offering products to customers through direct channels. In July 2003, Retail
Direct completed the purchase of the credit card and personal loans portfolios
of Frankfurt-based Santander Direkt Bank.
Contribution increased by 25% or £172 million to £873 million.
Total income was up 15% or £245 million to £1,835 million, reflecting continued
strong growth in supermarket banking (TPF), mortgages and cards. Net interest
income was up 13% or £100 million to £849 million. Average lending rose by 15%
to £20.3 billion of which average mortgage lending was 20% higher at £7.6
billion mainly in The One account. Average customer deposits were up 5% to £4.4
billion. During 2003, the total number of customer accounts increased by 1.7
million.
Non-interest income was up 17% or £145 million to £986 million. There was good
growth in insurance and ATM income resulting from increased volumes,
particularly in TPF and in the Cards Business.
Direct expenses increased by 9% or 7% excluding acquisitions, and other expenses
increased by £36 million, 9% (7% excluding acquisitions), with increased
processing and operational costs in support of the higher business levels.
The charge for provisions for bad debts increased by £16 million or 6% to £297
million, reflecting growth in lending volumes offset by higher recoveries. The
indicators of credit quality remain stable.
THE ROYAL BANK OF SCOTLAND GROUP plc
MANUFACTURING
2003 2002
(restated*)
£m £m
Staff costs 625 536
Other costs 1,250 1,226
------- -------
Total manufacturing costs 1,875 1,762
------- -------
Analysis:
Group Technology** 651 613
Group Purchasing and Property Operations** 636 585
Customer Support and other operations 588 564
------- -------
Total manufacturing costs 1,875 1,762
------- -------
* the prior year has been restated following the transfer of certain activities
from Corporate Banking and Financial Markets and Wealth Management.
** the prior year has also been restated to reflect the transfer of certain
business units within Manufacturing.
Manufacturing supports the customer facing businesses, mainly Corporate Banking
and Financial Markets, Retail Banking, Retail Direct and Wealth Management, and
provides operational technology, customer support in telephony, account
management, lending and money transmission, global purchasing, property and
other services.
Manufacturing drives optimum efficiencies and supports income growth across
multiple brands and channels by using a single scalable platform and common
processes wherever possible. It also leverages the Group's purchasing power and
has become the centre of excellence for managing large scale and complex change.
The expenditure incurred by Manufacturing relates to shared costs principally in
respect of the Group's UK banking operations. These costs reflect activities,
which are shared between the various customer-facing divisions and consequently
cannot be directly attributed to individual divisions. Instead, the Group
monitors and controls each of its customer facing divisions on revenue
generation and direct costs whilst in Manufacturing such control is exercised
through appropriate efficiency measures and targets.
Manufacturing's costs increased by 6% or £113 million, to £1,875 million.
Group Technology costs have increased by 6% or £38 million to £651 million. This
reflects business as usual cost growth and a specific improvement programme, the
majority of the cost of which will be borne by Group Technology. This is already
providing benefits across the Group and further investment opportunities have
been identified which will lead to further efficiency benefits across the Group
in 2004 and again in 2005.
The cost base of Group Purchasing and Property Operations rose by 9% or £51
million to £636 million, largely as a result of the continuing upgrade of the
property portfolio in major UK centres to support the Group's core business.
Customer Support and other operations costs were £588 million, 4% or £24 million
higher than the previous year. This reflects further expansion of business
operations with increased expenditure in customer support areas of Lending,
Telephony, Payments and Security. In telephony, the Royal Bank of Scotland
customer service proposition has been introduced to NatWest customers who can
now choose between speaking to their local branch, to a customer service officer
or using the automated telephone service.
THE ROYAL BANK OF SCOTLAND GROUP plc
WEALTH MANAGEMENT
2003 2002
(restated*)
£m £m
Net interest income 465 460
Non-interest income 414 447
----- -----
Total income 879 907
Expenses
- staff costs 275 301
- other 157 163
----- -----
432 464
----- -----
Contribution before provisions 447 443
Provisions for bad and doubtful debts (9) 11
----- -----
Contribution 438 454
----- -----
£bn £bn
Total assets 15.2 13.4
Investment management assets - excluding deposits 27.3 20.5
Customer deposits 29.3 29.1
Weighted risk assets 9.1 8.4
* the prior year has been restated following the transfer of certain activities
to Manufacturing.
Wealth Management comprises Coutts Group, Adam & Company, The Royal Bank of
Scotland International, The Royal Bank of Scotland Private Banking, NatWest
Offshore and NatWest Private Banking. Following the sale in September 2002 of a
50% interest, NatWest Stockbrokers now operates as a 50:50 joint venture with TD
Waterhouse. The Miami-based private banking operations of Coutts Group were sold
to Santander Central Hispano in July 2003, and in November 2003, Coutts Group
completed the acquisition of Bank von Ernst, one of Switzerland's most respected
private banks.
Contribution was £438 million, £16 million or 4% lower than 2002. Excluding the
acquisition and disposals, income was up 1%, with contribution before provisions
up 4%. The charge for provisions for bad and doubtful debts was £9 million
compared with a net release of £11 million in 2002.
Total income was down by 3% or £28 million to £879 million.
Net interest income increased by 1% or £5 million to £465 million. The benefit
from growth in lending volumes was partly negated by the effect of lower
interest rates which also caused a tightening of deposit margins.
Non-interest income declined by 7% or £33 million to £414 million. Excluding the
acquisition and disposals the decrease was 1%. This reflects the impact of lower
equity markets adversely affecting fees and commissions.
Investment management assets increased by £6.8 billion or 33% to £27.3 billion
principally due to the acquisition of Bank von Ernst in the year.
Expenses were down by 7% or £32 million to £432 million reflecting tight cost
control in difficult market conditions and the 7% reduction in staff numbers
since 31 December 2002.
Provisions for bad and doubtful debts were £9 million compared with a net
release of £11 million in 2002.
THE ROYAL BANK OF SCOTLAND GROUP plc
RBS INSURANCE (formerly Direct Line)
2003 2002
£m £m
Earned premiums 3,565 2,383
Reinsurers' share (504) (489)
------- ------
Insurance premium income 3,061 1,894
Net fees and commissions (99) 65
Other income 283 180
------- -------
Total income 3,245 2,139
------- -------
Expenses
- staff costs 241 178
- other 341 256
------- ------
582 434
------- ------
Gross claims 2,644 1,693
Reinsurers' share (449) (343)
------- -------
Net claims 2,195 1,350
------- -------
Contribution 468 355
------- -------
In-force policies (000)
- motor: UK 8,086 4,668
- motor: International 1,541 1,224
- home: UK 5,154 1,587
Combined operating ratio - UK (%) 91.6 89.4
Gross insurance reserves - total 6,582 3,002
RBS Insurance sells and underwrites retail, commercial and wholesale insurance
on the telephone, the internet, and through brokers. The Retail Divisions of
Direct Line and Churchill sell general insurance and motor breakdown services
direct to the customer. The Partnership Division is a leading wholesale provider
of insurance and motoring related services. Through its International Division,
Direct Line sells insurance in Spain, Germany, Italy and Japan. The Intermediary
and Broker Division sells general insurance products through its network of
brokers. In September 2003, RBS completed the acquisition of Churchill Insurance
Group PLC.
Contribution increased by 32% or £113 million to £468 million. Excluding
Churchill, contribution increased by 26% or £92 million.
Total income was up 52% or £1,106 million to £3,245 million. Excluding
Churchill, total income grew by 25% or £525 million.
After reinsurance, insurance premium income was up 62% or £1,167 million to
£3,061 million. Excluding Churchill, insurance premium income (net of
reinsurance) grew by 26% or £487 million. The number of UK in-force motor
insurance policies increased by 3.4 million of which 3.1 million was from
Churchill, while the number of UK in-force home insurance policies increased by
3.6 million including 3.4 million from Churchill. The number of international
in-force motor policies increased by 317,000 during the year.
Other income net of commissions payable was down from £245 million to £184
million. Excluding Churchill, which included £148 million commissions payable to
brokers and intermediaries, other income was up 16% or £38 million due to higher
investment income, embedded value profits and share of associates profits.
Expenses increased by 34% or £148 million to £582 million. Excluding Churchill,
expenses increased by 9% or £40 million. Staff numbers, excluding Churchill,
increased by 4% (400) to support growth in business volumes, particularly in the
partnership business.
THE ROYAL BANK OF SCOTLAND GROUP plc
RBS INSURANCE (continued)
Net claims, after reinsurance, increased by 63% or £845 million to £2,195
million. Excluding Churchill, net claims increased by 29% or £393 million.
UK Combined Operating ratio was 91.6%. Excluding Churchill, the UK ratio
improved from 89.4% to 89.2%.
THE ROYAL BANK OF SCOTLAND GROUP plc
ULSTER BANK
2003 2002
£m £m
Net interest income 396 339
Non-interest income 185 181
----- -----
Total income 581 520
Expenses
- staff costs 164 145
- other 112 109
----- -----
276 254
----- -----
Contribution before provisions 305 266
Provisions 32 22
----- -----
Contribution 273 244
----- -----
£bn £bn
Total assets 15.6 12.7
Loans and advances to customers - gross 11.6 9.1
Customer deposits 9.7 8.8
Weighted risk assets 11.0 9.0
Average exchange rate - €/£ 1.445 1.591
Spot exchange rate - €/£ 1.416 1.536
Ulster Bank provides a comprehensive range of retail and wholesale financial
services in Northern Ireland and the Republic of Ireland. Retail Banking has a
network of branches throughout Ireland and operates in the personal, commercial
and wealth management sectors. Corporate Banking and Financial Markets provides
a wide range of services in the corporate and institutional markets. In October
2003 Ulster Bank disposed of its stockbroking business, and in January 2004, it
completed the acquisition of First Active plc.
Contribution increased by 12% or £29 million to £273 million driven by strong
volume growth in both loan and deposit products. The number of customers
increased in 2003 by 36,000.
Total income increased by 12% or £61 million to £581 million reflecting the
strong volume growth, in particular residential mortgages.
Net interest income rose by 17% or £57 million to £396 million, reflecting
strong growth in both average customer lending and deposits which increased by
26% or £2.1 billion, to £10.1 billion and by 13% or £1.0 billion, to £8.9
billion respectively.
Non-interest income increased by £4 million to £185 million. Strong growth in
lending, transmission and card fee income was partially offset by lower dealing
profits. Uncertainty in equity markets adversely affected brokerage fees in the
stockbroking business which was sold in October 2003.
Expenses increased by 9% or £22 million to £276 million. This reflected the
annual pay award and the additional costs to support increased business volumes.
The charge for provisions for bad debts was up £10 million to £32 million
reflecting growth in lending.
THE ROYAL BANK OF SCOTLAND GROUP plc
CITIZENS
2003 2002
£m £m
Net interest income 1,310 1,248
Non-interest income 514 468
------- -------
Total income 1,824 1,716
Expenses
- staff costs 505 485
- other 374 370
------- -------
879 855
------- -------
Contribution before provisions 945 861
Provisions 88 95
------- -------
Contribution 857 766
------- -------
$bn $bn
Total assets 76.8 61.1
Loans and advances to customers - gross 43.5 31.4
Customer deposits 62.8 51.1
Weighted risk assets 50.8 38.8
Average exchange rate - US$/£ 1.635 1.503
Spot exchange rate - US$/£ 1.786 1.613
Citizens is engaged in retail and corporate banking activities through its
branch network in the states of Rhode Island, Connecticut, Massachusetts, New
Hampshire, Pennsylvania, Delaware and New Jersey. Citizens is the thirteenth
largest commercial banking organisation in the US based on deposits. In 2003,
Citizens completed the acquisitions of Commonwealth Bancorp, Inc. of
Pennsylvania in January, Port Financial Corp., the holding company for
CambridgePort Bank, a Massachusetts savings bank, in July and Community Bancorp,
Inc., Massachusetts, the holding company for Community National Bank, in
October. In September, Citizens announced the acquisition of Thistle Group
Holdings, Co. the holding company of Roxborough Manayunk Bank, which was
completed in January 2004.
Contribution which increased by 12% or £91 million to £857 million was
diminished by the weakening of the US dollar in relation to sterling. In US
dollar terms, contribution increased by 22% or $250 million to $1,401 million.
Total income was up 16% or $406 million to $2,984 million.
Net interest income increased by 14% or $268 million to $2,143 million.
Excluding the acquisitions, net interest income was up 9% or $164 million (£100
million), reflecting strong organic growth in personal loans and deposits.
Excluding the acquisitions, average loans were up 29% or $8.0 billion and
average deposits were up 20% or $9.1 billion. The benefit of this growth was
reduced by a narrowing interest margin due to reductions in US interest rates.
Non-interest income rose by 20% or $138 million to $841 million. Excluding the
acquisitions, non-interest income was up 16% or $115 million (£70 million).
THE ROYAL BANK OF SCOTLAND GROUP plc
CITIZENS (continued)
Expenses increased by 12% or $153 million to $1,438 million. Excluding the
acquisitions, expenses increased by 8% or $102 million (£62 million), to support
higher business volumes and expansion of Citizens' supermarket banking
programme.
Provisions were up $3 million from $142 million to $145 million. Excluding the
acquisitions, provisions were $2 million (£1 million), or 1%, lower than 2002.
Credit quality metrics remain strong and total non-performing loans were 0.40%
of total loans and advances at 31 December 2003 compared with 0.57% at the end
of 2002.
In 2003, Citizens increased its personal customer base by 376,000 accounts and
its business customers by 36,000 due to growth through both traditional and
supermarket branches, and the acquisition of Commonwealth Bancorp, Inc., Port
Financial Corp. and Community Bancorp, Inc.
THE ROYAL BANK OF SCOTLAND GROUP plc
CENTRAL ITEMS
2003 2002
£m £m
Funding costs 215 215
Departmental and corporate costs 414 372
----- -----
Total Central items 629 587
----- -----
The Centre comprises group and corporate functions, such as capital raising,
finance and human resources, which manage capital requirements and provide
services to the operating divisions.
Total Central items increased by £42 million to £629 million.
Funding costs at £215 million, were unchanged. Increased income from higher
shareholders' funds was offset by the funding costs associated with the
acquisition of Churchill in September 2003 and the £1.5 billion AVS dividend
paid in December 2003.
Central departmental costs and other corporate items at £414 million were £42
million or 11% higher than 2002. This is partly due to staff costs and other
costs relating to certain departments such as Customer Relations which have been
centralised and additional resources devoted to Group wide projects such as
preparations for the implementation of Basle II and International Accounting
Standards.
THE ROYAL BANK OF SCOTLAND GROUP plc
AVERAGE BALANCE SHEET
2003 2002
Average Average
balance Interest Rate Balance Interest Rate
Assets £m £m % £m £m %
Treasury and other eligible bills
UK 1,378 48 3.5 910 24 2.6
Overseas 64 1 1.6 351 6 1.7
Loans and advances to banks
UK 13,724 459 3.3 13,439 532 4.0
Overseas 9,559 212 2.2 9,811 304 3.1
Loans and advances to customers
UK 168,390 9,519 5.7 154,202 9,141 5.9
Overseas 44,862 2,240 5.0 35,759 1,963 5.5
Debt securities
UK 23,810 754 3.2 17,950 675 3.8
Overseas 17,927 765 4.3 18,188 916 5.0
--------- -------- --------- -------
Interest-earning assets - banking business
UK 207,302 10,780 5.2 186,501 10,372 5.6
Overseas 72,412 3,218 4.4 64,109 3,189 5.0
---------- --------- --------- -------
279,714 13,998 5.0 250,610 13,561 5.4
--------- --------
- trading business 96,648 78,380
---------- ---------
Total interest-earning assets 376,362 328,990
Non-interest-earning assets 67,026 65,898
---------- ---------
Total assets 443,388 394,888
---------- ---------
Percentage of assets applicable to Overseas operations 32.4% 32.0%
---------- ---------
Liabilities
Deposits by banks
UK 28,220 703 2.5 21,090 544 2.6
Overseas 9,565 218 2.3 9,058 215 2.4
Customer accounts
UK 133,002 3,009 2.3 120,522 3,067 2.5
Overseas 42,118 704 1.7 36,281 790 2.2
Debt securities in issue
UK 29,977 914 3.0 24,154 965 4.0
Overseas 9,630 119 1.2 8,693 209 2.4
Loan capital
UK 15,342 534 3.5 13,154 640 4.9
Overseas 154 16 10.4 166 17 10.2
Internal funding of trading business (22,909) (520) 2.3 (21,430) (735) 3.4
--------- ----- --------- -----
Interest-bearing liabilities - banking business
UK 185,283 4,663 2.5 158,791 4,507 2.9
Overseas 59,816 1,034 1.7 52,897 1,205 2.3
----------- ------- --------- -------
245,099 5,697 2.3 211,688 5,712 2.7
------- -------
- trading business 93,466 75,059
----------- -----------
Total interest-bearing liabilities 338,565 286,747
Non-interest-bearing liabilities
- demand deposits 24,919 28,249
- other liabilities 51,793 52,600
Shareholders' funds 28,111 27,292
----------- -----------
Total liabilities and shareholders' funds 443,388 394,888
----------- -----------
Percentage of liabilities applicable to Overseas
operations 30.7% 30.4%
-------- -------
The analysis between UK and Overseas has been compiled on the basis of location
of office. Interest receivable and interest payable on trading assets and
liabilities are included in dealing profits.
THE ROYAL BANK OF SCOTLAND GROUP plc
AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS
2003 2002
Average Average
Rate Rate
% %
The Group's base rate 3.7 4.0
London inter-bank three month offered rates:
Sterling 3.7 4.1
Eurodollar 1.2 1.8
Euro 2.3 3.3
Yields, spreads and margins of the banking business:
Gross yield
Group 5.0 5.4
UK 5.2 5.6
Overseas 4.4 5.0
Interest spread
Group 2.7 2.7
UK 2.7 2.7
Overseas 2.7 2.7
Net interest margin
Group 3.0 3.1
UK 3.0 3.1
Overseas 3.0 3.1
2003 2002
% %
Gross yield on interest-earning assets of banking business 5.0 5.4
Cost of interest-bearing liabilities of banking business (2.3) (2.7)
---- ----
Interest spread of banking business 2.7 2.7
Benefit from interest-free funds 0.3 0.4
---- ----
Net interest margin of banking business 3.0 3.1
---- ----
Group
Interest spread for the Group as a whole was unchanged at 2.7%.
Interest-free balances fell partly due to the outcome of the Competition
Commission inquiry into SME banking. This, together with the lower interest rate
environment contributed to the reduction in the benefit of interest-free funds
from 0.4% to 0.3% giving a decline in net interest margin from 3.1% to 3.0%.
UK
Interest spread remained unchanged at 2.7% with product margins remaining stable
despite growth in the relatively lower margin mortgage business. The reduced
benefit of interest-free funds due to the rate and volume impact described above
resulted in the decrease in net interest margin from 3.1% to 3.0%.
Overseas
Interest spread was unchanged at 2.7%. Although asset spreads have tightened in
US, this was offset by overall mix and volume improvements elsewhere. Lower
interest rates led to a reduction in the benefit from interest-free funds,
resulting in the decline in net interest margin from 3.1% to 3.0%.
THE ROYAL BANK OF SCOTLAND GROUP plc
STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2003
In the consolidated profit and loss account set out below, goodwill amortisation
and integration costs are included in the captions prescribed by the Companies
Act 1985.
2003 2002
£m £m
Net interest income 8,301 7,849
--------- ---------
Non-interest income (excluding general insurance) 7,867 7,072
General insurance net premium income 3,061 1,894
--------- ---------
Non-interest income 10,928 8,966
--------- ---------
Total income 19,229 16,815
--------- ---------
Administrative expenses 7,699 7,731
Depreciation and amortisation
- tangible fixed assets 919 895
- goodwill 763 731
--------- ---------
Operating expenses* 9,381 9,357
--------- ---------
Profit before other operating charges 9,848 7,458
General insurance net claims 2,195 1,350
--------- ---------
Operating profit before provisions 7,653 6,108
Provisions 1,494 1,345
--------- ---------
Profit on ordinary activities before tax 6,159 4,763
Tax on profit on ordinary activities 1,910 1,556
--------- ---------
Profit on ordinary activities after tax 4,249 3,207
Minority interests (including non-equity) 210 133
--------- ---------
Profit after minority interests 4,039 3,074
Preference dividends 261 305
--------- ---------
3,778 2,769
Additional Value Shares dividend 1,463 798
--------- ---------
Profit attributable to ordinary shareholders 2,315 1,971
Ordinary dividends 1,490 1,267
--------- ---------
Retained profit 825 704
--------- ---------
Basic earnings per ordinary share (Note 4) 79.0p 68.4p
--------- --------
Adjusted earnings per ordinary share (Note 4) 159.3p 144.1p
--------- --------
Diluted earnings per ordinary share (Note 4) 78.4p 67.4p
--------- --------
* Integration costs included in operating expenses comprise:
2003 2002
£m £m
Administrative expenses 229 955
Depreciation - 2
----- -----
229 957
----- -----
THE ROYAL BANK OF SCOTLAND GROUP plc
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2003
2003 2002
£m £m
Assets
Cash and balances at central banks 3,822 3,481
Items in the course of collection from other banks 2,501 2,741
Treasury bills and other eligible bills 4,846 11,459
Loans and advances to banks 51,891 44,296
Loans and advances to customers 252,531 223,324
Debt securities 79,949 67,042
Equity shares 2,300 1,886
Interests in associated undertakings 106 94
Intangible fixed assets 13,131 12,697
Tangible fixed assets 13,927 10,485
Settlement balances 2,857 4,102
Other assets 18,436 16,929
Prepayments and accrued income 5,421 4,353
----------- -----------
451,718 402,889
Long-term assurance assets attributable to policyholders 3,557 9,111
----------- -----------
Total assets 455,275 412,000
----------- -----------
Liabilities
Deposits by banks 67,323 54,720
Items in the course of transmission to other banks 958 1,258
Customer accounts 236,963 219,161
Debt securities in issue 41,016 33,938
Settlement balances and short positions 21,369 19,412
Other liabilities 20,584 20,754
Accruals and deferred income 13,173 8,626
Provisions for liabilities and charges 2,522 2,164
Subordinated liabilities 16,998 13,965
Minority interests
- equity (11) (11)
- non-equity 2,724 1,850
Shareholders' funds
- equity 25,176 23,545
- non-equity 2,923 3,507
----------- -----------
451,718 402,889
Long-term assurance liabilities attributable to policyholders 3,557 9,111
----------- -----------
Total liabilities 455,275 412,000
----------- -----------
Memorandum items
Contingent liabilities and commitments 154,557 144,180
---------- ----------
THE ROYAL BANK OF SCOTLAND GROUP plc
OVERVIEW OF CONSOLIDATED BALANCE SHEET
Total assets of £455.3 billion at 31 December 2003 were up £43.3 billion, 11%,
compared with 31 December 2002, reflecting business growth.
Treasury bills and other eligible bills decreased by £6.6 billion, 58%, to £4.8
billion, reflecting liquidity management.
Loans and advances to banks rose £7.6 billion, 17%, to £51.9 billion. Growth in
bank placings, up £1.7 billion, 7% to £25.4 billion, and reverse repurchase
agreements and stock borrowing ('reverse repos'), up £5.9 billion, 29%, to £26.5
billion, were due in part to a switch from treasury bills and other eligible
bills.
Loans and advances to customers were up £29.2 billion, 13%, to £252.5 billion.
Within this, reverse repos increased by 10%, £2.1 billion to £24.1 billion.
Excluding reverse repos, lending increased by £27.1 billion, 13% to £228.4
billion with growth in all divisions.
Debt securities increased by £12.9 billion, 19%, to £79.9 billion, principally
due to increased holdings in Financial Markets together with growth in Wealth
Management's investment portfolio of investment grade asset-backed securities,
Citizens' portfolio of US government and agency securities and the acquisition
of Churchill.
Equity shares rose £0.4 billion, 22% to £2.3 billion largely to support an
increase in Financial Markets equity derivatives business.
Intangible fixed assets increased by £0.4 billion, 3% to £13.1 billion. Goodwill
arising on the acquisitions made during the year amounted to £1.5 billion,
principally in respect of Churchill, £0.8 billion and Citizens' acquisitions,
£0.4 billion. This was partially offset by goodwill amortisation, £0.8 billion
and the adverse effect of exchange rate movements, £0.3 billion.
Tangible fixed assets were up £3.4 billion, 33% to £13.9 billion, primarily due
to growth in operating lease assets, up £1.1 billion, 20% to £6.4 billion, and
the acquisition of various investment properties.
Other assets rose by £1.5 billion, 9% to £18.4 billion, mainly due to growth in
the mark-to-market value of trading derivatives.
Long-term assurance assets and liabilities declined £5.6 billion, 61% to £3.6
billion, resulting from the transfer of the pension managed fund business of
NatWest Life to another third party life company.
Deposits by banks increased by £12.6 billion, 23% to £67.3 billion to fund
business growth, with repurchase agreements and stock lending ('repos') up £6.9
billion, 35%, to £27.0 billion and inter-bank deposits up £5.7 billion, 16% to
£40.3 billion.
Customer accounts were up £17.8 billion, 8% at £237.0 billion. Within this,
repos were up £2.0 billion, 8% to £27.0 billion. Excluding repos, deposits rose
by £15.8 billion, 8%, to £210.0 billion with growth mainly in CBFM, £6.4
billion, Retail Banking, £4.6 billion, Citizens, £3.2 billion and Ulster Bank
£0.9 billion. In $ terms, Citizens grew US$11.7 billion, 23%, of which, US$3.2
billion related to acquisitions.
Debt securities in issue were up £7.1 billion, 21%, at £41.0 billion primarily
to meet the Group's funding requirements.
THE ROYAL BANK OF SCOTLAND GROUP plc
OVERVIEW OF CONSOLIDATED BALANCE SHEET (continued)
Subordinated liabilities were up £3.0 billion, 22% to £17.0 billion. This
reflected the issue of £1.6 billion (€2,250 million) euro denominated and £0.7
billion (US$1,100 million) US$ denominated dated loan capital, and £1.1 billion
sterling denominated and £0.5 billion (US$850 million) US$ denominated, undated
loan capital. This was partially offset by the £0.4 billion (US$500 million and
£40 million) redemption of dated loan capital and the effect of exchange rate
movements, £0.5 billion.
Minority interests increased by £0.9 billion, 48%, to £2.7 billion, mainly
reflecting the issues by subsidiaries of the Group of US$850 million (£0.5
billion) Series I non-cumulative trust preferred securities in May 2003 and
US$650 million (£0.4 billion) Series II non-cumulative trust preferred
securities in December 2003.
Shareholders' funds rose £1.0 billion, 4% to £28.1 billion principally due to
retentions of £0.8 billion and the issue of £0.8 billion of equity shares in
respect of scrip dividends and the exercise of share options, partly offset by
the redemption of £0.4 billion non-equity preference shares in January 2003 and
the adverse effect of exchange rate movements on share premium account, £0.2
billion.
THE ROYAL BANK OF SCOTLAND GROUP plc
STATEMENT OF CONSOLIDATED TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31 DECEMBER 2003
2003 2002
£m £m
Profit attributable to ordinary shareholders 2,315 1,971
Currency translation adjustments and other movements 43 36
Revaluation of premises (69) (33)
------- -------
Total recognised gains in the year 2,289 1,974
Prior year adjustment arising from the implementation
of Financial Reporting Standard 19 'Deferred Tax' - (117)
------- -------
Total recognised gains 2,289 1,857
------- -------
RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 31 DECEMBER 2003
2003 2002
£m £m
Profit attributable to ordinary shareholders 2,315 1,971
Ordinary dividends (1,490) (1,267)
------- -------
Retained profit for the year 825 704
Issue of ordinary shares 775 560
Redemption of preference shares (364) (600)
Goodwill previously written off to reserves 40 -
Other recognised gains and losses (26) 3
Currency translation adjustment on share premium account (203) (283)
------ ----
Net increase in shareholders' funds 1,047 384
Opening shareholders' funds 27,052 26,668
--------- ---------
Closing shareholders' funds 28,099 27,052
--------- ---------
THE ROYAL BANK OF SCOTLAND GROUP plc
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2003
2003 2002
£m £m
Net cash inflow from operating activities (note 11) 19,708 13,737
--------- ---------
Dividends received from associated undertakings 9 1
--------- ---------
Returns on investments and servicing of finance
Preference dividends paid (269) (317)
Additional Value Shares dividend paid (1,463) (798)
Dividends paid to minority shareholders in subsidiary undertakings (130) (112)
Interest paid on subordinated liabilities (557) (674)
------- -------
Net cash outflow from returns on investments and servicing of finance (2,419) (1,901)
------- -------
Taxation
UK tax paid (933) (833)
Overseas tax paid (521) (274)
------- -------
Net cash outflow from taxation (1,454) (1,107)
------- -------
Capital expenditure and financial investment
Purchase of investment securities (44,861) (32,701)
Sale and maturity of investment securities 41,805 26,072
Purchase of tangible fixed assets (5,017) (3,367)
Sale of tangible fixed assets 1,108 811
------- -------
Net cash outflow from capital expenditure and financial investment (6,965) (9,185)
------- -------
Acquisitions and disposals
Purchases of businesses and subsidiary
undertakings (net of cash acquired) (1,748) (308)
Investment in associated undertakings (2) (2)
Sale of subsidiary and associated
undertakings (net of cash sold) 179 29
------- -------
Net cash outflow from acquisitions and disposals (1,571) (281)
------- -------
Ordinary equity dividends paid (772) (729)
------- -------
Net cash inflow before financing 6,536 535
------- -------
Financing
Proceeds from issue of ordinary share capital 184 85
Proceeds from issue of trust preferred securities 883 1,242
Redemption of preference share capital (364) (600)
Issue of subordinated liabilities 3,817 2,157
Repayment of subordinated liabilities (336) (202)
(Decrease)/increase in minority interests (56) 29
------- -------
Net cash inflow from financing 4,128 2,711
--------- -------
Increase in cash 10,664 3,246
--------- -------
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES
1. Accounting policies
There have been no changes to the Group's principal accounting policies as set out on pages 93 to 95 of the
2002 Report and Accounts.
2. Provisions for bad and doubtful debts
Operating profit is stated after charging provisions for bad and doubtful debts of £1,461 million (2002 -
£1,286 million) and amounts written off fixed asset investments of £33 million (2002 - £59 million). The
balance sheet provisions for bad and doubtful debts increased in the year to 31 December 2003 from £3,927
million to £3,929 million, and the movements thereon were:
2003 2002
Specific General Total Total
£m £m £m £m
At 1 January 3,330 597 3,927 3,653
Currency translation and other adjustments (23) (39) (62) (62)
Acquisitions 44 6 50 23
Amounts written off (1,519) - (1,519) (1,036)
Recoveries of amounts previously written off 72 - 72 63
Charge to profit and loss account 1,459 2 1,461 1,286
------- ----- ------- -------
At 31 December 3,363 566 3,929 3,927
------- ----- ------- -------
3. Taxation
The charge for taxation is based on a UK corporation tax rate of 30% and comprises:
2003 2002
£m £m
Tax on profit before goodwill amortisation and integration costs 2,012 1,863
Tax relief on goodwill amortisation and integration costs (102) (307)
------- -------
1,910 1,556
------- -------
The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation tax
rate of 30% as follows:
2003 2002
£m £m
Expected tax charge 1,848 1,429
Goodwill amortisation 203 190
Non-deductible items 106 111
Non-taxable items (111) (70)
Other (24) (33)
Adjustments in respect of prior periods (112) (71)
------- -------
Actual tax charge 1,910 1,556
------- -------
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
4. Earnings per share
Earnings per share have been calculated based on the following:
2003 2002
£m £m
Earnings
Profit attributable to ordinary shareholders 2,315 1,971
-------- -------
Number of shares
- millions
Weighted average number of
ordinary shares
In issue during the year 2,931 2,881
Effect of dilutive share options and
convertible non-equity shares 22 43
-------- -------
Diluted weighted average number of
ordinary shares during the year 2,953 2,924
-------- -------
Basic earnings per share 79.0p 68.4p
AVS dividend 49.9p 27.7p
--------- --------
128.9p 96.1p
Goodwill amortisation 25.0p 24.2p
Integration costs 5.4p 23.8p
--------- ---------
Adjusted earnings per share 159.3p 144.1p
--------- ---------
Diluted earnings per share 78.4p 67.4p
-------- -------
5. Ordinary dividend
The directors have recommended a final dividend of 35.7p per share on the ordinary shares which, when added to
the interim dividend of 14.6p per share, makes a total of 50.3p per share (2002 - 43.7p per share). Subject to
approval by shareholders at the annual general meeting, the final dividend will be paid on 4 June 2004 to
shareholders registered on 12 March 2004. As an alternative to cash, a scrip dividend election is to be offered
and shareholders will receive details of this by letter.
6. Additional Value Shares
The final dividend of 55p per share on the AVS was paid on 1 December 2003, in accordance with the original
schedule. A total of £1 per AVS amounting to £2.7 billion in aggregate has been paid to shareholders.
7. Analysis of repurchase agreements
2003 2002
£m £m
Reverse repurchase agreements and stock borrowing
Loans and advances to banks 26,522 20,578
Loans and advances to customers 24,069 21,941
Repurchase agreements and stock lending
Deposits by banks 27,044 20,097
Customer accounts 27,021 25,060
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
8. Contingent liabilities and commitments
2003 2002
£m £m
Contingent liabilities
Acceptances and endorsements 595 2,407
Guarantees and assets pledged as collateral security 8,787 5,200
Other contingent liabilities 5,482 7,981
--------- ---------
14,864 15,588
--------- ---------
Commitments
Documentary credits and other short-term
trade related transactions 605 655
Undrawn formal standby facilities, credit lines
and other commitments to lend 137,251 127,429
Other commitments 1,837 508
----------- ----------
139,693 128,592
----------- ----------
Total contingent liabilities and commitments 154,557 144,180
----------- ----------
9. Derivatives
Replacement cost of over-the-counter contracts (trading and non-trading)
The following table shows the gross replacement cost, which is the sum of the fair values, of all
over-the-counter contracts with third parties (trading and non-trading) with positive value. This measure makes
no allowance for netting arrangements.
2003 2002
£m £m
Exchange rate contracts 28,163 17,262
Interest rate contracts 54,974 64,083
Credit derivatives 272 377
Equity and commodity contracts 1,020 810
--------- ---------
84,429 82,532
--------- ---------
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
9. Derivatives (continued)
Derivatives held for trading purposes
The table below shows the notional principal amounts of trading instruments entered into with third parties.
2003 2002
£bn £bn
Exchange rate contracts 1,144.7 899.0
Interest rate contracts 5,307.8 3,900.4
Credit derivatives 28.5 22.0
Equity and commodity contracts 34.1 23.5
The table below shows the fair values (which, after netting, are the balance sheet values) of trading
instruments entered into with third parties.
2003 2002
Fair value Fair value
Assets Liabilities Assets Liabilities
£m £m £m £m
Exchange rate contracts 28,102 29,564 17,217 18,625
Interest rate contracts 54,266 54,212 63,695 64,281
Credit derivatives 273 155 377 139
Equity and commodity contracts 924 720 733 496
--------- --------- --------- ---------
83,565 84,651 82,022 83,541
Netting (69,478) (69,478) (68,812) (68,812)
--------- --------- --------- ---------
14,087 15,173 13,210 14,729
--------- --------- --------- ---------
Derivatives held for purposes other than trading
The Group uses derivatives to manage specific interest rate positions relating to assets and liabilities and to
hedge foreign currency exposures. The Group establishes non-trading derivative positions with third parties and
through intra-company and intra-Group transactions with the Group's independent trading operations. The table
below shows the notional principal amounts of the Group's non-trading derivatives (third party and internal).
2003 2002
£bn £bn
Exchange rate contracts 26.5 14.1
Interest rate contracts 135.1 112.2
Credit derivatives 1.0 1.5
Equity and commodity contracts 1.7 2.2
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
10. Analysis of consolidated shareholders' funds
2003 2002
£m £m
Called-up share capital
At beginning of year 754 893
Shares issued during the year 15 11
Preference shares redeemed during the year - (150)
----- ----
At end of year 769 754
----- -----
Share premium account
At beginning of year 7,608 7,465
Currency translation adjustments (203) (283)
Shares issued during the year 760 685
Preference shares redeemed during the year - (268)
Other movements 10 9
------- -------
At end of year 8,175 7,608
------- -------
Merger reserve
At beginning of year 11,455 12,029
Transfer to profit and loss account (574) (574)
--------- ---------
At end of year 10,881 11,455
--------- ---------
Revaluation reserve
At beginning of year 80 113
Revaluation of premises (69) (33)
Transfer to profit and loss account (4) -
----- -----
At end of year 7 80
----- -----
Other reserves
At beginning of year 387 212
Redemption of preference shares - 150
Transfer of increase in value of long-term assurance business 32 25
----- -----
At end of year 419 387
----- -----
Profit and loss account
At beginning of year 6,768 5,956
Currency translation adjustments and other movements 33 27
Retention for the year 825 704
Employee share option payments - (136)
Redemption of preference shares (364) (332)
Goodwill previously written off 40 -
Transfer from merger reserve 574 574
Transfer from revaluation reserve 4 -
Transfer of increase in value of long-term assurance business (32) (25)
-------- -------
At end of year 7,848 6,768
-------- -------
Closing shareholders' funds 28,099 27,052
--------- ---------
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
11. Analysis of net cash inflow from operating activities
2003 2002
£m £m
Net cash inflow from trading activities 9,028 7,459
Increase in loans and advances to banks and customers (23,343) (35,426)
Increase in deposits by banks and customers 26,857 33,895
(Increase)/decrease in securities (9,871) 1,799
Increase in debt securities in issue 7,078 3,269
Increase in settlement balances and short positions 3,202 482
Increase in other assets and liabilities 6,757 2,259
--------- ---------
Net cash inflow from operating activities 19,708 13,737
--------- ---------
12. Litigation
In December 2003, members of the Group were joined as defendants in a number of legal actions in the United
States following the collapse of Enron. Collectively, the claims are, to a substantial degree, unquantified and
in each case they are made against large numbers of defendants. The Group intends to defend these claims
vigorously. The US Courts dealing with the main Enron actions have ordered that the Group join the non-binding,
multi-party mediation which commenced in late 2003. Based on current knowledge including applicable defences
and given the unquantified nature of these claims, the directors are unable at this stage to predict with
certainty the eventual loss, if any, in these matters. The Group continues to co-operate fully with the
appropriate authorities.
Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas
jurisdictions, including the United States, involving claims by and against them arising in the ordinary course
of business. The directors of the company have reviewed the actual, threatened and known potential claims and
proceedings and, after consulting with the Group's legal advisers are satisfied that the outcome of these
claims and proceedings will not have a material adverse effect on the Group's consolidated net assets, results
of operations or cash flows.
13. Statutory accounts
Financial information contained in this document does not constitute statutory accounts within the meaning of
section 240 of the Companies Act 1985 ('the Act'). The statutory accounts for the year ended 31 December 2003
will be filed with the Registrar of Companies following the company's annual general meeting. The auditors have
reported on these accounts; their report was unqualified and did not contain a statement under section 237(2)
or (3) of the Act.
14. Form 20-F
A report on Form 20-F will be filed with the Securities and Exchange Commission in the United States.
THE ROYAL BANK OF SCOTLAND GROUP plc
ADDITIONAL ANALYSIS OF INCOME, EXPENSES AND PROVISIONS
2003 2002
£m £m
Non-interest income
Dividend income 58 58
----- ----
Fees and commissions receivable 5,755 5,308
Fees and commissions payable - banking (1,099) (930)
- insurance related (238) (35)
------- -------
Net fees and commissions 4,418 4,343
------- -------
Foreign exchange 540 447
Securities 798 662
Interest rate derivatives 455 353
------- -------
Dealing profits 1,793 1,462
------- -------
Income on rental assets 1,088 931
Embedded value profits 73 61
Other 437 217
------- -------
Other operating income 1,598 1,209
------- -------
Non-interest income (excluding general insurance premiums) 7,867 7,072
General insurance net premium income 3,061 1,894
--------- -------
Total non-interest income 10,928 8,966
--------- -------
Staff costs - wages, salaries and other staff costs 3,997 4,001
- social security costs 248 239
- pension costs 273 232
Premises and equipment 1,073 1,006
Other 2,108 2,253
-------- -------
Administrative expenses * 7,699 7,731
-------- -------
* Integration costs included in administrative expenses comprise:
Staff costs 125 530
Premises and equipment costs 31 127
Other administrative costs 73 298
----- -----
229 955
----- -----
Provisions for bad and doubtful debts 1,461 1,286
Amounts written off fixed asset investments 33 59
------- -------
Provisions 1,494 1,345
------- -------
THE ROYAL BANK OF SCOTLAND GROUP plc
ASSET QUALITY
Analysis of loans and advances to customers
The following table analyses loans and advances to customers (including reverse repurchase agreements and stock
borrowing) by industry.
2003 2002
£m £m
Central and local government 2,100 2,385
Finance 38,936 34,079
Individuals - home 61,960 49,986
Individuals - other 35,027 30,021
Other commercial and industrial comprising:
Manufacturing 12,769 14,715
Construction 5,839 5,152
Service industries and business activities 50,772 48,155
Agriculture, forestry and fishing 3,081 3,026
Property 31,629 26,593
Finance leases and instalment credit 14,340 13,132
----------- -----------
Loans and advances to customers - gross 256,453 227,244
Provisions for bad and doubtful debts (3,922) (3,920)
----------- -----------
Total loans and advances to customers 252,531 223,324
----------- -----------
Reverse repurchase agreements included in the analysis above:
Central and local government 1,079 1,000
Finance 22,883 20,941
Service industries and business activities 107 -
--------- ---------
Total 24,069 21,941
--------- ---------
Loans and advances to customers excluding
reverse repurchase agreements - net 228,462 201,383
----------- -----------
THE ROYAL BANK OF SCOTLAND GROUP plc
ASSET QUALITY (continued)
Cross border outstandings
The table below sets out the Group's cross border outstandings in excess of 0.75% of Group total assets (including
acceptances) of £455.9 billion (2002 - £414.4 billion). None of these countries have experienced repayment difficulties
which have required refinancing of outstanding debt.
2003 2002
£m £m
Germany 15,073 10,464
US 14,618 11,658
France 7,524 5,971
Netherlands 6,830 6,318
Cayman Islands 6,666 6,897
Japan 4,141 3,156
Spain 3,421 *
Italy * 3,867
* less than 0.75% of Group total assets (including acceptances).
Selected country exposures
The table below details exposures to countries that are sometimes considered as having a higher credit and foreign
exchange risk.
Bank Non-bank 2003 Bank Non-bank 2002
Total Total
£m £m £m £m £m £m
Argentina 26 4 30 30 15 45
Brazil 15 2 17 - 14 14
Turkey 5 65 70 25 65 90
Venezuela - 87 87 - 115 115
THE ROYAL BANK OF SCOTLAND GROUP plc
ASSET QUALITY (continued)
Risk elements in lending
The Group's loan control and review procedures do not include the classification
of loans as non-accrual, accruing past due, restructured and potential problem
loans, as defined by the Securities and Exchange Commission ('SEC') in the US.
The following table shows the estimated amount of loans which would be reported
using the SEC's classifications. The figures are stated before deducting the
value of security held or related provisions.
2003 2002
£m £m
Loans accounted for on a non-accrual basis (2):
Domestic 3,221 3,077
Foreign 1,211 1,098
------- -------
4,432 4,175
------- -------
Accruing loans which are contractually overdue
90 days or more as to principal or interest (3):
Domestic 561 363
Foreign 81 129
----- -----
642 492
----- -----
Loans not included above which are 'troubled
debt restructurings' as defined by the SEC:
Domestic 53 144
Foreign 30 60
----- -----
83 204
------- -------
Total risk elements in lending 5,157 4,871
------- -------
Potential problem loans (4)
Domestic 492 639
Foreign 99 544
----- -------
591 1,183
----- -------
Closing provisions for bad and doubtful debts
as a % of total risk elements in lending 76% 81%
------ ------
Closing provisions for bad and doubtful debts
as a % of total risk elements in lending and potential problem loans 68% 65%
------ ------
Risk elements in lending as a % of gross loans
and advances to customers 2.01% 2.14%
-------- --------
Notes:
1. For the analysis above, 'Domestic' consists of the United Kingdom domestic
transactions of the Group. 'Foreign' comprises the Group's transactions
conducted through offices outside the UK and through those offices in the UK
specifically organised to service international banking transactions.
2. The Group's UK banking subsidiary undertakings account for loans on a
non-accrual basis from the point in time at which the collectability of
interest is in significant doubt. Certain subsidiary undertakings of the
Group generally account for loans on a non-accrual basis when interest or
principal is past due 90 days.
3. Overdrafts generally have no fixed repayment schedule and consequently are
not included in this category.
4. Loans that are current as to payment of principal and interest but in respect
of which management has serious doubts about the ability of the borrower to
comply with contractual repayment terms. Substantial security is held in
respect of these loans and appropriate provisions have already been made in
accordance with the Group's provisioning policy for bad and doubtful debts.
THE ROYAL BANK OF SCOTLAND GROUP plc
ASSET QUALITY (continued)
Provisions for bad and doubtful debts
2003 2003 2002 2002
Specific General Specific General
£m £m £m £m
Provisions at beginning of year
Domestic 2,232 349 2,123 344
Foreign 1,098 248 916 270
------- ----- ------- -----
3,330 597 3,039 614
------- ----- ------- -----
Currency translation and other
adjustments
Domestic (2) - 11 (15)
Foreign (21) (39) (56) (2)
--- --- --- ---
(23) (39) (45) (17)
--- --- --- ---
Acquisitions
Domestic - - 11 -
Foreign 44 6 12 -
--- --- --- ---
44 6 23 -
--- --- --- ---
Amounts written-off
Domestic (1,097) - (743) -
Foreign (422) - (293) -
------- --- ------- ---
(1,519) - (1,036) -
------- --- ------- ---
Recoveries of amounts written-off
in previous periods
Domestic 38 - 37 -
Foreign 34 - 26 -
--- --- --- ---
72 - 63 -
--- --- --- ---
Charged to profit and loss account
Domestic 926 6 793 20
Foreign 533 (4) 493 (20)
------- --- ------- ---
1,459 2 1,286 -
------- --- ------- ---
Provisions at end of year (2)
Domestic 2,097 355 2,232 349
Foreign 1,266 211 1,098 248
------- ----- ------- -----
3,363 566 3,330 597
------- ----- ------- -----
THE ROYAL BANK OF SCOTLAND GROUP plc
ASSET QUALITY (continued)
Provisions for bad and doubtful debts (continued)
2003 2002
£m £m
Gross loans and advances to customers
Domestic 167,377 145,274
Foreign 89,076 81,970
----------- -----------
256,453 227,244
----------- -----------
Closing customer provisions as a % of gross
loans and advances to customers (3)
Domestic 1.46% 1.78%
Foreign 1.65% 1.63%
Total 1.53% 1.72%
Customer charge against profit as a % of gross
loans and advances to customers
Domestic 0.56% 0.56%
Foreign 0.59% 0.58%
Total 0.57% 0.57%
Notes:
1. For the analysis above, 'Domestic' consists of the United Kingdom domestic
transactions of the Group. 'Foreign' comprises the Group's transactions
conducted through offices outside the UK and through those offices in the UK
specifically organised to service international banking transactions.
2. Includes closing provisions against loans and advances to banks of £7 million
(2002 - £7 million).
3. Closing customer provisions exclude provisions against loans and advances to
banks.
THE ROYAL BANK OF SCOTLAND GROUP plc
MARKET RISK
The Group manages the market risk in its trading and treasury portfolios through
value-at-risk (VaR) limits as well as stress testing, position and sensitivity
limits. VaR is a technique that produces estimates of the potential negative
change in the market value of a portfolio over a specified time horizon at a
given confidence level. The table below sets out the trading and treasury VaR
for the Group, which assumes a 95% confidence level and a one-day time horizon.
Year to 31 December
At 31 December Maximum Minimum Average
£m £m £m £m
Trading
2003 7.4 14.2 5.6 9.4
2002 8.4 11.8 5.6 9.1
Treasury
2003 8.1 11.0 5.6 8.3
2002 6.5 6.7 3.5 4.4
The Group's VaR should be interpreted in light of the limitations of the
methodologies used. These limitations include:
• Historical data may not provide the best estimate of the joint
distribution of risk factor changes in the future and may fail to capture
the risk of possible extreme adverse market movements which have not
occurred in the historical window used in the calculations.
• VaR using a one-day time horizon does not fully capture the market risk of
positions that cannot be liquidated or hedged within one day.
• VaR using a 95% confidence level does not reflect the extent of potential
losses beyond that percentile.
• The Group largely computes the VaR of the trading portfolios at the close
of business and positions may change substantially during the course of the
trading day. Controls are in place to limit the Group's intra-day exposure
such as the calculation of VaR for selected portfolios.
These limitations and the nature of the VaR measure mean that the Group cannot
guarantee that losses will not exceed the VaR amounts indicated nor that losses
in excess of the VaR amounts will not occur more frequently than once in 20
business days.
THE ROYAL BANK OF SCOTLAND GROUP plc
REGULATORY RATIOS AND OTHER INFORMATION
2003 2002
Capital base (£m)
Ordinary shareholders' funds and minority interests 13,235 11,169
Preference shares and tax deductible securities 6,164 5,986
--------- ---------
Tier 1 capital 19,399 17,155
Tier 2 capital 16,439 13,271
--------- ---------
35,838 30,426
Less: investments in insurance companies, associated
undertakings and other supervisory deductions (4,618) (3,146)
--------- ---------
31,220 27,280
--------- ---------
Weighted risk assets (£m)
Banking book
- on-balance sheet 214,400 193,800
- off-balance sheet 36,400 28,700
Trading book 12,900 11,500
----------- -----------
263,700 234,000
----------- -----------
Risk asset ratio
- tier 1 7.4% 7.3%
- total 11.8% 11.7%
Share price £16.46 £14.88
Number of shares in issue 2,963m 2,901m
Market capitalisation £48.8bn £43.2bn
Net asset value per ordinary share £8.50 £8.12
Employee numbers
Corporate Banking and Financial Markets* 15,900 16,900
Retail Banking 30,700 30,100
Retail Direct 7,300 7,000
Manufacturing* 21,800 21,900
Wealth Management* 5,600 6,000
RBS Insurance 19,400 10,500
Ulster Bank 4,400 4,400
Citizens 14,100 13,300
Centre 1,700 1,700
---------- ----------
Group total 120,900 111,800
----------
Acquisitions in the year ended 31 December 2003 9,700
----------
Underlying 111,200
----------
* the prior year has been restated to reflect the transfer in 2003 of certain
activities from Corporate Banking and Financial Markets and Wealth Management to
Manufacturing.
THE ROYAL BANK OF SCOTLAND GROUP plc
ADDITIONAL FINANCIAL DATA FOR US INVESTORS
Reconciliation between UK and US GAAP
The following tables summarise the significant adjustments which would result
from the application of US generally accepted accounting principles ('US GAAP')
instead of UK GAAP.
2003 2002
Consolidated statement of income £m £m
Profit attributable to ordinary shareholders - UK GAAP 2,315 1,971
Amortisation of goodwill 721 681
Pension costs (369) (58)
Securities, derivatives and hedging 281 770
Software capitalisation (300) 283
Others (net) (258) (198)
Taxation 174 (341)
------- -------
Net income available for ordinary shareholders - US GAAP 2,564 3,108
------- -------
2003 2002
Consolidated shareholders' equity £m £m
Shareholders funds - UK GAAP 28,099 27,052
Goodwill 2,222 1,541
Proposed dividend 1,059 899
Recognition of pension scheme minimum liability - (3,568)
Perpetual regulatory tier one securities 678 751
Software development costs 660 960
Pension costs (27) 342
Taxation (166) 518
Others (net) (182) 433
--------- ---------
Shareholders equity - US GAAP 32,343 28,928
--------- ---------
Total assets
Total assets under US GAAP, which include acceptances and the grossing-up of
certain repurchase balances offset under UK GAAP, together with the affect of
adjustments made to net income and shareholders' equity were £488 billion (2002
- £431 billion).
THE ROYAL BANK OF SCOTLAND GROUP plc
FORWARD-LOOKING STATEMENTS
Certain sections in this document contain 'forward-looking statements' as that
term is defined in the United States Private Securities Litigation Reform Act of
1995, such as statements that include the words 'expect', 'estimate', 'project',
'anticipate', 'should', 'intend', 'plan', 'probability', 'risk', 'Value-at-Risk
('VaR')', 'target', 'goal', 'objective', 'will', 'endeavour', 'outlook',
'optimistic', 'prospects' and similar expressions or variations on such
expressions and sections such as 'Chairman's statement', 'Group Chief
Executive's review' and 'Financial review'.
In particular, this document includes forward-looking statements relating, but
not limited, to the Group's potential exposures to various types of market
risks, such as interest rate risk, foreign exchange rate risk and commodity and
equity price risk. Such statements are subject to risks and uncertainties. For
example, certain of the market risk disclosures are dependent on choices about
key model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures are only
estimates and, as a result, actual future gains and losses could differ
materially from those that have been estimated.
Other factors that could cause actual results to differ materially from those
estimated by the forward-looking statements contained in this document include,
but are not limited to: general economic conditions in the UK and in other
countries in which the Group has significant business activities or investments,
including the United States; the monetary and interest rate policies of the Bank
of England, the Board of Governors of the Federal Reserve System and other G-7
central banks; inflation; deflation; unanticipated turbulence in interest rates,
foreign currency exchange rates, commodity prices and equity prices; changes in
UK and foreign laws, regulations and taxes; changes in competition and pricing
environments; natural and other disasters; the inability to hedge certain risks
economically; the adequacy of loss reserves; acquisitions or restructurings;
technological changes; changes in consumer spending and saving habits; and the
success of the Group in managing the risks involved in the foregoing.
The forward-looking statements contained in this document speak only as of the
date of this report, and the Group does not undertake to update any
forward-looking statement to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
THE ROYAL BANK OF SCOTLAND GROUP plc
CONTACTS
Fred Goodwin Group Chief Executive 020 7672 0008
0131 523 2033
Fred Watt Group Finance Director 020 7672 0008
0131 523 2028
Richard O'Connor Head of Investor Relations 020 7672 1758
For media enquiries:
Howard Moody Group Director, Communications 020 7672 1916
07768 033562
Carolyn McAdam Head of Group Communications 020 7672 1915
07796 274968
18 February 2004
This information is provided by RNS
The company news service from the London Stock Exchange
