Final Results

Royal Bank of Scotland Group PLC 27 February 2003 THE ROYAL BANK OF SCOTLAND GROUP plc CONTENTS Page Results summary 2 2002 Highlights 3 Group Chief Executive's review 4 Financial review 7 Summary consolidated profit and loss account 10 Divisional performance 11 Corporate Banking and Financial Markets 12 Retail Banking 13 Retail Direct 14 Manufacturing 15 Wealth Management 16 Direct Line Group 17 Ulster Bank 18 Citizens 19 Central items 20 Average balance sheet 21 Average interest rates, yields, spreads and margins 22 Integration information 23 Statutory consolidated profit and loss account 25 Consolidated balance sheet 27 Overview of consolidated balance sheet 28 Statement of consolidated total recognised gains and losses 30 Reconciliation of movements in consolidated shareholders' funds 30 Consolidated cash flow statement 31 Notes 32 Asset quality Analysis of loans and advances to customers 40 Cross border outstandings 41 Selected country exposures 41 Risk elements in lending 42 Provisions for bad and doubtful debts 43 Market risk 45 Regulatory ratios and other information 46 Additional financial data for US investors 47 Forward-looking statements 48 Contacts 49 THE ROYAL BANK OF SCOTLAND GROUP plc RESULTS SUMMARY 2002 2001 (restated) Â£m Â£m Increase Total income 16,815 14,558 16% -------- -------- Operating expenses 7,669 6,841 12% -------- -------- Operating profit before provisions 7,796 6,769 15% -------- -------- Profit before tax, goodwill amortisation and integration costs 6,451 5,778 12% -------- -------- Profit before tax 4,763 4,252 12% -------- -------- Cost:income ratio 45.6% 47.0% - -------- -------- Adjusted earnings per ordinary share 144.1p 127.9p 13% -------- -------- Dividends per ordinary share 43.7p 38.0p 15% -------- -------- Sir George Mathewson, Chairman of The Royal Bank of Scotland Group plc, said:- 'In 2002 the Group continued to make good progress. The undoubted highlight was the completion of the NatWest IT integration on to the Royal Bank platform. This project - one of the largest integration projects ever undertaken worldwide - was completed ahead of schedule, with benefits well in excess of those promised to shareholders during the bid for NatWest. 'On a range of key measures of success including income, profitability, customer numbers, credit quality and return on capital the Group continues to perform well. This is particularly pleasing given that 2002 was by any standard a challenging year. 'We remain focussed on building strategic options for the Group and growing income in ways which will provide value for our shareholders, customers and staff. I am confident that the strength, diversity and flexibility of the Group provides us with an excellent platform from which to build value in the future.' THE ROYAL BANK OF SCOTLAND GROUP plc 2002 HIGHLIGHTS â€¢ Profit* up 12% to Â£6,451 million. â€¢ Income up 16% to Â£16,815 million. â€¢ Expenses up 12% to Â£7,669 million. â€¢ Excluding acquisitions, income up 12%, expenses up 7%. â€¢ Customer growth in all divisions. â€¢ Net interest margin stable at 3.1%. â€¢ Further efficiency gains - cost:income ratio 45.6%, improved from 47.0%. â€¢ Profit and loss charge for provisions Â£1,345 million against Â£991 million in 2001. The trend in provisions has been broadly consistent for three consecutive half years. â€¢ Completion of the NatWest IT integration on to the Royal Bank platform - one of the largest integration projects ever undertaken worldwide - with increased targets for NatWest integration met. â€¢ In the US, the Mellon Regional Franchise was successfully integrated on to the Citizens platform, also completed ahead of schedule. â€¢ Credit quality remains strong. â€¢ Balance sheet provision coverage of risk elements in lending maintained at 81%. â€¢ Adjusted earnings per share up 13%. â€¢ Dividend 43.7p per share, up 15%. * before tax, goodwill amortisation and integration costs THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW The Group continued to make good progress both financially and operationally during 2002. As a result, we increased our Group profit before tax, goodwill amortisation and integration costs by 12%, adjusted earnings per share by 13% and our dividend per share by 15%. Our business model recognises that, to deliver superior sustainable value to our shareholders, we need to do the same for our customers and our people. Our customers All divisions of the Group increased their customer numbers during 2002, arguably the clearest evidence that we are delivering value for our customers. Our divisions achieved consistently good results in various surveys of customer satisfaction, and won a number of awards for customer service. For example, in the important area of small businesses, NatWest was voted 'Best Bank that I would recommend to a small business' in the NOP Opinion Formers Survey, while The Royal Bank of Scotland won the award for 'Best Small Business Bank' from the Chartered Institute of Management Accountants. Notwithstanding these pleasing results, there is, as always, no room for complacency and we continue to strive for improvements. Our people As ever, the success of the Group is only made possible by the efforts and achievements of our people. Each year, a survey is carried out by the independent firm International Survey Research, which evaluates employee opinion under a number of criteria and relative to various external benchmarks. The response rate to the latest survey was our best ever at 83%, significantly higher than the response rate of 75% to the previous survey. The latest survey shows that we have further improved our performance from the very good level achieved in the last survey and continue to perform as well as a number of the world's best companies. I am also pleased to report that we are again ahead of the UK financial services sector in every category and improved our performance relative to both the global financial services and global high performance norms. Our shareholders To create value for our shareholders, we concentrate on the simple fundamentals of growing our income and improving our efficiency, whilst disciplining ourselves to retain a bias away from activities and geographies which may bring undue volatility to our results. During 2002 we grew income across the Group as a whole by 16%. Income growth was particularly strong in Citizens, Direct Line and Retail Direct. This growth was supported by increased customer numbers and business volumes: the Group's net interest margin remained stable at 3.1% (2001 - 3.1%). A more detailed review of the performance of our individual businesses is outlined later in this announcement. In addition to growing its income, the Group improved its efficiency in 2002. On a comparable basis, the Group cost:income ratio improved further to 45.0% (2001 - 47.0%), and to 45.6% including acquisitions, a level that keeps us at the forefront of efficiency when compared to similar banks in the UK and internationally. This represents a substantial improvement since 1999, when the pro forma cost:income ratio for the enlarged Group, including NatWest, was almost 60%. Provisions for bad debts were higher in 2002 than in 2001, reflecting the deterioration in the short-term economic environment. However, during 2002, provisions continued at a rate consistent with the second half of 2001 and the growth in our loan portfolio. As ever we remain focussed on ensuring that our balance sheet carries adequate provision for bad debts and our provision coverage remains at 81% of risk elements in lending. THE ROYAL BANK OF SCOTLAND GROUP plc Group Chief Executive's review (continued) Integration The large and complex NatWest IT integration was completed successfully in October 2002, several months ahead of schedule. In recognition of this outstanding achievement, an integration bonus amounting to 5% of salary was paid to all employees whose business units were involved in integration. Last year we announced increased targets for annual transaction benefits amounting to Â£2,030 million (formerly Â£1,730 million). These transaction benefits had been fully implemented by February 2003, although their full impact will not show through to profits until 2004. REVIEW OF DIVISIONS Corporate Banking and Financial Markets increased its contribution before manufacturing costs by 6% to Â£3,203 million (2001 - Â£3,024 million). Corporate Banking and Financial Markets maintained leading positions in the UK in corporate lending, leasing, deposits, payments, derivatives and foreign exchange and across a wide range of specialised corporate banking activities. Outside the UK, the division achieved good growth in Continental Europe through its offices in Paris, Frankfurt, Milan and Madrid. In the US, the division improved its already strong position in US treasuries and asset-backed securities. Retail Banking increased its contribution before manufacturing costs by 8% to Â£3,019 million (2001 - Â£2,807 million). Retail Banking increased its total personal customers by 3% to 13.1 million (2001 - 12.7 million) and total small business customers by 3% to 1.1 million. Both The Royal Bank of Scotland and NatWest achieved good growth in current accounts, including packaged current accounts, mortgages, personal loans and deposits and small business loans and deposits. NatWest maintained its market leading position for small business relationships. Retail Direct increased its contribution before manufacturing costs by 27% to Â£701 million (2001 - Â£551 million). Retail Direct increased its credit card accounts by 4% to 9.5 million (2001 - 9.1 million), while increasing both credit card balances and fee income associated with these accounts. Tesco Personal Finance grew its customer account base by 29% to 3.4 million (2001 - 2.6 million). The One account's (formerly Virgin One) average mortgage balances increased by 36% to Â£4.3 billion (2001 - Â£3.1 billion). Manufacturing costs increased by 7% to Â£1,682 million (2001 - Â£1,568 million). Within this amount, technology costs were up by 5% to Â£662 million (2001 - Â£632 million) and customer support and other operations were also up by 5% to Â£492 million (2001 - Â£469 million), both reflecting increased volumes and scope across a wide range of activities. Manufacturing completed the conversion of NatWest systems on to the RBS IT platform in October 2002, some months ahead of the original target. Wealth Management contribution declined by 6% to Â£432 million (2001 - Â£459 million), principally due to reduced fee income reflecting lower stock market values. However, Coutts, which is investing in its UK regional branch network, increased its total customer base by 5% to over 75,000. Offshore Banking launched a new expatriate service offering a full range of banking and investment services. Direct Line Group increased its contribution by 36% to Â£355 million (2001 - Â£261 million). Direct Line Group increased its UK motor insurance policies (including those sold through Tesco Personal Finance) by 16%, to 4.7 million (2001 - 4.0 million) and its UK home insurance policies by 17%, to 1.6 million (2001 - 1.4 million). In Continental Europe, Direct Line businesses in Spain, Italy and Germany doubled their total policy numbers to 1.2 million (2001- 0.6 million). THE ROYAL BANK OF SCOTLAND GROUP plc Group Chief Executive's review (continued) Ulster Bank increased its contribution by 7% to Â£244 million (2001 - Â£229 million). Ulster Bank increased its personal current accounts by 5% and business current accounts by 2%, mainly in the Republic of Ireland. During the year Ulster Bank completed its transformation programme, Project Horizon, which was designed to increase focus on customers across its branch network. Citizens increased its contribution by 53% to Â£766 million (2001 - Â£501 million). Citizens increased its personal customer base by 13% to 2.0 million (2001 - 1.8 million), partly by increasing its distribution capacity through supermarkets. Citizens also increased its business customers by 6% to 197,000 (2001 - 185,000). In August 2002, Citizens successfully completed the conversion to its own systems of Mellon Financial Corporation's regional banking franchise. Citizens also acquired Medford Bancorp, New England - completing conversion in December 2002 - and announced the acquisition of Commonwealth Bancorp, Pennsylvania in September 2002. Outlook International uncertainty inevitably casts something of a shadow over an otherwise reasonable prognosis for the key economies in which we operate. Whilst we have no particular insights as to how events might unfold, it is clear that the strength, diversity and flexibility of our Group present many options for future growth not only in the UK, but also in the US and in Continental Europe. By continuing to focus on the fundamentals of credit quality, income growth and improving efficiency, we are confident that we can continue to deliver superior sustainable value to our shareholders, our customers and our people. Fred Goodwin Group Chief Executive THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL REVIEW Profit RBS increased its profit before tax, goodwill amortisation and integration costs by 12%, or Â£673 million, from Â£5,778 million to Â£6,451 million. After goodwill amortisation and integration costs, profit before tax was up 12%, from Â£4,252 million to Â£4,763 million. Integration costs relating to NatWest, the Mellon Regional Franchise and Medford Bancorp Inc. ('Medford') were Â£957 million against Â£875 million in 2001. Total income RBS continued to achieve strong growth in income. Total income at Â£16,815 million was up by 16%, or Â£2,257 million. Excluding acquisitions, total income rose by 12%. Citizens increased its income by 53% (15% underlying growth, excluding the effect of acquisitions and exchange rate fluctuations), Direct Line Group by 39% (34% excluding acquisitions) and Retail Direct by 16%. Corporate Banking and Financial Markets income was up by 11%, notwithstanding Financial Markets' strong performance in 2001 when it benefited from market volatility and falling interest rates. Retail Banking grew its income by 8% and Ulster Bank by 8%. Income in Wealth Management declined 3% as the effect of lower stock market values on activity levels and fees more than offset the benefit from increased customer numbers and volumes. Net interest income Net interest income increased by 15%, or Â£1,003 million, to Â£7,849 million. Net interest income accounted for 47% of total income. Average interest-earning assets of the banking business increased by 14%. Net interest margin The Group's net interest margin remained stable at 3.1%. Improved lending margins offset the downward pressure on deposit margins arising from lower interest rates. Non-interest income Non-interest income increased by 16%, or Â£1,254 million, to Â£8,966 million. Non-interest income accounted for 53% of total income. Fees and commissions receivable were up 12%, or Â£573 million. Volume driven increases in lending fees and continued strong growth in fee paying current accounts contributed to the increase. Dealing profits at Â£1,462 million were up Â£36 million, 3%, on the strong performance in 2001. The increase in dealing profits resulted from customer led business growth and higher revenues from trading in interest rate instruments. Other operating income was Â£157 million, 15% higher mainly due to the expansion of CBFM's operating lease business. General insurance premium income, after reinsurance, rose by 38%, or Â£519 million reflecting Direct Line Group's organic growth and acquisitions in Continental Europe. Operating expenses Operating expenses, excluding goodwill amortisation and integration costs, rose by 12%, or Â£828 million, to Â£7,669 million. Excluding acquisitions, operating expenses were up 7%, Â£469 million in support of strong growth in business volumes. Cost:income ratio Strong income growth coupled with tight cost management resulted in a further improvement in the Group's cost:income ratio, to 45.6% from 47.0%. Excluding the effect of acquisitions, the cost:income ratio improved to 45.0%. THE ROYAL BANK OF SCOTLAND GROUP plc Financial Review (continued) Net insurance claims General insurance claims, after reinsurance, increased by 42%, or Â£402 million, to Â£1,350 million reflecting significant volume growth and acquisitions at Direct Line. Provisions The profit and loss charge for provisions was Â£1,345 million compared with Â£991 million in 2001. The charge for the two halves of the year was consistent with the second half of 2001. Bad debt provisions amounted to Â£1,286 million compared with Â£984 million in 2001. The charge reflects overall growth in lending and, as in the second half of 2001, is particularly influenced by provisions required against a number of specific corporate situations. Amounts written off fixed asset investments, largely in the first half of the year, were Â£59 million against Â£7 million in 2001. Total balance sheet provisions for bad debts amounted to Â£3,927 million at 31 December 2002, up 8% from Â£3,653 million at 31 December 2001. Credit quality Overall credit quality remains strong with no material change in the distribution by grade of the Group's total risk assets compared with the position at the previous year end. Risk elements in lending amounted to Â£4,871 million at 31 December 2002, up 8% from Â£4,493 million at 31 December 2001, and up 2% from Â£4,791 million at 30 June 2002. Total provision coverage (the ratio of total balance sheet provisions to risk elements in lending) at 31 December 2002 was maintained at 81%. Risk elements in lending and potential problem loans in aggregate amounted to Â£6,054 million an increase of 9% over 31 December 2001 and 1% over 30 June 2002. Integration The Group successfully completed the conversion of NatWest IT systems on to the RBS technology platform in October 2002. This programme ran for 30 months and involved more than 4,000 staff, culminating in the migration of a customer base three times the size of the Royal Bank of Scotland on to a single technology platform. The scale and complexity of this project are without precedent. Annualised revenue benefits of Â£805 million and annualised cost savings of Â£1,350 million were delivered by December 2002. In addition, by February 2003 all integration initiatives had been completed. As a result the full programme annualised benefits, comprising Â£890 million revenue benefits and Â£1,440 million cost savings, have been achieved less than three years after the acquisition of NatWest. Cumulative combined revenue and cost benefits to the profits for the period 2000 to 2002 amounted to Â£3.6 billion, which is Â£1.1 billion ahead of the original plan. In the US, Citizens completed the IT integration of the Mellon Regional Franchise in August 2002, earlier than planned. Benefits from this transaction have been delivered more quickly than was envisaged, and are on track to be delivered in full. THE ROYAL BANK OF SCOTLAND GROUP plc Financial Review (continued) Earnings and dividends Earnings per ordinary share, adjusted for goodwill amortisation, integration costs and the dividend on Additional Value Shares ('AVS') increased by 13%, from 127.9p to 144.1p. Basic earnings per ordinary share increased by 1%, from 67.6p to 68.4p reflecting the increase in the AVS dividend paid during the year. A second dividend of 30.0p per share was paid on 2 December 2002 to the holders of AVS issued in connection with the acquisition of NatWest. By the end of 2002, a total of 45.0p per AVS had been paid, in accordance with the original payment schedule. The third and final AVS dividend, if declared by the directors, of 55.0p per AVS will be paid on 1 December 2003. A final dividend of 31.0p per ordinary share is recommended, resulting in a total ordinary dividend for the year of 43.7p per ordinary share, an increase of 15%. The total dividend is covered 3.3 times by earnings before goodwill amortisation, integration costs and the AVS dividend. Balance sheet Total assets were Â£412 billion at 31 December 2002, 12% higher than total assets of Â£369 billion at 31 December 2001. Of the total assets, Â£311 billion (76%) related to banking business and Â£101 billion (24%) to trading business (31 December 2001: Â£285 billion (77%) banking business and Â£84 billion (23%) trading business). Lending to customers excluding repurchase agreements and stock borrowing ('reverse repos') increased by 13%, Â£22 billion. Including reverse repos, loans and advances to customers were up 17%. Customer deposits increased by 10%, from Â£199 billion at 31 December 2001 to Â£219 billion at 31 December 2002. Excluding repurchase agreements and stock lending ('repos'), customer deposits grew by 7%, Â£13 billion. Capital ratios at 31 December 2002 were 7.3% (tier 1) and 11.7% (total), against 7.1% (tier 1) and 11.5% (total) at 31 December 2001. Profitability The adjusted after-tax return on ordinary equity was 17.6% compared with 16.8% for 2001. This is based on profit attributable to ordinary shareholders before integration costs, goodwill amortisation and the AVS dividend, and average ordinary equity. Acquisitions In May 2002, Lombard, the leasing arm of CBFM, completed the acquisition of Dixon Motors PLC for a consideration of Â£118 million. In July 2002, Citizens announced the acquisition of Medford Bancorp Inc., a Massachusetts savings bank for a cash consideration of US$273 million and in September 2002 announced the acquisition of Pennsylvania based commercial bank, Commonwealth Bancorp Inc for a cash consideration of US$450 million. These acquisitions were completed in October 2002 and January 2003 respectively. THE ROYAL BANK OF SCOTLAND GROUP plc SUMMARY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2002 The profit and loss account set out below shows goodwill amortisation and integration costs separately. In the statutory profit and loss account on page 25, these items are included in the captions prescribed by the Companies Act. 2002 2001 (restated) Â£m Â£m Net interest income 7,849 6,846 -------- -------- Dividend income 58 54 Fees and commissions receivable 5,308 4,735 Fees and commissions payable (965) (930) Dealing profits 1,462 1,426 Other operating income 1,209 1,052 -------- -------- 7,072 6,337 General insurance premium income 1,894 1,375 -------- -------- Non-interest income 8,966 7,712 -------- --------- Total income 16,815 14,558 -------- --------- Staff costs 3,942 3,461 Other operating expenses 3,727 3,380 -------- -------- Operating expenses 7,669 6,841 -------- -------- Profit before other operating charges 9,146 7,717 General insurance claims 1,350 948 -------- -------- Operating profit before provisions 7,796 6,769 Provisions for bad and doubtful debts 1,286 984 Amounts written off fixed asset investments 59 7 -------- -------- Profit before goodwill amortisation and integration costs 6,451 5,778 Goodwill amortisation 731 651 Integration costs 957 875 -------- -------- Profit before tax 4,763 4,252 Tax 1,556 1,537 -------- -------- Profit after tax 3,207 2,715 Minority interests (including non-equity) 133 90 Preference dividends 305 358 -------- -------- 2,769 2,267 Additional Value Shares dividend 798 399 -------- -------- Profit attributable to ordinary shareholders 1,971 1,868 Ordinary dividends 1,267 1,085 -------- -------- Retained profit 704 783 -------- -------- Basic earnings per ordinary share (Note 5) 68.4p 67.6p ---------- --------- Adjusted earnings per ordinary share (Note 5) 144.1p 127.9p ---------- --------- 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. Increase/ 2002 2001 (decrease) Â£m Â£m % Corporate Banking and Financial 3,203 *3,024 6 Markets Retail Banking 3,019 2,807 8 Retail Direct 701 551 27 Manufacturing (1,682) (1,568) (7) Wealth Management 432 459 (6) Direct Line Group 355 261 36 Ulster Bank 244 *229 7 Citizens 766 501 53 Central items (587) **(486) (21) -------- -------- Profit before goodwill amortisation and Integration costs 6,451 5,778 12 -------- ------- * Restated to reflect the transfer of Ulster Bank's leasing business to Corporate Banking and Financial Markets with effect from 1 January 2002. ** Restated following the implementation of UITF 33. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE BANKING AND FINANCIAL MARKETS 2002 2001 (restated) Â£m Â£m Net interest income 2,349 2,138 Non-interest income 3,703 3,319 -------- -------- Total income 6,052 5,457 Direct expenses - staff costs 1,271 1,131 - operating lease depreciation 461 434 - other 392 366 -------- -------- Contribution before provisions 3,928 3,526 Provisions 725 502 -------- -------- Contribution 3,203 3,024 -------- -------- Direct cost:income ratio (%) 35.1 35.4 Total assets* - Corporate Banking (Â£bn) 104.7 96.1 - Financial Markets (Â£bn) 98.8 91.6 Loans and advances to customers* - gross (Â£bn) 95.7 83.7 Customer deposits* (Â£bn) 62.2 56.4 Weighted risk assets (Â£bn) 136.5 118.3 *excluding repos and reverse repos Corporate Banking and Financial Markets ('CBFM') is the largest provider of banking services to medium and large businesses in the UK and the leader in the UK in asset finance. 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 leveraged finance, trade finance, leasing and factoring. Treasury and capital markets products are provided through Financial Markets which is a leading player in debt, foreign exchange and derivatives products. Ulster Bank's leasing business was transferred to CBFM on 1 January 2002; the prior year has been restated to reflect this. In May 2002, Lombard, the leasing arm of CBFM, completed the acquisition of Dixon Motors PLC. Contribution increased by 6% or Â£179 million to Â£3,203 million. Contribution before provisions was up by 11%, Â£402 million to Â£3,928 million. Total income was up 11% or Â£595 million to Â£6,052 million. Excluding acquisitions, which added Â£67 million, total income increased 10%. Net interest income rose by 10% or Â£211 million to Â£2,349 million, reflecting customer lending growth in Corporate Banking and continued good performance by Financial Markets from strong wholesale money market activity. Average loans and advances to customers of the banking business increased by 12%, Â£9.3 billion to Â£86.9 billion. Non-interest income rose by 12% or Â£384 million to Â£3,703 million, mainly as a result of increased fees, reflecting growth in lending and in payment and electronic banking activities. Dealing profits benefited from continued customer led business growth and higher revenues from trading in interest rate instruments and matched the strong performance of 2001. Operating lease business expanded significantly during 2002 with average assets increasing by 23% from Â£3.5 billion to Â£4.3 billion resulting in higher income, up 16%, Â£112 million. Direct expenses increased by 10% or Â£193 million to Â£2,124 million. Excluding acquisitions, expenses were up Â£133 million or 7%, of which Â£106 million was higher staff costs reflecting business growth and Â£27 million was higher operating lease depreciation. The direct cost:income ratio improved from 35.4% to 35.1%. Provisions amounted to Â£725 million compared with Â£502 million in 2001. The increase reflected growth in lending and, as in the second half of 2001, provisions required against a number of specific corporate situations, and higher investment provisions. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL BANKING 2002 2001 Â£m Â£m Net interest income 2,840 2,622 Non-interest income 1,353 1,277 -------- -------- Total income 4,193 3,899 Direct expenses - staff costs 707 702 - other 254 226 -------- -------- Contribution before provisions 3,232 2,971 Provisions 213 164 -------- -------- Contribution 3,019 2,807 -------- -------- Direct cost:income ratio (%) 22.9 23.8 Total assets (Â£bn) 66.1 61.1 Loans and advances to customers - gross - mortgages (Â£bn) 31.7 28.5 - other (Â£bn) 23.5 20.5 Customer deposits (Â£bn) 61.7 56.8 Weighted risk assets (Â£bn) 38.6 35.2 Retail Banking provides a wide range of banking, insurance and related financial services to individuals and small businesses. These services are delivered from a network of Royal Bank of Scotland and NatWest branches throughout Great Britain and through the telephone, ATMs and the internet. Contribution increased by 8% or Â£212 million to Â£3,019 million. Total income was up 8% or Â£294 million to Â£4,193 million. The increase in income reflected continued growth in customer numbers. The number of personal current accounts increased by 4% to 10.63 million. Retail Banking is the leading provider of services to small businesses and has 1.10 million customers. Net interest income rose by 8% or Â£218 million to Â£2,840 million, reflecting strong growth in customer loans and deposits. Average loans to customers, excluding mortgages, grew by 14% or Â£2.7 billion to Â£21.8 billion. Average mortgage lending was up 10% or Â£2.7 billion to Â£29.8 billion. Average customer deposits increased by 6% or Â£3.1 billion to Â£57.2 billion. Non-interest income rose by 6% or Â£76 million to Â£1,353 million, reflecting growth in packaged current accounts, transmission income and higher volumes of general insurance products sold through the Royal Bank of Scotland and NatWest networks. Strong sales performance was seen in Bancassurance with new business up 30% although the sharp fall in equity markets depressed Bancassurance income. Direct expenses increased by 4% or Â£33 million to Â£961 million. Staff costs were up Â£5 million, 1% to Â£707 million. Other costs rose Â£28 million, 12% to Â£254 million partly due to increased incidence of fraud losses. The direct cost:income ratio improved from 23.8% to 22.9%. Provisions increased by Â£49 million to Â£213 million, reflecting recent growth in lending. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL DIRECT 2002 2001 Â£m Â£m Net interest income 749 674 Non-interest income 841 696 ------- ------- Total income 1,590 1,370 Direct expenses - staff costs 190 164 - other 418 400 ----- ----- Contribution before provisions 982 806 Provisions 281 255 ----- ----- Contribution 701 551 ----- ----- Direct cost:income ratio (%) 38.2 41.2 Total assets (Â£bn) 19.8 17.2 Loans and advances to customers - gross - mortgages (Â£bn) 7.4 5.9 - other (Â£bn) 12.4 11.2 Customer deposits (Â£bn) 4.4 4.3 Weighted risk assets (Â£bn) 14.6 12.5 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, (formerly Virgin Direct Personal Finance), Direct Line Financial Services ('DLFS'), Lombard Direct, 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 June 2002, Retail Direct completed the acquisition of the remaining interest that it did not previously own in WorldPay Limited, a well established provider of payment services to businesses trading through the internet. Contribution increased by 27% or Â£150 million to Â£701 million. Total income was up 16% or Â£220 million to Â£1,590 million, reflecting continued strong growth in the Cards Business and in TPF. The number of active credit card accounts increased during the year to 9.5 million. TPF continued its strong growth, increasing customer accounts across all products to 3.4 million. Net interest income was up 11% or Â£75 million to Â£749 million. Average customer lending increased by 16% to Â£17.9 billion. In TPF, average personal loans rose by 29% to Â£1.1 billion and average customer deposits rose by 26% to Â£1.9 billion. Average mortgage lending in The One account was 36% higher at Â£4.3 billion and in DLFS was up 10% to Â£2.3 billion. Average personal lending in DLFS and Lombard Direct increased by 20% to Â£2 billion. Non-interest income was up 21% or Â£145 million to Â£841 million mainly as a result of higher fee income reflecting growth in volumes, especially in TPF, where the total number of general insurance policies increased during the year to 1.3 million. Direct expenses increased by 8% or Â£44 million to Â£608 million reflecting increased volumes and higher marketing activity to support strong business expansion. The direct cost:income ratio improved from 41.2% to 38.2%. Provisions increased by Â£26 million to Â£281 million due to the growth in lending volumes. THE ROYAL BANK OF SCOTLAND GROUP plc MANUFACTURING 2002 2001 Â£m Â£m Staff costs 479 428 Other costs 1,203 1,140 ------- ------- Total manufacturing costs 1,682 1,568 ------- ------- Analysis: Group Technology 662 632 Group Purchasing and Property Operations 528 467 Customer Support and other operations 492 469 ------- ------- Total manufacturing costs 1,682 1,568 ------- ------- Manufacturing supports the customer facing businesses, mainly Corporate Banking and Financial Markets, Retail Banking and Retail Direct, and provides operational technology, customer support in telephony, account management and money transmission, global purchasing, property and other services. The expenditure incurred by Manufacturing relates to shared costs in respect of the Group's UK banking operations. These costs reflect, inter alia, operational technology, account processing and management, and money transmission activities which are shared between the various customer-facing divisions. Consequently, these joint costs 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 drives optimum efficiencies in high volume processing activities, leverages the Group's purchasing power and has become the centre of excellence for managing large scale and complex change such as integration. Total manufacturing costs at Â£1,682 million were 7% or Â£114 million higher than 2001. The increase in costs reflects growth in business volumes arising from customer accounts, mortgage applications, personal loans and ATM transactions, and initiatives to enhance customer service, particularly in NatWest telephony. Extending the scope of Manufacturing with transfers from other parts of the Group also contributed to this increase. Manufacturing successfully completed the integration of NatWest on to the RBS technology platform in October 2002, ahead of schedule. THE ROYAL BANK OF SCOTLAND GROUP plc WEALTH MANAGEMENT 2002 2001 Â£m Â£m Net interest income 460 464 Non-interest income 447 469 ----- ----- Total income 907 933 Expenses - staff costs 317 298 - other 169 181 ----- ----- Contribution before provisions 421 454 Net release of provisions 11 5 ----- ----- Contribution 432 459 ----- ----- Cost:income ratio (%) 53.6 51.3 Total assets (Â£bn) 13.4 12.5 Investment management assets - excluding deposits (Â£bn) 20.5 21.4 Customer deposits (Â£bn) 29.1 29.1 Weighted risk assets (Â£bn) 8.4 7.8 Wealth Management comprises Coutts Group, Adam & Company and the offshore banking businesses, The Royal Bank of Scotland International and NatWest Offshore. The Coutts Group focuses on private banking. The offshore businesses provide retail banking services to local and expatriate customers, and corporate banking and treasury services to corporate, intermediary and institutional clients. Adam & Company is a private bank operating primarily in Scotland. Contribution at Â£432 million was Â£27 million, 6% lower primarily due to the effect of the fall in equity markets on the level of activity and ad valorem fee income. Total income was down 3% or Â£26 million to Â£907 million. Net interest income declined by 1% or Â£4 million to Â£460 million, as a result of a slight contraction in deposit margins due to lower interest rates. Average customer deposits increased from Â£28.5 billion to Â£28.7 billion. Non-interest income was Â£22 million, 5% lower at Â£447 million. This reflected lower equity markets which continued adversely to affect fees and commissions. Investment management assets at Â£20.5 billion were Â£0.9 billion, 4% lower as new business inflow was more than offset by the significant decline in equity markets. Expenses were up 1% or Â£7 million to Â£486 million. The cost:income ratio was adversely affected by the fall in income, increasing to 53.6% from 51.3%. Releases and recoveries of provisions exceeded gross new provisions required. As a result, there was a net release of provisions of Â£11 million, against a net release of Â£5 million in 2001. THE ROYAL BANK OF SCOTLAND GROUP plc DIRECT LINE GROUP 2002 2001 Â£m Â£m Earned premiums 2,383 1,804 Reinsurers' share (489) (429) ------- ------- Insurance premium income 1,894 1,375 Other income 245 168 ------- ------- Total income 2,139 1,543 Expenses - staff costs 178 152 - other 256 182 Gross claims 1,693 1,263 Reinsurers' share (343) (315) ------ ------ Contribution 355 261 ------ ------ In-force policies (000) - motor: UK 4,668 4,017 - motor: International 1,224 601 - home: UK 1,587 1,360 Combined operating ratio - UK (%) 89.4 88.0 Insurance reserves - UK (Â£m) 1,946 1,541 Direct Line Group sells and underwrites retail and wholesale insurance on the telephone and the internet. The Retail Division sells general insurance and motor breakdown services direct to the customer and UKI Partnerships (formerly Green Flag) 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 acquisition of Royal & Sun Alliance's direct motor insurance operation in Italy was completed in September 2002, making Direct Line the leading direct motor insurer in Italy. Contribution increased by 36% or Â£94 million to Â£355 million. Total income was up 39% or Â£596 million to Â£2,139 million. Excluding acquisitions, which added Â£73 million, total income was up 34% or Â£523 million. After reinsurance, insurance premium income was up 38% or Â£519 million to Â£1,894 million, reflecting strong growth in customer numbers. The leading position in the UK direct motor insurance market was maintained with motor insurance policies increasing 16%, or 651,000 to 4.67 million. The number of UK in-force home insurance policies increased by 17% or 227,000 to 1.59 million. The number of international in-force motor policies more than doubled to 1.22 million, including 280,000 from acquisitions. Other income increased by 46% or Â£77 million to Â£245 million. Higher investment income and profit commissions contributed to this increase. Expenses increased by 30% or Â£100 million to Â£434 million. Excluding acquisitions, which added Â£35 million, expenses were up by 20% or Â£65 million reflecting business expansion. Net claims, after reinsurance, increased by 42% or Â£402 million to Â£1,350 million reflecting increased volumes. THE ROYAL BANK OF SCOTLAND GROUP plc ULSTER BANK 2002 2001 (restated) Â£m Â£m Net interest income 339 313 Non-interest income 181 170 ----- ----- Total income 520 483 Expenses - staff costs 145 135 - other 109 104 ----- ----- Contribution before provisions 266 244 Provisions 22 15 ----- ----- Contribution 244 229 ----- ----- Cost:income ratio (%) 48.8 49.5 Total assets (Â£bn) 12.7 10.8 Loans and advances to customers - gross (Â£bn) 9.1 7.6 Customer deposits (Â£bn) 8.8 7.7 Weighted risk assets (Â£bn) 9.0 7.7 Average exchange rate - â‚¬/Â£ 1.591 1.609 Spot exchange rate - â‚¬/Â£ 1.536 1.637 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. Ulster Bank's leasing business was transferred to CBFM on 1 January 2002; the prior year has been restated to reflect this. Contribution increased by 7%, or Â£15 million to Â£244 million. Total income increased by 8%, Â£37 million to Â£520 million. Net interest income rose by 8% or Â£26 million to Â£339 million, reflecting good growth in loans and deposits despite a less buoyant economic environment in the Republic of Ireland. Average customer lending and deposits of the banking business increased by 10%, Â£0.7 billion, to Â£8.0 billion, and by 7%, Â£0.5 billion, to Â£7.9 billion respectively. Average mortgage lending grew by 23% to Â£1.5 billion and the number of current accounts increased by 5%. Non-interest income rose by 6% or Â£11 million to Â£181 million. Increases of Â£7 million in net fees and commissions and Â£6 million in other operating income were partially offset by a Â£2 million reduction in dealing profits. Expenses increased by 6% or Â£15 million to Â£254 million to support higher business volumes and pay awards. The cost:income ratio improved from 49.5% to 48.8%. Provisions were up by Â£7 million to Â£22 million reflecting a small number of specific situations. THE ROYAL BANK OF SCOTLAND GROUP plc CITIZENS 2002 2001 Â£m Â£m Net interest income 1,248 814 Non-interest income 468 306 ------- ------- Total income 1,716 1,120 Expenses - staff costs 485 305 - other 370 245 ----- ----- Contribution before provisions 861 570 Provisions 95 69 ----- ----- Contribution 766 501 ----- ----- Cost:income ratio (%) 49.8 49.1 Total assets ($bn) 61.1 52.4 Loans and advances to customers - gross ($bn) 31.4 26.3 Customer deposits ($bn) 51.1 42.8 Weighted risk assets ($bn) 38.8 35.8 Average exchange rate - US$/Â£ 1.503 1.440 Spot exchange rate - US$/Â£ 1.613 1.450 Citizens is engaged in retail and corporate banking activities through its branch network in the states of Rhode Island, Connecticut, Massachusetts and New Hampshire and is the second largest bank in New England. The acquisition of the Mellon Regional Franchise in December 2001 extended Citizens presence to the states of Pennsylvania, Delaware and New Jersey. In July 2002, Citizens announced the acquisition of Medford Bancorp, Inc., a Massachusetts savings bank and in September 2002, announced the acquisition of Pennsylvania based commercial bank, Commonwealth Bancorp, Inc. These acquisitions were completed in October 2002 and January 2003 respectively. Contribution increased by 53% or Â£265 million to Â£766 million. Excluding the incremental contribution of Â£219 million from the Mellon Regional Franchise and Medford (the 'acquisitions') and a Â£21 million adverse impact of exchange rate translation, contribution increased by 14% or Â£67 million. Total income was up 53% or Â£596 million to Â£1,716 million. Excluding acquisitions and exchange rate fluctuations, organic income growth was 15% or Â£158 million. Net interest income rose by 53% or Â£434 million to Â£1,248 million. Excluding acquisitions, which added Â£364 million, and exchange rate fluctuations, net interest income was up 14% or Â£104 million, as a result of strong organic growth in customer loans and deposits. Non-interest income rose by 53% or Â£162 million to Â£468 million. Excluding acquisitions, which added Â£121 million, and movements in exchange rates, non-interest income was up 19% or Â£54 million, as a result of growth in deposit service charges and mortgage banking. Expenses increased by 55% or Â£305 million to Â£855 million. Excluding acquisitions, which added Â£256 million, and exchange rate fluctuations, expenses increased by 14% or Â£72 million, to support higher business volumes. Citizens increased its in-store banking activities by opening new branches in 58 Stop& Shop supermarkets. The cost of establishing presence in these stores contributed to the increase in operating expenses. The cost:income ratio increased from 49.1% to 49.8%. Excluding acquisitions and the impact of exchange rate translation, the underlying cost:income ratio improved from 48.7% to 48.2%. Provisions were up from Â£69 million to Â£95 million. Excluding the Mellon Regional Franchise which added Â£10 million, provisions were broadly consistent with the second half of 2001. THE ROYAL BANK OF SCOTLAND GROUP plc CENTRAL ITEMS 2002 2001 (restated) Â£m Â£m Funding costs 215 211 Central department costs - staff costs 108 99 - other 102 93 Other corporate items - net 162 83 ------ ------ Total Central items 587 486 ------ ------ The Centre comprises group and corporate functions which provide services to the operating divisions. Total Central items increased by Â£101 million to Â£587 million. Funding costs, which include interest on the perpetual regulatory tier one securities issued in August 2001 of Â£60 million (2001 - Â£23 million) were similar to the previous year. This reflected the benefit of retained earnings and lower interest rates. Other corporate items increased to Â£162 million compared with Â£83 million in 2001, which benefited from certain one off items. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE BALANCE SHEET 2002 2001(restated) Average Interest Rate Average Interest Rate balance balance Assets Â£m Â£m % Â£m Â£m % Treasury and other eligible bills UK 910 24 2.6 231 11 4.8 Overseas 351 6 1.7 277 8 2.9 Loans and advances to banks UK 13,439 532 4.0 18,214 834 4.6 Overseas 9,811 304 3.1 7,467 421 5.6 Loans and advances to customers UK 154,202 9,141 5.9 137,232 9,584 7.0 Overseas 35,759 1,963 5.5 28,847 1,981 6.9 Debt securities UK 17,950 675 3.8 16,632 931 5.6 Overseas 18,188 916 5.0 11,427 651 5.7 ----------- -------- ----------- --------- Interest-earning - banking business assets UK 186,501 10,372 5.6 172,309 11,360 6.6 Overseas 64,109 3,189 5.0 48,018 3,061 6.4 ----------- ---------- ----------- --------- 250,610 13,561 5.4 220,327 14,421 6.6 - trading business 78,380 ---------- 66,545 --------- ----------- ----------- Total interest-earning assets 328,990 286,872 Non-interest-earning assets 65,898 63,385 ----------- ----------- Total assets 394,888 350,257 ----------- ----------- Percentage of assets applicable to overseas operations 32.0% 27.1% ---------- ---------- Liabilities Deposits by banks UK 21,090 544 2.6 18,360 760 4.1 Overseas 9,058 215 2.4 8,779 382 4.4 Customer accounts UK 120,522 3,067 2.5 113,290 4,137 3.7 Overseas 36,281 790 2.2 26,239 927 3.5 Debt securities in issue UK 24,154 965 4.0 20,140 1,031 5.1 Overseas 8,693 209 2.4 8,407 384 4.6 Loan capital UK 13,154 640 4.9 10,779 657 6.1 Overseas 166 17 10.2 171 14 8.2 Internal funding of trading business (21,430) (735) 3.4 (16,202) (717) 4.4 ----------- -------- ----------- -------- Interest-bearing - banking business liabilities UK 158,791 4,507 2.9 147,943 5,931 4.0 Overseas 52,897 1,205 2.3 42,020 1,644 3.9 ----------- -------- ----------- -------- 211,688 5,712 2.7 189,963 7,575 4.0 - trading business 75,059 -------- 63,159 -------- ----------- ----------- Total interest-bearing liabilities 286,747 253,122 Non-interest-bearing liabilities - demand deposits 28,249 25,538 - other liabilities 52,600 46,249 Shareholders' funds 27,292 25,348 ----------- ----------- Total liabilities and shareholders' funds 394,888 350,257 ----------- ----------- Percentage of liabilities applicable to overseas operations 30.4% 27.5% ----------- ----------- 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 2002 2001 Average Average rate rate % % The Group's base rate 4.0 5.1 London inter-bank three month offered rates: Sterling 4.1 5.0 Eurodollar 1.8 3.8 Euro 3.3 4.3 Yields, spreads and margins of the banking business: Gross yield (1) Group 5.4 6.6 UK 5.6 6.6 Overseas 5.0 6.4 Interest spread (2) Group 2.7 2.6 UK 2.7 2.6 Overseas 2.7 2.5 Net interest margin (3) Group 3.1 3.1 UK 3.1 3.2 Overseas 3.1 3.0 (1) Gross yield is the interest rate earned on average interest-earning assets of the banking business. (2) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (3) Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business. THE ROYAL BANK OF SCOTLAND GROUP plc INTEGRATION INFORMATION 1. NATWEST INTEGRATION In the Offer Document for NatWest issued on 16 December 1999, the Group made various estimates in respect of revenue benefits, cost savings and staff reductions. Those estimates were based on the latest available published information at that time, namely NatWest interim accounts for the half year to 30 June 1999 and the Group's accounts for the year to 30 September 1999. On 19 April 2000, the Group revised its estimates upwards as a consequence of the experience gained by having detailed access to NatWest following the acquisition on 6 March 2000. These revised estimates are shown in the tables below as 'plan'. Subsequently, the Group further revised the integration targets upwards in February 2002 for the remainder of the programme based on actual achievements. These targets are shown in the tables below as 'revised plan'. In February 2003 all integration initiatives were completed and the annualised benefits of Â£890 million for revenue benefits and Â£1,440 million for cost savings from the full programme achieved. Period ending REVENUE BENEFITS December December December March 2000 2001 2002 2003 â€¢ Cumulative gross revenue initiatives implemented at the end of each period (Â£m) Plan 120 350 550 595 revised plan 800 890 actual 147 605 805 December 2003 â€¢ Impact on profit before tax (Â£m) Plan 50 120 240 390 revised plan 460 590 actual 52 312 472 The gross revenue initiatives generated income of Â£712 million in the year to 31 December 2002 which, net of costs, claims and provisions, added Â£472 million to profit before tax. Period ending COST SAVINGS December December December March 2000 2001 2002 2003 â€¢ Cumulative cost savings implemented at the end of each period (Â£m) Plan 550 900 1,200 1,340 revised plan 1,340 1,440 actual 653 1,205 1,350 December 2003 â€¢ Impact on profit before tax (Â£m) Plan 290 700 1,050 1,300 revised plan 1,280 1,400 actual 448 1,008 1,284 Period ending STAFF REDUCTIONS December December December March 2000 2001 2002 2003 â€¢ Cumulative total Plan 9,000 14,000 16,000 18,000 revised plan 18,000 18,000 actual 13,000 17,000 18,000 THE ROYAL BANK OF SCOTLAND GROUP plc INTEGRATION INFORMATION (continued) Period ending INTEGRATION COSTS December December December March 2000 2001 2002 2003 â€¢ Cumulative charge (Â£m) Plan 650 1,150 1,350 1,400 revised plan 2,200 2,300 actual 547 1,394 2,204 2. MELLON REGIONAL FRANCHISE INTEGRATION In the announcement relating to the acquisition of the Mellon Regional Franchise issued on 17 July 2001, the Group disclosed various estimates in respect of cost savings and revenue benefits. Those estimates were based on the unaudited management accounts of the Mellon Regional Franchise for the four months ended 20 April 2001 and Citizens financial statements for the year ended 31 December 2000. These estimates were confirmed as part of the Group's 2001 year end reporting. Period ending REVENUE BENEFITS December December December 2002 2003 2004 â€¢ Cumulative gross revenue initiatives implemented at the end of each period (US$m) Plan 57 136 242 actual 70 â€¢ Impact on profit before tax (US$m) Plan 2 34 104 actual 19 The gross revenue initiatives generated income of US$43 million in the year to 31 December 2002 which, net of costs and provisions, added US$19 million to profit before tax. Period ending COST SAVINGS December December December 2002 2003 2004 â€¢ Cumulative cost savings implemented at the end of each period (US$m) Plan 71 95 101 actual 95 â€¢ Impact on profit before tax (US$m) Plan 46 83 98 actual 70 Period ending INTEGRATION COSTS December December December December 2001 2002 2003 2004 â€¢ Cumulative charge (US$m) Plan 101 241 260 267 actual 41 239 3. MEDFORD Integration costs relating to the Medford acquisition amounted to US$22 million. The above discussions should be read in light of the 'Forward-looking statements' on page 48. THE ROYAL BANK OF SCOTLAND GROUP plc STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2002 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. 2002 2001 (restated) Â£m Â£m Interest receivable 13,561 14,421 Interest payable 5,712 7,575 -------- -------- Net interest income 7,849 6,846 -------- -------- Dividend income 58 54 Fees and commissions receivable 5,308 4,735 Fees and commissions payable (965) (930) Dealing profits 1,462 1,426 Other operating income 1,209 1,052 -------- -------- 7,072 6,337 General insurance - earned premiums 2,383 1,804 - reinsurance (489) (429) -------- -------- Non-interest income 8,966 7,712 --------- --------- Total income 16,815 14,558 -------- --------- Administrative expenses - staff costs* 4,472 4,059 - premises and equipment* 1,006 873 - other* 2,253 1,903 Depreciation and amortisation - tangible fixed assets* 895 881 - goodwill 731 651 -------- -------- Operating expenses 9,357 8,367 -------- -------- Profit before other operating charges 7,458 6,191 General insurance - gross claims 1,693 1,263 - reinsurance (343) (315) -------- -------- Operating profit before provisions 6,108 5,243 Provisions for bad and doubtful debts 1,286 984 Amounts written off fixed asset investments 59 7 -------- -------- Profit on ordinary activities before tax 4,763 4,252 -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2002 (continued) 2002 2001 (restated) Â£m Â£m Profit on ordinary activities before tax 4,763 4,252 Tax on profit on ordinary activities 1,556 1,537 -------- -------- Profit on ordinary activities after tax 3,207 2,715 Minority interests (including non-equity) 133 90 -------- -------- Profit for the financial year 3,074 2,625 Preference dividends 305 358 -------- -------- 2,769 2,267 Additional Value Shares dividend 798 399 -------- -------- Profit attributable to ordinary shareholders 1,971 1,868 Ordinary dividends 1,267 1,085 -------- -------- Retained profit 704 783 -------- -------- Basic earnings per ordinary share (Note 5) 68.4p 67.6p -------- -------- Adjusted earnings per ordinary share (Note 5) 144.1p 127.9p -------- -------- Diluted earnings per ordinary share (Note 5) 67.4p 66.3p -------- -------- * Integration costs included in operating expenses comprised: 2002 2001 Â£m Â£m Staff costs 530 598 Premises and equipment 127 64 Other administrative expenses 298 188 Depreciation 2 25 -------- -------- 957 875 -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2002 2002 2001 (restated) Â£m Â£m Assets Cash and balances at central banks 3,481 3,093 Items in the course of collection from other banks 2,741 3,288 Treasury bills and other eligible bills 11,459 10,136 Loans and advances to banks 44,296 38,513 Loans and advances to customers 223,324 190,492 Debt securities 67,042 64,040 Equity shares 1,886 1,557 Interests in associated undertakings 94 108 Intangible fixed assets 12,697 13,325 Tangible fixed assets 10,485 8,813 Other assets 21,031 21,550 Prepayments and accrued income 4,353 3,696 ----------- ----------- 402,889 358,611 Long-term assurance assets attributable to policyholders 9,111 10,248 ----------- ----------- Total assets 412,000 368,859 ----------- ----------- Liabilities Deposits by banks 54,720 40,038 Items in the course of transmission to other banks 1,258 2,109 Customer accounts 219,161 198,995 Debt securities in issue 33,938 30,669 Other liabilities 40,166 37,357 Accruals and deferred income 8,626 7,669 Provisions for liabilities and charges - deferred taxation 1,834 1,650 - other provisions 330 341 Subordinated liabilities - dated loan capital 7,602 6,681 - undated loan capital including convertible debt 6,363 5,849 Minority interests - equity (11) 5 - non-equity 1,850 580 Shareholders' funds - equity 23,545 22,287 - non-equity 3,507 4,381 ----------- ----------- 402,889 358,611 Long-term assurance liabilities attributable to policyholders 9,111 10,248 ----------- ----------- Total liabilities 412,000 368,859 ----------- ----------- Memorandum items Contingent liabilities and commitments 144,180 138,844 ----------- ----------- THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONSOLIDATED BALANCE SHEET Total assets of Â£412.0 billion at 31 December 2002 were up Â£43.1 billion, 12%, compared with 31 December 2001 due to business growth. Treasury bills and other eligible bills increased by Â£1.3 billion, 13%, to Â£11.5 billion reflecting liquidity management partially offset by reduced trading activity. Loans and advances to banks rose Â£5.8 billion, 15%, to Â£44.3 billion. Bank placings were up Â£2.9 billion, 14% to Â£23.7 billion and reverse repos increased by Â£2.9 billion, 16%, to Â£20.6 billion. Loans and advances to customers were up Â£32.8 billion, 17%, to Â£223.3 billion, including reverse repos which increased Â£10.3 billion to Â£21.9 billion. Excluding reverse repos, lending increased by Â£22.5 billion, 13% to Â£201.4 billion. Growth in customer lending was across all divisions with increases of Â£11.8 billion in CBFM, Â£6.3 billion in Retail Banking, Â£2.6 billion in Retail Direct, Â£1.4 billion in Ulster Bank and Â£1.3 billion in Citizens. In US$ terms, customer lending in Citizens was up 20% or US$5.1 billion, including US$0.6 billion arising from the acquisition of Medford. Debt securities and equity shares increased by Â£3.3 billion, 5%, to Â£68.9 billion, principally due to increased holdings in Financial Markets, together with growth in Wealth Management's investment portfolio of investment grade asset-backed securities and Citizens' portfolio of US government securities. Intangible fixed assets declined by Â£0.6 billion, 5% to Â£12.7 billion, primarily because of amortisation. Goodwill arising on acquisitions during the year, Â£0.4 billion, was largely offset by the effect of exchange rate movements. All other assets rose by Â£1.6 billion, 4%, to Â£42.2 billion. Tangible fixed assets were up Â£1.7 billion, 19% to Â£10.5 billion mainly reflecting increased operating lease assets in CBFM. Growth in the mark-to-market value of trading derivatives, up Â£2.4 billion as a result of increased trading activity, was largely offset by lower settlement balances and other assets. Long term assurance assets and liabilities attributable to policyholders declined Â£1.1 billion, 11% to Â£9.1 billion reflecting the fall in equity markets, partially offset by increased investments. Deposits by banks increased by Â£14.7 billion, 37% to Â£54.7 billion, with repos up Â£9.7 billion, to Â£20.1 billion and inter-bank deposits up Â£5.0 billion, 17% to Â£34.6 billion. Customer accounts were up Â£20.2 billion, 10% at Â£219.2 billion, including repos up Â£7.6 billion, 44% to Â£25.1 billion. Excluding repos, deposits rose Â£12.6 billion, 7% to Â£194.1 billion with increases of Â£5.8 billion in CBFM, Â£4.9 billion in Retail Banking and Â£1.6 billion in Citizens. In US$ terms, Citizens grew by US$7.0 billion, 18%, of which US$1.1 billion related to Medford. Debt securities in issue were up Â£3.3 billion, 11%, to Â£33.9 billion primarily to meet the Group's funding requirements. All other liabilities increased by Â£3.1 billion, 6% to Â£52.2 billion. Higher mark-to-market value of trading derivatives, up Â£3.7 billion, short positions, up Â£1.8 billion and accruals and deferred income, up Â£1.0 billion, were partially offset by lower settlement balances. THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONSOLIDATED BALANCE SHEET (continued) Subordinated liabilities were up Â£1.4 billion, 11% to Â£14.0 billion. The issue of Â£1.2 billion (US$1,850 million) US$ denominated and Â£0.1 billion (â‚¬230 million) euro denominated dated loan capital and Â£0.8 billion sterling denominated undated loan capital were partially offset by the Â£0.2 billion (US$250 million and Â£40 million) redemption of dated loan capital and the effect of exchange rate movements of Â£0.5 billion. Minority interests increased by Â£1.3 billion to Â£1.8 billion principally reflecting the issues of â‚¬1,250 million and US$750 million trust preferred securities by subsidiaries of the Group. Shareholders' funds rose Â£0.4 billion to Â£27.1 billion principally due to retentions of Â£0.7 billion and the issue of Â£0.6 billion of equity shares in respect of scrip dividend and the exercise of share options, partly offset by the redemption of Â£0.6 billion non-equity preference shares in January 2002 and the adverse effect of exchange rate movements on share premium account, Â£0.3 billion. THE ROYAL BANK OF SCOTLAND GROUP plc STATEMENT OF CONSOLIDATED TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2002 2002 2001 Â£m Â£m Profit attributable to ordinary shareholders 1,971 1,868 Currency translation adjustments and other movements 36 (3) Revaluation of premises (33) 72 ------- ------- Total recognised gains and losses in the year 1,974 1,937 ------- Prior year adjustment arising from the implementation of FRS 19 (117) ------- Total recognised gains and losses since 31 December 2001 1,857 ------- RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS FOR THE YEAR ENDED 31 DECEMBER 2002 2002 2001 Â£m Â£m Profit attributable to ordinary shareholders 1,971 1,868 Ordinary dividends (1,267) (1,085) -------- -------- Retained profit for the year 704 783 Issue of ordinary and preference shares 560 2,759 Perpetual regulatory tier one securities - 835 Redemption of preference shares (600) - Other recognised gains and losses 3 69 Currency translation adjustment on share premium account (283) 58 -------- -------- Net increase in shareholders' funds as previously reported 384 4,504 Perpetual regulatory tier one securities - (835) -------- -------- Net increase in shareholders' funds as restated 384 3,669 -------- -------- Opening shareholders' funds as previously reported 27,620 23,116 Prior year adjustments arising from the implementation of: - FRS 19 (117) (117) - UITF 33 (835) - --------- --------- Opening shareholders' funds as restated 26,668 22,999 --------- --------- Closing shareholders' funds 27,052 26,668 --------- --------- THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED CASH FLOW STATEMENT FOR YEAR ENDED 31 DECEMBER 2002 2002 2001 (restated) Â£m Â£m Net cash inflow from operating activities (note 12) 13,737 7,287 --------- ------- Dividends received from associated undertakings 1 1 --------- ------- Returns on investments and servicing of finance Preference dividends paid (317) (353) Additional Value Shares dividend paid (798) (399) Dividends paid to minority shareholders in subsidiary undertakings (112) (43) Interest paid on subordinated liabilities (674) (652) ---------- --------- Net cash outflow from returns on investments and servicing of finance (1,901) (1,447) ---------- --------- Taxation UK tax paid (833) (790) Overseas tax paid (274) (419) ---------- --------- Net cash outflow from taxation (1,107) (1,209) ---------- --------- Capital expenditure and financial investment Purchase of investment securities (32,701) (27,537) Sale and maturity of investment securities 26,072 20,578 Purchase of tangible fixed assets (3,367) (4,245) Sale of tangible fixed assets 811 867 ---------- ---------- Net cash outflow from capital expenditure and financial investment (9,185) (10,337) ---------- ----------- Acquisitions and disposals Purchases of businesses and subsidiary undertakings (net of cash acquired) (308) (1,614) Investment in associated undertakings (2) (47) Sale of subsidiary and associated undertakings (net of cash sold) 29 8 -------- -------- Net cash outflow from acquisitions and disposals (281) (1,653) -------- -------- Ordinary equity dividends paid (729) (653) -------- --------- Net cash inflow/(outflow) before financing 535 (8,011) -------- --------- Financing Proceeds from issue of ordinary share capital 85 2,131 Proceeds from issue of preference share capital - 281 Proceeds from issue of trust preferred securities 1,242 - Redemption of preference share capital (600) - Issue of subordinated liabilities 2,157 2,705 Repayment of subordinated liabilities (202) (693) Increase/(decrease) in minority interests 29 (13) -------- -------- Net cash inflow from financing 2,711 4,411 -------- -------- Increase/(decrease) in cash 3,246 (3,600) -------- --------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES 1. Accounting policies and restatements Accounting policies There have been no changes to the Group's principal accounting policies as set out on pages 49 to 51 of the 2001 Report and Accounts, except as noted below. The Group has implemented Financial Reporting Standard 19 'Deferred Tax' ('FRS 19') which requires recognition of deferred tax assets and liabilities on all timing differences, with specified exceptions. Previously, provision was made for deferred tax only to the extent that timing differences were expected to reverse and the deferred tax liability crystallise in the foreseeable future. Prior periods have been restated resulting in a decrease in profit and loss account reserves of Â£117 million at 31 December 2001; an increase in the deferred tax liability of Â£194 million and an increase in the deferred tax asset of Â£77 million as at 31 December 2001. The tax charge for 2001 is unchanged. Following the issuance of Urgent Issues Task Force Abstract 33 'Obligations in capital instruments' ('UITF 33') in February 2002, the Group has reclassified its perpetual regulatory tier one securities, issued in August 2001, from non-equity shareholders' funds to subordinated liabilities and the interest on these securities (Â£60 million in 2002) is now included in interest payable rather than non-equity dividends. Comparative figures have been restated resulting in an increase in interest payable of Â£23 million in 2001, a reduction in non-equity shareholders' funds of Â£835 million, an increase in undated loan capital of Â£820 million and an increase in accruals and deferred income of Â£15 million as at 31 December 2001. Restatements Following the transfer of Ulster Bank's leasing business to Corporate Banking and Financial Markets with effect from 1 January 2002, prior year information for these divisions has been restated. The Group's results are not affected. 2. Provisions for bad and doubtful debts Operating profit is stated after charging provisions for bad and doubtful debts of Â£1,286 million (2001 - Â£984 million). The balance sheet provisions for bad and doubtful debts increased in the year to 31 December 2002 from Â£3,653 million to Â£3,927 million, and the movements thereon were: 2002 2001 Specific General Total Total Â£m Â£m Â£m Â£m At 1 January 3,039 614 3,653 3,153 Currency translation and other adjustments (45) (17) (62) 17 Acquisition of businesses 23 - 23 254 Amounts written off (1,036) - (1,036) (835) Recoveries of amounts previously written off 63 - 63 80 Charge to profit and loss account 1,286 - 1,286 984 -------- -------- -------- -------- At 31 December 3,330 597 3,927 3,653 -------- -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 3. Taxation The charge for taxation is based on a UK corporation tax rate of 30% and comprises: 2002 2001 (restated) Â£m Â£m Tax on profit before goodwill amortisation and integration costs 1,863 1,798 Tax relief on goodwill amortisation and integration costs (307) (261) ------- ------- 1,556 1,537 ------- ------- The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation tax rate of 30% as follows: 2002 2001 (restated) Â£m Â£m Expected tax charge 1,429 1,276 Goodwill amortisation 183 169 Contributions to employee share ownership trust (40) (48) Non-deductible items 179 251 Non-taxable items (163) (92) Capital allowances in excess of depreciation (340) (280) Other (8) 8 -------- ------- Current tax charge for the year 1,240 1,284 Deferred taxation 316 253 -------- ------- Actual tax charge 1,556 1,537 -------- ------- 4. Pension costs The Group accounts for pension costs in accordance with SSAP 24 'Accounting for pension costs'. The charge to the profit and loss account is based on the latest actuarial valuation of the various pension funds, the most significant of which is The Royal Bank of Scotland Group Pension Fund ('the Fund') formed following the merger of The Royal Bank of Scotland Staff Pension Scheme and the National Westminster Bank Pension Fund. The latest actuarial valuation of the Fund was as at 31 March 2001 and showed a surplus of Â£1,058 million. Notwithstanding the surplus, the Group has continued to make contributions to the Fund which amounted to Â£109 million for 2002. The charge against pre-tax profits for pensions in respect of the Fund for 2002 amounted to Â£187 million (2001 - Â£150 million). This includes Â£77 million in each year for the amortisation of the National Westminster Bank Pension Fund surplus recognised as an asset under FRS 7 'Fair Values in Acquisition Accounting' on the acquisition of NatWest in 2000. The written down value of this asset after tax, at 31 December 2002 was Â£548 million (31 December 2001 - Â£602 million). The Accounting Standards Board has deferred the implementation of FRS 17 'Retirement Benefits' until 2005; the disclosures required by FRS 17 are included in the Group's 2002 Annual Report and Accounts. Under the FRS 17 basis of valuation, the Fund shows a deficit after tax of Â£1.2 billion at 31 December 2002. The profit and loss charge for 2002 in respect of the Fund under FRS 17 would have been Â£81 million lower than that currently charged and consequently reported profits would have been Â£81 million higher. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 5. Earnings per share The earnings per share have been calculated based on the following: 2002 2001 Â£m Â£m Earnings Profit attributable to ordinary shareholders 1,971 1,868 ------- -------- Number of shares - millions Weighted average number of ordinary shares In issue during the year 2,881 2,762 Effect of dilutive share options and convertible non-equity shares 43 55 -------- -------- In issue during the year - diluted 2,924 2,817 -------- -------- Basic earnings per share 68.4p 67.6p AVS dividend 27.7p 14.5p -------- -------- 96.1p 82.1p Goodwill amortisation 24.2p 23.2p Integration costs 23.8p 22.6p ---------- --------- Adjusted earnings per share 144.1p 127.9p ---------- --------- Diluted earnings per share 67.4p 66.3p ---------- --------- 6. Ordinary dividend The directors have recommended a final dividend of 31.0p per share on the ordinary shares which, when added to the interim dividend of 12.7p per share, makes a total of 43.7p per share (2001 - 38.0p per share). Subject to approval by shareholders at the annual general meeting, the final dividend will be paid on 6 June 2003 to shareholders registered on 14 March 2003. As an alternative to cash, a scrip dividend election is to be offered and shareholders will receive details of this by letter. 7. Additional Value Shares The second dividend of 30.0p per share on the AVS was paid on 2 December 2002, which when added to the first dividend of 15.0p, makes a total of 45.0p per AVS, in accordance with the original schedule. The third and final dividend of 55.0p, if declared by the directors, will be paid on 1 December 2003. 8. Analysis of repurchase agreements 2002 2001 Â£m Â£m Reverse repurchase agreements and stock borrowing Loans and advances to banks 20,578 17,721 Loans and advances to customers 21,941 11,588 Repurchase agreements and stock lending Deposits by banks 20,097 10,446 Customer accounts 25,060 17,455 THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 9. Contingent liabilities and commitments 2002 2001 Â£m Â£m Contingent liabilities Acceptances and endorsements 2,407 2,814 Guarantees and assets pledged as 5,200 4,653 collateral security Other contingent liabilities 7,981 6,106 ---------- ---------- 15,588 13,573 ---------- ---------- Commitments Documentary credits and other short-term trade related transactions 655 2,107 Undrawn formal standby facilities, credit lines and other commitments to lend 127,429 122,826 Other commitments 508 338 ----------- ----------- 128,592 125,271 ----------- ----------- Total contingent liabilities and 144,180 138,844 commitments ---------- ---------- 10. 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. 2002 2001 Â£m Â£m Exchange rate contracts 17,262 12,638 Interest rate contracts 64,460 36,853 Equity and commodity contracts 810 188 ---------- ---------- 82,532 49,679 ---------- ---------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 10. Derivatives (continued) Derivatives held for trading purposes The table below shows the notional principal amounts of trading instruments entered into with third parties. 2002 2001 Â£bn Â£bn Exchange rate contracts 899.0 788.6 Interest rate contracts 3,922.4 3,658.7 Equity and commodity contracts 23.5 18.6 The table below shows the fair values (which, after netting, are the balance sheet values) of trading instruments entered into with third parties. 2002 2001 Fair value Fair value Assets Liabilities Assets Liabilities Â£m Â£m Â£m Â£m Exchange rate contracts 17,217 18,625 12,586 12,595 Interest rate contracts 64,072 64,420 36,638 36,851 Equity and commodity contracts 733 496 472 475 ---------- ---------- ---------- ---------- 82,022 83,541 49,696 49,921 Netting (68,812) (68,812) (38,846) (38,846) ---------- ---------- ---------- ---------- 13,210 14,729 10,850 11,075 ---------- ---------- ---------- ---------- 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). 2002 2001 Â£bn Â£bn Exchange rate contracts 14.1 13.9 Interest rate contracts 113.7 108.7 Equity and commodity contracts 2.2 0.8 THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 11. Analysis of consolidated shareholders' funds 2002 2001 (restated) Called-up share capital Â£m Â£m At beginning of year 893 848 Shares issued during the year 11 45 Preference shares redeemed during the year (150) - -------- -------- At end of year 754 893 -------- -------- Share premium account At beginning of year 7,465 6,530 Currency translation adjustments (283) 58 Shares issued during the year 685 870 Preference shares redeemed during the year (268) - Other movements 9 7 -------- -------- At end of year 7,608 7,465 -------- -------- Merger reserve At beginning of year 12,029 12,604 Shares issued to finance the Mellon Regional Franchise acquisition - 2,007 Transfer to profit and loss account (574) (2,582) --------- ---------- At end of year 11,455 12,029 --------- ---------- Revaluation reserve At beginning of year 113 40 Revaluation of premises (33) 72 Transfer from profit and loss account - 1 ---- ----- At end of year 80 113 ---- ----- Other reserves At beginning of year 212 191 Redemption of preference shares 150 - Transfer of increase in value of long-term assurance business 25 17 Other movements - 4 ----- ----- At end of year 387 212 ----- ----- Profit and loss account As previously reported 6,073 2,903 Prior year adjustment (117) (117) -------- -------- At beginning of year, as restated 5,956 2,786 Currency translation adjustments and other movements 27 (14) Retention for the year 704 783 Employee share option payments (136) (163) Redemption of preference shares (332) - Transfer from merger reserve 574 2,582 Transfer of increase in value of long-term assurance business (25) (17) Transfer to revaluation reserve - (1) -------- ------- At end of year 6,768 5,956 -------- ------- Closing shareholders' funds 27,052 26,668 ---------- ---------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 12. Reconciliation of operating profit to net cash inflow from operating activities 2002 2001 (restated) Â£m Â£m Operating profit 4,763 4,252 (Increase)/decrease in prepayments and accrued income (657) 486 Interest on subordinated liabilities 659 674 Increase in accruals and deferred income 856 490 Amortisation of and provisions against investment securities 99 39 Provisions for bad and doubtful debts 1,286 984 Loans and advances written off net of recoveries (973) (755) Profit on sale of tangible fixed assets (32) (55) Profit on sale of subsidiaries and associates (13) - (Loss)/profit from associated undertakings (2) 6 Profit on sale of investment securities (85) (48) Provisions for liabilities and charges 50 67 Provisions utilised (57) (37) Depreciation and amortisation of tangible and intangible fixed assets 1,626 1,532 Increase in value of long-term assurance business (61) (55) ---------- ---------- Net cash inflow from trading activities 7,459 7,580 Decrease/(increase) in items in the course of collection 547 (327) Increase in treasury and other eligible bills (1,323) (6,796) Increase in loans and advances to banks (2,756) (4,785) Increase in loans and advances to customers (32,670) (18,038) Decrease in securities 1,799 760 Decrease/(increase) in other assets 615 (3,327) (Decrease)/increase in items in the course of transmission (851) 402 Increase in deposits by banks 14,512 4,604 Increase in customer accounts 19,383 11,584 Increase in debt securities in issue 3,269 11,262 Increase in other liabilities 2,597 4,271 Effects of other accruals and other non-cash movements 1,156 97 ---------- ---------- Net cash inflow from operating activities 13,737 7,287 ---------- ---------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 13. Litigation Members of the Group are engaged in litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of business. The directors, after reviewing the actual, threatened and known potential claims against Group undertakings and taking into account the advice of the relevant legal advisers, are satisfied that the outcome of these claims will not have a material adverse effect on the net assets of the Group. 14. 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 2002 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 Sections 237(2) or (3) of the Act. 15. Form 20-F The Group will be producing a single document which combines its UK Report and Accounts and the Annual Report on Form 20-F. The combined document will be despatched to shareholders and filed with the Securities and Exchange Commission in the US in March 2003. 16. Recent developments On 30 January 2003, RBS redeemed the entire issue of the US$200 million Series B and US$400 million Series C non-cumulative preference shares of US$0.01. 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 geographical area and type of customer. 2002 2001 Â£m Â£m UK Central and local government 1,521 706 Manufacturing 7,386 7,401 Construction 3,468 3,018 Finance 12,396 8,517 Service industries and business activities 26,022 25,033 Agriculture, forestry and fishing 2,463 2,391 Property 15,939 12,274 Individuals - home mortgages 42,101 36,976 - other 22,255 20,076 Finance leases and instalment credit 11,723 11,258 ----------- ----------- 145,274 127,650 Overseas residents 23,657 24,164 ----------- ----------- Total UK offices 168,931 151,814 ----------- ----------- Overseas US 41,008 29,230 Rest of the world 17,305 13,093 ----------- ----------- Total overseas offices 58,313 42,323 ----------- ----------- Loans and advances to customers - gross 227,244 194,137 Provisions for bad and doubtful debts (3,920) (3,645) ----------- ----------- Total loans and advances to customers 223,324 190,492 ----------- ----------- 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 Â£414.4 billion (2001 - Â£371.6 billion). None of these countries have experienced repayment difficulties which have required refinancing of outstanding debt. 2002 2001 Â£m Â£m US 11,658 8,901 Germany 10,464 7,969 Cayman Islands 6,897 5,501 Netherlands 6,318 4,596 France 5,971 4,930 Italy 3,867 1,848 Japan 3,156 2,365 Switzerland * 3,646 * less than 0.75% of Group total assets (including acceptances). Selected country exposures The Group devotes particular attention to exposures to countries that have been adversely affected by global economic pressure. The table below details exposures to countries that are sometimes considered as having a higher credit and foreign exchange risk. 2002 2001 Bank Non-bank Total Bank Non-bank Total Â£m Â£m Â£m Â£m Â£m Â£m Argentina 30 15 45 39 12 51 Brazil - 14 14 158 22 180 Mexico 66 91 157 108 62 170 Turkey 25 65 90 38 102 140 Venezuela - 115 115 - 99 99 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 incorporate estimates and are stated before deducting the value of security held or related provisions. 2002 2001 Â£m Â£m Loans accounted for on a non-accrual basis (2): Domestic 3,077 2,829 Foreign 1,098 737 -------- -------- 4,175 3,566 -------- -------- Accruing loans which are contractually overdue 90 days or more as to principal or interest (3): Domestic 363 643 Foreign 129 142 -------- -------- 492 785 -------- -------- Loans not included above which are 'troubled debt restructurings' as defined by the SEC: Domestic 144 26 Foreign 60 116 -------- -------- 204 142 -------- -------- Total risk elements in lending 4,871 4,493 -------- -------- Closing provisions for bad and doubtful debts as a % of total risk elements in lending 81% 81% -------- -------- Risk elements in lending as a % of gross loans and advances to customers 2.14% 2.31% -------- -------- Potential problem loans (4) Domestic 639 801 Foreign 544 279 -------- -------- 1,183 1,080 -------- -------- 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, principally Citizens, 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 2002 2001 Specific General Specific General Â£m Â£m Â£m Â£m Provisions at beginning of year Domestic 2,123 344 2,034 336 Foreign 916 270 551 232 -------- -------- -------- -------- 3,039 614 2,585 568 -------- -------- -------- -------- Currency translation and other adjustments Domestic 11 (15) 4 - Foreign (56) (2) 10 3 -------- -------- -------- -------- (45) (17) 14 3 -------- -------- -------- -------- Acquisitions of businesses Domestic 11 - 83 - Foreign 12 - 138 33 -------- --------- -------- -------- 23 - 221 33 -------- -------- -------- -------- Amounts written-off Domestic (743) - (645) - Foreign (293) - (190) - -------- -------- -------- -------- (1,036) (835) - -------- -------- -------- -------- Recoveries of amounts written-off in previous periods Domestic 37 - 54 - Foreign 26 - 26 - -------- -------- -------- -------- 63 - 80 - -------- -------- -------- -------- Charged to profit and loss account Domestic 793 20 593 8 Foreign 493 (20) 381 2 -------- -------- -------- -------- 1,286 - 974 10 -------- -------- -------- -------- Provisions at end of year (2) Domestic 2,232 349 2,123 344 Foreign 1,098 248 916 270 -------- -------- -------- -------- 3,330 597 3,039 614 -------- -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY (continued) Provisions for bad and doubtful debts (continued) 2002 2001 Â£m Â£m Gross loans and advances to customers Domestic 145,274 127,650 Foreign 81,970 66,487 ------------ ----------- 227,244 194,137 ----------- ----------- Closing customer provisions as a % of gross loans and advances to customers (3) Domestic 1.78% 1.93% Foreign 1.63% 1.77% Total 1.73% 1.88% Customer charge against profit as a % of gross loans and advances to customers Domestic 0.56% 0.47% Foreign 0.58% 0.58% Total 0.57% 0.51% 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 Â£7 million (2001 - Â£8 million). (3) Closing customer provisions exclude closing 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 Â£m Â£m Â£m Â£m Trading 2002 8.4 11.8 5.6 9.1 2001 8.2 15.6 7.7 11.3 Treasury 2002 6.5 6.7 3.5 4.4 2001 4.6 5.9 3.8 4.5 The Group's VaR should be interpreted in light of the limitations of the methodologies used. These limitations include: â€¢ 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. â€¢ 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. â€¢ VaR using a 95% confidence level does not reflect the extent of potential losses beyond that percentile. â€¢ 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 indicted 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 2002 2001 Capital base (Â£m) Ordinary shareholders' funds and minority 11,169 9,318 interests Preference shares and tax deductible 5,986 5,734 securities ----------- ----------- Tier 1 capital 17,155 15,052 Tier 2 capital 13,271 11,734 Tier 3 capital - 172 ---------- ---------- 30,426 26,958 Less: investments in insurance companies, associated undertakings and other supervisory (3,146) (2,698) deductions ---------- ----------- 27,280 24,260 ----------- ----------- Weighted risk assets (Â£m) Banking book - on-balance sheet 193,800 176,000 - off-balance sheet 28,700 22,000 Trading book 11,500 12,500 ----------- ----------- 234,000 210,500 ----------- ----------- Risk asset ratio - tier 1 7.3% 7.1% - total 11.7% 11.5% Share price Â£14.88 Â£16.72 Number of shares in issue 2,901m 2,860m Market capitalisation Â£43.2bn Â£47.8bn Net asset value per ordinary share Â£8.08 Â£7.79* Employee numbers 'Corporate Banking and Financial Markets 18,500 14,400 ** Retail Banking 30,100 30,500 Retail Direct 7,000 6,200 Manufacturing 19,800 20,700 Wealth Management 6,500 7,100 Direct Line Group 10,500 9,200 Ulster Bank** 4,400 4,500 ** Citizens 13,300 11,500 Centre 1,700 1,600 ---------- ---------- Group total 111,800 105,700 Cumulative effect of acquisitions since January 2001: - Corporate Banking and Financial Markets 4,100 300 - Retail Direct 200 - - Direct Line Group 900 700 - Citizens 5,200 3,800 ------------ ------------ Underlying employee numbers 101,400 100,900 ------------ ------------ * Restated to reflect the implementation of FRS 19. ** Restated to reflect the transfer of Ulster Bank's leasing business to Corporate Banking and Financial Markets. 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. 2002 2001 Consolidated statement of income Â£m Â£m Profit attributable to ordinary shareholders - UK GAAP 1,971 1,868 Adjustments in respect of: Acquisition accounting - (113) Amortisation of goodwill 681 (48) Property depreciation (18) (13) Property disposals - 1 Loan fees and costs (72) (95) Pension costs (58) 242 Long-term assurance business (37) (25) Leasing (71) (68) Derivatives and hedging 770 (125) Software development costs 283 442 Tax effect on the above adjustments (261) (44) Deferred taxation (80) 40 ---------- ---------- Net income available for ordinary shareholders - US GAAP 3,108 2,062 ---------- ---------- Dividend per ordinary share - paid during the year 39.7p 34.5p ---------- ---------- 2002 2001 (restated) Consolidated shareholders' equity Â£m Â£m Shareholders' funds - UK GAAP 27,052 26,668 Adjustments in respect of: Acquisition accounting 418 418 Goodwill 1,541 860 Property revaluation and depreciation (277) (292) Proposed dividend 899 772 Loan fees and costs (241) (169) Pension costs 342 400 Recognition of pension scheme minimum liability (3,568) - Long-term assurance business (121) (84) Leasing (165) (94) Available-for-sale securities 284 272 Derivatives and hedging 535 (112) Perpetual regulatory tier one securities 751 835 Software development costs 960 677 Tax effect on cumulative UK/US GAAP adjustments (461) (200) Tax effect on other comprehensive income 1,013 (74) Deferred taxation (34) 46 ---------- ---------- Shareholders' equity - US GAAP 28,928 29,923 ---------- ---------- As explained on page 32, following the issuance of UITF 33, the Group's perpetual regulatory tier one securities are classified as subordinated liabilities rather than shareholders' funds under UK GAAP. This change does not affect their classification as shareholders' equity under US GAAP. 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 effect of adjustments made to net income and shareholders' equity were Â£431 billion (2001 - Â£387 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' and similar expressions or variations on such expressions and sections such as 'Chairman's comments', 'Group Chief Executive's review', 'Financial review - Integration and Outlook' and 'Integration information'. 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 7427 9760 0131 523 2033 Fred Watt Group Finance Director 020 7427 9760 0131 523 2028 Alan Waite Head of Group Corporate Finance 020 7427 9574 27 February 2003 END This information is provided by RNS The company news service from the London Stock Exchange

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