Final Results - Part 1

Royal Bank of Scotland Group PLC 28 February 2008 Annual Results 2007 Annual Results for the year ended 31 December 2007 THE ROYAL BANK OF SCOTLAND GROUP plc CONTENTS Page Forward-looking statements 2 Acquisition of ABN AMRO 3 2007 highlights 4 2007 results summary - Group including ABN AMRO 5 2007 results summary - excluding ABN AMRO 6 Group Chief Executive's review 7 Summary consolidated income statement 12 Financial review 13 Description of business 16 Divisional performance 18 Corporate Markets 19 - Global Banking & Markets 20 - UK Corporate Banking 22 Retail Markets 23 - Retail 24 - Wealth Management 26 Ulster Bank 27 Citizens 28 RBS Insurance 30 Manufacturing 32 Central items 33 ABN AMRO 34 Average balance sheet - excluding ABN AMRO 36 Average balance sheet - including ABN AMRO 37 STATUTORY RESULTS 38 Condensed consolidated income statement 39 Condensed consolidated balance sheet 40 Overview of condensed consolidated balance sheet 41 Condensed consolidated statement of recognised income and expense 43 Condensed consolidated cash flow statement 44 Notes 45 Analysis of income, expenses and impairment losses 53 Regulatory ratios 54 Asset quality Analysis of loans and advances to customers 55 Risk elements in lending 56 Credit market exposures 57 Fair value - financial instruments 59 Derivatives 60 Market risk 61 Other information 63 Restatements 64 Financial calendar 65 Contacts 65 THE ROYAL BANK OF SCOTLAND GROUP plc FORWARD-LOOKING STATEMENTS Certain sections in this document contain 'forward-looking statements' as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words 'expect', 'estimate', 'project', 'anticipate', 'should', 'intend', 'plan', 'probability', 'risk', 'Value-at-Risk ('VaR')', 'target', 'goal', 'objective', 'will', 'endeavour', 'outlook', 'optimistic', 'prospects' and similar expressions or variations on such expressions and sections such as 'Group Chief Executive's review' and 'Financial review'. In particular, this document includes forward-looking statements relating, but not limited, to the Group's potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. Such statements are subject to risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G-7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing. The forward-looking statements contained in this document speak only as of the date of this report, and the Group does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. THE ROYAL BANK OF SCOTLAND GROUP plc Acquisition of ABN AMRO On 17 October 2007, RFS Holdings B.V. ('RFS Holdings''), a company jointly owned by RBS, Fortis N.V., Fortis SA/NV ('Fortis') and Banco Santander S.A. ('Santander') (together, the 'Consortium Banks'') and controlled by RBS, completed the acquisition of ABN AMRO Holding N.V. ('ABN AMRO''). In due course, RFS Holdings will implement an orderly separation of the business units of ABN AMRO with RBS retaining the following ABN AMRO business units: â€¢ Continuing businesses of Business Unit North America; â€¢ Business Unit Global Clients and wholesale clients in the Netherlands (including former Dutch wholesale clients) and Latin America (excluding Brazil); â€¢ Business Unit Asia (excluding Saudi Hollandi); and â€¢ Business Unit Europe (excluding Antonveneta). Certain other assets will continue to be shared by the Consortium Banks. Statutory results RFS Holdings is jointly owned by the Consortium Banks. It is controlled by RBS and is therefore fully consolidated in its financial statements. Consequently, the statutory results of the RBS Group for the year ended 31 December 2007 include the results of ABN AMRO for the period from 17 October 2007 to 31 December 2007. The interests of Fortis and Santander are included in minority interests. Presentation of ABN AMRO The financial review in this Company Announcement focuses on RBS excluding ABN AMRO in order to provide a meaningful comparison with the prior year. The performance of ABN AMRO for the period from 17 October 2007 to 31 December 2007 is discussed separately. THE ROYAL BANK OF SCOTLAND GROUP plc 2007 HIGHLIGHTS RBS GROUP - including ABN AMRO (1) â€¢ Group operating profit(2) up 9% to Â£10,282 million â€¢ Profit after tax up 19% to Â£7,712 million â€¢ Adjusted earnings per ordinary share up 18% to 78.7p â€¢ Total dividend up 10% to 33.2p â€¢ Tier 1 capital ratio 7.3% â€¢ Total capital ratio 11.2% â€¢ Underlying performance of retained ABN AMRO businesses in line with expectations â€¢ Synergies increased by 33% to â‚¬2.3 billion â€¢ Improved financial returns and earnings accretion RBS - excluding ABN AMRO â€¢ Operating profit up 9% to Â£10,298 million â€¢ Profit after tax up 22% to Â£7,940 million â€¢ Adjusted earnings per ordinary share up 22% to 81.7p â€¢ Income up 3% to Â£28,864 million â€¢ Cost:income ratio down to 40.7% from 42.1% â€¢ Impairment losses declined to 0.40% of loans and advances from 0.46% in 2006 â€¢ Average customer deposits up 11% â€¢ Average customer lending up 10% â€¢ Net interest margin 2.46%, compared with 2.47% in 2006 â€¢ Adjusted return on equity 20.4%, up from 19.0% (1) Includes ABN AMRO from date of acquisition, 17 October 2007 (2) Profit before tax, purchased intangibles amortisation and integration costs THE ROYAL BANK OF SCOTLAND GROUP plc 2007 RESULTS SUMMARY - GROUP INCLUDING ABN AMRO * 2007 2006 Increase Â£m Â£m Â£m Total income 31,115 28,002 3,113 _______ _______ _____ Operating expenses (1) 14,053 12,252 1,801 _______ _______ _____ Operating profit before impairment losses (1) 12,410 11,292 1,118 _______ _______ _____ Group operating profit (2) 10,282 9,414 868 _______ _______ _____ Purchased intangibles amortisation 274 94 180 _______ _______ _____ Integration costs 108 134 (26) _______ _______ _____ Profit before tax 9,900 9,186 714 _______ _______ _____ Basic earnings per ordinary share 76.4p 64.9p 11.5p _______ _______ _____ Adjusted earnings per ordinary share (3) 78.7p 66.7p 12.0p _______ _______ _____ * includes ABN AMRO from date of acquisition (1) excluding purchased intangibles amortisation and integration costs. (2) profit before tax, purchased intangibles amortisation and integration costs. (3) adjusted earnings per ordinary share is based on earnings adjusted for purchased intangibles amortisation and integration costs. Sir Fred Goodwin, Group Chief Executive, said: 'It is tempting to think of the task before us in 2008 only in terms of the integration of ABN AMRO, and delivery of the substantial cost and revenue synergies. To do so, however, would overlook the real opportunities for the enlarged Group. Whilst the future seems as difficult as ever to predict, it is clear that we enter 2008 with real momentum behind our organic growth, and with our product range, distribution capabilities and customer franchises materially enhanced. Coupled with our greater presence in the world's largest and fastest growing economies, there is much to be done, but a confidence that it will be, to the benefit of our shareholders, our customers and our staff.' THE ROYAL BANK OF SCOTLAND GROUP plc 2007 RESULTS SUMMARY - EXCLUDING ABN AMRO 2007 2006 Increase Â£m Â£m Â£m Total income 28,864 28,002 862 _______ _______ _____ Operating expenses (1) 12,173 12,252 (79) _______ _______ _____ Operating profit before impairment losses (1) 12,163 11,292 871 _______ _______ _____ Group operating profit (2) 10,298 9,414 884 _______ _______ _____ Purchased intangibles amortisation 124 94 30 _______ _______ _____ Integration costs 108 134 (26) _______ _______ _____ Profit before tax 10,066 9,186 880 _______ _______ _____ Cost:income ratio (3) 40.7% 42.1% _______ _______ (1) excluding purchased intangibles amortisation and integration costs. (2) profit before tax, purchased intangibles amortisation and integration costs. (3) the cost:income ratio is based on total income and operating expenses as defined in (1) above, and after netting operating lease depreciation against rental income. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW 2007 for The Royal Bank of Scotland Group was defined by another strong operating performance and by the acquisition of ABN AMRO. The diversity and quality of our business platform enabled us to deliver good financial results, with operating profit for the enlarged RBS Group rising by 9% to Â£10,282 million. Adjusted earnings per share increased by 18% to 78.7p. Our earnings momentum remained powerful, notwithstanding the impact of challenging credit market conditions in the second half of the year. Our Group headline results reflect the inclusion of the whole of ABN AMRO, whose results from 17 October 2007 are consolidated in our statutory accounts. ABN AMRO has enhanced the diversity of the Group, giving us a pre-eminent position in global corporate banking and providing us with new capabilities in transaction banking while presenting additional retail and commercial growth opportunities in Asia and the Middle-East. RBS excluding ABN AMRO Our operating performance in 2007 is best seen in the results of RBS excluding the 76 days of ownership of ABN AMRO. We continued our strong momentum, with total income increasing by 3% to Â£28,864 million and operating profit by 9% to Â£10,298 million. Adjusted earnings per share rose by 22% to 81.7p, benefiting from a lower than usual tax rate of 21%. These results have been held back by the second half credit market deterioration, which led our Global Banking & Markets division to incur write-downs on its US mortgage-related and leveraged finance exposures. The valuations of our credit market positions have been stable since our trading update in December. However, the weakening credit profile of some financial guarantors has caused us to mark down the value of our positions with these counterparties. During 2007 we also made Â£119 million of goodwill payments to customers in respect of current account fees. After deducting costs and adjusting for fair value gains on liabilities, these one-off elements reduced RBS's profit in 2007 by Â£1,163 million. We also realised good gains on the planned disposal of a number of non-strategic assets, including Southern Water. The gains increased profit by Â£1,187 million after deducting costs and fees, almost exactly offsetting the effects of the negative one-offs, so the headline operating profit reflects our underlying performance. Our businesses demonstrated the value of diversification, delivering good growth in our major customer bases in corporate, commercial and retail banking. We achieved particularly strong performances in UK Corporate Banking, Retail, Ulster and Wealth Management. Total RBS income rose by 3% to Â£28,864 million, while costs were reduced by 1% to Â£12,173 million, resulting in a further improvement in the cost:income ratio to 40.7%. Against a weaker economic backdrop in the US, Citizens, whilst performing well relative to its peers, experienced testing conditions, while otherwise good results in Insurance were set back by the exceptionally severe flooding that affected many of our UK customers in June and July. Overall credit metrics remained very strong, and impairment losses declined by 1% to Â£1,865 million. As a result of our cautious approach to the UK personal credit market, in particular to the direct loans market, we achieved a further reduction in UK personal impairments, and the credit quality of our UK corporate customers remained stable in 2007. We have taken active steps to manage our risk profile and ensure that our lending portfolio remains appropriately positioned, nowhere more so than in the US, where the overall quality of our book remains high but we have experienced a reversion from the low levels of impairment seen in recent years. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) Our Businesses In 2007 we benefited from our diverse income streams and the quality of our franchises. We were able to use our platform to increase activity in attractive markets, while moving away from areas where the risk:return equation was less positive, ensuring the Group's underlying earnings momentum remained strong. Global Banking & Markets enjoyed another strong first half performance and took full advantage of the market volatility in the second half to deliver excellent performances in interest rate and currency trading. Inevitably, the second half witnessed significantly lower origination volumes in credit markets as well as write-downs on its sub-prime related exposures, leaving operating profit for the year at Â£3,687 million, 2% lower than 2006's record figure. UK Corporate Banking had another successful year, with operating profit up 11% to Â£1,961 million. By continuing to invest in service quality we have now achieved market-leading customer satisfaction scores, helping us to increase customer numbers by 4%. Retail delivered a strong performance, increasing operating profit by 10% to Â£2,470 million. We achieved strong growth in savings and investment products while maintaining a cautious approach to personal credit. Earnings momentum built over the course of the year, with a strong second half reflecting good growth in savings balances and a further reduction in unsecured credit defaults. Our success in developing our franchise is built on customer satisfaction, and on this metric RBS and NatWest maintained their lead over the other major High Street banks. Wealth Management's growth trajectory remains very strong, with operating profit increasing by 30% to Â£413 million as we continued to expand Coutts UK's regional franchise and achieved significant growth in both customer numbers and income in the Asia-Pacific region. Our growth opportunities in Asia-Pacific are significantly enhanced as a result of the Group's increased presence in the region. Ulster Bank has maintained its strong growth record, notwithstanding a moderation in the pace of Ireland's economic expansion, with operating profit rising by 22% to Â£513 million. We have continued to invest in the good opportunities for future growth presented by the Irish banking market. Citizens has continued to develop its franchise, increasing its consumer banking customer base by 2% and achieving good results in its growing corporate and commercial banking operations. Market conditions remain difficult, however, and we continued to respond to challenging income prospects with tight cost control. The credit quality of the Citizens portfolio is high, although we have seen impairment losses reverting from the very low levels seen in recent years, resulting in a 9% decrease in operating profit to $2,647 million. With the dollar weaker over the year, this decline was more marked in sterling terms. In RBS Insurance, we have built on our strong position as the UK's leading personal lines insurer by further sharpening our focus on selective underwriting of the more profitable segments, reducing volumes in some less profitable segments. Results were held back by the Â£274 million impact of the floods that resulted from the UK's wettest summer for 250 years, and excluding this, operating profit increased by 28%. Including the adverse effects of the floods, operating profit declined by 9% to Â£683 million. Manufacturing is central to the way we operate, underpinning our determination to deliver efficient, consistent and reliable service to our customers while deriving scale benefits achievable from sharing infrastructure, processes and services across our businesses. We held costs to Â£2,914 million, just 1% higher than in 2006, despite continued investment in technology and property to support increased transaction volumes and the development of our business. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) ABN AMRO The acquisition of ABN AMRO gives us the ability to accelerate our existing strategies for growth outside the UK, particularly in rapidly expanding markets, while adding complementary product capabilities and customer franchises to our portfolio of businesses. As a result of the acquisition, our Global Banking & Markets division can lay claim to be the pre-eminent corporate bank globally for large corporates, financial institutions and governments. It has top 5 rankings across a broad range of products, extended global reach and leading customer franchises in the UK and Continental Europe and top 5 customer franchises in the US and Asia-Pacific. Underpinning this position is the global transaction banking strength of the enlarged Group, which will deepen customer relationships and provide further opportunities to cross-sell GBM's strong product capabilities. ABN AMRO is one of a small number of banks with global scale and competence in international payments, trade finance and cash management and it would have been extremely difficult to develop an equivalent business organically. Similarly, while we have over recent years sought to develop our activities in fast-growing markets in Asia, the Middle-East and Eastern Europe and have achieved strong growth in GBM and Wealth Management, ABN AMRO now significantly expands our presence in many new markets. The integration has made a strong start, and we have identified additional cost savings and revenue benefits over and above those we originally anticipated. We now expect to achieve cost savings totalling â‚¬1,596 million in three years, 21% more than we originally indicated. We have identified another â‚¬100m of net revenue benefits in Global Banking & Markets and â‚¬200m in the International Retail businesses, bringing the total for net revenue benefits we expect to achieve in three years to â‚¬688 million. All told, integration benefits are now expected to total â‚¬2.3 billion, compared with our original estimate of â‚¬1.7 billion. Applying these increased synergies to the financial targets originally announced in our offer would have yielded increased accretion in adjusted earnings per share of 9%, a return on investment in 2010 of 16% and an internal rate of return of 18%. We completed our transition plans on schedule and now have the support of the relevant staff bodies for the plan. We expect to make further rapid progress in separating businesses over the course of this year. After reviewing the assets acquired and considering the practicalities and economics of separating them, we transferred the Global Clients activities in Brazil to Santander for a consideration of â‚¬750 million, and there may be further smaller adjustments to the original allocation between the Consortium partners. For 2007 as a whole, the ABN AMRO businesses that will be retained by RBS made an underlying operating profit of Â£439 million. We have concluded our initial review of the ABN AMRO balance sheet and applying RBS valuation methodologies have recorded a reduction of Â£978 million in the carrying value of financial instruments we acquired. While credit market activities reflected the prevailing market conditions, equities, currencies and rates all achieved good growth. Transaction banking maintained good momentum and the Asian retail operations achieved very strong growth. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) Capital The Group's Tier 1 capital ratio at 31 December was 7.3% and our total capital ratio 11.2%. We remain within our target ranges of 7%-8% for Tier 1 and 11% to 12% for total capital. Our core Tier 1 ratio was 4.5% at year end. At the time of the bid for ABN AMRO we indicated that it was our intention to continue to rebuild our capital ratios and revert to a preference capital content in the range 25% to 30%. We remain committed to this goal, and the improved financial returns now expected on the acquisition will help to accelerate delivery of the Group's capital regeneration commitments. From January 1 2008 the Basel II capital framework came into effect in many of the key markets in which the Group operates, with the notable exception of the US. We have received approval from the Financial Services Authority to adopt the Advanced Internal Ratings Based approach to calculating capital requirements for the majority of our businesses, placing us among the small number of banks whose risk systems and approaches have achieved the advanced standard for credit - the most sophisticated available under Basel II. Our reported capital ratios are expected to be similar to their Basel I equivalents. The Board is recommending a final dividend of 23.1p, making a total of 33.2p for the full year, an increase of 10%. This represents a payout ratio of 42%. Group structure RBS's organisational architecture has remained largely unchanged since 2000, but it now needs to evolve to recognise our presence in over 50 countries and to facilitate the integration and operation of our expanded footprint. This new organisational structure will give us the right framework for managing the enlarged Group in a way that fully capitalises on the enhanced range of attractive growth opportunities now available to us. Some of our businesses can best serve our customers' needs by organising themselves on a global basis, while others are best managed with a more regional focus. We have therefore established Global Markets, which is made up of two divisions, Global Banking & Markets (GBM) and Global Transaction Services (GTS). The first of these corresponds largely to the existing GBM, enhanced by the related product capabilities and customer franchises of ABN AMRO. GTS will combine ABN AMRO's world class capability in international payments with our substantial existing corporate transaction banking and merchant acquiring activities. This new division ranks among the top five payments businesses in the world with pro forma operating profit of approximately Â£1.6 billion in 2007. Both GTS and GBM will report to Johnny Cameron as Chairman, Global Markets. The remainder of our banking franchises have more distinctively national or regional characteristics and it makes sense to continue to manage them on this basis. We are now represented in an expanded range of countries, and in order to ensure effective coordination and control we have regrouped our retail and commercial banking activities into four regional divisions: UK Retail and Commercial Banking, US Retail and Commercial Banking, Europe and Middle East Retail and Commercial Banking, and Asia Retail and Commercial Banking. Gordon Pell will oversee these divisions as Chairman, Regional Markets. RBS Insurance is a distinctive business and will retain its existing structure and strategy. We will maintain and build on the Group's Manufacturing model, which has proved so effective in driving efficiency in our UK activities, and will now extend this across the Group globally, with Ron Teerlink moving from his current role at ABN AMRO to become Chief Executive, Group Manufacturing. Provisional pro forma financials for the Group under the revised divisional structure are set out in a separate document. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) Outlook It is tempting to think of the task before us in 2008 only in terms of the integration of ABN AMRO, and delivery of the substantial cost and revenue synergies. To do so, however, would overlook the real opportunities for the enlarged Group. Whilst the future seems as difficult as ever to predict, it is clear that we enter 2008 with real momentum behind our organic growth, and with our product range, distribution capabilities and customer franchises materially enhanced. Coupled with our greater presence in the world's largest and fastest growing economies, there is much to be done, but a confidence that it will be, to the benefit of our shareholders, our customers and our staff. Sir Fred Goodwin Group Chief Executive THE ROYAL BANK OF SCOTLAND GROUP plc SUMMARY CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 In the income statement set out below, amortisation of purchased intangible assets and integration costs are shown separately. In the statutory income statement on page 39, these items are included in operating expenses. *Group including Excluding ABN AMRO ABN AMRO 2007 2007 2006 Â£m Â£m Â£m Net interest income 12,668 11,377 10,596 _______ _______ _______ Non-interest income (excluding insurance net 12,338 11,505 11,433 premium income) Insurance net premium income 6,109 5,982 5,973 _______ _______ _______ Non-interest income 18,447 17,487 17,406 _______ _______ _______ Total income 31,115 28,864 28,002 Operating expenses 14,053 12,173 12,252 _______ _______ _______ Profit before other operating charges 17,062 16,691 15,750 Insurance net claims 4,652 4,528 4,458 _______ _______ _______ Operating profit before impairment losses 12,410 12,163 11,292 Impairment losses 2,128 1,865 1,878 _______ _______ _______ Profit before tax, purchased intangibles 10,282 10,298 9,414 amortisation and integration costs Amortisation of purchased intangible assets 274 124 94 Integration costs 108 108 134 _______ _______ _______ Profit before tax 9,900 10,066 9,186 Tax 2,052 2,126 2,689 Loss from discontinued operations, net of tax 136 - - _______ _______ _______ Profit for the year 7,712 7,940 6,497 Minority interests 163 149 104 Other owners 246 246 191 _______ _______ _______ Profit attributable to ordinary shareholders 7,303 7,545 6,202 _______ _______ _______ Basic earnings per ordinary share (Note 4) 76.4p 64.9p _______ _______ Adjusted earnings per ordinary share (Note 4) 78.7p 66.7p _______ _______ * includes ABN AMRO from date of acquisition. THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL REVIEW The following discussion is based on the results of the Group excluding the contribution of ABN AMRO, which is discussed separately on page 35. GROUP (excluding ABN AMRO) Profit Profit before tax was up 10%, from Â£9,186 million to Â£10,066 million. Group operating profit increased by 9% or Â£884 million, from Â£9,414 million to Â£10,298 million. Total income The Group achieved strong growth in income during 2007. Total income was up 3% or Â£862 million to Â£28,864 million, notwithstanding the significant impact of the developments in global credit markets in the second half of 2007. Net interest income increased by 7% to Â£11,377 million and represents 39% of total income (2006 - 38%). Average loans and advances to customers and average customer deposits grew by 10% and 11% respectively. Non-interest income increased by Â£81 million to Â£17,487 million and represents 61% of total income (2006 - 62%). Net interest margin The Group's net interest margin at 2.46% was down marginally from 2.47% in 2006. Operating expenses Operating expenses, excluding purchased intangibles amortisation and integration costs, decreased by 1% to Â£12,173 million. Cost:income ratio The Group's cost:income ratio was 40.7% compared with 42.1% in 2006. Net insurance claims Bancassurance and general insurance claims, after reinsurance, increased by 2% to Â£4,528 million reflecting adverse weather conditions in the summer of 2007. Excluding the impact of the floods in the summer, net insurance claims decreased by 7%. Impairment losses Impairment losses fell 1% to Â£1,865 million, compared with Â£1,878 million in 2006. Risk elements in lending and potential problem loans represented 1.49% of gross loans and advances to customers excluding reverse repos at 31 December 2007 (2006 - 1.57%). Provision coverage of risk elements in lending and potential problem loans was 61% (2006 - 62%). Integration Integration costs were Â£108 million compared with Â£134 million in 2006. THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL REVIEW (continued) Taxation The effective tax rate for 2007 was 21.1% (2006 - 29.3%). The headline rate is lower than the standard rate of UK corporation tax of 30% principally due to certain non-taxable capital gains and changes to deferred tax balances following the change in rate of corporation tax. Earnings Basic earnings per ordinary share increased by 23%, from 64.9p to 79.8p. Earnings per ordinary share adjusted for purchased intangibles amortisation and integration costs increased by 22%, from 66.7p to 81.7p. Restatements Divisional results for 2006 have been restated to reflect transfers of businesses between divisions in 2007. These changes do not affect the Group's results. A divisional analysis of these restatements is set out on page 64. The number of ordinary shares in issue and per share data for the prior year have been restated to reflect the bonus issue in May 2007. THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL REVIEW (continued) GROUP - INCLUDING ABN AMRO Capital Capital ratios at 31 December 2007 were 7.3% (Tier 1) and 11.2% (Total). Profitability The adjusted after-tax return on ordinary equity, which is based on profit attributable to ordinary shareholders before purchased intangibles amortisation and integration costs, and average ordinary equity, was 19.9% compared with 19.0% in 2006. Bonus issue In May 2007, the Group capitalised Â£1,576 million of its share premium account by way of a bonus issue of two new ordinary shares of 25p each for every one held. Dividends A final dividend of 23.1p per ordinary share is recommended, giving a total dividend for the year of 33.2p, an increase of 10%. If approved, the final dividend will be paid on 6 June 2008 to shareholders registered on 7 March 2008. The total dividend is covered 2.4 times by earnings before purchased intangibles amortisation and integration costs. THE ROYAL BANK OF SCOTLAND GROUP plc DESCRIPTION OF BUSINESS Corporate Markets is focused on the provision of debt and risk management services to medium and large businesses and financial institutions in the UK and around the world. Its activities have been organised into two businesses, Global Banking & Markets and UK Corporate Banking, in order to enhance our focus on the distinct needs of these two customer segments. Global Banking & Markets is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt financing, risk management and investment services to its customers. UK Corporate Banking is the largest provider of banking, finance and risk management services to UK corporate customers. Through its network of relationship managers across the country it distributes the full range of Corporate Markets' products and services to companies. Retail Markets leads the co-ordination and delivery of our multi-brand retail strategy across our product range and comprises Retail and Wealth Management. Retail comprises both The Royal Bank of Scotland and NatWest retail brands. It offers a full range of banking products and related financial services to the personal, premium and small business (SMEs) markets through the largest network of branches and ATMs in the UK, as well as through telephone and internet banking. Retail is the UK market leader in SME banking. Retail issues a comprehensive range of credit and charge cards and other financial products through The Royal Bank of Scotland, NatWest and other brands, including MINT, First Active UK and Tesco Personal Finance. It is the leading merchant acquirer in Europe and ranks 3rd globally. Wealth Management provides private banking and investment services to its global clients through Coutts Group, Adam & Company, The Royal Bank of Scotland International and NatWest Offshore. Ulster Bank, including First Active, provides a comprehensive range of retail and wholesale financial services in the Republic of Ireland and Northern Ireland. Retail Banking has a network of branches throughout Ireland and operates in the personal, commercial and wealth management sectors. Corporate Markets provides a wide range of services in the corporate and institutional markets. RBS's European Consumer Finance ('ECF') activities, previously part of RBS Retail Markets, are now managed within Ulster Bank. ECF provides consumer finance products, particularly card-based revolving credits and fixed-term loans, in Germany and the Benelux countries. Citizens is engaged in retail and corporate banking activities through its branch network in 13 states in the United States and through non-branch offices in other states. Citizens was ranked the 9th largest commercial banking organisation in the US based on deposits as at 30 September 2007. Citizens Financial Group includes two banks, RBS Citizens, NA and Citizens Bank of Pennsylvania, which operate under the Citizens brand in Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and under the Charter One brand in Illinois, Indiana, Michigan and Ohio. Citizens also includes RBS Lynk, our US merchant acquiring business, and Kroger Personal Finance, our credit card joint venture with the second largest US supermarket group. RBS Insurance sells and underwrites retail and SME insurance over the telephone and internet, as well as through brokers and partnerships. Direct Line, Churchill and Privilege sell general insurance products direct to the customer. Through its International Division, RBS Insurance sells general insurance, mainly motor, in Spain, Germany and Italy. The Intermediary and Broker Division sells general insurance products through independent brokers. THE ROYAL BANK OF SCOTLAND GROUP plc DESCRIPTION OF BUSINESS (continued) Manufacturing supports the customer-facing businesses and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services. Manufacturing drives efficiencies and supports income growth across multiple brands and channels by using a single, scalable platform and common processes wherever possible. It also leverages the Group's purchasing power and has become the centre of excellence for managing large-scale and complex change. The expenditure incurred by Manufacturing relates to costs principally in respect of the Group's banking and insurance operations in the UK and Ireland. These costs reflect activities that are shared between the various customer-facing divisions and consequently cannot be directly attributed to individual divisions. Instead, the Group monitors and controls each of its customer-facing divisions on revenue generation and direct costs whilst in Manufacturing such control is exercised through appropriate efficiency measures and targets. For financial reporting purposes the Manufacturing costs have been allocated to the relevant customer-facing divisions on a basis management considers to be reasonable. The Centre comprises group and corporate functions, such as capital raising, finance, risk management, legal, communications and human resources. The Centre manages the Group's capital requirements and Group-wide regulatory projects and provides services to the operating divisions. ABN AMRO is a major international banking group with a leading position in international payments and a strong investment banking franchise with particular strengths in emerging markets, as well as offering a range of retail and commercial banking services in Asia and the Middle East, Europe, the Netherlands, North America and Latin America. On 17 October 2007 the majority of ABN AMRO's share capital was acquired by RFS Holdings, which is in turn owned jointly by RBS, Fortis and Santander. The businesses of ABN AMRO to be retained by RBS comprise principally its global wholesale businesses and its international retail businesses in Asia, Eastern Europe and the Middle-East. THE ROYAL BANK OF SCOTLAND GROUP plc DIVISIONAL PERFORMANCE The profit before amortisation of purchased intangible assets and integration costs and after allocation of Manufacturing costs where appropriate, of each division is detailed below, and is described as 'operating profit' in the divisional analyses that follow. The allocations of Manufacturing costs are shown separately in the results for each division. 2007 2006 Increase Â£m Â£m % Corporate Markets - Global Banking & Markets 3,687 3,779 (2) - UK Corporate Banking 1,961 1,762 11 Total Corporate Markets 5,648 5,541 2 Retail Markets - Retail 2,470 2,250 10 - Wealth Management 413 318 30 Total Retail Markets 2,883 2,568 12 Ulster Bank 513 421 22 Citizens 1,323 1,582 (16) RBS Insurance 683 749 (9) Manufacturing - - - Central items (752) (1,447) 48 _______ _______ _______ Group operating profit (excluding ABN AMRO) 10,298 9,414 9 ABN AMRO (1) 128 - - Central items (144) - - _______ _______ _______ Group operating profit (including ABN AMRO) 10,282 9,414 9 _______ _______ _______ Risk-weighted assets of each division were as follows: 2007 2006 Â£bn Â£bn Corporate Markets - Global Banking & Markets 152.6 138.1 - UK Corporate Banking 104.6 93.1 Total Corporate Markets 257.2 231.2 Retail Markets - Retail 73.3 70.6 - Wealth Management 7.5 6.4 Total Retail Markets 80.8 77.0 Ulster Bank 36.0 29.7 Citizens 57.1 57.6 Other 9.5 4.8 _______ _______ 440.6 400.3 ABN AMRO 168.4 - _______ _______ 609.0 400.3 _______ _______ Note: (1) ABN AMRO excludes discontinued operations: Antonveneta, Business Unit Asset Management and Business Unit Private Equity. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE MARKETS 2007 2006 Â£m Â£m Net interest income from banking activities 4,111 3,805 Non-interest income 6,211 6,488 _______ _______ Total income 10,322 10,293 _______ _______ Direct expenses - staff costs 2,457 2,539 - other 732 628 - operating lease depreciation 684 736 _______ _______ 3,873 3,903 _______ _______ Contribution before impairment losses 6,449 6,390 Impairment losses 219 274 _______ _______ Contribution 6,230 6,116 Allocation of Manufacturing costs 582 575 _______ _______ Operating profit 5,648 5,541 _______ _______ Â£bn Â£bn Total assets* 682.1 472.4 Loans and advances to customers - gross* - banking book 221.7 181.1 - trading book 20.0 15.4 Rental assets 12.0 13.9 Customer deposits* 159.5 132.6 Risk-weighted assets 257.2 231.2 _______ _______ * excluding reverse repos and repos Corporate Markets grew operating profit in 2007 by 2% to Â£5,648 million, notwithstanding difficult conditions in global credit markets. Total income was flat at Â£10,322 million, as the credit market deterioration in the second half of the year resulted in substantial write-downs in Global Banking & Markets income, but good progress in UK Corporate Banking combined with tight expense control and declining impairments lifted profits. Average loans and advances to customers, excluding reverse repos, grew by 17% and average customer deposits (excluding repos) by 19%. The portfolio remains well diversified by counterparty, sector and geography, and the average credit grade continues to improve. Assets grew strongly outside the UK, particularly in Western Europe and Asia. Overall corporate credit conditions remained benign, and impairment losses represented 0.1% of loans and advances to customers. Risk-weighted assets rose by 11%. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE MARKETS - GLOBAL BANKING & MARKETS 2007 2006 Â£m Â£m Net interest income from banking activities 1,785 1,632 _______ _______ Net fees and commissions receivable 1,368 1,032 Trading activities 849 2,211 Income from rental assets (net of related funding costs) 679 677 Other operating income (net of related funding costs) 1,899 1,279 _______ _______ Non-interest income 4,795 5,199 _______ _______ Total income 6,580 6,831 _______ _______ Direct expenses - staff costs 1,826 1,975 - other 518 442 - operating lease depreciation 365 406 _______ _______ 2,709 2,823 _______ _______ Contribution before impairment losses 3,871 4,008 Impairment losses 39 85 _______ _______ Contribution 3,832 3,923 Allocation of Manufacturing costs 145 144 _______ _______ Operating profit 3,687 3,779 _______ _______ Â£bn Â£bn Total assets* 579.4 383.7 Loans and advances to customers - gross* - banking book 121.1 94.3 - trading book 20.0 15.4 Rental assets 10.2 12.2 Customer deposits* 72.9 54.1 Risk-weighted assets 152.6 138.1 _______ _______ * excluding reverse repos and repos Global Banking & Markets (GBM) achieved strong performances in many of its businesses in 2007, with particularly strong growth in interest rate and currency trading activities, but financial results were held back by challenging credit market conditions in the second half of the year. Operating profit was Â£3,687 million, 2% lower than 2006's record result. While many parts of GBM grew strongly, total income of Â£6,580 million was 4% lower than in 2006, reflecting both cumulative 2007 write-downs of our sub-prime-related and leveraged finance positions and an additional Â£456 million in response to the weakening credit profile of certain financial guarantors. These losses were partially offset by a reduction of Â£123 million in the carrying value of our own debt and by a gain of Â£950 million realised on the sale of Southern Water. The resulting reduction in profit, net of write-downs, gains and variable costs, was Â£484 million. Excluding these effects, underlying income rose by 8% and underlying operating profit by 10%, reflecting the business's continued operating momentum. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE MARKETS - GLOBAL BANKING & MARKETS (continued) The strength of GBM and the successful diversification of its product capabilities resulted in a continuation of the strong growth we have achieved in Asia and continental Europe in recent years. In Asia we have now established a solid platform, with good product capabilities and client relationships. In 2007 this resulted in Asian income growing by 96%, with outstanding growth in our activities in China and Japan. In Europe, income grew by 39%, with particularly good results in the Nordic region and in the Iberian Peninsula, where GBM further expanded its strong position in the provision of financing and risk management services to corporates and financial institutions. Income in the UK grew by 21%, while results in North America declined as a result of credit market conditions affecting GBM's asset-backed and structured credit businesses. Net interest income increased by 9% to Â£1,785 million. Average loans and advances to customers, excluding reverse repos, increased by 22% as we expanded our customer base outside the UK and average customer deposits increased by 25%. Net fee income rose by 33% to Â£1,368 million, reflecting our top tier position in arranging, structuring and distributing large scale financings. We achieved particularly strong growth in non-US loan markets. Income from trading activities declined by Â£1,362 million. Interest rate and currency trading activities took advantage of increased volatility leading to income growth of 78% and 48% respectively. These strong performances were supplemented by good growth in our broadening product range, including equity derivatives and retail investor products. However, in credit markets write-downs reflecting the weakening of the US housing market led to a sharp fall in income. Rental and other asset-based activities achieved continuing success in originating, structuring, financing and managing physical assets such as aircraft, trains, ships and real estate for our customers. Income from rental assets, net of related funding costs and operating lease depreciation, increased by 16% to Â£314 million. Other operating income increased to Â£1,899 million, net of related funding costs, including the successful sale of Southern Water concluded during the second half. The majority of our remaining private equity portfolio has been sold into a fund, managed by RBS, thereby improving capital efficiency while offering more predictable and stable returns. Costs were reduced by 4% to Â£2,854 million, in line with income. We continued to invest in expanding our geographical footprint, our infrastructure and our product range. Portfolio credit risk remained stable and impairment losses declined to Â£39 million in 2007, with no deterioration in overall corporate credit quality. The liquidity and profitability of our corporate customers remains generally strong. Total assets increased to Â£579.4 billion, primarily reflecting an increase of Â£128.8 billion in derivative assets (mostly rates and currencies) accompanied by a corresponding increase in derivative liabilities. The increase was a result of the strong growth in client-driven interest rate and currency trading activities in a more volatile market environment. Careful risk and capital management held our risk-weighted assets to Â£152.6 billion, an increase of 10% over the prior year. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE MARKETS - UK CORPORATE BANKING 2007 2006 Â£m Â£m Net interest income from banking activities 2,326 2,173 Non-interest income 1,416 1,289 _______ _______ Total income 3,742 3,462 _______ _______ Direct expenses - staff costs 631 564 - Other 214 186 - operating lease depreciation 319 330 _______ _______ 1,164 1,080 _______ _______ Contribution before impairment losses 2,578 2,382 Impairment losses 180 189 _______ _______ Contribution 2,398 2,193 Allocation of Manufacturing costs 437 431 _______ _______ Operating profit 1,961 1,762 _______ _______ Â£bn Â£bn Total assets* 102.7 88.7 Loans and advances to customers - gross* 100.6 86.8 Customer deposits* 86.6 78.5 Risk-weighted assets 104.6 93.1 _______ _______ * excluding reverse repos and repos UK Corporate Banking had another successful year of profitable growth, building further on our market-leading position and achieving significant improvements in customer satisfaction. Total income rose by 8% to Â£3,742 million and contribution by 9% to Â£2,398 million. Operating profit rose by 11% to Â£1,961 million. There has been good growth in customer volumes, with average loans and advances up 11% and average deposits up 14%. Net interest income from banking activities increased by 7% to Â£2,326 million as net interest margin narrowed slightly from the prior year. In recent months we have seen firmer margins in some areas. Non-interest income rose by 10% to Â£1,416 million, as a result of growth in fees and continued progress in the distribution of trade and invoice finance products as well as of interest rate and foreign exchange products. Total expenses rose by 6% to Â£1,601 million, with investment targeted towards improving customer service. Around 600 new front line roles were created and major new functionality was added to the Bankline electronic banking platform. These initiatives have contributed to strongly favourable customer satisfaction scores in 2007. Impairment losses totalled Â£180 million, 5% lower than in 2006, reflecting the strong quality of the portfolio. Corporate credit metrics remained stable. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS 2007 2006 Â£m Â£m Net interest income 4,760 4,604 Non-interest income 4,030 3,851 _______ _______ Total income 8,790 8,455 _______ _______ Direct expenses - staff costs 1,699 1,616 - other 742 748 _______ _______ 2,441 2,364 _______ _______ Insurance net claims 518 488 _______ _______ Contribution before impairment losses 5,831 5,603 Impairment losses 1,200 1,311 _______ _______ Contribution 4,631 4,292 Allocation of Manufacturing costs 1,748 1,724 _______ _______ Operating profit 2,883 2,568 _______ _______ Â£bn Â£bn Total banking assets 125.1 118.4 Loans and advances to customers - gross - mortgages 72.0 69.7 - personal 21.5 20.5 - cards 8.4 8.2 - business 20.2 18.1 Customer deposits* 130.4 115.5 Investment management assets - excluding deposits 42.1 34.9 Risk-weighted assets 80.8 77.0 _______ _______ * customer deposits exclude bancassurance. Retail Markets delivered a strong performance in 2007 with operating profit rising by 12% to Â£2,883 million as a result of good income growth, tight expense control and reduced impairment costs. Total income rose 4% to Â£8,790 million, and income net of claims also grew by 4% to Â£8,272 million. These strong results reflect the emphasis on savings and investment products, our focus on profitability rather than volume in consumer lending, and significant investment in our Wealth Management business in the UK and Asia. Customer deposits increased by 13% to Â£130.4 billion, while loans and advances grew by 5% to Â£122.1 billion. The full year results show momentum developing in the business, with operating profit in the second half of the year 14% higher than in the same period of 2006. Expenses have been kept under tight control, with efficiency gains allowing us to invest and grow the business. Impairment losses maintained the improvement witnessed in the first half of the year, falling by 8% for the year as a whole. Arrears trends on credit cards and unsecured personal loans continued to improve, as did the quality of our asset base. Risk-weighted assets rose by 5% to Â£80.8 billion at the end of 2007. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - RETAIL 2007 2006 Â£m Â£m Net interest income 4,191 4,108 Non-interest income 3,571 3,458 _______ _______ Total income 7,762 7,566 _______ _______ Direct expenses - staff costs 1,361 1,317 - other 614 621 _______ _______ 1,975 1,938 _______ _______ Insurance net claims 518 488 _______ _______ Contribution before impairment losses 5,269 5,140 Impairment losses 1,196 1,310 _______ _______ Contribution 4,073 3,830 Allocation of Manufacturing costs 1,603 1,580 _______ _______ Operating profit 2,470 2,250 _______ _______ Â£bn Â£bn Total banking assets 111.1 107.4 Loans and advances to customers - gross - Mortgages 67.3 65.6 - Personal 17.3 17.2 - Cards 8.3 8.1 - Business 18.7 16.9 Customer deposits* 96.5 87.1 Risk-weighted assets 73.3 70.6 _______ _______ * customer deposits exclude bancassurance. Retail achieved strong results in 2007, increasing operating profit by 10% to Â£2,470 million as a result of good income growth in both consumer and business banking combined with tight cost control and a reduction in impairment losses. Total income grew by 3% to Â£7,762 million, while income net of claims grew by 2% to Â£7,244 million and contribution by 6% to Â£4,073 million. We have accelerated the expansion of our consumer banking franchise, opening more than 975,000 new personal current accounts in 2007 and maintaining the Group's joint number one position in the current account market. RBS and NatWest continue to lead the other major high street banks in Great Britain for customer satisfaction. We continue to focus on sales through the branch channel, and by adding more customer advisers in our branches have achieved a significant uplift in volumes. Bancassurance continued its excellent progress with sales growth of 28% to Â£342 million annual premium equivalent, representing a doubling of 2005 sales. We invested further in our sales force, ending the year with more than 1,000 financial planning managers. In business banking we strengthened our management team and improved operational processes, producing good results. During 2007 we placed an additional 500 business managers back in branches, launched additional products to support the start-up market, and added new roles supporting ethnic minorities, women in business and community banking. In our cards and direct finance business, we have maintained our focus on credit card sales through the branch channel, where new business sales were up 47% on 2006, while continuing to take a cautious view on direct sales. Our cards acquiring business continued to grow market share, strengthening its market leading position with an 11% increase in transactions in 2007. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - RETAIL (continued) Average customer deposit balances were 9% higher, driven by accelerating growth in both personal savings, up 12%, and business deposits, up 11%, alongside modest growth in current account balances. Savings balance growth was helped by good sales of new accounts to branch customers, with NatWest opening more than 1 million new savings accounts. Average loans and advances to customers increased by 3%, with average mortgage lending up 5% and average business lending up 9%. Mortgage activity focused on branch channels, where net lending was 14% higher than in the previous year. We also took advantage of improved margins in the intermediary segment in the latter part of the year to improve volumes. Direct loan balances declined over the year as we maintained our strategy of focussing unsecured personal lending on profitability rather than volume, although we continued to grow lending through the branch channel. After a decline in credit card balances in the first half of the year we improved recruitment and retention in the second half. Net interest income increased by 2% to Â£4,191 million, with strong growth in deposits helping to mitigate the impact of lower unsecured lending volumes and lower average card balances. Net interest margin declined modestly, in line with previous guidance, with savings margins consistent with 2006, despite increased competition for deposits. Non-interest income was Â£3,571 million, 3% ahead of 2006, with strong growth in investment income offset by lower levels of direct lending and reduced instances of current account fees. Total expenses rose by 2% to Â£3,578 million, driven by increased investment in customer-facing staff in branches and in our bancassurance and investment businesses. Other costs reduced by 1% to Â£614 million. Impairment losses decreased by 9% to Â£1,196 million, reflecting the improvement in arrears trends on both credit cards and unsecured personal loans. Mortgage arrears remained very low, and we have maintained conservative lending criteria - the average loan-to-value ratio of Retail's mortgages was 46% overall and 63% on new mortgages written in 2007, and this improved as the year progressed. Small business credit quality remained good. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - WEALTH MANAGEMENT 2007 2006 Â£m Â£m Net interest income 569 496 Non-interest income 459 393 _______ _______ Total income 1,028 889 _______ _______ Direct expenses - staff costs 338 299 - other 128 127 _______ _______ 466 426 _______ _______ Contribution before impairment losses 562 463 Impairment losses 4 1 _______ _______ Contribution 558 462 Allocation of Manufacturing costs 145 144 _______ _______ Operating profit 413 318 _______ _______ Â£bn Â£bn Loans and advances to customers - gross 10.5 8.8 Investment management assets - excluding deposits 35.1 28.2 Customer deposits 33.9 28.4 Risk-weighted assets 7.5 6.4 _______ _______ Wealth Management's offering of private banking and investment services continued to deliver very strong growth in income, up 16% in 2007 to Â£1,028 million. Contribution grew by 21% to Â£558 million and operating profit by 30% to Â£413 million. We have continued Coutts & Co's UK regional expansion programme, and this has helped us to grow customer numbers by 7% and income by 22%. Outside the UK, Coutts International has been re-branded as RBS Coutts to leverage the global brand strength of the group in the continental European and Asia-Pacific markets and RBS Coutts has maintained its momentum in the Asia-Pacific region, succeeding in growing customer numbers by 27% and income by 51% in US dollar terms. Growth in banking volumes contributed to a 15% rise in net interest income to Â£569 million. Average loans and advances to customers rose by 13% and average deposits by 17%. Non-interest income grew by 17% to Â£459 million, reflecting higher investment management fees and new product sales, including new investment vehicles specialising in private equity and natural resources, as well as continued growth in underlying new business volumes, particularly in the UK and Asia. Assets under management rose to Â£35.1 billion at 31 December 2007, up 24% from a year earlier. Total expenses rose by 7% to Â£611 million, with direct expense up 9% at Â£466 million, reflecting continued investment in the UK and continental Europe along with a further significant expansion of our team of private bankers in Asia. Total headcount increased by 12%. THE ROYAL BANK OF SCOTLAND GROUP plc ULSTER BANK 2007 2006 Â£m Â£m Net interest income 979 873 Non-interest income 318 252 _______ _______ Total income 1,297 1,125 _______ _______ Direct expenses - staff costs 302 254 - other 159 131 _______ _______ 461 385 _______ _______ Contribution before impairment losses 836 740 Impairment losses 104 104 _______ _______ Contribution 732 636 Allocation of Manufacturing costs 219 215 _______ _______ Operating profit 513 421 _______ _______ Average exchange rate - â‚¬/Â£ 1.461 1.467 _______ _______ Â£bn Â£bn Total assets 54.8 44.5 Loans and advances to customers - gross - mortgages 18.3 15.0 - corporate 24.8 19.6 - other 4.0 3.6 Customer deposits 21.8 18.1 Risk-weighted assets 36.0 29.7 Spot exchange rate - â‚¬/Â£ 1.361 1.490 _______ _______ Ulster Bank maintained its success in building its personal and corporate banking business in the island of Ireland, with total income rising by 15% to Â£1,297 million, contribution by 15% to Â£732 million and operating profit by 22% to Â£513 million. These results reflect solid sales growth across all activities, driven by an enhanced range of innovative products and an expanded distribution network. Net interest income increased by 12% to Â£979 million, reflecting good growth in both loans and deposits. Average loans and advances to customers increased by 24%, with particular strength in business lending, with a 29% increase spread across a variety of industrial sectors. Our mortgage book also saw very good growth in 2007, in spite of the slowdown in the housing market, with average balances up 17%. We achieved particular success in attracting remortgagers with our Switcher package. We were also successful in the current account switching market, winning 100,000 new current account customers during the year. This, together with new product launches such as the eSavings Account and Reward Reserve savings accounts, contributed to a 17% increase in average customer deposits. Net interest margin tightened, reflecting more competitive market conditions and increased funding costs. Non-interest income rose by 26% to Â£318 million, driven by strong performances in Corporate Markets and credit cards. We successfully launched our new wealth business in the course of the year. Total expenses increased by 13% to Â£680 million, as we continued our investment programme to support the future growth of the business. We continued to expand our branch and business centre footprint and recruited additional customer-facing staff, particularly in Corporate Markets. Despite tighter housing market conditions, arrears trends saw no deterioration in 2007 and impairment losses remained stable at Â£104 million. THE ROYAL BANK OF SCOTLAND GROUP plc CITIZENS 2007 2006 2007 2006 Â£m Â£m $m $m Net interest income 1,975 2,085 3,954 3,844 Non-interest income 1,147 1,232 2,295 2,271 _______ _______ _______ _______ Total income 3,122 3,317 6,249 6,115 _______ _______ _______ _______ Direct expenses - staff costs 741 803 1,483 1,480 - other 717 751 1,437 1,385 _______ _______ _______ _______ 1,458 1,554 2,920 2,865 _______ _______ _______ _______ Contribution before impairment 1,664 1,763 3,329 3,250 losses Impairment losses 341 181 682 333 _______ _______ _______ _______ Operating profit 1,323 1,582 2,647 2,917 _______ _______ _______ _______ Average exchange rate - US$/Â£ 2.001 1.844 _______ _______ $bn $bn Total assets 161.1 162.2 Loans and advances to customers - gross - mortgages 19.1 18.6 - home equity 35.9 34.5 - other consumer 21.7 23.2 - corporate and commercial 37.6 32.7 Customer deposits 115.0 106.8 Customer deposits (excluding wholesale funding) 105.0 101.8 Risk-weighted assets 114.4 113.1 Spot exchange rate - US$/Â£ 2.004 1.965 _______ _______ Against the background of weaker housing and credit market conditions, Citizens' franchise demonstrated resilience in 2007, with a particularly good performance in corporate and commercial banking. Modest growth in net interest margins and strong fee growth in several products lifted income by 2% to $6,249 million which, coupled with tight cost control, resulted in contribution before impairment losses growing by 2% to $3,329 million. However, impairment losses increased from 0.31% of loans and advances to 0.60%, resulting in a decrease in operating profit of 9% to $2,647 million. In sterling terms, total income decreased by 6% to Â£3,122 million and operating profit fell by 16% to Â£1,323 million. Net interest income rose by 3% to $3,954 million. Average loans and advances to customers increased by 4%, with strong growth in corporate and commercial lending, up 13%, with close attention being paid to our risk appetite in light of prevailing market conditions. Average customer deposits increased by 1% but deposit margins narrowed as a result of deposit pricing competition and continued migration from low-cost checking accounts and liquid savings to higher-cost products. Notwithstanding this migration, Citizens' net interest margin increased slightly to 2.80% in 2007, compared with 2.72% in 2006, thanks in part to improved lending spreads in the latter part of the year. Non-interest income rose by 1% to $2,295 million. Business and corporate fees rose strongly, with good results especially in foreign exchange, interest rate derivatives and cash management, driven by increasing cooperation with RBS Corporate Markets. Good progress was also made in credit card issuing, where we increased our customer base by 20%, and in merchant acquiring, where RBS Lynk achieved significant growth, processing 30% more transactions than in 2006 and expanding its merchant base by 5%. THE ROYAL BANK OF SCOTLAND GROUP plc CITIZENS (continued) In response to more difficult market conditions Citizens intensified cost discipline, with a reduction in headcount helping to limit total expense growth to 2%, despite enhancements to infrastructure and processes as well as continued investment in growth opportunities including mid-corporate banking, contactless debit cards and merchant acquiring. Rising losses and increased provisions lifted impairment costs from $333 million in 2006 to $682 million in 2007. Against a background of weaker economic activity the Citizens portfolio is performing well, although we have experienced a reversion from the very low levels of impairment seen in recent years, reflecting both the planned expansion of our commercial loan book and the impact of a softer housing market. There has also been an increase in reserving. The average FICO scores on our consumer portfolios, including home equity lines of credit, remain in excess of 700, with 97% of lending secured. Average loan-to-value ratios at the end of 2007 were 58% on our residential mortgage book and 74% on our home equity book. THE ROYAL BANK OF SCOTLAND GROUP plc RBS INSURANCE 2007 2006 Â£m Â£m Earned premiums 5,607 5,713 Reinsurers' share (220) (212) _______ _______ Insurance premium income 5,387 5,501 Net fees and commissions (465) (486) Other income 734 664 _______ _______ Total income 5,656 5,679 _______ _______ Direct expenses - staff costs 297 319 - other 447 426 _______ _______ 744 745 _______ _______ Gross claims 4,091 4,030 Reinsurers' share (81) (60) _______ _______ Net claims 4,010 3,970 _______ _______ Contribution 902 964 Allocation of Manufacturing costs 219 215 _______ _______ Operating profit 683* 749 _______ _______ * The impact of the June and July floods was to reduce operating profit by Â£274 million In-force policies (thousands) - Own-brand motor 6,713 6,790 - Own-brand non-motor (home, rescue, pet, HR24) 3,752 3,759 - Partnerships & broker (motor, home, rescue, SMEs, 9,302 11,242 pet, HR24) General insurance reserves - total (Â£m) 8,192 8,068 _______ _______ RBS Insurance has made good progress in 2007 in competitive markets. Total income was maintained at Â£5,656 million, in line with 2006 levels, with growth in our own-brand businesses offset by a decline in partnerships. Operating profit declined by 9% to Â£683 million, reflecting the impact of the severe flooding experienced in June and July. Excluding the Â£274 million impact of the floods, contribution grew by 22% and operating profit by 28%, supported by strong claims management and the benefits of improved risk selection in this and prior years. We have continued to focus on selective underwriting of more profitable business. Our own-brand businesses have performed well, with income rising by 1% and contribution growing by 4%. Excluding the impact of the floods, own-brand contribution grew by 24%. In the UK motor market we have pursued a strategy of targeting lower risk drivers and have increased premium rates to offset claims inflation, improving profitability by implementing heavier price increases in higher risk categories. Our international businesses performed well, with Spain delivering strong profit growth while, in line with plan, our German and Italian businesses also achieved profitability in 2007. Home insurance grew across all of our own brands in the second half, and we achieved particular success in the distribution of home policies through our bank branches, with sales up 40%. THE ROYAL BANK OF SCOTLAND GROUP plc RBS INSURANCE (continued) In our partnerships and broker business, providing underwriting and processing services to third parties, we have concentrated on more profitable opportunities and have consequently not renewed a number of large rescue contracts. We also pulled back from some less profitable segments of the broker market. This resulted in a 17% reduction in in-force policies, but income fell by only 2%. Contribution from partnerships and brokers fell by 22% as a result of flood-related claims. Excluding the impact of the floods, contribution from partnerships and brokers increased by 18%. For RBS Insurance as a whole, insurance premium income, net of fees and commissions, was 2% lower at Â£4,922 million, reflecting modest growth in our own brands offset by a 5% decline in the partnerships and broker segment. Other income rose by 11% to Â£734 million, reflecting increased investment income. Total expenses were held flat at Â£963 million. Within this, staff costs reduced by 7%, reflecting our continued focus on improving efficiency whilst maintaining service standards. A 5% rise in non-staff costs reflects increased marketing investment in our own brands. Net claims rose by 1% to Â£4,010 million. Gross claims relating to the floods in June and July cost more than Â£330 million, with a net impact, after allowing for profit sharing and reinsurance, of Â£274 million. Excluding the impact of the floods, net claims costs were reduced by 7%. In the motor book, while average claims costs have continued to rise, this has been mitigated by improvements in risk selection and management and by continuing efficiencies in claims handling. The UK combined operating ratio for 2007, including manufacturing costs, increased to 98.0%, reflecting a higher loss ratio and the reduction in partnership income. Excluding the impact of the floods, the combined operating ratio was 91.9%. THE ROYAL BANK OF SCOTLAND GROUP plc MANUFACTURING 2007 2006 Â£m Â£m Staff costs 763 762 Other costs 2,151 2,110 _______ _______ Total Manufacturing costs 2,914 2,872 Allocated to divisions (2,914) (2,872) _______ _______ - - _______ _______ Analysis of Manufacturing costs: Group Technology 984 974 Group Property 962 932 Customer Support and other operations 968 966 _______ _______ Total Manufacturing costs 2,914 2,872 _______ _______ Manufacturing costs increased by 1% to Â£2,914 million, as further improvements in productivity enabled us to support growth in business volumes and to maintain high levels of customer satisfaction while continuing to invest in the further development of our business. Staff costs were flat, as salary inflation was offset by reduced headcount in Operations, resulting from process efficiencies. Other costs increased by 2%, reflecting property investment and continued growth in the volumes of transactions handled. Group Technology costs remained under tight control, increasing by only 1% to Â£984 million, as significant improvements in productivity were balanced by investment in software development. Group Property costs rose by 3% to Â£962 million, reflecting refurbishment and expansion of the Ulster Bank network and continuing investment to support the strong growth of our business in Europe and Asia, including the opening of a new Corporate Markets office in Paris and further development of our office portfolio in India and Singapore. Customer Support and other operations costs remained broadly flat at Â£968 million, with further significant improvements in productivity enabling us to continue to absorb significant increases in service volumes. At the same time we maintained our focus on service quality, and our UK-based telephony centres continued to record market-leading customer satisfaction scores. Our investment in process reengineering across our operational centres under the 'Work-Out' banner is expected to deliver further improvements in efficiency. THE ROYAL BANK OF SCOTLAND GROUP plc CENTRAL ITEMS 2007 2006 Â£m Â£m Funding and corporate costs 145 862 Departmental and other costs 461 442 _______ _______ 606 1,304 Allocation of Manufacturing costs 146 143 _______ _______ Total central items 752 1,447 _______ _______ Central costs were substantially lower, reflecting in part the gains realised on a number of planned disposals that formed part of the Group's funding arrangements for the acquisition of ABN AMRO. These gains contributed to a reduction of Â£717 million in funding and corporate costs, which also benefited from a reduction of Â£152 million in the carrying value of our own debt accounted for at fair value and the receipt of a dividend on our investment in Bank of China. These benefits were partially offset by goodwill payments amounting to Â£119 million in respect of current account administration fees. Excluding realised gains totalling Â£475 million, funding and corporate costs were Â£620 million, 28% lower than in 2006. Departmental and other costs increased by 4% to Â£461 million. This largely reflects the centralisation of certain functions and increased regulatory requirements. CENTRAL ITEMS RELATING TO ABN AMRO 2007 2006 Â£m Â£m Funding and corporate costs 144 - _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc ABN AMRO - RBS BUSINESSES In order to provide a basis for comparison of the performance of ABN AMRO businesses to be retained by the Group, set out below are the underlying full year results adjusted for credit market related write-downs, the impact of the sale of LaSalle Bank and some minor normalisations. ABN AMRO RBS businesses 2007 â‚¬m Total income 6,886 Expenses 5,906 _______ Impairment losses 338 _______ Underlying profit 642 _______ For 2007 as a whole, the RBS acquired businesses of ABN AMRO performed in line with expectations, producing an underlying operating profit of â‚¬642 million, excluding shared assets, credit market write-downs and the impact of the sale of LaSalle Bank. RBS's portion of shared central costs and assets produced a net loss of â‚¬76 million for the full year. While credit market activities reflected the prevailing market conditions in the second half of the year, ABN AMRO's equities, rates and financial institutions business lines all achieved solid income growth in 2007. Transaction banking maintained good momentum, with income up 7%, reflecting strong growth in cash management balances and significant expansion in trade finance. International retail banking businesses performed well over the whole of 2007, increasing customer numbers by 12% to 3.7 million with strong growth in India. There was also strong growth in China, Singapore and Hong Kong for Van Gogh Preferred Banking, which offers a premium service to its customer base, as well as an 18% increase in credit card customers. ABN AMRO continued to invest in its Asian footprint, opening 16 new branches across China, India, Indonesia, Hong Kong and Malaysia. The cost:income ratio in 2007 was 86%, with some redundancy costs in the second half of the year taken in business as usual expenses. The ABN AMRO cost base in 2007 was made less flexible by the bonus arrangements put in place when ABN AMRO originally announced its merger plans with Barclays. Impairments increased to â‚¬338 million for the full year from around â‚¬180 million in 2006, primarily reflecting 2006 non-recurring provision releases in North America. There was also a modest increase in provisioning across Asia in line with balance growth, partially offset by a significant reduction in impairments on the Taiwan credit card portfolio. The integration has made a strong start, with a further â‚¬570 million of cost savings and revenue benefits identified in addition to those originally anticipated. Cost savings are now expected to total â‚¬1,596 million in three years, 21% more than originally indicated. Another â‚¬100m of net revenue benefits have been identified in Global Banking & Markets and â‚¬200m in the International Retail businesses, bringing the total for net revenue benefits expected in three years to â‚¬688 million. All told, integration benefits are now expected to total â‚¬2.3 billion, compared with our original estimate of â‚¬1.7 billion. Applying these increased synergies to the financial targets originally announced in our offer would have yielded increased accretion in adjusted earnings per share of 9%, a return on investment in 2010 of 16% and an internal rate of return of 18%. Transition plans were completed on schedule, and following extensive consultation we have now received the support of the relevant staff bodies. Further rapid progress in separating businesses is expected over the course of this year. THE ROYAL BANK OF SCOTLAND GROUP plc ABN AMRO As discussed on page 3, the results of ABN AMRO for the period from 17 October 2007 to 31 December 2007 are fully consolidated for the purpose of the Group's statutory results. However, we are also showing separately the results of ABN AMRO and of the businesses that will be retained by the Group. ABN AMRO 2007 (note 1) Â£m Net interest income from banking activities 1,419 _______ Net fees and commissions receivable 571 Trading activities 104 Other operating income (net of related funding costs) 174 Insurance premium income 127 _______ Non-interest income 976 _______ Total income 2,395 _______ Direct expenses - staff costs 937 - other 943 _______ 1,880 _______ Insurance claims 124 _______ Contribution before impairment losses 391 Impairment losses 263 _______ Operating profit from continuing operations (note 2) 128 _______ Â£bn Total assets 774.3 Loans and advances to customers - gross 287.7 Customer deposits 240.8 Risk-weighted assets 168.4 _______ Notes: (1) Results of ABN AMRO for the period 17 October 2007 to 31 December 2007 and as at 31 December 2007. (2) The discontinued operations of ABN AMRO - Banca Antonveneta, Business Unit Asset Management and Business Unit Private Equity reported losses after tax for the period from 17 October 2007 to 31 December 2007 of Â£136 million. ABN AMRO as a whole recorded income totalling Â£2,395 million and operating profit from continuing operations of Â£128 million for the period from 17 October to 31 December 2007. Within this total, the businesses to be retained by RBS, including our portion of shared assets, accounted for total income of Â£814 million. Trading profits of these businesses totalled Â£49 million, offset by Â£91 million of credit market write-downs and a Â£73 million cost for our portion of shared assets. The results of the businesses to be transferred to Fortis and Santander, together with their portion of the shared assets, are reflected in minority interests in the Group's financial statements. We have concluded our initial review of the ABN AMRO balance sheet and, applying RBS's valuation methodologies, have recorded a reduction of Â£978 million in the carrying value of financial instruments we acquired. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE BALANCE SHEET - EXCLUDING ABN AMRO 2007 2006 Average Average balance Interest Rate balance Interest Rate Â£m Â£m % Â£m Â£m % Assets Treasury and other 488 21 4.30 2,129 93 4.37 eligible bills Loans and advances 27,397 1,350 4.93 23,290 979 4.20 to banks Loans and advances 397,149 25,964 6.54 360,562 22,181 6.15 to customers Debt securities 31,986 1,790 5.60 35,155 1,713 4.87 _______ ______ _______ ______ Interest-earning 457,020 29,125 6.37 421,136 24,966 5.93 assets - banking business ______ ______ Trading business 276,766 202,408 Non-interest-earning 274,910 210,358 assets _______ _______ Total assets 1,008,696 833,902 _______ _______ Liabilities Deposits by banks 64,899 2,776 4.28 64,811 2,621 4.04 Customer accounts 284,899 11,691 4.10 254,678 8,899 3.49 Debt securities in 97,593 5,160 5.29 81,161 3,746 4.62 issue Subordinated 26,113 1,439 5.51 26,647 1,391 5.22 liabilities Internal funding of (64,816) (3,180) 4.91 (49,405) (2,100) 4.25 trading business _______ ______ _______ ______ Interest-bearing 408,688 17,886 4.38 377,892 14,557 3.85 liabilities - banking business ______ ______ Trading business 279,038 204,810 Non-interest-bearing liabilities - demand deposits 30,417 29,577 - other 247,194 184,747 liabilities Shareholders' equity 43,359 36,876 _______ _______ Total liabilities 1,008,696 833,902 _______ _______ Notes: 1. Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. 2. Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance assets and liabilities in view of their distinct nature. As a result, interest income has been adjusted by Â£85 million (2006 - Â£63 million). 3. Changes in the fair value of interest-bearing financial instruments designated as at fair value through profit or loss are recorded in other operating income in the consolidated income statement. In the average balance sheet shown above, interest includes interest income and interest expense related to these instruments of Â£313 million (2006 - Â£215 million) and Â£536 million (2006 - Â£465 million) respectively and the average balances have been adjusted accordingly. AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS- EXCLUDING ABN AMRO 2007 2006 Average rate % % The Group's base rate 5.51 4.64 London inter-bank three month offered rates: - Sterling 6.00 4.85 - Eurodollar 5.29 5.20 - Euro 4.28 3.08 Yields, spreads and margins of the banking business: Gross yield on interest-earning assets of banking business 6.37 5.93 Cost of interest-bearing liabilities of banking business (4.38) (3.85) _______ _______ Interest spread of banking business 1.99 2.08 Benefit from interest-free funds 0.47 0.39 _______ _______ Net interest margin of banking business 2.46 2.47 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE BALANCE SHEET - INCLUDING ABN AMRO 2007 Average balance Interest Rate Â£m Â£m % Assets Interest-earning assets - banking business 535,158 33,818 6.32 ______ Trading business 313,204 Non-interest-earning assets 311,914 _______ Total assets 1,160,276 _______ Liabilities Interest-bearing liabilities - banking 484,053 21,288 4.40 business ______ Trading business 316,540 Non-interest-bearing liabilities - demand deposits 32,871 - other liabilities 283,453 Shareholders' equity 43,359 _______ Total liabilities 1,160,276 _______ AVERAGE YIELDS, SPREADS AND MARGINS- INCLUDING ABN AMRO 2007 Yields, spreads and margins of the banking business: % Gross yield on interest-earning assets of banking business 6.32 Cost of interest-bearing liabilities of banking business (4.40) _______ Interest spread of banking business 1.92 Benefit from interest-free funds 0.42 _______ Net interest margin of banking business 2.34 _______ This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW FR TPMATMMMTMMP

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