Final Results - Part 2

Royal Bank of Scotland Group PLC 28 February 2008 THE ROYAL BANK OF SCOTLAND GROUP plc STATUTORY RESULTS The results presented on pages 39 to 52 inclusive are on a statutory basis and include the results of ABN AMRO for the period from 17 October 2007 to 31 December 2007. The interests of Fortis and Santander in RFS Holdings are included in minority interests. THE ROYAL BANK OF SCOTLAND GROUP plc CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 In the income statement below, amortisation of purchased intangible assets and integration costs are included in operating expenses. 2007 2006 Â£m Â£m Interest receivable 33,420 24,688 Interest payable 20,752 14,092 _______ _______ Net interest income 12,668 10,596 _______ _______ Fees and commissions receivable 8,465 7,116 Fees and commissions payable (2,311) (1,922) Income from trading activities 1,327 2,675 Other operating income (excluding insurance premium income) 4,857 3,564 Insurance premium income 6,398 6,243 Reinsurers' share (289) (270) _______ _______ Non-interest income 18,447 17,406 _______ _______ Total income 31,115 28,002 _______ _______ Staff costs 7,552 6,723 Premises and equipment 1,766 1,421 Other administrative expenses 3,147 2,658 Depreciation and amortisation 1,970 1,678 _______ _______ Operating expenses* 14,435 12,480 _______ _______ Profit before other operating charges and impairment losses 16,680 15,522 Insurance claims 4,770 4,550 Reinsurers' share (118) (92) Impairment losses 2,128 1,878 _______ _______ Operating profit before tax 9,900 9,186 Tax 2,052 2,689 _______ _______ Profit from continuing operations 7,848 6,497 Loss from discontinued operations, net of tax 136 - _______ _______ Profit for the year 7,712 6,497 Minority interests 163 104 Other owners 246 191 _______ _______ Profit attributable to ordinary shareholders 7,303 6,202 _______ _______ Basic earnings per ordinary share (Note 4) 76.4p 64.9p _______ _______ Diluted earnings per ordinary share (Note 4) 75.7p 64.4p _______ _______ * Operating expenses include: Â£m Â£m Integration costs: Administrative expenses 48 118 Depreciation and amortisation 60 16 _______ _______ 108 134 Amortisation of purchased intangible assets 274 94 _______ _______ 382 228 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc CONDENSED CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2007 2007 2006 Â£m Â£m Assets Cash and balances at central banks 17,866 6,121 Treasury and other eligible bills 18,229 5,491 Loans and advances to banks 219,460 82,606 Loans and advances to customers 829,250 466,893 Debt securities 276,427 127,251 Equity shares 53,026 13,504 Settlement balances 16,589 7,425 Derivatives 337,410 116,681 Intangible assets 48,492 18,904 Property, plant and equipment 18,750 18,420 Prepayments, accrued income and other assets 19,066 8,136 Assets of disposal groups 45,954 - _______ _______ Total assets 1,900,519 871,432 _______ _______ Liabilities Deposits by banks 312,633 132,143 Customer accounts 682,365 384,222 Debt securities in issue 273,615 85,963 Settlement balances and short positions 91,021 49,476 Derivatives 332,060 118,112 Accruals, deferred income and other liabilities 34,024 15,660 Retirement benefit liabilities 496 1,992 Deferred taxation 5,510 3,264 Insurance liabilities 10,162 7,456 Subordinated liabilities 37,979 27,654 Liabilities of disposal groups 29,228 - _______ _______ Total liabilities 1,809,093 825,942 Equity: Minority interests 38,388 5,263 Owners' equity* Called up share capital 2,530 815 Reserves 50,508 39,412 Total equity 91,426 45,490 _______ _______ Total liabilities and equity 1,900,519 871,432 _______ _______ *Owners' equity attributable to: Ordinary shareholders 44,684 36,546 Other equity owners 8,354 3,681 _______ _______ 53,038 40,227 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONDENSED CONSOLIDATED BALANCE SHEET Total assets of Â£1,900.5 billion at 31 December 2007 were up Â£1,029.1 billion compared with 31 December 2006, of which Â£774.2 billion relates to the acquisition of ABN AMRO. Excluding ABN AMRO, total assets were up Â£254.9 billion, 29% to Â£1,126.3 billion largely reflecting an increase in derivative assets, which was accompanied by a corresponding increase in derivative liabilities, and secured financing through reverse repos and lending growth across all divisions. Treasury and other eligible bills increased by Â£12.7 billion to Â£18.2 billion. Excluding ABN AMRO, treasury and other eligible bills grew Â£11.0 billion to Â£16.5 billion due to increased trading activity. Loans and advances to banks increased by Â£136.9 billion to Â£219.5 billion with reverse repurchase agreements and stock borrowing ('reverse repos') up by Â£121.8 billion to Â£175.9 billion. Excluding ABN AMRO, loans and advances to banks increased by Â£14.8 billion, 18%, to Â£97.4 billion of which reverse repos increased by Â£13.5 billion, 25% to Â£67.6 billion and bank placings increased by Â£1.3 billion, 5%, to Â£29.8 billion. Loans and advances to customers rose by Â£362.4 billion to Â£829.3 billion. Within this, reverse repos increased by Â£79.4 billion to Â£142.4 billion. Excluding ABN AMRO, loans and advances to customers were up Â£76.9 billion, 16%, to Â£543.8 billion with reverse repos increasing by Â£16.1 billion, 26% to Â£79.1 billion. Excluding reverse repos, lending rose by Â£60.8 billion, 15% to Â£464.7 billion, reflecting growth across all divisions. Debt securities increased by Â£149.2 to Â£276.4 billion of which Â£121.8 billion related to the acquisition of ABN AMRO. Excluding ABN AMRO, debt securities increased by Â£27.4 billion, 22%, to Â£154.6 billion principally due to increased trading book holdings in Corporate Markets. Equity shares rose by Â£39.5 billion to Â£53.0 billion primarily reflecting the acquisition of ABN AMRO, partially offset by a Â£0.8 billion reduction in the value of the Bank of China shareholding. Intangible assets increased by Â£29.6 billion to Â£48.5 billion due to the acquisition of ABN AMRO and represented goodwill of Â£24.5 billion and other intangible assets of Â£5.1 billion. Property, plant and equipment were up Â£0.3 billion, 2% to Â£18.8 billion. Excluding ABN AMRO, property, plant and equipment were down Â£1.9 billion, 10% to Â£16.6 billion mainly as a result of the sale of the Canary Wharf investment properties and sale and leaseback transactions in the UK and US. Settlement balances rose Â£9.2 billion to Â£16.6 billion. Excluding ABN AMRO, settlement balances were down Â£2.1 billion, 28% to Â£5.3 billion as a result of reduced customer activity. Derivatives, assets and liabilities increased reflecting the acquisition of ABN AMRO, growth in trading volumes and the effects of interest and exchange rate movements amidst current market conditions. Prepayments, accrued income and other assets were up Â£10.9 billion to Â£19.1 billion primarily reflecting the acquisition of ABN AMRO. Assets and liabilities of disposal groups comprise those business units of ABN AMRO that were acquired exclusively with a view to disposal, including Banca Antonveneta, Asset Management and Private Equity. Deposits by banks rose by Â£180.5 billion to Â£312.6 billion of which repurchase agreements and stock lending ('repos') were up Â£86.7 billion to Â£163.0 billion. Excluding ABN AMRO, deposits by banks rose by Â£10.7 billion, 8% to Â£142.8 billion. Inter-bank deposits were up Â£11.9 billion, 21% at Â£67.7 billion, partially offset by a reduction in repos down Â£1.2 billion, 2% to Â£75.2 billion. THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONDENSED CONSOLIDATED BALANCE SHEET (continued) Customer accounts were up Â£298.1 billion to Â£682.4 billion with repos up Â£70.9 billion to Â£134.9 billion. Excluding ABN AMRO, customer accounts were up Â£57.8 billion, 15% at Â£442.1 billion with repos up Â£11.0 billion, 17% to Â£75.0 billion. Excluding repos, deposits rose by Â£46.8 billion, 15%, to Â£367.0 billion with good growth in all divisions. Debt securities in issue have increased by Â£187.7 billion to Â£273.6 billion. Excluding ABN AMRO, the increase was Â£58.7 billion, 68% to Â£144.7 billion. Settlement balances and short positions were up Â£41.5 billion to Â£91.0 billion. Excluding ABN AMRO, the increase in settlement balances and short positions was Â£4.4 billion, 9% to Â£53.8 billion reflecting growth in customer activity. Accruals, deferred income and other liabilities increased Â£18.4 billion to Â£34.0 billion largely reflecting the acquisition of ABN AMRO. Subordinated liabilities were up Â£10.3 billion, 37% to Â£38.0 billion. Excluding ABN AMRO, subordinated liabilities were unchanged at Â£27.7 billion. The issue of Â£1.0 billion dated loan capital and Â£0.7 billion movement in exchange rates was offset by the redemption of Â£0.7 billion dated loan capital, Â£0.4 billion undated loan capital and Â£0.6 billion non-cumulative preference shares. Deferred taxation liabilities rose by Â£2.2 billion, 69% to Â£5.5 billion largely due to the acquisition of ABN AMRO. Equity minority interests increased by Â£33.1 billion to Â£38.4 billion reflecting Â£33.8 billion in respect of the acquisition of ABN AMRO, partially offset by a reduction of Â£0.4 billion in the value of the investment in Bank of China. Owners' equity increased by Â£12.8 billion, 32%, to Â£53.0 billion. The profit for the year of Â£7.6 billion, issue of Â£2.7 billion of ordinary share capital, Â£3.2 billion of non-cumulative fixed rate equity preference shares and Â£1.1 billion of other paid-in equity to fund the Group's investment in ABN AMRO, together with other issues of Â£0.4 billion non-cumulative fixed rate equity preference shares and Â£0.1 billion of ordinary shares in respect of the exercise of share options, a Â£1.5 billion net decrease after tax in the Group's pension liability and Â£0.4 billion resulting from the effect of exchange rates, were partly offset by the payment of the 2006 final ordinary dividend and the 2007 interim dividend, Â£3.0 billion and preference dividends of Â£0.3 billion, Â£0.5 billion reduction in available-for-sale reserves, and a Â£0.4 billion decrease in cash flow hedging reserve. THE ROYAL BANK OF SCOTLAND GROUP plc CONDENSED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 31 DECEMBER 2007 2007 2006 Â£m Â£m Net movements in reserves: Available-for-sale (1,289) 4,479 Cash flow hedges (564) (249) Currency translation 2,210 (1,681) Actuarial gains on defined benefit plans 2,189 1,781 Tax on items recognised direct in equity (170) (1,173) _______ _______ Net income recognised direct in equity 2,376 3,157 Profit for the year 7,712 6,497 _______ _______ Total recognised income and expense for the year 10,088 9,654 _______ _______ Attributable to: Equity shareholders 8,610 7,707 Minority interests 1,478 1,947 _______ _______ 10,088 9,654 _______ _______ The net movement in the available-for-sale reserves relates principally to the gains realised on disposals and decline in the value of the investment in Bank of China. The value of the Group's investment (excluding external investors' interests) amounts to Â£2.8 billion and the original cost of the acquisition was Â£0.8 billion. Currency translation differences relate predominantly to the minority interests arising on the acquisition of ABN AMRO. THE ROYAL BANK OF SCOTLAND GROUP plc CONDENSED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 2007 2006 Â£m Â£m Operating activities Operating profit before tax 9,900 9,186 Adjustments for: Depreciation and amortisation 1,970 1,678 Interest on subordinated liabilities 1,542 1,386 Charge for defined benefit pension schemes 489 580 Cash contribution to defined benefit pension schemes (599) (536) Elimination of foreign exchange differences and other (13,517) 3,396 non-cash items _______ _______ Net cash inflow from trading activities (215) 15,690 Changes in operating assets and liabilities 28,261 3,980 _______ _______ Net cash flows from operating activities before tax 28,046 19,670 Income taxes paid (2,442) (2,229) _______ _______ Net cash flows from operating activities 25,604 17,441 _______ _______ Investing activities Sale and maturity of securities 63,007 27,126 Purchase of securities (61,020) (19,126) Sale of property, plant and equipment 5,786 2,990 Purchase of property, plant and equipment (5,080) (4,282) Investment in business interests and intangible assets 13,640 (63) Discontinued activities (334) - _______ _______ Net cash flows from investing activities 15,999 6,645 _______ _______ Financing activities Issue of ordinary shares 77 104 Issue of other equity interests 3,600 671 Issue of paid up equity 1,073 - Issue of subordinated liabilities 1,018 3,027 Proceeds of minority interests issued 31,095 1,354 Redemption of minority interests (545) (81) Repurchase of ordinary shares - (991) Shares purchased by employee trusts (65) (254) Shares issued under employee share schemes 79 108 Repayment of subordinated liabilities (1,708) (1,318) Dividends paid (3,411) (2,727) Interest paid on subordinated liabilities (1,522) (1,409) _______ _______ Net cash flows from financing activities 29,691 (1,516) _______ _______ Effects of exchange rate changes on cash and cash 6,010 (3,468) equivalents _______ _______ Net increase in cash and cash equivalents 77,304 19,102 Cash and cash equivalents at beginning of year 71,651 52,549 _______ _______ Cash and cash equivalents at end of year 148,955 71,651 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES 1. Accounting policies There have been no significant changes to the Group's accounting policies. 2. Loan impairment provisions Operating profit is stated after charging loan impairment losses of Â£2,106 million (2006 - Â£1,877 million). The balance sheet loan impairment provisions increased in the year ended 31 December 2007 from Â£3,935 million to Â£6,441 million, and the movements thereon were: 2007 2006 Â£m Â£m At 1 January 3,935 3,887 Currency translation and other adjustments 137 (61) Acquisition of subsidiaries 2,210 - Amounts written-off (2,171) (1,841) Recoveries of amounts previously written-off 390 215 Charge to income statement 2,106 1,877 Unwind of discount (166) (142) _______ _______ At 31 December 6,441 3,935 _______ _______ The provision at 31 December 2007 includes Â£3 million (2006 - Â£2 million) in respect of loans and advances to banks. 3. Taxation The charge for taxation on continuing operations comprises: 2007 2006 Â£m Â£m Tax on profit before intangibles amortisation and 2,149 2,750 integration costs Tax relief on intangibles amortisation and (97) (61) integration costs _______ _______ 2,052 2,689 _______ _______ Overseas tax included above 508 1,100 _______ _______ The charge for taxation represents 20.7% (2006 - 29.3%) of profit before tax. It differs from the tax charge computed by applying the standard UK corporation tax rate of 30% as follows: 2007 2006 Â£m Â£m Profit before tax 9,900 9,186 _______ _______ Expected tax charge at 30% 2,970 2,756 Non-deductible items 263 288 Non-taxable items (595) (251) Foreign profits taxed at other rates (37) 63 Reduction in deferred tax liability following change in the rate of UK Corporation Tax (189) - Other 7 19 Adjustments in respect of prior periods (367) (186) _______ _______ Actual tax charge 2,052 2,689 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 4. Earnings per share Earnings per share have been calculated based on the following: 2007 2006 Â£m Â£m Earnings Profit attributable to ordinary shareholders 7,303 6,202 Add back finance cost on dilutive convertible securities 60 64 _______ _______ Diluted earnings attributable to ordinary shareholders 7,363 6,266 _______ _______ Number of shares - millions Weighted average number of ordinary shares* In issue during the year 9,557 9,555 Effect of dilutive share options and convertible 166 174 securities _______ _______ Diluted weighted average number of ordinary shares in issue during the year 9,723 9,729 _______ _______ Basic earnings per share* 76.4p 64.9p Intangibles amortisation (net of minority interest 1.5p 0.7p share) Integration costs 0.8p 1.1p _______ _______ Adjusted earnings per share* 78.7p 66.7p _______ _______ Diluted earnings per shares* 75.7p 64.4p _______ _______ Adjusted diluted earnings per shares* 77.9p 66.1p _______ _______ *prior period data have been restated to reflect the two for one bonus issue of ordinary shares in May 2007. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 5. Segmental analysis from continuing operations The revenues for each division in the table below are gross of intra-group transactions. 2007 2006 Total revenue Â£m Â£m Corporate Markets - Global Banking & Markets 22,126 19,057 - UK Corporate Banking 7,321 5,980 Retail Markets - Retail 13,936 12,755 - Wealth Management 3,140 2,421 Ulster Bank 3,038 2,557 Citizens 5,528 5,874 RBS Insurance 6,422 6,447 Manufacturing 42 54 ABN AMRO 5,959 - Central items 10,730 8,109 Elimination of intra-group transactions (23,775) (18,968) _______ _______ 54,467 44,286 _______ _______ 2007 2006 Operating profit before tax Â£m Â£m Corporate Markets - Global Banking & Markets 3,687 3,779 - UK Corporate Banking 1,961 1,762 Total Corporate Markets 5,648 5,541 Retail Markets - Retail 2,470 2,250 - Wealth Management 413 318 Total Retail Markets 2,883 2,568 Ulster Bank 513 421 Citizens 1,323 1,582 RBS Insurance 683 749 Manufacturing - - ABN AMRO (16) - Central items (752) (1,447) _______ _______ 10,282 9,414 Amortisation of purchased intangible assets (274) (94) Integration costs (108) (134) _______ _______ 9,900 9,186 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 6. Dividends* During the year dividends of 22.1p per ordinary share (2006 - 17.7p) in respect of the final dividend for 2006 and 10.1p per ordinary share (2006 - 8.1p) in respect of the interim dividend for 2007 were paid to ordinary shareholders. The directors have recommended a final dividend for 2007 of 23.1p per ordinary share. Subject to approval by shareholders at the Annual General Meeting, the final dividend will be paid on 6 June 2008 to shareholders registered on 7 March 2008. *prior period data have been restated to reflect the two for one bonus issue of ordinary shares in May 2007. 7. Analysis of repurchase agreements 2007 2006 Â£m Â£m Reverse repurchase agreements and stock borrowing Loans and advances to banks 175,941 54,152 Loans and advances to customers 142,357 62,908 _______ _______ Repurchase agreements and stock lending Deposits by banks 163,038 76,376 Customer accounts 134,916 63,984 _______ _______ 8. Retirement benefit surplus/(liability) 2007 2006 Â£m Â£m Fair value of plan assets 27,662 18,959 Present value of defined benefit obligations 27,322 20,951 _______ _______ Net pension surplus/(liability) 340 (1,992) _______ _______ Schemes in net surplus (included in Other assets) 836 - Schemes in net deficit (496) (1,992) _______ _______ The transition to a net surplus of Â£340 million at 31 December 2007 from a net pension liability of Â£1,992 million at 31 December 2006 reflects strong growth in scheme assets coupled with a higher discount rate due to the rise in AA rated corporate bond yields. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 9. Analysis of consolidated equity 2007 2006 Â£m Â£m Called-up share capital At beginning of year 815 826 Bonus issue of ordinary shares* 1,576 - Shares issued during the year 139 2 Shares repurchased during the year - (13) _______ _______ At end of year 2,530 815 _______ _______ Paid-in equity Securities issued during the year 1,073 - _______ _______ At end of year 1,073 - _______ _______ Share premium account At beginning of year 12,482 11,777 Bonus issue of ordinary shares* (1,576) - Shares issued during the year 6,257 815 Shares repurchased during the year - (381) Redemption of preference shares classified as debt 159 271 _______ _______ At end of year 17,322 12,482 _______ _______ Merger reserve At beginning and end of year 10,881 10,881 _______ _______ Available-for-sale reserves At beginning of year 1,528 (73) Unrealised (losses)/gains in the year (191) 2,609 Realised gains in the year (513) (313) Taxation 208 (695) _______ _______ At end of year 1,032 1,528 _______ _______ Cash flow hedging reserve At beginning of year (149) 59 Amount recognised in equity during the year (460) (109) Amount transferred from equity to earnings in the year (138) (140) Taxation 192 41 _______ _______ At end of year (555) (149) _______ _______ Foreign exchange reserve At beginning of year (872) 469 Retranslation of net assets, net of related hedges 376 (1,341) Taxation 70 - _______ _______ At end of year (426) (872) _______ _______ *in May 2007, the Group capitalised Â£1,576 million of its share premium account by way of a two for one bonus issue of ordinary shares of 25p each. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 9. Analysis of consolidated equity (continued) 2007 2006 Â£m Â£m Capital redemption reserve At beginning of year 170 157 Shares repurchased during the year - 13 _______ _______ At end of year 170 170 _______ _______ Retained earnings At beginning of year 15,487 11,346 Profit attributable to ordinary and equity preference 7,549 6,393 shareholders Ordinary dividends paid (3,044) (2,470) Equity preference dividends paid (246) (191) Shares repurchased during the year - (624) Redemption of preference shares classified as debt (159) (271) Actuarial gains recognised in retirement benefit 1,517 1,262 schemes, net of tax Net cost of shares bought and used to satisfy (40) (38) share-based payments Share-based payments, net of tax 8 80 _______ _______ At end of year 21,072 15,487 _______ _______ Own shares held At beginning of year (115) (7) Shares purchased during the year (65) (254) Shares issued under employee share schemes 119 146 _______ _______ At end of year (61) (115) _______ _______ Owners' equity at end of year 53,038 40,227 _______ _______ Minority interests At beginning of year 5,263 2,109 Currency translation adjustments and other movements 1,834 (297) Acquisition of ABN AMRO 32,245 - Profit attributable to minority interests 163 104 Dividends paid (121) (66) (Losses)/gains on available-for-sale securities, net of (564) 2,140 tax Movements in cash flow hedging reserves, net of tax 26 - Actuarial gains recognised in retirement benefit 19 - schemes, net of tax Equity raised 76 1,354 Equity withdrawn (553) (81) _______ _______ At end of year 38,388 5,263 _______ _______ Total equity at end of year 91,426 45,490 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 10. Analysis of contingent liabilities and commitments 2007 2006 Â£m Â£m Contingent liabilities Guarantees and assets pledged as collateral 46,441 10,725 security Other contingent liabilities 15,479 9,121 _______ _______ 61,920 19,846 _______ _______ Commitments Undrawn formal standby facilities, credit lines and other commitments to lend 335,688 242,655 Other commitments 2,491 2,402 _______ _______ 338,179 245,057 _______ _______ Total contingent liabilities and commitments 400,099 264,903 _______ _______ Additional contingent liabilities arise in the normal course of the Group's business. It is not anticipated that any material loss will arise from these transactions. 11. Litigation Proceedings, including consolidated class actions on behalf of former Enron securities holders, have been brought in the United States against a large number of defendants, including the Group, following the collapse of Enron. The claims against the Group could be significant; the class plaintiff's position is that each defendant is responsible for an entire aggregate damage amount less settlements - they have not quantified claimed damages against the Group in particular. The Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously. Recent United States Supreme Court and United States Court of Appeals for the Fifth Circuit decisions provide further support for the Group's position. The Group is unable reliably to estimate the liability, if any, that might arise or its effect on the Group's consolidated net assets, its operating results or cashflows in any particular period. On 27 July 2007, following discussions between the Office of Fair Trading ('OFT'), the Financial Ombudsman Service, the Financial Services Authority and all the major UK banks (including the Group) in the first half of 2007, the OFT issued proceedings in a test case against the banks including the Group to determine the legal status and enforceability of certain charges relating to unauthorised overdrafts. The hearing of the test case commenced on 17 January 2008. The Group maintains that its charges are fair and enforceable and is defending its position vigorously. It cannot, however, at this stage predict with any certainty the outcome of the test case and is unable reliably to estimate the liability, if any, that may arise or its effect on the Group's consolidated net assets, operating results or cash flows in any particular period. Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. The Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, does not expect that the outcome of these other claims and proceedings will have a material adverse effect on its consolidated net assets, operating results or cash flows in any particular period. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 12. Regulatory enquiries and investigations In the normal course of business the Group and its subsidiaries co-operate with regulatory authorities in various jurisdictions in their enquiries or investigations into alleged or possible breaches of regulations. As previously disclosed by ABN AMRO, the United States Department of Justice has been conducting a criminal investigation into ABN AMRO's dollar clearing activities, Office of Foreign Assets Control compliance procedures and other Bank Secrecy Act compliance matters. ABN AMRO has cooperated and continues to cooperate fully with the investigation. Prior to the acquisition by the Group, ABN AMRO had reached an agreement in principle with the Department of Justice that would resolve all presently known aspects of the ongoing investigation by way of a Deferred Prosecution Agreement in return for a settlement payment by ABN AMRO of US$500 million (which amount was accrued by ABN AMRO in its interim financial statements for the six months ended 30 June 2007). Negotiations are continuing to enable a written agreement to be concluded. Certain of the Group's subsidiaries have received requests for information from various US governmental agencies and self regulatory organisations including in connection with sub-prime mortgages and securitisations, collateralised debt obligations and synthetic products related to sub-prime mortgages. The Group and its subsidiaries are cooperating with these various requests for information and investigations. 13. Statutory accounts Financial information contained in this document does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985 ('the Act'). The statutory accounts for the year ended 31 December 2007 will be filed with the Registrar of Companies following the company's Annual General Meeting. The auditors have reported on these accounts: their report was unqualified and did not contain a statement under section 237(2) or (3) of the Act. 14. Date of approval This announcement was approved by the Board of directors on 27 February 2008. 15. Form 20-F A report on Form 20-F will be filed with the Securities and Exchange Commission in the United States. THE ROYAL BANK OF SCOTLAND GROUP plc ANALYSIS OF INCOME, EXPENSES AND IMPAIRMENT LOSSES Excluding Statutory ABN AMRO 2007 2007 2006 Â£m Â£m Â£m Non-interest income Fees and commissions receivable 8,465 7,730 7,116 Fees and commissions payable - banking (1,845) (1,665) (1,432) - insurance related (466) (466) (490) _______ _______ _______ Net fees and commissions 6,154 5,599 5,194 _______ _______ _______ Foreign exchange 1,050 928 738 Interest rate 1,466 1,748 973 Credit (1,430) (1,620) 841 Other 241 167 123 _______ _______ _______ Income from trading activities 1,327 1,223 2,675 _______ _______ _______ Rental and other asset-based activities 2,601 2,484 2,149 Other income - principal investments 1,213 1,213 794 - net realised gains on 293 293 196 available-for-sale securities - dividend income 116 116 73 - profit on sale of property, plant and 430 430 125 equipment - other 204 147 227 _______ _______ _______ Other operating income 4,857 4,683 3,564 _______ _______ _______ Non-interest income (excluding insurance 12,338 11,505 11,433 premiums) _______ _______ _______ Insurance net premium income 6,109 5,982 5,973 _______ _______ _______ Total non-interest income 18,447 17,487 17,406 _______ _______ _______ Staff costs - Wages, salaries and other staff costs 6,434 5,640 5,641 - social security costs 522 407 389 - pension costs 578 550 617 Premises and equipment 1,762 1,538 1,411 Other 3,081 2,494 2,626 _______ _______ _______ Administrative expenses 12,377 10,629 10,684 Operating lease depreciation 727 699 787 Other depreciation and amortisation 949 845 781 _______ _______ _______ Operating expenses 14,053 12,173 12,252 _______ _______ _______ General insurance 4,010 4,010 3,970 Bancassurance 642 518 488 _______ _______ _______ Insurance net claims 4,652 4,528 4,458 _______ _______ _______ Loan impairment losses 2,106 1,843 1,877 Impairment of available-for-sale securities 22 22 1 _______ _______ _______ Impairment losses 2,128 1,865 1,878 _______ _______ _______ Note: the data above exclude amortisation of purchased intangibles and integration costs. THE ROYAL BANK OF SCOTLAND GROUP plc REGULATORY RATIOS 2007 2006 Â£m Â£m Capital base Ordinary shareholders' funds and minority interests 27,324 20,281 less intangibles Preference shares and tax deductible securities 17,040 9,760 _______ _______ Tier 1 capital 44,364 30,041 Tier 2 capital 33,693 27,491 Tier 3 capital 200 - _______ _______ 78,257 57,532 Less: Supervisory deductions (10,283) (10,583) _______ _______ 67,974 46,949 _______ _______ Risk-weighted assets Banking book - on-balance sheet 480,200 318,600 - off-balance sheet 84,600 59,400 Trading book 44,200 22,300 _______ _______ 609,000 400,300 _______ _______ Risk asset ratio Tier 1 7.3% 7.5% Total 11.2% 11.7% _______ _______ Composition of capital Tier 1 Shareholders' equity and minority interests 88,311 41,700 Innovative tier 1 securities and preference shares 6,919 4,900 Goodwill and other intangible assets (48,492) (18,904) Regulatory and other adjustments (2,374) 2,345 _______ _______ Total qualifying tier 1 capital 44,364 30,041 _______ _______ Tier 2 Unrealised gains in available-for-sale equity securities in shareholders' equity and minority interests 3,115 3,790 Collective impairment losses, net of taxes 2,582 2,267 Qualifying subordinated liabilities 27,681 21,024 Minority and other interests in tier 2 capital 315 410 _______ _______ Total qualifying tier 2 capital 33,693 27,491 _______ _______ Tier 3 200 - _______ _______ Supervisory deductions Unconsolidated investments 4,297 3,870 Investments in other banks (1) 463 5,203 Other deductions 5,523 1,510 _______ _______ 10,283 10,583 _______ _______ Total regulatory capital 67,974 46,949 _______ _______ Note: (1) The reduction in supervisory deductions for investments in other banks reflects changes to the FSA rules following the implementation of certain provisions of the EU Capital Requirements Directive with effect from 1 January 2007. THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY Analysis of loans and advances to customers The following table analyses loans and advances to customers (including reverse repurchase agreements and stock borrowing) by industry and geography. Statutory Excluding ABN AMRO 2007 2007 2006 Â£m Â£m Â£m Central and local government 3,135 3,129 6,732 Finance 70,690 40,542 25,017 Individuals - home 73,916 72,726 70,884 Individuals - other 28,186 28,122 27,922 Other commercial and industrial comprising: - Manufacturing 13,452 11,943 11,051 - Construction 10,202 10,088 8,251 - Service industries and business 53,965 48,578 43,887 activities - Agriculture, forestry and fishing 2,473 2,467 2,767 - Property 50,051 46,157 39,296 Finance leases and instalment credit 15,632 15,632 14,218 Interest accruals 2,344 1,860 1,497 _______ _______ _______ Total domestic 324,046 281,244 251,522 Overseas residents 98,845 98,845 69,242 _______ _______ _______ Total UK offices 422,891 380,089 320,764 _______ _______ _______ Overseas US 135,059 87,054 92,166 Rest of the World 277,738 80,855 57,896 _______ _______ _______ Total Overseas offices 412,797 167,909 150,062 _______ _______ _______ Loans and advances to customers - 835,688 547,998 470,826 gross Loan impairment provisions (6,438) (4,233) (3,933) _______ _______ _______ Total loans and advances to customers 829,250 543,765 466,893 _______ _______ _______ Reverse repurchase agreements included in the analysis above: Central and local government - - 3,677 Finance 55,159 26,984 17,540 Accruals 228 228 220 _______ _______ _______ 55,387 27,212 21,437 Overseas residents 31,425 31,425 18,487 _______ _______ _______ Total UK offices 86,812 58,637 39,924 US 47,151 15,557 19,383 Rest of the World 8,394 4,862 3,601 _______ _______ _______ Total 142,357 79,056 62,908 _______ _______ _______ Loans and advances to customers excluding reverse repurchase agreements - net 686,893 464,709 403,985 _______ _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY (continued) Risk elements in lending The Group's loan control and review procedures do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the Securities and Exchange Commission ('SEC') in the US. The following table shows the estimated amount of loans which would be reported using the SEC's classifications. The figures are stated before deducting the value of security held or related provisions. REIL, PPL and customer loans and advances are, where appropriate, shown gross of provisions recorded by ABN AMRO at the date of its acquisition by the Group. Excluding Statutory ABN AMRO 2007 2007 2006 Â£m Â£m Â£m Loans accounted for on a non-accrual basis (2): - Domestic 5,599 5,577 5,420 - Foreign 4,763 1,091 812 _______ _______ _______ 10,362 6,668 6,232 _______ _______ _______ Accruing loans which are contractually overdue 90 days or more as to principal or interest (3): - Domestic 217 217 81 - Foreign 152 39 24 _______ _______ _______ 369 256 105 _______ _______ _______ _______ _______ _______ Total risk elements in lending 10,731 6,924 6,337 _______ _______ _______ Potential problem loans (4) - Domestic 63 63 47 - Foreign 608 1 5 _______ _______ _______ 671 64 52 _______ _______ _______ Closing provisions for impairment as a % of total risk elements in lending and potential 56% 61% 62% problem loans _______ _______ _______ Risk elements in lending as a % of gross lending to customers excluding reverse repos 1.55% 1.48% 1.55% _______ _______ _______ Risk elements in lending and potential problem loans as a % of gross lending to customers excluding reverse 1.64% 1.49% 1.57% repos _______ _______ _______ 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. All loans against which an impairment provision is held are reported in the non-accrual category. 3. Loans where an impairment event has taken place but no impairment recognised. This category is used for fully collateralised non-revolving credit facilities. 4. Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for fully collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible. THE ROYAL BANK OF SCOTLAND GROUP plc CREDIT MARKET EXPOSURES Group (including ABN AMRO) Net exposure at Average price 31 December 2007 Â£m % Super senior tranches of ABS CDOs High grade CDOs 2,581 84 Mezzanine CDOs 1,253 70 CDO squared - - Sub-prime trading inventory Investment grade 937 79 Non-investment grade 255 54 Residuals 100 50 Leveraged finance 8,698 95 The Group has a leading position in structuring, distributing and trading asset-backed securities (ABS). These activities include buying mortgage-backed securities, including securities backed by US sub-prime mortgages, and repackaging them into collateralised debt obligations (CDOs) for subsequent sale to investors. The Group retains exposure to some of the super senior tranches of these CDOs which are all carried at fair value. At 31 December 2007 the Group's exposure to these super senior tranches, net of hedges and write-downs, totalled Â£2.6 billion to high grade CDOs, which include commercial loan collateral as well as prime and sub-prime mortgage collateral, and Â£1.3 billion to mezzanine CDOs, which are based primarily on residential mortgage collateral. Both categories of CDO have high attachment points. There was also Â£1.2 billion of exposure to sub-prime mortgages through a trading inventory of mortgage-backed securities and CDOs and Â£100 million through securitisation residuals. In the second half of 2007, rising mortgage delinquencies and expectations of declining house prices in the US led to a deterioration of the estimated value of these exposures. Our valuations of the ABS CDO super senior exposures take into consideration outputs from our proprietary model, observable market benchmarks and prudent valuation adjustments. Trading book exposures and residuals are marked to market on the basis of direct prices, where available, or observable market benchmarks. Since our Trading Update in December, we have decided to take an additional mark-down of 10% on the valuation of high grade CDOs in ABN AMRO's portfolio. Drawn leveraged finance positions totalled Â£8.7 billion at 31 December 2007. Positions are valued by considering recent syndication prices in the same or similar assets, prices in the secondary loan market, and with reference to relevant indices for credit products such as the LevX, LCDX and ITraxx and CDX credit default swap indices. THE ROYAL BANK OF SCOTLAND GROUP plc CREDIT MARKET EXPOSURES (continued) Group (including ABN AMRO) Exposure net of hedges at 31 December 2007 Â£m Alt-A - Investment grade 1,972 - Non-investment grade 261 CLOs 1,386 Commercial mortgages 8,808 Financial guarantors 2,547 The Group has Â£2.2 billion of US Alt-A residential mortgage trading inventory, of which more than 85% is investment grade. Collateralised loan obligation exposures totalled Â£1.4 billion. Commercial mortgage exposure, consisting of loans originated for the purposes of securitisation, totalled Â£8.8 billion at 31 December. The portfolio consisted predominantly of commercial mortgages originated in Europe. The Group hedges some of its positions with counterparties including financial guarantors. At 31 December 2007 the Group had Â£2.5 billion of derivative exposure to financial guarantors. All of the above exposures are carried at fair value. THE ROYAL BANK OF SCOTLAND GROUP plc FAIR VALUE - FINANCIAL INSTRUMENTS Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of management estimation, the extent of which depends on the instrument's complexity and the availability of market-based data. Where such data are not observable, they are estimated by management. The table below shows financial instruments carried at fair value at 31 December 2007 in the Group's financial statements, by valuation method. Assets Liabilities 2007 2007 Â£bn Â£bn Quoted prices in active markets 159.4 65.7 Valuation techniques - based on observable market data 669.5 510.3 - incorporating information other than observable data 32.7 15.3 _______ _______ At 31 December 861.6 591.3 _______ _______ Financial assets and liabilities valued based on information other than observable market data include certain syndicated and commercial mortgage loans, certain residual interests in securitisations, super senior tranches of high grade and mezzanine collateralised debt obligations and other sub-prime trading inventory, less liquid debt securities, certain structured debt securities in issue and OTC derivatives. On the initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in profit or loss over the life of the transaction; when market data become observable; or when the transaction matures or is closed out as appropriate. At 31 December 2007, net gains of Â£72 million (2006 - Â£15 million) were carried forward in the balance sheet. During the year net gains of Â£67 million (2006 - Â£3 million) were deferred and Â£10 million (2006 - Â£4 million) released to profit or loss. THE ROYAL BANK OF SCOTLAND GROUP plc DERIVATIVES Assets Liabilities 2007 2007 Â£m Â£m Exchange rate contracts Spot, forwards and futures 29,829 29,629 Currency swaps 14,785 13,789 Options purchased 13,750 - Options written - 13,892 Interest rate contracts Interest rate swaps 202,478 201,487 Options purchased 30,681 - Options written - 31,199 Futures and forwards 807 987 Credit derivatives 34,123 29,855 Equity and commodity contracts 10,957 11,222 _______ _______ 337,410 332,060 _______ _______ The Group enters into master netting agreements in respect of its derivatives activities. These arrangements, which give the Group a legal right to set-off derivative assets and liabilities with the same counterparty, do not result in a net presentation in the Group's balance sheet for which IFRS requires an intention to settle net as well as a legally enforceable right to set off. They are however effective in reducing the Group's credit exposure from derivative assets. The Group has executed master netting agreement with the majority of its derivative counterparties resulting in a significant reduction in its net exposure to derivative assets. Furthermore it holds substantial collateral against this net derivative asset exposure. THE ROYAL BANK OF SCOTLAND GROUP plc MARKET RISK The Group manages the market risk in its trading and treasury portfolios through its market risk management framework. This expresses limits based on, but not limited to: value-at-risk (VaR); stress testing and scenario analysis; and position and sensitivity analyses. 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 given confidence levels. The table below sets out the VaR, at a 95% confidence level and a one-day time horizon, for the Group's trading and treasury portfolios. The VaR for the Group's trading portfolios includes idiosyncratic risk and is segregated by type of market risk exposure. Average Year end Maximum Minimum Excluding ABN AMRO Â£m Â£m Â£m Â£m Trading VaR Interest rate 11.7 9.6 17.6 7.6 Credit spread 17.7 37.9 44.0 12.6 Currency 2.6 2.6 6.9 1.1 Equity 2.4 1.9 6.8 1.4 Commodity 0.2 0.1 1.6 - Diversification effects (12.4) _______ _______ _______ _______ 31 December 2007 20.3 39.7 45.5 13.2 _______ _______ _______ _______ 31 December 2006 14.2 15.6 18.9 10.4 _______ _______ _______ _______ Treasury VaR 31 December 2007 3.6 5.3 5.8 1.3 _______ _______ _______ _______ 31 December 2006 2.4 1.5 4.4 0.6 _______ _______ _______ _______ Average Year end Maximum Minimum Including ABN AMRO Â£m Â£m Â£m Â£m Trading VaR Interest rate 12.5 15.0 21.8 7.6 Credit spread 18.8 41.9 45.2 12.6 Currency 2.6 3.0 6.9 1.1 Equity 5.4 14.0 22.0 1.4 Commodity 0.2 0.5 1.6 - Diversification effects (28.7) _______ _______ _______ _______ 31 December 2007 21.6 45.7 50.1 13.2 _______ _______ _______ _______ Treasury VaR 31 December 2007 3.7 5.5 6.4 1.3 _______ _______ _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc MARKET RISK (continued) The Group's VaR should be interpreted in light of the limitations of the methodologies used. These limitations include: Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements which have not occurred in the historical window used in the calculations. VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day. VaR using a 95% confidence level does not reflect the extent of potential losses beyond that percentile. The Group largely computes the VaR of trading portfolios at the close of business and positions may change substantially during the course of the trading day. Controls are in place to limit the Group's intra-day exposure, such as the calculation of VaR for selected portfolios. These limitations and the nature of the VaR measure mean that the Group cannot guarantee that losses will not exceed the VaR amounts indicated. The Group undertakes stress testing to identify the potential for losses in excess of the VaR. The Group's treasury activities include its money market business and the management of internal funds flow within the Group's businesses. THE ROYAL BANK OF SCOTLAND GROUP plc OTHER INFORMATION 2007 2006 Ordinary share price* Â£4.44 Â£6.64 Number of ordinary shares in issue* 10,006m 9,459m Market capitalisation Â£44.4bn Â£62.8bn Net asset value per ordinary share* Â£4.47 Â£3.86 Employee numbers in continuing operations (full time equivalents rounded to the nearest hundred) Global Banking & Markets 10,300 8,600 UK Corporate Banking 9,500 8,800 Retail 37,500 38,900 Wealth Management 5,000 4,500 Ulster Bank 6,400 5,600 Citizens 22,500 23,100 RBS Insurance 17,300 17,500 Manufacturing 25,200 25,400 Centre 2,900 2,600 _______ _______ Total excluding ABN AMRO 136,600 135,000 ABN AMRO 89,800 - _______ _______ Group total 226,400 135,000 _______ _______ *prior year data have been restated to reflect the two for one bonus issue of ordinary shares in May 2007. THE ROYAL BANK OF SCOTLAND GROUP plc RESTATEMENTS Divisional results for 2006 have been restated to reflect transfers of operations and businesses between divisions in 2007, principally the transfer of our European Consumer Finance business from Retail to Ulster Bank. These changes do not affect the Group's results. Previously reported Transfers Restated Â£m Â£m Â£m Global Banking & Markets - Net interest income 1,629 3 1,632 - Non-interest income 5,197 2 5,199 - Other costs 427 15 442 Contribution 3,933 (10) 3,923 _______ _______ _______ UK Corporate Banking - Net interest income 2,169 4 2,173 - Non-interest income 1,284 5 1,289 - Staff costs 562 2 564 - Other costs 183 3 186 Contribution 2,189 4 2,193 _______ _______ _______ Retail - Net interest income 4,211 (103) 4,108 - Non-interest income 3,492 (34) 3,458 - Staff costs 1,349 (32) 1,317 - Other costs 656 (35) 621 - Impairment losses 1,343 (33) 1,310 Contribution 3,867 (37) 3,830 _______ _______ _______ Wealth Management - Net interest income 500 (4) 496 - Non-interest income 434 (41) 393 - Other costs 137 (10) 127 Contribution 497 (35) 462 _______ _______ _______ Ulster Bank - Net interest income 773 100 873 - Non-interest income 215 37 252 - Staff costs 224 30 254 - Other costs 91 40 131 - Impairment losses 71 33 104 Contribution 602 34 636 _______ _______ _______ Manufacturing - Staff costs 763 (1) 762 - Other costs 2,089 21 2,110 Contribution (2,852) (20) (2,872) _______ _______ _______ Centre - Funding and corporate costs 917 (55) 862 - Departmental and other costs 451 (9) 442 Contribution (1,368) 64 (1,304) _______ _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL CALENDAR 2008 Annual General Meeting 23 April 2008 at 2pm at the EICC, The Exchange, Morrison Street, Edinburgh EH3 8EE 2007 final dividend payment 6 June 2008 2008 interim results announcement 8 August 2008 2008 interim dividend payment October 2008 2008 annual results announcement February 2009 CONTACTS Sir Fred Goodwin Group Chief Executive 020 7672 0008 0131 523 2203 Guy Whittaker Group Finance Director 020 7672 0003 0131 523 2028 Richard O'Connor Head of Investor Relations 020 7672 1758 For media enquiries: Andrew McLaughlin Director, Economic and Corporate Affairs 0131 626 3868 07786 111689 Carolyn McAdam Group Head of Media Relations 020 7672 1914 07796 274968 27 February 2008 -------------------------- This information is provided by RNS The company news service from the London Stock Exchange

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