Final Results - Pre-tax Profit Up 20% - Part 1

Royal Bank of Scotland Group PLC 28 November 1999 PART 1 THE ROYAL BANK OF SCOTLAND GROUP plc PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 1999 FINANCIAL HIGHLIGHTS 1999 1998 % £m £m Increase Profit before taxation and 1,211 1,007 20 exceptional items ----- ----- Profit before taxation 1,211 1,001 21 ----- ----- Profit attributable to ordinary 776 637 22 shareholders ----- ----- Earnings per ordinary share 87.8p 73.4p 20 ----- ----- Dividends per ordinary share 28.5p 24.6p 16 ----- ----- Viscount Younger, Chairman of The Royal Bank of Scotland Group plc said:- 'These are excellent results. They are in line with our consistent performance which made us the fastest growing, in terms of income, of the UK banking groups over the five years to 1998. We again achieved record profits, reflecting our success in building our core businesses, in developing new businesses which use a range of brands to exploit fresh opportunities and markets, and in integrating and developing acquisitions. Strong growth was achieved in all our main business areas, and our group cost:income ratio improved from 52.0% to 49.5%. Our focus on providing highly competitive financial services products to our customers has resulted in consistent profits growth in increasingly competitive markets. Indeed The Royal Bank of Scotland Group has made an enormous contribution to financial services in the UK.' CONTENTS PAGE Chairman's statement 3 Overview of results 4 Consolidated profit and loss account 6 Consolidated balance sheet 8 Statement of total recognised gains and losses 9 Reconciliation of movements in shareholders' funds 9 Cash flow statement 10 Divisional performances - UK Bank 11 - New Retail Financial Services 12 Businesses - Angel Trains 14 - RBS Cards 15 - Investor Services 16 - Direct Line Insurance 17 - Citizens 18 - The Royal Bank of Scotland 19 International - Central items 20 Notes 21 Average balance sheet 26 Average interest rates, yields, spreads and margins 27 Risk elements in lending 28 Derivatives business 29 Five-year financial summary 30 Ratios and other information 33 Contacts 34 CHAIRMAN'S STATEMENT The Group has enjoyed another very successful year, with our profit before tax up 21%, to £1,211 million. The increase in our profit reflects strong performances from all of our wide range of diverse businesses. The UK Bank increased its profit before exceptionals by 18%, from £626 million to £736 million, through increased volumes and maintained margins. Direct Line increased its profit from £64 million to £101 million due to higher earned premiums and investment income. Citizens profit increased from £214 million to £242 million, excluding the one-off gain in 1998. The Royal Bank of Scotland International increased its profit by 27%, to £70 million. RBS Cards increased its profit from £61 million to £85 million, a rise of 39%. Angel Trains made a profit of £53 million, an increase of 15% on 1998 (nine and a half months trading). Investor Services made a profit of £14 million, up from £5 million in 1998. In the New Retail Financial Services Businesses, Tesco Personal Finance was trading profitably by the end of the year and Direct Line Financial Services made an increased profit for the year. Dividend. The directors have recommended a final dividend of 20.3p which, together with the interim dividend of 8.2p, makes a total for the year of 28.5p, an increase of 16%. Outlook. With our record of enterprise and achievement in building new and existing businesses The Royal Bank of Scotland Group is well placed to continue to build value for our shareholders. OVERVIEW OF RESULTS Group profit before tax rose by 21%, from £1,001 million to £1,211 million. Profit before tax and exceptional items increased by 20%, from £1,007 million to £1,211 million. Net interest income grew by 10% to £1,756 million. Strong growth was achieved in both corporate and personal lending. Group average interest-earning assets increased by 12%. The interest margin was maintained at 2.5%. Non-interest income, excluding general insurance and the exceptional items in 1998, grew by £256 million to £1,672 million, an increase of 18%. Of this increase, £63 million came from Angel Trains. The balance primarily came from increased fees and commissions. General insurance premium income, after reinsurance, increased by 18% to £710 million. Total income, excluding exceptional items in 1998, increased by 14% to £4,138 million. Operating expenses were up by 9% to £2,048 million. Excluding Angel Trains, the increase was 7%, reflecting growth in business volumes. Group cost:income ratio improved from 52.0% to 49.5%. General insurance claims, after reinsurance, increased by 14% to £590 million. In Direct Line Insurance, claims increased by 9%. Provisions for bad debts, excluding exceptional provisions for bad debts in the Far East in 1998, increased to £276 million, principally as a consequence of continued strong growth in credit cards, personal loans and corporate advances. The tax charge was £361 million on profit before tax of £1,211 million, an effective rate of 29.8%. Profit attributable to ordinary shareholders, after tax, minority interests and preference dividends increased by 22%, from £637 million to £776 million. Earnings per share increased by 20%, from 73.4p to 87.8p. After adjusting for the exceptional items in 1998, earnings per share increased by 21%, from 72.3p to 87.8p. Group return on equity, after tax, increased from 28% to 32%. Group total assets increased by 12% to £88.9 billion. Within this, loans and advances to customers grew by 20% to £49.3 billion. Group risk-weighted assets increased from £49.1 billion to £56.8 billion. At 30 September 1999, the capital ratios were 8.1% (tier 1) and 12.1% (total). Year 2000. The Year 2000 problem concerns the inability of information systems, primarily computer software programs, properly to recognise and process date sensitive information prior to, during and after the Year 2000. The Group, many of its customers and the third parties it deals with, use software and related technology throughout their businesses that could be affected by the Year 2000 problem and may therefore not be Year 2000 compliant. The Group's management recognised early the significance of the Year 2000 issue and started its compliance programme in mid 1996. Each of the Group's main entities has monitored closely its progress via a Year 2000 Steering Group reporting to a senior executive of the entity. In addition, the overall Group's Year 2000 compliance programme is monitored on a monthly basis by the Group Board. The Group has conducted a Year 2000 compliance programme designed to achieve Year 2000 compliance by: (a) testing and obtaining assurances that existing IT business critical systems and business critical processes ('Systems') operate through critical dates including testing new products before purchase and implementation; (b) reviewing customer credit risk in the light of their Year 2000 preparations; (c) liaising with key third parties to determine the Year 2000 compliance of their Systems; (d) conducting interface testing to ensure the continued operation of third party interface systems through the critical dates; and (e) preparing contingency plans to ensure business continuity including the development of an incident management structure and command centre to monitor and manage the operation of the Group through the critical dates. As a result of the measures undertaken and described above, the directors believe that the Group's Systems are, and will remain, Year 2000 compliant. In forming this view, the directors have relied on assurances given by third parties including hardware and software suppliers, experts and key third parties with which the Group deals. However, there can be no assurance that the Systems of any company will perform as expected or that measures taken or to be taken by the Group or by third parties will successfully minimise or eliminate the effects of the Year 2000 problem. Any failure could have a materially adverse impact on the financial condition and results of the Group and may not be embraced by the Group's contingency plans. The total estimated cost of the Group's Year 2000 compliance programme is expected to be £66 million. Of this amount, £62 million has been expended to 30 September 1999. Segmental analysis of Group operating profit before exceptional items is shown below. The performance of each division is discussed on the pages indicated below. 1999 1998 Page £m £m UK Bank 11 736 626 New Retail Financial Services 12 (35) (59) Businesses Angel Trains 14 53 46 RBS Cards 15 85 61 Investor Services 16 14 5 Direct Line Insurance 17 101 64 Citizens 18 242 247 The Royal Bank of Scotland 19 70 55 International (RBSI) Central items 20 (55) (38) ---- ---- Total 1,211 1,007 ---- ---- RBS Cards is now shown separately and integrates the Bank's credit card businesses (previously included in the UK Bank) and RBS Advanta (previously included in New Retail Financial Services Businesses). The 1998 figures for the UK Bank and New Retail Financial Services Businesses have been restated to reflect this. CONSOLIDATED PROFIT AND LOSS ACCOUNT 1999 1998 Note £m £m Interest receivable 4,996 5,123 Interest payable 3,240 3,525 ----- ----- NET INTEREST INCOME 1,756 1,598 ----- ----- Dividend income 34 28 Fees and commissions receivable 1,084 923 Fees and commissions payable (93) (84) Dealing profits (see note below)* 191 268 Other operating income 456 377 ----- ----- 1,672 1,512 General insurance - earned premiums 869 740 - reinsurance (159) (140) ----- ----- NON-INTEREST INCOME 2,382 2,112 ----- ----- TOTAL INCOME 4,138 3,710 ----- ----- Administrative expenses - staff costs 956 884 - profit share 47 43 - premises and equipment 298 280 - other 468 429 Depreciation and amortisation 279 243 ----- ----- OPERATING EXPENSES 2,048 1,879 ----- ----- PROFIT BEFORE OTHER OPERATING CHARGES 2,090 1,831 General insurance - gross claims 720 625 - reinsurance (130) (107) ----- ----- PROFIT BEFORE PROVISIONS FOR BAD AND 1,500 1,313 DOUBTFUL DEBTS Provisions for bad and doubtful debts 2 - excluding Far East 276 200 - Far East ** - 132 Amounts written off investments - excluding Far East 13 10 - Far East ** - 14 Write-down of finance leases** - 13 ----- ----- GROUP OPERATING PROFIT 1,211 944 Profit on sale of fixed asset - 57 investment ----- ----- PROFIT ON ORDINARY ACTIVITIES BEFORE 1,211 1,001 TAX Tax on Group profit on ordinary 3 (361) (286) activities ----- ----- PROFIT ON ORDINARY ACTIVITIES AFTER TAX 850 715 Minority interests - equity 6 (20) ----- ----- PROFIT AFTER MINORITY INTERESTS 856 695 Preference dividends 80 58 ----- ----- PROFIT ATTRIBUTABLE TO ORDINARY 776 637 SHAREHOLDERS Ordinary dividends 4 254 215 ----- ----- RETAINED PROFIT 522 422 ----- ----- * 1998 includes an exceptional gain of £96 million ** Exceptional item in 1998 EARNINGS PER ORDINARY SHARE 5 87.8p 73.4p Adjustments to exclude exceptional items: Gain on Superdiplo - (7.7p) Far East provisions - 11.7p Write-down of finance leases - (0.1p) Profit on sale of fixed asset - (5.0p) investment ----- ----- ADJUSTED EARNINGS PER ORDINARY SHARE 5 87.8p 72.3p ----- ----- DILUTED EARNINGS PER ORDINARY SHARE 5 86.6p 72.4p ----- ----- CONSOLIDATED BALANCE SHEET 1999 1998 Note £m £m ASSETS Cash and balances at central banks 1,394 1,295 Treasury bills and other eligible 701 639 bills Loans and advances to banks 10,375 11,514 Items in course of collection due from 1,655 1,652 other banks Loans and advances to customers 6 49,340 41,017 Debt securities 15,632 13,021 Less: non-recourse finance (243) (247) 15,389 12,774 Equity shares 913 857 Interests in associated undertakings 43 43 Intangible fixed assets 11 - Tangible fixed assets 2,526 2,005 Other assets 7 5,339 6,801 Prepayments and accrued income 1,166 1,079 ------ ------ TOTAL ASSETS 88,852 79,676 ------ ----- LIABILITIES Deposits by banks 8 6,418 4,437 Items in course of collection due to 975 520 other banks Customer accounts 8 55,180 50,685 Debt securities in issue 9,199 7,459 Other liabilities 9 6,647 8,076 Accruals and deferred income 2,582 2,419 Provisions for liabilities and charges - deferred taxation 465 395 - pensions and other similar 6 20 obligations - other provisions - 9 Subordinated liabilities - dated loan capital 1,917 1,391 - undated loan capital including 1,115 1,220 convertible debt Minority interests - equity 108 73 - non-equity 38 19 Called up share capital 10 224 220 Share premium account 11 2,130 1,458 Other reserves 11 147 113 Revaluation reserve 11 17 (10) Profit and loss account 11 1,684 1,172 ------ ------ TOTAL LIABILITIES 88,852 79,676 ------ ------ MEMORANDUM ITEMS: Contingent liabilities 2,728 2,814 ------ ------ Commitments (mainly standby facilities, credit lines and other commitments to lend) 20,922 15,581 ------ ------ STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 1999 1998 £m £m Profit attributable to ordinary shareholders 776 637 Currency translation adjustments on foreign currency net investments 5 (3) Movements in revaluations of premises 28 14 Movements in net unrealised gains and losses on debt securities and equity shares - (4) ----- ----- Total recognised gains and losses 809 644 ----- ----- RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 1999 1998 £m £m Profit attributable to ordinary shareholders 776 637 Ordinary dividends (254) (215) ----- ----- Retained profit 522 422 Other recognised net gains and losses relating 33 7 to the year Currency translation on share premium account 23 (42) Increase in share capital 4 4 Premium arising on issues of shares 609 239 Elimination of goodwill on acquisitions - (754) Write-back of goodwill 28 50 Other movements 30 (15) ----- ----- Net increase/(decrease) in shareholders' funds 1,249 (89) Opening shareholders' funds 2,953 3,042 ----- ----- Closing shareholders' funds 4,202 2,953 ----- ----- CASH FLOW STATEMENT 1999 1998 £m £m Net cash inflow from operating activities 5,059 1,087 Returns on investments and servicing of (295) (285) finance Taxation (311) (135) Capital expenditure and financial (3,415) (1,176) investment Acquisitions and disposals 16 (917) Ordinary equity dividends paid (138) (193) ------ ------ Net cash inflow/(outflow) before financing 916 (1,619) Financing 959 370 ----- ------ Increase/(decrease) in cash 1,875 (1,249) ----- ------ RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Operating profit - the company and its 1,211 944 subsidiary undertakings Increase in interest receivable and (87) (150) prepaid expenses Increase in interest payable and accrued 126 607 expenses Decrease in other provisions (9) (14) Increase in provisions for bad and 94 182 doubtful debts Interest payable on subordinated 251 226 liabilities Depreciation and diminution in value of 278 243 fixed assets Profit on sales of tangible fixed assets (5) (10) Profit on sales of investment securities (112) (72) and associated undertakings Profit on sale of fixed asset investment - (57) Other non-cash movements 7 208 ----- ----- Net cash inflow from trading activities 1,754 2,107 Net increase/(decrease) in deposits by 1,941 (958) banks Increase in customer accounts 4,495 3,018 Net increase in debt securities in issue 1,740 1,864 Increase in loans to customers (8,425) (2,530) Net decrease in loans to banks 2,915 1,293 Increase in items in course of collection (3) (582) due from other banks Increase/(decrease) in items in course of 455 (116) collection due to other banks Increase in treasury bills and other (62) (10) eligible bills Decrease/(increase) in debt securities and equity shares (other than investment 159 (2,480) securities) Net decrease/(increase) in other assets 1,823 (1,985) Net (decrease)/increase in other (1,733) 1,466 liabilities ------ ------ Net cash inflow from operating activities 5,059 1,087 ------ ------ DIVISIONAL PERFORMANCES - UK BANK 1999 1998 £m £m Net interest income 1,082 1,001 Non-interest income 829 715 ----- ----- Total income 1,911 1,716 Expenses 991 949 ----- ----- Profit before provisions 920 767 Provisions for bad and 171 132 doubtful debts Amounts written off 13 9 investments ----- ----- Profit before exceptional 736 626 items ----- ----- Cost:income ratio (%) 51.9 55.3 Total assets (£bn) 57.9 51.8 Employees at 30 September 18,160 17,830 The UK Bank figures for 1998 have been restated to exclude RBS Cards, which is now shown separately. The UK Bank increased its profit before exceptional items by 18%, from £626 million to £736 million. Income increased by 11%, mainly due to higher corporate advances and increased fee income, whilst costs increased by only 4%. As a result, the UK Bank's cost:income ratio improved further, from 55.3% to 51.9%. UK Bank provisions for bad debts increased from £132 million to £171 million due to higher volumes in both corporate and personal advances. Notes: The UK Bank excludes RBSI, Angel Trains, RBS Cards, Investor Services (i.e. RBS Trust Bank and RBS Global Custody), Tesco Personal Finance and Virgin Direct Personal Finance, which are disclosed separately. The figures for the UK Bank on page 31 assume that it had a total risk asset ratio of 10% and that the tier 1 element was 6%, split between ordinary equity and preference shares in the same ratio as the Group. DIVISIONAL PERFORMANCES - NEW RETAIL FINANCIAL SERVICES BUSINESSES 1999 1998 £m £m Net interest income 82 50 Non-interest income - associated companies - (4) - other 31 16 Insurance premium income 76 47 ----- ---- Total income 189 109 Expenses 130 117 General insurance claims 75 45 ------ ---- Loss before provisions (16) (53) Provisions for bad and doubtful debts 19 6 ----- ----- Loss before tax (35) (59) ----- ----- Total assets (£m) 3,748 2,293 Employees at 30 September 2,440 2,350 All of the New Retail Financial Services Businesses are treated as subsidiaries, except Direct Line Life/Unit Trusts and Linea Directa, which are treated as associated companies. RBS Advanta, which had previously been included in New Retail Financial Services Businesses, is now integrated with RBS Cards. The comparative figures for 1998 have been adjusted to reflect this. Direct Line Financial Services Commenced 1999 1998 Trading % £m £m owned Profit before tax Mar 93 100 8 6 Direct Line Financial Services has continued to make progress and increased its profit to £8 million. Personal loans grew by 60%, from £214 million to £343 million and mortgages were maintained at £1.4 billion. Privilege Insurance Commenced 1999 1998 Trading % £m £m owned Loss before tax Oct 94 100 (9) (4) Privilege Insurance increased its policy numbers from 264,000 to 445,000, a rise of 69%. Increased losses reflect a higher level of claims during the year. Direct Line Life/Unit Trusts Commenced 1999 1998 Trading % £m £m owned Profit/(loss) before tax Feb 95 50 1 (2) Direct Line Life/Unit Trusts made a profit of £1 million in 1999 compared with a loss of £2 million in the previous year. The number of policyholders was 36,800 at 30 September 1999. Linea Directa Commenced 1999 1998 Trading % £m £m owned Loss before tax Jun 95 50 (1) (2) Linea Directa increased its policy numbers from 177,000 to 212,000. The Group's share of its losses was £1 million in 1999, compared with a loss of £2 million in the previous year. Direct Line Accident Commenced 1999 1998 Management Trading % £m £m owned Loss before tax Aug 95 100 (7) (9) Direct Line Accident Management made a loss of £7 million, £5 million of which relates to the loss incurred on two discontinued repair centres. Tesco Personal Finance Commenced 1999 1998 Trading % £m £m owned Loss before tax Jul 97 50 (12) (35) Tesco Personal Finance made a loss of £12 million in 1999 compared with a loss of £35 million in the previous year. By the end of the year the venture was trading profitably. At 30 September 1999, Tesco Personal Finance had advances of £846 million (1998 - £259 million) and deposits of £978 million (1998 - £735 million). Virgin Direct Personal Finance Commenced 1999 1998 Trading % £m £m owned Loss before tax Oct 97 50 (15) (13) Virgin Direct Personal Finance made a loss of £15 million in 1999, mainly due to marketing costs, compared with a loss of £13 million in the previous year. At 30 September 1999 Virgin Direct Personal Finance had advances of £790 million compared with £155 million at 30 September 1998. DIVISIONAL PERFORMANCES - ANGEL TRAINS 1999 1998 £m £m Operating lease rentals 291 228 Interest payable (62) (45) ----- ----- Total income 229 183 Depreciation and maintenance 150 118 Administrative expenses 26 19 ----- ----- Profit before tax 53 46 ----- ----- Cost:income ratio (%) 77 75 Total assets (£m) 1,642 887 Employees at 30 September 110 80 Angel Trains has contributed a profit of £53 million, 15% higher than 1998, which represented nine and a half months trading. Angel Trains continued its success in winning new business by negotiating an agreement with Virgin Rail to supply the rolling stock for the West Coast main line. This transaction, together with the previously announced order for English, Welsh and Scottish Railways accounted for most of the increase in total assets during the year. Note: The purchase of Angel Trains in December 1997 for £395 million was funded by equity of £200 million and borrowings of £195 million. A further payment of £13 million representing contingent consideration was made during the year. The interest on the borrowings has been deducted in arriving at the profit disclosed above. DIVISIONAL PERFORMANCES - RBS CARDS 1999 1998 £m £m Net interest income 144 98 Non-interest income 125 109 ----- ----- Total income 269 207 Expenses 113 99 ----- ----- Profit before provisions 156 108 Provisions for bad and doubtful debts 71 47 ---- ---- Profit before tax 85 61 ---- ---- Cost:income ratio (%) 42.0 47.8 Total assets (£m) 2,286 1,944 Employees at 30 September 1,200 1,080 RBS Cards comprises the credit card businesses previously included in the UK Bank, and RBS Advanta, which was previously included as part of the New Retail Financial Services Businesses. RBS Cards has made a profit of £85 million compared with £61 million in 1998, an increase of 39%. Total income increased by 30% and expenses increased by only 14%. As a result the cost:income ratio improved from 47.8% to 42.0%. Provisions for bad debts were £24 million higher than the prior year, reflecting the growth in credit card advances in recent years. At 30 September 1999 credit card balances were over £2.2 billion and the number of accounts over 2.2 million. DIVISIONAL PERFORMANCES - INVESTOR SERVICES 1999 1998 £m £m Net interest income 6 17 Non-interest income 154 120 ----- ----- Total income 160 137 Expenses 146 132 ----- ----- Profit before tax 14 5 ----- ----- Cost:income ratio (%) 91 96 Employees at 30 September 1,310 1,190 On 31 October 1999, the Group completed the sale of its main investor services businesses to The Bank of New York. DIVISIONAL PERFORMANCES - DIRECT LINE INSURANCE 1999 1998 £m £m Earned premiums 754 672 Reinsurers' share (120) (119) ----- ----- Insurance premium income 634 553 Net interest income 60 66 Non-interest income 69 46 ----- ----- Total income 763 665 Expenses 147 128 Gross claims 611 561 Reinsurers' share (96) (88) ----- ----- Profit before tax 101 64 ----- ----- In-force policies (000) Motor 2,179 2,053 Home 894 863 ------ ----- Total 3,073 2,916 ------ ----- Operating ratio (%) 96 101 Total assets (£m) 1,411 1,201 Insurance reserves - net (£m) 997 872 Employees at 30 September 3,290 3,200 Direct Line Insurance increased its profit from £64 million to £101 million, an increase of 58%. Overall, premium income was up by 15%, while expenses were also up by 15%. Claims increased by 9%. In motor insurance, policy numbers increased by 6%. Average written motor premiums were up by 8%. In motor insurance, the operating ratio (the total of expense ratio and claims ratio) improved from 109% to 102%. In home insurance, policy numbers increased from 863,000 to 894,000. The increase in average written premiums was 1%. In home insurance, the operating ratio increased from 85% to 90%. In Direct Line Rescue, the number of policies has grown to 330,000. In October 1999, Direct Line announced the acquisition of Green Flag, which has over 2.5 million customers. Direct Line completed the acquisition on 26 November 1999. Note: These accounts are prepared on the basis of the Group's normal accounting policies. Direct Line Insurance's own accounts are prepared in line with normal insurance industry practice. DIVISIONAL PERFORMANCES - CITIZENS 1999 1998 £m £m Net interest income 408 376 Non-interest income 141 117 ----- ----- Total income 549 493 Expenses 292 264 ----- ----- Profit before provisions 257 229 Provisions for bad and doubtful debts 15 15 ----- ----- 242 214 Gain on sale of consumer credit card portfolio - 33 ----- ----- Profit before tax 242 247 ----- ----- Cost:income ratio (%) 53.2 50.2 Total assets (£m) 11,824 9,714 Employees at 30 September 5,190 5,010 US$/£ rate of exchange - average $1.63 $1.65 Citizens profit of £242 million is a 13% increase over the prior year profit adjusted for the one-off gain of £33 million in 1998. Excluding this gain the cost:income ratio shows an improvement from 53.5% to 53.2%. Income, excluding the one-off gain in 1998, was up by 11%,and expenses were also up by 11%. The increase in Citizens' income reflects strong volume growth in both commercial and consumer loans and increased income from service fees. In October 1999, Citizens completed the acquisition of the major part of the commercial banking business of State Street Corporation for a cash premium of US$350 million. This business has commercial loans totalling US$2.3 billion and deposits of US$1.1 billion. In June 1999, Citizens announced that it had entered into an agreement to acquire, by way of merger, the entire issued share capital of UST Corp. of Boston, Massachusetts for a consideration of approximately US$1.4 billion. The acquisition is expected to complete in early 2000. DIVISIONAL PERFORMANCES - THE ROYAL BANK OF SCOTLAND INTERNATIONAL (RBSI) 1999 1998 £m £m Net interest income 85 68 Non-interest income 44 36 ----- ----- Total income 129 104 Expenses 59 49 ----- ----- Profit before provisions 70 55 Provisions for bad and doubtful debts - - ----- ----- Profit before tax 70 55 ----- ----- Cost:income ratio (%) 45.7 47.1 Total assets - gross (£m) 7,877 7,259 Employees at 30 September 920 890 The Royal Bank of Scotland International, headquartered in Jersey, increased its profit from offshore banking by 27% to £70 million (1998 - £55 million). Income rose by 24%, and costs by 20%, reflecting growth in the business. RBSI continues to make good progress in each of its four main activities: offshore personal banking, investor services, the treasury operation and its corporate banking services. On 31 October 1999, RBSI completed the sale of 30% of its investor services businesses to The Bank of New York. DIVISIONAL PERFORMANCES - CENTRAL ITEMS The Centre's deficit for the year ended 30 September 1999 was as follows: 1999 1998 £m £m Central income less expenses 16 2 Funding costs (71) (40) ----- ----- Deficit before exceptional items (55) (38) ----- ----- The Centre's balance sheet at 30 September 1999 was as follows: 1999 1998 £m £m Book value of the shareholders' funds of business units: UK Bank 2,460 2,178 New Retail Financial Services Businesses 119 97 Angel Trains 291 235 RBS Cards 201 148 Investor Services 64 55 Direct Line Insurance 362 315 Citizens 905 707 RBSI 359 299 ----- ---- 4,761 4,034 Net borrowing by the Centre (559) (1,081) ----- ----- 4,202 2,953 ----- ----- Funded by Group shareholders' funds: Preference shares 1,350 838 Ordinary shareholders' funds 2,852 2,115 ----- ----- 4,202 2,953 ----- ----- Investment in Banco Santander Central Hispano (BSCH) The investment in BSCH is held in the Centre and at 30 September 1999 the unrecognised surplus over book value was £354 million (1998 - £230 million). NOTES 1. Accounting policies The Group has adopted FRS 10 - 'Goodwill and Intangible Assets', resulting in goodwill arising on acquisitions after 1 October 1998 being capitalised on the balance sheet, and amortised over its useful life, if appropriate. Previously goodwill arising on acquisitions was charged to reserves immediately. No adjustment has been made to goodwill previously charged to reserves. The Group has also adopted FRS 11 - 'Impairment of Fixed Assets and Goodwill' and FRS 12 - 'Provisions, Contingent Liabilities and Contingent Assets'. The impact of adopting these new standards was not material in the years ended 30 September 1999 and 1998. 2. Provisions for bad and doubtful debts Group operating profit is stated after charging provisions for bad and doubtful debts of £276 million (1998 - £332 million, including a £132 million exceptional provision). The balance sheet provisions for bad and doubtful debts increased from £633 million to £737 million, and the movements therein were: 1999 1998 Specific General Total Specific General Total £m £m £m £m £m £m At 1 October 454 179 633 354 105 459 Currency translation 9 1 10 (6) (2) (8) adjustments Amounts written off net of (182) - (182) (139) - (139) recoveries Additions on acquisitions - - - - 1 1 Released on disposal - - - (12) - (12) Transfers between provisions 12 (12) - (3) 3 - Charge to profit and loss account - UK Bank 172 (1) 171 129 3 132 - New Retail Financial 16 3 19 3 3 6 Services Businesses - RBS Cards 71 - 71 47 - 47 - Citizens 15 - 15 15 - 15 Charge to profit and loss 274 2 276 194 6 200 account Exceptional charge to profit - - - 66 66 132 and loss account ---- ----- ---- ---- ---- ---- At 30 September 567 170 737 454 179 633 ---- ----- ---- ---- ---- ---- 3. Tax charge The charge for taxation is based on a UK corporation tax rate of 30.5% for the year to 30 September 1999 (1998 - 31%) and is made up as follows: 1999 1998 £m £m Current year charge - UK 305 244 - Overseas 64 72 Prior year (8) (14) Exceptional items - (16) ----- ----- Tax charge 361 286 ----- ----- The tax charge of £361 million on profit before tax of £1,211 million represents an effective rate of 29.8%. 4. Ordinary dividends The directors have recommended a final dividend of 20.3p on the ordinary shares for the year to 30 September 1999. If approved by the shareholders, this dividend will be paid on 18 February 2000 to those shareholders registered on 17 December 1999. Together with the interim dividend, this will make a total distribution of 28.5p per share, an increase of 16%. If the necessary approval of the dividend is obtained from shareholders at the annual general meeting on 13 January 2000, a scrip dividend election, as an alternative to cash, is to be offered and shareholders will receive details of this by letter after that date. 5. Earnings per share The earnings per share figures disclosed on page 7 have been calculated in accordance with FRS 14 - 'Earnings per Share', and are based on the following: 1999 1998 £m £m Earnings: Profit attributable to ordinary 776 637 shareholders Exceptional items - (10) ----- ----- Profit attributable to ordinary shareholders before exceptional items 776 627 ----- ----- Number of shares - millions Number of ordinary shares: Weighted average number of ordinary shares in issue during the year 883.8 867.2 Dilutive effect of share options 12.4 12.6 outstanding ----- ----- Diluted weighted average number of ordinary shares in issue during the year 896.2 879.8 ----- ----- 6. Loans and advances to customers 1999 1998 £m £m UK offices ECGD and government 150 78 Manufacturing 2,715 2,075 Construction 648 543 Finance 2,891 2,197 Service industries 5,585 4,968 Agriculture, forestry and fishing 673 643 Property 3,668 2,935 Business and other services 2,477 2,011 Individuals - mortgages 9,544 8,317 - other 6,283 4,550 Instalment credit and other loans 1,059 900 Finance leases 2,555 2,587 Overseas residents 2,799 2,248 ------ ------ 41,047 34,052 ------ ------ Overseas offices Continental Europe 1,046 484 United States 6,807 5,811 Rest of the World 1,177 1,303 ------ ------ 9,030 7,598 ------ ------ Total 50,077 41,650 Provisions for bad and doubtful debts (737) (633) (Note 2) ------ ----- Total loans and advances to customers 49,340 41,017 ------ ------ 7. Other assets 1999 1998 £m £m Long-term assurance fund assets attributable to policyholders 2,013 1,709 Foreign exchange and interest rate contracts 1,150 2,603 Other 2,176 2,489 ----- ----- 5,339 6,801 ----- ----- 8. Analysis of deposits 1999 1998 £m £m Deposits by banks Repayable on demand 1,890 1,486 With agreed maturity dates or periods of notice, by remaining maturity - three months or less 2,703 1,989 - one year or less but over three months 1,398 687 - five years or less but over one year 94 20 - over five years 333 255 ------ ----- 6,418 4,437 ------ ----- Customer accounts Repayable on demand 35,925 32,232 With agreed maturity dates or periods of notice, by remaining maturity - three months or less 14,759 14,507 - one year or less but over three months 3,150 2,607 - five years or less but over one year 947 1,023 - over five years 399 316 ------ ------ 55,180 50,685 ------ ------ 9. Other liabilities 1999 1998 £m £m Notes in circulation 873 930 Long-term assurance fund liabilities to 2,013 1,709 policyholders Foreign exchange and interest rate contracts 1,451 2,709 Short positions 312 732 Current taxation 185 229 Proposed final dividend 181 153 Other liabilities 1,632 1,614 ----- ----- 6,647 8,076 ----- ----- 10. Called up share capital Non-cum Cum dollar Ordinary pref pref Total £m £m £m £m 1 October 1998 218 1 1 220 Issued during the year 4 - - 4 ----- ---- ---- ----- 30 September 1999 222 1 1 224 ----- ---- ---- ----- During the year to 30 September 1999, 5.5 million ordinary shares were allotted under share option schemes, 1.8 million ordinary shares were allotted under the profit sharing (share ownership) scheme and 9.0 million ordinary shares were allotted in lieu of cash dividends. In addition, the company issued 12 million Series H, 12 million Series I and 9 million Series J, non-cumulative dollar preference shares of US$0.01 each at US$25.00 per share. 11. Reserves £m At 1 October 1998 2,733 Currency translation adjustments 28 Premium on issues of shares 609 Movements on revaluation of premises 28 Write-back of goodwill 28 Retained profit for the year 522 Other movements 30 ------ At 30 September 1999 3,978 ------ The reserves of the Group include share premium of £2,130 million, of which £1,349 million relates to the issues of non-cumulative dollar preference shares. AVERAGE BALANCE SHEET 1998/99 1997/98 Average Average Balance Rate Balance Rate £m % £m % ASSETS Treasury and other eligible bills UK 740 6.1 646 7.5 Overseas 3 4.8 30 5.0 Loans and advances to banks UK 9,157 5.4 11,804 6.6 Overseas 960 4.8 1,582 5.7 Loans and advances to customers UK 34,209 7.7 28,777 8.9 Overseas 7,911 7.5 7,188 8.3 Lease and HP receivables UK 3,408 8.3 3,358 9.0 Overseas 279 6.3 133 7.4 Debt securities UK 10,676 5.9 6,845 7.4 Overseas 4,168 6.5 3,739 6.5 ------ ------ ------ ----- Interest earning assets 71,511 7.0 64,102 8.0 Non-interest earning assets 12,946 ------ 10,538 ----- ------ ------ Total average assets 84,457 74,640 ------ ------ LIABILITIES Deposits by banks UK 5,344 5.4 4,144 6.6 Overseas 1,038 4.6 1,289 5.7 Customer accounts UK 39,775 4.6 35,313 6.0 Overseas 8,708 3.9 8,732 4.4 Debt securities in issue UK 6,594 6.2 5,750 7.2 Overseas 1,674 4.9 812 5.0 Loan capital 2,901 8.7 2,517 9.0 ------ ------ ------ ----- Interest bearing liabilities 66,034 4.9 58,557 6.0 Interest free liabilities ------ ----- Demand deposits 3,010 2,877 Other liabilities 11,893 10,144 Shareholders' funds 3,520 3,062 ------ ------ Total average liabilities 84,457 74,640 ------ ------ Average balances have been calculated on a daily basis using customers' cleared balances, netted where interest set-off arrangements exist. The analysis into UK and overseas in the above table has been compiled on the basis of location of office. AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS 1999 1998 Average Average Rate Rate % % United Kingdom The Bank's base rate 5.7 7.3 London inter-bank offered rate: Three month sterling 5.7 7.5 Three month eurodollar 5.2 5.6 Yields, spreads and margins: Gross yield (1) Group 7.0 8.0 UK 7.0 8.2 Overseas 7.0 7.4 Interest spread (2) Group 2.1 2.0 UK 1.9 1.8 Overseas 2.9 2.8 Interest margin (3) Group 2.5 2.5 UK 2.2 2.3 Overseas 3.4 3.5 (1) Gross yield is the average interest rate earned on average interest earning assets. (2) Interest spread is the difference between the gross yield and the average interest rate paid on average interest bearing liabilities. (3) Interest margin is net interest income as a percentage of average interest earning assets. RISK ELEMENTS IN LENDING The Group's advances 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. 1999 1998 £m £m Loans accounted for on a non-accrual basis: Domestic 378 416 Foreign 170 148 Accruing loans which are contractually overdue 90 days or more as to principal or interest: * Domestic 322 311 Foreign 110 117 Loans not included above which are classified as 'troubled debt restructurings' by the SEC: Domestic 13 15 Foreign 104 5 ----- ----- Total 1,097 1,012 ----- ----- Provisions as a % of risk elements in lending 67% 63% * Generally, lending by way of overdraft has no fixed repayment schedule and consequently is not included in this category. Loans that are current as to payment of principal and interest and not reflected in the above table, but in respect of which the Group has serious doubts about the ability of the borrower to comply with loan repayment terms, totalled approximately £246 million at 30 September 1999 (1998 - £143 million). In accordance with the Group's provisioning policy for bad and doubtful debts it is considered that adequate provisions for the above risk elements in lending have been made in the accounts. Gross interest income not recognised but which would have been recognised in the year ended 30 September 1999 under the original terms of non-accrual and restructured loans amounted to £53 million from domestic loans and £32 million from foreign loans. Interest on non-accrual and restructured loans included in the consolidated profit and loss account in the year ended 30 September 1999 totalled £4 million from domestic loans and £13 million from foreign loans. DERIVATIVES BUSINESS In the normal course of business, the Group enters into a variety of derivative transactions which are primarily in the foreign exchange and interest rate markets. They are used to provide financial services to customers, to take, hedge and modify positions as part of the Group's trading activities and to hedge or modify market risk exposure arising on the balance sheet from a variety of activities, including lending and securities investment. Market risk The Group uses a variety of techniques to measure the risk of loss arising from adverse movements in market prices. These include value at risk methodology (VaR) for quantifying exposure. The following table shows the trading market risk related VaR. 1999 1998 £m £m As at 30 September 2.6 1.1 1999 1998 High Low Average High Low Average £m £m £m £m £m £m Year ended 30 2.9 1.0 1.9 1.8 0.6 1.1 September The figures above are subject to the assumptions and limitations of the Group's VaR model. The model is based on historic movements which may not be indicative of future market conditions. The Group continuously researches this and other limitations to the model and also uses other techniques to measure and manage market related risk. MORE TO FOLLOW FR BPBTBLLITTRL

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