Final Results
Royal Bank of Scotland Group PLC
24 February 2005
THE ROYAL BANK OF SCOTLAND GROUP plc
CONTENTS Page
Results summary 2
2004 Highlights 3
Group Chief Executive's review 4
Financial review 8
Summary consolidated profit and loss account 10
Divisional performance 11
Corporate Banking and Financial Markets 12
Retail Banking 14
Retail Direct 16
Manufacturing 18
Wealth Management 19
RBS Insurance 20
Ulster Bank 22
Citizens 24
Central items 26
Average balance sheet 27
Average interest rates, yields, spreads and margins 28
Statutory consolidated profit and loss account 29
Consolidated balance sheet 30
Overview of consolidated balance sheet 31
Statement of consolidated total recognised gains and losses 33
Reconciliation of movements in consolidated shareholders' funds 33
Consolidated cash flow statement 34
Notes 35
Analysis of income, expenses and provisions 41
Asset quality 42
Analysis of loans and advances to customers 42
Cross border outstandings 43
Risk elements in lending 44
Provisions for bad and doubtful debts 45
Market risk 46
Regulatory ratios and other information 47
Additional financial data for US investors 48
Forward-looking statements 49
Restatements 50
Financial calendar 52
Contacts 52
THE ROYAL BANK OF SCOTLAND GROUP plc
RESULTS SUMMARY
2004 2003
(restated) Increase
£m £m £m %
Total income 22,754 19,281 3,473 18
_______ _______ _______
Operating expenses* 9,662 8,524 1,138 13
_______ _______ _______
Operating profit before provisions* 9,612 8,562 1,050 12
_______ _______ _______
Profit before tax, goodwill amortisation and integration costs 8,101 7,068 1,033 15
_______ _______ _______
Profit before tax 6,917 6,076 841 14
_______ _______ _______
Cost:income ratio** 40.8% 42.6%
_______ _______
Basic earnings per ordinary share 138.0p 76.9p 61.1p 79
_______ _______ _______
Adjusted earnings per ordinary share 172.5p 157.2p 15.3p 10
_______ _______ _______
Dividends per ordinary share 58.0p 50.3p 7.7p 15
_______ _______ _______
* excluding goodwill amortisation and integration costs.
** the cost:income ratio is based on operating expenses excluding
goodwill amortisation and integration costs, and after netting operating
lease depreciation against rental income.
Sir Fred Goodwin, Group Chief Executive, said:
'These results demonstrate very clearly three key features of the Group - strong
organic income growth, the creation of additional growth options, both at home
and internationally and our ability to deliver integration benefits from
acquisitions. Consequently, we believe that we can deliver superior value for
our shareholders, our customers and our people in 2005.'
THE ROYAL BANK OF SCOTLAND GROUP plc
2004 HIGHLIGHTS
• Income up 18% to £22,754 million.
• Profit before tax, goodwill amortisation and integration costs up £1,033
million, 15% to £8,101 million.
• Profit before tax up 14% to £6,917 million.
• Underlying margin stable and in line with expectations.
• Further efficiency gains - cost:income ratio 40.8%, improved from 42.6% in
2003.
• Customer growth in all divisions.
• Average loans and advances to customers up 19%.
• Average customer deposits up 10%.
• Credit quality remains strong.
• Basic earnings per ordinary share up 79%.
• Adjusted earnings per ordinary share up 10%.
• Total dividend 58.0p per ordinary share up 15%.
THE ROYAL BANK OF SCOTLAND GROUP plc
GROUP CHIEF EXECUTIVE'S REVIEW
Our results for 2004 demonstrate the Group's ability to sustain growth across
the broad range of our businesses. Strong organic income growth has been
supplemented by a significant contribution from recent acquisitions, while
efficiency and credit quality have continued to improve. The result has been a
15% increase in our profit before tax, goodwill amortisation and integration
costs to £8,101 million. Our profit before tax rose by 14% to £6,917 million and
adjusted earnings per share by 10% to 172.5p.
Total income rose 18%. The key to this strong performance has been the Group's
ability to maintain momentum in organic income growth across its divisions.
Excluding acquisitions and exchange rate fluctuations, total income grew by 11%,
with good contributions from each of our divisions. Every division delivered
organic increases in customer numbers, income and contribution to Group
operating profit.
This organic performance has been complemented by a number of important
acquisitions, which have strengthened the market position of our businesses and
enhanced their ability to continue to grow their income. The most significant of
these was the acquisition of Charter One, which expanded Citizens' footprint
into a number of adjacent states in the Mid West, creating one of the ten
largest banks in the US.
The diversity of our income streams is an important factor in our ability to
maintain consistent growth. Non-interest income represents 60% of the Group's
total income, and our business and geographical diversity also means that our
future income is not unduly exposed to any single activity.
Net interest income grew by 11%, reflecting strong growth in average loans and
advances to customers and in average customer deposits. The Group net interest
margin was 2.92%, five basis points lower than in 2003, but unchanged from the
first half of 2004. The inclusion of First Active, with its portfolio of
low-risk mortgages, contributed to this modest year-on-year decline, as did the
strong organic growth in mortgage lending, while consumer lending spreads
continued to tighten. Against this, Group margins benefited from increased
lending to commercial and mid-corporate customers and from the impact of rising
interest rates. Non-interest income grew by 23%, reflecting strong organic
growth in insurance premium income, good growth in fees and commissions and the
acquisition in September 2003 of Churchill.
We have maintained our focus on efficiency, improving the Group cost:income
ratio to 40.8%, compared with 42.6% in 2003 and underlying cost:income ratio
improved again in the second half of the year. Operating expenses increased by
9% to support organic growth and by a further 4% as a result of acquisitions.
The Group continued to invest in initiatives that will enhance its ability to
serve its customers and improve its efficiency. We have invested in CBFM's debt
capital markets capability in the US. The Group Efficiency Programme, launched
in 2003, is progressing well, and we remain confident that it will lead to
further improvements in the Group cost:income ratio.
Overall credit quality continued to improve, and the charge for provisions rose
by just 1% to £1,511 million, much less than the rise in lending. Credit metrics
continue to improve, with risk elements in lending and potential problem loans
falling to 1.66% of gross loans and advances, compared with 2.24% at the end of
2003. Balance sheet provision coverage of risk elements in lending and potential
problem loans improved from 68% at the end of 2003 to 73% at the end of 2004.
Provisions in Retail Banking have risen, reflecting the seasoning of NatWest's
loan portfolio following its strong growth since 2000, while UK credit cards, in
line with the market, are seeing some increase in arrears levels. Offsetting
this, the improving corporate credit environment resulted in lower provisions in
CBFM.
At 31 December 2004, following the completion of the Charter One acquisition,
our Tier 1 capital ratio was 7.0% and our total capital ratio was 11.7%.
THE ROYAL BANK OF SCOTLAND GROUP plc
GROUP CHIEF EXECUTIVE'S REVIEW (continued)
REVIEW OF DIVISIONS
Corporate Banking and Financial Markets (CBFM) increased its income by 12% and
its contribution by 18% to £4,265 million. CBFM is the largest provider of
banking services to UK businesses.
Net interest income rose by 10%, or by 12% if the cost of funding rental assets
is excluded. The increase reflects strong growth in lending to mid-corporate
customers, while customer deposits also grew. The strength of our mid-corporate
business led to an improvement in net interest margin.
Non-interest income increased by 14%, as a result of steady growth in lending
fees and income from rental assets and financial markets. Dealing profits
increased by 12%, reflecting growth across all customer segments. The Group's
average trading value-at-risk (VaR) remains modest and was £10.8 million (2003 -
£9.4 million).
CBFM's expenses were 15% higher, reflecting strong growth in all businesses and
the investment we have made in the expansion of our overseas operations
including our US debt capital markets business.
CBFM's contribution before provisions for bad debts was up by 11%. Provisions
were 23% lower than in 2003.
Retail Banking increased its income by 6% and its contribution by 3% to £3,279
million.
Net interest income was up by 5%, reflecting good growth in mortgage lending and
an increase in other loans, albeit at lower interest margins. Our market share
of net mortgage lending has risen to over 7% in 2004 from around 5% in 2003.
This strong growth in low-risk mortgage assets has contributed to the reduction
in net interest margin. Both mortgage and non-mortgage lending have evidenced a
slowdown in growth in the second half of the year. Non-interest income grew by
8%. Our customer base expanded, with the number of personal current accounts
growing by 3% and particularly strong recruitment of student and youth accounts.
We added 1,000 extra front-line staff to the branch network. Including this, the
overall increase in costs was contained to 4%.
Retail Banking's contribution before provisions was up by 7%. As anticipated,
provisions rose from £273 million in 2003 to £389 million in 2004, reflecting
the seasoning of NatWest's loan portfolio following its strong growth since
2000, as well as some increase in fraud, as reported in the first half.
Retail Direct increased its income by 16% and its contribution by 18% to £1,040
million. Excluding acquisitions, its contribution rose by 14%.
Higher net interest income reflected an increase in average loans and advances
to customers, spread across mortgages, credit card balances and personal loans.
Customer numbers rose by 14%, partly as a result of the acquisition of the US
credit card business of People's Bank. Retail Direct also reached agreements to
distribute consumer loans to the customers of Tchibo, a leading German retailer,
and credit cards to the customers of Kroger, the second largest US supermarket
group. The new MINT credit card was launched in December 2003, and 711,000 cards
have been issued to date. Tesco Personal Finance increased its customer base to
4.8 million, with particularly strong sales of insurance products.
Retail Direct enhanced its position in international card and internet payments
through the acquisitions of Bibit, a leading European internet payments
specialist, and Lynk Systems, an Atlanta-based US merchant acquirer.
Manufacturing's costs increased by 15% to £2,439 million. Of the £325 million
increase, £82 million reflects the acquisitions of Churchill and First Active.
The balance of the increase in costs results from higher business volumes,
continued investment in Group Efficiency Programme initiatives, which are
expected to improve the future performance of the Group, and the ongoing upgrade
of the Group's property portfolio.
THE ROYAL BANK OF SCOTLAND GROUP plc
GROUP CHIEF EXECUTIVE'S REVIEW (continued)
Wealth Management increased its total income by 17% and its contribution by 16%
to £468 million. Net interest income increased by 9% to £497 million, as a
result of growth in both lending and deposits. Non-interest income grew by 28%
to £451 million, reflecting higher fee income as a result of improved equity
markets and the acquisition of Bank von Ernst in November 2003. Bank von Ernst
remains on track to deliver the expected benefits. Excluding acquisitions and
disposals, income rose by 12% and contribution by 14%.
RBS Insurance increased its income by 52% and its contribution by 42% to £862
million, reflecting both the acquisition of Churchill in September 2003 and
organic growth. Excluding Churchill, income grew 17% and contribution 13%.
Churchill's performance has also been good and the integration is on track. The
Privilege brand was successfully relaunched in August, targeting motorists with
four years or more of no-claims discount. RBS Insurance remains the market
leader in UK motor insurance and is now the second largest general insurer in
the UK.
Ulster Bank increased income by 28% and its contribution by 32% to £468 million.
This reflects strong organic growth, particularly in mortgage lending, as well
as the acquisition of First Active, which was completed in January 2004. Both
these factors contributed to a narrowing of the net interest margin. Trading
momentum at First Active is good and the integration is proceeding well.
Citizens increased its income, in US dollars, by 31% and its contribution by 36%
to $1,900 million. Excluding acquisitions, Citizens' contribution in US dollars
increased by 13% to $1,570 million. The acquisition of Charter One was completed
on 31 August 2004, its trading performance has been good, and integration is on
track to deliver the cost savings and income benefits we anticipated. Charter
One's balance sheet has been successfully restructured to reduce risk and
position it for a rising interest rate environment. The weakness of the US
dollar relative to sterling meant that income in sterling terms rose by 17% and
contribution by 21% to £1,037 million.
Our customers
We aim to deliver value for our customers. Our success in achieving this in 2004
is shown by increased customer numbers in each of our divisions, as well as by
positive surveys of customer satisfaction. In NatWest, the option to telephone
branches direct, along with the appointment of over 1,000 additional branch
staff, has led to significant improvements in customer satisfaction. During 2004
our products and our services again won many awards.
Our people
Our people are the key to our success. The continuing commitment of our
employees is evident from the results of our 2004 Employee Opinion Survey. The
response rate to this survey was 84%, our highest ever, and the Group
outperformed the UK and Global Financial Services Norm in 13 out of 14
categories. We continue to invest in our employees through an extensive range of
development and leadership programmes. As a result of organic growth and
acquisitions, staff numbers increased by 15,700 in 2004. We now employ 136,600
people worldwide.
Our shareholders
Our goal is to generate superior sustainable value for our shareholders. The
scale and diversity of our businesses, together with their ability to maintain
consistent organic income growth, provide a strong platform for this. Our
confidence that we can continue to deliver growth is reflected in a 15% increase
in our dividend to 58p per ordinary share. This is the twelfth consecutive year
in which we have increased our dividend per share by 15% or more.
THE ROYAL BANK OF SCOTLAND GROUP plc
GROUP CHIEF EXECUTIVE'S REVIEW (continued)
Outlook
Economic growth during 2004 was strong in virtually all of the economies in
which we operate, and this trend is expected to continue in 2005 albeit at a
slightly lower rate.
We continue to see strong growth in lending to commercial and mid-corporate
customers, and some recovery in demand from large corporates, with consumers
continuing to behave rationally given the prevailing climate and stimuli in
their particular economies. Whilst in the UK context we would expect the
transition away from consumer credit-led activity to continue, the outlook for
employment and hence the economy remains positive.
In a number of respects, 2004 represented a continuation of established themes
within our results: strong income growth, improving efficiency, good credit
quality. Importantly however, the continued development, both organic and
through acquisition, of our businesses has introduced further strength and
diversity in key areas.
As a consequence, we remain confident that we can deliver superior value for our
shareholders, our customers and our people in 2005.
Sir Fred Goodwin
Group Chief Executive
THE ROYAL BANK OF SCOTLAND GROUP plc
FINANCIAL REVIEW
Profit
Profit before tax, goodwill amortisation and integration costs increased by 15%
or £1,033 million, from £7,068 million to £8,101 million. At constant exchange
rates the increase was 18% or £1,278 million.
Profit before tax was up 14%, from £6,076 million to £6,917 million.
The Group made a number of acquisitions during 2004 which had a bearing on the
year's results. These included:
In January 2004, Ulster Bank completed the acquisition of First Active plc, for
a cash consideration of €887 million.
In March 2004, RBS completed the purchase of the credit card business of
People's Bank in the US.
In August 2004, Citizens completed the acquisition of Charter One Financial,
Inc. for a cash consideration of US$10.1 billion.
The Group has adopted Financial Reporting Standard 17 'Retirement Benefits'
('FRS 17') - the standard that replaces SSAP24 'Pension Costs'. The effect on
the prior year of adopting FRS 17 is shown on page 51.
Total income
The Group achieved strong growth in income during 2004. Total income was up 18%
or £3,473 million to £22,754 million. Excluding acquisitions and at constant
exchange rates, total income was up by 11%, £2,004 million.
Net interest income increased by 11% to £9,208 million and represents 40% of
total income (2003 - 43%). Excluding acquisitions and at constant exchange
rates, net interest income was up 8%. Average loans and advances to customers
and average customer deposits grew by 19% and 10% respectively.
Non-interest income increased by 23% to £13,546 million and represents 60% of
total income (2003 - 57%). Excluding acquisitions and at constant exchange
rates, non-interest income was up 13%. There was good growth in transmission
income and other fees, up 17% while general insurance premium income increased
by 58%, reflecting organic growth and the acquisition of Churchill in September
2003. Gross income from rental assets grew by 18%, reflecting strong growth in
operating lease assets.
Net interest margin
The Group's net interest margin at 2.92% was in line with expectations.
Excluding the acquisition of First Active, the Group's net interest margin was
down 0.03% from 2.97% in 2003, principally as a result of strong organic growth
in mortgage lending and the increased funding cost of rental assets, the income
from which is included in other income.
Operating expenses
Operating expenses, excluding goodwill amortisation and integration costs, rose
by 13% to £9,662 million to support the strong growth in business volumes.
Excluding acquisitions and at constant exchange rates, operating expenses were
up by 9%, £739 million.
Cost:income ratio
The Group's ratio of operating expenses (excluding goodwill amortisation and
integration costs and after netting operating lease depreciation against rental
income) to total income improved further to 40.8% from 42.6%. Excluding Charter
One, the Group's cost:income ratio was 40.6%.
Net insurance claims
General insurance claims, after reinsurance, increased by 59% to £3,480 million.
Excluding Churchill, the increase was 20%, consistent with volume growth and
business mix.
THE ROYAL BANK OF SCOTLAND GROUP plc
Financial Review (continued)
Provisions
The profit and loss charge for bad and doubtful debts and amounts written off
fixed asset investments was £1,511 million compared with £1,494 million in 2003.
The charge for provisions in 2004 represented 0.51% of gross loans and advances
to customers (excluding reverse repurchase agreements), compared with 0.64% in
2003.
Credit quality
Credit quality remains strong with no material change during 2004 in the
distribution by grade of the Group's total risk assets.
The ratio of risk elements in lending to gross loans and advances to customers
improved to 1.58% (2003 - 2.01%). Risk elements in lending and potential problem
loans represented 1.66% of gross loans and advances to customers (2003 - 2.24%).
Provision coverage of risk elements in lending and potential problem loans
improved to 73% (2003 - 68%).
Integration
Integration costs in 2004 were £269 million principally relating to the
integration of Churchill and the acquisitions by Citizens.
Earnings and dividends
Basic earnings per ordinary share increased by 79%, from 76.9p to 138.0p. The
final dividend on the Additional Value Shares ('AVS') paid in December 2003
reduced earnings per ordinary share for that year by 49.9p. Adjusting for this
and for goodwill amortisation and integration costs, earnings per ordinary share
increased by 10%, from 157.2p to 172.5p.
A final dividend of 41.2p per ordinary share is recommended, making a total for
the year of 58.0p per share, an increase of 15%. If approved, the final dividend
will be paid on 3 June 2005 to shareholders registered on 11 March 2005. The
total dividend is covered 2.9 times by earnings before goodwill amortisation and
integration costs.
Balance sheet
Total assets were £583 billion at 31 December 2004, 28% higher than total assets
of £454 billion at 31 December 2003.
Lending to customers, excluding repurchase agreements and stock borrowing
('reverse repos'), increased in 2004 by 28% or £64.8 billion to £293.3 billion.
Excluding acquisitions and reverse repos, lending increased by 18%. Customer
deposits, excluding repurchase agreements and stock lending ('repos'), grew in
2004 by 16% or £33.0 billion to £242.9 billion. Excluding acquisitions and
repos, deposits increased by 7%.
Although the adoption of FRS 17 has reduced shareholders' funds by £3,220
million (2003 £2,001 million), this has no effect on the Group's regulatory
capital at 31 December 2004.
Capital ratios at 31 December 2004 were 7.0% (tier 1) and 11.7% (total), against
7.4% (tier 1) and 11.8% (total) at 31 December 2003.
Profitability
The adjusted after-tax return on ordinary equity was stable at 20.1%. This is
based on profit attributable to ordinary shareholders before goodwill
amortisation, integration costs and in 2003 the AVS dividend, and average
ordinary equity.
THE ROYAL BANK OF SCOTLAND GROUP plc
SUMMARY CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2004
In the profit and loss account set out below, goodwill amortisation and
integration costs are shown separately. In the statutory profit and loss account
on page 29, these items are included in the captions prescribed by the Companies
Act 1985.
2004 2003
(restated)
£m £m
Net interest income 9,208 8,301
_______ _______
Non-interest income (excluding general insurance) 8,602 7,857
General insurance net premium income 4,944 3,123
_______ _______
Non-interest income 13,546 10,980
_______ _______
Total income 22,754 19,281
Operating expenses 9,662 8,524
_______ _______
Profit before other operating charges 13,092 10,757
General insurance net claims 3,480 2,195
_______ _______
Operating profit before provisions 9,612 8,562
Provisions 1,511 1,494
_______ _______
Profit before tax, goodwill amortisation and integration costs 8,101 7,068
Goodwill amortisation 915 763
Integration costs 269 229
_______ _______
Profit before tax 6,917 6,076
Tax 2,155 1,888
_______ _______
Profit after tax 4,762 4,188
Minority interests (including non-equity) 250 210
Preference dividends 256 261
_______ _______
4,256 3,717
Additional Value Shares dividend - 1,463
_______ _______
Profit attributable to ordinary shareholders 4,256 2,254
Ordinary dividends 1,837 1,490
_______ _______
Retained profit 2,419 764
_______ _______
Basic earnings per ordinary share (Note 4) 138.0p 76.9p
_______ _______
Adjusted earnings per ordinary share (Note 4) 172.5p 157.2p
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
DIVISIONAL PERFORMANCE
The contribution of each division before goodwill amortisation and integration
costs and, where appropriate, Manufacturing costs is detailed below.
2004 2003 Increase
£m £m %
Corporate Banking and Financial Markets 4,265 3,620 18
Retail Banking* 3,279 3,170 3
Retail Direct* 1,040 881 18
Manufacturing* (2,439) (2,114) (15)
Wealth Management* 468 402 16
RBS Insurance* 862 609 42
Ulster Bank* 468 354 32
Citizens 1,037 857 21
Central items** (879) (711) (24)
_______ _______ _______
Profit before goodwill amortisation and integration costs 8,101 7,068 15
_______ _______ _______
* the prior year has been restated to reflect the transfer in 2004 of certain
activities from Wealth Management to Retail Banking and from other divisions,
principally RBS Insurance and Ulster Bank, to Manufacturing (see page 50).
** the prior year has been restated following the implementation of FRS 17.
THE ROYAL BANK OF SCOTLAND GROUP plc
CORPORATE BANKING AND FINANCIAL MARKETS
2004 2003
£m £m
Net interest income excluding funding cost of rental assets 2,959 2,653
Funding cost of rental assets (414) (329)
_______ _______
Net interest income 2,545 2,324
_______ _______
Fees and commissions receivable 1,723 1,537
Fees and commissions payable (277) (220)
Dealing profits (before associated direct costs) 1,855 1,661
Income from rental assets 1,282 1,088
Other operating income 381 307
_______ _______
Non-interest income 4,964 4,373
_______ _______
Total income 7,509 6,697
_______ _______
Direct expenses
- staff costs 1,642 1,410
- other 412 394
- operating lease depreciation 610 518
_______ _______
2,664 2,322
_______ _______
Contribution before provisions 4,845 4,375
Provisions 580 755
_______ _______
Contribution 4,265 3,620
_______ _______
£bn £bn
Total assets** 265.3 219.0
Loans and advances to customers - gross**
- banking book 114.9 99.3
- trading book 10.0 5.0
Rental assets 11.2 10.1
Customer deposits** 74.9 68.6
Weighted risk assets - banking 160.9 140.0
- trading 16.9 12.6
_______ _______
** excluding reverse repos and repos
Corporate Banking and Financial Markets ('CBFM') is the largest provider of
banking services and structured financing to medium and large businesses in the
UK and a growing provider of debt financing and risk management solutions to
large businesses in Europe and North America. It provides an integrated range of
products and services to mid-sized and large corporate and institutional
customers in the UK and overseas, including corporate and commercial banking,
treasury and capital markets products, structured and acquisition finance, trade
finance, leasing and factoring. Treasury and capital markets products are
provided through Financial Markets, which is a leading provider of debt, foreign
exchange and derivatives products.
THE ROYAL BANK OF SCOTLAND GROUP plc
CORPORATE BANKING AND FINANCIAL MARKETS (continued)
Contribution increased by 18%, £645 million to £4,265 million reflecting growth
in all business areas.
Total income was up 12% or £812 million to £7,509 million. Strong growth in all
locations was partially masked by the effect of stronger sterling on the
translation of income from Europe and North American businesses. At constant
exchange rates, income grew by 14% and contribution was up 20%.
Net interest income, excluding the cost of funding rental assets, increased 12%
or £306 million to £2,959 million. Average loans and advances to customers of
the banking business increased by 10% or £9.5 billion to £103.8 billion. The
second half of 2004 saw a modest recovery in large corporate lending. Average
customer deposits within the banking business increased by 8% or £5.0 billion to
£66.0 billion. An improvement in margins was achieved through strong growth in
our UK mid-corporate relationships.
Fees receivable rose by £186 million, 12% to £1,723 million with growth driven
by lending, structured finance and capital markets activities. Fees payable,
including brokerage, were up £57 million to £277 million due to the greater
volumes of trading and structuring business.
Dealing profits, which is income (before associated direct costs) arising from
our role in providing customers with debt and risk management products in
interest rate, currency and credit asset classes, rose by 12% to £1,855 million.
Growth was achieved across all our customer segments and product classes with
further diversification of dealing revenues in the US to compensate for lower
residential mortgage refinancing volume than in 2003. The Group's trading
value-at-risk (VaR) remains modest and the average VaR was £10.8 million (2003 -
£9.4 million).
The asset rental business, comprising operating lease assets and investment
properties continued to grow strongly. Rental assets increased to £11.2 billion
and income after deducting funding costs and operating lease depreciation
increased by 7%, £17 million to £258 million.
Other operating income also grew strongly, up £74 million or 24% to £381
million.
Direct expenses increased by 15% or £342 million to £2,664 million. Excluding
operating lease depreciation, operating expenses were up 14%, £250 million. This
was mainly due to the mix effect of faster growth in businesses with inherently
higher cost:income ratios, such as Capital Markets and our overseas businesses,
together with the investment in new revenue initiatives in the US.
The charge for provisions for bad debts and amounts written off fixed asset
investments amounted to £580 million, a decrease of 23%, £175 million. The
reduction reflects an improvement in corporate credit quality and the economic
environment in 2004.
THE ROYAL BANK OF SCOTLAND GROUP plc
RETAIL BANKING
2004 2003*
£m £m
Net interest income 3,112 2,959
Non-interest income 1,630 1,514
_______ _______
Total income 4,742 4,473
_______ _______
Direct expenses
- staff costs 834 793
- other 240 237
_______ _______
1,074 1,030
_______ _______
Contribution before provisions 3,668 3,443
Provisions 389 273
_______ _______
Contribution 3,279 3,170
_______ _______
£bn £bn
Total banking assets 74.2 63.9
Loans and advances to customers - gross
- mortgages 44.1 36.6
- small business 15.2 13.8
- consumer lending 12.9 11.4
Customer deposits 70.6 66.5
Weighted risk assets 49.7 42.9
_______ _______
*the prior year has been restated to reflect the transfer in 2004 of certain
activities from Wealth Management.
Retail Banking comprises both The Royal Bank of Scotland and NatWest retail
brands. It offers a full range of banking products and related financial
services to the personal, premium and small business markets through a network
of branches, telephone, ATMs and the internet.
The division continued to achieve strong volume growth across all key product
areas - in particular mortgages, loans and savings - supported by increased
customer numbers. As a result, income increased by 6% or £269 million to £4,742
million, and contribution by 3% or £109 million to £3,279 million.
Net interest income rose by 5% or £153 million to £3,112 million, reflecting
strong growth in lending and deposits which more than offset the impact of
business mix - particularly strong growth in low risk mortgage lending - and the
impact of lower margin in some areas, especially unsecured lending. Average
loans to customers, excluding mortgages, grew by 12% or £2.8 billion to £26.5
billion. Average mortgage lending grew by 21% or £7.0 billion to £40.7 billion.
Both mortgage and non-mortgage lending have evidenced a slowdown in growth in
the second half of the year. Average customer deposits increased by 8% or £4.9
billion to £66.0 billion.
Non-interest income rose by 8% or £116 million to £1,630 million. This reflected
higher fee income associated with strong asset growth in both personal and
business sectors together with increased volumes of money transmission activity.
Direct expenses increased by 4% or £44 million to £1,074 million. Staff expenses
increased 5% or £41 million to £834 million, principally due to the deployment
of an additional one thousand customer facing staff in the NatWest network. The
increase in other expenses was 1% or £3 million, reflecting rigorous cost
management.
THE ROYAL BANK OF SCOTLAND GROUP plc
RETAIL BANKING (continued)
The charge for provisions for bad and doubtful debts increased by £116 million
to £389 million. The increased charge reflects the anticipated increase in
delinquency rates in the NatWest portfolio following growth in unsecured lending
in recent years. NatWest credit experience is now broadly consistent with the
RBS portfolio which has been stable for a number of years. As reported in the
first half, there has also been a higher incidence of fraud which has led to
some deterioration in recovery rates.
The overall quality of the loan portfolio, the majority of which is mortgage
lending, as measured by probability of default, remained in line with
expectations.
THE ROYAL BANK OF SCOTLAND GROUP plc
RETAIL DIRECT
2004 2003*
£m £m
Net interest income 938 849
Non-interest income 1,191 986
_______ _______
Total income 2,129 1,835
_______ _______
Direct expenses
- staff costs 259 211
- other 453 446
_______ _______
712 657
_______ _______
Contribution before provisions 1,417 1,178
Provisions 377 297
_______ _______
Contribution 1,040 881
_______ _______
£bn £bn
Total assets 26.9 21.9
Loans and advances to customers - gross
- mortgages 9.2 8.2
- other 16.0 13.8
Customer deposits 4.4 4.4
Weighted risk assets 21.1 16.8
_______ _______
*the prior year has been restated to reflect the transfer in 2004 of certain
activities to Manufacturing.
Retail Direct issues a comprehensive range of credit and debit cards to personal
and corporate customers and engages in merchant acquiring and processing
facilities for retail businesses. It also includes: Tesco Personal Finance
('TPF'), The One account, Direct Line Financial Services, Lombard Direct,
WorldPay Limited, the Group's internet banking platform, the Primeline brand,
and the consumer lending business in Continental Europe, all of them offering
products to customers through direct channels. During 2004, Retail Direct
significantly expanded its international operations. In the US it acquired the
credit card business of People's Bank and Lynk Systems Inc. a merchant
acquisition business and entered into an agreement to distribute credit cards to
customers of Kroger. In continental Europe, the acquisition of the leading
European internet payment specialist, Bibit, was completed in May and agreement
to distribute consumer loan products to the customers of Tchibo, a leading
German retailer, was concluded.
Contribution increased by 18% or £159 million to £1,040 million.
Total income was up 16% or £294 million to £2,129 million, reflecting continued
strong growth across all products, particularly credit cards. Excluding
acquisitions income rose by 9%, £155 million, and contribution was up by 14%,
£125 million. Net interest income was up 10% or £89 million to £938 million.
Average lending rose by 19% to £24.2 billion, of which average mortgage lending
was 16% higher at £8.8 billion, mainly in The One account. Average customer
deposits were stable. The new MINT branded credit card was launched in December
2003 and while the 0% introductory interest rate for nine months on MINT cards
depressed net interest margin, over 711,000 MINT credit cards have been issued
and attracted significant balances. During 2004, the total number of customer
accounts increased by 2.3 million.
Non-interest income was up 21% or £205 million to £1,191 million, reflecting
increased volumes and acquisitions.
Direct expenses increased by 8% or £55 million to £712 million. Staff costs were
up 23%, due to the acquisitions and increased headcount to support higher
business volumes. Excluding acquisitions, staff costs were up 8%. The increase
in other expenses was limited to 2%, as a result of tight cost management and
efficiencies within the core businesses.
The charge for provisions for bad debts increased by £80 million or 27% to £377
million, reflecting the growth in lending volumes and the acquisition of the
credit card business from People's Bank.
THE ROYAL BANK OF SCOTLAND GROUP plc
RETAIL DIRECT (continued)
Excluding acquisitions, provisions for bad debts were up 14%, £41 million.
Credit metrics across the portfolio remain broadly stable, however consistent
with the market there was some increase in the levels of arrears towards the end
of the year in credit cards.
THE ROYAL BANK OF SCOTLAND GROUP plc
MANUFACTURING
2004 2003*
£m £m
Staff costs 794 671
Other costs 1,645 1,443
_______ _______
Total manufacturing costs 2,439 2,114
_______ _______
Analysis:
Group Technology 807 686
Group Purchasing and Property Operations 854 718
Customer Support and other operations 778 710
_______ _______
Total manufacturing costs 2,439 2,114
_______ _______
*prior periods have been restated following the transfer of certain activities,
principally from RBS Insurance and Ulster Bank. These increased costs by £370m
in 2004 and £239m in 2003.
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 optimum efficiencies and supports income growth across
multiple brands and channels by using a single scalable platform and common
processes wherever possible. It also leverages the Group's purchasing power and
has become the centre of excellence for managing large scale and complex change.
The expenditure incurred by Manufacturing relates to shared costs principally in
respect of the Group's banking operations in UK and Ireland. These costs reflect
activities which are shared between the various customer-facing divisions and
consequently cannot be directly attributed to individual divisions. Instead, the
Group monitors and controls each of its customer facing divisions on revenue
generation and direct costs whilst in Manufacturing such control is exercised
through appropriate efficiency measures and targets.
Manufacturing's costs increased by £325 million, 15% to £2,439 million.
Manufacturing is now supporting RBS Insurance and Ulster Bank and of the £325
million increase, £82 million reflects technology and property operations of
Churchill (2004 - £96 million; 2003 - £33 million) and First Active (2004 - £19
million; 2003 - £nil) which were acquired in September 2003 and January 2004
respectively.
The balance of the increase was required to support higher business volumes, to
upgrade the Group's regional property portfolio and to invest in the Group
Efficiency Programme initiatives that are improving the Group's overall
efficiency.
A number of initiatives aimed at improving efficiency and customer service were
introduced in the year, including a sales prompt system on screens in NatWest
branches and in RBS and NatWest telephony: enhanced fraud prevention; conversion
of paper based branch reports to screen; image and workflow capability in
service centres; the introduction of a new image enabled mortgage platform which
has improved the efficiency and quality of our service and the introduction of
an on-line customer query management system.
THE ROYAL BANK OF SCOTLAND GROUP plc
WEALTH MANAGEMENT
2004 2003*
£m £m
Net interest income 497 457
Non-interest income 451 352
_______ _______
Total income 948 809
_______ _______
Expenses
- staff costs 299 259
- other 164 139
_______ _______
463 398
_______ _______
Contribution before provisions 485 411
Provisions 17 9
_______ _______
Contribution 468 402
_______ _______
£bn £bn
Loans to customers 9.2 7.9
Investment management assets - excluding deposits 22.3 22.3
Customer deposits 31.7 29.1
Weighted risk assets 8.3 9.1
_______ _______
*the prior year has been restated to reflect the transfer in 2004 of certain
activities to Retail Banking and Manufacturing. This includes £5 billion of
investment assets managed by the Affluent Banking business.
Wealth Management comprises Coutts Group, Adam & Company, The Royal Bank of
Scotland International and NatWest Offshore. The Miami based private banking
operations of Coutts Group were sold in July 2003, and in November 2003, Coutts
Group completed the acquisition of Bank von Ernst.
Contribution at £468 million was £66 million or 16% higher than 2003. Excluding
the acquisition and adjusting for the disposal, contribution was up 14%, £54
million.
Total income increased by 17% or £139 million to £948 million, including a full
year contribution from Bank von Ernst. Excluding the acquisition and disposal,
income was 12%, £94 million higher.
Net interest income increased by 9% or £40 million to £497 million. The increase
reflects growth in both lending and deposit volumes, combined with the benefit
of higher average interest rates.
Non-interest income increased by 28% or £99 million to £451 million, reflecting
higher fee income as a result of the improved equity markets and the acquisition
of Bank von Ernst.
Investment management assets were stable at £22.3 billion. Excluding the
acquisition and disposal and at constant exchange rates, investment assets
increased 7%.
Expenses were up by 16% or £65 million to £463 million to support the growth in
income and reflecting the acquisition of Bank von Ernst. Excluding the
acquisition and disposal, expenses were up 9%, £33 million.
The charge for provisions for bad and doubtful debts was £17 million compared
with £9 million in 2003, reflecting a small number of specific cases.
THE ROYAL BANK OF SCOTLAND GROUP plc
RBS INSURANCE
2004 2003*
£m £m
Earned premiums 5,357 3,627
Reinsurers' share (413) (504)
_______ _______
Insurance premium income 4,944 3,123
Net fees and commissions (488) (161)
Other income 478 283
_______ _______
Total income 4,934 3,245
_______ _______
Expenses
- staff costs 293 222
- other 299 219
_______ _______
592 441
_______ _______
Gross claims 3,724 2,644
Reinsurers' share (244) (449)
_______ _______
Net claims 3,480 2,195
_______ _______
Contribution 862 609
_______ _______
In-force policies (000)
- motor: UK 8,338 8,086
- motor: Continental Europe 1,639 1,425
- non-motor (including home, rescue, pet): UK 10,919 10,518
Gross insurance reserves - total (£m) 7,394 6,582
_______ _______
*the prior year has been restated to reflect the transfer in 2004 of certain
activities to Manufacturing and to recognise a reclassification of income from
net fees and commissions to insurance premium income.
RBS Insurance comprising Direct Line Group and Churchill Insurance Group, which
was acquired in September 2003, sells and underwrites retail, commercial and
wholesale insurance on the telephone, the internet, and through brokers and
intermediaries. The Retail Divisions of Direct Line and Churchill sell general
insurance and motor breakdown services direct to the customer. The Partnership
Division is a leading wholesale provider of insurance and motoring related
services. Through its International Division, RBS Insurance sells motor and
other insurance products in Spain, Germany and Italy. The Intermediary and
Broker Division sells general insurance products through its network of brokers
and intermediaries.
Contribution increased by 42% or £253 million to £862 million and included the
first full year's contribution from Churchill, which was acquired in September
2003. Excluding Churchill, contribution grew by 13%, £73 million.
Total income was up 52% or £1,689 million to £4,934 million. Excluding
Churchill, total income grew by 17%, £450 million.
After reinsurance, insurance premium income was up 58% or £1,821 million to
£4,944 million. Excluding Churchill, net insurance premium income grew by 17%.
At 31 December 2004, the number of UK in-force motor insurance policies was 8.3
million and the number of in-force motor policies in Continental Europe was 1.6
million. The International Division passed the milestone of 1 million motor
policies in Spain in December. Non-motor policies, including home, rescue and
pet insurance, increased to 10.9 million at 31 December 2004.
THE ROYAL BANK OF SCOTLAND GROUP plc
RBS INSURANCE (continued)
Net fees and commissions payable increased from £161 million to £488 million,
due mainly to commissions payable to intermediaries in the broker division
acquired as part of Churchill. Other income was up due to the acquisition of
Churchill and increased investment income driven by higher business volumes.
Expenses increased by 34% or £151 million to £592 million. Excluding Churchill,
expenses increased by 10%, £37 million, to support higher business volumes.
Net claims, after reinsurance, increased by 59% or £1,285 million to £3,480
million. Excluding Churchill, net claims increased by 20%, consistent with mix
and volume growth.
The UK combined operating ratio, which includes manufacturing costs, was 93.7%
compared with 91.2% for 2003. This deterioration is attributable in part to a
change in business mix due to the full year impact of commissions payable to
brokers and intermediaries in Churchill. Excluding Churchill, the UK ratio was
broadly in line with the prior year (2004 - 89.9%; 2003 - 88.6%).
THE ROYAL BANK OF SCOTLAND GROUP plc
ULSTER BANK
2004 2003*
£m £m
Net interest income 550 396
Non-interest income 193 185
_______ _______
Total income 743 581
_______ _______
Expenses
- staff costs 158 137
- other 77 58
_______ _______
235 195
_______ _______
Contribution before provisions 508 386
Provisions 40 32
_______ _______
Contribution 468 354
_______ _______
£bn £bn
Total assets 27.4 15.6
Loans and advances to customers - gross
- mortgages 8.8 2.8
- other 12.9 8.8
Customer deposits 13.5 9.7
Weighted risk assets 18.5 11.0
Average exchange rate - €/£ 1.474 1.445
Spot exchange rate - €/£ 1.418 1.416
_______ _______
*the prior year has been restated to reflect the transfer in 2004 of certain
activities to Manufacturing.
Ulster Bank provides a comprehensive range of retail and wholesale financial
services in Northern Ireland and the Republic of Ireland. Retail Banking has a
network of branches throughout Ireland and operates in the personal, commercial
and wealth management sectors. Corporate Banking and Financial Markets provides
a wide range of services in the corporate and institutional markets. In January
2004, Ulster Bank completed the acquisition of First Active plc.
Contribution increased by 32% or £114 million to £468 million.
Total income increased by 28% or £162 million to £743 million reflecting the
acquisition of First Active and strong organic growth, particularly in
residential mortgages. Adjusting for First Active and the disposal in October
2003 of NCB Stockbrokers ('NCB'), income increased by 12% at constant exchange
rates. During 2004, the number of customers increased by 454,000, of which
374,000 relate to First Active.
Net interest income rose by 39% or £154 million to £550 million, reflecting
strong growth across all customer lending products and in customer deposits.
Excluding First Active and NCB and at constant exchange rates, net interest
income increased by 14%. The net interest margin decreased mainly due to strong
growth in low risk mortgage lending both organic and due to the acquisition of
First Active, a leading mortgage provider in the Republic of Ireland. Underlying
product margins remain stable.
Non-interest income increased by £8 million, 4% to £193 million. Strong growth
in lending fees and sales of treasury products was partially offset by a
reduction in brokerage fees following the disposal of NCB. Excluding First
Active and NCB, non-interest income was up 6%, £10 million.
Expenses increased by 21% or £40 million to £235 million. Excluding First Active
and NCB expenses increased by 8% to support the growth in business.
THE ROYAL BANK OF SCOTLAND GROUP plc
ULSTER BANK (continued)
The charge for provisions for bad debts increased by £8 million to £40 million,
reflecting the growth in lending business. Excluding First Active and NCB
provisions for bad and doubtful debts were up £4 million. Asset quality remains
strong.
THE ROYAL BANK OF SCOTLAND GROUP plc
CITIZENS
2004 2003
£m £m
Net interest income 1,540 1,310
Non-interest income 601 514
_______ _______
Total income 2,141 1,824
_______ _______
Expenses
- staff costs 551 505
- other 473 374
_______ _______
1,024 879
_______ _______
Contribution before provisions 1,117 945
Provisions 80 88
_______ _______
Contribution 1,037 857
_______ _______
$bn $bn
Total assets 132.1 76.8
Loans and advances to customers - gross 83.4 43.5
Customer deposits 99.2 62.8
Weighted risk assets 87.4 50.8
Average exchange rate - US$/£ 1.832 1.635
Spot exchange rate - US$/£ 1.935 1.786
_______ _______
Citizens is engaged in retail and corporate banking activities through its
branch network in the states of Connecticut, Delaware, Illinois, Indiana,
Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, Vermont, and non-branch offices in other states.
Citizens was ranked eighth largest commercial banking organisation in the US
based on deposits as at 30 September 2004. In January 2004, Citizens completed
the acquisition of Thistle Group Holdings, Co. the holding company of Roxborough
Manayunk Bank which was converted to Citizens' systems in February 2004. On 31
August 2004, Citizens completed the acquisition of Charter One Financial, Inc.
expanding the Citizens' branch network to Illinois, Indiana, Michigan, New York,
Ohio and Vermont.
Contribution was affected by the weak US dollar relative to sterling and at
£1,037 million was up 21%, £180 million. In US dollar terms, contribution
increased by 36% or $499 million to $1,900 million. Excluding the acquisitions,
contribution increased by 13% or $183 million to $1,570 million.
Total income was up 31% or $939 million to $3,923 million. During 2004, Citizens
increased its personal customer base by 1,993,000 accounts and its business
customers by 174,000. Excluding the acquisitions, Citizens increased its
personal customers by 199,000 and its business customers by 30,000.
Net interest income increased by 32% or $678 million to $2,821 million,
reflecting the acquisitions and strong organic growth in both personal loans and
deposits. Excluding the acquisitions, net interest income increased by 11% or
$228 million, average loans were up 24% or $8.8 billion and average deposits
were up 14% or $8.0 billion. The benefit from higher volumes more than offset
the impact of interest rates on margins.
Non-interest income rose by 31% or $261 million to $1,102 million. Excluding the
acquisitions, non-interest income increased 6% or $47 million before a reduction
in mortgage fees, down from $53 million to $24 million in 2004.
THE ROYAL BANK OF SCOTLAND GROUP plc
CITIZENS (continued)
Expenses increased by 31% or $439 million to $1,877 million. Excluding
acquisitions, expenses were up 7% due to additional costs to support higher
business volumes, investment in branch automation and the expansion of
traditional and supermarket banking in Mid Atlantic and New England.
Provisions increased by only $1 million to $146 million, with credit quality
metrics remaining strong.
THE ROYAL BANK OF SCOTLAND GROUP plc
CENTRAL ITEMS
2004 2003*
£m £m
Funding costs 284 215
Departmental and corporate costs 595 496
_______ _______
Total Central items 879 711
_______ _______
*the prior year has been restated following the implementation of FRS 17.
The Centre comprises group and corporate functions, such as capital raising,
finance and human resources, which manage capital requirements and provide
services to the operating divisions.
Total Central items increased by £168 million to £879 million.
Funding costs at £284 million, were up 32% or £69 million reflecting the funding
of the various acquisitions undertaken by the Group during the year.
Changes in net pension costs on the adoption of FRS 17 are reported in Central
items. These comprise higher pension cost of £81 million partially offset by the
expected return on pension scheme assets less interest on scheme liabilities of
£33 million.
Central departmental costs and other corporate items at £595 million were £99
million or 20% higher than 2003. This is principally due to higher Group pension
costs, up £48 million, the centralisation of certain functions and expenditure
on Group-wide projects such as International Accounting Standards and Basel II.
THE ROYAL BANK OF SCOTLAND GROUP plc
AVERAGE BALANCE SHEET
Restated
2004 2003
Average Interest Rate Average Interest Rate
balance balance
£m £m %
Assets
Treasury and other eligible bills
UK 835 34 4.07 1,378 48 3.48
Overseas 62 1 1.61 64 1 1.56
Loans and advances to banks
UK 13,528 527 3.90 13,724 459 3.34
Overseas 9,189 264 2.87 9,559 212 2.22
Loans and advances to customers
UK 184,837 11,152 6.03 168,390 9,519 5.65
Overseas 69,118 3,201 4.63 44,862 2,240 4.99
Debt securities
UK 19,549 756 3.87 23,810 754 3.17
Overseas 18,132 761 4.20 17,927 765 4.27
_______ ______ _______ ______
Interest-earning - banking business
assets
UK 218,749 12,469 5.70 207,302 10,780 5.20
Overseas 96,501 4,227 4.38 72,412 3,218 4.44
_______ ______ _______ ______
315,250 16,696 5.30 279,714 13,998 5.00
______ ______
- trading business 133,353 96,648
_______ _______
Total interest-earning assets 448,603 376,362
Non-interest-earning assets 70,510 66,060
_______ _______
Total assets 519,113 442,422
_______ _______
Percentage of assets applicable to Overseas 33.1% 32.4%
operations
_______ _______
Liabilities
Deposits by banks
UK 35,059 1,060 3.02 28,220 703 2.49
Overseas 16,425 398 2.42 9,565 218 2.28
Customer accounts
UK 143,257 3,954 2.76 133,002 3,009 2.26
Overseas 50,654 878 1.73 42,118 704 1.67
Debt securities in issue
UK 37,097 1,229 3.31 29,977 914 3.05
Overseas 12,320 229 1.86 9,630 119 1.24
Loan capital
UK 17,959 665 3.70 15,342 534 3.48
Overseas 235 15 6.38 154 16 10.39
Internal funding of trading business (36,075) (940) 2.61 (22,909) (520) 2.27
_______ ______ _______ ______
Interest-bearing - banking business
liabilities
UK 198,055 5,988 3.02 185,283 4,663 2.52
Overseas 78,876 1,500 1.90 59,816 1,034 1.73
_______ ______ _______ ______
276,931 7,488 2.70 245,099 5,697 2.32
______ ______
- trading business 131,743 93,466
_______ _______
Total interest-bearing liabilities 408,674 338,565
Non-interest-bearing liabilities
- demand deposits 26,866 24,919
- other liabilities 53,726 52,810
Shareholders' funds 29,847 26,128
_______ _______
Total liabilities 519,113 442,422
_______ _______
Percentage of liabilities applicable to 30.6% 30.6%
Overseas operations
_______ _______
The analysis between UK and Overseas has been compiled on the basis of location
of office. Interest receivable and interest payable on trading assets and
liabilities are included in dealing profits.
THE ROYAL BANK OF SCOTLAND GROUP plc
AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS
2004 2003
Average rate % %
The Group's base rate 4.38 3.69
London inter-bank three month offered rates:
Sterling 4.64 3.74
Eurodollar 1.62 1.22
Euro 2.11 2.33
Yields, spreads and margins of the banking business:
Gross yield
Group 5.30 5.00
UK 5.70 5.20
Overseas 4.38 4.44
Interest spread
Group 2.60 2.68
UK 2.68 2.68
Overseas 2.48 2.71
Net interest margin
Group 2.92 2.97
UK 2.96 2.95
Overseas 2.83 3.02
_______ _______
2004 2003
% %
Gross yield on interest-earning assets of banking business 5.30 5.00
Cost of interest-bearing liabilities of banking business (2.70) (2.32)
_______ _______
Interest spread of banking business 2.60 2.68
Benefit from interest-free funds 0.32 0.29
_______ _______
Net interest margin of banking business 2.92 2.97
_______ _______
Group
The net interest margin decreased from 2.97% to 2.92%. The interest spread
declined reflecting principally a change in mix towards relatively lower margin
mortgage business including the acquisition of First Active. This was partially
offset by an increase in the benefit from interest-free funds due to increased
volumes and movements in interest rates.
UK
The UK net interest margin increased slightly from 2.95% to 2.96%. An increase
in the benefit from interest-free funds, due to movements in interest rates, and
improvements in corporate lending margins were largely offset by growth in the
mortgage business.
Overseas
The Overseas net interest margin decreased from 3.02% to 2.83%. This reduction
reflected the continued tightening of asset spreads in the US, together with the
growth in mortgage business following the acquisition of First Active. Higher
volumes together with movements in interest rates led to an increase in the
benefit of interest-free funds.
THE ROYAL BANK OF SCOTLAND GROUP plc
STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2004
In the consolidated profit and loss account set out below, goodwill amortisation
and integration costs are included in the captions prescribed by the Companies
Act 1985.
2004 2003
(restated)
£m £m
Net interest income 9,208 8,301
_______ _______
Non-interest income (excluding general insurance) 8,602 7,857
General insurance net premium income 4,944 3,123
_______ _______
Non-interest income 13,546 10,980
_______ _______
Total income 22,754 19,281
_______ _______
Administrative expenses 8,824 7,834
Depreciation and amortisation
- tangible fixed assets 1,107 919
- goodwill 915 763
_______ _______
Operating expenses* 10,846 9,516
_______ _______
Profit before other operating charges 11,908 9,765
General insurance net claims 3,480 2,195
_______ _______
Operating profit before provisions 8,428 7,570
Provisions 1,511 1,494
_______ _______
Profit on ordinary activities before tax 6,917 6,076
Tax on profit on ordinary activities 2,155 1,888
_______ _______
Profit on ordinary activities after tax 4,762 4,188
Minority interests (including non-equity) 250 210
_______ _______
Profit after minority interests 4,512 3,978
Preference dividends 256 261
_______ _______
4,256 3,717
Additional Value Shares dividend - 1,463
_______ _______
Profit attributable to ordinary shareholders 4,256 2,254
Ordinary dividends 1,837 1,490
_______ _______
Retained profit 2,419 764
_______ _______
Basic earnings per ordinary share (Note 4) 138.0p 76.9p
_______ _______
Adjusted earnings per ordinary share (Note 4) 172.5p 157.2p
_______ _______
Diluted earnings per ordinary share (Note 4) 136.9p 76.3p
_______ _______
* Integration costs included in operating expenses comprise:
£m £m
Administrative expenses 267 229
Depreciation 2 -
_______ _______
269 229
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
CONSOLIDATED BALANCE SHEET
AT 31 DECEMBER 2004
2004 2003
(restated)
£m £m
Assets
Cash and balances at central banks 4,293 3,822
Items in the course of collection from other banks 2,629 2,501
Treasury bills and other eligible bills 6,110 4,846
Loans and advances to banks 58,260 51,891
Loans and advances to customers 345,469 252,531
Debt securities 91,211 79,949
Equity shares 2,960 2,300
Intangible fixed assets 17,576 13,131
Tangible fixed assets 16,294 13,927
Settlement balances 5,682 2,857
Other assets 22,255 17,807
Prepayments and accrued income 6,928 5,309
_______ _______
579,667 450,871
Long-term assurance assets attributable to policyholders 3,800 3,557
_______ _______
Total assets 583,467 454,428
_______ _______
Liabilities
Deposits by banks 99,081 67,323
Items in the course of transmission to other banks 802 958
Customer accounts 285,062 236,963
Debt securities in issue 58,960 41,016
Settlement balances and short positions 32,990 21,369
Other liabilities 26,152 20,584
Accruals and deferred income 15,588 13,155
Post-retirement benefit liabilities 1,901 1,445
Provisions for liabilities and charges 3,071 2,249
Subordinated liabilities 20,366 16,998
Minority interests
- equity 158 (11)
- non-equity 3,671 2,724
Shareholders' funds
- equity 27,345 23,175
- non-equity 4,520 2,923
_______ _______
579,667 450,871
Long-term assurance liabilities attributable to policyholders 3,800 3,557
_______ _______
Total liabilities 583,467 454,428
_______ _______
Memorandum items
Contingent liabilities and commitments 196,870 154,557
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
OVERVIEW OF CONSOLIDATED BALANCE SHEET
Total assets of £583.5 billion at 31 December 2004 were up £129.0 billion, 28%,
compared with 31 December 2003, reflecting business growth and acquisitions.
Treasury bills and other eligible bills increased by £1.3 billion, 26%, to £6.1
billion, reflecting trading activity.
Loans and advances to banks rose £6.4 billion, 12%, to £58.3 billion. Bank
placings were up £2.9 billion, 11% to £28.3 billion, and reverse repurchase
agreements and stock borrowing ('reverse repos'), were up £3.5 billion, 13%, to
£30.0 billion.
Loans and advances to customers were up £92.9 billion, 37%, to £345.5 billion.
Within this, reverse repos increased by £28.1 billion to £52.2 billion
reflecting growth in trading activities. Excluding reverse repos, lending
increased by £64.8 billion, 28% to £293.3 billion reflecting organic growth
across all divisions and £23.4 billion arising from acquisitions, principally
Charter One, £18.0 billion, First Active, £4.1 billion, and the People's Bank
credit card business, £1.0 billion. In $ terms, Citizens grew US$39.5 billion,
92%, including US$32.7 billion related to acquisitions.
Debt securities increased by £11.3 billion, 14%, to £91.2 billion, principally
due to increased holdings in Financial Markets and the acquisition of First
Active.
Equity shares were up £0.7 billion, 29%, to £3.0 billion, mainly due to the
acquisition of Charter One and growth in Financial Markets trading activity.
Intangible fixed assets increased by £4.4 billion, 34% to £17.6 billion.
Goodwill arising on the acquisitions made during 2004 amounted to £5.9 billion,
including £4.7 billion in respect of Charter One. This was partially offset by
goodwill amortisation, £0.9 billion and the adverse effect of exchange rate
movements, £0.5 billion.
Tangible fixed assets were up £2.4 billion, 17% to £16.3 billion, mainly
reflecting growth in operating lease assets, up £1.4 billion, 22% to £7.8
billion.
Settlement balances increased by £2.8 billion to £5.7 billion as a result of
increased levels of customer activity.
Other assets rose by £4.4 billion, 25% to £22.3 billion, mainly due to an
increase in the mark-to-market value of trading derivatives and acquisitions.
Deposits by banks increased by £31.8 billion, 47% to £99.1 billion to fund
business growth, with repurchase agreements and stock lending ('repos') up £16.3
billion, 60%, to £43.3 billion and inter-bank deposits up £15.5 billion, 38% to
£55.8 billion.
Customer accounts were up £48.1 billion, 20% at £285.1 billion. Within this,
repos were up £15.1 billion, 56% to £42.1 billion reflecting growth in trading
activities. Excluding repos, deposits rose by £33.0 billion, 16%, to £242.9
billion with growth in CBFM, £6.3 billion, Retail Banking, £4.1 billion, Wealth
Management, £2.7 billion, Citizens, £15.8 billion, including the acquisition of
Charter One and Ulster Bank, £3.8 billion, including First Active. In $ terms,
Citizens grew US$36.4 billion, 58%, including US$29.1 billion related to
acquisitions.
Debt securities in issue increased by £17.9 billion, 44%, to £59.0 billion
primarily to meet the Group's funding requirements.
The increase in settlement balances and short positions reflected growth in
customer activity.
THE ROYAL BANK OF SCOTLAND GROUP plc
OVERVIEW OF CONSOLIDATED BALANCE SHEET (continued)
Other liabilities rose by £5.6 billion, 27% to £26.2 billion, principally due to
an increase in the mark-to-market value of trading derivatives.
Accruals and deferred income increased by £2.4 billion, 18% to £15.6 billion.
Post-retirement benefit liabilities, recognised on the adoption of FRS 17, were
up £0.5 billion, 32% to £1.9 billion with actuarial losses, net of deferred tax,
up £1.1 billion, mainly due to changes in actuarial assumptions, partially
offset by asset growth and a £750 million payment to the RBS Group Pension Fund.
Provisions for liabilities and charges increased £0.8 billion, 37% to £3.1
billion principally due to higher provisions for deferred tax.
Subordinated liabilities were up £3.4 billion, 20% to £20.4 billion. This
reflected the issue of £1.3 billion (US$2,425 million), £0.7 billion (€1,000
million) and £0.4 billion (AUD1,000 million) dated loan capital, and £1.1
billion (£1,100 million), £1.0 billion (€1,500 million) and £0.1 billion (JPY25
billion) undated loan capital, together with £0.1 billion of dated and undated
loan capital arising from the acquisition of First Active and £0.2 billion dated
loan capital arising from the acquisition of Charter One. This was partially
offset by the redemption of dated loan capital, £0.7 billion (US$1,050 million
and £140 million), the conversion of £0.5 billion (US$850 million) undated loan
capital into US$ preference shares and the effect of exchange rate movements,
£0.4 billion.
Non-equity minority interests were up £0.9 billion, 35% to £3.7 billion mainly
reflecting the issues by subsidiaries of the Group of US$950 million (£0.5
billion) Series III non-cumulative trust preferred securities in August 2004 and
US$1,000 million (£0.6 billion) Series IV non-cumulative trust preferred
securities in August/September 2004.
Shareholders' funds increased by £5.8 billion, 22% to £31.9 billion including
£2.6 billion from the placing of 165 million ordinary shares in connection with
the acquisition of Charter One, the issue of £1.3 billion preference share
capital and conversion of £0.5 billion (US$850 million) undated loan capital
into US$ preference shares. The remainder reflects retentions of £2.4 billion
and the issue of £0.6 billion of ordinary shares in respect of scrip dividends
and the exercise of share options and revaluation of premises, £0.1 billion,
which were partly offset by £1.1 billion actuarial losses, net of deferred tax,
recognised in post-retirement benefit schemes and the adverse effect of exchange
rate movements on share premium account, £0.2 billion and profit and loss
account, £0.4 billion.
THE ROYAL BANK OF SCOTLAND GROUP plc
STATEMENT OF CONSOLIDATED TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31 DECEMBER 2004
2004 2003
(restated)
£m £m
Profit attributable to ordinary shareholders 4,256 2,254
_______ _______
Actuarial (losses)/gains (1,598) 69
Current tax relief 56 -
Deferred tax asset/(liability) 408 (33)
_______ _______
Actuarial (losses)/gains recognised in post-retirement benefit schemes (1,134) 36
_______ _______
Currency translation adjustments and other movements (399) 48
Revaluation of premises 56 (69)
_______ _______
Other recognised (losses)/gains (343) (21)
_______ _______
Total recognised gains in the year 2,779 2,269
_______
Prior year adjustment arising on the implementation of FRS 17 (2,001)
_______
Total recognised gains and losses recognised since 31 December 2003 778
_______
RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 31 DECEMBER 2004
2004 2003
(restated)
£m £m
Profit attributable to ordinary shareholders 4,256 2,254
Ordinary dividends (1,837) (1,490)
_______ _______
Retained profit for the year 2,419 764
Issue of ordinary and preference shares 4,603 775
Conversion of exchangeable undated loan capital 460 -
Redemption of preference shares - (364)
Actuarial (losses)/gains recognised in post-retirement benefit schemes (1,134) 36
Own shares held in relation to employee share schemes (7) -
Goodwill previously written off to reserves - 40
Other recognised gains and losses (343) (21)
Currency translation adjustment on share premium account (231) (203)
_______ _______
Net increase in shareholders' funds 5,767 1,027
_______ _______
Opening shareholders' funds as previously reported 28,099 27,052
Prior year adjustment arising on the implementation of FRS 17 (2,001) (1,981)
_______ _______
Opening shareholders' funds as restated 26,098 25,071
Net increase in shareholders' funds 5,767 1,027
_______ _______
Closing shareholders' funds 31,865 26,098
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2004
2004 2003
£m £m
Net cash inflow from operating activities (note 10) 6,307 19,708
_______ _______
Dividends received from associated undertakings 9 9
_______ _______
Returns on investments and servicing of finance
Preference dividends paid (253) (269)
Additional Value Shares dividend paid - (1,463)
Dividends paid to minority shareholders in subsidiary undertakings (204) (130)
Interest paid on subordinated liabilities (613) (557)
_______ _______
Net cash outflow from returns on investments and servicing of finance (1,070) (2,419)
_______ _______
Taxation
Tax paid (1,394) (1,454)
_______ _______
Capital expenditure and financial investment
Purchase of investment securities (41,790) (44,861)
Sale and maturity of investment securities 43,022 41,805
Purchase of tangible fixed assets (4,354) (5,017)
Sale of tangible fixed assets 1,596 1,108
_______ _______
Net cash outflow from capital expenditure and financial investment (1,526) (6,965)
_______ _______
Acquisitions and disposals
Purchases of businesses and subsidiary undertakings (net of cash acquired) (7,648) (1,748)
Investment in associated undertakings (48) (2)
Sale of subsidiary and associated undertakings (net of cash sold) 22 179
_______ _______
Net cash outflow from acquisitions and disposals (7,674) (1,571)
_______ _______
Ordinary equity dividends paid (1,235) (772)
______ _______
Net cash inflow before financing (6,583) 6,536
_______ _______
Financing
Proceeds from issue of ordinary share capital 2,845 184
Proceeds from issue of preference share capital 1,358 -
Proceeds from issue of trust preferred securities 1,075 883
Redemption of preference share capital - (364)
Issue of subordinated liabilities 4,624 3,817
Repayment of subordinated liabilities (718) (336)
Increase/(decrease) in minority interests 185 (56)
_______ _______
Net cash inflow from financing 9,369 4,128
_______ _______
Increase in cash 2,786 10,664
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES
1. Accounting policies
There have been no changes to the Group's principal accounting policies as
set out on pages 137 to 140 of the 2003 Report and Accounts, except as noted
below.
FRS 17 'Retirement Benefits' supersedes Statement of Standard Accounting
Practice 24 'Pension costs' (SSAP24) and the Urgent Issues Task Force
Abstract 6 'Accounting for post-retirement benefits other than pensions'.
All the disclosure requirements of FRS 17 were adopted by the Group in its
2002 financial statements. The Group has implemented the recognition and
measurement provisions of FRS 17 in 2004 in the light of the introduction of
International Financial Reporting Standards from 1 January 2005; the
measurement principles in the equivalent international accounting standard
(IAS 19 'Employee Benefits') are similar to those in FRS 17. Prior periods
have been restated. The impact of this change in accounting policy is
disclosed on page 51.
2. Provisions for bad and doubtful debts
Operating profit is stated after charging provisions for bad and doubtful
debts of £1,428 million (2003 - £1,461 million) and amounts written off
fixed asset investments of £83 million (2003 - £33 million). The balance
sheet provisions for bad and doubtful debts increased in the year to 31
December 2004 from £3,929 million to £4,228 million, and the movements
thereon were:
2004 2003
Specific General Total Total
£m £m £m £m
At 1 January 3,363 566 3,929 3,927
Currency translation and other adjustments (22) (76) (98) (62)
Acquisitions 222 68 290 50
Amounts written off (1,468) - (1,468) (1,519)
Recoveries of amounts previously written off 147 - 147 72
Charge to profit and loss account 1,412 16 1,428 1,461
_______ _______ _______ _______
At 31 December 3,654 574 4,228 3,929
_______ _______ _______ _______
The provision at 31 December 2004 includes provision against loans and
advances to banks of £6 million (2003 - £7 million).
3. Taxation
The charge for taxation is based on a UK corporation tax rate of 30% and comprises:
2004 2003
(restated)
£m £m
Tax on profit before goodwill amortisation and integration costs 2,273 1,990
Tax relief on goodwill amortisation and integration costs (118) (102)
_______ _______
2,155 1,888
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
3. Taxation (continued)
The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation
tax rate of 30% as follows:
2004 2003
(restated)
£m £m
Expected tax charge 2,075 1,823
Goodwill amortisation 248 203
Non-deductible items 124 106
Non-taxable items (88) (111)
Other 13 (21)
Adjustments in respect of prior periods (217) (112)
_______ _______
Actual tax charge 2,155 1,888
_______ _______
4. Earnings per share
Earnings per share have been calculated based on the following:
2004 2003
(restated)
£m £m
Earnings
Profit attributable to ordinary shareholders 4,256 2,254
Add back dividends on dilutive convertible non-equity shares 66 -
_______ _______
Diluted earnings attributable to ordinary shareholders 4,322 2,254
_______ _______
Number of shares
- millions
Weighted average number of ordinary shares
In issue during the year 3,085 2,931
Effect of dilutive share options and convertible non-equity shares 73 22
_______ _______
Diluted weighted average number of ordinary shares during the year 3,158 2,953
_______ _______
Basic earnings per share 138.0p 76.9p
AVS dividend - 49.9p
_______ _______
138.0p 126.8p
Goodwill amortisation 28.7p 25.0p
Integration costs 5.8p 5.4p
_______ _______
Adjusted earnings per share 172.5p 157.2p
_______ _______
Diluted earnings per share 136.9p 76.3p
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
5. Ordinary dividend
The directors have recommended a final dividend of 41.2p per share on the ordinary shares which, when
added to the interim dividend of 16.8p per share, makes a total of 58.0p per share (2003 - 50.3p per
share). Subject to approval by shareholders at the annual general meeting, the final dividend will be paid
on 3 June 2005 to shareholders registered on 11 March 2005. As an alternative to cash, a scrip dividend
election is to be offered and shareholders will receive details of this by letter.
6. Analysis of repurchase agreements
2004 2003
£m £m
Reverse repurchase agreements and stock borrowing
Loans and advances to banks 29,975 26,522
Loans and advances to customers 52,184 24,069
_______ _______
Repurchase agreements and stock lending
Deposits by banks 43,342 27,044
Customer accounts 42,134 27,021
_______ _______
7. Contingent liabilities and commitments
2004 2003
£m £m
Contingent liabilities
Acceptances and endorsements 362 595
Guarantees and assets pledged as collateral security 10,438 8,787
Other contingent liabilities 5,293 5,482
_______ _______
16,093 14,864
_______ _______
Commitments
Documentary credits and other short-term
trade related transactions 182 605
Undrawn formal standby facilities, credit lines
and other commitments to lend 179,230 137,251
Other commitments 1,365 1,837
_______ _______
180,777 139,693
_______ _______
Total contingent liabilities and commitments 196,870 154,557
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
8. Derivatives
Replacement cost of over-the-counter contracts (trading and non-trading)
The following table shows the gross replacement cost, which is the sum of the fair values, of all
over-the-counter contracts with third parties (trading and non-trading) with positive value. This measure
makes no allowance for netting arrangements.
2004 2003
£m £m
Exchange rate contracts 29,244 28,163
Interest rate contracts 59,033 54,974
Credit derivatives 264 272
Equity and commodity contracts 1,441 1,020
_______ _______
89,982 84,429
_______ _______
Derivatives held for trading purposes
The table below shows the notional principal amounts of trading instruments entered into with third parties.
2004 2003
£bn £bn
Exchange rate contracts 1,422.7 1,144.7
Interest rate contracts 6,613.0 5,307.8
Credit derivatives 59.2 28.5
Equity and commodity contracts 43.4 34.1
_______ _______
The table below shows the fair values (which, after netting, are the balance sheet values) of trading
instruments entered into with third parties.
2004 2003
Fair value Fair value
Assets Liabilities Assets Liabilities
£m £m £m £m
Exchange rate contracts 29,211 30,204 28,102 29,564
Interest rate contracts 58,644 59,113 54,266 54,212
Credit derivatives 264 285 273 155
Equity and commodity contracts 1,274 941 924 720
_______ _______ _______ _______
89,393 90,543 83,565 84,651
Netting (71,509) (71,509) (69,478) (69,478)
_______ _______ _______ _______
17,884 19,034 14,087 15,173
_______ _______ _______ _______
Derivatives held for purposes other than trading
The Group uses derivatives to manage specific interest rate positions relating to assets and liabilities and
to hedge foreign currency exposures. The Group establishes non-trading derivative positions with third
parties and through intra-company and intra-Group transactions with the Group's independent trading
operations. The table below shows the notional principal amounts of the Group's non-trading derivatives
(third party and internal).
2004 2003
£bn £bn
Exchange rate contracts 25.8 26.5
Interest rate contracts 134.1 135.1
Credit derivatives 1.2 1.0
Equity and commodity contracts 2.3 1.7
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
9. Analysis of consolidated shareholders' funds
2004 2003
(restated)
£m £m
Called-up share capital
At beginning of year 769 754
Shares issued during the year 53 15
_______ _______
At end of year 822 769
_______ _______
Share premium account
At beginning of year 8,175 7,608
Currency translation adjustments (231) (203)
Shares issued during the year, net of expenses 4,550 760
Conversion of exchangeable undated loan capital 460 -
Other movements 10 10
_______ _______
At end of year 12,964 8,175
_______ _______
Merger reserve
At beginning of year 10,881 11,455
Transfer to profit and loss account (574) (574)
_______ _______
At end of year 10,307 10,881
_______ _______
Other reserves
At beginning of year 419 387
Transfer of increase in value of long-term assurance business 38 32
_______ _______
At end of year 457 419
_______ _______
Revaluation reserve
At beginning of year 7 80
Revaluation of premises 56 (69)
Transfer from/(to) profit and loss account 29 (4)
_______ _______
At end of year 92 7
_______ _______
Profit and loss account
As previously reported 7,848 6,768
Prior year adjustment (2,001) (1,981)
_______ _______
At beginning of year, as restated 5,847 4,787
Currency translation adjustments and other movements (409) 38
Retention for the year 2,419 764
Own shares held in relation to employee share schemes (7) -
Redemption of preference shares - (364)
Actuarial (losses)/gains recognised in post-retirement benefit schemes (1,134) 36
Goodwill previously written off - 40
Transfer from merger reserve 574 574
Transfer of increase in value of long-term assurance business (38) (32)
Transfer (to)/from revaluation reserve (29) 4
_______ _______
At end of year 7,223 5,847
_______ _______
Closing shareholders' funds 31,865 26,098
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
NOTES (continued)
10. Analysis of net cash inflow from operating activities
2004 2003
£m £m
Net cash inflow from trading activities 9,349 9,100
Increase in loans and advances to banks and customers (72,913) (23,343)
Increase in deposits by banks and customers 53,417 26,857
Increase in securities (10,367) (9,871)
Increase in debt securities in issue 17,163 7,078
Increase in settlement balances and short positions 8,796 3,202
Increase in other assets and liabilities 862 6,685
_______ _______
Net cash inflow from operating activities 6,307 19,708
_______ _______
11. Litigation
Since December 2003, members of the Group have been joined as defendants in a number of legal actions in the
United States following the collapse of Enron. Collectively the claims are, to a substantial degree,
unquantified and in each case they are made against large numbers of defendants. The Group intends to defend
these claims vigorously. The US Courts dealing with the main Enron actions have ordered that the Group join
the non-binding, multi-party mediation which commenced in late 2003. Based on current knowledge including
applicable defences and given the unquantified nature of these claims, the directors are unable at this
stage to predict with certainty the eventual loss in these matters. In addition, pursuant to requests
received from the US Securities and Exchange Commission and the US Department of Justice, the Group has been
providing copies of Enron-related materials to these authorities and continues to co-operate fully with
them.
Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas
jurisdictions, including the United States, involving claims by and against them arising in the ordinary
course of business. The directors of the company have reviewed these other actual, threatened and known
potential claims and proceedings and, after consulting with the Group's legal advisers are satisfied that
the outcome of these claims and proceedings will not have a material adverse effect on the Group's
consolidated net assets, results of operations or cash flows.
12. International Financial Reporting Standards
The Group's 2005 interim and annual accounts will be prepared in accordance with International Financial
Reporting Standards (IFRS). In 2004, IFRS implementation activities have included building IT solutions,
revising processes and reporting structures, Group-wide IFRS training and analysis of new standards and
amendments to existing standards. The Group remains on track to produce IFRS compliant accounts in 2005. A
summary of the key differences between the Group's current accounting policies and IFRS is included in the
Group's 2004 Annual Report and Accounts. The Group will issue its 2004 results restated to IFRS in the
second quarter of 2005.
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
2004 will be filed with the Registrar of Companies following the company's annual general meeting. The
auditors have reported on these accounts; their report was unqualified and did not contain a statement under
section 237(2) or (3) of the Act.
14. Form 20-F
A report on Form 20-F will be filed with the Securities and Exchange Commission in the United States.
THE ROYAL BANK OF SCOTLAND GROUP plc
ANALYSIS OF INCOME, EXPENSES AND PROVISIONS
2004 2003
(restated)
£m £m
Non-interest income
Dividend income 79 58
_______ _______
Transmission 1,545 1,364
Lending 1,196 1,002
Card related services 1,820 1,440
Other 2,073 1,887
_______ _______
Fees and commissions receivable 6,634 5,693
Fees and commissions payable - banking (1,400) (1,099)
- insurance related (554) (238)
_______ _______
Net fees and commissions 4,680 4,356
_______ _______
Foreign exchange 616 540
Securities 847 798
Interest rate derivatives 525 455
_______ _______
Dealing profits 1,988 1,793
_______ _______
Income from rental assets 1,282 1,088
Embedded value profits 94 73
Net pension finance income 85 52
Other 394 437
_______ _______
Other operating income 1,855 1,650
_______ _______
Non-interest income (excluding general insurance premiums) 8,602 7,857
General insurance net premium income 4,944 3,123
_______ _______
Total non-interest income 13,546 10,980
_______ _______
Staff costs - wages, salaries and other staff costs 4,543 3,997
- social security costs 295 248
- pension costs 506 408
Premises and equipment 1,184 1,073
Other 2,296 2,108
_______ _______
Administrative expenses* 8,824 7,834
_______ _______
*Integration costs included in administrative expenses comprise:
Staff costs 113 125
Premises and equipment costs 34 31
Other administrative costs 120 73
_______ _______
267 229
_______ _______
Provisions for bad and doubtful debts 1,428 1,461
Amounts written off fixed asset investments 83 33
_______ _______
Provisions 1,511 1,494
_______ _______
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.
2004 2003
£m £m
Central and local government 1,866 1,217
Finance 25,157 18,948
Individuals - home 57,529 48,117
Individuals - other 27,863 25,526
Other commercial and industrial comprising:
Manufacturing 6,292 6,384
Construction 5,024 3,960
Service industries and business activities 30,850 29,290
Agriculture, forestry and fishing 2,480 2,562
Property 26,445 19,670
Finance leases and instalment credit 13,083 11,703
_______ _______
196,589 167,377
Overseas residents 44,053 27,168
_______ _______
Total UK offices 240,642 194,545
_______ _______
Overseas
US 74,045 40,373
Rest of the World 35,004 21,535
_______ _______
Total overseas offices 109,049 61,908
_______ _______
Loans and advances to customers - gross 349,691 256,453
Provisions for bad and doubtful debts (4,222) (3,922)
_______ _______
Total loans and advances to customers 345,469 252,531
_______ _______
Reverse repurchase agreements included in the analysis above:
Central and local government 1,413 923
Finance 19,163 11,235
_______ _______
20,576 12,158
Overseas residents 14,013 2,818
_______ _______
Total UK offices 34,589 14,976
US 17,187 8,815
Rest of the World 408 278
_______ _______
Total 52,184 24,069
_______ _______
Loans and advances to customers excluding reverse repurchase agreements - net 293,285 228,462
_______ _______
THE ROYAL BANK OF SCOTLAND GROUP plc
ASSET QUALITY (continued)
Cross border outstandings
The table below sets out the Group's cross border outstandings in excess of 0.75% of Group total assets
(including acceptances) of £583.8 billion (2003 - £455.0 billion). None of these countries have experienced
repayment difficulties which have required refinancing of outstanding debt.
2004 2003
£m £m
US 28,795 14,618
Germany 14,050 15,073
France 9,604 7,524
Netherlands 8,871 6,830
Cayman Islands 7,258 6,666
Spain 5,249 3,421
Japan 4,610 4,141
_______ _______
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.
2004 2003
£m £m
Loans accounted for on a non-accrual basis (2):
Domestic 3,705 3,221
Foreign 1,075 1,211
_______ _______
4,780 4,432
_______ _______
Accruing loans which are contractually overdue
90 days or more as to principal or interest (3):
Domestic 646 561
Foreign 79 81
_______ _______
725 642
_______ _______
Loans not included above which are 'troubled
debt restructurings' as defined by the SEC:
Domestic 14 53
Foreign 10 30
_______ _______
24 83
_______ _______
Total risk elements in lending 5,529 5,157
_______ _______
Potential problem loans (4)
Domestic 173 492
Foreign 107 99
_______ _______
280 591
_______ _______
Closing provisions for bad and doubtful debts
as a % of total risk elements in lending 76% 76%
_______ _______
Closing provisions for bad and doubtful debts as a % of
total risk elements in lending and potential problem loans 73% 68%
_______ _______
Risk elements in lending as a % of gross loans
and advances to customers 1.58% 2.01%
_______ _______
Notes:
1. For the analysis above, 'Domestic' consists of the United Kingdom domestic
transactions of the Group. 'Foreign' comprises the Group's transactions
conducted through offices outside the UK and through those offices in the UK
specifically organised to service international banking transactions.
2. The Group's UK banking subsidiary undertakings account for loans on a
non-accrual basis from the point in time at which the collectability of
interest is in significant doubt. Certain subsidiary undertakings of the
Group generally account for loans on a non-accrual basis when interest or
principal is past due 90 days.
3. Overdrafts generally have no fixed repayment schedule and consequently are
not included in this category.
4. Loans that are current as to payment of principal and interest but in respect
of which management has serious doubts about the ability of the borrower to
comply with contractual repayment terms. Substantial security is held in
respect of these loans and appropriate provisions have already been made in
accordance with the Group's provisioning policy for bad and doubtful debts.
THE ROYAL BANK OF SCOTLAND GROUP plc
ASSET QUALITY (continued)
Provisions for bad and doubtful debts
2004 2003
£m £m
Provisions at beginning of year 3,929 3,927
Currency translation and other adjustments (98) (62)
Acquisitions 290 50
Amounts written-off
- Domestic (920) (1,097)
- Foreign (548) (422)
_______ _______
(1,468) (1,519)
_______ _______
Recoveries
- Domestic 88 38
- Foreign 59 34
_______ _______
147 72
_______ _______
Sub-total 2,800 2,468
_______ _______
Provisions charged against profit:
Net specific provisions
- Domestic 970 926
- Foreign 442 533
_______ _______
1,412 1,459
General provision 16 2
_______ _______
Total bad and doubtful debt provisions charge to profit 1,428 1,461
_______ _______
Provisions at end of year 4,228 3,929
_______ _______
Provisions at end of year comprise:
Specific
- Domestic 2,329 2,097
- Foreign 1,325 1,266
_______ _______
Total specific provisions 3,654 3,363
General provisions 574 566
_______ _______
4,228 3,929
_______ _______
The closing provisions include provision against loans and advances to banks of
£6 million (2003 - £7 million).
THE ROYAL BANK OF SCOTLAND GROUP plc
MARKET RISK
The Group manages the market risk in its trading and treasury portfolios through
value-at-risk (VaR) limits as well as stress testing, position and sensitivity
limits. VaR is a technique that produces estimates of the potential negative
change in the market value of a portfolio over a specified time horizon at a
given confidence level. The table below sets out the trading and treasury VaR
for the Group, which assumes a 95% confidence level and a one-day time horizon.
Period end Maximum Minimum Average
£m £m £m £m
Trading VaR
2004 10.3 16.0 6.4 10.8
_______ _______ _______ _______
2003 7.4 14.2 5.6 9.4
_______ _______ _______ _______
Treasury VaR
2004 5.5 8.6 5.5 7.0
_______ _______ _______ _______
2003 8.1 11.0 5.6 8.3
_______ _______ _______ _______
The Group's VaR should be interpreted in light of the limitations of the
methodologies used. These limitations include:
• Historical data may not provide the best estimate of the joint
distribution of risk factor changes in the future and may fail to capture
the risk of possible extreme adverse market movements which have not
occurred in the historical window used in the calculations.
• VaR using a one-day time horizon does not fully capture the market risk of
positions that cannot be liquidated or hedged within one day.
• VaR using a 95% confidence level does not reflect the extent of potential
losses beyond that percentile.
• The Group largely computes the VaR of the trading portfolios at the close
of business and positions may change substantially during the course of the
trading day. Controls are in place to limit the Group's intra-day exposure
such as the calculation of VaR for selected portfolios.
These limitations and the nature of the VaR measure mean that the Group cannot
guarantee that losses will not exceed the VaR amounts indicated nor that losses
in excess of the VaR amounts will not occur more frequently than once in 20
business days.
THE ROYAL BANK OF SCOTLAND GROUP plc
REGULATORY RATIOS AND OTHER INFORMATION
2004 2003
Tier 1 Tier 2 Total Tier 1 Tier 2 Total
Capital Capital
Capital base (£m)
Shareholders' funds 31,772 93 31,865 26,090 8 26,098
Minority interests 3,702 127 3,829 2,583 130 2,713
Subordinated liabilities 615 19,751 20,366 666 16,332 16,998
General provision for bad and doubtful debts - 574 574 - 566 566
Regulatory adjustments
- Pension fund deficit 1,867 - 1,867 1,414 - 1,414
- Other 2,314 (316) 1,998 1,777 (597) 1,180
Goodwill (17,576) - (17,576) (13,131) - (13,131)
_______ _______ _______ _______ _______ _______
22,694 20,229 42,923 19,399 16,439 35,838
_______ _______ _______ _______
Investments in insurance companies, associated (5,165) (4,618)
undertakings and other supervisory deductions
_______ _______
37,758 31,220
_______ _______
Weighted risk assets (£m)
Banking book
- on-balance sheet 261,800 214,400
- off-balance sheet 44,900 36,400
Trading book 17,100 12,900
_______ _______
323,800 263,700
_______ _______
Risk asset ratio
- tier 1 7.0% 7.4%
- total 11.7% 11.8%
Share price £17.52 £16.46
Number of shares in issue 3,173m 2,963m
Market capitalisation £55.6bn £48.8bn
Net asset value per ordinary share £8.62 £7.82
Employee numbers
Corporate Banking and Financial Markets 16,400 15,900
Retail Banking* 32,200 31,100
Retail Direct 9,700 7,300
Manufacturing* 24,900 23,400
Wealth Management* 5,200 5,200
RBS Insurance* 19,500 18,800
Ulster Bank* 4,100 3,400
Citizens 22,600 14,100
Centre 2,000 1,700
_______ _______
Group total 136,600 120,900
Acquisitions in the two years ended 31 (20,400) (9,200)
December 2004
_______ _______
Underlying 116,200 111,700
_______ _______
*the prior year has been restated to reflect the transfer in 2004 of certain
activities from Wealth Management to Retail Banking and from RBS Insurance and
Ulster Bank to Manufacturing.
THE ROYAL BANK OF SCOTLAND GROUP plc
ADDITIONAL FINANCIAL DATA FOR US INVESTORS
Reconciliation between UK and US GAAP
The following tables summarise the significant adjustments, which would result
from the application of US generally accepted accounting principles ('US GAAP')
instead of UK GAAP.
2004 2003
Consolidated statement of income £m £m
Profit attributable to ordinary shareholders - UK GAAP 4,256 2,254
Amortisation of goodwill 780 721
Pension costs (285) (286)
Securities, derivatives and hedging (607) 281
Software development costs (261) (300)
Others (net) (318) (258)
Taxation 383 152
_______ _______
Net income available for ordinary shareholders - US GAAP 3,948 2,564
_______ _______
2004 2003
Consolidated shareholders' equity £m £m
Shareholders' funds - UK GAAP 31,865 26,098
Goodwill 3,002 2,222
Proposed dividend 1,308 1,059
Software development costs 399 660
Pension costs 1,900 2,828
Taxation (621) (1,020)
Others (net) (465) (182)
_______ _______
Shareholders' equity - US GAAP 37,388 31,665
_______ _______
Total assets
Total assets under US GAAP, which include acceptances and the grossing-up of
certain repurchase balances offset under UK GAAP, together with the effect of
adjustments made to net income and shareholders' equity were £631 billion
(2003 - £488 billion).
THE ROYAL BANK OF SCOTLAND GROUP plc
FORWARD-LOOKING STATEMENTS
Certain sections in this document contain 'forward-looking statements' as that
term is defined in the United States Private Securities Litigation Reform Act of
1995, such as statements that include the words 'expect', 'estimate', 'project',
'anticipate', 'should', 'intend', 'plan', 'probability', 'risk', 'Value-at-Risk
('VaR')', 'target', 'goal', 'objective', 'will', 'endeavour', 'outlook',
'optimistic', 'prospects' and similar expressions or variations on such
expressions and sections such as '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
RESTATEMENTS
Divisional Restatements
During 2004, a number of activities were transferred between divisions. The
Affluent Banking business was transferred from Wealth Management to Retail
Banking; further activities were transferred from Retail Direct, Wealth
Management, RBS Insurance and Ulster Bank to Manufacturing; and, within RBS
Insurance, certain income has been re-classified from net fees and commissions
to insurance premium income in order to conform the accounting policies of
Direct Line and Churchill.
2003 Transfer 2003
Previously Restated
reported
£m £m £m
Retail Banking
- Net interest income 2,951 8 2,959
- Non-interest income 1,452 62 1,514
- Staff costs 777 16 793
- Other costs 227 10 237
Contribution 3,126 44 3,170
_______ _______ _______
Retail Direct
- Other costs 454 (8) 446
Contribution 873 8 881
_______ _______ _______
Manufacturing
- Staff costs 625 46 671
- Other costs 1,250 193 1,443
Contribution (1,875) (239) (2,114)
_______ _______ _______
Wealth Management
- Net interest income 465 (8) 457
- Non-interest income 414 (62) 352
- Staff costs 275 (16) 259
- Other costs 157 (18) 139
Contribution 438 (36) 402
_______ _______ _______
RBS Insurance
- Insurance premium income 3,061 62 3,123
- Net fees and commissions (99) (62) (161)
- Staff costs 241 (19) 222
- Other costs 341 (122) 219
Contribution 468 141 609
_______ _______ _______
Ulster Bank
- Staff costs 164 (27) 137
- Other costs 112 (54) 58
Contribution 273 81 354
_______ _______ _______
Group profit is unaffected by these changes.
THE ROYAL BANK OF SCOTLAND GROUP plc
RESTATEMENTS (continued)
Impact of implementation of FRS 17 (pension costs)
Following the implementation of FRS 17 the prior year has been restated. The
following table shows the effect of this change.
2003
£m
Income (Note 1)
19,229
- As previously reported
19,281
- As restated
_______
Change 52
_______
Pension costs
- As previously reported 273
- As restated 408
_______
Change (135)
_______
Profit before tax
- As previously reported 6,159
- As restated 6,076
_______
Change (83)
_______
Shareholders' funds
- As previously reported 28,099
- As restated 26,098
_______
Change (Note 2) (2,001)
_______
Notes:
1. Under FRS 17, the expected return on pension scheme assets less the interest
on scheme liabilities is credited to income and has been included in other
operating income.
2. The change in shareholders' funds is consistent with disclosures relating to
FRS 17 previously included in our Annual Report and Accounts for 2003.
3. Changes shown above as a result of implementing FRS 17 are reported in
Central items.
THE ROYAL BANK OF SCOTLAND GROUP plc
FINANCIAL CALENDAR
Annual general meeting 20 April 2005
2004 final dividend payment 3 June 2005
2005 interim results announcement 4 August 2005
2005 interim dividend payment October 2005
CONTACTS
Sir Fred Goodwin Group Chief Executive 020 7672 0008
0131 523 2033
Fred Watt Group Finance Director 020 7672 0008
0131 523 2028
Richard O'Connor Head of Investor Relations 020 7672 1758
For media enquiries:
Howard Moody Group Director, Communications 020 7672 1916
07768 033562
Carolyn McAdam Head of Group Communications 020 7672 1915
07796 274968
23 February 2005
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