Interim Results-Part 1 of 2

Royal Bank of Scotland Group PLC 1 August 2000 THE ROYAL BANK OF SCOTLAND GROUP plc Part 1 FOREWORD TO PRO FORMA RESULTS These interim results include National Westminster Bank Plc ('NatWest'), which was acquired on 6 March 2000. Following the acquisition, the Group's accounting year end was changed from 30 September to 31 December. Consequently these results are for the six months to 30 June, the date to which interim results will be drawn up in the future. The acquisition has had a significant effect on the Group's financial position and, as a consequence, comparisons with the prior year on a statutory basis (which only includes NatWest from 6 March 2000) are of limited benefit. In order to provide shareholders with relevant and meaningful information, pro forma results have been prepared on the basis described on page 4. The pro forma results assume that the acquisition of NatWest took place on 1 January 1999. This approach facilitates meaningful comparisons with the prior year and provides a benchmark against which the Group's future performance can be judged. As required by The Listing Rules, statutory results for the Group have been prepared both for the six months to 31 March 2000, the previous interim date, and for the nine months to 30 June 2000. The statutory results are also being announced at this time and are set out in a separate report. THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL HIGHLIGHTS - PRO FORMA BASIS 12 months 6 months 6 months ended ended ended 31 30 June 30 June December 2000 1999 Increase 1999 £m £m % £m Profit before tax, goodwill amortisation and integration costs 2,011 1,639 23 3,359 -------- -------- -------- Goodwill amortisation 308 280 10 566 -------- -------- -------- Integration costs 189 n/a 113 -------- -------- -------- Profit before tax 1,514 1,359 11 2,680 -------- -------- -------- Cost:income ratio 55.7% 60.0% 59.3% -------- -------- -------- Profit attributable to 782 703 11 1,425 ordinary shareholders -------- -------- -------- Adjusted earnings per 46.1p 37.2p 24 78.3p ordinary share -------- -------- -------- Viscount Younger, Chairman of The Royal Bank of Scotland Group plc said:- 'We are making good progress with integration and have met all of our initial targets. Whilst recognising that much remains to be done, the integration process is firmly on track to deliver the forecast cost savings and other benefits. We announced on 19 April 2000 that, as a consequence of changing our year end to 31 December, the interim dividend would be paid later in the year. The directors have recommended an interim dividend of 9.5p per ordinary share for the period to 30 June 2000, an increase of 16% over the interim dividend paid in 1999. A 23% increase in profit before tax, goodwill amortisation and integration costs is an encouraging start, the more so as it demonstrates the potential of the enlarged Group.' THE ROYAL BANK OF SCOTLAND GROUP plc CONTENTS PAGE PRO FORMA RESULTS Basis of preparation of pro forma results 4 Overview of results 5 Consolidated profit and loss account 6 Consolidated balance sheet 8 Acquisition of NatWest 9 Divisional performances 10 - Corporate Banking and Financial Markets 11 - Retail Banking 12 - Retail Direct 13 - Manufacturing 14 - Wealth Management 15 - Direct Line Insurance 16 - Ulster Bank 17 - Citizens 18 - Central items 19 Notes 20 Integration information 23 Average balance sheet 25 Average interest rates, yields, spreads and 26 margins Risk elements in lending 27 Market risk 28 Regulatory ratios and other information 29 Derivation of pro forma information 30 INDEPENDENT REVIEW REPORT BY THE AUDITORS 33 CONTACTS 34 THE ROYAL BANK OF SCOTLAND GROUP plc BASIS OF PREPARATION OF PRO FORMA RESULTS The pro forma results for the six months ended 30 June 2000 and 30 June 1999 and the year ended 31 December 1999 have been prepared on the following basis: 1. They incorporate the results of NatWest from 1 January 1999. 2. Goodwill arising on the acquisition of NatWest, currently estimated to be £11.2 billion (see page 9), has been amortised over its estimated economic life of 20 years from 1 January 1999. Goodwill arising on other acquisitions made by the Group - Green Flag, the commercial banking operations of State Street Corporation, and UST Corp - has been amortised from the effective dates of acquisition, also over 20 years. 3. A surplus of £1,070 million in NatWest Pension Funds has been amortised, from 1 January 1999, over the estimated average remaining service life of members of the schemes. 4. An adjustment has been made to reflect the net funding of the acquisition of NatWest as acquired on 1 January 1999. This comprises cash paid and loan notes issued to NatWest shareholders of £7,349 million and fees and expenses relating to the acquisition of £176 million less net proceeds of £3,910 million from the issue of new ordinary and preference shares and £20 million of proceeds from the exercise of options over NatWest ordinary shares. 5. The results of businesses disposed of since 1 January 1999 and the profit arising on their sale have been excluded from the pro forma accounts. The principal disposals were RBS Trust Bank, Gartmore and the venture capital investments of NatWest. A funding adjustment has been made to recognise the benefit of estimated net proceeds of £1,500 million assuming that these funds were received on 1 January 1999. 6. All expenditure incurred to integrate the Group's existing operations with those of NatWest and relating to projects and initiatives to achieve the cost reduction and income enhancement targets set in connection with the acquisition of NatWest has been shown separately under the caption 'Integration costs'. In the six months to 31 December 1999 NatWest incurred restructuring costs of £113m (mainly severance payments). These are classified as 'integration costs' in the prior year pro forma results. 7. Changes have been made to align NatWest accounting presentation with that adopted by the Group. However, in the following instances, the NatWest presentation has been adopted: (a) interest receivable and interest payable on trading assets and liabilities, previously shown in net interest income, are included in dealing profits. (b) fraud losses, formerly included in provisions for bad and doubtful debts, are included in administrative expenses. (c) credit card processing costs, which were reported in administrative expenses - other, have been moved to fees and commissions payable. (d) a transfer of certain costs within administrative expenses from staff costs to other costs. 8. Rentals receivable less depreciation on operating lease assets, which were included in net interest income in NatWest's accounts, are shown in 'Other operating income' and 'Depreciation and amortisation' respectively. 9. Group operating profit excludes goodwill amortisation and integration costs which are shown separately on the face of the profit and loss account. 10. The consolidated balance sheet on page 8 is the actual balance sheet and incorporates all preliminary fair value and other adjustments relating to the acquisition of NatWest. THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF RESULTS (pro forma basis) Profit before tax, goodwill amortisation and integration costs increased by 23%, £372 million, from £1,639 million to £2,011 million. Net interest income increased by 11%, £275 million, to £2,868 million. However, as identified in NatWest's 1999 statutory accounts, in Financial Markets, the favourable market conditions in the first half of 1999 were not repeated. Consequently, the net interest income in NatWest Financial Markets was down £96 million - excluding this, net interest income would have been £371 million, 15% higher than in 1999. Good growth was achieved in both corporate advances and personal advances. Average interest-earning assets of the Group's banking business increased by 10%. Net interest margin of the banking business was maintained at 3.0%. Non-interest income, excluding general insurance, grew by 6%, £141 million, to £2,656 million, despite a fall of £46 million in NatWest Financial Markets, whose performance in the first half of 1999 was boosted by the favourable trading conditions - adjusting for this, the increase would be £187 million, 8%. Fees and commissions receivable increased by 12%, £217 million, to £1,970 million. Dealing profits were up by 9%, £48 million, to £574 million. Other operating income at £489 million was down 11%, £63 million, due to restructuring costs in the life assurance businesses and one-off income in the prior year. General insurance premium income, after reinsurance, increased by 30%, £103 million, to £450 million. Total income increased by 10%, £519 million, to £5,974 million. Operating expenses, excluding goodwill amortisation and integration costs, were up 2%, £57 million, to £3,330 million. Staff expenses were down £24 million to £1,747 million. Staff numbers fell by 4,000 (6,700 excluding the impact of businesses acquired) to 99,200. Other expenses were up 5%, £81 million, to £1,583 million. Group cost:income ratio improved from 60.0% to 55.7%. General insurance claims, after reinsurance, increased by 12%, £34 million, to £323 million. Provisions for bad and doubtful debts were up 17%, £42 million, to £284 million reflecting volume growth. Total provisions at 30 June 2000 were 71% of risk elements in lending, against 61% at 30 June 1999 reflecting a continuation of the Group's conservative stance on provisioning. Goodwill arising on the acquisition of NatWest is currently estimated to be £11.2 billion. This is calculated after preliminary fair value adjustments amounting to approximately £627 million. This goodwill is being amortised over its estimated economic life of 20 years, resulting in a charge of £560 million per annum. Integration costs, which is expenditure incurred in respect of cost reduction and income enhancement targets, were £189 million in the period. The tax charge was £548 million on profit before tax of £1,514 million - an effective rate of 30.1%, excluding goodwill amortisation. Profit attributable to ordinary shareholders, after tax, minority interests and preference dividends increased by 11%, from £703 million to £782 million. Adjusted earnings per share increased by 24%, from 37.2p to 46.1p. Group post-tax return on equity, excluding goodwill, increased from 30.6% to 35.5%. Group total assets were £306 billion at 30 June 2000. Loans and advances to customers were £156 billion. Capital ratios at 30 June 2000 were 6.4% (tier 1) and 11.4% (total). THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED PROFIT AND LOSS ACCOUNT (pro forma basis) 12 6 months 6 months months ended ended ended 31 30 June 30 June December 2000 1999 1999 £m £m £m Interest receivable 7,059 6,005 12,495 Interest payable 4,191 3,412 7,221 -------- ------- ------- Net interest income 2,868 2,593 5,274 -------- ------- ------- Dividend income 17 18 37 Fees and commissions receivable 1,970 1,753 3,597 Fees and commissions payable (394) (334) (675) Dealing profits 574 526 1,027 Other operating income 489 552 1,073 -------- ------- ------- 2,656 2,515 5,059 General insurance - earned income 621 425 929 - reinsurance (171) (78) (197) -------- ------- ------- Non-interest income 3,106 2,862 5,791 -------- ------- ------- Total income 5,974 5,455 11,065 -------- ------- ------- Administrative expenses - staff costs 1,747 1,771 3,512 - premises and equipment 425 430 892 - other 769 673 1,405 Depreciation of tangible fixed 389 399 754 assets -------- ------- ------- Operating expenses 3,330 3,273 6,563 -------- ------- ------- Profit before other operating 2,644 2,182 4,502 charges General insurance - gross claims 462 356 764 - reinsurance (139) (67) (163) ------ ----- ------- Profit before provisions for bad 2,321 1,893 3,901 and doubtful debts Provisions for bad and doubtful 284 242 526 debts Amounts written off investments 26 12 16 -------- ------- ------- Group operating profit before goodwill amortisation and 2,011 1,639 3,359 integration costs Goodwill amortisation 308 280 566 Integration costs 189 - 113 -------- ------- ------- Group profit before tax 1,514 1,359 2,680 Tax (548) (484) (917) -------- ------- ------- Group profit after tax 966 875 1,763 -------- ------- ------- THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED PROFIT AND LOSS ACCOUNT (pro forma basis) 12 6 months 6 months months ended ended ended 31 30 June 30 June December 2000 1999 1999 £m £m £m Group profit after tax 966 875 1,763 Minority interests (22) (27) (43) ------- ------- ------- Profit after minority interests 944 848 1,720 Preference dividends 162 145 295 ------- ------- ------- Profit attributable to ordinary 782 703 1,425 shareholders ------- ------- ------- Basic earnings per ordinary share 29.5p 26.6p 53.9p ------ ------- ------- Adjusted earnings per ordinary 46.1p 37.2p 78.3p share (Note 6) ------- ------- ------- THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2000 Actual 30 June 2000 £m Assets Cash and balances at central banks and 6,449 items in the course of collection Treasury bills and other eligible bills 5,332 Loans and advances to banks 37,324 Loans and advances to customers 156,292 Debt securities and equity shares 54,297 Intangible fixed assets 12,121 Other assets 24,132 ------- 295,947 Long-term assurance assets attributable to 10,258 policyholders ------- Total assets 306,205 ------- Liabilities Deposits by banks and items in the course 35,472 of transmission to other banks Customer accounts 166,221 Debt securities in issue 23,614 Other liabilities 37,348 Subordinated liabilities 10,092 Minority interests 759 Shareholders' funds 22,441 ------- 295,947 Long-term assurance liabilities to 10,258 policyholders ------- Total liabilities 306,205 ------- Memorandum items: Contingent liabilities and commitments 99,699 ------ THE ROYAL BANK OF SCOTLAND GROUP plc ACQUISITION OF NATWEST £m £m Consideration paid: Issue of 1,563.5 million new RBSG 25 pence ordinary shares to NatWest ordinary shareholders (Note a) 13,462 Payment of cash to NatWest ordinary 7,110 shareholders (Note b) Issue of loan notes to NatWest ordinary 239 shareholders (Note b) Fees and expenses related to the 176 acquisition ------- 20,987 ------- Net assets acquired: Shareholders' funds 9,648 Less: preference shares (488) ------- NatWest net assets as at 6 March 2000 9,160 ------- Fair value adjustments: Goodwill in NatWest (533) Disposal of businesses: (Note c) - Gartmore 866 - Other 271 ------- 1,137 Pension fund surplus 1,070 Contingent asset 70 Fixed assets excluding property (40) Property (172) Financial instruments carried at cost (203) Other (428) Tax on fair value adjustments (274) ------- Total fair value adjustments 627 ------- Adjusted net assets acquired 9,787 ------- Goodwill arising on acquisition (Note d) 11,200 ------- Notes (a) The 'Consideration paid' information above is based on the closing price on the London Stock Exchange on 3 March 2000, the trading day immediately prior to the offer for NatWest being declared unconditional in all respects, of 861 pence per RBSG ordinary share of 25 pence. (b) NatWest ordinary shareholders had the right to receive, for each NatWest share held, 0.968 new RBSG 25 pence ordinary shares plus 400 pence in cash or loan notes. A 'Partial cash alternative' was also offered, which, for each NatWest share held, consisted of 0.92 new RBSG 25 pence ordinary shares plus 450 pence in cash or loan notes. (c) The fair value adjustment relating to the disposal of businesses reflects the excess of sale proceeds over the net tangible asset value of these businesses in NatWest's consolidated balance sheet at 6 March 2000. (d) The goodwill arising on acquisition is being amortised over its estimated economic life of 20 years, resulting in a charge of £560 million per annum. THE ROYAL BANK OF SCOTLAND GROUP plc DIVISIONAL PERFORMANCES (pro forma basis) The results of each division before integration costs and goodwill amortisation are detailed below. 6 6 12 months months months ended ended ended 30 30 31 June June December 2000 1999 1999 £m £m £m Corporate Banking and 1,337 1,265 2,491 Financial Markets Retail Banking 1,202 1,044 2,144 Retail Direct 177 128 302 ------ ----- ------- Contribution before 2,716 2,437 4,937 manufacturing costs Manufacturing* (859) (927) (1,866) ------ ----- ------- Operating profit 1,857 1,510 3,071 Wealth Management 200 145 328 Direct Line Insurance Group 76 36 100 Ulster Bank 96 83 166 Citizens 167 125 258 Central items (385) (260) (564) ----- ------ ------ Group operating profit before goodwill amortisation and integration costs 2,011 1,639 3,359 ------ ----- ------- * Given the integrated nature of Manufacturing's services it is neither meaningful nor practical to allocate these costs to Corporate Banking and Financial Markets, Retail Banking and Retail Direct. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE BANKING AND FINANCIAL MARKETS (pro forma basis) 6 6 12 months months months ended ended ended 30 30 31 June June December 2000 1999 1999 £m £m £m Net interest income 885 887 1,758 Non-interest income 1,398 1,330 2,663 ----- ------ ----- Total income 2,283 2,217 4,421 Direct expenses 837 877 1,721 ------ ----- ----- Contribution before provisions 1,446 1,340 2,700 Provisions for bad and 83 65 193 doubtful debts Amounts written off 26 10 16 investments ----- ------ ----- Contribution 1,337 1,265 2,491 ----- ----- ----- Direct cost:income ratio (%) 36.7 39.6 38.9 Total assets (£bn) 186.2 170.5 176.3 Employees at period end - permanent 13,000 14,400 14,000 - temporary 700 800 600 ------ ------ ------- - total 13,700 15,200 14,600 ------ ------ ------- Corporate Banking and Financial Markets provides an integrated range of products and services to its mid-sized, large corporate and institutional customers in the UK and overseas including corporate and commercial banking, treasury and capital markets products, structured and leveraged finance, trade finance, leasing and factoring. Net interest income was flat due to a decline of £96 million in NatWest Financial Markets which benefitted from the favourable market conditions in the first half of 1999. Adjusting for this, underlying net interest income increased by 11%. Non-interest income was up £68 million, 5% to £1,398 million. There was a fall in NatWest Financial Markets' non-interest income of £46 million from the high level achieved in the first half of 1999. But for this, non-interest income would have been 9% higher. Direct expenses were down 5%, £40 million to £837 million. Provisions for bad and doubtful debts were up £18 million, 28% to £83 million. Amounts written off investments were £26 million (1999: £10 million). Contribution was up 6%, £72 million to £1,337 million. The direct cost:income ratio improved to 36.7% from 39.6%. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL BANKING (pro forma basis) 6 6 12 months months months ended ended ended 30 30 31 June June December 2000 1999 1999 £m £m £m Net interest income 1,180 1,081 2,221 Non-interest income 546 551 1,084 ------ ----- ------- Total income 1,726 1,632 3,305 Direct expenses 456 519 1,043 ------ ------ ------- Contribution before provisions 1,270 1,113 2,262 Provisions for bad and 68 69 118 doubtful debts ----- ----- ------ Contribution 1,202 1,044 2,144 ----- ----- ------ Direct cost:income ratio (%) 26.4 31.8 31.6 Total assets (£bn) 53.8 50.0 51.9 Employees at period end - permanent 30,300 33,900 32,300 - temporary 1,500 2,700 2,000 ------ ------ ------ - total 31,800 36,600 34,300 ------ ------ ------ Retail Banking provides a wide range of banking, insurance and other related financial services to individuals and small businesses. These services are delivered from a UK-wide network of RBS and NatWest branches and through alternative distribution channels. Net interest income was 9%, £99 million higher at £1,180 million reflecting growth in loans and deposits, including current accounts. Non-interest income was flat mainly due to the restructuring of the life assurance businesses. Direct expenses at £456 million were down 12%, £63 million. Provisions for bad and doubtful debts were down £1 million. Contribution before integration costs increased by 15%, £158 million to £1,202 million. The direct cost:income ratio improved from 31.8% to 26.4%. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL DIRECT (pro forma basis) 6 6 12 months months months ended ended ended 30 30 31 June June December 2000 1999 1999 £m £m £m Net interest income 256 234 496 Non-interest income 265 215 475 ----- ----- ----- Total income 521 449 971 Direct expenses 238 226 470 ----- ----- ----- Contribution before provisions 283 223 501 Provisions for bad and 106 95 199 doubtful debts ----- ----- ----- Contribution 177 128 302 ----- ----- ----- Direct cost:income ratio (%) 45.7 50.3 48.4 Total assets (£bn) 13.3 9.0 10.7 Employees at period end - permanent 5,700 5,200 5,600 - temporary 700 500 600 ------ ----- ------- - total 6,400 5,700 6,200 ------ ----- ------- Retail Direct issues a comprehensive range of credit, charge and debit cards to personal and corporate customers and engages in acquisition and processing facilities for retail businesses. It also includes the Group's internet banking platform, Tesco Personal Finance, Virgin Direct Personal Finance, Direct Line Financial Services and Lombard Direct. Net interest income grew by 9%, £22 million to £256 million, due to higher lending volumes. Non-interest income increased 23%, £50 million to £265 million. Direct expenses at £238 million were 5%, £12 million higher. Provisions for bad and doubtful debts increased by 12%, £11 million to £106 million. Contribution rose by 38%, £49 million to £177 million. The direct cost:income ratio improved from 50.3% to 45.7%. THE ROYAL BANK OF SCOTLAND GROUP plc MANUFACTURING (pro forma basis) 6 6 12 months months months ended ended ended 30 30 31 June June December 2000 1999 1999 £m £m £m Staff costs 274 314 637 Other costs 585 613 1,229 ------ ----- ------ Total manufacturing costs 859 927 1,866 ------ ----- ------ Employees at period end - permanent 17,900 18,500 18,500 - temporary 2,000 2,900 2,300 ------ ------ ------- - total 19,900 21,400 20,800 ------ ------ ------- Manufacturing supports the customer facing businesses of Corporate Banking and Financial Markets, Retail Banking and Retail Direct and provides operational technology, account management, money transmission, property and other services. Total manufacturing costs declined by 7%, £68 million, to £859 million. The reduction reflects the initial benefits of integrating RBS and NatWest operations, with reduced technology related expenditure partially offset by cost increases associated with the migration of additional work into NatWest processing centres (87% complete by 30 June). THE ROYAL BANK OF SCOTLAND GROUP plc WEALTH MANAGEMENT (pro forma basis) 6 6 12 months months months ended ended ended 30 30 31 June June December 2000 1999 1999 £m £m £m Net interest income 204 184 380 Non-interest income 237 199 402 ---- ----- ----- Total income 441 383 782 Expenses 244 235 457 ---- ----- ----- Profit before provisions 197 148 325 Provisions for bad and (3) 3 (3) doubtful debts ---- ----- ----- Profit before integration 200 145 328 costs ---- ----- ----- Cost:income ratio (%) 55.3 61.4 58.4 Total assets (£bn) 10.2 9.5 9.8 Employees at period end - permanent 6,200 6,200 6,200 - temporary 600 700 600 ------ ----- ------- - total 6,800 6,900 6,800 ------ ----- ------- Wealth Management, which includes Coutts, brings together the Group's businesses that focus on longer term savings, investments and private banking markets in the UK and internationally. It also includes the Group's offshore banking interests which deliver a wide range of services to local customers, expatriates, intermediaries and institutional clients. Total income was up 15%, £58 million to £441 million. Net interest income grew by 11%, £20 million to £204 million while non-interest income increased 19%, £38 million to £237 million. Expenses were 4%, £9 million higher at £244 million. There was a net recovery of provisions for bad and doubtful debts of £3 million (1999: charge of £3 million). Profit before integration costs increased by 38%, £55 million to £200 million. The cost:income ratio improved from 61.4% to 55.3%. THE ROYAL BANK OF SCOTLAND GROUP plc DIRECT LINE INSURANCE GROUP (pro forma basis) 6 6 12 months months months ended ended ended 30 30 31 June June December 2000 1999 1999 £m £m £m Earned premiums 621 425 929 Reinsurers' share (171) (78) (197) ------ ----- ------ Insurance premium income 450 347 732 Net interest income 43 33 72 Non-interest income 37 38 92 ------ ----- ------ Total income 530 418 896 Expenses 131 93 195 Gross claims 462 356 764 Reinsurers' share (139) (67) (163) ----- ----- ------ Profit before goodwill amortisation and integration costs 76 36 100 ------ ----- ------ In-force policies (000) Motor 2,714 2,383 2,524 Home 952 882 918 Combined operating ratio 89.5 101.3 98.9 - DLI and Privilege Total assets (£bn) 2.2 1.5 1.9 Insurance reserves - net (£m) 1,226 1,092 1,171 Employees at period end - permanent 6,300 4,800 5,700 - temporary 100 100 100 ----- ----- ----- - total 6,400 4,900 5,800 ----- ----- ----- Direct Line Insurance Group sells and underwrites motor and personal lines insurance directly by telephone and over the internet to consumers. It includes Green Flag, the UK's third largest breakdown recovery service. Premium income grew strongly, up £103 million, 30%. Green Flag contributed £68 million to this growth. Claims were 12%, £34 million higher at £323 million. Profit before goodwill amortisation and integration costs was up 111%, £40 million, at £76 million, partly due to the acquisition of Green Flag in November 1999. Motor in-force policies have increased by 8% in the six months to 30 June 2000. Home in-force policies show a growth of 4% in the six months ended 30 June 2000. The Group's year-end of 30 September led to a material seasonal effect on Direct Line Insurance's half-yearly results. As a consequence of the change in the year end, it is expected that the seasonal effect will be largely eliminated. MORE TO FOLLOW

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