Interim Results - Part 2

Royal Bank of Scotland Group PLC 7 August 2001 PART 2 THE ROYAL BANK OF SCOTLAND GROUP plc NOTES 1. Basis of preparation and presentation of pro forma results (a) Basis of preparation The pro forma results for the six months ended 30 June 2000 and the year ended 31 December 2000 have been prepared on the following basis: (i) They incorporate the results of NatWest from 1 January 1999 and assume that the fair value adjustments were made on 31 December 1998. (ii) Goodwill arising on the acquisition of NatWest of £11,390 million has been amortised over its estimated economic life of 20 years. Goodwill arising on other acquisitions made by the Group after 1 January 1999 - Green Flag, the commercial banking operations of State Street Corporation, and UST Corp. - has been amortised from the effective dates of acquisition, generally also over 20 years. Goodwill arising on acquisitions prior to 1 January 1999 was written off directly to reserves and has not been reinstated, as permitted by Financial Reporting Standard 10. (iii) 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. (iv) An adjustment has been made to reflect the net funding of the acquisition of NatWest as if acquired on 1 January 1999. The net funding 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. (v) 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. (b) Basis of presentation (i) 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'. (ii) Group operating profit is stated before goodwill amortisation and integration costs which are shown separately on the face of the profit and loss account. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 2. Accounting policies and presentation There have been no changes to the Group's principal accounting policies as set out on pages 49 to 51 of the 2000 Report and Accounts. Certain data as at 30 June 2000 have been restated following the change in NatWest's accounting policy on the write-off of bad debts to bring it into line with the Group's. 3. Provisions for bad and doubtful debts Group operating profit is stated after charging provisions for bad and doubtful debts of £367 million (30 June 2000 - £284 million). The balance sheet provisions for bad and doubtful debts increased in the six months to 30 June 2001 from £3,153 million to £3,236 million, and the movements thereon were: Specific General Total £m £m £m At 1 January 2001 2,585 568 3,153 Currency translation adjustment 25 9 34 Amounts written off (354) - (354) Recoveries of amounts previously 36 - 36 written-off Transfers between provisions 2 (2) - Charge to profit & loss account 360 7 367 -------- -------- -------- At 30 June 2001 2,654 582 3,236 -------- -------- -------- At 30 June 2000 2,497 577 3,074 -------- -------- -------- 4. Goodwill The amortisation of goodwill is based on an estimated economic life of 20 years and comprises: Pro forma Pro forma Half-year Half-year Full Year 2001 2000 2000 £m £m £m Goodwill on the acquisition of NatWest* 285 283 570 Other - from actual date of acquisition 33 28 65 ----- ----- ----- 318 311 635 ----- ----- ----- * the pro forma figures assume acquisition on 1 January 1999. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 5. Taxation The charge for taxation is based on a UK corporation tax rate of 30% (2000 - 30%) and comprises: Pro Pro forma forma Half-year Half-year Full Year 2001 2000 2000 £m £m £m Tax on profit before goodwill amortisation and integration costs 847 604 1,306 Tax relief on integration costs (101) (56) (135) ----- ----- ------- 746 548 1,171 ----- ----- ------- The tax charge of £746 million, equivalent to 36% of pre-tax profit, is higher than the standard UK tax rate of 30% mainly due to goodwill amortisation, which is not allowable for UK tax. 6. Earnings per share The earnings per share have been calculated based on the following: Pro forma Pro forma Half-year Half-year Full Year 2001 2000 2000 £m £m £m Earnings: Profit attributable to ordinary 1,104 779 1,779 shareholders ------- ----- ------- Number of shares - millions Weighted average number of ordinary shares in issue during the period 2,687 2,652 2,660 -------- -------- -------- Basic earnings per share 41.1p 29.4p 66.9p Goodwill amortisation 11.6p 11.6p 23.4p Integration costs 9.9p 5.1p 11.7p -------- -------- -------- Adjusted earnings per share 62.6p 46.1p 102.0p -------- -------- -------- Adjusted earnings are calculated by excluding from the profit attributable to ordinary shareholders the after tax effect of goodwill amortisation and integration costs. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 7. Analysis of loans and advances to customers The following table analyses loans and advances to customers of UK and overseas offices by type of customer and geographical area: 30 June 30 June 31 December 2001 2000 2000 £m £m £m UK Central and local government 1,543 1,897 1,957 Manufacturing 6,655 6,549 6,806 Construction 2,931 2,439 2,615 Finance 10,801 10,346 9,944 Service industries 16,742 16,919 17,242 Agriculture, forestry and fishing 2,362 2,425 2,373 Property 10,516 9,874 10,415 Business and other services 4,094 3,710 3,661 Individuals - home mortgage 34,362 30,621 32,600 - other 19,438 16,137 17,881 Instalment credit and other loans 5,174 5,055 4,929 Finance leases 5,966 5,891 5,887 ----------- ----------- ----------- 120,584 111,863 116,310 Overseas residents 24,111 16,071 19,257 ----------- ----------- ----------- Total UK offices 144,695 127,934 135,567 ----------- ----------- ----------- Overseas USA 25,881 18,935 23,050 Rest of the World 12,039 12,489 12,598 ----------- ----------- ----------- Total overseas offices 37,920 31,424 35,648 ----------- ----------- ----------- 182,615 159,358 171,215 Provisions for bad and doubtful debts* 3,226 3,066 3,139 ----------- ----------- ----------- Total loans and advances to customers 179,389 156,292 168,076 ----------- ----------- ----------- * Excluding provisions for bad and doubtful debts in respect of banks THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 8. Cross border outstandings The table below sets out the Group's cross-border outstandings to countries for which outstandings individually represented in excess of 1% of Group total assets (including acceptances). None has experienced repayment difficulties which have required refinancing of outstanding debt. 30 June 30 June 31 December 2001 2000 2000 £m £m £m Germany 8,336 7,548 6,156 USA 6,364 9,198 6,520 France 4,706 3,821 3,310 Cayman Islands 4,555 * * Netherlands 4,520 3,713 3,446 Canada * 3,360 * Japan * * 3,891 * less than 1% Group total assets (including acceptances) At 30 June 2001, Switzerland (£3,422 million), Japan (£3,123 million), Italy (£2,824 million) and Canada (£2,669 million) were the only countries that had cross-border outstandings of between 0.75% and 1% of Group total assets (including acceptances). At 31 December 2000, Switzerland (£3,137 million) and the Cayman Islands (£2,878 million) were the only countries that had cross-border outstandings of between 0.75% and 1% of Group total assets (including acceptances). At 30 June 2000, Japan (£2,606 million) and Italy (£2,381 million) were the only countries that had cross-border outstandings of between 0.75% and 1% of Group total assets (including acceptances). 9. Ordinary dividend The directors have declared an interim dividend of 11.0p per share on the ordinary shares. The interim dividend will be paid on 12 October 2001 to shareholders registered on 17 August 2001. As an alternative to cash, a scrip dividend election is to be offered and shareholders will receive details of this by letter. 10. Auditors' review The interim results have been reviewed by the Group's auditors, Deloitte & Touche, and their review report is set out on page 30. 11. Interim report and Form 6-K An interim report is being sent to shareholders. An interim report on Form 6-K is being furnished to the Securities and Exchange Commission in the US. Copies of both documents will be available at the Company's registered office at 36 St Andrew Square, Edinburgh, EH2 2YB. 12. Final results The Group's results for the year ended 31 December 2001 will be announced on Thursday 28 February 2002. THE ROYAL BANK OF SCOTLAND GROUP plc INTEGRATION INFORMATION In the Offer Document for NatWest issued on 16 December 1999, the Group made various estimates in respect of cost savings, staff reductions and revenue benefits. Those estimates were based on the latest available published information at that time, namely NatWest interim accounts for the half year to 30 June 1999 and the Group's accounts for the year to 30 September 1999. All the benefits detailed below are measured against that published information. On 19 April 2000, the Group revised its estimates as a consequence of the experience gained by having detailed access to NatWest following the acquisition on 6 March 2000. These revised estimates are shown in the tables below as 'plan'. Period ending REVENUE BENEFITS December June December December March 2000 2001 2001 2002 2003 * Cumulative gross revenue initiatives implemented at the end of each period (£m) plan 120 350 550 595 actual 147 302 December 2003 * Impact on profit before tax (£m) plan 50 120 240 390 actual 52 106 The gross revenue initiatives generated income of £136 million, which, net of costs, generated a profit of £106 million in the six months to 30 June 2001. Period ending COST SAVINGS December June December December March 2000 2001 2001 2002 2003 * Cumulative cost savings implemented at the end of each period (£m) plan 550 900 1,200 1,340 actual 653 875 December 2003 * Impact on profit before tax (£m) plan 290 700 1,050 1,300 actual 448 422 Period ending STAFF REDUCTIONS December June December December March 2000 2001 2001 2002 2003 * Cumulative total plan 9,000 14,000 16,000 18,000 actual 13,000 16,000 Period ending INTEGRATION COSTS December June December December March 2000 2001 2001 2002 2003 * Cumulative total charge to P&L (£m) plan 650 1,150 1,350 1,400 actual 547* 908 *includes £113 million incurred by NatWest in the second half of 1999. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE BALANCE SHEET Pro forma 2001 2000 Average Average Six months ended 30 June balance Rate balance Rate £m % £m % Assets Treasury and other eligible bills UK 174 5.7 461 4.3 Overseas 84 4.8 136 4.4 Loans and advances to banks UK 17,542 5.2 16,852 5.8 Overseas 9,314 6.1 8,815 6.4 Loans and advances to customers UK 117,689 7.2 101,362 7.8 Overseas 26,060 7.3 21,272 7.6 Instalment credit and finance lease receivables UK 14,311 8.3 13,902 8.7 Overseas 1,510 6.9 1,883 6.2 Debt securities UK 16,165 5.9 18,586 6.2 Overseas 10,892 6.1 9,351 6.1 ----------- ----------- Interest-earning assets - banking business 213,741 6.9 192,620 7.3 Interest-earning assets - trading business 68,661 53,617 ----------- ----------- Total interest-earning assets 282,402 246,237 Non-interest-earning assets 59,280 52,151 ----------- ----------- Total assets 341,682 298,388 ----------- ----------- Liabilities Deposits by banks UK 17,191 4.5 13,724 4.5 Overseas 7,828 5.2 7,433 5.3 Customer accounts UK 112,250 4.1 104,426 4.6 Overseas 25,325 4.1 20,584 4.4 Debt securities in issue UK 19,887 5.3 15,899 6.2 Overseas 8,257 5.5 8,298 6.0 Loan capital UK 10,186 7.0 9,413 7.1 Overseas 342 8.2 477 11.3 Internal funding of trading business UK (15,937) 4.6 (11,238) 4.6 Overseas (1,966) 4.6 (962) 4.8 ----------- ----------- Interest-bearing liabilities - banking 183,363 4.5 168,054 5.0 business Interest-bearing liabilities - trading 65,508 50,405 business ----------- ----------- Total interest-bearing liabilities 248,871 218,459 Non-interest-bearing liabilities demand deposits 24,363 21,150 other liabilities 44,561 36,705 Shareholders' equity 23,887 22,074 ----------- ----------- Total liabilities and shareholders' equity 341,682 298,388 ----------- ----------- The analysis into UK and overseas has been compiled on the basis of location of office. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS Pro forma 2001 2000 Average Average rate rate % % Six months ended 30 June The Group's base rate 5.6 5.9 London inter-bank offered rate: three month sterling 5.5 6.2 three month eurodollar 4.9 6.4 Yields, spreads and margins of the banking business: Gross yield (1) Group 6.9 7.3 UK 7.0 7.5 Overseas 6.7 6.9 Interest spread (2) Group 2.4 2.3 UK 2.5 2.5 Overseas 2.1 1.9 Net interest margin (3) Group 3.0 3.0 UK 3.1 3.1 Overseas 2.9 2.6 (1) Gross yield is the interest rate earned on average interest-earning assets of the banking business. (2) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (3) Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business. THE ROYAL BANK OF SCOTLAND GROUP plc 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 incorporate estimates and are stated before deducting the value of security held or related provisions. 30 June 30 June 31 December 2001 2000 2000 £m £m £m Loans accounted for on a non-accrual basis: Domestic 2,555 2,387 2,482 Foreign 400 614 344 -------- -------- ------- 2,955 3,001 2,826 -------- -------- -------- Accruing loans which are contractually overdue 90 days or more as to principal or interest*: Domestic 770 565 662 Foreign 143 187 168 -------- -------- -------- 913 752 830 -------- -------- -------- Loans not included above which are classified as 'troubled debt restructurings' by the SEC: Domestic 37 22 43 Foreign 140 104 122 -------- -------- -------- 177 126 165 -------- -------- -------- Total risk elements in lending 4,045 3,879 3,821 -------- -------- -------- Closing provisions for bad and doubtful debts as a % of total risk elements in lending 80% 79% 83% -------- -------- -------- * Generally, lending by way of overdraft has no fixed repayment schedule and consequently is not included in this category. Loans that are current as to payment of principal and interest and not reflected in the above table, but in respect of which management has serious doubts about the ability of the borrower to comply with contractual repayment terms, totalled approximately £880 million at 30 June 2001 (30 June 2000 - £ 816 million; 31 December 2000 - £772 million). 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 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 VaR for the Group. The comparative figures for the six months to 30 June 2000 are presented as if NatWest had been part of the Group throughout that period. The Group's VaR assumes a 95% confidence level and one-day time horizon. Six months to 30 June At 30 June Maximum Minimum Average £m £m £m £m Trading 2001 12.1 15.2 8.8 11.3 2000 10.3 11.6 8.5 9.7 Treasury 2001 5.3 5.3 4.0 4.4 2000 4.0 5.0 3.0 3.7 The Group's VaR should be interpreted in the light of the assumptions underlying the methodologies adopted and their limitations. Historical data used in computing VaR may not be indicative of future market conditions. THE ROYAL BANK OF SCOTLAND GROUP plc REGULATORY RATIOS AND OTHER INFORMATION 30 June 30 June 31 December 2001 2000 2000 Weighted risk assets (£m) Banking book - on balance sheet 159,600 139,300 146,600 - off balance sheet 17,700 15,800 16,200 Trading book 13,600 10,500 12,400 ----------- ----------- ----------- 190,900 165,600 175,200 ----------- ----------- ----------- Risk asset ratio - tier 1 7.2% 6.4% 6.9% - total 11.4% 11.4% 11.5% Share price at period end £15.67 £11.06 £15.82 Number of shares in issue at period end 2,705m 2,661m 2,678m Market capitalisation £42.4bn £29.4bn £42.4bn Net asset value per ordinary share £7.47 £7.00 £7.12 Employee numbers Corporate Banking and Financial Markets 13,100 13,700 13,100 Retail Banking 29,300 31,800 28,900 Retail Direct 6,000 6,400 5,800 Manufacturing 19,300 19,900 19,200 Wealth Management 6,800 6,800 6,800 Direct Line Insurance Group 7,500 6,400 6,700 Ulster Bank 4,700 4,800 4,600 Citizens 7,300 7,500 7,300 Centre 1,600 1,900 1,600 ---------- ---------- ---------- Group total 95,600 99,200 94,000 ---------- ---------- ---------- Forward looking statements Certain sections of this document contain forward-looking statements. We use words such as 'expect', 'believe', 'risk' and 'VaR' to identify forward-looking statements. Our statements are subject to certain risks and uncertainties, as discussed in the Operating and Financial Review and Risk Management sections of the Annual Report and Accounts. These risks and uncertainties could cause actual results to differ materially from our statements. Statutory accounts Financial figures as at and for the year ending 31 December 2000 do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985 ('the Act'). The statutory accounts for that period have been filed with the Registrar of Companies and have been reported on by the auditors under Section 235 of the Act. The report of the auditors was unqualified and did not contain a statement under Section 237(2) or (3) of the Act. THE ROYAL BANK OF SCOTLAND GROUP plc INDEPENDENT REVIEW REPORT TO THE ROYAL BANK OF SCOTLAND GROUP plc Introduction We have been instructed by the company to review the financial information for the six months ended 30 June 2001 which comprises the profit and loss account, the balance sheet, the divisional performance disclosures and related notes 1 to 12 , which have been prepared as described in note 1 and in accordance with the accounting policies referred to in note 2. This financial information is not subject to the Listing Rules of the Financial Services Authority. We have read the other information contained in this report and, solely on that basis, have considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities This report, including the financial information contained herein, is the responsibility of, and has been approved by, the directors. The directors have determined that the accounting policies and presentation applied to the figures are consistent with those applied in preparing the preceding annual accounts except for those changes that are disclosed. Review work performed We conducted our review having regard to guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2001. Deloitte & Touche Chartered Accountants Edinburgh 6 August 2001 THE ROYAL BANK OF SCOTLAND GROUP plc CONTACTS Fred Watt Group Finance Director 020 7427 8412 0131 523 2028 Grahame Whitehead Deputy Group Finance Director 020 7427 9450 0131 523 2970 A copy of management's presentation to investment analysts will be available on the Group's website www.rbs.co.uk. 7 August 2001 MORE TO FOLLOW

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