Interim Results - Pre-tax Profit Up 31%

Royal Bank of Scotland Group PLC 28 January 2000 THE ROYAL BANK OF SCOTLAND GROUP INTERIM PROFITS FORECAST * PROFIT BEFORE TAX UP 31 PER CENT * PROFIT BEFORE TAX AND EXCEPTIONAL ITEMS UP 23 PER CENT * EARNINGS PER SHARE UP 28 PER CENT * ADJUSTED EARNINGS PER SHARE UP 19 PER CENT * IMPROVEMENT IN ALL BUSINESSES A conference call has been arranged for Analysts between 11.15am and noon and for the Press between 12.15pm and 1.00pm. The dial in number for both calls is 0141 567 8830 and you should ask for The Royal Bank of Scotland Conference Call. ROYAL BANK GROUP FORECASTS INCREASED INTERIM PROFIT The Royal Bank of Scotland Group ('the RBS Group') today issued a forecast of its results for the six months to 31 March 2000. Group profit before tax is forecast to increase by 31 per cent to £695 million (1999 - £531 million). Profit before tax and exceptional items is forecast to increase by 23 per cent to £651 million (1999 - £531 million). The profit forecast is made in the absence of unforeseen circumstances and on the basis of a number of given assumptions. The RBS Group's total income is anticipated to rise 19 per cent to £2,325 million, while operating expenses, before exceptional items, increase by 12 per cent to £1,133 million. The RBS Group's cost:income ratio is forecast to improve from 51.8 per cent to 48.7 per cent. Earnings per share are forecast to rise by 28 per cent, from 37.9p to 48.4p. After adjusting for exceptional items, earnings per share rise by 19 per cent, from 37.9p to 45.0p. Sir George Mathewson, Group Chief Executive, said: 'We believe that the three proposals for NatWest's future are quite different, featuring different visions, different benefits and different risks. We believe that our track record significantly reinforces the strength of our proposals and we take this opportunity to provide further evidence of our continuing success in growing income, growing profits and improving efficiency. 'The improvement demonstrated in our forecast profit is based on progress across all parts of our Group, in both new and established businesses.' Divisional performances: * In the largest business area, the UK Bank, profit is forecast to increase by 19 per cent to £411 million (1999 - £344 million). * In the USA, Citizens Financial Group is forecast to increase its profit before exceptional items by 13 per cent to £135 million (1999 - £119 million). * The RBS Group's insurance division, comprising Direct Line Insurance, Privilege Insurance and Green Flag (from the date of acquisition in November 1999), is forecast to increase its profit from £9 million to £14 million. Because of the seasonal pattern of claims, the Group's motor insurance businesses tend to make the larger proportion of their profit in the second half of the year. * The RBS Group's New Retail Financial Services Businesses are forecast to reduce their loss from £17 million in 1999 to £1 million. * Angel Trains, the RBS Group's train leasing business, is forecast to increase its profit from £24 million to £33 million. * RBS Cards is forecast to increase its profit from £37 million to £47 million. * The RBS Group's offshore business, The Royal Bank of Scotland International, is forecast to increase its profit by 29 per cent to £44 million (1999 - £34 million). * The above results exclude a forecast exceptional gain of £99 million realised from the sale of the RBS Group's main investor services businesses in October 1999 and forecast exceptional restructuring costs of £55 million incurred in relation to the acquisitions, by Citizens Financial Group, of UST Corp. of Boston and the commercial banking business of State Street Corporation. THE ROYAL BANK OF SCOTLAND GROUP plc FORECAST GROUP RESULTS FOR THE HALF-YEAR TO 31 MARCH 2000 The Board of The Royal Bank of Scotland Group plc ('RBS') forecasts that, subject to unforeseen circumstances and on the basis and assumptions, including the notes to the Group profit forecast, which form an integral part of this forecast, the Group results for the half year to 31 March 2000 ('the forecast Group results') will be as follows: Forecast Half- Half- Full year year Year 2000 1999 Forecast 1999 £m £m % £m increase Profit before tax and 651 531 23 1,211 exceptional items (not less than) ----- ----- ----- Profit before tax 695 531 31 1,211 (not less than) ----- ----- ----- Profit attributable to 433 333 30 776 ordinary shareholders (not less than) ----- ----- ----- Earnings per ordinary 48.4p 37.9p 28 87.8p share (not less than) ------- ------ ----- The basis and assumptions underlying this profit forecast, and letters from PricewaterhouseCoopers and Goldman Sachs and Merrill Lynch relating thereto, follow. THE ROYAL BANK OF SCOTLAND GROUP plc BASIS AND ASSUMPTIONS 1. Basis The profit forecast is based on: * the unaudited management accounts of the RBS Group for the three months to 31 December 1999 presented to and approved by the Group Board; and * management estimates and forecasts for the three months ending 31 March 2000. Such management forecasts are based on current operating experience and expected market and economic conditions. The profit forecast has been prepared excluding the impact of the current bid for NatWest. Specifically, the forecast excludes any anticipated post acquisition profits and losses of NatWest, related financing and capital raising transactions and costs, other direct costs of acquisition and post acquisition costs, such as integration costs. 2. Group accounting policies The profit forecast was prepared on the basis of the accounting policies adopted by the RBS Group in the audited accounts for the year ended 30 September 1999 and as amended for changes arising from the adoption of Financial Reporting Standard ('FRS') 15, Tangible Fixed Assets, and FRS 16, Current Tax. The adoption of these new accounting standards does not have a material impact on the RBS Group. 3. Assumptions The principal assumptions on which the forecast is based and which are outside the directors' control are: * There will be no material change in the present management or control of the RBS Group. * There will be no material change to the RBS Group's customers' ability to meet their obligations to the RBS Group from that currently anticipated by the directors. * There will be no material change in legislation or regulatory requirements impacting the RBS Group's operations or its accounting policies. Any further guidance issued by the Financial Services Authority in respect of providing for pensions mis-selling will not have a material adverse affect on the RBS Group. * There will be no material change in interest rates or exchange rates from those currently prevailing. * There will not be any material change in the rates or bases of taxation, both direct and indirect, affecting the RBS Group from those currently prevailing. * There will not be any changes in general trading and economic conditions in the countries in which the RBS Group operates or trades which would materially affect the RBS Group's business. * There will be no material changes in the market value of listed investments held by the RBS Group. * There will be no natural disasters or other circumstances which would cause there to be a materially adverse change in the level of insurance claims in the forecast period than that which the RBS Group has historically experienced. * There will be no changes in circumstances (credit, operational or otherwise) affecting the performance of the RBS Group's underwriters or other trading companies which would have a materially adverse effect on the RBS Group. * There will be no major disruptions to the businesses of the RBS Group, its suppliers or its major customers by reason of industrial disruption, civil disturbance or government action. * There will be no material losses arising in respect of the RBS Group's contingent liabilities. * Any Year 2000 problems at RBS Group's key counterparties will not have a materially adverse financial impact on the RBS Group. * Results of businesses giving rise to dealing profits in the second quarter have been assumed to follow trends of the first quarter. THE ROYAL BANK OF SCOTLAND GROUP plc BASIS AND ASSUMPTIONS (continued) 4. Notes to the forecast Group results (a) Forecast consolidated profit and loss account (unaudited) Forecast before Forecast except except Forecast -ional -ional Half- Half- (Audited) items items year year Full Year 2000 1999 1999 £m £m £m £m £m NET INTEREST INCOME 1,033 - 1,033 865 1,756 NON-INTEREST INCOME 824 - 824 753 1,672 General insurance 468 - 468 335 710 premiums (net of reinsurance) -------- -------- -------- ----- -------- TOTAL INCOME 2,325 - 2,325 1,953 4,138 OPERATING EXPENSES 1,133 55 1,188 1,011 2,048 -------- -------- -------- ----- -------- PROFIT BEFORE OTHER 1,192 (55) 1,137 942 2,090 OPERATING CHARGES General insurance 395 - 395 302 590 claims (net of reinsurance) -------- -------- -------- ----- -------- PROFIT BEFORE PROVISIONS FOR BAD AND DOUBTFUL DEBTS 797 (55) 742 640 1,500 Provisions for bad 146 - 146 108 276 and doubtful debts Amounts written off - - - 1 13 investments ----- ----- ----- ----- ------- GROUP OPERATING 651 (55) 596 531 1,211 PROFIT Profit on sale of - 99 99 - - business ----- ----- ----- ----- ------- PROFIT ON ORDINARY 651 44 695 531 1,211 ACTIVITIES BEFORE TAX Tax on Group profit (199) (13) (212) (164) (361) on ordinary activities ------- ------- ------- ----- -------- PROFIT ON ORDINARY 452 31 483 367 850 ACTIVITIES AFTER TAX Minority interests 7 - 7 2 6 - equity ------- ------- ------- ----- ------- PROFIT AFTER MINORITY 459 31 490 369 856 INTERESTS Preference dividends 57 - 57 36 80 ------- ------- ------- ----- ------- PROFIT ATTRIBUTABLE TO ORDINARY SHAREHOLDERS 402 31 433 333 776 ------- ------- ------- ----- ------- EARNINGS PER ORDINARY SHARE 48.4p 37.9p 87.8p Adjustments to exclude exceptional items: Restructuring costs on 4.3p - - acquisitions Profit on sale of business (7.7p) - - ------ ----- ----- ADJUSTED EARNINGS PER 45.0p 37.9p 87.8p ORDINARY SHARE ------ ----- ----- THE ROYAL BANK OF SCOTLAND GROUP plc BASIS AND ASSUMPTIONS (continued) 4. Notes to the forecast Group results (continued) Group profit before tax up 31%, from £531 million to £695 million. Profit before tax and exceptional items up by 23%, from £531 million to £651 million. Net interest income up by 19% to £1,033 million. Non-interest income, excluding general insurance, up by 9% to £824 million. General insurance premium income, after reinsurance, up by 40% to £468 million. Total income up by 19% to £2,325 million. Operating expenses, before exceptional items, up by 12% to £1,133 million. Group cost:income ratio improves from 51.8% to 48.7%. General insurance claims, after reinsurance, up by 31% to £395 million. Provisions for bad debts up by £38 million to £146 million. Exceptional items of £99 million from the sale of the Group's main investor services businesses and exceptional restructuring costs of £55 million in relation to Citizens' acquisitions. Tax charge of £212 million on profits before tax of £695 million, an effective rate of 30.5%. Profit attributable to ordinary shareholders, after tax, minority interests and preference dividends, up by 30%, from £333 million to £433 million. Earnings per share up by 28%, from 37.9p to 48.4p. After adjusting for the exceptional items, earnings per share up by 19%, from 37.9p to 45.0p. (b) Segmental analysis of forecast Group operating profit before exceptional items is shown below. Forecast (Audited) Half-year Half- Full Year year 2000 1999 1999 £m £m £m UK Bank 411 344 736 New Retail Financial (1) (17) (26) Services Businesses Angel Trains 33 24 53 RBS Cards 47 37 85 Direct Line Insurance 14 9 93 Division Citizens 135 119 242 The Royal Bank of 44 34 70 Scotland International Central Items (32) (26) (56) Investor Services - 7 14 - discontinued ------ ------ -------- Group operating profit 651 531 1,211 before exceptional items ------ ------ -------- Privilege Insurance (previously included in the New Retail Financial Services Businesses) is now included with Direct Line Insurance and Green Flag as the Direct Line Insurance Division. The 1999 figures have been adjusted to reflect this. THE ROYAL BANK OF SCOTLAND GROUP plc Enquiries Sir George Mathewson Group Chief Executive 0171 427 8145 0131 523 2672 Fred Goodwin Deputy Group Chief Executive 0171 427 8116 0131 523 2033 Not for release, publication or distribution in or into Australia, Canada or Japan. The directors of RBS accept responsibility for the information contained in this document. To the best of the knowledge and belief of such persons (who have taken all reasonable care to ensure that such is the case), the information contained in this document, for which they are responsible, is in accordance with the facts and does not omit anything likely to affect the import of such information. The contents of this document, which have been prepared by and are the sole responsibility of the directors of RBS, have been approved by Merrill Lynch International and Goldman Sachs International solely for the purposes of section 57 of the Financial Services Act 1986. Merrill Lynch International and Goldman Sachs International, each of which is regulated in the United Kingdom by The Securities and Futures Authority Limited, are acting for RBS and no-one else in connection with the offer by RBS for National Westminster Bank plc ('NatWest') (the 'Offer') and will not be responsible to anyone other than RBS for providing the protections afforded to the customers of Merrill Lynch International and Goldman Sachs International, nor for giving advice in relation to the Offer. The Offer is not being made in or into and is not capable of acceptance in or from Canada, Australia or Japan. Custodians, nominees and trustees should observe these restrictions and should not send or distribute this document in, into or from Canada, Australia or Japan. The New RBS Ordinary Shares and the Loan Notes proposed to be issued in connection with the Offer have not been cleared by the securities commission or similar authority of any province or territory of Canada and no prospectus has been, nor is it intended that one will be, filed or registration made under any securities laws of any province or territory of Canada, nor has a prospectus in relation to the New RBS Ordinary Shares or the Loan Notes been lodged, nor is it intended that one will be lodged with, or registered by the Australian Securities Commission, nor have any steps been taken, nor is it intended that any steps will be taken, to enable the New RBS Ordinary Shares or the Loan Notes to be offered in compliance with applicable securities laws of Japan. Accordingly, unless an exemption under applicable securities laws is available, or such steps are consequently taken, neither the New RBS Ordinary Shares nor the Loan Notes may be offered, sold, re-sold, transferred or delivered, directly or indirectly, in, or into or from, Canada, Australia or Japan or any other jurisdiction in which the offer of the New RBS Ordinary Shares or the Loan Notes would constitute a violation of relevant laws or require registration thereof. Certain statements in this document are 'forward looking statements'. All forward looking statements involve risks and uncertainties and are based on current expectations regarding important risk factors. Statements contained herein regarding the consummation and benefits of the proposed transaction, as well as expectations with respect to future interest receivable, ability to sustain margins, and realisation of financial and operating synergies and efficiencies, are subject to known or unknown risks, uncertainties and contingencies, many of which are beyond the control of RBS, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements. Factors that might cause forward looking statements to differ materially from actual results include, among other things, requirements imposed by regulatory authorities to permit the transaction to be consummated, competitive factors in the industries in which RBS and NatWest compete, changes in the monetary and interest rate policies of the Bank of England and other G-7 central banks, inflation, deflation, the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries, fluctuations in interest rates, equity prices and foreign currencies, the adequacy of loss reserves, the inability to hedge certain risks economically, changes in consumer spending and other habits, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which RBS and NatWest and their respective affiliates operate. The Directors The Royal Bank of Scotland Group plc 42 St Andrew Square EDINBURGH EH2 2YE The Directors The Directors Merrill Lynch International Goldman Sachs International Ropemaker Place Peterborough Court 25 Ropemaker Street 133 Fleet Street LONDON LONDON EC2Y 9LY EC4A 2BB 28 January 2000 Dear Sirs We refer to the statement made by the Board of The Royal Bank of Scotland Group plc ('RBS') entitled the 'Forecast Group Results for the Half Year to 31 March 2000' of the announcement dated 28 January 2000 ('the announcement') regarding the profit forecast of RBS and its subsidiary and associated undertakings ('the RBS Group'), together with note 4, 'Notes to the Forecast Group Results', to the profit forecast, for the six months ending 31 March 2000 ('the forecast results'). We have reviewed the basis of compilation and the accounting policies for the forecast results. The forecast results, for which the directors of RBS are solely responsible, include the results shown by unaudited management accounts for the three months ended 31 December 1999 and a forecast for the three months ending 31 March 2000. We conducted our work in accordance with the Statements of Investment Circular Reporting Standards issued by the Auditing Practices Board of the United Kingdom. Our work has not been carried out in accordance with auditing standards generally accepted in the United States of America ('US') and accordingly should not be relied upon as if our work had been carried out in accordance with those standards. This letter has been prepared in accordance with standards and practices established in the United Kingdom for use solely in connection with the offer by Merrill Lynch International and Goldman Sachs International, on behalf of RBS, for the entire issued share capital of National Westminster Bank plc. The letter has not been prepared in connection with the filing of a registration statement with the US Securities and Exchange Commission and does not comply with United States generally accepted auditing standards. Accordingly, under the United States auditing standards we are unable to express any opinion with respect to the forecast results of the RBS Group. In our opinion the forecast results of the RBS Group have been properly compiled on the basis stated and the basis of accounting is consistent with the accounting policies of RBS. PricewaterhouseCoopers Merrill Lynch International Goldman Sachs International Ropemaker Place Peterborough Court 25 Ropemaker Street 133 Fleet Street London EC2Y 9LY London EC4A 2BB The Directors The Royal Bank of Scotland Group plc 42 St Andrew Square Edinburgh EH2 2YE 28 January 2000 Dear Sirs Royal Bank of Scotland Group plc Profit Forecast We refer to the profit forecast made by The Royal Bank of Scotland Group plc ('RBS') for the six months ending 31 March 2000, which is set out in this document. We have discussed the profit forecast and the basis and assumptions on which it has been prepared with you as Directors of RBS. We have also discussed the accounting policies and calculations for the profit forecast with PricewaterhouseCoopers, RBS's auditors, and we have considered their letter of 28 January 2000 addressed to yourselves and ourselves on this matter. We have relied upon the accuracy and completeness of all of the financial and other information discussed with us and have assumed such accuracy and completeness for the purposes of rendering this letter. This report is provided in compliance with Rules 28.3(b) and 28.4 of the City Code on Takeovers and Mergers and Rule 2.15 of the Listing Rules of the London Stock Exchange. On the basis of the foregoing, we consider that the profit forecast referred to above, for which the Directors of RBS are solely responsible, has been made with due care and consideration. For and on behalf of For and on behalf of Merrill Lynch International Goldman Sachs International Matthew Greenburgh Andrew Chisholm Managing Director Managing Director

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