Trading Stmt/IFRS Report-Pt.1

Royal Bank of Scotland Group PLC 8 June 2005 PART 1 THE ROYAL BANK OF SCOTLAND GROUP PLC Pre-close Trading Update for the half year ending 30 June 2005 and IFRS Transition Report Highlights: Pre-close Trading Update â€¢ The Group continues to perform well in the first half of 2005 â€¢ Strong overall income growth â€¢ The Group's efficiency programme remains to plan to deliver previously stated benefits â€¢ Overall credit metrics expected to remain stable â€¢ The integrations of Churchill, First Active and Charter One remain fully on track â€¢ Underlying profit growth remains broadly consistent with the comparable period IFRS Transition Report 2004 IFRS restated results relative to UK GAAP: 2004 Restatement - retrospective basis â€¢ Income of Â£23,391 million, an increase of 3% â€¢ Profit before tax of Â£7,284 million, an increase of 5% â€¢ Basic adjusted earnings per share of 157.4p, an increase of 14% â€¢ Adjusted earnings per share of 170.2p, a reduction of 1% 2004 Restatement - proforma (retrospective and prospective basis) â€¢ Profit before tax, a reduction of around 5% â€¢ Basic earnings per share, an increase of around 5% â€¢ Adjusted earnings per share, a reduction of around 5% Pre-close Trading Update 8 June 2005 Introduction The Royal Bank of Scotland Group ('RBS') will be holding discussions with analysts and investors ahead of its close period for the half year ending 30 June 2005. This statement sets out the information that will be covered in those discussions. Attached to this statement are RBS statutory results for 2004 restated under International Financial Reporting Standards ('IFRS'). These reflect the IFRS standards which are required to be applied to 2004. In addition, RBS results for 2005 will also be affected by IAS 32, IAS 39 and IFRS 4, which have been implemented from 1 January 2005. The comments in this statement are based on underlying trends as if IFRS had applied in full to our results for both 2004 and 2005. Proforma guidance on this basis is also included in the attachment to this statement. Summary RBS has continued to perform well in the first half of 2005. Highlights of our interim results for 2005 are expected to include continued strong organic growth in income, stable overall credit metrics and the delivery of expected benefits from recent acquisitions. Income and Margins Overall organic income growth remains strong, most notably in Citizens and Corporate Banking and Financial Markets, tempered by a lower rate of income growth in our UK Retail Markets business. UK Retail Markets, comprising Retail Banking, Retail Direct and Wealth Management have, as anticipated at the time of our 2004 results presentation in February, seen a degree of transition in consumer behaviour away from unsecured lending which has reduced our growth in income from this source. The impact upon the Group is however limited, as unsecured lending to UK consumers accounted for less than 10% of our income in 2004. The Group's net interest margin is expected to be lower primarily as a result of changes in the business mix, including relatively strong growth in mortgages and large corporate lending, coupled with lower growth in unsecured personal lending. Non-interest income has continued to grow, reflecting higher insurance premium income, higher corporate banking fee income and higher dealing profits. RBS Insurance has continued to increase its income, despite pressure on premium pricing in motor insurance reflecting very competitive conditions. Expenses The Group's efficiency programme remains on track to deliver the anticipated benefits, and whilst the Group cost:income ratio will marginally increase in absolute terms as a result of the application of IFRS and the acquisition of Charter One, the underlying trajectory is comparable to that on a UK GAAP basis. Credit Quality and Provisions Overall credit metrics are expected to have remained stable. Total provisions are expected to be higher than in 2004, but the increase is expected to be below the increase in average loans and advances. Provisions in UK Retail Markets have risen, reflecting both growth in lending and increased credit card arrears which, whilst higher than the historically low levels seen in recent years, remain within normal parameters. Citizens' credit metrics remain strong, and Corporate Banking and Financial Markets provision charges are expected to reduce. Integration Activity The integrations of Churchill, First Active and Charter One remain fully on track. In each case important stages in the IT conversion have been completed successfully and we remain confident that we shall be able to deliver the expected transaction benefits. Profit Strong overall income growth, coupled with our cost:income ratio and stable credit quality, is expected to produce underlying growth in profit before tax broadly consistent with that reported for the comparable period last year. International Financial Reporting Standards Following resolution of the uncertainties surrounding the interpretation of IAS 39 which we referred to at the time of our last IFRS update - in particular, in relation to impairment and hedging - we estimate that the total impact on our 2004 adjusted earnings per share (before goodwill amortisation and integration costs), had all IFRS applied, would have been a reduction of around 5% relative to UK GAAP. We expect a similar impact on 2005 IFRS adjusted earnings per share relative to UK GAAP earnings. Sir Fred Goodwin, Group Chief Executive, commented: 'The Group continues to make good progress and, while the adoption of IFRS will make interpretation of the trends in results generally more challenging this year, the underlying strength of our business performance should be readily apparent when we publish our interim results.' CONTACTS Sir Fred Goodwin Group Chief Executive 0131 523 2003 Fred Watt Group Finance Director 0131 523 2028 Richard O'Connor Head of Investor Relations 0131 523 5103 0207 672 1758 For media enquiries Howard Moody Group Director, Communications 0131 523 2056 This announcement contains forward looking statements, including such statements within the meaning of Section 27A of the US Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements concern or may affect future matters, such as RBS's future economic results, business plans and strategies, and are based upon the current expectations of the directors. They are subject to a number of risks and uncertainties that might cause actual results and events to differ materially from the expectations expressed in the forward looking statements. Factors that could cause or contribute to differences in current expectations include, but are not limited to, regulatory developments, competitive conditions, technological developments and general economic conditions. These factors risks and uncertainties are discussed in RBS's SEC filings, including, but not limited to, RBS's report on Form 6-K containing this announcement and certain sections of RBS's Annual Report on Form 20-F. Information in this announcement of the price at which investments have been bought or sold in the past or the yield on investments cannot be relied upon as a guide to future performance. RBS assumes no responsibility to update any of the forward looking statements contained in this announcement. CONTENTS Page SECTION 1 Introduction 2 Overview 3 SECTION 2 2004 Results Results summary 6 Financial review 7 Summary consolidated income statements 9 Consolidated balance sheets 11 Divisional performance 14 Corporate Banking and Financial Markets 15 Retail Banking 17 Retail Direct 19 Manufacturing 21 Wealth Management 23 RBS Insurance 25 Ulster Bank 27 Citizens 29 Central items 31 Analysis of IFRS adjustments 33 SECTION 3 2005 Results 42 IFRS consolidated opening balance sheet at 1 January 2005 44 Analysis of IFRS adjustments 45 Reconciliation of shareholders' funds 46 Regulatory ratios 47 SECTION 4 Bases of preparation of IFRS results 49 Provisional accounting policies 50 Significant differences between UK GAAP and IFRS 59 Tesco Personal Finance ('TPF') 65 Reports by the auditors 67 Forward-looking statements 70 Restatements 71 Contacts 74 INTRODUCTION In June 2002, the European Union ('the EU') adopted a regulation that requires, from 1 January 2005, listed companies to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (' IFRS') adopted by the EU. As part of the process of moving to reporting under IFRS the Group is required to restate statutory comparative figures for 2004 on the basis only of the standards applicable at that time. Section 2 of this document contains such restatement of the 2004 results and the auditors' report thereon is set out on page 67. A number of significant new standards are to be applied with prospective effect from 1 January 2005, and to facilitate comparisons with our 2005 results in due course, an overview of the impact on our 2004 results on a proforma basis of all new standards is included on pages 3 and 4. Sections 3 and 4 of the document provide further analysis of the impact of IAS 32, IAS 39 and IFRS 4 and of the provisional accounting policies of the Group under IFRS together with an explanation of the differences between UK GAAP and IFRS accounting policies. The UK GAAP data included in this announcement are as published by the Group in respect of its interim and full year 2004 results save for restatements of divisional results reflecting the transfer of businesses between divisions and the reallocation of pension costs to divisions from the Group Centre. These have no effect on the Group's results. The information in this announcement is based on IFRS expected to be applicable at 31 December 2005. IFRS currently in issue, and adopted by the EU, are subject to interpretation issued from time to time by the International Financial Reporting Interpretation Committee. Further IFRS or interpretations may be issued during 2005, which may also be applicable for 2005. In addition, as market practice develops in respect of IFRS, alternative interpretations and applications of IFRS may result. OVERVIEW OF THE IMPACT OF IFRS The following provides an overview of the impact of all IFRS on the reported results of the Group on a proforma basis. RESULTS Income, expenses and impairment are affected by rules on recognition and timing that are different to those followed under UK GAAP. While these do not change the economics or cash flows of a transaction, they affect the level of reported operating profit (profit before goodwill and integration costs), profit before tax and earnings per share in any single period. In addition, within the income statement, certain items are now reported on a different line to that under UK GAAP. For example, the coupon payment on the majority of the Group's preference shares, which are tier one capital instruments, now appear 'above the line' within interest paid in net interest income. While this will reduce reported operating profit and profit before tax, it has no effect on earnings per share. Similarly, goodwill is no longer amortised. This increases reported profit before tax and basic earnings per share but has no impact on operating profit and adjusted earnings per share. The Group has for many years excluded goodwill amortisation from both of these measures. The estimated impact of the full implementation of IFRS (retrospective and prospective adjustments) on reported measures, subject to any further changes to the standards or their interpretation, is as follows: Adjusted earnings per share - a reduction of around 5% from that reported under UK GAAP, representing the application of the new rules on recognition and timing. Basic earnings per share - an increase of around 10% with the impact of recognition and timing more than offset by goodwill no longer being amortised. Profit before tax - a reduction of around 5%, representing the impact of the items affecting operating profit (above) in part offset by goodwill no longer being amortised. BALANCE SHEET Application of IFRS also affects the reported balance sheet of the Group. In addition new regulatory treatments apply to the calculation of Tier 1 and Total Capital. As a result of the restatement of the Group's 2004 results under IFRS and with the impact of IAS 32, IAS 39 and IFRS 4 also included, the effect on shareholders' funds and regulatory capital of the Group is as follows: Regulatory Capital Ratios Shareholders' Tier 1 Total Funds Capital Capital Reported under UK GAAP Â£31.9bn 7.0% 11.7% At 31 December 2004 Reported under IFRS Â£29.9bn 6.7% 11.6% At 1 January 2005 The analysis of the impact on shareholders' funds is shown on page 46; an analysis of and the movement on capital ratios is shown on page 47. SECTION 2 2004 Results The financial information on pages 6 to 40 includes retrospective adjustments only and does not reflect the effects of IAS 32, IAS 39 and IFRS 4. RESULTS SUMMARY Year ended 31 December 2004 Half year ended 30 June 2004 IFRS UK GAAP IFRS UK GAAP Â£m Â£m Â£m Â£m Total income 23,391 22,754 11,192 10,964 _______ _______ ______ _______ Operating expenses* 9,797 9,662 4,697 4,639 _______ _______ ______ _______ Operating profit before provisions* 9,334 9,612 4,505 4,602 _______ _______ _______ _______ Profit before tax, intangibles amortisation 7,849 3,767 3,851 and integration costs 8,101 _______ _______ _______ _______ Intangibles amortisation 45 915 4 413 _______ _______ _______ _______ Integration costs 520 269 178 57 _______ _______ _______ _______ Profit before tax 7,284 6,917 3,585 3,381 _______ _______ _______ _______ Cost:income ratio** 40.0% 40.8% 40.1% 40.6% _______ _______ _______ _______ Basic earnings per ordinary share 157.4p 138.0p 79.7p 69.9p _______ _______ ______ _______ Adjusted earnings per ordinary share*** 170.2p 172.5p 83.9p 84.4p _______ _______ _______ _______ * excluding intangibles amortisation and integration costs. ** the cost:income ratio is based on operating expenses excluding amortisation of purchased intangibles and integration costs, and after netting operating lease depreciation against rental income. *** adjusted earnings per ordinary share is based on earnings adjusted for amortisation of purchased intangibles and integration costs. The IFRS results shown above exclude the effects of IAS 32, IAS 39 and IFRS 4. FINANCIAL REVIEW The Group's 2004 results have been prepared in accordance with IFRS. As permitted by IFRS 1, they do not reflect the effects of IAS 32, IAS 39 and IFRS 4. The commentary set out below explains the effect of IFRS as applied on a retrospective basis to the full year 2004 results. Income Total income was Â£23,391 million, an increase of Â£637 million, 3% compared with Â£22,754 million under UK GAAP. Income in Retail Banking benefited by Â£798 million from the consolidation of the life assurance business on a line-by-line basis rather than the recognition of the change in embedded value as a single amount in other operating income. Insurance net premium income in RBS Insurance increased by Â£109 million due to proportional consolidation of Linea Directa, our joint venture in Spain. These were partially offset by a reduction in income due to the fact that TPF is proportionately consolidated under IFRS, and the transfer of the net return on pension fund to operating expenses. Operating expenses Operating expenses, excluding amortisation of purchased intangibles and integration costs, were Â£9,797 million, 1% or Â£135 million higher than under UK GAAP. The increase was principally due to operating expenses of the life assurance business (Â£106 million), share based payments (Â£36 million), amortisation of capitalised software development costs (Â£27 million) and leasing (Â£49 million). These were partially offset by the reduction in pension costs reflecting the net return on pension fund. Claims Under IFRS, net insurance claims were Â£780 million or 22% higher at Â£4,260 million, reflecting the line-by-line consolidation of the life assurance business and the proportional consolidation of Linea Directa. Provisions Provisions were Â£1,485 million, Â£26 million, 2% lower due to the proportional consolidation of TPF. Purchased intangibles amortisation The amortisation of intangible assets was Â£870 million lower at Â£45 million. Under IFRS goodwill is not amortised; instead it is tested annually for impairment. The Group's purchased intangible assets include core deposit intangibles and mortgage servicing rights. These are being amortised over their expected economic lives. Integration costs Integration costs at Â£520 million were Â£251 million higher than reported under UK GAAP. The increase reflects the amortisation of capitalised software developed in respect of the integration of NatWest. Under IFRS, the costs of internally developed software are capitalised and amortised over their useful economic life; under the Group's UK GAAP accounting policy these costs were written off as incurred. The total integration costs relating to the acquisition of NatWest are unchanged. The change in accounting policy on software under IFRS results in such costs being recognised in different accounting periods than under UK GAAP. Profit Profit before tax was Â£7,284 million, Â£367 million, 5% higher than Â£6,917 million reported under UK GAAP. This reflects the fact that although profit before tax, intangibles amortisation and integration costs was 3%, Â£252 million lower at Â£7,849 million, this reduction is more than offset by non amortisation of goodwill. FINANCIAL REVIEW (continued) Earnings and dividends Basic earnings per ordinary share were 157.4p compared with 138.0p under UK GAAP. The increase of 14% or 19.4p per ordinary share is mainly due to non-amortisation of goodwill. Earnings per share adjusted for the amortisation of purchased intangibles and integration costs were 1% or 2.3p per ordinary share lower at 170.2p compared with 172.5p reflecting the impact of the retrospective adjustments on recognition and timing described above. The appropriation for ordinary dividends was Â£249 million less than under UK GAAP. Under IFRS, dividends are recognised only when paid or approved by shareholders. Balance sheet Total assets at 31 December 2004 increased by Â£4.7 billion under IFRS, principally as a result of the consolidation of special purpose entities established to facilitate customer transactions (Â£5.0 billion), the non-amortisation of goodwill (Â£0.9 billion) and the capitalisation of software development costs (Â£0.6 billion) partially offset by the proportionate consolidation of TPF (Â£1.4 billion) and a reduction of Â£0.3 billion due to the changes in accounting for operating and finance leases. Note The information in this announcement is based on IFRS expected to be applicable at 31 December 2005. Further IFRS or interpretations may be issued during 2005, which may also be applicable for 2005. In addition, as market practice develops in respect of IFRS, alternative interpretations and applications of IFRS may result. SUMMARY CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 9,208 (137) 9,071 _______ _______ _______ Non-interest income (excluding insurance premium income) 8,602 71 8,673 Insurance net premium income 4,944 703 5,647 _______ _______ _______ Non-interest income 13,546 774 14,320 _______ _______ _______ Total income 22,754 637 23,391 Operating expenses 9,662 135 9,797 _______ _______ _______ Profit before other operating charges 13,092 502 13,594 Insurance net claims 3,480 780 4,260 _______ _______ _______ Operating profit before provisions 9,612 (278) 9,334 Provisions 1,511 (26) 1,485 _______ _______ _______ Profit before tax, intangible assets amortisation 8,101 (252) 7,849 and integration costs Amortisation of purchased intangible assets 915 (870) 45 Integration costs 269 251 520 _______ _______ _______ Profit on ordinary activities before tax 6,917 367 7,284 Tax on profit on ordinary activities 2,155 (160) 1,995 _______ _______ _______ Profit for period 4,762 527 5,289 Minority interests (250) 73 (177) Preference dividends (256) - (256) _______ _______ _______ Profit attributable to ordinary shareholders 4,256 600 4,856 _______ _______ _______ Ordinary dividends 1,837 (249) 1,588 _______ _______ _______ Basic earnings per ordinary share (Note 1 on page 40) 138.0p 19.4p 157.4p _______ _______ _______ Adjusted earnings per ordinary share (Note 1 on page 40) 172.5p (2.3p) 170.2p _______ _______ _______ The IFRS adjustments excluding IAS 32, IAS 39 and IFRS 4 are analysed on page 33. SUMMARY CONSOLIDATED INCOME STATEMENT FOR THE HALF YEAR ENDED 30 JUNE 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 4,378 (67) 4,311 _______ _______ _______ Non-interest income (excluding insurance premium income) 4,170 5 4,175 Insurance net premium income 2,416 290 2,706 _______ _______ _______ Non-interest income 6,586 295 6,881 _______ _______ _______ Total income 10,964 228 11,192 Operating expenses 4,639 58 4,697 _______ _______ _______ Profit before other operating charges 6,325 170 6,495 Insurance net claims 1,723 267 1,990 _______ _______ _______ Operating profit before provisions 4,602 (97) 4,505 Provisions 751 (13) 738 _______ _______ _______ Profit before tax, intangible assets amortisation 3,851 (84) 3,767 and integration costs Amortisation of purchased intangible assets 413 (409) 4 Integration costs 57 121 178 _______ _______ _______ Profit on ordinary activities before tax 3,381 204 3,585 Tax on profit on ordinary activities 1,048 (61) 987 _______ _______ _______ Profit for period 2,333 265 2,598 Minority interests (111) 30 (81) Preference dividends (116) - (116) _______ _______ _______ Profit attributable to ordinary shareholders 2,106 295 2,401 _______ _______ _______ Ordinary dividends 529 530 1,059 _______ _______ _______ Basic earnings per ordinary share (Note 1 on page 40) 69.9p 9.8p 79.7p _______ _______ _______ Adjusted earnings per ordinary share (Note 1 on page 40) 84.4p (0.5p) 83.9p _______ _______ _______ The IFRS adjustments excluding IAS 32, IAS 39 and IFRS 4 are analysed on page 34. CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004 UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Assets Cash and balances at central banks 4,293 - 4,293 Items in the course of collection from other banks 2,629 - 2,629 Treasury bills and other eligible bills 6,110 - 6,110 Loans and advances to banks 58,260 184 58,444 Loans and advances to customers 345,469 1,782 347,251 Debt securities 91,211 2,697 93,908 Equity shares 2,960 1,763 4,723 Intangible fixed assets 17,576 1,666 19,242 Property, plant and equipment 16,294 134 16,428 Settlement balances 5,682 - 5,682 Other assets 22,255 183 22,438 Prepayments and accrued income 6,928 46 6,974 Long-term assurance assets 3,800 (3,800) - _______ _______ _______ Total assets 583,467 4,655 588,122 _______ _______ _______ Liabilities Deposits by banks 99,081 - 99,081 Items in the course of transmission to other banks 802 - 802 Customer accounts 285,062 (1,747) 283,315 Debt securities in issue 58,960 5,039 63,999 Settlement balances and short positions 32,990 - 32,990 Other liabilities 26,152 (1,368) 24,784 Accruals and deferred income 15,588 459 16,047 Post-retirement benefit liabilities 1,901 1,039 2,940 Provisions for liabilities and charges - deferred taxation liabilities 2,873 (812) 2,061 - other provisions 198 4,142 4,340 Subordinated liabilities 20,366 - 20,366 Minority interests 3,829 (337) 3,492 Shareholders' funds 31,865 2,040 33,905 Long-term assurance liabilities 3,800 (3,800) - _______ _______ _______ Total liabilities 583,467 4,655 588,122 _______ _______ _______ The IFRS adjustments excluding IAS 32, IAS 39 and IFRS 4 are analysed on page 37. CONSOLIDATED BALANCE SHEET AT 30 JUNE 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Assets Cash and balances at central banks 3,140 17 3,157 Items in the course of collection from other banks 3,149 - 3,149 Treasury bills and other eligible bills 6,902 - 6,902 Loans and advances to banks 60,152 191 60,343 Loans and advances to customers 290,154 1,451 291,605 Debt securities 89,813 2,211 92,024 Equity shares 2,315 1,695 4,010 Intangible fixed assets 13,589 1,231 14,820 Property, plant and equipment 14,866 243 15,109 Settlement balances 10,288 - 10,288 Other assets 14,424 233 14,657 Prepayments and accrued income 5,943 41 5,984 Long-term assurance assets 3,531 (3,531) - _______ _______ _______ Total assets 518,266 3,782 522,048 _______ _______ _______ Liabilities Deposits by banks 84,120 3 84,123 Items in the course of transmission to other banks 996 - 996 Customer accounts 253,949 (1,585) 252,364 Debt securities in issue 51,721 3,838 55,559 Settlement balances and short positions 38,058 - 38,058 Other liabilities 17,301 76 17,377 Accruals and deferred income 13,862 237 14,099 Post-retirement benefit liabilities 1,490 618 2,108 Provisions for liabilities and charges - deferred taxation liabilities 2,097 (359) 1,738 - other provisions 217 3,818 4,035 Subordinated liabilities 17,832 - 17,832 Minority interests 2,685 (348) 2,337 Shareholders' funds 30,407 1,015 31,422 Long-term assurance liabilities 3,531 (3,531) - _______ _______ _______ Total liabilities 518,266 3,782 522,048 _______ _______ _______ The IFRS adjustments excluding IAS 32, IAS 39 and IFRS 4 are analysed on page 38. CONSOLIDATED OPENING BALANCE SHEET AT 1 JANUARY 2004 UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Assets Cash and balances at central banks 3,822 - 3,822 Items in the course of collection from other banks 2,501 - 2,501 Treasury bills and other eligible bills 4,846 - 4,846 Loans and advances to banks 51,891 1,011 52,902 Loans and advances to customers 252,531 662 253,193 Debt securities 79,949 1,199 81,148 Equity shares 2,300 1,745 4,045 Intangible fixed assets 13,131 896 14,027 Property, plant and equipment 13,927 320 14,247 Settlement balances 2,857 - 2,857 Other assets 17,807 247 18,054 Prepayments and accrued income 5,309 32 5,341 Long-term assurance assets 3,557 (3,557) - _______ _______ _______ Total assets 454,428 2,555 456,983 _______ _______ _______ Liabilities Deposits by banks 67,323 - 67,323 Items in the course of transmission to other banks 958 - 958 Customer accounts 236,963 (1,497) 235,466 Debt securities in issue 41,016 3,129 44,145 Settlement balances and short positions 21,369 - 21,369 Other liabilities 20,584 (1,019) 19,565 Accruals and deferred income 13,155 404 13,559 Post-retirement benefit liabilities 1,445 591 2,036 Provisions for liabilities and charges - deferred taxation liabilities 2,036 (300) 1,736 - other provisions 213 3,882 4,095 Subordinated liabilities 16,998 - 16,998 Minority interests 2,713 (321) 2,392 Shareholders' funds 26,098 1,243 27,341 Long-term assurance liabilities 3,557 (3,557) - _______ _______ _______ Total liabilities 454,428 2,555 456,983 _______ _______ _______ The IFRS adjustments excluding IAS 32, IAS 39 and IFRS 4 are analysed on page 39. DIVISIONAL PERFORMANCE The contribution of each division before amortisation of purchased intangibles and integration costs and, where appropriate, Manufacturing costs is detailed below. Year ended 31 December 2004 UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Corporate Banking and Financial Markets 4,350 (106) 4,244 Retail Banking 3,220 (8) 3,212 Retail Direct 964 (115) 849 Manufacturing (2,546) 27 (2,519) Wealth Management 374 (17) 357 RBS Insurance 862 1 863 Ulster Bank 450 (2) 448 Citizens 1,061 - 1,061 Central items (634) (32) (666) _______ _______ _______ Profit before amortisation of purchased intangibles 8,101 (252) 7,849 and integration costs _______ _______ _______ Half year ended 30 June 2004 (unaudited) UK GAAP Effect of IFRS IFRS Â£m Â£m Â£m Corporate Banking and Financial Markets 2,081 (19) 2,062 Retail Banking 1,613 (13) 1,600 Retail Direct 447 (44) 403 Manufacturing (1,227) 16 (1,211) Wealth Management 188 (5) 183 RBS Insurance 395 (1) 394 Ulster Bank 212 (1) 211 Citizens 430 - 430 Central items (288) (17) (305) _______ _______ _______ Profit before amortisation of purchased intangibles 3,851 (84) 3,767 and integration costs _______ _______ _______ As set out on pages 71 to 73, 2004 results have been restated to reflect the transfers of businesses between divisions. CORPORATE BANKING AND FINANCIAL MARKETS Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income excluding funding cost of rental assets 3,040 (41) 2,999 Funding cost of rental assets (414) - (414) _______ _______ _______ Net interest income 2,626 (41) 2,585 _______ _______ _______ Fees and commissions receivable 1,762 (25) 1,737 Fees and commissions payable (277) 23 (254) Dealing profits (before associated direct costs) 1,895 - 1,895 Income on rental assets 1,282 - 1,282 Other operating income 381 55 436 _______ _______ _______ Non-interest income 5,043 53 5,096 _______ _______ _______ Total income 7,669 12 7,681 _______ _______ _______ Direct expenses - staff costs 1,708 5 1,713 - other 421 40 461 - operating lease depreciation 610 73 683 _______ _______ _______ 2,739 118 2,857 _______ _______ _______ Contribution before provisions 4,930 (106) 4,824 Provisions 580 - 580 _______ _______ _______ Contribution 4,350 (106) 4,244 _______ _______ _______ Contribution at Â£4,244 million, is Â£106 million or 2% lower than under UK GAAP. The reduction principally reflects the changes in accounting for finance and operating leases, fees eliminated on consolidation of special purpose entities and the timing difference created by amortisation of internally developed software which was previously written off as incurred under the Group's UK GAAP accounting policy. CORPORATE BANKING AND FINANCIAL MARKETS Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income excluding funding cost of rental assets 1,465 (18) 1,447 Funding cost of rental assets (197) - (197) _______ _______ _______ Net interest income 1,268 (18) 1,250 _______ _______ _______ Fees and commissions receivable 825 - 825 Fees and commissions payable (137) 11 (126) Dealing profits (before associated direct costs) 1,025 - 1,025 Income on rental assets 618 - 618 Other operating income 160 31 191 _______ _______ _______ Non-interest income 2,491 42 2,533 _______ _______ _______ Total income 3,759 24 3,783 _______ _______ _______ Direct expenses - staff costs 846 (16) 830 - other 214 19 233 - operating lease depreciation 303 40 343 _______ _______ _______ 1,363 43 1,406 _______ _______ _______ Contribution before provisions 2,396 (19) 2,377 Provisions 315 - 315 _______ _______ _______ Contribution 2,081 (19) 2,062 _______ _______ _______ RETAIL BANKING Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 3,123 (47) 3,076 Insurance net premium income - 594 594 Other non-interest income 1,657 252 1,909 _______ _______ _______ Total income 4,780 799 5,579 _______ _______ _______ Direct expenses - staff costs 910 54 964 - other 261 51 312 _______ _______ _______ 1,171 105 1,276 _______ _______ _______ Insurance net claims - 702 702 _______ _______ _______ Contribution before provisions 3,609 (8) 3,601 Provisions 389 - 389 _______ _______ _______ Contribution 3,220 (8) 3,212 _______ _______ _______ Contribution at Â£3,212 million is Â£8 million lower. Virtually all of the IFRS adjustments arise from the consolidation of the life assurance business on a line-by-line basis. As a result, net interest income decreased by Â£47 million and non-interest income increased by Â£846 million. Staff costs and other costs increased by Â£54 million and Â£51 million respectively. Insurance net claims, which represent payments under assurance contracts, were Â£702 million. RETAIL BANKING Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 1,520 (21) 1,499 Insurance net premium income - 242 242 Other non-interest income 829 48 877 _______ _______ _______ Total income 2,349 269 2,618 _______ _______ _______ Direct expenses - staff costs 440 31 471 - other 110 20 130 _______ _______ _______ 550 51 601 _______ _______ _______ Insurance net claims - 231 231 _______ _______ _______ Contribution before provisions 1,799 (13) 1,786 Provisions 186 - 186 _______ _______ _______ Contribution 1,613 (13) 1,600 _______ _______ _______ RETAIL DIRECT Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 851 (69) 782 Non-interest income 1,134 (139) 995 _______ _______ _______ Total income 1,985 (208) 1,777 _______ _______ _______ Direct expenses - staff costs 247 2 249 - other 434 (68) 366 _______ _______ _______ 681 (66) 615 _______ _______ _______ Contribution before provisions 1,304 (142) 1,162 Provisions 340 (27) 313 _______ _______ _______ Contribution 964 (115) 849 _______ _______ _______ Contribution at Â£849 million is Â£115 million, 12%, lower due principally to the proportionate consolidation of Tesco Personal Finance ('TPF'). The change in the accounting treatment of TPF does not affect the profit attributable to ordinary shareholders as there is a commensurate reduction in minority interests. RETAIL DIRECT Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 415 (37) 378 Non-interest income 530 (59) 471 _______ _______ _______ Total income 945 (96) 849 _______ _______ _______ Direct expenses - staff costs 121 (3) 118 - other 220 (36) 184 _______ _______ _______ 341 (39) 302 _______ _______ _______ Contribution before provisions 604 (57) 547 Provisions 157 (13) 144 _______ _______ _______ Contribution 447 (44) 403 _______ _______ _______ MANUFACTURING Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Staff costs 870 (144) 726 Other costs 1,676 117 1,793 _______ _______ _______ Total manufacturing costs 2,546 (27) 2,519 _______ _______ _______ Total manufacturing costs were Â£2,519 million, Â£27 million or 1% lower. The charge for amortisation of software development costs is lower than the amounts expensed under the Group's UK GAAP accounting policy. Staff costs are reduced as amounts are capitalised while other costs are increased due to the amortisation charge. MANUFACTURING Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Staff costs 432 (81) 351 Other costs 795 65 860 _______ _______ _______ Total manufacturing costs 1,227 (16) 1,211 _______ _______ _______ WEALTH MANAGEMENT Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 403 - 403 Non-interest income 370 1 371 _______ _______ _______ Total income 773 1 774 _______ _______ _______ Expenses - staff costs 262 - 262 - other 119 16 135 _______ _______ _______ 381 16 397 _______ _______ _______ Contribution before provisions 392 (15) 377 Provisions 18 2 20 _______ _______ _______ Contribution 374 (17) 357 _______ _______ _______ Contribution at Â£357 million is Â£17 million or 5% lower principally due to the amortisation of software development costs. WEALTH MANAGEMENT Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 197 - 197 Non-interest income 173 - 173 _______ _______ _______ Total income 370 - 370 _______ _______ _______ Expenses - staff costs 123 - 123 - other 57 5 62 _______ _______ _______ 180 5 185 _______ _______ _______ Contribution before provisions 190 (5) 185 Provisions 2 - 2 _______ _______ _______ Contribution 188 (5) 183 _______ _______ _______ RBS INSURANCE Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Earned premiums 5,357 150 5,507 Reinsurers' share (413) (41) (454) _______ _______ _______ Insurance premium income 4,944 109 5,053 Net fees and commissions (488) 7 (481) Other income 478 (11) 467 _______ _______ _______ Total income 4,934 105 5,039 _______ _______ _______ Expenses - staff costs 293 11 304 - other 299 15 314 _______ _______ _______ 592 26 618 _______ _______ _______ Gross claims 3,724 102 3,826 Reinsurers' share (244) (24) (268) _______ _______ _______ Net claims 3,480 78 3,558 _______ _______ _______ Contribution 862 1 863 _______ _______ _______ Contribution at Â£863 million was Â£1 million higher. The increases in income, expenses and gross claims reflect the proportionate consolidation of Linea Directa. RBS INSURANCE Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Earned premiums 2,631 70 2,701 Reinsurers' share (215) (21) (236) _______ _______ _______ Insurance premium income 2,416 49 2,465 Net fees and commissions (210) 4 (206) Other income 213 (4) 209 _______ _______ _______ Total income 2,419 49 2,468 _______ _______ _______ Expenses - staff costs 152 5 157 - other 149 8 157 _______ _______ _______ 301 13 314 _______ _______ _______ Gross claims 1,827 50 1,877 Reinsurers' share (104) (13) (117) _______ _______ _______ Net claims 1,723 37 1,760 _______ _______ _______ Contribution 395 (1) 394 _______ _______ _______ ULSTER BANK Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 550 - 550 Non-interest income 193 - 193 _______ _______ _______ Total income 743 - 743 _______ _______ _______ Expenses - staff costs 176 - 176 - other 77 2 79 _______ _______ _______ 253 2 255 _______ _______ _______ Contribution before provisions 490 (2) 488 Provisions 40 - 40 _______ _______ _______ Contribution 450 (2) 448 _______ _______ _______ Contribution at Â£448 million was Â£2 million lower due to the amortisation of software development costs. ULSTER BANK Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 256 - 256 Non-interest income 95 - 95 _______ _______ _______ Total income 351 - 351 _______ _______ _______ Expenses - staff costs 86 - 86 - other 35 1 36 _______ _______ _______ 121 1 122 _______ _______ _______ Contribution before provisions 230 (1) 229 Provisions 18 - 18 _______ _______ _______ Contribution 212 (1) 211 _______ _______ _______ CITIZENS Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 1,594 - 1,594 Non-interest income 652 - 652 _______ _______ _______ Total income 2,246 - 2,246 _______ _______ _______ Expenses - staff costs 572 - 572 - other 496 - 496 _______ _______ _______ 1,068 - 1,068 _______ _______ _______ Contribution before provisions 1,178 - 1,178 Provisions 117 - 117 _______ _______ _______ Contribution 1,061 - 1,061 _______ _______ _______ The implementation of IFRS, other than IAS 32 and IAS 39, has not affected Citizens' contribution. CITIZENS Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Net interest income 666 - 666 Non-interest income 255 - 255 _______ _______ _______ Total income 921 - 921 _______ _______ _______ Expenses - staff costs 246 - 246 - other 190 - 190 _______ _______ _______ 436 - 436 _______ _______ _______ Contribution before provisions 485 - 485 Provisions 55 - 55 _______ _______ _______ Contribution 430 - 430 _______ _______ _______ CENTRAL ITEMS Year ended 31 December 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Funding costs 267 - 267 Departmental and corporate costs 367 32 399 _______ _______ _______ Total Central items 634 32 666 _______ _______ _______ Total central items were Â£666 million, an increase of Â£32 million, or 5% reflecting the cost of share based payments. Under IFRS, the fair value of employee options at the date of grant is expensed on a straight line basis over the vesting period. UK GAAP did not require the recognition of the cost of stock options. CENTRAL ITEMS Half year ended 30 June 2004 (unaudited) UK GAAP Effect IFRS of IFRS Â£m Â£m Â£m Funding costs 113 - 113 Departmental and corporate costs 175 17 192 _______ _______ _______ Total Central items 288 17 305 _______ _______ _______ MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange

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