Final Results - Part 2
Royal Bank of Scotland Group PLC
1 March 2001
PART 2
NOTES TO PRO FORMA BASIS RESULTS
1. Basis of preparation
The pro forma results for the years ended 31 December 2000 and 1999 have
been prepared on the following basis:
1. They incorporate the results of NatWest from 1 January 1999 and
assume that the fair value adjustments were made on 31 December 1998.
2. Goodwill arising on the acquisition of NatWest of £11,390 million
(see page 8), has been amortised over its estimated economic life of
20 years from 1 January 1999.
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, 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.
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 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.
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 £113 million
(mainly staff severance payments). These are classified as
'integration costs' in the prior year pro forma results.
7. 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.
8. NatWest wrote off loans when the normal banking relationship with the
borrower had ceased and the debt became subject to recovery
procedures. This practice has been amended to bring it in line with
the RBS approach of writing off when there is no realistic prospect
of recovery. As a result, specific provisions for bad debts have
increased by £1.0 billion at 31 December 2000 and £1.1 billion at 31
December 1999 with a corresponding increase in the gross amount of
loans to customers and non-accrual loans. This adjustment does not
affect profit before tax or net loans and advances.
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 7 incorporates fair value and
other adjustments relating to the acquisition of NatWest. The balance
sheet as at 31 December 2000 is the actual balance sheet; the balance
sheet as at 31 December 1999 is on a pro forma basis.
Page 19 of 32
NOTES TO PRO FORMA BASIS RESULTS (continued)
2. Accounting policies and presentation
(i) Implementation by the Group of Financial Reporting Standard ('FRS')
15 'Tangible Fixed Assets' and FRS 16 'Current Tax' had no material
effect on reported profits. From 1 January 2000, the Group's
freehold and long leasehold buildings, following a reassessment of
their useful economic lives, are being depreciated over 50 years.
(ii) The following changes to the accounting presentation adopted by the
Group have been made to give a fairer presentation of the results
of the enlarged Group:
a) Interest receivable and interest payable on trading assets and
liabilities previously shown in net interest income are now
included in dealing profits. As a result of this change there
are reductions of £175 million (1999 - £155 million) and £159
million (1999 - £150 million) in interest receivable and
interest payable respectively and an increase of £16 million
(1999 - £5 million) in dealing profits.
b) Fraud losses, formerly included in provisions for bad and
doubtful debts are included in administrative expenses. The
charge for bad and doubtful debt provisions has decreased by £
13 million (1999 - £10 million) with a corresponding increase
in administrative expenses - other.
c) Credit card processing costs are now reported in fees and
commissions payable increasing this profit and loss caption by
£40 million (1999 - £37 million) and reducing administrative
expenses - other.
d) Following an analysis of staff costs, a net £14 million (1999 -
£10 million) has been transferred within administrative
expenses between staff costs and other costs.
Comparative figures have been restated to reflect these changes in
presentation which do not affect profit before tax.
3. Provisions for bad and doubtful debts
Group operating profit is stated after charging provisions for bad and
doubtful debts of £602 million (1999 - £526 million). The balance sheet
provisions for bad and doubtful debts increased in the twelve months to
31 December 2000 from £3,152 million to £3,153 million, and the movements
thereon were:
Specific General Total
£m £m £m
At 1 January 2000 2,586 566 3,152
Acquisition of subsidiaries 55 - 55
Currency translation adjustment 31 11 42
Amounts written off net of recoveries (698) - (698)
Transfers between provisions 19 (19) -
Charge to profit & loss account 592 10 602
-------- -------- --------
At 31 December 2000 2,585 568 3,153
-------- -------- --------
Page 20 of 32
NOTES TO PRO FORMA BASIS RESULTS (continued)
4. Goodwill
The amortisation of goodwill is based on an estimated economic life of 20
years, and comprises:
31 December 31 December
2000 1999
£m £m
Goodwill on the acquisition of NatWest* 570 570
Other - from actual date of acquisition 65 6
-------- --------
635 576
-------- --------
*assuming acquisition on 1 January 1999
5. Taxation
The charge for taxation is based on a UK corporation tax rate of 30% for
the year ended 31 December 2000 (1999 - 30.25%) and is made up as
follows:
31 31
December December
2000 1999
£m £m
Tax on profit before goodwill amortisation and 1,306 951
integration costs
Tax relief on integration costs (135) (34)
-------- --------
1,171 917
-------- --------
The tax charge of £1,171 million, equivalent to 35% 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. Pro forma earnings per share
The pro forma earnings per share have been calculated based on the
following:
31 December 31 December
2000 1999
£m £m
Earnings:
Profit attributable to ordinary shareholders 1,779 1,415
------- -------
Number of shares -
millions
Weighted average number of ordinary shares in
issue during the period 2,660 2,643
-------- --------
Basic earnings per share 66.9p 53.6p
Integration costs 11.7p 3.0p
Goodwill amortisation 23.4p 21.7p
--------- --------
Adjusted earnings per share 102.0p 78.3p
--------- --------
Adjusted earnings are calculated by excluding from the profit
attributable to ordinary shareholders the after tax effect of goodwill
amortisation and integration costs.
Page 21 of 32
NOTES TO PRO FORMA BASIS RESULTS (continued)
7. Ordinary Dividends
The directors have declared a final dividend of 23.5p per share on the
ordinary shares which, when added to the interim dividend of 9.5p per
share makes a total of 33.0p per share, an increase of 16%. The final
dividend will be paid on 18 May 2001 to shareholders registered on 16
March 2001. As an alternative to cash, a scrip dividend election is to be
offered and shareholders will receive details of this by letter.
8. Other information
The financial information does not constitute statutory accounts for the
period ended 31 December 2000. Statutory accounts for the 15 months ended
31 December 2000 will be delivered to the Registrar of Companies
following the company's annual general meeting. The auditors have
reported on these accounts; their report was not qualified and did not
contain a statement under Section 237 (2) or 3 of the Companies Act 1985.
Page 22 of 32
INTEGRATION INFORMATION
In the Offer Document 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 this 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 December December March
2000 2001 2002 2003
* Cumulative gross revenue initiatives
implemented at the end of each period (£m)
plan 120 350 550 595
actual as at 31 December 2000 147
December
2003
* Impact on profit before tax (£m)
plan 50 120 240 390
actual year to 31 December 2000 52
The gross revenue initiatives generated income in the profit and loss account
of £71 million, which, net of costs, gave rise to a profit of £52 million in
the year to 31 December 2000.
Period ending
COST SAVINGS December December December March
2000 2001 2002 2003
* Cumulative cost savings implemented
at the end of each period (£m)
plan 550 900 1,200 1,340
actual as at 31 December 2000 653
December
2003
* Impact on profit before tax (£m)
plan 290 700 1,050 1,300
actual year to 31 December 2000 448
Period ending
STAFF REDUCTIONS December December December March
2000 2001 2002 2003
* Cumulative total
plan 9,000 14,000 16,000 18,000
actual as at 31 December 2000 13,000
Period ending
INTEGRATION COSTS December December December March
2000 2001 2002 2003
* Cumulative total charge to P&L (£m)
plan 650 1,150 1,350 1,400
actual as at 31 December 2000 547*
* includes £113 million incurred by NatWest in the second half of 1999.
Page 23 of 32
CONSOLIDATED PROFIT AND LOSS ACCOUNT (pro forma basis)
31 December 2000 31 December 1999
Second First Second First
half half half half
£m £m £m £m
Net interest income 3,061 2,868 2,681 2,593
-------- -------- -------- --------
Dividend income 29 17 19 18
Fees and commissions receivable 2,109 1,970 1,844 1,753
Fees and commissions payable (410) (394) (341) (334)
Dealing profits 557 574 501 526
Other operating income 509 489 521 552
-------- -------- -------- --------
2,794 2,656 2,544 2,515
General insurance
- earned income 725 621 504 425
- reinsurance (196) (171) (119) (78)
-------- -------- -------- --------
Non-interest income 3,323 3,106 2,929 2,862
-------- -------- -------- --------
Total income 6,384 5,974 5,610 5,455
-------- -------- -------- --------
Administrative expenses
- staff costs 1,693 1,747 1,741 1,771
- premises and equipment 414 425 462 430
- other 797 769 732 673
Depreciation of tangible fixed assets 380 389 355 399
-------- -------- -------- --------
Operating expenses 3,284 3,330 3,290 3,273
-------- -------- -------- --------
Profit before other operating charges 3,100 2,644 2,320 2,182
General insurance
- gross claims 520 462 408 356
- reinsurance (145) (139) (96) (67)
-------- -------- -------- --------
Operating profit before provisions 2,725 2,321 2,008 1,893
Provisions for bad and doubtful debts 318 284 284 242
Amounts written off investments 17 26 4 12
-------- -------- -------- --------
Group operating profit before goodwill
amortisation and integration costs 2,390 2,011 1,720 1,639
Goodwill amortisation 324 311 292 284
Integration costs 245 189 113 -
-------- -------- -------- --------
Group profit before tax 1,821 1,511 1,315 1,355
Tax 623 548 433 484
-------- -------- -------- --------
Group profit after tax 1,198 963 882 871
Minority interests 32 22 16 27
-------- -------- -------- --------
Profit after minority interests 1,166 941 866 844
Preference dividends 166 162 150 145
-------- -------- -------- --------
Profit attributable to ordinary 1,000 779 716 699
shareholders -------- -------- -------- --------
Page 24 of 32
DIVISIONAL PERFORMANCE (pro forma basis)
31 December 2000 31 December 1999
Second First Second First
half half half half
£m £m £m £m
Corporate Banking and Financial 1,393 1,337 1,226 1,265
Markets
Retail Banking 1,265 1,202 1,100 1,044
Retail Direct 196 177 174 128
------- -------- ------- -------
Contribution before manufacturing 2,854 2,716 2,500 2,437
costs
Manufacturing (801) (859) (939) (927)
-------- -------- -------- --------
Operating profit 2,053 1,857 1,561 1,510
Wealth Management 205 200 183 145
Direct Line Insurance Group 125 76 64 36
Ulster Bank 104 96 83 83
Citizens 182 167 133 125
Central items (279) (385) (304) (260)
-------- -------- -------- --------
Group operating profit before
goodwill
amortisation and integration costs 2,390 2,011 1,720 1,639
-------- -------- -------- --------
Page 25 of 32
AVERAGE BALANCE SHEET (pro forma basis)
2000 1999
Average Average
Balance Rate Balance Rate
£m % £m %
Year ended 31 December
Assets
Treasury and other eligible bills
UK 463 4.5 825 5.2
Overseas 131 4.6 378 1.6
Loans and advances to banks
UK 14,965 5.8 17,435 5.2
Overseas 8,884 6.7 8,764 5.5
Loans and advances to customers
UK 106,302 7.9 91,014 7.4
Overseas 23,271 7.8 16,112 7.0
Instalment credit and finance lease
receivables
UK 14,113 8.5 14,370 9.2
Overseas 1,796 7.0 1,426 6.4
Debt securities
UK 18,004 5.7 20,172 5.8
Overseas 9,812 6.3 8,229 5.8
----------- -----------
Interest-earning assets - banking 197,741 7.4 178,725 6.9
business
Interest-earning assets - trading 53,946 6.4 47,767 5.6
business
----------- -----------
Total interest-earning assets 251,687 7.2 226,492 6.6
Non-interest-earning assets 52,931 53,194
----------- -----------
Total assets 304,618 279,686
----------- -----------
Liabilities
Deposits by banks
UK 13,851 5.4 14,878 4.0
Overseas 7,667 5.7 7,880 4.8
Customer accounts
UK 106,012 4.7 97,885 4.3
Overseas 22,297 4.7 16,785 3.9
Debt securities in issue
UK 14,831 5.9 16,411 5.9
Overseas 7,881 6.3 6,463 5.3
Loan capital
UK 9,829 7.1 8,468 6.8
Overseas 502 9.8 473 9.5
Internal funding of trading business
UK (10,774) 4.9 (9,944) 5.4
Overseas (1,025) 5.1 (1,971) 4.5
----------- ---------
Interest-bearing liabilities - banking
business 171,071 5.1 157,328 4.5
Interest-bearing liabilities - trading 50,336 6.1 44,964 5.3
business
---------- --------
Total interest-bearing liabilities 221,407 5.3 202,292 4.7
Non-interest-bearing liabilities ---------- --------
demand deposits 21,938 18,688
other liabilities 38,520 37,334
Shareholders' equity 22,753 21,372
Total liabilities and shareholders' ---------- ---------
equity 304,618 279,686
----------- ---------
The analysis into UK and overseas in the above table has been compiled on the
basis of location of office.
Page 26 of 32
AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS (pro forma basis)
2000 1999
Average Average
Rate Rate
% %
Year ended 31 December
The Group's base rate 6.0 5.3
London inter-bank offered rate:
three month sterling 6.2 5.5
three month eurodollar 6.5 5.4
Yields, spreads and margins of the banking business:
Gross yield (1)
Group 7.4 6.9
UK 7.5 7.1
Overseas 7.2 6.3
Interest spread (2)
Group 2.3 2.4
UK 2.4 2.6
Overseas 1.9 1.8
Net interest margin (3)
Group 3.0 3.0
UK 3.1 3.1
Overseas 2.7 2.5
(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.
Page 27 of 32
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.
Actual Pro forma
31 31
December December
2000 1999
£m £m
Loans accounted for on a non-accrual basis:
Domestic 2,482 2,462
Foreign 344 629
-------- --------
2,826 3,091
-------- --------
Accruing loans which are contractually overdue
90 days or more as to principal or interest*:
Domestic 662 558
Foreign 168 144
-------- --------
830 702
-------- --------
Loans not included above which are classified as
'troubled debt restructurings' by the SEC:
Domestic 43 22
Foreign 122 110
-------- --------
165 132
-------- --------
Total risk elements 3,821 3,925
-------- --------
Closing provisions for bad and doubtful debts as a % of
total risk 83% 80%
elements in lending
* 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 £772 million at 31 December 2000 (31 December
1999 - £898 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.
Page 28 of 32
MARKET RISK (pro forma basis)
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 as if NatWest had been part of the Group throughout the periods
presented. The Group's VaR assumes a 95% confidence level and one-day time
horizon.
Year ended 31 December
At 31 December Maximum Minimum Average
£m £m £m £m
Trading
2000 9.8* 12.4 8.1 9.7
1999 9.4 11.9 7.4 9.6
Treasury
2000 5.4 5.7 2.8 4.0
1999 5.1 13.1 4.6 9.4
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.
*Actual as at 31 December 2000.
Page 29 of 32
REGULATORY RATIOS AND OTHER INFORMATION
Actual Actual
31 December 30 June
2000 2000
Weighted risk assets (£m)
Banking book
- on balance sheet 146,600 139,300
- off balance sheet 16,200 15,800
Trading book 12,400 10,500
----------- -----------
175,200 165,600
----------- -----------
Risk asset ratio
- tier 1 6.9% 6.4%
- total 11.5% 11.4%
Share price at period end £15.82 £11.06
Market capitalisation £42.4bn £29.4bn
Employee numbers (pro forma basis) Actual Pro forma
31 December 31 December
2000 1999
Corporate Banking and Financial Markets 13,100 14,600
Retail Banking 28,900 34,300
Retail Direct 5,800 6,200
Manufacturing 19,200 20,800
Wealth Management 6,800 6,800
Direct Line Insurance Group 6,700 5,800
Ulster Bank 4,600 4,900
Citizens 7,300 5,600
Central items 1,600 2,300
---------- -----------
Group total 94,000 101,300
---------- -----------
Effect of acquisitions by:-
Direct Line 800 800
Citizens 1,900 200
---------- -----------
Underlying 91,300 100,300
----------- -----------
Integration headcount savings
Integration headcount reductions are measured against the 'base number' i.e 30
June 1999 staff numbers for NatWest plus those at 30 September 1999 for RBS.
The 'base number' of 103,500 staff reduces to 93,000 excluding Direct Life
Insurance Group and Citizens as they are not materially affected by
integration savings. On the same basis, group total staff numbers at 31
December 2000 are 80,000, a reduction of 13,000 compared with the adjusted
base number.
Forward looking statements
Certain sections of this document contain forward-looking statements. We use
words such as 'plan', '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.
Page 30 of 32
Independent Review Report to The Royal Bank of Scotland GROUP plc
Introduction
We have been instructed by the company to review the pro forma financial
information set out on pages 4 to 22, 24 and 25, which has been prepared as
described on page 19 and in accordance with the accounting policies referred
to on page 20. This pro forma financial information is not subject to the
Listing Rules of the UK Listing Authority.
We have read the other information contained in the results announcement and,
solely on that basis, have considered whether it contains any apparent
misstatements or material inconsistencies with the pro forma financial
information.
Directors' responsibilities
The results announcement, including the pro forma financial information
contained therein, 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. A review consists principally of
making enquiries of group management and applying analytical procedures to the
pro forma 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 Auditing Standards and therefore provides a lower level of
assurance than an audit. Accordingly, we do not express an audit opinion on
the pro forma financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the pro forma financial information as presented for the
year ended 31 December 2000.
Deloitte & Touche
Chartered Accountants
Edinburgh
28 February 2001
Page 31 of 32
CONTACTS
Fred Goodwin Group Chief Executive 020 7427 8116
0131 523 2033
Fred Watt Group Finance Director 020 7427 8412
0131 523 2028
Grahame Whitehead Deputy Group Finance Director 020 7427 9450
0131 523 2970
1 March 2001
END
Page 32 of 32
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