23rd Apr 2008 17:09
Royal Bank of Scotland Group PLC23 April 2008 The Royal Bank of Scotland Group plc - AGM Statement 23 April 2008 The Meeting dealt with proposed Resolutions as outlined in the Notice of theMeeting issued to Shareholders dated 14 March 2008 and a summary of the businessand financial performance of the Group in 2007 was provided. The following is an extract from the speech made by Sir Tom McKillop, Chairman,at the meeting. The last few months have been a difficult period for banks, because of thedislocation to financial markets, which has been widely discussed in the media.I am sure that you will all have seen the announcement we made yesterday of ourintentions to take actions to raise our capital ratios through a rights issueand by making some disposals. The board is convinced that these actions are inthe best interests of RBS and of its shareholders. You will receive a lot more information concerning that when the prospectus isissued and you will have the opportunity to debate our capital plans fully at aGeneral Meeting that will take place next month. Today's meeting is primarily concerned with the Group's 2007 financial year, andwith the resolutions before you on the agenda. So I would like first of all to take you through the Group's financialperformance in 2007; discuss the acquisition of ABN AMRO; and comment on currenttrading conditions. As you will have seen from our Report and Accounts, RBS delivered a strong setof results for 2007. We increased Group operating profit by 9 per cent to £10.3 billion. Earningsper share grew by 18 per cent to 78.7 pence per share, benefiting from afavourable tax rate in 2007. In the light of these results, the Board has recommended a final dividend of23.1 pence, making a total of 33.2 pence for the year. That represents anincrease of 10 per cent from 2006. These are the Group's statutory results and the figures include the entirety ofABN AMRO, and its funding costs, since the completion of the acquisition - thatis to say, for the last 76 days of the year. I will not go through all the financial results as they are set out in ourReport and Accounts, but to remind you of our performance in 2007, I will focusinitially on the Group excluding ABN AMRO, before coming onto the acquisition ofABN AMRO For RBS, excluding ABN AMRO, income grew by 3% in 2007 to almost £29 billion. This was a lower rate of income growth than we have achieved in recent years,reflecting the significant deterioration in credit markets that we haveexperienced since the second half of 2007. As a result of this deterioration wenot only experienced a marked slowdown in business volumes in some of ourspecialist markets, such as asset-backed securities and leveraged finance, butalso took write-downs on the value of some financial assets, particularly thosewhich are exposed directly or indirectly to the US mortgage market. On the other hand, we also made good profits on the disposal of a number ofassets during the course of the year, including Southern Water. We reduced our operating costs by 1 per cent, with the result that our cost:income ratio improved from 42.1 per cent in 2006 to 40.7 per cent in 2007. At the same time, while growing our average lending to customers by 10 per cent,we achieved a 1 per cent reduction in impairment losses, which reflects a verystrong performance in controlling our credit risks. Once again, these results showed the strength, the flexibility and the diversityof the business model we operate. There were good performances within all ofour divisions, and some particularly strong collective performances in UKCorporate Banking, in Retail, in Wealth Management and in Ulster Bank. Global Banking and Markets experienced more difficult conditions in its creditmarkets business and its results were affected by some significant write-downswe took on a number of financial assets. On the other hand GBM achieved stronggrowth in foreign exchange and money markets. Outside the UK, it continued toproduce strong growth in continental Europe and Asia, and overall, it delivereda profit for 2007 only slightly lower than in 2006. Citizens experienced challenging market conditions, and its results wereaffected by the weaker dollar. Although RBS Insurance's results were affected by last summer's severe floodingin several regions of the United Kingdom, it actually achieved a very goodunderlying performance. Just to put our 2007 results in context our performance last year placed us 4thin the world among banks in terms of Group operating profit. To summarise: In 2007 we achieved strong organic growth, despite the effect of more difficultcredit market conditions on our Global Banking & Markets business, with reducedoperating costs, reduced credit costs and increased returns. Turning now to the acquisition of ABN AMRO: I would like to take a few minutes to take you through the Board's thinking onthis matter. The Board met many times to consider the acquisition of ABN AMRO and we gave ita great deal of thought throughout the whole process. We had entered 2007 with our eyes fixed firmly on organic growth, but when ABNAMRO indicated that it was looking for a partner it was incumbent on us toconsider the implications for our Group. An opportunity that fits so closelywith our strategic priorities does not arise often and it was, and remains, theBoard's view that the acquisition will deliver good, long-term value enhancementto you, our shareholders. And I am grateful for the strong support that shareholders gave to this view atour Extraordinary General Meeting in August last year. ABN AMRO brought us some very good businesses, and it has created for us someoutstanding opportunities. In the first place, we now have an enhanced global presence. ABM AMRO had a very broad footprint and presence in a number of countriesparticularly in the Middle East and Asia where we had been keen to expand. ABN AMRO also had some very strong customer franchises and these were highlycomplementary to our own corporate banking business. RBS was already one of the world's leading corporate banks but as result of theacquisition we can now lay claim to real pre-eminence in this field. As you willsee from this slide our Global Banking and Markets customer franchise now ranks1st in the UK and continental Europe and among the top 5 banks in both theUnited States and Asia. These are very strong positions that we could notpreviously have laid claim to. We also have improved product capabilities, for example through the addition ofABN AMRO's world-class business in global payments and trade finance. We nowcall the combined business Global Transaction Services, or simply GTS. And we have also added to our strategic options in some of the world'sfastest-growing economies, notably in the emerging markets. The Board remains convinced that in the long term ABN AMRO will prove to addvalue for shareholders. Over the last six months we have been able to confirm our positive view of theABN AMRO businesses we have secured. Our teams have also had the opportunity toconfirm their view of the financial benefits we can derive from combining ourbusinesses. Indeed, we now expect these benefits to be even greater than those we originallyanticipated. By 2010, when we have completed the integration process, we expectto achieve synergies totalling almost 2.3 billion euros a year. As a result, the financial returns are now expected to be even more attractivethan we had thought when we were first considering this transaction. Another topic on which many shareholders have written to me is the performanceof our share price over the last year, and I would like to make a few points onthis. The Board shares your disappointment at what has happened to our stock marketvaluation over the last year. The financial sector and banks in particular havebeen affected by the volatility in global markets. RBS is not alone inexperiencing a decline in our share price - by more than some of ourcompetitors, but by less than others. Of course we are not happy about this performance. We cannot control how thestock market values our business in the short term. All we can do is manage ourbusiness in a way that delivers good, sustainable growth, and our performance in2007, as I discussed already achieved this. A point made by some major institutional shareholders is that they would preferus to operate with significant higher capital ratios and that if we were tore-base our capital at higher levels there might be some potential for re-ratingour stock. We have listened to these comments and, although these were not theonly cause of our decision, our actions announced yesterday have responded tothis point. The Board had been fully engaged throughout 2007 in monitoring the impact ofthis deterioration, and we continued to review conditions as 2008 unrolled. Asit happened, the overall business performance in January and February wassatisfactory, and after thorough consideration we announced our 2007 results,remaining of the belief that our capital plans, which envisaged rebuilding ourcapital ratios primarily through the profits our businesses generate forthemselves, remained achievable. March 2008, however, took on a very different shape with further, severedeterioration in credit markets and a worsening outlook for the wider economy.As soon as this became clear to the Board, we decided that the time had come totake decisive action to reposition our capital base. To summarise, the Board has decided that, in the changed market and economiccircumstances, our bank needs to operate in the future with significantly highercapital ratios than we have aimed for in the past. The key elements of our new capital plans are: • A rights issue to raise £12 billion • Estimated write-downs on credit market exposures of £4.3 billion after tax • And possible asset disposals which could generate £4 billion of capital. The Board has been fully engaged in monitoring our capital position as eventshave developed, and has taken these decisions based not only on the sharpdeterioration in credit markets during March but also on our judgment of thesteadily worsening economic outlook and the increasingly clear expectation ofinvestors and of many others that banks should strengthen their capital base. The Board was convinced that significantly stronger capital ratios were nowrequired in what had become a very different world for financial institutionslike ours, and we are convinced that the actions we announced yesterday are inthe best interests of shareholders. One significant element in our planning was our continuing exposure to a numberof credit market assets including those related to the US mortgage market. Wetook some write-downs on these exposures in 2007 but in considering theappropriate size for our capital base the Board made an assessment of the likelyamount of write-downs in 2008 that could result from the further deteriorationin credit markets. We always keep our portfolio of businesses under review but in the context ofour new capital targets we have identified for possible full or partial disposala number of assets which are not central to the powerful UK and internationalbanking franchises that RBS has built. These include RBS Insurance and a numberof other smaller assets. Our capital plan assumes that these disposals couldcontribute approximately £4 billion to our capital during 2008. As you will have seen from yesterday's announcement, we propose to raise £12billion of capital by a 11 for 18 rights issue. The new shares will be priced at 200 pence each, which represents a discount of46% to the closing price of RBS shares on Monday, the night before theannouncement. This rights issue is fully underwritten by Goldman Sachs, Merrill Lynch and UBS. The Board believes that the 2007 level of dividend payout ratio, adjusted forthe bonus element of the rights issue, remains sustainable over the medium term,given the strength and diversity of the Group, though it also believes that itwould be prudent to pay the 2008 interim dividend in shares. A prospectus will be issued in early May which will contain all the technicaldetails, and you will have an opportunity to debate this at greater length at ageneral meeting next month. But I would like to address one particular point that has been made to me, whichis why we are proposing to pay out the 2007 dividend on which you will be votingtoday when we are also seeking to raise capital. The recommendation on the dividend was made at our February Board Meeting aheadof the marked deterioration in credit market conditions that occurred in March.It would be technically very difficult to reverse it. More generally, the 2007 dividend will be paid in respect of the Group's 2007performance, and it will be paid to shareholders who were on our register on the7th March. Those shareholders may not be the same as those holding the sharestoday. We have decided to accelerate the payment of the dividend and it will bepossible to take up your rights with that cash. So I would like to confirm that, if you approve the resolution today, the 2007final dividend will be paid in cash as announced. I would now like to comment briefly on the Group's operating performance so farthis year. With the notable exception of further write-downs on our credit marketexposures, the Group's overall performance so far this year has beensatisfactory. Parts of Global Banking & Markets have been acutely affected by thedeteriorating conditions in credit markets, although other parts of GlobalBanking & Markets, such as interest rates and currencies, are doing well. By contrast, GTS and our Retail and Commercial banking businesses have performedwell, and the strong growth we have been achieving in Asia has continued. It is important in uncertain times like these that we should be there for ourcustomers, and I am pleased that we are, for example, very much open forbusiness in the UK mortgage market, where we have achieved our best ever marketshare in the first quarter. We have achieved good growth in both personal and corporate deposits, and creditquality remains stable overall, with reduced credit costs in some parts of ourbusiness and slightly higher bad debts in some others. While conditions in credit markets remain difficult many of our divisions areseeing good opportunities to do business with our customers at good riskadjusted rates of return. A number of our competitors have had to reduce theirlevels of activity and we are taking advantage of this. Our priorities at RBS must remain, first of all, to deliver the ABN AMROintegration and transaction benefits, and to ensure that we must maintain adisciplined approach to navigating GBM through these difficult waters. But we must keep up the momentum of our businesses. Many of them are doingwell, despite the so-called "credit crisis". While there is a more cautious mood in the US and, to a lesser extent in the UK,we are now, as a result of our acquisition of ABN AMRO, much better positionedin fast-growing economies, particularly in Asia. And we now have an enhancedpresence globally and stronger customer franchises and product capabilities. Wehave many opportunities for future growth. There are a number of elements that are central to our ability to capitalise onthese opportunities for growth, elements that come out of our engagement withsome of our major stakeholders and I'd like to comment on some of these now. First of all, and crucially important, our customers. I am happy to reportthat we have again maintained our number 1 position for customer service in UKhigh street banking. We take customer service very seriously, and in 2007 we have worked hard toimprove our service. And this shows up in our customer satisfaction scores. Our people, too, are central to our success. Every year we monitor staff engagement by participating in a comprehensiveemployee opinion survey, which enables us to benchmark ourselves against ourcompetitors. I am very pleased that in the 2007 survey we scored higher thanthe Global Financial Services norm in every category. And we also improved our scores in every category as compared with our 2006survey. One reason behind these good scores is our approach towards involvement in ourcommunities. In 2007 we invested £58 million in the communities where ouremployees live and work, and we supported employee giving programmes thatgenerated £12 million in charitable donations. Our people and our customers have told us that they care very much about their,and our, impact on the environment. In 2007 we launched a Group-wide environment programme, focussing not only onour own impact on the environment but also on ways of enabling our employees andour customers to make a difference through their own choices. RBS uses 100 per cent green electricity in the UK and Ireland, and we haveinvested £55 million to reduce our carbon footprint, through energy efficiencymeasures including solar roof tiles and intelligent energy management for ourbuildings. We have also launched tools to enable our employees and our customers to offsettheir own carbon footprints and developed new products. As a result, RBS has been included in the Carbon Disclosure Project's LeadershipIndex, and we were ranked among the 100 Most Sustainable Global Corporations atthe 2008 Davos meetings. So where does that leave us now? These are difficult times for everyone concerned, and many financialinstitutions are being adversely affected by events in the credit markets, andface challenging times in the coming months. There are lessons to be learnedfrom what has happened, and we are anxious to learn, so that we are even betterprepared in the future. But it is often in adversity that competitive advantage is won. We haveoutstanding franchises, considerably enhanced following the acquisition of ABNAMRO whether it be in geographic spread, client base or product range. Ourpriorities are clear and we are all focused on delivering the full potential ofthe many opportunities available to us. Forward Looking Statements This document does not constitute an offer to sell, or a solicitation of anoffer to subscribe for, securities of RBS or any of its affiliates in anyjurisdiction or an inducement to enter into investment activity. This documentis not a prospectus but an advertisement and investors should not subscribe forany securities referred to in this document except on the basis of theinformation contained in the prospectus to be published in due course. The securities mentioned herein (the "Securities") have not been, and will notbe, registered under the United States Securities Act of 1933 (the "SecuritiesAct") and may not be offered or sold in the United States absent registration oran exemption from the registration requirements of the Securities Act. Therewill be no public offer of the Securities in the United States. Certain statements made in this document constitute forward-looking statementswithin the meaning of the United States Private Securities Litigation Reform Actof 1995. Forward looking statements can be identified by the use of words suchas ''may'', ''will'', ''expect'', ''intend'', ''estimate'', ''anticipate'', ''believe'', ''plan'', ''seek'', ''continue'' or similar expressions and relateto, among other things, the performance of RBS's various business units in thenear to medium term, the amount by which RBS expects to write down the value ofcertain of its assets, RBS's expectations in respect of the rights issue, itscapital ratios and its dividend payout ratio, RBS's business strategy and itsplans and objectives for future operations. Such statements are based on currentexpectations and, by their nature, are subject to a number of risks anduncertainties that could cause actual results and performance to differmaterially from any expected future results or performance, expressed orimplied, by the forward-looking statement. Factors that might cause forwardlooking statements to differ materially from actual results, include among otherthings, general economic conditions in the European Union, in particular in theUnited Kingdom, and in other countries in which RBS has business activities orinvestments, including the United States; the inability of RBS to hedge certainrisks economically; the adequacy of RBS's impairment provisions and lossreserves; RBS's ability to achieve revenue benefits and cost savings from theintegration of certain of ABN AMRO's businesses and assets; and the potentialexposure of RBS to various types of market risks, such as interest rate risk,foreign exchange rate risk, credit risk and commodity and equity price risk.These forward-looking statements speak only as of the date of this document. Theinformation and opinions contained in this document are subject to changewithout notice and, subject to compliance with applicable law, RBS assumes noresponsibility or obligation to update publicly or review any of theforward-looking statements contained herein. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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