Final Results

1st Mar 2007 07:06

Royal Bank of Scotland Group PLC01 March 2007 Annual Results 2006 Annual Results for the year ended 31 December 2006 THE ROYAL BANK OF SCOTLAND GROUP plc CONTENTS Page 2006 highlights 2 Results summary 3 Group Chief Executive's review 4 Summary consolidated income statement 7 Financial review 8 Description of business 10 Divisional performance 12 Corporate Markets 13 - Global Banking & Markets 14 - UK Corporate Banking 16 Retail Markets 17 - Retail 18 - Wealth Management 20 Ulster Bank 21 Citizens 23 RBS Insurance 25 Manufacturing 27 Central items 28 Average balance sheet 29 Average interest rates, yields, spreads and margins 30 Condensed consolidated income statement 31 Condensed consolidated balance sheet 32 Overview of condensed consolidated balance sheet 33 Condensed statement of recognised income and expense 35 Condensed consolidated cash flow statement 36 Notes 37 Analysis of income, expenses and impairment losses 44 Regulatory ratios 45 Asset quality 46 Analysis of loans and advances to customers 46 Risk elements in lending 47 Market risk 48 Other information 49 Forward-looking statements 50 Restatements 51 Financial calendar 53 Contacts 53 THE ROYAL BANK OF SCOTLAND GROUP plc 2006 HIGHLIGHTS • Group operating profit* up 14% to £9,414 million. • Income up 10% to £28,002 million. • Profit after tax up 17% to £6,497 million. • Adjusted earnings per ordinary share up 14% to 200.0p. • Capital returned through dividend increase. • Final dividend 66.4p; total dividend 90.6p, up 25%. • Adjusted return on equity 19%, up from 18.2%. • Average loans and advances to customers up 14%. • Average customer deposits up 11%. • UK income up 9% to £20,430 million. • International income up 11% to £7,572 million. • Cost:income ratio down to 42.1% from 42.4%. • Impairment losses stable at 0.46% of loans and advances. • UK personal unsecured arrears have levelled in the second half. • Tier 1 capital ratio 7.5%. • Total capital ratio 11.7%. • Share repurchase of £1 billion completed. *profit before tax, purchased intangibles amortisation, integration costs andnet gain on sale of strategic investments and subsidiaries. THE ROYAL BANK OF SCOTLAND GROUP plc RESULTS SUMMARY 2006 2005 Increase £m £m £m Total income (1) 28,002 25,569 2,433 _______ _______ _____ Operating expenses (2) 12,252 11,298 954 _______ _______ _____ Operating profit before impairment losses (1,2) 11,292 9,958 1,334 _______ _______ _____ Group operating profit (3) 9,414 8,251 1,163 _______ _______ _____Purchased intangibles amortisation 94 97 (3) _______ _______ _____Integration costs 134 458 (324) _______ _______ _____Net gain on sale of strategic investments and - 240 (240)subsidiaries _______ _______ _____Profit before tax 9,186 7,936 1,250 _______ _______ _____ Cost:income ratio (4) 42.1% 42.4% _______ _______Basic earnings per ordinary share 194.7p 169.4p 25.3p _______ _______ _____Adjusted earnings per ordinary share (5) 200.0p 175.9p 24.1p _______ _______ _____ (1) excluding gain on sale of strategic investments in 2005. (2) excluding purchased intangibles amortisation, integration costs and loss on sale of subsidiaries. (3) profit before purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries. (4) the cost:income ratio is based on total income and operating expenses as defined in (1) and (2) above, and after netting operating lease depreciation against rental income. (5) adjusted earnings per ordinary share is based on earnings adjusted for purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries. Sir Fred Goodwin, Group Chief Executive, said: "Whilst building greater diversification of income across the Group, we activelymanage the trade-off between sustainable growth, risk and return. Our 2006 results provide clear evidence of the success of this approach. We havedelivered strong organic earnings growth and improved returns on equity,notwithstanding the adverse industry and market-wide pressures facing some ofour major businesses. Furthermore, we have retained our inherently cautiousstance towards higher risk activities such as unsecured consumer lending andsub-prime credit markets more generally. Today's excellent results and increased dividend demonstrate the strength ofRBS. We are expanding our reach and making progress in all the major economieswe operate in. We face the future confidently, with momentum and a provenstrategy for success." THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW The Royal Bank of Scotland Group performed strongly in 2006, increasingoperating profit by 14% to £9,414 million and adjusted earnings per share by 14%to 200.0p. Adjusted return on equity increased to 19.0% in 2006 from 18.2%.Total shareholder return in 2006 was 18%. Over the last ten years totalshareholder return has also averaged 18%. We are building a group whose diversity, scale, distribution capacity andoperational excellence can deliver superior, sustainable income growth, combinedwith controlled risk and strong returns. Our results in 2006 demonstrate onceagain the success of our model. Investment in meeting the needs of our customers has enabled us to continue toachieve good organic growth across the range of our businesses, with alldivisions contributing to this. Total income grew by 10% to £28,002 million,with particularly strong performances from Global Banking & Markets, UKCorporate Banking, Wealth Management and Ulster Bank. Whilst continuing toinvest in business expansion, we held cost growth to 8%, bringing our cost:income ratio down to 42.1%, compared with 42.4% in 2005. We have continued to build our market share in UK retail, commercial andcorporate banking, increased our customer base in Europe and made good progressin building a platform for sustained growth in North America. We have also laidthe foundations for a growing share in the vibrant financial services markets ofthe Asia-Pacific region. The breadth of the Group's businesses is reflected inour results: 42% of our operating profit came from outside the UK. Sound control of risk is fundamental to the Group's business, and our resultshere are reassuring. We have grown average customer lending by 14% whileimpairment losses have increased by 10%. Central to this is our longstandingaversion to sub-prime lending, wherever we do business. We have also maintainedthe customer-driven nature of our trading activities, as reflected in tradingincome growth of 14%, compared with an increase of only 9% in our average dailyvalue at risk. Our businesses We manage costs where they arise, with customer-facing divisions controllingtheir direct expenses and our Manufacturing division taking responsibility forshared costs. We do not allocate these shared costs between divisions in theday-to-day management of our business, and the way in which we present ourfinancial results reflects this. We have, however, shown separately in thisannouncement an allocation of Manufacturing costs to the customer-facingdivisions on the same basis as in our Interim results announcement. Thediscussion of divisional operating profit in this review reflects thisallocation. Corporate Markets has achieved another strong performance in 2006, with totalincome growing by 17% to £10,279 million and operating profit by 20% to £5,552million. Global Banking & Markets produced a 22% increase in total income to £6,826million, with operating profit rising by 25% to £3,790 million. We continue toinvest in the extension of GBM's geographical footprint and product range. Theseinvestments are bearing fruit and have made an important contribution to GBM'ssuccess in 2006. Sustained growth in income reflects its increasing strength inglobal debt capital markets and excellent results from the origination,structuring, management and distribution of assets. UK Corporate Banking has increased total income by 9% to £3,453 million andoperating profit by 12% to £1,762 million. UKCB strengthened its market-leadingpositions in corporate and commercial banking while achieving considerablesuccess in providing a full range of financing and risk management services toits customers. Corporate credit conditions remain benign. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) Retail Markets has grown total income by 5% to £8,637 million and operatingprofit by the same percentage to £2,653 million, with robust growth from Wealthand a good performance in consumer and business banking. We have responded tothe changing pattern of demand from our customers by strengthening ourcapabilities in the savings and investment market, with good results. That hasenabled us to deliver excellent growth in wealth management, savings accountsand bancassurance sales. We have also further strengthened our position incurrent accounts, where we are now joint UK market leader. We maintained ourtraditional unwillingness to engage in sub-prime lending and further reduced ouractivity in the direct loans market last year. Arrears on our unsecured card andpersonal loan book in the second half were flat compared with the first and,when considered alongside our credit performance over the last two years,reflect the benefits of our conservative credit selection criteria. Ulster Bank continues to deliver good growth in both the Republic of Ireland andNorthern Ireland, with total income increasing by 15% to £988 million andoperating profit by 20% to £388 million. We have made particularly good progressin extending our corporate banking franchise. With increased customer numbers incorporate and in personal banking, we have achieved strong growth in bothlending and deposits. Citizens has been building its customer franchise in commercial banking and incard issuing and acquiring, diversifying its traditional deposit-focusedbusiness. Total income grew by 3% to $6,115 million and operating profit by 2%to $2,917 million. Business and home equity lending showed good growth but wefaced more challenging conditions in deposits, where the industry has beenaffected by the flattening of the yield curve and the migration from liquidsavings to lower margin term and time deposits. The decline in net interestmargin has, however, slowed noticeably in the second half of the year, and wecontinue to see opportunities to develop our footprint through supermarketbanking. We maintained good expense discipline, and credit quality remainsstrong, underpinned by our focus on prime customers. RBS Insurance increased total income by 3% to £5,679 million and operatingprofit by 3% to £750 million. We have maintained our disciplined approach topricing and risk selection, focusing on more profitable customers acquiredthrough our direct brands. An upward trend in the UK motor market pricing becameevident towards the end of the year and we have successfully put throughincreases in our own premium rates in line with that trend, although these willtake some time to feed through into income. Our European motor insurancebusinesses are growing well with more than 2 million policyholders. We managedoperating costs and claims rigorously. Manufacturing has demonstrated the scale benefits achievable from sharingprocesses and infrastructure across our businesses, with costs growing by 3% to£2,852 million. Our platform has handled significantly greater business volumes,yet we have held technology and customer support expenses almost flat. Thisperformance has provided us with the wherewithal to continue to invest infurther enhancements to customer service. 2006 also saw the successfulintegration of Ulster Bank's core systems onto the Group's IT platform. Basel II We submitted our application for qualification under the Basel II AdvancedInternal Ratings-Based approach at the end of 2006 and will run in parallelduring 2007. Like many other large banking groups, we expect a modest reductionin our Basel II minimum capital requirements under Pillar 1, and will workclosely with the Financial Services Authority over the course of this year todetermine our assessment under Pillar 2. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) Bank of China We have made good progress in developing our partnership with Bank of China. Ourjoint credit card business has already issued more than 1.2 million cards andits scope has been expanded to include all credit cards and merchant acquiringin mainland China. We are establishing a joint private banking business and willbe opening pilot offices in Beijing and Shanghai during the first half of 2007.Co-operation in corporate banking is also bearing fruit, and we have togethercompleted a number of significant transactions in shipping, aviation and tradefinance. Capital Our 2006 results demonstrate the effective use of capital, with our increasingdistribution capabilities helping to minimise the capital required to supportour considerable strength in origination. The capital our businesses generatedhas enabled us to invest in organic growth across the Group, carry out a £1billion share buyback and increase the dividends paid out in the course of theyear by 28%, while holding our Tier 1 capital ratio steady at 7.5%. Looking at 2007 we expect to remain strongly capital-generative and we aim toachieve a balance between growth, risk and return in the deployment of thatcapital. We see a wide range of opportunities across the Group to achieveattractive returns from organic growth in existing businesses and investment innew income streams and markets. In addition, we intend to reduce further theproportion of preference shares in our Tier 1 capital base. Our target range forTier 1 capital is unchanged at 7-8%. Returning capital to our shareholders remains integral to our strategy, andhaving consulted with them, we have heard a clear preference for capital to bereturned through increased dividends. We are therefore proposing to raise ourpayout ratio to 45% through a final dividend of 66.4p, making a total of 90.6pfor the year, an increase of 25%. Outlook Our proven business model has delivered strong results in 2006. We believe thatthe strategic choices we have made, together with the prospects for continuedgrowth in the world economy, position us well for 2007. We remain confident inthe Group's ability to take advantage of the many opportunities to investprofitably in sustainable growth. Sir Fred Goodwin Group Chief Executive THE ROYAL BANK OF SCOTLAND GROUP plc SUMMARY CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 In the income statement set out below, amortisation of purchased intangibleassets, integration costs and net gain on sale of strategic investments andsubsidiaries are shown separately. In the statutory income statement on page 31,these items are included in non-interest income and operating expenses asappropriate. 2006 2005 £m £m Net interest income 10,596 9,918 _______ _______Non-interest income (excluding insurance net premium income) 11,433 9,872Net insurance premium income 5,973 5,779 _______ _______Non-interest income 17,406 15,651 _______ _______Total income 28,002 25,569Operating expenses 12,252 11,298 _______ _______Profit before other operating charges 15,750 14,271Insurance net claims 4,458 4,313 _______ _______Operating profit before impairment losses 11,292 9,958Impairment losses 1,878 1,707 _______ _______Profit before tax, intangible assets amortisation, 9,414 8,251integration costs and net gain on sale of strategicinvestments and subsidiariesAmortisation of purchased intangible assets 94 97Integration costs 134 458Net gain on sale of strategic investments and subsidiaries - 240 _______ _______Operating profit before tax 9,186 7,936Tax 2,689 2,378 _______ _______Profit for the year 6,497 5,558Minority interests 104 57Preference dividends 191 109 _______ _______Profit attributable to ordinary shareholders 6,202 5,392 _______ _______ Basic earnings per ordinary share (Note 4) 194.7p 169.4p _______ _______ Adjusted earnings per ordinary share (Note 4) 200.0p 175.9p _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL REVIEW Profit Profit before tax, purchased intangibles amortisation, integration costs and netgain on sale of strategic investments and subsidiaries increased by 14% or£1,163 million, from £8,251 million to £9,414 million. Profit before tax was up 16%, from £7,936 million to £9,186 million, reflectingstrong organic income growth in all divisions. Total income The Group achieved strong growth in income during 2006. Total income was up 10%or £2,433 million to £28,002 million. Net interest income increased by 7% to £10,596 million and represents 38% oftotal income (2005 - 39%). Average loans and advances to customers and averagecustomer deposits grew by 14% and 11% respectively. Non-interest income increased by 11% to £17,406 million and represents 62% oftotal income (2005 - 61%). Net interest margin The Group's net interest margin at 2.47% was down from 2.55% in 2005, due mainlyto the business mix effect of growth in corporate and mortgage lending and theimpact of the flatter US dollar yield curve. Operating expenses Operating expenses, excluding purchased intangibles amortisation and integrationcosts, rose by 8% to £12,252 million. Cost:income ratio The Group's cost:income ratio was 42.1% compared with 42.4% in 2005. Net insurance claims Bancassurance and general insurance claims, after reinsurance, increased by 3%to £4,458 million reflecting volume growth. Impairment losses Impairment losses were £1,878 million compared with £1,707 million in 2005, anincrease of 10%. Risk elements in lending and potential problem loans represented 1.57% of grossloans and advances to customers excluding reverse repos at 31 December 2006(2005 - 1.60%). Provision coverage of risk elements in lending and potential problem loans was62% compared with 65% at 31 December 2005. This reflects amounts written-off andthe changing mix from unsecured to secured exposures. Integration Integration costs were £134 million compared with £458 million in 2005. Includedare costs relating to the integration of First Active and Charter One, as wellas the amortisation of software costs relating to the integration of Churchill.Integration costs in 2005 included software costs relating to the acquisition ofNatWest which were previously written-off as incurred under UK GAAP but underIFRS were capitalised and amortised. All such software was fully amortised bythe end of 2005. THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL REVIEW (continued) Earnings and dividends Basic earnings per ordinary share increased by 15%, from 169.4p to 194.7p.Earnings per ordinary share adjusted for purchased intangibles amortisation,integration costs and net gain on sale of strategic investments and subsidiariesincreased by 14%, from 175.9p to 200.0p. A final dividend of 66.4p per ordinary share is recommended, giving a totaldividend for the year of 90.6p, an increase of 25%. If approved, the finaldividend will be paid on 8 June 2007 to shareholders registered on 9 March 2007.The total dividend is covered 2.2 times by earnings before purchased intangiblesamortisation, integration costs and net gain on sale of strategic investmentsand subsidiaries. Balance sheet Total assets were £871.4 billion at 31 December 2006, 12% higher than totalassets of £776.8 billion at 31 December 2005. Lending to customers, excluding repurchase agreements and stock borrowing("reverse repos"), increased in 2006 by 10% or £35.7 billion to £404.0 billion.Customer deposits, excluding repurchase agreements and stock lending ("repos"),grew by 9% or £26.1 billion to £320.2 billion. Capital ratios at 31 December 2006 were 7.5% (Tier 1) and 11.7% (Total). Profitability The adjusted after-tax return on ordinary equity, which is based on profitattributable to ordinary shareholders before purchased intangibles amortisation,integration costs and net gain on sale of strategic investments andsubsidiaries, and average ordinary equity, was 19.0% compared with 18.2% in2005. RESTATEMENTS Divisional results for 2005 have been restated to reflect transfers ofbusinesses between divisions in 2006. These changes do not affect the Group'sresults. A divisional analysis of these restatements is set out on page 51. The cash flow statement for 2005 has been restated (see page 52). THE ROYAL BANK OF SCOTLAND GROUP plc DESCRIPTION OF BUSINESS Corporate Markets is focused on the provision of debt and risk managementservices to medium and large businesses and financial institutions in the UK andaround the world. Corporate Banking and Financial Markets was renamed CorporateMarkets on 1 January 2006 when we reorganised our activities into twobusinesses, Global Banking & Markets and UK Corporate Banking, in order toenhance our focus on the distinct needs of these two customer segments. Global Banking & Markets is a leading banking partner to major corporations andfinancial institutions around the world, providing an extensive range of debtfinancing, risk management and investment services to its customers. UK Corporate Banking is the largest provider of banking, finance and riskmanagement services to UK corporate customers. Through its network ofrelationship managers across the country it distributes the full range ofCorporate Markets' products and services to companies. Retail Markets was established in June 2005 to lead co-ordination and deliveryof our multi-brand retail strategy across our product range, and comprisesRetail and Wealth Management. Retail comprises both The Royal Bank of Scotland and NatWest retail brands. Itoffers a full range of banking products and related financial services to thepersonal, premium and small business markets (SMEs) through the largest networkof branches and ATMs in the UK, as well as through telephone and internetbanking. Retail is the UK market leader in small business banking. Retail issues a comprehensive range of credit and charge cards and otherfinancial products through The Royal Bank of Scotland, NatWest and other brands,including MINT, First Active UK and Tesco Personal Finance. It is the leadingmerchant acquirer in Europe and ranks 4th globally. Wealth Management provides private banking and investment services to its globalclients through Coutts Group, Adam & Company, The Royal Bank of ScotlandInternational and NatWest Offshore. Ulster Bank, including First Active, provides a comprehensive range of retailand wholesale financial services in the Republic of Ireland and NorthernIreland. Retail Banking has a network of branches throughout Ireland andoperates in the personal, commercial and wealth management sectors. CorporateMarkets provides a wide range of services in the corporate and institutionalmarkets. Citizens is engaged in retail and corporate banking activities through itsbranch network in 13 states in the United States and through non-branch officesin other states. Citizens was ranked the 8th largest commercial bankingorganisation in the US based on deposits as at 30 September 2006. CitizensFinancial Group includes the seven Citizens Banks, Charter One, RBS NationalBank, our US credit card business, RBS Lynk, our US merchant acquiring business,and Kroger Personal Finance, our credit card joint venture with the secondlargest US supermarket group. RBS Insurance sells and underwrites retail, SME and wholesale insurance over thetelephone and internet, as well as through brokers and partnerships. The RetailDivisions of Direct Line, Churchill and Privilege sell general insuranceproducts direct to the customer. Through its International Division, RBSInsurance sells general insurance, mainly motor, in Spain, Germany and Italy.The Intermediary and Broker Division sells general insurance products throughits network of 2,500 independent brokers. THE ROYAL BANK OF SCOTLAND GROUP plc DESCRIPTION OF BUSINESS (continued) Manufacturing supports the customer-facing businesses and provides operationaltechnology, customer support in telephony, account management, lending and moneytransmission, global purchasing, property and other services. Manufacturing drives efficiencies and supports income growth across multiplebrands and channels by using a single, scalable platform and common processeswherever possible. It also leverages the Group's purchasing power and has becomethe centre of excellence for managing large-scale and complex change. The expenditure incurred by Manufacturing relates to costs principally inrespect of the Group's banking and insurance operations in the UK and Ireland.These costs reflect activities that are shared between the variouscustomer-facing divisions and consequently cannot be directly attributed toindividual divisions. Instead, the Group monitors and controls each of itscustomer-facing divisions on revenue generation and direct costs whilst inManufacturing such control is exercised through appropriate efficiency measuresand targets. For financial reporting purposes the Manufacturing costs have beenallocated to the relevant customer-facing divisions on a basis managementconsiders to be reasonable. The Centre comprises group and corporate functions, such as capital raising,finance, risk management, legal, communications and human resources. The Centremanages the Group's capital requirements and Group-wide regulatory projects andprovides services to the operating divisions. THE ROYAL BANK OF SCOTLAND GROUP plc DIVISIONAL PERFORMANCE The profit before amortisation of purchased intangible assets, integration costsand net gain on sale of strategic investments and subsidiaries and afterallocation of Manufacturing costs where appropriate, of each division isdetailed below, and is described as 'operating profit' in the divisionalanalyses that follow. The allocations of Manufacturing costs are shownseparately in the results for each division. 2006 2005 Increase £m £m % Corporate Markets - Global Banking & Markets 3,790 3,041 25 - UK Corporate Banking 1,762 1,572 12 Total Corporate Markets 5,552 4,613 20 Retail Markets - Retail 2,299 2,264 2 - Wealth Management 354 272 30 Total Retail Markets 2,653 2,536 5 Ulster Bank 388 323 20 Citizens 1,582 1,575 - RBS Insurance 750 728 3 Manufacturing - - - Central items (1,511) (1,524) 1 _______ _______ _______ Group operating profit 9,414 8,251 14 _______ _______ _______ Risk-weighted assets of each division were as follows: 2006 2005 £bn £bn Corporate Markets - Global Banking & Markets 138.1 120.0 - UK Corporate Banking 93.1 82.6 Total Corporate Markets 231.2 202.6 Retail Markets - Retail 71.9 74.5 - Wealth Management 6.5 6.1 Total Retail Markets 78.4 80.6 Ulster Bank 28.3 22.4 Citizens 57.6 61.8 Other 4.8 3.6 _______ _______ 400.3 371.0 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE MARKETS 2006 2005 £m £m Net interest income from banking activities 3,798 3,439Non-interest income 6,481 5,321 _______ _______Total income 10,279 8,760 _______ _______Direct expenses - staff costs 2,537 2,006 - other 610 521 - operating lease depreciation 736 733 _______ _______ 3,883 3,260 _______ _______Contribution before impairment losses 6,396 5,500Impairment losses 274 335 _______ _______Contribution 6,122 5,165Allocation of Manufacturing costs 570 552 _______ _______Operating profit 5,552 4,613 _______ _______ £bn £bn Total assets* 472.3 409.2Loans and advances to customers - gross* - banking book 181.1 158.7 - trading book 15.4 11.8Rental assets 13.9 13.2Customer deposits* 132.5 111.1Risk-weighted assets 231.2 202.6 _______ _______ * excluding reverse repos and repos Corporate Markets achieved a strong performance in 2006, with excellent resultsacross many of our businesses. Total income, after deducting operating leasedepreciation, rose by 19% to £9,543 million with contribution growing by 19% to£6,122 million. Operating profit rose by 20% to £5,552 million. Average loans and advances grew by 19% and average customer deposits by 17%. Ourportfolio remains well diversified by counterparty, sector and geography andbalanced in credit distribution. Assets grew strongly outside the UK,particularly in Western Europe. Overall credit conditions remained benign, andimpairment losses represented 0.14% of loans and advances to customers. Average risk-weighted assets rose by 12%, with disciplined capital allocationand increasing returns. The ratio of operating profit to average risk-weightedassets improved from 2.3% to 2.5%. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE MARKETS - GLOBAL BANKING & MARKETS 2006 2005 £m £m Net interest income from banking activities 1,629 1,486 _______ _______Net fees and commissions receivable 998 790Trading activities 2,242 1,949Income from rental assets (net of related funding costs) 677 622Other operating income (net of related funding costs) 1,280 744 _______ _______Non-interest income 5,197 4,105 _______ _______Total income 6,826 5,591 _______ _______Direct expenses - staff costs 1,975 1,518 - other 427 357 - operating lease depreciation 406 398 _______ _______ 2,808 2,273 _______ _______Contribution before impairment losses 4,018 3,318Impairment losses 85 139 _______ _______Contribution 3,933 3,179Allocation of Manufacturing costs 143 138 _______ _______Operating profit 3,790 3,041 _______ _______ £bn £bn Total assets* 383.6 330.9Loans and advances to customers - gross* - banking book 94.3 82.0 - trading book 15.4 11.8Rental assets 12.2 11.9Customer deposits* 54.1 44.7Risk-weighted assets 138.1 120.0 _______ _______ * excluding reverse repos and repos Global Banking & Markets performed strongly in 2006, delivering excellent growthin income while continuing to build our strong international franchise. Totalincome rose by 22% to £6,826 million, contribution by 24% to £3,933 million andoperating profit by 25% to £3,790 million. GBM is a leading provider of debt financing and risk management solutionscovering the origination, structuring and distribution of a wide range ofassets. In 2006 we arranged over $450 billion of financing for our corporate andinstitutional customers, up 17% from 2005. We ranked first among managers ofglobal asset-backed and mortgage-backed securitisations and fourth amongmanagers of global syndicated loans, while among managers of international bondswe moved from thirteenth place to eighth. These league table positionsdemonstrate our success in broadening and deepening our franchise. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE MARKETS - GLOBAL BANKING & MARKETS (continued) In 2006 we have further invested in extending our product capabilities and ourworldwide reach. Income in North America rose by 18% in local currency, despiteflat revenues in our US residential mortgage-backed securities business, as theinvestments we have made in our debt capital markets, loan markets, rates andcredit trading businesses have borne fruit. In Europe, income increased by 26% in local currency as a result of goodperformances in Germany, France, Spain, Italy and the Nordic region. Weparticipated in many of the largest cross-border financings in 2006.Asia-Pacific, too, showed marked progress, with income increasing by 35% in USdollar terms. We have established a promising presence in the region, buildingour product capability and client relationships. Net interest income from banking activities rose by 10% to £1,629 million,representing 24% of total GBM income. Average loans and advances to customersincreased by 20% as we further expanded our customer base outside the UK. Net fee income rose by 26% to £998 million, reflecting our top tier position inarranging, structuring and distributing large scale private and publicfinancings. We have increased our customer penetration, and in 2006 were thethird most active underwriter of bonds for European, including UK, corporates. Income from trading activities continued to grow steadily, rising by 15% to£2,242 million as a result of good volumes of debt and risk management productsprovided to our customers. A strong performance in credit products wassupplemented by growth in our broadening product range, including equityderivatives and structured credit, partially offset by the impact of a slower USmortgage-backed securities market. Average trading book value at risk remainedmodest at £14.2 million. Our rental and other asset-based activities have achieved continuing success inoriginating, structuring, financing and managing physical assets such asaircraft, trains, ships and real estate for our customers. This success hasdriven good growth in net income from rental assets, which increased (net ofrelated funding costs and operating lease depreciation) to £271 million from£224 million. These businesses also generate value through the ownership of a portfolio ofassets which we manage actively. Good results from these activities, as well asfrom principal investments where we work with our corporate customers and withfinancial sponsors, leveraging our financial capability to structure andparticipate in a wide variety of investment opportunities, were reflected inother operating income, which increased to £1,280 million (net of relatedfunding costs) from £744 million in 2005. We have maintained good cost discipline while continuing to invest in extendingour geographical footprint, our infrastructure and our product range. Net ofoperating lease depreciation our cost:income ratio was 39.6%. Total expensesgrew by 22% to £2,951 million. Variable performance-related compensationincreased and now accounts for 41% of total costs. Portfolio risk remained stable and the corporate credit environment remainedbenign. Impairment losses fell to £85 million, with the distribution ofimpairments over the course of the year reflecting recoveries in the first half. Average risk-weighted assets grew by 11% and the ratio of operating profit toaverage risk-weighted assets improved from 2.6% to 2.9%. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE MARKETS - UK CORPORATE BANKING 2006 2005 £m £m Net interest income from banking activities 2,169 1,953Non-interest income 1,284 1,216 _______ _______ Total income 3,453 3,169 _______ _______Direct expenses - staff costs 562 488 - other 183 164 - operating lease depreciation 330 335 _______ _______ 1,075 987 _______ _______Contribution before impairment losses 2,378 2,182Impairment losses 189 196 _______ _______Contribution 2,189 1,986Allocation of Manufacturing costs 427 414 _______ _______Operating profit 1,762 1,572 _______ _______ £bn £bn Total assets* 88.7 78.3Loans and advances to customers - gross* 86.8 76.7Customer deposits* 78.4 66.4Risk-weighted assets 93.1 82.6 _______ _______ * excluding reverse repos and repos UK Corporate Banking had a successful year across all its businesses,strengthening its market leading positions in corporate and commercial bankingand building good momentum in the provision of a broadening range of financingand risk management services to its customer base. As a result UKCB increasedits total income by 9% to £3,453 million and contribution by 10% to £2,189million. Operating profit rose by 12% to £1,762 million. Net interest income from banking activities grew by 11% to £2,169 million. Weachieved an 18% increase in average loans and advances to customers, with goodgrowth across all customer segments. We increased average customer deposits by21%, demonstrating the attractiveness of our range of deposit products forcommercial and corporate customers. Changes in the deposit mix and somenarrowing of lending margins, principally in the first half of the year, led toa modest decline in UKCB's net interest margin. Non-interest income rose by 6% to £1,284 million, reflecting good growth inorigination fees and improved distribution of trade and invoice finance andinterest rate and foreign exchange products. Total expenses rose by 7% to £1,502 million. The increase in direct expenses,excluding operating lease depreciation, reflected the recruitment of additionalrelationship managers and other staff to strengthen the quality of serviceprovided to our expanding customer base, as well as further investment in ourelectronic banking proposition. Impairment losses were 4% lower than in 2005 at £189 million. Portfolio riskremained stable and the credit environment benign. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS 2006 2005 £m £m Net interest income 4,711 4,510Non-interest income 3,926 3,746 _______ _______Total income 8,637 8,256 _______ _______Direct expenses - staff costs 1,648 1,565 - other 793 829 _______ _______ 2,441 2,394 _______ _______Insurance net claims 488 486 _______ _______Contribution before impairment losses 5,708 5,376Impairment losses 1,344 1,185 _______ _______Contribution 4,364 4,191Allocation of Manufacturing costs 1,711 1,655 _______ _______Operating profit 2,653 2,536 _______ _______ £bn £bn Total banking assets 119.9 114.4Loans and advances to customers - gross - mortgages 69.8 64.6 - personal 21.0 21.5 - cards 9.1 9.6 - business 18.1 16.7Customer deposits* 115.6 105.3Investment management assets - excluding deposits 34.9 31.4Risk-weighted assets 78.4 80.6 _______ _______ * customer deposits exclude bancassurance. Retail Markets achieved a good performance in 2006, with total income rising by5% to £8,637 million. Contribution before impairment losses increased by 6% to£5,708 million, contribution by 4% to £4,364 million and operating profit by 5%to £2,653 million. Responding to evolving demand from its customers, Retail Markets has added toits capabilities in deposits and investment products and has been rewarded bystrong growth in these areas. Lending growth has been centred on high qualityresidential mortgages and small business loans, while personal unsecured lendingwas flat, as we limited our activity in the direct loans market and customerdemand remained subdued. We have used our full range of brands to addressmarkets flexibly, focusing on the most appropriate products and channels in thelight of prevailing market conditions. Expenses have been kept under tightcontrol, with additional investment in our business offset by efficiency gainsand the benefits of combining Retail Banking and Direct Channels into a unifiedbusiness. Customer recruitment has been centred on our branch channels, where we haveachieved good growth in savings accounts and are joint market leader forpersonal current accounts. Our commitment to customer service, through thelargest network of branches and ATMs in the UK, is reflected in ourindustry-leading customer satisfaction ratings. Average risk-weighted assets fell by 1%, reflecting a change in business mixtoward mortgage lending as well as careful balance sheet management, includingincreased use of securitisations. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - RETAIL 2006 2005 £m £m Net interest income 4,211 4,068 Non-interest income 3,492 3,374 _______ _______ Total income 7,703 7,442 _______ _______ Direct expenses - staff costs 1,349 1,307 - other 656 696 _______ _______ 2,005 2,003 _______ _______ Insurance net claims 488 486 _______ _______ Contribution before impairment losses 5,210 4,953 Impairment losses 1,343 1,172 _______ _______ Contribution 3,867 3,781 Allocation of Manufacturing costs 1,568 1,517 _______ _______ Operating profit 2,299 2,264 _______ _______ £bn £bn Total banking assets 108.8 104.3 Loans and advances to customers - gross - mortgages 65.6 61.1 - personal 17.7 17.7 - cards 9.0 9.5 - business 16.9 16.3 Customer deposits* 87.1 79.8 Risk-weighted assets 71.9 74.5 _______ _______ * customer deposits exclude bancassurance. Retail has delivered a good performance in 2006, achieving 4% growth in totalincome to £7,703 million. Contribution before impairment losses was up by 5% to£5,210 million, contribution by 2% to £3,867 million, and operating profit by 2%to £2,299 million. We have advanced in personal banking, with good growth in savings and investmentproducts combined with effective cost control and improvements in the quality ofour lending book. Credit card recruitment and unsecured personal lendingcontinues to be focused on lower risk segments, with reduced emphasis onacquisition through direct marketing. We have continued to expand our customer franchise, growing our personal currentaccount base by 232,000 in 2006 as a result of our sustained focus on qualityand customer service. We continue to have the highest share of customersswitching current accounts from other banks, and are now joint leader in thepersonal current account market. RBS is first and NatWest is joint second amongmajor high street banks in Great Britain for the percentage of main currentaccount customers that are "extremely satisfied" overall. Net interest income increased by 4% to £4,211 million, with faster growth indeposits helping to mitigate lower unsecured lending volumes. Net interestmargin improved slightly in the second half. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - RETAIL (continued) Average customer deposit balances were 9% higher, driven by personal savingsbalances up 12% and accelerating growth in business deposits, up 7%. Averagemortgage lending was up 8%, with stronger volumes in the second half leading toa 7% market share of net lending in that period. Our offset mortgage productcontinues to perform well. For the year as a whole, average personal unsecuredand credit card lending was flat, reflecting the slower UK consumer demand andour concentration on quality business with existing customers. In the secondhalf we further reduced our activity in the direct loans market, but unsecuredbalances from our RBS and NatWest customers are broadly in line with the firsthalf. Average business lending rose 5%, reflecting our cautious credit stance. Non-interest income rose by 4% to £3,492 million. There was strong growth in ourinvestments and private banking businesses as well as business banking fees,mitigating the slowdown in personal loan related insurance income. Despite investments for future growth, total expenses rose by just 2%, to £3,573million, whilst direct expenses were held flat at £2,005 million. Staff costsincreased by 3% to £1,349 million, reflecting sustained investment in customerservice and the expansion of our bancassurance and investment businesses. Wecontinue to make efficiency gains as a result of the consolidation of our retailbusinesses. Other costs, such as marketing expenses, fell by 6% to £656 million,also benefiting from consolidation. Impairment losses increased by 15% to £1,343 million, but were lower in thesecond half of the year than in the first. The year-on-year change in impairmentlosses slowed from 18% in the first half to 11% in the second half. Credit cardarrears have stabilised, while the rate of increase in arrears on unsecuredpersonal loans continued to slow. Mortgage arrears remain very low - the averageloan-to-value ratio of Retail's mortgages was 46% overall and 64% on newmortgages written in 2006. Small business credit quality remains steady. Bancassurance Bancassurance has had an excellent year with sales increasing by 56% to £267million annual premium equivalent. The growth reflects the continued increase infocus on the recruitment of Financial Planning Managers, up 25% and productivitylevels, up 43%. Increased sales of collective investments on the back of asuccessful ISA season and strong individual pensions growth, boosted by A-Day,helped underpin the outturn. Sales of guaranteed bonds were also particularlystrong, and helped support a new business margin which improved significantlyover the period. The product proposition was strengthened across all lines.Latest market share data shows an increase from 6.6% to 9.0%. On a UK GAAPembedded value basis for life assurance, investment contracts and open endedinvestment companies, adjusted for investment market volatility, pre tax profitwas £78 million compared with £42 million in 2005. Net claims, which include maturities, surrenders and liabilities topolicyholders, were stable at £488 million compared with £486 million in 2005. Retail Banking/Direct Channels In the second half of 2006 Retail Banking and Direct Channels were combined toform Retail. On the previous basis, Retail Banking's income rose by 5% to £5,651million and contribution by 5% to £3,046 million. Direct Channels' income wasflat and contribution declined by 6% to £821 million. To facilitate comparisonwith previously published information, further details are set out on page 52. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - WEALTH MANAGEMENT 2006 2005 £m £m Net interest income 500 442Non-interest income 434 372 _______ _______Total income 934 814 _______ _______Direct expenses - staff costs 299 258 - other 137 133 _______ _______ 436 391 _______ _______Contribution before impairment losses 498 423Impairment losses 1 13 _______ _______Contribution 497 410Allocation of Manufacturing costs 143 138 _______ _______Operating profit 354 272 _______ _______ £bn £bn Loans and advances to customers - gross 8.8 7.8Investment management assets - excluding deposits 28.2 25.4Customer deposits 28.5 25.5Risk-weighted assets 6.5 6.1 _______ _______ Wealth Management delivered strong growth, with total income rising by 15% to£934 million. Contribution grew by 21% to £497 million and operating profit by30% to £354 million. Wealth Management's offering of private banking and investment servicesdelivered robust organic income growth in 2006. Our continuing investment inCoutts UK, Adam & Company and our offshore businesses helped us to achieve anoverall increase in client numbers of 5%. Coutts UK customers rose by 9%.Outside the UK, Coutts International moved its headquarters to Singapore and wassuccessful in the Asia-Pacific region in recruiting additional experiencedprivate bankers. We grew customer numbers in the region by 13% and income by24%. Growth in banking volumes contributed to a 13% rise in net interest income to£500 million. Average loans and advances to customers rose by 14% and averagedeposits by 10%, with net interest margin maintained at close to 2005 levels. Non-interest income grew by 17% to £434 million, reflecting higher investmentmanagement fees and performance fees, as well as strong growth in new businessvolumes, particularly in the UK. Assets under management rose by 11%, to £28.2billion at the year-end. Total expenses rose by 9% to £579 million. In a highly competitive recruitmentmarket, headcount was successfully increased by 7%, reflecting our continuedinvestment in the UK and further expansion in Asia. Impairment losses returned to historic levels, following a number of specificitems in prior years.THE ROYAL BANK OF SCOTLAND GROUP plc ULSTER BANK 2006 2005 £m £m Net interest income 773 655 Non-interest income 215 203 _______ _______ Total income 988 858 _______ _______ Direct expenses - staff costs 224 191 - other 91 79 _______ _______ 315 270 _______ _______ Contribution before impairment losses 673 588 Impairment losses 71 58 _______ _______ Contribution 602 530 Allocation of Manufacturing costs 214 207 _______ _______ Operating profit 388 323 _______ _______ Average exchange rate - •/£ 1.467 1.463 _______ _______ £bn £bn Total assets 43.1 35.9 Loans and advances to customers - gross - mortgages 15.0 13.2 - corporate 19.6 13.7 - other 2.1 1.3 Customer deposits 18.0 15.9 Risk-weighted assets 28.3 22.4 Spot exchange rate - •/£ 1.490 1.457 _______ _______ Ulster Bank made strong progress in both personal and corporate banking in theRepublic of Ireland and in Northern Ireland, with total income rising by 15% to£988 million. Contribution increased by 14% to £602 million and operating profitby 20% to £388 million. Net interest income increased by 18% to £773 million, reflecting good growth inboth loans and customer deposits. Average loans and advances to customersincreased by 28%, and average customer deposits by 15%. A principal focus during2006 was the expansion of our corporate banking franchise, and we succeeded inincreasing corporate customer numbers by 7% in the Republic of Ireland and by 4%in Northern Ireland. This contributed to strong growth in both corporatelending, where average loans and advances increased by 32%, and deposits, withUlster Bank winning a share of new business current accounts well in excess ofits historic market share, particularly in the Republic of Ireland. Averagemortgage balances grew by 26%, although the rate of growth was slower in thesecond half when there was some evidence of a more subdued pace of expansion inthe mortgage market. The change in business mix resulting from strong growth incorporate lending and mortgages, together with some competitive pressures, ledto a modest reduction in net interest margin in the first half, with marginstabilising in the second half. Non-interest income rose by 6% to £215 million. Ulster Bank achieved good growthin fees from credit cards and ATMs as well as in sales of investment products,which was only partially offset by the introduction of Ulster Bank's new rangeof current accounts, which are free of transaction fees. THE ROYAL BANK OF SCOTLAND GROUP plc ULSTER BANK (continued) Total expenses increased by 11% to £529 million, as we continued our investmentprogramme to support the future growth of the business. We recruited additionalcustomer-facing staff, particularly in corporate banking, opened three newbusiness centres and continued with our branch improvement programme. By the endof 2006, 70% of Ulster Bank branches had been upgraded. During 2006 we successfully completed the migration of our core systems to theRBS Group manufacturing model and, as a result, we now have access to thecomplete RBS product range. The credit environment remains benign. Impairment losses rose by £13 million to£71 million, consistent with growth in lending. THE ROYAL BANK OF SCOTLAND GROUP plc CITIZENS 2006 2005 2006 2005 £m £m $m $m Net interest income 2,085 2,122 3,844 3,861Non-interest income 1,232 1,142 2,271 2,079 _______ _______ _______ _______Total income 3,317 3,264 6,115 5,940 _______ _______ _______ _______Direct expenses - staff costs 803 819 1,480 1,490 - other 751 739 1,385 1,344 _______ _______ _______ _______ 1,554 1,558 2,865 2,834 _______ _______ _______ _______Contribution before impairment 1,763 1,706 3,250 3,106lossesImpairment losses 181 131 333 239 _______ _______ _______ _______Operating profit 1,582 1,575 2,917 2,867 _______ _______ _______ _______ Average exchange rate - US$/£ 1.844 1.820 _______ _______ $bn $bn Total assets 162.2 158.8Loans and advances to customers - gross - mortgages 18.6 18.8 - home equity 34.5 31.8 - other consumer 23.2 24.8 - corporate and commercial 32.7 29.2Customer deposits 106.8 106.3Risk-weighted assets 113.1 106.4 Spot exchange rate - US$/£ 1.965 1.721 _______ _______ Citizens grew its total income by 3% to $6,115 million and its operating profitby 2% to $2,917 million. In sterling terms, Citizens total income increased by2% to £3,317 million, while its operating profit rose slightly to £1,582million. We have achieved good growth in lending volumes, with average loans and advancesto customers increasing by 10%. In business lending, average loans excludingfinance leases increased by 15%, reflecting Citizens' success in adding newmid-corporate customers and increasing its total number of business customers by4% to 467,000. In personal lending, Citizens increased average mortgage and homeequity lending by 14%, though the mortgage market slowed in the second half.Average credit card receivables, while still relatively small, increased by 19%. We increased average customer deposits by 4%, although spot balances at the endof 2006 were little changed from the end of 2005. As interest rates rose furtherand the US yield curve inverted, we saw migration from low-cost checking andliquid savings to higher-cost term and time deposits. This migration is aprincipal reason for the decline in Citizens' net interest margin to 2.72% in2006, compared with 3.00% in 2005. The decline slowed over the course of theyear, with net interest margin in the second half 6 basis points lower than inthe first. Lower net interest margins more than offset the benefit of higheraverage loans and deposits, leaving net interest income marginally lower at$3,844 million. THE ROYAL BANK OF SCOTLAND GROUP plc CITIZENS (continued) Non-interest income rose by 9% to $2,271 million. Business and corporate feesrose strongly, with good results especially in foreign exchange, interest ratederivatives and cash management benefiting from increased activity withCorporate Markets. There was good progress in debit cards, where issuance hasbeen boosted by the launch in September of our "Everyday Rewards" programme.Citizens has also become the US's leading issuer of Paypass(TM) contactlessdebit cards, with 3.65 million cards issued. Our credit card customers increasedby 20%, whilst RBS Lynk, our merchant acquiring business, also achievedsignificant growth, processing 40% more transactions than it did in 2005 andexpanding its merchant base by 11%. Tight cost control and a 5% reduction in headcount limited the increase in totalexpenses to only 1%, despite continued investment in growth opportunities suchas mid-corporate banking, contactless debit cards, merchant acquiring andsupermarket banking. Citizens continued to expand its branch network. Our partnership with Stop &Shop Supermarkets has helped us to expand our supermarket banking franchise intoNew York, while in October we announced the purchase of GreatBanc, Inc.,strengthening our position in the Chicago market and making us the 4th largestbank in the Chicago area, based on deposits. The acquisition was completed inFebruary 2007. Impairment losses totalled $333 million, representing just 0.31% of loans andadvances to customers and illustrating the prime quality of our portfolio.Underlying strong credit quality remained unchanged as our portfolio grew, withrisk elements in lending and problem loans representing 0.32% of loans andadvances, the same level as in 2005. Our consumer lending is to prime customerswith average FICO scores on our portfolios, including home equity lines ofcredit, in excess of 700, and 95% of lending is secured. THE ROYAL BANK OF SCOTLAND GROUP plc RBS INSURANCE 2006 2005 £m £m Earned premiums 5,713 5,641Reinsurers' share (212) (246) _______ _______Insurance premium income 5,501 5,395Net fees and commissions (486) (449)Other income 664 543 _______ _______Total income 5,679 5,489 _______ _______Direct expenses - staff costs 319 316 - other 426 411 _______ _______ 745 727 _______ _______Gross claims 4,030 3,903Reinsurers' share (60) (76) _______ _______Net claims 3,970 3,827 _______ _______Contribution 964 935Allocation of Manufacturing costs 214 207 _______ _______Operating profit 750 728 _______ _______ In-force policies (thousands) - Core motor: UK 7,490 7,439 - Core motor: Continental Europe 2,114 1,862 - Core non-motor (including home, rescue, SMEs, pet, 4,920 4,799 HR24): UK - Partnerships (including motor, home, rescue, SMEs, 7,267 7,559 pet, HR24) General insurance reserves - total (£m) 8,068 7,776 _______ _______ RBS Insurance increased total income by 3% to £5,679 million, with contributionalso rising by 3% to £964 million and operating profit by the same percentage to£750 million. We achieved good overall policy growth of 3% in our core businesses includingexcellent progress in our European businesses. Our joint venture in Spain grewpolicy numbers by 14% to 1.34 million. In the UK we have grown our core motor book by 1% whilst focusing on moreprofitable customers acquired through our direct brands, with good resultsachieved through the internet channel, which accounted for half of all newown-brand motor policies last year. We implemented price rises in motor insurance in the second half of the year,and average motor premium rates across the market increased in the fourthquarter. Higher premium rates will, however, take time to feed through intoincome, and competition on prices remains strong. Our core non-motor personal lines policies grew by 3%, with particularly goodprogress in Tesco Personal Finance. SME has also performed well with policiessold through our intermediary business growing by 10%. THE ROYAL BANK OF SCOTLAND GROUP plc RBS INSURANCE (continued) However, some of our partnership books continue to age and we did not renew anumber of other partnerships. As a result, the number of partnership policies inforce fell by 8% in motor and by 9% in home. Insurance premium income was up 2% to £5,501 million, reflecting a modestoverall increase in the total number of in-force policies. Net fees and commissions payable increased by 8% to £486 million, whilst otherincome rose by 22% to £664 million, reflecting increased investment income. Total expenses rose by 3% to £959 million. Good cost discipline held directexpenses to £745 million, up 2%. Staff costs rose by 1%, reflecting improvedefficiency despite continued investment in service standards. A 4% rise innon-staff costs included increased marketing expenditure to support growth incontinental Europe. Net claims rose by 4% to £3,970 million. The environment for home claimsremained benign, whilst underlying increases in average motor claims costs werepartially offset by purchasing efficiencies and improvements in risk management. The UK combined operating ratio for 2006, including Manufacturing costs, was94.6%, compared with 93.4% in 2005, reflecting a higher loss ratio and thediscontinuation of some partnerships. THE ROYAL BANK OF SCOTLAND GROUP plc MANUFACTURING 2006 2005 £m £m Staff costs 763 725Other costs 2,089 2,033 _______ _______Total Manufacturing costs 2,852 2,758Allocated to divisions (2,852) (2,758) _______ _______ - - _______ _______ Analysis of Manufacturing costs:Group Technology 966 953Group Property 910 834Customer Support and other operations 976 971 _______ _______Total Manufacturing costs 2,852 2,758 _______ _______ Manufacturing costs increased by 3% to £2,852 million, benefiting frominvestment in efficiency programmes while supporting business growth andmaintaining high levels of customer satisfaction. Staff costs rose by 5%, withincreases in Group Technology partially offset by reduced headcount inOperations. Group Technology costs were 1% higher at £966 million, as we achievedsignificant improvements in productivity balanced by investment in softwaredevelopment. In the biggest integration project undertaken since NatWest, webrought Ulster Bank onto the RBS technology platform. Group Property costs increased by 9% to £910 million, reflecting thecontinuation of our branch improvement programme and ongoing investment in majoroperational centres, including Manchester, Birmingham and Glasgow. Customer Support and other operations held costs virtually flat at £976 millionand, like Group Technology, achieved significant improvements in productivity.At the same time we maintained our focus on service quality, and our UK-basedtelephony centres continued to record market-leading customer satisfactionscores. Our investment in 'lean manufacturing' approaches across our operationalcentres is expected to deliver further improvements in efficiency. THE ROYAL BANK OF SCOTLAND GROUP plc CENTRAL ITEMS 2006 2005 £m £m Funding costs 780 801Departmental and corporate costs 588 586 _______ _______ 1,368 1,387Allocation of Manufacturing costs 143 137 _______ _______Total central items 1,511 1,524 _______ _______ Total central items decreased by 1% to £1,511 million. Central funding costs were 3% lower at £780 million, largely reflecting a yearon year reduction of £41 million in IFRS-related volatility. The Group hedgesits economic risks, and volatility attributable to derivatives in economichedges that do not meet the criteria in IFRS for hedge accounting is transferredto the Group's central treasury function. Departmental and corporate costs at £588 million were similar to 2005. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE BALANCE SHEET 2006 2005 Average Average balance Interest Rate balance Interest Rate £m £m % £m £m %AssetsTreasury and other 2,129 93 4.37 3,223 140 4.34eligible bills Loans and advances 23,290 979 4.20 24,803 957 3.86to banks Loans and advances 360,562 22,181 6.15 317,585 18,717 5.89to customers Debt securities 35,155 1,713 4.87 38,079 1,691 4.44 _______ ______ _______ ______ Interest-earning 421,136 24,966 5.93 383,690 21,505 5.60assets - bankingbusiness ______ ______Trading business 202,408 172,990Non-interest-earning 210,358 180,368assets _______ _______Total assets 833,902 737,048 _______ _______LiabilitiesDeposits by banks 64,811 2,621 4.04 62,125 2,083 3.35Customer accounts 254,678 8,899 3.49 228,416 6,821 2.99Debt securities in 81,161 3,746 4.62 72,293 2,704 3.74issueSubordinated 26,647 1,391 5.22 26,590 1,276 4.80liabilitiesInternal funding of (49,405) (2,100) 4.25 (39,814) (1,164) 2.92trading business _______ ______ _______ ______Interest-bearing 377,892 14,557 3.85 349,610 11,720 3.35liabilities -banking business ______ ______Trading business 204,810 172,744Non-interest-bearingliabilities - demand deposits 29,577 28,665 - other 184,747 153,081 liabilitiesShareholders' equity 36,876 32,948 _______ _______Total liabilities 833,902 737,048 _______ _______ Notes: 1. Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. 2. Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance long-term assets and liabilities attributable to policyholders, in view of their distinct nature. As a result, interest income has been adjusted by £63 million (2005 - £59 million). 3. Changes in the fair value of interest-bearing financial instruments designated as at fair value through profit or loss are recorded in other operating income in the consolidated statement of income. In the average balance sheet shown above, interest includes interest income and interest expense related to these instruments of £215 million (2005 - £115 million) and £465 million (2005 - £307 million) respectively and the average balances have been adjusted accordingly. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS 2006 2005Average rate % % The Group's base rate 4.64 4.65 London inter-bank three month offered rates: - Sterling 4.85 4.76 - Eurodollar 5.20 3.56 - Euro 3.08 2.18 2006 2005Yields, spreads and margins of the banking business: % % Gross yield on interest-earning assets of banking business 5.93 5.60Cost of interest-bearing liabilities of banking business (3.85) (3.35) _______ _______Interest spread of banking business 2.08 2.25Benefit from interest-free funds 0.39 0.30 _______ _______Net interest margin of banking business 2.47 2.55 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 In the income statement below, net gain on sale of strategic investments andsubsidiaries, amortisation of purchased intangible assets and integration costsare included in other non-interest income and operating expenses as appropriate. 2006 2005 £m £m Interest receivable 24,688 21,331Interest payable 14,092 11,413 _______ _______Net interest income 10,596 9,918 _______ _______Fees and commissions receivable 7,116 6,750Fees and commissions payable (1,922) (1,841)Income from trading activities 2,675 2,343Other operating income (excluding insurance premium income) 3,564 2,953Insurance premium income 6,243 6,076Reinsurers' share (270) (297) _______ _______Non-interest income 17,406 15,984 _______ _______Total income 28,002 25,902 _______ _______Staff costs 6,723 5,992Premises and equipment 1,421 1,313Other administrative expenses 2,658 2,816Depreciation and amortisation 1,678 1,825 _______ _______Operating expenses* 12,480 11,946 _______ _______Profit before other operating charges and impairment losses 15,522 13,956Insurance claims 4,550 4,413Reinsurers' share (92) (100)Impairment losses 1,878 1,707 _______ _______Operating profit before tax 9,186 7,936Tax 2,689 2,378 _______ _______Profit for the year 6,497 5,558Minority interests 104 57Preference dividends 191 109 _______ _______Profit attributable to ordinary shareholders 6,202 5,392 _______ _______ Basic earnings per ordinary share (Note 4) 194.7p 169.4p _______ _______ Diluted earnings per ordinary share (Note 4) 193.2p 168.3p _______ _______ Adjusted earnings per ordinary share (Note 4) 200.0p 175.9p _______ _______ * Operating expenses include: £m £mIntegration costs:Administrative expenses 118 318Depreciation and amortisation 16 140 _______ _______ 134 458Amortisation of purchased intangible assets 94 97 _______ _______ 228 555 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc CONDENSED CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2006 2006 2005 £m £mAssetsCash and balances at central banks 6,121 4,759Treasury and other eligible bills 5,491 5,538Loans and advances to banks 82,606 70,587Loans and advances to customers 466,893 417,226Debt securities 127,251 120,965Equity shares 13,504 9,301Intangible assets 18,904 19,932Property, plant and equipment 18,420 18,053Settlement balances 7,425 6,005Derivatives 116,681 95,663Prepayments, accrued income and other assets 8,136 8,798 _______ _______Total assets 871,432 776,827 _______ _______ LiabilitiesDeposits by banks 132,143 110,407Customer accounts 384,222 342,867Debt securities in issue 85,963 90,420Settlement balances and short positions 49,476 43,988Derivatives 118,112 96,438Accruals, deferred income and other liabilities 15,660 14,247Retirement benefit liabilities 1,992 3,735Deferred taxation 3,264 1,695Insurance liabilities 7,456 7,212Subordinated liabilities 27,654 28,274 _______ _______Total liabilities 825,942 739,283Equity:Minority interests 5,263 2,109Shareholders' equity*Called up share capital 815 826Reserves 39,412 34,609Total equity 45,490 37,544 _______ _______Total liabilities and equity 871,432 776,827 _______ _______ *Shareholders' equity attributable to:Ordinary shareholders 36,546 32,426Preference shareholders 3,681 3,009 _______ _______ 40,227 35,435 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONDENSED CONSOLIDATED BALANCE SHEET Total assets of £871.4 billion at 31 December 2006 were up £94.6 billion, 12%,compared with 31 December 2005, reflecting business growth. Treasury and other eligible bills remained stable at £5.5 billion. Loans and advances to banks increased by £12.0 billion, 17%, to £82.6 billion.Reverse repurchase agreements and stock borrowing ("reverse repos") increased by£12.3 billion, 30% to £54.2 billion, offset by a reduction in bank placings of£0.3 billion, 1% to £28.4 billion. Loans and advances to customers were up £49.7 billion, 12%, to £466.9 billion.Within this, reverse repos increased by 29%, £14.0 billion to £62.9 billion.Excluding reverse repos, lending rose by £35.7 billion, 10%, to £404.0 billionreflecting organic growth across all divisions. Debt securities increased by £6.3 billion, 5%, to £127.3 billion, principallydue to increased trading book holdings in Corporate Markets. Equity shares rose by £4.2 billion, 45%, to £13.5 billion, reflecting theincrease in the fair value of available-for-sale securities, principally theinvestment in Bank of China. Intangible assets decreased by £1.0 billion, 5%, to £18.9 billion, principallydue to exchange rate movements. Property, plant and equipment were up £0.4 billion, 2%, to £18.4 billion, mainlydue to growth in investment properties and operating lease assets. Settlement balances rose £1.4 billion, 24%, to £7.4 billion as a result ofincreased customer activity. Derivatives, assets and liabilities, increased reflecting growth in tradingvolumes and the effects of interest and exchange rates. Prepayments, accrued income and other assets were down £0.7 billion, 8%, to £8.1billion. Deposits by banks rose by £21.7 billion, 20%, to £132.1 billion to fund businessgrowth. Increased repurchase agreements and stock lending ("repos"), up £28.5billion, 59%, to £76.4 billion were partially offset by lower inter-bankdeposits, down £6.8 billion, 11%, at £55.7 billion. Customer accounts were up £41.4 billion, 12% at £384.2 billion. Within this,repos increased £15.3 billion, 31%, to £64.0 billion. Excluding repos, depositsrose by £26.1 billion, 9%, to £320.2 billion with good growth in all divisions. Debt securities in issue decreased by £4.5 billion, 5%, to £86.0 billion. The increase in settlement balances and short positions, up £5.5 billion, 12%,to £49.5 billion, reflected growth in customer activity. Accruals, deferred income and other liabilities increased £1.4 billion, 10%, to£15.7 billion. THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONDENSED CONSOLIDATED BALANCE SHEET (continued) Subordinated liabilities were down £0.6 billion, 2%, to £27.7 billion. The issueof £2.3 billion dated and £0.7 billion undated loan capital was offset by theredemption of £0.3 billion dated loan capital, £0.7 billion undated loan capitaland £0.3 billion non-cumulative preference shares and the effect of exchangerates, £1.7 billion and other movements, £0.6 billion. Deferred taxation liabilities rose by £1.6 billion to £3.3 billion largelyreflecting the provision for tax on the uplift in the value ofavailable-for-sale equity shares. Equity minority interests increased by £3.2 billion to £5.3 billion. Of theincrease, £2.1 billion related to the uplift in the value of the investment inBank of China attributable to minority shareholders. The remaining increaseprimarily arose from the issue of £400 million trust preferred securities and arestructuring of the life assurance joint venture with Aviva, following therepayment of an existing loan replaced by an equity investment. Thisrestructuring has no effect on the Group's regulatory capital position. Shareholders' equity increased by £4.8 billion, 14%, to £40.2 billion. Theprofit for the year of £6.4 billion, issue of £0.7 billion non-cumulative fixedrate equity preference shares and £0.1 billion of ordinary shares in respect ofthe exercise of share options, £1.6 billion increase in available-for-salereserves, mainly reflecting the Group's share in the investment in Bank of Chinaand a £1.3 billion net decrease after tax in the Group's pension liability, werepartly offset by the payment of the 2005 final ordinary dividend and the 2006interim dividend, £2.5 billion and preference dividends of £0.2 billion,together with £1.0 billion ordinary share buybacks and £1.6 billion resultingfrom the effect of exchange rates and other movements. THE ROYAL BANK OF SCOTLAND GROUP plc CONDENSED STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 31 DECEMBER 2006 2006 2005 £m £m Net movements in reserves:Available-for-sale 4,479 (547)Cash flow hedges (249) (67)Currency translation (1,681) 842 Actuarial gains/(losses) on defined benefit plans 1,781 (799)Tax on items recognised direct in equity (1,173) 478 _______ _______Net income/(expense) recognised direct in equity 3,157 (93)Profit for the year 6,497 5,558 _______ _______Total recognised income and expense for the year 9,654 5,465 _______ _______ Attributable to:Equity shareholders 7,707 5,355Minority interests 1,947 110 _______ _______ 9,654 5,465 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc CONDENSED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 2006 2005 £m £m (Restated)Operating activitiesOperating profit before tax 9,186 7,936 Adjustments for:Depreciation and amortisation 1,678 1,825Interest on subordinated liabilities 1,386 1,271 Charge for defined benefit pension schemes 580 462 Cash contribution to defined benefit pension schemes (536) (452)Elimination of foreign exchange differences and other 3,396 (4,472)non-cash items _______ _______Net cash inflow from trading activities 15,690 6,570 Changes in operating assets and liabilities 3,980 (519) _______ _______Net cash flows from operating activities before tax 19,670 6,051Income taxes paid (2,229) (1,911) _______ _______ Net cash flows from operating activities 17,441 4,140 _______ _______ Investing activities Sale and maturity of securities 27,126 39,472Purchase of securities (19,126) (39,196)Sale of property, plant and equipment 2,990 2,220Purchase of property, plant and equipment (4,282) (4,812)Net investment in business interests and intangible (63) (296)assets _______ _______Net cash flows from investing activities 6,645 (2,612) _______ _______Financing activities Issue of ordinary shares 104 163Issue of equity preference shares 671 1,649Issue of subordinated liabilities 3,027 1,234Proceeds from minority interests 1,354 1,264 Redemption of minority interests (81) (121)Repurchase of ordinary shares (991) -Shares purchased by employee trusts (254) -Shares issued under employee share schemes 108 -Repayment of subordinated liabilities (1,318) (1,553)Dividends paid (2,727) (2,007) Interest on subordinated liabilities (1,409) (1,332) _______ _______Net cash flows from financing activities (1,516) (703) _______ _______ Effects of exchange rate changes on cash and cash (3,468) 1,703equivalents _______ _______ Net increase in cash and cash equivalents 19,102 2,528 Cash and cash equivalents at beginning of year 52,549 50,021 _______ _______ Cash and cash equivalents at end of year 71,651 52,549 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES 1. Accounting policies There have been no changes to the Group's principal accounting policies as set out on pages 136 to 142 of the 2005 Report and Accounts. 2. Loan impairment provisions Operating profit is stated after charging loan impairment losses of £1,877 million (2005 - £1,703 million). The balance sheet loan impairment provisions increased in the year ended 31 December 2006 from £3,887 million to £3,935 million, and the movements thereon were: 2006 2005 £m £m At 1 January 3,887 4,145 Currency translation and other adjustments (61) 51 Amounts written-off (1,841) (2,040) Recoveries of amounts previously written-off 215 172 Charge to income statement 1,877 1,703 Unwind of discount (142) (144) _______ _______ At 31 December 3,935 3,887 _______ _______ The provision at 31 December 2006 includes £2 million (2005 - £3 million) in respect of loans and advances to banks. 3. Taxation The charge for taxation is summarised as follows: 2006 2005 £m £m Tax on profit before intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries 2,750 2,486 Tax relief on intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries (61) (108) _______ _______ Charge for taxation 2,689 2,378 _______ _______ Overseas tax included above 1,100 946 _______ _______ The charge for taxation represents 29.3% (2005 - 30%) of profit before tax. It differs from the tax charge computed by applying the standard UK corporation tax rate of 30% as follows: 2006 2005 £m £m Profit before tax 9,186 7,936 _______ _______ Expected tax charge at 30% 2,756 2,381 Non-deductible items 288 309 Non-taxable items (251) (166) Foreign profits taxed at other rates 63 77 Other 19 (15) Adjustments in respect of prior periods (186) (208) _______ _______ Actual tax charge 2,689 2,378 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 4. Earnings per share Earnings per share have been calculated based on the following: 2006 2005 £m £m Earnings Profit attributable to ordinary shareholders 6,202 5,392 Add back finance cost on dilutive convertible securities 64 65 _______ _______ Diluted earnings attributable to ordinary shareholders 6,266 5,457 _______ _______ Number of shares - millions Weighted average number of ordinary shares In issue during the year 3,185 3,183 Effect of dilutive share options and convertible 58 60 securities _______ _______ Diluted weighted average number of ordinary shares in issue during the year 3,243 3,243 _______ _______ Basic earnings per share 194.7p 169.4p Intangibles amortisation 2.0p 2.0p Integration costs 3.3p 9.9p Net gain on sale of strategic investments and subsidiaries - (5.4p) _______ _______ Adjusted earnings per share 200.0p 175.9p _______ _______ Diluted earnings per share 193.2p 168.3p _______ _______ Adjusted diluted earnings per share 198.4p 174.7p _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 5. Segmental analysis The revenues for each division in the table below are gross of intra-group transactions. 2006 2005 Total revenue £m £m Corporate Markets - Global Banking & Markets 19,052 12,097 - UK Corporate Banking 5,975 6,205 Retail Markets - Retail 12,946 12,396 - Wealth Management 2,458 1,999 Ulster Bank 2,370 1,788 Citizens 5,874 4,882 RBS Insurance 6,447 6,261 Manufacturing 54 60 Central items 8,078 5,189 Elimination of intra-group transactions (18,968) (11,757) _______ _______ 44,286 39,120 Disposal of strategic investments and - 333 subsidiaries _______ _______ 44,286 39,453 _______ _______ 2006 2005 Operating profit before tax £m £m Corporate Markets - Global Banking & Markets 3,790 3,041 - UK Corporate Banking 1,762 1,572 Total Corporate Markets 5,552 4,613 Retail Markets - Retail 2,299 2,264 - Wealth Management 354 272 Total Retail Markets 2,653 2,536 Ulster Bank 388 323 Citizens 1,582 1,575 RBS Insurance 750 728 Manufacturing - - Central items (1,511) (1,524) _______ _______ 9,414 8,251 Amortisation of purchased intangible assets (94) (97) Integration costs (134) (458) Net gain on sale of strategic investments and - 240 subsidiaries _______ _______ 9,186 7,936 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 6. Dividend and share capital During the year dividends of 53.1p per ordinary share (2005 - 41.2p) in respect of the final dividend for 2005 and 24.2p per ordinary share (2005 - 19.4p) in respect of the interim dividend for 2006 were paid to ordinary shareholders. The directors have recommended a final dividend for 2006 of 66.4p per ordinary share. Subject to approval by shareholders at the Annual General Meeting, the final dividend will be paid on 8 June 2007 to shareholders registered on 9 March 2007. At the Annual General Meeting the shareholders will be asked to approve a bonus issue of 2 new ordinary shares of 25 pence each fully paid for each ordinary share held. If approved, the record date for the bonus issue will be 4 May 2007 and the new ordinary shares of 25 pence each are expected to be admitted to listing on 8 May 2007. 7. Analysis of repurchase agreements 2006 2005 £m £m Reverse repurchase agreements and stock borrowing Loans and advances to banks 54,152 41,804 Loans and advances to customers 62,908 48,887 _______ _______ Repurchase agreements and stock lending Deposits by banks 76,376 47,905 Customer accounts 63,984 48,754 _______ _______ 8. Litigation Proceedings, including a consolidated class action, have been brought in the United States against a large number of defendants, including the Group, following the collapse of Enron. The claims against the Group could be significant but are largely unquantified. The Group considers that it has substantial and credible legal and factual defences to these claims and it continues to defend them vigorously. A court ordered mediation commenced in September 2003 but no material progress has been made towards a resolution of the claims, although a number of other defendants have reached settlements in the principal class action. The Group is unable reliably to estimate the possible loss in relation to these matters or the effect that the possible loss might have on the Group's consolidated net assets or its operating results or cashflows in any particular period. In addition, pursuant to requests received from the US Securities and Exchange Commission and the Department of Justice, the Group has provided copies of Enron-related materials to these authorities and has co-operated fully with them. Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. The Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, is satisfied that the outcome of these other claims and proceedings will not have a material adverse effect on its consolidated net assets, operating results or cash flows in any particular period. THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 9. Analysis of consolidated equity 2006 2005 £m £m Called-up share capital At beginning of year 826 822 Implementation of IAS 32 on 1 January 2005 - (2) Shares issued during the year 2 6 Shares repurchased during the year (13) - _______ _______ At end of year 815 826 _______ _______ Share premium account At beginning of year 11,777 12,964 Implementation of IAS 32 on 1 January 2005 - (3,159) Shares issued during the year 815 1,972 Shares repurchased during the year (381) - Redemption of preference shares classified as debt 271 - _______ _______ At end of year 12,482 11,777 _______ _______ Merger reserve At beginning and end of year 10,881 10,881 _______ _______ Available-for-sale reserves At beginning of year (73) - Implementation of IAS 32 and IAS 39 on 1 January 2005 - 289 Currency translation adjustments (43) 4 Unrealised gains in the year 2,652 35 Realised gains in the year (313) (582) Taxation (695) 181 _______ _______ At end of year 1,528 (73) _______ _______ Cash flow hedging reserve At beginning of year 59 - Implementation of IAS 32 and IAS 39 on 1 January 2005 - 67 Amount recognised in equity during the year (109) 18 Amount transferred from equity to earnings for the year (140) (85) Taxation 41 59 _______ _______ At end of year (149) 59 _______ _______ Foreign exchange reserve At beginning of year 469 (320) Retranslation of net assets, net of related hedges (1,341) 789 _______ _______ At end of year (872) 469 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 9. Analysis of consolidated equity (continued) 2006 2005 £m £m Capital redemption reserve At beginning of year 157 157 Shares repurchased during the year 13 - _______ _______ At end of year 170 157 _______ _______ Retained earnings At beginning of year 11,346 9,408 Implementation of IAS 32 and IAS 39 on 1 January 2005 - (1,078) Profit attributable to ordinary and equity preference 6,393 5,501 shareholders Ordinary dividends paid (2,470) (1,927) Equity preference dividends paid (191) (109) Shares repurchased during the year (624) - Redemption of preference shares classified as debt (271) - Actuarial gains/(losses) recognised in retirement benefit schemes, net of tax 1,262 (561) Net cost of shares bought and used to satisfy (38) - share-based payments Share-based payments 80 112 _______ _______ At end of year 15,487 11,346 _______ _______ Own shares held At beginning of year (7) (7) Shares purchased during the year (254) - Shares issued under employee share schemes 146 - _______ _______ At end of year (115) (7) _______ _______ Shareholders' equity at end of year 40,227 35,435 _______ _______ Minority interests At beginning of year 2,109 3,492 Implementation of IAS 32 and IAS 39 on 1 January 2005 - (2,541) Currency translation adjustments and other movements (297) 53 Profit for the year 104 57 Dividends paid (66) (95) Unrealised gains on available-for-sale securities 2,140 - Equity raised 1,354 1,264 Equity withdrawn (81) (121) _______ _______ At end of year 5,263 2,109 _______ _______ Total equity at end of year 45,490 37,544 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 10. Retirement benefit liabilities 2006 2005 £m £m Present value of defined benefit obligations 20,951 21,123 Fair value of plan assets 18,959 17,388 _______ _______ Net pension liability 1,992 3,735 _______ _______ The reduction in net pension liability of £1,743 million reflects strong growth in scheme assets coupled with a higher discount rate due to the rise in AA rated corporate bond yields. This was partially offset by a change in mortality assumptions in light of increased life expectancy of current and future pensioners. 11. Analysis of contingent liabilities and commitments 2006 2005 £m £m Contingent liabilities Guarantees and assets pledged as collateral 13,013 12,253 security Other contingent liabilities 6,833 6,394 _______ _______ 19,846 18,647 _______ _______ Commitments Undrawn formal standby facilities, credit lines and other commitments to lend 235,586 203,021 Other commitments 2,402 3,529 _______ _______ 237,988 206,550 _______ _______ Total contingent liabilities and commitments 257,834 225,197 _______ _______ 12. Statutory accounts Financial information contained in this document does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985 ("the Act"). The statutory accounts for the year ended 31 December 2006 will be filed with the Registrar of Companies following the company's Annual General Meeting. The auditors have reported on these accounts: their report was unqualified and did not contain a statement under section 237(2) or (3) of the Act. 13. Date of approval This announcement was approved by the Board of directors on 28 February 2007. 14. Form 20-F A report on Form 20-F will be filed with the Securities and Exchange Commission in the United States. THE ROYAL BANK OF SCOTLAND GROUP plc ANALYSIS OF INCOME, EXPENSES AND IMPAIRMENT LOSSES 2006 2005 £m £m Non-interest income Fees and commissions receivable 7,116 6,750 Fees and commissions payable - banking (1,432) (1,378) - insurance related (490) (463) _______ _______ Net fees and commissions 5,194 4,909 _______ _______ Foreign exchange 738 647 Interest rates 973 943 Credit 841 666 Other 123 87 _______ _______ Income from trading activities 2,675 2,343 _______ _______ Rental and other asset-based activities 2,149 1,736 Other income - Principal investments 794 560 - net realised gains on available-for-sale securities 196 83 - dividend income 73 79 - profit on sale of property, plant and equipment 125 32 - other 227 130 _______ _______ Other operating income 3,564 2,620 _______ _______ Non-interest income (excluding insurance premiums) 11,433 9,872 _______ _______ Insurance net premium income 5,973 5,779 _______ _______ Total non-interest income 17,406 15,651 _______ _______ Staff costs - wages, salaries and other staff costs 5,641 4,985 - social security costs 389 353 - pension costs 617 506 Premises and equipment 1,411 1,274 Other 2,626 2,592 _______ _______ Administrative expenses 10,684 9,710 Operating lease depreciation 787 805 Other depreciation and amortisation 781 783 _______ _______ Operating expenses 12,252 11,298 _______ _______ General insurance 3,970 3,827 Bancassurance 488 486 _______ _______ Insurance net claims 4,458 4,313 _______ _______ Loan impairment losses 1,877 1,703 Impairment losses against available-for-sale securities 1 4 _______ _______ Impairment losses 1,878 1,707 _______ _______ Note: the data above exclude amortisation of purchased intangibles andintegration costs, and net gain on sale of strategic investments andsubsidiaries in 2005. THE ROYAL BANK OF SCOTLAND GROUP plc REGULATORY RATIOS 2006 2005 £m £mCapital baseOrdinary shareholders' funds and minority interests 20,281 18,196less intangiblesPreference shares and tax deductible securities 9,760 10,022 _______ _______Tier 1 capital 30,041 28,218Tier 2 capital 27,491 22,437 _______ _______ 57,532 50,655Less: Supervisory deductions (10,583) (7,282) _______ _______ 46,949 43,373 _______ _______Risk-weighted assetsBanking book - on-balance sheet 318,600 303,300 - off-balance sheet 59,400 51,500Trading book 22,300 16,200 _______ _______ 400,300 371,000 _______ _______Risk asset ratioTier 1 7.5% 7.6%Total 11.7% 11.7% _______ _______ Composition of capitalTier 1Shareholders' equity and minority interests 41,700 37,414Innovative tier 1 securities and preference shares 4,900 5,746Goodwill and other intangible assets (18,904) (19,932)Regulatory and other adjustments 2,345 4,990 _______ _______Total qualifying tier 1 capital 30,041 28,218 _______ _______ Tier 2Unrealised gains in available-for-sale equitysecuritiesin shareholders' equity and minority interests 3,790 130Collective impairment losses, net of taxes 2,267 2,169Qualifying subordinated liabilities 21,024 20,060Minority and other interests in tier 2 capital 410 78 _______ _______Total qualifying tier 2 capital 27,491 22,437 _______ _______ Supervisory deductionsUnconsolidated investments 3,870 3,958Investments in other banks 5,203 1,789Other deductions 1,510 1,535 _______ _______ 10,583 7,282 _______ _______ Total regulatory capital 46,949 43,373 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY Analysis of loans and advances to customersThe following table analyses loans and advances to customers (including reverserepurchase agreements and stock borrowing) by industry. 2006 2005 £m £m Central and local government 6,732 3,340Finance 25,017 27,091Individuals - home 70,884 65,286Individuals - other 27,922 26,323Other commercial and industrial comprising: - Manufacturing 11,051 11,615 - Construction 8,251 7,274 - Service industries and business activities 43,887 40,687 - Agriculture, forestry and fishing 2,767 2,645 - Property 39,296 32,899Finance leases and instalment credit 14,218 13,909Interest accruals 1,497 1,250 _______ _______ 251,522 232,319Overseas residents 69,242 52,234 _______ _______Total UK offices 320,764 284,553 _______ _______ OverseasUS 92,166 90,606Rest of the World 57,896 45,951 _______ _______Total Overseas offices 150,062 136,557 _______ _______ Loans and advances to customers - gross 470,826 421,110Loan impairment provisions (3,933) (3,884) _______ _______Total loans and advances to customers 466,893 417,226 _______ _______ Reverse repurchase agreements included in the analysis above: Central and local government 3,677 1,001Finance 17,540 18,427Accruals 220 187 _______ _______ 21,437 19,615Overseas residents 18,487 14,237 _______ _______Total UK offices 39,924 33,852US 19,383 14,994Rest of the World 3,601 41 _______ _______Total 62,908 48,887 _______ _______ Loans and advances to customers excludingreverse repurchase agreements - net 403,985 368,339 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY (continued) Risk elements in lending The Group's loan control and review procedures do not include the classificationof loans as non-accrual, accruing past due, restructured and potential problemloans, as defined by the Securities and Exchange Commission ('SEC') in the US.The following table shows the estimated amount of loans which would be reportedusing the SEC's classifications. The figures are stated before deducting thevalue of security held or related provisions. 2006 2005 £m £mLoans accounted for on a non-accrual basis (2): - Domestic 5,420 4,977 - Foreign 812 949 _______ _______ 6,232 5,926 _______ _______Accruing loans which are contractually overdue90 days or more as to principal or interest (3): - Domestic 81 2 - Foreign 24 7 _______ _______ 105 9 _______ _______Loans not included above which are 'troubled debtrestructurings' as defined by the SEC: - Domestic - 2 - Foreign - - _______ _______ - 2 _______ _______Total risk elements in lending 6,337 5,937 _______ _______Potential problem loans (4) - Domestic 47 14 - Foreign 5 5 _______ _______ 52 19 _______ _______ Closing provisions for impairment as a % oftotal risk elements in lending and potential problem loans 62% 65% _______ _______Risk elements in lending as a % of gross lending tocustomers excluding reverse repos 1.55% 1.60% _______ _______Risk elements in lending and potential problem loans as a %of gross lending to customers excluding reverse repos 1.57% 1.60% _______ _______ 1. For the analysis above, 'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group's transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions. 2. All loans against which an impairment provision is held are reported in the non-accrual category. 3. Loans where an impairment event has taken place but no impairment recognised. This category is used for over collateralised non-revolving credit facilities. 4. Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for over-collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible. THE ROYAL BANK OF SCOTLAND GROUP plc MARKET RISK The Group manages the market risk in its trading and treasury portfolios throughits market risk management framework, which is based on value-at-risk (VaR)limits, together with, but not limited to, stress testing, scenario analysis,and position and sensitivity limits. VaR is a technique that produces estimatesof the potential negative change in the market value of a portfolio over aspecified time horizon at a given confidence level. The table below sets out theVaR for the Group, which assumes a 95% confidence level and a one-day timehorizon. The VaR for the Group's trading portfolios is segregated by type ofmarket risk exposure, including idiosyncratic risk. Average Period end Maximum Minimum £m £m £m £mTrading VaR Interest rate 8.7 10.2 15.0 5.7Credit spread 13.2 14.1 15.7 10.4Currency 2.2 2.5 3.5 1.0Equity and commodity 1.4 1.6 4.3 0.6Diversification effects (12.8) _______ _______ _______ _______31 December 2006 14.2 15.6 18.9 10.4 _______ _______ _______ _______31 December 2005 13.0 12.8 16.5 9.9 _______ _______ _______ _______ Treasury VaR 31 December 2006 2.4 1.5 4.4 0.6 _______ _______ _______ _______31 December 2005 4.0 3.5 5.8 2.8 _______ _______ _______ _______ The Group's VaR should be interpreted in light of the limitations of themethodologies used. These limitations include: Historical data may not provide the best estimate of the joint distribution ofrisk factor changes in the future and may fail to capture the risk of possibleextreme adverse market movements which have not occurred in the historicalwindow used in the calculations.VaR using a one-day time horizon does not fully capture the market risk ofpositions that cannot be liquidated or hedged within one day.VaR using a 95% confidence level does not reflect the extent of potential lossesbeyond that percentile.The Group largely computes the VaR of the trading portfolios at the close ofbusiness and positions may change substantially during the course of the tradingday. Controls are in place to limit the Group's intra-day exposure such as thecalculation of VaR for selected portfolios. These limitations and the nature of the VaR measure mean that the Group cannotguarantee that losses will not exceed the VaR amounts indicated nor that lossesin excess of the VaR amounts will not occur more frequently than once in 20business days. THE ROYAL BANK OF SCOTLAND GROUP plc OTHER INFORMATION 31 December 31 December 2006 2005 Ordinary share price £19.93 £17.55 Number of ordinary shares in issue 3,153m 3,197m Market capitalisation £62.8bn £56.1bn Net asset value per ordinary share £11.59 £10.14 Employee numbers (full time equivalents rounded to thenearest hundred) Global Banking & Markets 8,700 7,400UK Corporate Banking 8,800 8,400Retail 39,800 40,400Wealth Management 4,500 4,200Ulster Bank 4,800 4,400Citizens 23,100 24,400RBS Insurance 17,500 19,300Manufacturing 25,200 26,000Centre 2,600 2,500 _______ _______ Group total 135,000 137,000 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc FORWARD-LOOKING STATEMENTS Certain sections in this document contain 'forward-looking statements' as thatterm is defined in the United States Private Securities Litigation Reform Act of1995, such as statements that include the words 'expect', 'estimate', 'project','anticipate', 'should', 'intend', 'plan', 'probability', 'risk', 'Value-at-Risk("VaR")', 'target', 'goal', 'objective', 'will', 'endeavour', 'outlook','optimistic', 'prospects' and similar expressions or variations on suchexpressions and sections such as 'Group Chief Executive's review' and 'Financialreview'. In particular, this document includes forward-looking statements relating, butnot limited, to the Group's potential exposures to various types of marketrisks, such as interest rate risk, foreign exchange rate risk and commodity andequity price risk. Such statements are subject to risks and uncertainties. Forexample, certain of the market risk disclosures are dependent on choices aboutkey model characteristics and assumptions and are subject to variouslimitations. By their nature, certain of the market risk disclosures are onlyestimates and, as a result, actual future gains and losses could differmaterially from those that have been estimated. Other factors that could cause actual results to differ materially from thoseestimated by the forward-looking statements contained in this document include,but are not limited to: general economic conditions in the UK and in othercountries in which the Group has significant business activities or investments,including the United States; the monetary and interest rate policies of the Bankof England, the Board of Governors of the Federal Reserve System and other G-7central banks; inflation; deflation; unanticipated turbulence in interest rates,foreign currency exchange rates, commodity prices and equity prices; changes inUK and foreign laws, regulations and taxes; changes in competition and pricingenvironments; natural and other disasters; the inability to hedge certain riskseconomically; the adequacy of loss reserves; acquisitions or restructurings;technological changes; changes in consumer spending and saving habits; and thesuccess of the Group in managing the risks involved in the foregoing. The forward-looking statements contained in this document speak only as of thedate of this report, and the Group does not undertake to update anyforward-looking statement to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events. THE ROYAL BANK OF SCOTLAND GROUP plc RESTATEMENTS (1) Divisional results for 2005 have been restated to reflect transfers ofbusinesses between divisions in 2006. These changes do not affect the Group'sresults. Previously *Change in reported Resegmentation presentation Transfers Restated £m £m £m £m £m Global Banking &Markets (1) - Net interest 1,200 (166) 452 - 1,486 income - Non-interest 4,598 (51) (452) 10 4,105 income - Staff costs 1,471 40 - 7 1,518 - Other costs 391 (35) - 1 357 - Impairment 117 22 - - 139 lossesContribution 3,421 (244) - 2 3,179 _______ _______ _______ _______ _______ UK CorporateBanking (1) - Net interest 1,760 166 49 (22) 1,953 income - Non-interest 1,257 51 (49) (43) 1,216 income - Staff costs 529 (40) - (1) 488 - Other costs 132 35 - (3) 164 - Impairment 218 (22) - - 196 lossesContribution 1,803 244 - (61) 1,986 _______ _______ _______ _______ _______ Retail - Net interest 4,057 11 4,068 income - Non-interest 3,342 32 3,374 income - Staff costs 1,256 51 1,307 - Other costs 686 10 696 Contribution 3,799 (18) 3,781 _______ _______ _______ Wealth Management - Other costs 135 (2) 133 Contribution 408 2 410 _______ _______ _______ RBS Insurance - Staff costs 323 (7) 316 - Other costs 413 (2) 411 Contribution 926 9 935 _______ _______ _______ Manufacturing - Staff costs 740 (15) 725 - Other costs 2,003 30 2,033 Contribution (2,743) (15) (2,758) _______ _______ _______ Centre - Funding costs 810 (9) 801 - Department 658 (72) 586 costs Contribution (1,468) 81 (1,387) _______ _______ _______ \* The change in presentation is in respect of funding costs relating to rentaland other assets which have been netted against Income from rental assets andOther operating income in the presentation of Corporate Markets' results only.These funding costs continue to be included in interest payable in computing theGroup's net interest margin. Note:(1) The above shows how the Global Banking & Markets and UK Corporate Bankingfigures have been computed from the previous Global Banking & Markets and MidCorporate and Commercial analysis presented in 2005. This takes into account thereorganisation of these segments, changes in the presentation of funding costsand transfers of businesses between Corporate Markets and other divisions. THE ROYAL BANK OF SCOTLAND GROUP plc RESTATEMENTS (continued) (2) Retail Markets was reorganised during the second half of 2006 into Retail (bycombining Retail Banking and Direct Channels) and Wealth Management and is now managed onthis basis. To facilitate comparison, set out below are the results of Retail Banking andDirect Channels as they would have been reported. The prior year numbers reflect thetransfer of certain activities between these two businesses, the largest of which was theintermediary mortgage business transferred to Direct Channels from Retail Banking. Retail Banking Direct Channels 2006 2005 2006 2005 £m £m £m £m Net interest income 3,285 3,110 926 958 Non-interest income 2,366 2,284 1,126 1,090 _______ _______ _______ _______ Total income 5,651 5,394 2,052 2,048 _______ _______ _______ _______ Direct expenses - staff costs 1,115 1,080 234 227 - other 297 330 359 366 _______ _______ _______ _______ 1,412 1,410 593 593 _______ _______ _______ _______ Insurance net claims 488 486 - - _______ _______ _______ _______ Contribution before impairment losses 3,751 3,498 1,459 1,455 Impairment losses 705 590 638 582 _______ _______ _______ _______ Contribution 3,046 2,908 821 873 _______ _______ _______ _______ (3) Cash flow statementTwo line items in the 2005 cash flow statement have been amended as set out below. Noother caption is affected and the amount of cash and cash equivalents is unchanged. 2005 As reported Revised £m £m Other non-cash items 338 (4,472) _______ _______ Effects of foreign exchange rate changes on cash and cash (3,107) 1,703equivalents _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL CALENDAR 2006 final dividend payment 8 June 2007 2007 interim results announcement 3 August 2007 2007 interim dividend payment October 2007 2007 annual results announcement 28 February 2008 CONTACTS Sir Fred Goodwin Group Chief Executive 020 7672 0008 0131 523 2203 Guy Whittaker Group Finance Director 020 7672 0003 0131 523 2028 Richard O'Connor Head of Investor Relations 020 7672 1758 For media enquiries: Howard Moody Group Director, Communications 020 7672 1923 07768 033562 Carolyn McAdam Head of Group Communications 020 7672 1914 07796 274968 28 February 2007 This information is provided by RNS The company news service from the London Stock Exchange

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