22nd Apr 2008 07:01
Royal Bank of Scotland Group PLC22 April 2008 NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTOTHE UNITED STATES, CANADA, AUSTRALIA, JAPAN OR SOUTH AFRICA THE ROYAL BANK OF SCOTLAND GROUP PLC £12 Billion Rights Issue Update on Credit Market Exposures, Disposals, Capital, Trading Conditions andOutlook 22 April 2008 • RBS announces increased target capital ratios of 7.5% to 8.5% for Tier 1 capital and in excess of 6% for core Tier 1 capital on a proportional consolidated ("look through") basis • RBS takes actions to increase its Tier 1 capital ratio to in excess of 8% and its core Tier 1 capital ratio to in excess of 6% on a proportional consolidated basis by the end of 2008 • Rights issue to raise £12 billion net, fully underwritten • 11 new shares for every 18 existing shares at 200 pence per share • Disposals to generate estimated £4 billion of core Tier 1 capital net of tax • Estimated capital effect of £4.3 billion net of tax (£5.9 billion before tax) from write-downs in respect of credit market exposures in 2008 • Overall underlying performance of the Group has remained satisfactory with the principal exception of a slowdown in capital markets activity in Global Banking & Markets • ABN AMRO integration synergies on plan • Following the rights issue, RBS believes that it will be in a strong position to realise the substantial value in its UK and international franchises and to take advantage of the growth opportunities available to it £12 Billion Rights Issue Update on Credit Market Exposures, Disposals, Capital, Trading Conditions andOutlook Summary RBS today announces a rights issue to increase its capital base, implementingrevised targets for its capital ratios. The revised targets* are for the Group to maintain a Tier 1 capital ratio ofbetween 7.5% and 8.5% and a core Tier 1 capital ratio in excess of 6%. Theseratios are expressed on a proportional consolidated basis. The rights issue of £12.0 billion and other actions are forecast to result in aTier 1 capital ratio in excess of 8% and a core Tier 1 capital ratio in excessof 6% at 31 December 2008, on a proportional consolidated basis. In preparing the underlying capital forecasts, it has been assumed that therewill be write-downs additional to those reported in 2007 in relation to creditmarket exposures and gains from disposals of some non-core assets. The assumedeffect on core Tier 1 capital of the estimated write-downs is £4.3 billion netof tax (£5.9 billion before tax) and of the estimated disposal gains is £4billion net of tax. Overall, the Group's underlying performance, excluding write-downs, has remainedsatisfactory with the principal exception of a slowdown in capital marketsactivity in Global Banking & Markets. Sir Tom McKillop, Chairman, said: "This is a difficult time for the financial services industry, and it haspresented us with specific challenges. Central to these has been the questionof our capital ratios, which have been the focus of much attention, bothinternal and external, over recent months. It was the Board's declared intention to rebuild our Tier 1 capital to themiddle to upper end of our historic range of 7% to 8% over a three year period,but in light of the current market environment, this level and timing areconsidered no longer appropriate. In discussions with shareholders it was clear that many of them had reached asimilar conclusion, hence today's announcement that we are launching a rightsissue to re-position our capital ratios and strengthen our capital base. Naturally, shareholders wish to understand what we have assumed in relation tothe prospects for further write-downs and disposals of non-core assets, andtoday's announcement seeks to clarify the basis of our capital planning." * Previous guidance referred to 7% to 8% for Tier 1 capital ratio, with 25% to30% preference share content, but with no target set for core Tier 1 capitalratio Background to and Reasons for the Rights Issue RBS's capital plan had assumed that it would maintain its Tier 1 capital ratioin the range 7% to 8% and that it would rebuild its core Tier 1 capital ratiotowards 5% by 2010. At the time of its 2007 results announcement RBS confirmedthat it was operating within the parameters of this plan. The balance of risks and opportunities inherent in this plan have been undercontinual review. However, in the light of developments during March includingthe severe and increasing deterioration in credit market conditions, theworsening economic outlook and the increased likelihood that credit marketscould remain difficult for some time, the Board has concluded that it is nowappropriate for RBS to accelerate its plans to increase its capital ratios andto move to a higher target range to reflect the generally weakened businessenvironment. Reflecting these factors, the Board has raised its target range for the Group'sTier 1 capital ratio to 7.5% to 8.5% and has set a target for the core Tier 1capital ratio of in excess of 6% at 31 December 2008 on a proportionalconsolidated basis.* Having identified these targets it was clear that, whilst acknowledging withregret the demands this would place on shareholders, the most appropriate way ofreaching them more quickly was through a rights issue. In considering the sizeof the rights issue the Board, as well as having regard to the potentialbusiness performance, made an assessment, based on current knowledge, of thelikely quantum of write-downs in 2008 in respect of the deterioration in creditmarkets and the potential for gains from full or partial disposals. The Board has estimated that the effect on capital of write-downs in respect ofcredit market exposures could be £4.3 billion net of tax (£5.9 billion beforetax) in 2008. These estimates are based on prudent assumptions reflecting thefurther sharp deterioration in market conditions and outlook in credit marketsat this point. Further details of the estimates of write-downs in respect ofcredit market exposures for capital planning purposes are set out below. As part of an ongoing exercise, recalibrated in the context of its decision toincrease capital levels, the Board has identified for possible whole or partialdisposal RBS Insurance and other smaller assets which are not central to thepowerful UK and international banking franchises that RBS has built. RBS isdetermined to achieve full and fair value in respect of any such disposals. Atthis stage RBS has assumed in its capital plan that a £4 billion increase incore Tier 1 capital by the end of 2008 can be achieved in this way, althoughthere is scope for fewer disposals to be made, whilst still exceeding the targetcore Tier 1 ratio of 6%. * Previous guidance referred to 7% to 8% for Tier 1 capital ratio, with 25% to30% preference share content, but with no target set for core Tier 1 capitalratio In addition, RBS envisages continuing reduction of the capital demands ofcertain business lines, including Global Banking & Markets, through activemanagement of its balance sheet. Taking the above into account and having regard to the outlook for retainedprofits and the de-risking of the balance sheet, the Board has determined thatit is appropriate to raise £12 billion through the rights issue, with the effectof achieving a Tier 1 capital ratio in excess of 8% and a core Tier 1 capitalratio in excess of 6% by year end on a proportional consolidated basis. Rights Issue The proposed rights issue will raise proceeds of £12.0 billion, net of expenses.The issue is being made on the basis of 11 new shares for every 18 existingshares at an issue price of 200 pence per RBS share. This represents a 34.9%discount to the theoretical ex-rights price and 46.3% discount to the closingprice of RBS shares of 372.5 pence per share on 21 April 2008, the last tradingday before this announcement. A prospectus in connection with the rights issue will be published by early May2008. RBS will seek approval from its shareholders in respect of the rightsissue at an Extraordinary General Meeting in mid-May 2008. The nil paid trading period is expected to commence in mid-May 2008 and dealingsin new fully paid shares are expected to commence in June 2008. Goldman Sachs International, Merrill Lynch International and RBS are acting asjoint bookrunners to the rights issue. UBS Limited is acting as co-bookrunnerto the rights issue. The rights issue is fully underwritten by Goldman SachsInternational, Merrill Lynch International and UBS Limited. Credit Market Exposures For capital planning purposes RBS has used the values detailed below as thebasis for its estimates of write-downs in 2008 in respect of the credit marketexposures set out in the table below. These estimates are based on prudentassumptions reflecting the further sharp deterioration in market conditions andoutlook in credit markets at this point. The capital effect of these estimatedwrite-downs is £4.3 billion net of tax (£5.9 billion before tax). Fair value gains on own liabilities are estimated to be £0.6 billion and are notincluded in the estimated capital effect. The estimated write-downs before tax, which have been used for RBS's capitalplanning purposes, are as follows. £ million Net Exposure 31 Average Current Estimated Average Estimated December 2007 (1) Price % Net Exposure (2) Price % Write-downs Before Tax (3) ABS CDOsHigh Grade CDOs 2,581 84 1,608 52 (990)Mezzanine CDOs 1,253 70 361 20 (902) Monoline 2,547 n/a 3,174 n/a (1,752)Exposures (4) US ResidentialMortgagesSubprime (5) 1,292 72 600 38 (405)Alt-A 2,233 83 1,007 50 (666)Other Non-Agency 794 94 660 82 (100) US Commercial 1,809 97 1,397 83 (201)Mortgages Leveraged LoansFunded and Unfunded 14,506 96 12,354 88 (1,250)(6) CLOs 1,386 93 1,214 87 (106) CDS Hedging 470 Total Net of CDS Hedging (5,902) (1) Net of hedges and write-downs (2) Current exposure net of hedges and estimated write-downs (3) Estimated write-downs before tax in 2008 (4) Monoline exposures relate to credit protection purchased on credit assets,including CDOs. As the value of the instruments underlying the hedges hasfallen, the mark-to-market value of the hedges, and hence of the Group'sexposure, has increased. A credit valuation adjustment of £1,752 million hasbeen estimated reflecting the monolines' weakening credit profile. Furtherinformation relating to exposures to monolines is set out in Appendix II (5) Includes investment grade, non-investment grade and residuals (6) Funded exposures at 31 December 2007 were £8,698 million Dividend The Board of RBS believes that the 2007 dividend payout ratio of around 45%remains sustainable over the medium-term, given the strength and diversity ofthe Group. The Board will assess future dividends based on circumstances at thetime. Subject to this, the Board's target for 2008 is that there would be asimilar dividend payout ratio to 2007, based on earnings adjusted to excludecredit market-related write-downs and non-recurring items such as gains ondisposals and integration costs. It should be noted that the capital raised in the rights issue is not expectedto generate the same return as existing capital in the business. This effectalone is likely to result in a reduction in dividend per share in 2008, aftertaking into account an adjustment in respect of the bonus element of the rightsissue. The Board believes that it would be prudent to pay the 2008 interim dividend inshares. It is, however, RBS's current intention that the 2008 final dividendwill be paid in cash. The Board confirms that the 2007 final dividend, if approved by shareholders,will be paid in cash as previously announced. Board and Management This has been a difficult period for banks, including RBS. In addition toconsideration of the capital position, the Board has taken the opportunity tostand back and look at the management and governance of the business and howeffectively it is functioning. The Board of RBS has full confidence that the executive team will be able tolead RBS through the current challenging conditions, deliver the transactionbenefits relating to the acquisition of ABN AMRO, and realise the substantialvalue in RBS's UK and international franchises. In response to the difficulties in its credit markets business, RBS has madesignificant changes to its North American management structure and hasstrengthened the control environment within GBM. Certain structured creditactivities have been discontinued and problematic US sub-prime mortgage-relatedassets are now managed by a dedicated work-out unit with a view to minimisingrisk and reducing positions at an appropriate pace. As part of continuing succession planning, the Nominations Committee and fullBoard have been engaged throughout 2007 in planning future changes to the Boardand searches are already under way to recruit three new non-executive directorswith experience appropriate to the enlarged Group's operations. Each of the directors intends to take up in full his or her rights to subscribefor new RBS ordinary shares under the rights issue. Contacts Andrew McLaughlinGroup Director, Economics & Corporate AffairsMobile: 07786 111689 Carolyn McAdamGroup Head of Media RelationsMobile: 07796 274968 Richard O'ConnorHead of Investor RelationsMobile: 07909 873681 Wire Services Conference Call 0730, 22 April 2008 Analysts Conference 280 Bishopsgate, London, EC2M 4RB0930, 22 April 2008 Press Conference 280 Bishopsgate, London, EC2M 4RB1200, 22 April 2008 Dial-in Numbers International Dial-in: +44 (0) 1452 55 00 00UK Free Call Dial-in: 0800 953 1533UK Local Dial-in: 0845 245 5205USA Free Call Dial-in: 1866 247 4222Replay Access No: 44362366# Goldman Sachs International, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting exclusively for RBS andfor no-one else as joint sponsor, joint bookrunner and joint underwriter inrelation to the proposed Rights Issue and the listing of the New Shares on theOfficial List and their admission to trading on the London Stock Exchange'smarket for listed securities, and will not be responsible to any other personfor providing the protections afforded to clients of Goldman Sachs Internationalnor for providing advice in connection with the proposed Rights Issue, proposedlisting or admission to trading or contents of this announcement or any othermatters referred to in this announcement. Merrill Lynch International, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting exclusively for RBS andfor no-one else as joint sponsor, joint bookrunner and joint underwriter inrelation to the proposed Rights Issue and the listing of the New Shares on theOfficial List and their admission to trading on the London Stock Exchange'smarket for listed securities, and will not be responsible to any other personfor providing the protections afforded to clients of Merrill Lynch Internationalnor for providing advice in connection with the proposed Rights Issue, proposedlisting or admission to trading or contents of this announcement or any othermatters referred to in this announcement. The Royal Bank of Scotland plc, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting exclusively for RBS andfor no-one else as joint-bookrunner in relation to the proposed Rights Issue andwill not be responsible to any other person for providing the protectionsafforded to clients of The Royal Bank of Scotland plc nor for providing advicein connection with the proposed Rights Issue, proposed listing or admission totrading or contents of this announcement or any other matters referred to inthis announcement. UBS Limited, which is authorised and regulated in the United Kingdom by theFinancial Services Authority, is acting exclusively for RBS and for no-one elseas co-bookrunner and joint underwriter in relation to the proposed Rights Issueand will not be responsible to any other person for providing the protectionsafforded to clients of UBS Limited nor for providing advice in connection withthe proposed Rights Issue, proposed listing or admission to trading or contentsof this announcement or any other matters referred to in this announcement. Goldman Sachs International, Merrill Lynch International, UBS Limited and theother underwriters may, in accordance with applicable legal and regulatoryprovisions, engage in transactions in relation to the Nil Paid Rights, the FullyPaid Rights or the Ordinary Shares and/or related instruments for their ownaccount for the purpose of hedging their underwriting exposure or otherwise.Except as required by applicable law or regulation, the underwriters do notpropose to make any public disclosure in relation to such transactions. A circular to Shareholders relating to the Rights Issue is expected to bepublished and posted to Shareholders during April 2008. A Prospectus relating tothe Rights Issue is expected to be published and posted to Shareholders by earlyMay 2008. The Provisional Allotment Letters are expected to be despatched byearly May 2008. The Prospectus will give further details of the New Shares, theNil Paid Rights and the Fully Paid Rights to be offered pursuant to the RightsIssue. A copy of the Prospectus when published will be available from the registeredoffice of The Royal Bank of Scotland Group plc at 36 St Andrew Square,Edinburgh, EH2 2YB and from its head office at Gogarburn, PO Box 1000,Edinburgh, EH12 1HQ. The Prospectus will be also available for inspection duringusual business hours on any weekday (Saturdays, Sundays and Bank Holidaysexcepted) from the date of its publication until Admission at the offices ofLinklaters LLP, One Silk Street, London, EC2Y 8HQ. This announcement is not a Prospectus but an advertisement and investors shouldnot subscribe for any Nil Paid Rights, Fully Paid Rights or New Shares referredto in this announcement except on the basis of the information contained in theProspectus. This announcement does not constitute an offer to sell, or a solicitation of anoffer to subscribe for, the Nil Paid Rights, the Fully Paid Rights or the NewShares being issued in connection with the Rights Issue, in any jurisdiction inwhich such offer or solicitation is unlawful. This announcement is issued by The Royal Bank of Scotland Group plc and approvedsolely for the purposes of Section 21 of the Financial Services and Markets Act2000 by Goldman Sachs International of Peterborough Court, 133 Fleet Street,London, EC4A 2BB and Merrill Lynch International of 2 King Edward Street,London, EC1A 1HQ. These materials are not for distribution, directly or indirectly in, or into theUnited States (including its territories and dependencies, any State of theUnited States and the District of Columbia), Australia, Canada, Japan or SouthAfrica. These materials do not constitute or form a part of any offer orsolicitation to purchase or subscribe for securities in the United States. TheSecurities mentioned herein have not been, and will not be, registered under theUnited States Securities Act of 1993 (the "Securities Act"). The Securities may not be offered or sold in the United States absentregistration or an applicable exemption from the registration requirements ofthe Securities Act. There will be no public offer of securities in the UnitedStates. The Nil Paid Rights, the Fully Paid Rights, the New Shares and the ProvisionalAllotment Letters have not been approved or disapproved by the US Securities andExchange Commission, any state's securities commission in the United States orany US regulatory authority, nor have any of the foregoing authorities passedupon or endorsed the merits of the offering of the Nil Paid Rights, the FullyPaid Rights, the New Shares and the Provisional Allotment Letters or theaccuracy or adequacy of this announcement. Any representation to the contrary isa criminal offence. The Nil Paid Rights, the Fully Paid Rights, the New Sharesand the Provisional Allotment Letters have not been or will not be registeredunder the relevant laws of any state, province or territory of Australia,Canada, Japan or South Africa and may not be offered, sold, taken up, exercised,resold, renounced, transferred or delivered, directly or indirectly, withinAustralia, Canada, Japan or South Africa except pursuant to an applicableexemption. Neither the content of The Royal Bank of Scotland Group plc's website nor anywebsite accessible by hyperlinks on The Royal Bank of Scotland Group plc'swebsite is incorporated in, or forms part of, this announcement. The distribution of this announcement and/or the Prospectus and/or theProvisional Allotment Letters and/or the transfer of Nil Paid Rights, Fully PaidRights and/or New Shares into jurisdictions other than the United Kingdom may berestricted by law. Persons into whose possession this announcement comes shouldinform themselves about and observe any such restrictions. Any failure to complywith these restrictions may constitute a violation of the securities laws of anysuch jurisdiction. Certain statements made in this announcement constitute forward-lookingstatements within the meaning of the United States Private Securities LitigationReform Act of 1995. Forward looking statements can be identified by the use ofwords such as ''may'', ''will'', ''expect'', ''intend'', ''estimate'', ''anticipate'', ''believe'', ''plan'', ''seek'', ''continue'' or similarexpressions and relate to, among other things, the performance of RBS's variousbusiness units in the near to medium term, the amount by which RBS expects towrite down the value of certain of its assets, RBS's expectations in respect ofthe rights issue, its capital ratios and its dividend payout ratio, RBS'sbusiness strategy and its plans and objectives for future operations. Suchstatements are based on current expectations and, by their nature, are subjectto a number of risks and uncertainties that could cause actual results andperformance to differ materially from any expected future results orperformance, expressed or implied, by the forward-looking statement. Factorsthat might cause forward looking statements to differ materially from actualresults, include among other things, general economic conditions in the EuropeanUnion, in particular in the United Kingdom, and in other countries in which RBShas business activities or investments, including the United States; theinability of RBS to hedge certain risks economically; the adequacy of RBS'simpairment provisions and loss reserves; RBS's ability to achieve revenuebenefits and cost savings from the integration of certain of ABN AMRO'sbusinesses and assets; and the potential exposure of RBS to various types ofmarket risks, such as interest rate risk, foreign exchange rate risk, creditrisk and commodity and equity price risk. These forward-looking statements speakonly as of the date of this announcement. The information and opinions containedin this announcement are subject to change without notice and, subject tocompliance with applicable law, RBS assumes no responsibility or obligation toupdate publicly or review any of the forward-looking statements containedherein. Appendix I Estimated Capital Ratios The table below sets out the estimated capital ratios at 30 June and at 31 December 2008. Core Tier 1 Tier 1Fully consolidated basis30 June 2008 > 6% > 8%31 December 2008 > 6% > 8%Proportional consolidated basis30 June 2008 > 5% > 7.5%31 December 2008 > 6% > 8% Appendix II Monoline Exposures by Counterparty Credit Quality £bn Notional Current Estimates Fair Value of Gross Total W'downs Hedge Net Exposure U'lying Asset Exposure (pre-tax)AAA / AA 19.8 15.6 4.2 (1.1) (0.4) 2.7A / BBB 2.6 2.2 0.4 (0.3) 0.2Non-investment grade 2.6 1.0 1.6 (1.3) 0.3Total 25.0 18.8 6.2 (2.7) (0.4) 3.2Credit value adjustments taken in 2007 0.9Estimated credit value adjustments before tax in 2008 (1.8) Monoline Exposures by Collateral Type £bn Notional Fair Value of % Split U'lying U'lying Asset Mark U'lying Asset Asset Value Value as % of Notional To MarketRMBS and CDO of RMBS 6.1 2.5 13% 41% 3.6Other ABS 4.5 4.1 22% 91% 0.3CMBS 3.7 2.6 14% 70% 1.0Non ABS (incl CLOs) 10.8 9.6 51% 88% 1.2Total 25.0 18.8 100% 75% 6.2 CDO Exposures Super Senior Tranches of ABS CDOs High Grade Mezzanine Total Net open exposures at 31 Dec 2007 (£bn) 2.6 1.3 3.8Effective attachment point at 31 Dec 2007 40% 62% 50%Attachment point after estimated write-downs 63% 89% 74%% of underlying RMBS sub-prime assets 69% 91% 79%- originated in 2005 and earlier 24% 23% 24%- originated in 2006 28% 69% 46%- originated in 2007 48% 8% 30%Net open exposures after estimated write-downs (£bn) 1.6 0.4 2.0 Appendix III Trading Update This trading update constitutes RBS's Interim Management Statement for theperiod from 31 December 2007 to 22 April 2008. Comments relate primarily to proforma unaudited results for the Group including the ABN AMRO businesses to beretained by RBS and cover the first quarter of 2008. Comparisons are with thefirst quarter of 2007, on the same pro forma basis, unless otherwise stated.Divisional analysis is on the basis of the new Group structure announced on 28February 2008. Details of the revised structure and pro forma financialinformation for 2006 and 2007 are contained in the announcement and resultspresentation accompanying the Group's Annual Results on 28 February 2008 whichare appended as Appendix IV. Additionally, details of loans and advances,customer deposits and risk-weighted assets at 31 December 2007 are appended asAppendix V. The operating performance of many of RBS's businesses since the beginning of2008 has remained good, but results have been held back by the effects of thecontinuing deterioration in credit markets, which has resulted in additionalwrite-downs on credit market exposures in the first quarter. Some Global Banking& Markets businesses have experienced a reduced level of activity, althoughothers continue to perform well, as do Global Transaction Services and RegionalMarkets. Overall, the Group's underlying results, excluding write-downs, haveremained satisfactory. In a more uncertain environment for its customers, RBS has continued to benefitfrom strong growth in personal and corporate deposits and good growth inlending. Group net interest margin in the quarter was slightly lower, reflectingincreased funding costs partially offset by stronger new business margins insome lending products. Overall credit risk metrics have remained stable in the first quarter, with acontinued decline in UK personal sector impairment losses but increaseddelinquencies in a specific US retail portfolio. Corporate credit qualityremains broadly stable. RBS Divisions Global Markets Global Banking & Markets (GBM) has been acutely affected by credit marketconditions, particularly in March, with further write-downs in credit marketsduring the quarter. There were good performances in rates and currencies, butlower business volumes in credit markets and equities, with correspondingreductions in costs. Credit impairments have remained low. GBM has made a good start on exploiting the potential of ABN AMRO, with asignificant number of deals already recorded as a result of combining theproduct expertise and customer franchises of the two businesses. In response to the difficulties in its credit markets business, RBS has madesignificant changes to its North American management structure and hasstrengthened the control environment within GBM. It intends to reduce itsheadcount globally by more than originally envisaged through the ABN AMROintegration process. Certain structured credit activities have been discontinued and problematic USsub-prime mortgage-related assets are now managed by a dedicated work-out unitwith a view to minimising risk and reducing positions at an appropriate pace.GBM remains focused on effective management of its capital and has acceleratedother balance sheet management actions. Global Transaction Services (GTS) has delivered good growth in income andprofit, despite a reduced benefit from non-interest bearing deposits as a resultof lower interest rates. Transaction volumes have increased and the productstrength and international capabilities of this new division have attractedsignificant new business, winning a number of notable new mandates in cashmanagement, trade finance and financial institutions. GTS continues to expandits international reach in merchant acquiring. Expense growth has remained undercontrol. Regional Markets UK Retail & Commercial Banking has achieved steady growth in income, net ofclaims. Retail and commercial deposits have grown strongly, increasing by 12%in the first quarter, and there has been continued excellent progress in UKwealth management where assets under management increased by 15%. After twoyears in which RBS has had a limited appetite for the returns available in theUK mortgage market, it is now seeing competitors withdrawing from the market andhas taken advantage of opportunities to write good credit quality mortgages atattractive margins. In the first quarter of 2008, RBS has achieved an 11% shareof net new mortgage lending at an average loan to value of 64%. Retail impairment losses have continued to decline, reflecting our continuedcautious approach to the personal unsecured credit market, while commercialcredit quality has remained stable. We continue to monitor our exposure tocommercial property carefully, and remain satisfied with the performance of ourportfolio. Only 1% of commitments secured on commercial property is forspeculative commercial property development. US Retail & Commercial Banking has continued to achieve modest income growthwhile maintaining good cost discipline, but overall results have been held backby increased impairments in one specific loan portfolio. RBS continues todiversify its business, achieving good growth in commercial banking volumes andin cards. Deposit volumes are stable, but margins have been eroded bycompetitive pressure. Consumer lending volumes have contracted as underwritingstandards have been tightened and consumer spending has slowed. Investment isbeing focused on the development of commercial banking activities and otherselected opportunities. Citizens' credit portfolio continues to perform satisfactorily, with theexception of a specific portfolio within its home equity book, referred to inRBS's trading update of 6 December 2007. Delinquencies on this portfolio haverisen markedly as the housing market has continued to weaken and the Group hascontinued to increase provisions. Excluding this portfolio, delinquencies inconsumer lending represented only 0.7% of balances in the first quarter,unchanged from the level of a year earlier. Europe and Middle East Retail & Commercial Banking has continued to deliver goodprofit growth, though income growth within Ulster Bank has moderated in linewith the slower pace of Irish economic expansion. Credit quality remainsstable. Results in sterling terms have benefited from the movement in the euroexchange rate. The business in the UAE continues to make good progress withrecord sales of credit cards and personal loans in March and continued strongperformance in affluent banking. Asia Retail & Commercial Banking has continued to generate very strong growth inboth income and operating profit. RBS Coutts has maintained its momentum withdeposits 18% ahead and assets under management 16% higher in March. In China,the affluent banking business is making excellent progress, with client fundsdoubling. The division is pressing ahead with continued focused investment inits retail and commercial banking franchise in the region. RBS Insurance has achieved strong new business volumes and good renewal rates inits own motor and home brands. Expenses reflect accelerated marketing activity,while claims costs were lower as a result of enhanced risk selection as well asmore favourable weather conditions. International businesses in Spain, Italyand Germany continued to make good progress. Group Manufacturing has continued to deliver good productivity gains in supportof business growth in our customer-facing divisions while continuing to investin our infrastructure in the UK and internationally. Technology and operationscosts remain tightly controlled. Acquisitions and Disposals On 1 April 2008 RBS completed the formation of a commodities market-making jointventure with Sempra Energy, RBS Sempra Commodities. ABN AMRO Integration Integration benefits and headcount reductions achieved during the first quarterare slightly ahead of RBS's initial expectations. Cost benefits are slightlyahead of schedule, while revenue benefits are slightly behind. As indicated inits announcement on 28 February 2008, RBS expects to achieve integrationbenefits totalling €2.3 billion by 2010, compared with its original estimate of€1.7 billion. Implementation teams are now in place, with, for example, 44 separateworkstreams established in GBM, covering products, clients, regions, functionsand migration, involving 1,200 staff from RBS and ABN AMRO. The ABN AMRO businesses acquired by RBS have been restructured to mirror the newRBS Group structure. Future single management appointments have been made andthe co-location of GBM teams has begun, with rebranding of ABN AMRO buildingsalready under way. The combined GBM and GTS teams have already achieved asignificant number of deals in which ABN AMRO customers gain access to RBSproduct capabilities, such as US Treasury bonds, while RBS customers benefitfrom ABN AMRO product expertise in areas such as cash management and tradefinance. Outlook The outlook is inevitably clouded by the disruption to markets, as a result ofwhich volumes are likely to be significantly lower in some areas of GBM.However, other areas of GBM, and most of the Group's other businesses, aremaking good progress, taking advantage of the opportunities that have becomeavailable in this changed environment to achieve profitable growth at goodrisk-adjusted rates of return. The Group is now better positioned in growtheconomies and has many additional opportunities to exploit its enhancedpresence, customer franchises and product capabilities. With reinforced capital ratios, the Group will be in a stronger position tonavigate through an economic environment that remains uncertain and well placedto take advantage of the growth opportunities available to it. Appendix IV Pro forma financial information for the Group under the revised divisionalstructure In February 2008 RBS announced a new organisational structure. The mainbusiness units of the Group under the new structure are set out below. Global Banking & Markets UK Retail & Commercial US Retail & Commercial RBS Insurance Banking Banking • GBM except • UKCB except Money • Citizens, except • Direct LineTransaction Banking Transmission Corporate Money Transmission, RBS Lynk • Churchill• ABN AMRO 'GBM' • Retail except and Citizensexcept Transaction Merchant Acquiring, Manufacturing • PrivilegeBanking Commercial Cards and Card Operations (unchanged) • UK Wealth Management Global Transaction Europe & Middle East Asia Retail & Commercial GroupServices Retail & Commercial Banking Manufacturing Banking • ABN AMRO Transaction • Ulster Bank, • ABN AMRO Retail & • ManufacturingBanking including ECF Commercial in Asia • ABN AMRO• GBM Transaction • ABN AMRO Retail & • International Wealth ManufacturingBanking Commercial in Europe and Management Middle East • Citizens• UKCB Money ManufacturingTransmission • Card Operations• Citizens CorporateMoney Transmission • Retail MerchantAcquiring • Retail CommercialCards • RBS Lynk Set out below are summarised pro forma unaudited results for the Group under therevised divisional structure. These show the underlying performance of the Groupincluding the full year results of the ABN AMRO businesses acquired by RBS. These figures are provisional and may be refined in due course. However, nomaterial adjustments are anticipated. GROUP 2007 2006 £m £m Total income 33,490 31,737 Operating expenses 16,553 15,957 Insurance net claims 4,528 4,458 _______ _______ Operating profit before impairment losses 12,409 11,322 Impairment losses 2,095 2,000 _______ _______Group operating profit * 10,314 9,322 _______ _______ BALANCE SHEET 2007 AT 31 DECEMBER 2007 £bn Loans and advances to customers - gross 707.2Customer Deposits 559.0Risk Weighted Assets 490.0 DIVISIONAL ANALYSIS 2007 2006 £m £m Global Banking & Markets 4,916 4,365Global Transaction Services 1,632 1,561UK Retail & Commercial Banking 6,250 5,722US Retail & Commercial Banking 1,557 1,821Europe and Middle East Retail & Commercial Banking 760 662Asia Retail & Commercial Banking 209 119RBS Insurance 902 964Group Manufacturing (4,234) (4,164)Central items (1,678) (1,728) _______ _______Group operating profit * 10,314 9,322 _______ _______ * Group operating profit Excludes • RBS unusual items - credit market write-downs and goodwill payments, offset by the gains on sale of Southern Water and certain other assets • ABN AMRO pre and post acquisition credit market write-downs and the impact of the LaSalle sale • RBS share of ABN AMRO's shared assets • amortisation of purchased intangible assets and integration costs; and Includes • the cost of funding the ABN AMRO acquisition within Central Items. Whilst part of the acquisition consideration was funded by the issue of preference shares, these pro forma results assume that the cash element of the consideration was debt funded. 2007 2006 Global Banking & Markets £m £m Rates, Currencies & Commodities 3,280 2,050Equities 1,221 1,036Credit Markets 2,667 2,869Asset & Portfolio Management 3,722 3,936 _______ _______Total income 10,890 9,891Direct expenses 5,850 5,476 _______ _______Contribution before impairment losses 5,040 4,415Impairment losses 124 50 _______ _______Contribution 4,916 4,365 _______ _______ Global Banking & Markets comprises the Global Banking and Markets businesses ofRBS and ABN AMRO except for transaction banking. 2007 2006 Global Transaction Services £m £m Net interest income 839 759Non-interest income 1,348 1,318 _______ _______Total income 2,187 2,077Direct expenses 543 519 _______ _______Contribution before impairment losses 1,644 1,558Impairment losses 12 (3) _______ _______Contribution 1,632 1,561 _______ _______ Global Transaction Services comprises RBS and ABN AMRO transaction banking, UKand US corporate money transmission, UK and US merchant acquiring and UKcommercial cards. 2007 2006 UK Retail & Commercial Banking £m £m Net interest income 6,677 6,406Non-interest income 4,432 4,170 _______ _______Total income 11,109 10,576Direct expenses 2,973 2,868Insurance net claims 518 488 _______ _______Contribution before impairment losses 7,618 7,220Impairment losses 1,368 1,498 _______ _______Contribution 6,250 5,722 _______ _______ UK Retail & Commercial Banking comprises UK Retail Banking and UK CommercialBanking which are set out below. 2007 2006 UK Retail Banking £m £m Net interest income 4,680 4,544Non-interest income 3,423 3,276 _______ _______Total income 8,103 7,820Direct expenses 2,068 2,027Insurance net claims 518 488 _______ _______Contribution before impairment losses 5,517 5,305Impairment losses 1,188 1,309 _______ _______Contribution 4,329 3,996 _______ _______ UK Retail Banking comprises Retail Markets except for merchant acquiring,commercial cards and International Wealth Management. 2007 2006 UK Commercial Banking £m £m Net interest income 1,997 1,862Non-interest income 1,009 894 _______ _______Total income 3,006 2,756Direct expenses 905 841 _______ _______Contribution before impairment losses 2,101 1,915Impairment losses 180 189 _______ _______Contribution 1,921 1,726 _______ _______ UK Commercial Banking comprises UK Corporate Banking except for moneytransmission. 2007 2006 US Retail & Commercial Banking $m $m Net interest income 3,873 3,765Non-interest income 1,870 1,905 _______ _______Total income 5,743 5,670Direct expenses 1,949 1,975 _______ _______Contribution before impairment losses 3,794 3,695Impairment losses 682 333 _______ _______Contribution 3,112 3,362 _______ _______ US Retail & Commercial Banking comprises Citizens except for corporate moneytransmission, merchant acquiring and its manufacturing activities. 2007 2006 Europe and Middle East Retail & Commercial Banking £m £m Net interest income 1,053 925Non-interest income 363 287 _______ _______Total income 1,416 1,212Direct expenses 521 423 _______ _______Contribution before impairment losses 895 789Impairment losses 135 127 _______ _______Contribution 760 662 _______ _______ Europe and Middle East Retail & Commercial Banking comprises Ulster Bank and ABNAMRO retail and commercial businesses in Europe and Middle East. 2007 2006 Asia Retail & Commercial Banking £m £m Net interest income 285 226Non-interest income 398 305 _______ _______Total income 683 531Direct expenses 356 272 _______ _______Contribution before impairment losses 327 259Impairment losses 118 140 _______ _______Contribution 209 119 _______ _______ Asia Retail & Commercial Banking comprises the International Wealth Managementactivities of RBS and the retail and commercial businesses of ABN AMRO in Asia. Group Manufacturing comprises RBS and ABN AMRO Manufacturing activities. Thescope of Global Manufacturing has been expanded to include US Retail &Commercial Banking's manufacturing activities and UK Cards operations. Central Items comprises RBS group and corporate functions, the RBS share of ABNAMRO's head office costs and the pro forma funding costs associated with the ABNAMRO acquisition. Appendix V Loans and Advances to Customers - Gross 31 December 2007 £bn Excluding Reverse Repos Global Banking & Markets 227.2Global Transaction Services 9.9UK Retail & Commercial Banking 218.4US Retail & Commercial Banking 57.0Europe and Middle East Retail & Commercial Banking 47.8Asia Retail & Commercial Banking 4.3Other 0.4 _______ 565.0 Reverse Repos 142.2 _______Group 707.2 _______ Customer Deposits 31 December 2007 £bn Excluding Repos Global Banking & Markets 106.9Global Transaction Services 45.7UK Retail & Commercial Banking 200.9US Retail & Commercial Banking 51.9Europe and Middle East Retail & Commercial Banking 22.2Asia Retail & Commercial Banking 11.3 _______ 438.9 Repos 120.1 _______Group 559.0 _______ Risk Weighted Assets 31 December 2007 £bn Global Banking & Markets 191.4Global Transaction Services 12.7UK Retail & Commercial Banking 178.9US Retail & Commercial Banking 57.1Europe and Middle East Retail & Commercial Banking 36.7Asia Retail & Commercial Banking 3.3Other 9.9 _______Group 490.0 _______ This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
RBS.L