4th Aug 2005 07:02
Royal Bank of Scotland Group PLC04 August 2005 Part 1 Interim Results for the half year ended 30 June 2005 THE ROYAL BANK OF SCOTLAND GROUP plc CONTENTS Page Presentation of information 2 2005 First half highlights 3 Results summary 4 PRO FORMA RESULTS 5 Group Chief Executive's review 6 Summary consolidated income statement 10 Financial review - pro forma basis 11 Divisional performance 13 Corporate Banking and Financial Markets 14 Retail Markets 16 Retail Banking 17 Retail Direct 19 Wealth Management 20 Manufacturing 21 Citizens 22 RBS Insurance 24 Ulster Bank 26 Central items 27 Average balance sheet 28 Average interest rates, yields, spreads and margins 29 Summary consolidated balance sheet 30 Overview of summary consolidated balance sheet 31 Notes on pro forma results 33 Analysis of income, expenses and provisions 35 Asset quality 36 Analysis of loans and advances to customers 36 Risk elements in lending 37 Market risk 38 STATUTORY RESULTS 39Reconciliation of statutory and pro forma income statement 40Condensed consolidated income statement 42Review of condensed consolidated income statement 43Condensed consolidated balance sheet 45 Overview of condensed consolidated balance sheet 46 Condensed statement of changes in equity 48 Condensed consolidated cash flow statement 49 Notes 50 Regulatory ratios and other information 56 Forward-looking statements 57 Independent review report by the auditors 58 Financial calendar 59 Contacts 59 THE ROYAL BANK OF SCOTLAND GROUP plc PRESENTATION OF INFORMATION In preparing its interim results, the Group has applied IFRS expected to beextant at 31 December 2005. As a result of continued amendments to IAS 39 'Financial Instruments:Recognition and Measurement' during 2004 and into 2005 the Group was not in aposition fully to implement this standard for statutory reporting from 1 January2004. The Group has therefore taken advantage of the option in IFRS 1 'First-time Adoption of International Financial Reporting Standards' to implementIAS 39, together with IAS 32 'Financial Instruments: Disclosure andPresentation' and IFRS 4 'Insurance Contracts', from 1 January 2005 withoutrestating its 2004 profit and loss account and balance sheet. This comparativeinformation is referred to as the 'statutory basis' or 'statutory results'. Thiswas the basis for the Group's IFRS Transition Report published on 8 June 2005. However, given the importance of IAS 32, IAS 39 and IFRS 4, the Group providedan indication of their effect on profit before tax and on earnings per share inJune 2005. We are now providing detailed comparative information on a pro formabasis that includes the estimated effect of these standards for the six monthsto 30 June 2004 to facilitate inter-period comparison. Their overall effect onprofit before tax and earnings per share is consistent with the guidance givenin June 2005. The pro forma income statement for the six months ended 30 June 2004 has beenprepared as though the requirements of IAS 32, IAS 39 and IFRS 4 had beenapplied from 1 January 2004 except for the requirements relating to hedgeaccounting; no hedge ineffectiveness has been recognised in profit or loss.Impairment provisions reflect the information and estimates on which previousGAAP provisions were established. Classification of financial assets intoheld-to-maturity, held-for-trading, available-for-sale, loans and receivables ordesignated as at fair value through profit or loss at 1 January 2004 isconsistent with the approach adopted on 1 January 2005 for the statutoryinformation. The results for 2005 with pro forma comparatives for 2004 are presented on pages5 to 37 and with the statutory results for 2004 on pages 39 to 55. Aconsolidated opening balance sheet as at 1 January 2005 is presented on page 30incorporating the initial effect of implementing IAS 32, IAS 39 and IFRS 4. The bases of preparation of the pro forma information are detailed on page 33and the principal adjustments to the statutory results are detailed on pages 40to 41. THE ROYAL BANK OF SCOTLAND GROUP plc 2005 FIRST HALF HIGHLIGHTS Compared with 2004 first half pro forma results • Income up 15% to £12,465 million. • Profit before tax, intangibles amortisation and integration costs up £598 million, 18% to £4,011 million. • Profit before tax up 14% to £3,688 million. • Excluding acquisitions and currency movements, income was up 10%, costs up 9% and operating profit up 12%. • Cost:income ratio, excluding acquisitions 41.7% compared with 41.8% for the first half of 2004. • Adjusted earnings per ordinary share up 8% to 86.7p. • Basic earnings per ordinary share up 4% to 79.8p. • Customer growth in all divisions. • Average loans and advances to customers up 25%. • Average customer deposits up 16%. • Overall credit quality stable and problem loan metrics continue to improve. • Interim dividend 19.4p per ordinary share, up 15.5%. Comparison with 2004 first half statutory results is set out on page 43 of thisAnnouncement. THE ROYAL BANK OF SCOTLAND GROUP plc RESULTS SUMMARY Pro forma Statutory First half First half First half 2005 2004 Increase 2004 £m £m £m £m Total income 12,465 10,861 1,604 11,192 _______ _______ _____ _______Operating expenses* 5,485 4,744 741 4,697 _______ _______ _____ _______Operating profit before provisions* 4,858 4,196 662 4,505 _______ _______ _____ _______Profit before tax, intangibles amortisation and 4,011 3,413 598 3,767integration costs _______ _______ _____ _______Intangibles amortisation 42 4 38 4 _______ _______ _____ _______Integration costs 281 178 103 178 _______ _______ _____ _______Profit before tax 3,688 3,231 457 3,585 _______ _______ _____ _______Cost:income ratio** 42.2% 41.8% 40.1% _______ _______ _______Cost:income ratio** excluding acquisitions 41.7% 41.8% 40.1% _______ _______ _______Basic earnings per ordinary share 79.8p 76.4p 3.4p 79.7p _______ _______ _____ _______Adjusted earnings per ordinary share*** 86.7p 80.6p 6.1p 83.9p _______ _______ _____ _______ * excluding intangibles amortisation and integration costs. ** the cost:income ratio is based on operating expenses excluding intangibles amortisation and integration costs, and after netting operating lease depreciation against rental income. *** adjusted earnings per ordinary share is based on earnings adjusted for intangibles amortisation and integration costs. Sir Fred Goodwin, Group Chief Executive, said: "These results continue some consistent themes in the Group's performance -double digit income, profit and dividend growth and an increasing diversity ofincome by both geography and business segment. I am particularly pleased with the performance of Corporate Banking andFinancial Markets which has delivered high quality earnings across its businesshere in the UK and also in Europe, the US and Asia Pacific. In additionCitizens, Ulster Bank and RBS Insurance have each delivered a good performance,while keeping the integration of their respective acquisitions well on target. Despite the well documented easing of consumer demand in the UK our RetailMarkets divisions recorded increased income and customer numbers. Increasing diversity ensures we can gain from strengthening market conditions indifferent geographies and consequently are not overly dependent on theperformance of any single economy". THE ROYAL BANK OF SCOTLAND GROUP plc PRO FORMA RESULTS To allow more meaningful comparison with the 2005 first half results, pro formaresults have been prepared for the first half of 2004. The pro forma resultsinclude the impact of standards relating to financial instruments and insurancecontracts (IAS 32, IAS 39 and IFRS 4) and the bases of preparation of theseresults and the principal adjustments to the statutory results are described onpages 33 and 40 and 41, respectively. A detailed reconciliation of the consolidated income statement for the sixmonths ended 30 June 2004 from a statutory basis to a pro forma basis is shownon page 41. The Group Chief Executive's review on page 6 and the financial review on pages10 to 37 compare the results for the first half of 2005 with the pro formaresults for the first half of 2004. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW We have delivered strong income and profit growth in the first half of 2005.Profit before tax, amortisation of intangibles and integration costs increasedby 18% to £4,011 million. Our ability to achieve sustained growth owes much tothe diversity of our income streams, which are balanced both by geography and bycustomer, and to the growing contribution of recent acquisitions. Total income increased by 15% to £12,465 million. Corporate Banking andFinancial Markets and Citizens produced particularly strong performances,tempered by a lower rate of growth in our Retail Markets business, comprisingRetail Banking, Retail Direct and Wealth Management. Underlying business metricsremain good with improved customer service scores and growth in customer numbersin all divisions. Excluding acquisitions and currency movements, total incomerose by 10%. Growth in both lending and deposits has remained strong. Average loans andadvances to customers increased by 17%, excluding acquisitions. We wereespecially successful in expanding our mortgage book, with good growth in the UKand Ireland. Average customer deposits, excluding acquisitions, grew by 9%, withcustomer balances in higher interest savings accounts growing faster thancurrent account balances. Excluding acquisitions and currency movements, operating expenses increased by9% and the cost:income ratio improved slightly to 41.7% compared with 41.8% inthe first half of 2004. Including Charter One, with its higher cost:incomeratio, the Group's cost:income ratio was 42.2%. All of the Group initiatives toimprove efficiency remain fully on track albeit that IFRS re-bases the cost:income ratio to a higher level. Overall credit quality remains stable, with total provisions rising more slowlythan average loans and advances. Lower rates of provisioning in CBFM reflectedthe continuation of the trend of improving credit quality in corporate banking.Against this, as we indicated at the time of our final results for 2004,provisions in Retail Markets have risen, reflecting the growth in lending inprevious years as well as a slight increase in the proportion of customers inarrears. Operating profit excluding acquisitions and currency movements increased by 12%and adjusted earnings per share increased by 8% to 86.7p. Dividend per share hasincreased by 15.5%. Capital ratios at 30 June 2005 were 6.6% (Tier 1) and 11.4% (Total). Theimplementation of IFRS and the consequent changes to the FSA rules, particularlyin respect of pension fund deficits, reduced the Group's Tier 1 ratio at 30 June2005 by 50 basis points. On a like for like basis, the Group's Tier 1 ratiowould have been 7.1% compared with 7.0% at 31 December 2004 under UK GAAP. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) REVIEW OF DIVISIONS Corporate Banking and Financial Markets (CBFM) achieved a strong performance inthe first half, with further progress from our core mid-corporate franchise andparticularly robust growth from large corporate and institutional banking. Totalincome rose by 16% to £4,308 million and contribution by 23% to £2,534 million. All CBFM's principal businesses experienced strong lending growth, with averageloans and advances to customers increasing by 17%. Large corporates, especially,increased drawings on their loan facilities. Customer deposits grew by 13%. Netinterest income, excluding the cost of funding rental assets, grew by 10% to£1,700 million. Non-interest income increased by 20% to £2,841 million, with strong performancesfrom the full range of our businesses. Fee income from customer services in riskmanagement, financial structuring debt raising and banking operations grewstrongly as we continued to extend our customer franchise and other non-interestincome from a range of businesses was up from a low level in the first half of2004. Income from trading activities also rose strongly. This reflects anexcellent performance by our growing interest rate derivatives business, drivenby increasing customer volumes, as well as the expansion of our financialmarkets activities in Europe and the US. RBS Greenwich Capital also deliveredincome from trading activities that matched its strong result in the first halfof 2004. We have continued to invest in the development of our financial markets andstructured finance businesses in Europe, as well as in our core corporatebanking operations in the UK. In the US, our debt capital markets business,launched just over a year ago, is already producing encouraging results. Theseinvestments, together with higher performance-related bonuses, contributed to a13% increase in costs to £1,589 million. CBFM's strong performance in the first half maintains the division's consistentrecord of growing both income and contribution, thanks to the strength anddiversity of its businesses, and to the investment made over the years inexpanding its product and geographic coverage. Retail Markets was established in June to strengthen co-ordination and deliveryof our multi-brand retail strategy. It increased total income by 6% andcontribution before impairment provisions by 5% in the first half of 2005. Thecomponent parts of Retail Markets: Retail Banking, Retail Direct and WealthManagement are discussed below. • Retail Banking has faced more difficult market conditions, with consumer lending growing at a slower pace than in recent years, some tightening of lending spreads and an increase in provisions. We have, however, continued to outgrow the market in mortgages, where average lending rose by 16% to £45.1 billion. Total income increased by 3% to £2,621 million, and contribution fell by 2% to £1,480 million. Retail Banking net interest margin declined as price repositioning of the unsecured lending book resulted in a greater percentage at current pricing; growth in savings products outstripped that in current accounts and other low interest accounts; and low risk mortgages continued to grow strongly. With direct expense growth contained at 2%, Retail Banking's contribution before provisions increased by 1% to £1,775 million. Provisions for loan impairment rose by 18% to £295 million. This largely reflects growth in lending over recent years. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) REVIEW OF DIVISIONS (continued) • Retail Direct increased its income by 13% reflecting continued good growth in card and payment services, supermarket banking and mortgages. Increased provisions, resulting from some credit quality deterioration in credit cards, as we signalled earlier in the year, limited its contribution to £325 million, up 4%. Net interest income rose by 12%, with average lending up 11% and net interest margins held stable. Mortgage balances grew particularly strongly, rising by 25% to £10.6 billion. The mix effect of this strong growth in mortgages, which earn lower margins, reduced the net interest margin. This was, however, offset by an increase in interest-bearing credit card balances as a percentage of total card balances. Tesco Personal Finance continued to make strong progress, winning customers especially in credit cards. Direct expenses grew by 9%, reflecting continued investment in new business areas such as First Active mortgages in the UK. Provisions for loan impairment increased by 34% to £278 million, reflecting growth in lending volumes as well as the increasing arrears levels we reported at the year end. The trend in arrears has, however, shown signs of stabilisation in recent months. • Wealth Management increased its income by 8% and its contribution by 16% to £208 million, with good growth from Coutts UK. Net interest income rose by 5%, as a result of good growth in lending and deposit volumes. Non-interest income was 10% higher, reflecting both improved equity markets and new investment business. Manufacturing's costs increased by 9% to £1,317 million, though this increasewould have been lower without the application of new IFRS rules on softwareamortisation. In addition to supporting normal growth in the business, theincrease reflected mostly higher technology spending, which is delivering incomeand cost benefits across the Group, and the continuing upgrade of our regionalproperty portfolio, including the opening of our new Spinningfields regionalcentre in Manchester. Citizens' income increased, in US dollars, by 72% and its contribution rose by79% to $1,403 million, including Charter One, whose integration into the Groupremains fully on track to deliver the cost savings and income benefits weanticipated. Charter One contributed $516 million in the six month period. Thefirst phase of integration - the technology conversion - was completed lastmonth, five months ahead of schedule. This paves the way for a second phase ofcost savings derived from transforming the way Charter One does business, andgives us the ability to introduce the Citizens product-set to Charter Oneexisting and new customers. Citizens' New England and Mid-Atlantic franchise, meanwhile, continued toachieve good growth. Excluding Charter One, Citizens' total income rose by 12%and contribution by 13% to $887 million, with good volume growth in bothdeposits and lending partially offset by the effect of tighter asset spreads onnet interest margin. RBS Insurance increased its income by 7% and its contribution by 6% to £435million - a good performance in difficult market conditions. The Group continuedto build on its already strong position in the UK insurance market, with thenumber of motor policies increasing by 6% from 30 June 2004, and has succeededin raising premium income, despite continued competitive pressure on pricing.Privilege made good progress, with motor policy numbers increasing by 25%between December and June. Motor policy numbers in continental Europe rose by15%. Although net claims increased by 8%, partly as a result of the severestorms experienced earlier in the year, tight expense control meant that the UKcombined operating ratio, including manufacturing costs, improved slightly to93.1%, compared with 93.3% for the full year 2004. The integration of Churchillremains fully on track, and its contribution in the first half, net ofmanufacturing costs, rose to £103 million. That is more than the profit of £86million it reported for the whole of 2002, the year before its acquisition. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) REVIEW OF DIVISIONS (continued) Ulster Bank increased its income by 15% and its contribution by 18% to £251million. Net interest income rose by 18%, reflecting strong growth in lending.Mortgage lending grew especially strongly, with particularly good progress inthe Republic of Ireland, where our share of new business is now up to 18%. Themix impact of this contributed to a decline in net interest margin. Non-interestincome also gained from strong growth in lending fees. The integration of FirstActive remains fully on track. Outlook The economic outlook for the remainder of 2005 remains clearly positive,although it is noticeable that some of the elements contributing to this viewhave changed during the first half of the year. In the UK it now seems likely that interest rates have peaked, which should easesome of the pressure felt on household budgets, to which interest rates havebeen but one contributor. At the same time, consumer credit quality shows signsof having stabilised, against a backdrop of historically high levels ofemployment and household wealth. That said the attendant "belt tightening" inthe consumer sector has created a sense of the prospects for both growth andsentiment whilst satisfactory in absolute terms are relatively more subdued thanearlier in the year. The prospects for our business in the United States are markedly better giventhe robust performance of the US economy. While the economic environment issubdued in some areas of Europe, the prospects for the relevant parts of theeconomy in which we operate comfortably support our growth targets. Our results for the first half highlight the benefits of strength and diversityin our operations and income streams, and we would expect this to be equallyapparent in the second half of the year. Sir Fred Goodwin Group Chief Executive THE ROYAL BANK OF SCOTLAND GROUP plc SUMMARY CONSOLIDATED INCOME STATEMENT FOR THE HALF YEAR ENDED 30 JUNE 2005 (unaudited) In the income statement set out below, intangibles amortisation and integrationcosts are shown separately. In the statutory income statement on page 42, theseitems are included in operating expenses. Pro forma First half First half 2005 2004 £m £m Net interest income 4,734 4,271 _______ _______Non-interest income (excluding insurance net premium income) 4,902 3,896Insurance net premium income 2,829 2,694 _______ _______Non-interest income 7,731 6,590 _______ _______Total income 12,465 10,861Operating expenses 5,485 4,744 _______ _______Profit before other operating charges 6,980 6,117Insurance net claims 2,122 1,921 _______ _______Operating profit before provisions 4,858 4,196Provisions 847 783 _______ _______Profit before tax, intangible assets amortisation 4,011 3,413and integration costsAmortisation of purchased intangible assets 42 4Integration costs 281 178 _______ _______Profit on ordinary activities before tax 3,688 3,231Tax on profit on ordinary activities 1,095 914 _______ _______Profit for period 2,593 2,317Minority interests 34 16Preference dividends 25 - _______ _______Profit attributable to ordinary shareholders 2,534 2,301 _______ _______ Basic earnings per ordinary share (Note 5) 79.8p 76.4p _______ _______ Adjusted earnings per ordinary share (Note 5) 86.7p 80.6p _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL REVIEW - PRO FORMA BASIS In the following analyses, the results for the six months ended 30 June 2005 arecompared with the pro forma results for the six months ended 30 June 2004, whichare presented in accordance with the bases of preparation detailed on page 33. Profit Profit before tax, intangibles amortisation and integration costs increased by18% or £598 million, from £3,413 million to £4,011 million. Profit before tax was up 14%, from £3,231 million to £3,688 million. Total income The Group achieved strong growth in income during the first half of 2005. Totalincome was up 15% or £1,604 million to £12,465 million. Excluding acquisitionsand at constant exchange rates, total income was up by 10%, £1,079 million. Net interest income increased by 11% to £4,734 million and represents 38% oftotal income (2004 - 39%). Average loans and advances to customers and averagecustomer deposits grew by 25% and 16% respectively, or 17% and 9% respectivelyexcluding acquisitions. Non-interest income increased by 17% to £7,731 million and represents 62% oftotal income (2004 - 61%). Fees receivable were up 17% with good growth intransmission and card related fees reflecting higher volumes. General insurancepremium income increased by 6%, reflecting volume growth in both motor and homeinsurance products. In Financial Markets, income from trading activities grewstrongly with increased volumes reflecting growth in customer-driven productsresulting in an increase in revenue of 14%. Income from rental assets (operatinglease and investment property portfolios) grew by 11% to £725 million. Net interest margin The Group's net interest margin at 2.60% was down from 2.83% in 2004. Of thereduction of 23 basis points, strong organic growth in lower margin mortgagelending accounted for 9 basis points. The balance of the decline includes theflattening of the US dollar yield curve (4 basis points), a change in thedeposit mix (3 basis points), the price repositioning of the Group's UK retailunsecured lending book (3 basis points) and higher levels of rental assets (2basis points). Operating expenses Operating expenses, excluding intangibles amortisation and integration costs,rose by 16% to £5,485 million in support of higher business volumes togetherwith investment in efficiency enhancement and business development initiatives.Excluding acquisitions and at constant exchange rates, operating expenses wereup by 9%, £447 million. Cost:income ratio The Group's cost:income ratio was 42.2% compared with 41.8% in 2004. Excludingacquisitions and at constant exchange rates, the cost:income ratio improvedslightly to 41.7%. Net insurance claims Bancassurance and general insurance claims, after reinsurance, which under IFRSinclude maturities and surrenders, increased by 10% to £2,122 million reflectingvolume growth and maturities of our guaranteed capital bond. Provisions The profit and loss charge for impairment provisions was £847 million comparedwith £783 million in the first half of 2004, an increase of 8%, or 5% excludingacquisitions. This reflects improvements in credit quality in CBFM and higherprovisions in unsecured lending due to both growth in previous years andincreased arrears in credit cards. THE ROYAL BANK OF SCOTLAND GROUP plc Financial Review - PRO FORMA BASIS (continued) The ratio of risk elements in lending to gross loans and advances to customersexcluding reverse repos improved to 1.63% at 30 June 2005 (1 January 2005 -1.84%). Risk elements in lending and potential problem loans represented 1.64% of grossloans and advances to customers excluding reverse repos at 30 June 2005 (1January 2005 - 1.85%). Provision coverage of risk elements in lending and potential problem loansimproved to 71% at 30 June 2005 (1 January 2005 - 70%). Integration Integration costs were £281 million compared with £178 million in the first halfof 2004. Included in both periods is some £140 million of software costspreviously written-off as incurred under UK GAAP but now amortised under IFRSrelating to the acquisition of NatWest. All such software will be fullyamortised by the end of 2005. The balance principally relates to the integrationof Churchill, First Active and Citizens' acquisitions, including Charter Onewhich was acquired in August 2004. Earnings and dividends Basic earnings per ordinary share increased by 4%, from 76.4p to 79.8p. Earningsper ordinary share adjusted for intangibles amortisation and integration costs,increased by 8%, from 80.6p to 86.7p. An interim dividend of 19.4p per ordinary share, an increase of 15.5%, will bepaid on 7 October 2005 to shareholders registered on 12 August 2005. The interimdividend is covered 4.5 times by earnings before intangibles amortisation andintegration costs. Balance sheet Total assets were £757.2 billion at 30 June 2005, 9% higher than total assets of£696.5 billion at 1 January 2005. Lending to customers, excluding repurchase agreements and stock borrowing("reverse repos"), increased in the first half of 2005 by 11% or £34.2 billionto £349.4 billion. Customer deposits, excluding repurchase agreements and stocklending ("repos"), grew by 7% or £18.7 billion to £276.4 billion over the sameperiod. Compared with 30 June 2004, average loans and advances to customersincreased by 25%, £61.0 billion, and average customer deposits were up 17%,£35.3 billion. Capital ratios at 30 June 2005 were 6.6% (Tier 1) and 11.4% (Total). Theimplementation of IFRS and the consequent changes to the FSA rules, particularlyin respect of pension fund deficits, reduced the Group's Tier 1 ratio at 30 June2005 by 50 basis points. On a like for like basis, the Group's Tier 1 ratiowould have been 7.1% compared with 7.0% at 31 December 2004 under UK GAAP. Profitability The adjusted after-tax return on ordinary equity, which is based on profitattributable to ordinary shareholders before intangibles amortisation andintegration costs, and average ordinary equity, was 18.2% compared with 19.0%for the first half of 2004. This movement reflects underlying improvements inprofitability offset by the impact of acquisitions. THE ROYAL BANK OF SCOTLAND GROUP plc DIVISIONAL PERFORMANCE The contribution of each division before amortisation of purchased intangibleassets, integration costs and, where appropriate, Manufacturing costs isdetailed below. Pro forma First half First half 2005 2004 Increase £m £m % Corporate Banking and Financial Markets 2,534 2,054 23Retail MarketsRetail Banking 1,480 1,507 (2)Retail Direct 325 314 4Wealth Management 208 180 16Total Retail Markets 2,013 2,001 1Manufacturing (1,317) (1,211) (9)Citizens 749 430 74RBS Insurance 435 410 6Ulster Bank 251 212 18Central items (654) (483) (35) _______ _______ _______Profit before amortisation of purchased intangible assets 4,011 3,413 18and integration costs _______ _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE BANKING AND FINANCIAL MARKETS Pro forma First half First half 2005 2004 £m £m Net interest income excluding funding cost of rental assets 1,700 1,552Funding cost of rental assets (233) (197) _______ _______Net interest income 1,467 1,355 _______ _______Fees and commissions receivable 786 695Fees and commissions payable (134) (126)Income from trading activities 1,175 1,034Income from rental assets 725 654Other operating income 289 101 _______ _______Non-interest income 2,841 2,358 _______ _______Total income 4,308 3,713 _______ _______Direct expenses- staff costs 982 830- other 256 233- operating lease depreciation 351 343 _______ _______ 1,589 1,406 _______ _______Contribution before provisions 2,719 2,307Provisions 185 253 _______ _______Contribution 2,534 2,054 _______ _______ 30 June 1 January 2005 2005 £bn £bn Total assets* 414.3 360.9Loans and advances to customers - gross*- banking book 151.1 137.9- trading book 13.9 10.1Rental assets 12.4 11.5Customer deposits* 107.4 100.6 _______ _______ * excluding reverse repos and repos Corporate Banking and Financial Markets ("CBFM") is the largest provider ofbanking services and structured financing to medium and large businesses in theUK and a growing provider of debt financing and risk management solutions tolarge businesses in Europe and North America and to financial institutionsworldwide. The business provides an integrated range of products and services, includingcorporate and commercial banking, treasury and capital markets products,structured and acquisition finance, trade finance, leasing and factoring. CBFMis also a leading global provider of debt, foreign exchange and derivativesproducts and includes RBS Greenwich Capital in North America. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE BANKING AND FINANCIAL MARKETS (continued) Contribution increased by 23% or £480 million to £2,534 million reflectinggrowth in all business areas and a lower charge for provisions. Contributionbefore provisions increased by 18% to £2,719 million. Total income was up 16% or £595 million to £4,308 million. Strong growth wasachieved across all major geographies, with our non-UK businesses continuing toproduce good results, reflecting the investment we have made in them in prioryears. Net interest income, excluding the cost of funding rental assets, increased 10%or £148 million to £1,700 million. All businesses experienced strong lendinggrowth. Average loans and advances to customers in the banking businessesincreased by 17% to £125.2 billion partly due to higher utilisations of lendingfacilities by large corporates. Average customer deposits in the bankingbusinesses also increased by 13% to £83.1 billion, with particularly stronggrowth in large corporate and institutional deposits. Non-interest income rose by 20% to £2,841 million. Within this figure, feesearned from customer services in risk management, financial structuring,debt-raising and banking operations rose by £91 million or 13% to £786 millionas we continued to extend our customer franchise. Fees payable increased by £8million, or 6%. Income from trading activities, which arises from our role in providingcustomers with debt and risk management products in interest rate, currency andcredit, rose by 14% or £141 million to £1,175 million. The income growth hasbeen achieved through increasing customer volumes across the product range andthe strengthening of our customer franchise, notably with global financialinstitutions. Average trading value-at-risk remained modest at around £12million. The asset rental business, comprising operating lease assets and investmentproperties continued to grow with average rental assets increasing by 7% to£11.7 billion; income from rental assets was 11% higher at £725 million. Other operating income, including realised gains and changes in fair value offinancial assets, rose to £289 million, compared with £101 million in the firsthalf of 2004, and with £245 million in the second half of 2004. Direct expenses increased by 13% or £183 million to £1,589 million. The increasein staff costs reflects higher performance-related bonuses and the expansion ofour debt capital markets business in the US in the second half of last year. The charge for loan impairment provisions amounted to £185 million, a decreaseof 27%, or £68 million. The lower charge reflects the continuing strong creditfundamentals in our corporate lending portfolio. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS Retail Markets comprises Retail Banking, Retail Direct and Wealth Management.The performance of each of these divisions is discussed on pages 17 to 20. Pro forma First half First half 2005 2004 £m £m Net interest income 2,181 2,148Non-interest income 1,791 1,601 _______ _______Total income 3,972 3,749 _______ _______Direct expenses- staff costs 733 710- other 430 410 _______ _______ 1,163 1,120 _______ _______Insurance net claims 226 170 _______ _______Contribution before provisions 2,583 2,459Provisions 570 458 _______ _______Contribution 2,013 2,001 _______ _______ THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - RETAIL BANKING Pro forma First half First half 2005 2004 £m £m Net interest income 1,542 1,567Non-interest income 1,079 969 _______ _______Total income 2,621 2,536 _______ _______Direct expenses- staff costs 477 467- other 143 142 _______ _______ 620 609 _______ _______Insurance net claims 226 170 _______ _______Contribution before provisions 1,775 1,757Provisions 295 250 _______ _______Contribution 1,480 1,507 _______ _______ 30 June 1 January 2005 2005 £bn £bn Total banking assets 75.8 72.8Loans and advances to customers - gross- mortgages 46.5 44.1- personal 13.5 13.0- business 16.1 15.2Customer deposits 74.1 71.4 _______ _______ Retail Banking comprises both The Royal Bank of Scotland and NatWest retailbrands. It offers a full range of banking products and related financialservices to the personal, premium and small business markets through a networkof branches, telephone, ATMs and the internet. Contribution fell by 2% or £27 million to £1,480 million, reflecting a slowerpace of growth in consumer lending and an increased charge for provisions.Contribution before provisions increased by 1% or £18 million to £1,775 million. Total income increased by 3% or £85 million to £2,621 million. Overall customernumbers have continued to increase since June 2004 with personal customers up260,000. We have also opened more savings accounts for our existing currentaccount customers and new customers, with personal savings accounts up by423,000 in the past year. Net interest income was 2% or £25 million lower at £1,542 million. Growth incustomer advances, particularly mortgage lending, remains strong. Average loansto customers grew by 14% to £73.3 billion, although the rate of growth hasslowed in the first half of this year. Average mortgage lending grew by 16% to£45.1 billion, with unsecured personal lending up 12% to £13.0 billion andbusiness loans up 10% to £15.2 billion. Average customer deposits increased by6% to £69.2 billion. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - RETAIL BANKING (continued) Net interest margin declined as price repositioning of the unsecured lendingbook resulted in a greater percentage at current pricing; growth in savingsproducts outstripped that in current accounts and other low interest accounts;and low risk mortgages continued to grow strongly. In non-interest income, bancassurance premium and other income was £319 millioncompared with £262 million, reflecting improved investment returns and strongsales of commission-based single premium bonds. Annualised Premium Equivalentincome was £73 million or 2% higher than 2004. Other non-interest income increased by 7% or £53 million to £760 million. Thisreflects good growth in fee income in both our core personal and small businessbanking areas. Direct expenses increased by 2% or £11 million to £620 million. We continue toinvest in customer- facing activities with the focus on customer service andstaff availability. At the same time we are achieving operating efficiencies inother areas. Net claims in bancassurance, which under IFRS include maturities and surrenders,were £226 million compared with £170 million in 2004, mainly reflectingmaturities of our successful guaranteed capital bond. The charge for loan impairment provisions increased by 18% or £45 million to£295 million. The increased charge principally reflects the growth in lendingover recent years, including the 17% growth achieved in 2004. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL MARKETS - RETAIL DIRECT Pro forma First half First half 2005 2004 £m £mNet interest income 425 378Non-interest income 532 469 _______ _______Total income 957 847 _______ _______Direct expenses- staff costs 129 120- other 225 205 _______ _______ 354 325 _______ _______Contribution before provisions 603 522Provisions 278 208 _______ _______Contribution 325 314 _______ _______ 30 June 1 January 2005 2005 £bn £bn Total assets 25.7 23.0Loans and advances to customers - gross- mortgages 12.0 9.4- cards 9.1 9.3- other 4.3 3.8Customer deposits 2.7 2.7 _______ _______ Retail Direct issues a comprehensive range of credit and charge cards throughThe Royal Bank of Scotland, NatWest and other brands, including MINT and TescoPersonal Finance (TPF). Other products and services are offered to consumersRelated Shares:
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