One of the indicators we watch most carefully is Job Satisfaction and Engagement. In 2007 we once again out performed the
The Group enjoys leading positions in a number of markets, including corporate and SME banking, current accounts, merchant acquiring and car insurance. In corporate banking, RBS is the number one brand in
RBS was named Global Bank of the Year 2007 by The Banker magazine
Corporate Markets Retail Markets Ulster Bank RBS Insurance Manufacturing ABN AMRO
Europe in terms of relationships with large corporates and financial institutions. Direct Line operates in Germany, Italy and Spain. We have recently developed our presence in the Middle East, most notably through our private banking and wealth management businesses.
� Average loans and advances were up 11% and average deposits were up 14%.
to £31,115 million (2006 – £28,002 million) and operating profit increased by 9% to £10,282 million
The Group now serves over 40 million customers in 53 countries worldwide. In each of those markets we will continue our relentless focus on customers’ needs.
The acquisition of ABN AMRO gives us the ability to accelerate our existing strategies for growth outside the UK, particularly in rapidly expanding markets, while adding complementary capabilities and customer franchises to our portfolio of businesses. The integration has made a strong start, and synergies are now expected to total €2.3 billion, compared with our original estimate of €1.7 billion.
Our GBM division enjoyed another strong first half performance and throughout 2007 made good progress, in our Continental
Responsibilities Course was designed to engage young people in wealth management and empower them to become financially successful.
These included a new business banking proposition for startups; OneCard, the first all-in-one card in the Irish market allowing smaller companies to rationalise their payments process; and the first personalised credit card, allowing customers to brand their cards with the image of their choice.
• Since the late 1980s, Citizens has approved more than 41,000 Small Business Administration loans totalling more than $2 billion.
• The Customer Relationship Review, an automated profiling and customer data management tool, was introduced to enhance and improve customer service.
Very challenging economic conditions affected our personal lending, mortgage and auto loans businesses. However,
We have taken a range of actions to protect our customers.
Panel, a cohort of 10,000 secondary school pupils aged between 11 and 18 years. We will keep in touch with this group of young people over the next five years to understand how different levels of financial education and understanding affect the capabilities, aspirations and decisions they make as they enter early adulthood.
Recognition Our efforts in managing the Group’s environmental impact have been recognised by others. The ratings agency Innovest upgraded us to AAA for managing social and environmental risks and opportunities, and we were again included in the
UK. Adam & Company is the major private bank in Scotland. The offshore banking businesses – The Royal Bank of Scotland
RBS Insurance competes in personal lines insurance and, to a limited extent, in commercial insurance. There is strong competition from a range of insurance companies which now operate telephone and internet direct sales businesses.
Competition is principally with the large US commercial and investment banks and international banks active in the US.
The Group’s insurance businesses are subject to inherent risks involving claims
The Group is subject to financial services laws, regulations, administrative actions and policies in each location in which the Group operates. This supervision and regulation, in particular in the UK and US, if changed could materially affect the Group’s business, the products and services offered or the value of assets.
The effective tax rate for 2007 was 20.7% (2006 – 29.3%). The headline rate is lower than the standard rate of UK corporation tax of 30% principally due to certain non-taxable capital gains and changes to deferred tax balances following the change in rate of corporation tax.
or £283.0 billion to £686.9 billion. Customer deposits, excluding repurchase agreements and stock lending (“repos”), grew by 71% or £227.2 billion to £547.5 billion.
Cost of interest-bearing liabilities of the banking business (4.40) (3.85) (3.35)
Internal funding of trading business – UK (68,395) (3,307) 4.84 (44,475) (1,893) 4.26
Total interest-bearing liabilities – banking business (2, 3) 484,053 21,288 4.40 377,892 14,557 3.85
Corporate Markets and Retail Markets partially offset by higher impairment in Citizens. New impairment losses were up 20%, £425 million to £2,518 million. Recoveries of amounts previously written-off were up £175 million, 81% to £390 million. Consequently the net charge to the income statement was up £250 million, 13% to £2,128 million.
Risk-weighted assets 152.6 138.1 120.0 * excluding repos and reverse repos 2007 compared with 2006
While many parts of GBM grew strongly, total income of £6,580 million was 4% lower than in 2006, reflecting both cumulative 2007 write-downs of our sub-prime-related and leveraged finance positions and an additional £456 million in response to the weakening credit profile of certain financial guarantors.
B u s in e s s r e v ie w 2006 compared with 2005
These businesses also generate value through the ownership of a portfolio of assets which we manage actively. Good results from these activities, as well as from principal investments where we work with our corporate customers and with financial sponsors, leveraging our financial capability to structure and participate in a wide variety of investment opportunities, were reflected in other operating income, which increased to £1,279 million (net of related funding costs) from £744 million in 2005.
UK Corporate Banking (‘UKCB’) had another successful year of profitable growth, building further on our market-leading position and achieving significant improvements in customer satisfaction. Total income rose by 8% to £3,742 million and contribution by 9% to £2,398 million. Operating profit rose by 11% to £1,961 million.
Inc., strengthening our position in the Chicago market and making us the 4th largest bank in the Chicago area, based on deposits. The acquisition was completed in February 2007.
(2006 – 11.7%) and the tier 1 RAR was 7.3% (2006 – 7.5%).
• Pension obligation risk: is the risk that the liabilities of the
data are analysed between businesses acquired by RBS and those acquired by Fortis and Santander.
Industry analysis plays an important part in assessing potential concentration risk from within the loan portfolio. Particular attention is given to industry sectors where the Group believes there is a high degree of risk or potential for volatility in the future.
The Group operates in over 50 countries, but with the majority of assets in the UK, North America and Europe.
As at 31 December 2007 total customer provisions were £6,438 million. Excluding ABN AMRO minority interest, total customer provisions were £4,961 million, up £1,028 million (26%) from 31 December 2006.
Capital (owners’ equity and subordinated debt) increased by £13.0 billion (19%) to provide 9% of total funding at
Group’s non-trading activities are interest rate risk, currency risk and equity risk.
The Group undertakes a programme of daily backtesting, which compares the actual profit or loss realised in trading activity to the VaR estimation. The results of the backtesting process are one of the methods by which the Group monitors the ongoing suitability of its VaR model. Backtesting exceptions are those instances when a realised loss exceeds the predicted VaR. At the 99% confidence level, no more than one backtesting exception is expected every 100 trading days. The Group experienced three backtesting exceptions at the consolidated Group level during 2007.
Non-trading interest rate risk can arise in these activities from a variety of sources, including where assets, liabilities and offbalance sheet instruments have different repricing dates.
Two measures that are reported both to Citizens ALCO and the
Uncertainty regarding possible frequency and severity of claims arise as follows: a) Motor insurance contracts (private and commercial): claims experience varies, but the principal factors include age, gender and driving experience, together with the type of vehicle and location.
This accountability includes regular testing and certification of the adequacy and effectiveness of controls and compliance with Group Policies including the Group’s
These include the reviews by the Competition Commission and the FSA into payment protection insurance, the OFT’s reviews of undertakings given following the Competition Commission inquiry in 2002 into the provision of banking services to SMEs.
Cameron joined RBS from Dresdner Kleinwort Benson in 1998. In 2000, he was appointed Deputy Chief
Appointed to the Board in March 2006, Mark Fisher is a career banker having joined National Westminster Bank
Appointed to the Board in November 2001, Jim Currie is a highly experienced senior international civil servant who spent many years working in Brussels and
Bank and director general of GATT and its successor, the World Trade Organisation.
In due course, RFS Holdings will implement an orderly separation of the business units of ABN AMRO with the company retaining the following ABN AMRO business units: • Continuing businesses of Business Unit North America; • Business Unit Global Clients and wholesale clients in the
Details of the ordinary and preference share capital are provided in Note 26 on the accounts on pages 177 to 179.
The non-executive directors combine broad business and commercial experience with independent and objective judgement. The balance between non-executive and executive directors enables the Board to provide clear and effective leadership and maintain the highest standards of integrity across the company’s business activities. The names and biographies of all Board members are set out on pages 92 and 93.
Committee makes recommendations to the Board on the remuneration arrangements for the executive directors and the
Audit, Remuneration and Nominations Committees and individual attendance by members is shown below.
The Group assessed the effectiveness of its internal control over financial reporting as of 31 December 2007 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in ‘Internal Control – Integrated
Securities Exchange Act of 1934 and related guidance, the members of the Audit Committee are selected with a view to the expertise and experience of the Audit Committee as a whole, and the Audit Committee reports to the Board as a single entity. The designation of a director or directors as an
Chief Executive, and maintains oversight of the application of remuneration policy below this level. The Committee reviews all long-term incentive arrangements operated by the Group.
For the awards made in 2006 and 2007, the EPS element of the awards will not vest if EPS growth is below 5% per annum compound over the three year period. Where EPS growth is between 5% per annum and 10% per annum vesting will occur on a straight-line basis from 25% to 100%. Vesting at 100% will occur if EPS growth is at least 10% per annum compound.
The target shareholding level is 200% of gross annual salary for the Group Chief Executive and 100% of gross annual salary for executive directors. Target shareholding levels are determined by reference to ordinary shares held, together with any vested awards under the Group’s Medium-term
companies. The total shareholder return for FTSE banks for the same period has been added for comparison. The total shareholder return for the company and the indices have been rebased to 100 for 2002.
(3) Award has now vested and shares will be released to Mr Whittaker on 28 February 2008.
Guy Whittaker is provided with a cash allowance in place of pension benefits.
Net income/(expense) recognised direct in equity 2,376 3,157 (93) 2 2 4
Cash and cash equivalents 1 January 71,651 52,549 50,021 657 1,126 309
The Group is no longer required to include reconciliations of shareholders’ equity and net income under IFRS and US GAAP
However, provision is made where commission is refundable in the event of policy cancellation in line with estimated cancellations.
(1 January 2004) was £13,131 million, its carrying value under previous GAAP.
relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
F in a n c ia l s ta te m e n ts 17. Netting
Derivative financial instruments are recognised initially, and subsequently measured, at fair value. Derivative fair values are determined from quoted prices in active markets where available. Where there is no active market for an instrument, fair value is derived from prices for the derivative’s components using appropriate pricing or valuation models.
Payment’ to grants under these schemes after 7 November 2002 that had not vested on 1 January 2005. The expense for these transactions is measured based on the fair value on the date the options are granted. The fair value is estimated using valuation techniques which take into account the option’s exercise price, its term, the risk-free interest rate and the expected volatility of the market price of The Royal Bank of
Scotland Group plc’s shares. Vesting conditions are not taken into account when measuring fair value, but are reflected by adjusting the number of options included in the measurement of the transaction such that the amount recognised reflects the number that actually vest. The fair value is expensed on a straight-line basis over the vesting period.
The Group’s loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost. A loan is impaired when there is objective evidence that events since the loan was granted have affected expected cash flows from the loan. The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan’s original effective interest rate.
There is significant subjectivity in the valuation with very little market activity to provide support for fair value levels at which willing buyers and sellers would transact.
The interpretation is effective for annual accounting periods beginning on or after 1 March 2007 and is not expected to have a material effect on the Group or company.
The IASB issued a revised IAS 23 ‘Borrowing Costs’ in March 2007. Entities are required to capitalise borrowing costs attributable to the development or construction of intangible assets or property plant or equipment. The standard is effective for accounting periods beginning on or after 1
Ordinary shares of the company with a fair value of £69 million (2006 – £89 million; 2005 – £78 million) are held by the Group’s pension schemes; £65 million (2006 – £87 million; 2005 – £76 million) in the Main scheme which also holds other financial instruments issued by the Group with a value of £606 million (2006 – £258 million; 2005 – £299 million).
Final dividend for previous year declared during the current year 22.1 17.7 13.7 2,091 1,699 1,308
(7) Comprises bonds and medium term notes of £119,021 million (2006 – £43,408 million) and certificates of deposit and other commercial paper of £154,594 (2006 – £42,555 million).
Service industries and business activities 74,399 16,801 4,411 — 95,611 6,687
Service industries and business activities 2,664 2 27 2 2,695 2
UK federal Other sponsored building backed government agency government entity society securities(1) Corporate Other Total 2007 £m £m £m £m £m £m £m £m £m
The Group recognised goodwill of £23.3 billion following the preliminary allocation of fair values since acquiring ABN AMRO on 17 October 2007 (Note 35). Subsequent events have not significantly affected the assumptions and estimates supporting the consortium’s investment decision and the Group has therefore concluded that there is no impairment of the goodwill recognised at 31 December 2007.
Contractual obligations to purchase, construct or develop investment properties or to repair, maintain or enhance investment properties 9 6
Pension allowances Provisions gains transition instruments Intangibles hedging forward Other Total £m £m £m £m £m £m £m £m £m £m £m
US$500 million floating rate Bermudan callable subordinated notes 2013 (callable September 2008) 232 —
US$1,500 million floating rate Bermudan callable subordinated notes 2015 (callable March 2010) 717 —
CAD700 million 5.37% fixed rate undated subordinated notes (callable May 2016) 363 317
US$500 million 7.75% reset subordinated notes (redeemed October 2007) — 262 €400 million 6.625% fixed/floating rate undated subordinated notes (callable October 2009) 303 280 €100 million floating rate undated step-up notes (callable October 2009) 74 68 £325 million 7.625% undated subordinated step-up notes (callable January 2010) 357 359 £200 million 7.125% undated subordinated step-up notes (callable October 2022) 205 205 £200 million 11.5% undated subordinated notes (callable December 2022) (4) 269 272
Movements in cash flow hedging reserves, net of tax 26 —
Non-cumulative convertible preference shares of €0.01 — — — — —
dollar deposits and 2.76% above the Canadian dollar offered rate respectively.
Group’s continuing involvement in those assets; or derecognition of the assets and the separate recognition, as assets or liabilities, of any rights and obligations created or retained in the transfer (see Accounting policy on page 129).
Financial assets held by the Group to meet these cash outflows include cash, balances at central banks and treasury bills of £36.1 billion (2006 – £11.6 billion), loans to banks and customers of £1,048.7 billion (2006 – £549.5 billion) including £452.4 billion (2006 – £288.9 billion) repayable within three months. The Group also held debt securities with a market value of £276.4 billion (2006 – £127.3 billion) of which £130.3 billion (2006 – £67.4 billion) were pledged to secure liabilities.
The principal market risks arising from the Group’s non-trading activities are interest rate risk, currency risk and equity risk.
US Government-backed entities. This balance sheet management approach is common for US retail banks where mortgages are originated and then sold to Federal agencies for funding through the capital markets.
Current estimate of cumulative claims 2,583 2,909 3,175 3,940 3,954 4,572 21,133
Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to the expectations of the
Profit on sale of property, plant and equipment (741) (216) (91) — — —
Increase in settlement balances and short positions 8,073 4,068 10,326 — — —
Satisfied by: Issue of 531 million ordinary shares of the company (4) 2,719
Finance, that issues a comprehensive range of credit and charge cards to personal and corporate customers and provides card processing services for retail businesses.
Note: (1) Revenue represents total income included in the income statement grossed-up for interest payable and fees and commissions payable.
230 Exchange rates 231 Economic and monetary environment 231 Supervision and regulation 234 Description of property and equipment 234 Major shareholders 234 Material contracts 234 FSA Listing Rules disclosure
The table below sets out the Group’s cross border outstandings in excess of 0.75% of Group total assets
None of these countries has experienced repayment difficulties that have required refinancing of outstanding debt.
Approximate weighted average interest rate during the year 4.6% 4.5% 3.4%
Basel II is the most significant change to regulation of the banking industry for many years and will have a lasting effect on our relationships with customers, investors and other key stakeholders. The FSA in the UK has endorsed the Group’s approach to managing credit risk under Basel
Ratings Based approach for the calculation of credit risk capital requirements from 1 January 2008. From 2008, the
(iii) pertains to a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax
PRO, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company)
Articles of Association primarily to take account of changes in company law introduced by the Companies Act 2006.
The company was incorporated and registered in Scotland under the Companies Act 1948 as a limited company on 25