02 Measuring our success 04 Group profile 06 Divisional profile 08 Chairman’s statement 10 Group Chief Executive’s review
Report and accounts 27 Business review 91 Governance 117 Financial statements 213 Additional information 235 Shareholder information
Focus on growth and efficiency 22,515 pro forma 42.0 pro forma 7,108 pro forma
* profit before tax, purchased intangibles amortisation, integration costs, and net gain on sale of strategic investments and subsidiaries in 2005.
The profile and success of the Work-Out initiative has grown every year and in 2007 we had a record number of employees participating across the globe. Employees who participate in Work-Out sessions consistently record higher levels of job satisfaction and engagement in the annual Employee Opinion Survey.
customers served in six continents new savings accounts opened in the UK
reduction in global fraud losses in the UK for reduction in internet fraud
• We operate the largest free-to-use ATM network in the UK
• Our Global Banking & Markets division (‘GBM’) has a relationship with more than 95% of the FTSE 100 companies.
• RBS Insurance is the UK’s number one car insurer and number two for general and household insurance.
• Global Banking & Markets in North America has a relationship with 80% of the Fortune 100 companies.
The Royal Bank of Scotland has operated in Great Britain since 1727.
Greenwich Capital is among the principal suppliers of corporate finance and debt capital markets services across the US.
RBS Lynk and the Kroger Personal Finance joint venture. The ABN AMRO
acquisition extends our presence in the Americas, a market of 750 million people and GDP of $19,000 billion in 2007. We will continue to develop our strong US franchises while capitalising on these new opportunities.
• RBS has a relationship with more than 95% of the
• RBS is the number five corporate bank in Asia-Pacific, excluding
• With the ABN AMRO acquisition, we have access to 3.7 million new retail customers.
• RBS Coutts grew income by 51% in US dollar terms.
In 2007, the countries in which we have a presence in Europe and the
In 2007, the countries in which we have a presence in the Asia-Pacific region had a combined population approaching 3.4 billion people.
D iv is io n a l p ro fi le
Markets and UK Corporate Banking, in order to enhance our focus on the distinct needs of these two customer segments.
UK Corporate Banking is the largest provider of banking, finance and risk management services to UK corporate customers. Through its network of relationship managers across the country it distributes the full range of Corporate
Retail comprises both RBS and NatWest retail brands. It offers a full range of banking products and related financial services to the personal, premium and small business (SMEs) markets through the largest network of branches and ATMs in the UK, by telephone and internet. Retail is the UK market leader in
Offshore, in the UK and internationally in selected markets in Europe and Asia-Pacific.
� We opened more than 975,000 new personal current accounts, maintaining the Group’s joint number one position in that market.
� ifr magazine named us Sterling Bond House of the Year in 2007.
� Impairment losses fell 5%, reflecting the strong quality of the portfolio.
International division, RBS Insurance sells general insurance, mainly motor, in Spain, Germany and Italy. The Intermediary and Broker division sells general insurance products through independent brokers.
Manufacturing supports the customer-facing businesses and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services.
ABN AMRO is a major international banking group with a leading position in international payments and a strong investment banking franchise with particular strengths in emerging markets, as well as offering a range of retail financial services in Asia and the Middle East, ABN AMRO has regional business units in Europe, the Netherlands, North America,
� We held cost growth to 1%, despite investing to support increased transaction volumes and the development of our businesses.
� GBM and ABN AMRO’s capabilities will make us a global top five bank in products including Global
� Kroger Personal Finance, our joint venture with the second largest US supermarket group, sold over two million products.
It was, and remains the Board’s view that the acquisition of
Another was to hasten a slowdown in the pace of activity in some economies, especially in the US.
We have witnessed the benefits of the Group’s long-standing focus on credit quality and the diversification of our income streams which have allowed us to deliver record profits despite the challenging environment.
There were no changes to the composition of the Board during the year. This stability and continuity served the Group well and is particularly important in the current environment.
I would like to thank my colleagues for their support and commitment in 2007.
We have a great deal to do in 2008. Markets will continue to be demanding and we have a major integration to deliver.
But we also have an unparalleled set of opportunities and their realisation will allow us to continue on the impressive growth trajectory that has characterised RBS over the past decade.
Our results demonstrate the resilience of the Group in the face of testing circumstances. The summer floods came during the wettest May to July in England and Wales since records began in 1766. While RBS Insurance responded magnificently to meet the needs of customers in distress, the impact on profits is evident. The pace of activity in the US slowed as the housing market weakened, leading to challenging conditions for Global
Delivering such a robust financial performance in this environment is the consequence of action in two areas: over a number of years we have diversified the Group’s income streams and last year also saw us benefit from our focus on credit quality and risk management with our impairments, excluding ABN AMRO, down 1%.
GBM enjoyed another strong first half performance and took full advantage of the volatility in the second half to deliver excellent performances in interest rate and currency trading.
Inevitably, the second half witnessed significantly lower origination volumes in credit markets and write-downs on US mortgagerelated exposures. Our UK Corporate Banking business enjoyed another very successful year maintaining its consistent record of high single-figure income growth and further advancing its market share from a position of leadership. By continuing to invest in service quality we have achieved market-leading customer satisfaction scores and customer numbers increased by 4%.
Retail delivered strong growth in savings and investment products while maintaining a cautious approach to unsecured credit. Our success is built on customer satisfaction, and on this metric RBS and NatWest maintained their lead over the other major high street banks. Wealth Management’s trajectory remains very strong. We continued to expand Coutts UK’s regional franchise and achieved significant growth in Asia-Pacific.
Ulster Bank maintained its strong growth record and we have continued to invest in the good opportunities for future growth presented by the Irish market. Citizens further developed its franchise, increasing its consumer banking customer base by 2% and achieving good results in its growing corporate and commercial banking operations.
In RBS Insurance, we have built on our strong position as the UK’s leading personal lines insurer by further sharpening our focus on selective underwriting of the more profitable segments, reducing volumes in others. Of course, results were held back by the floods, but excluding this, operating profit grew strongly.
The Group’s Tier 1 capital ratio at 31 December was 7.3%
In recent years we have created options that will allow the
Group to pursue the opportunities for profitable growth stemming from these economic changes. Rapid economic growth raises demand for the routine risk management and payments services in which we have excellent capabilities.
We had also positioned the Group for continued growth in mature markets. In UK retail banking we anticipated that households would save more and successfully boosted our sales of savings and investment products. We focused on investing in customer service in UK Corporate Banking and have strengthened our market leading position. In the US our distribution and product capabilities now provide an excellent platform in the corporate and commercial markets.
Some of our businesses can best serve customers’ needs by organising themselves on a global basis. Others are best managed with a more regional focus. We have therefore established Global Markets which comprises two divisions,
GBM, enhanced by the product capabilities and customer franchises of ABN AMRO. GTS will combine ABN AMRO’s world class capability in international payments with our existing corporate transaction banking and merchant acquiring activities.
It ranks among the top five payments businesses in the world with operating profit of approximately £1.6 billion in 2007.
The remainder of our banking franchises have more distinctively national or regional characteristics. It makes sense to continue to manage them on this basis. We are now represented in an expanded range of countries, and in order to ensure effective coordination and control we have regrouped our retail and commercial banking activities into four regional divisions: UK
We will further extend our manufacturing model across the enlarged Group globally.
Coupled with our greater presence in the world’s largest and fastest growing economies, there is much to be done, but a confidence that it will be, to the benefit of our shareholders, our customers and our employees.
• In terms of relationships with large corporates and financial institutions, we are now number one in the
An important reason for this sustained performance is our relationship banking model, which involves a long-term commitment to customers. In 2007, we invested in several hundred more Relationship Managers, and co-located relationship and specialist product teams across the UK to provide ‘joined-up’ local delivery for customers. We also invested in simplified and easier-to-use documentation, and in new mobile technology which allows our people to spend more time with the companies we serve.
� We began a new relationship with Wales’ leading brewer and pub operator SA Brain & Co Ltd.
� After more than 200 years with one of our major UK competitors, one of Essex’s longest established law firms, Gepp & Sons, was persuaded to move their banking relationship to UKCB.
• With 2,278 RBS and NatWest branches, our network is the UK’s largest. We opened, upgraded or refurbished 224 branches in 2007.
• 50% of first year full-time undergraduates in England and Wales with a student account have one with RBS
2007 was another successful year for our credit card partnership with Bank of China. A total of 2.3 million new cards were issued across all channels, and our strength as a co-brand partner was reflected in seven new co-brand deals with major companies in China, including one with Air China.
� In September, Retail Markets launched its Revolve account for 11–18 year olds. Customers can design and personalise the look of their debit card.
• 11,000 clients worldwide invest more than £8 billion in securities markets using Coutts & Co’s Discretionary
Wealth Management delivered strong organic growth, reflecting our brand strength, product portfolio and geographic reach. There are significant, long-term opportunities in this market, with the wealth of the world’s High Net Worth Individuals forecast to reach US$51.6 trillion by 2011, growing at an annual rate of 7%.
As part of our partnership with the Bank of China, our new joint private banking initiative opened for business in Beijing and Shanghai in March.
Coutts & Co launched its first financial education programme for children of clients in July 2007. The 21/2 day Assets &
Management. In 2007, we saw a 27% rise in customer numbers.
• We funded the first large scale biodiesel production plant in Ireland, helping Ireland to meet its EU Biofuels
Our Corporate Markets business leveraged the strengths of the wider Group to finance construction of the N6 motorway and widening of the M50 ring road around Dublin. The consortium for these Public Private Partnerships involved contractors from
This is the new branch and business centre at Blackpool in County Cork.
Citizens continued to make progress in developing its corporate and commercial franchise. In doing so it drew on the strengths of the wider Group, enabling us to make private placements, public bond offerings and loan syndications and to provide cross-border solutions to clients. Citizens’ Foreign Exchange and Derivatives revenue grew by more than 20%.
� Ellen Wolf, CFO, American Water, with Thomas Connor, RBS Greenwich
Between 14 June and 22 July we received nearly 11,500 flood claims, including 3,900 in one day.
• We managed £4 billion of claims and answered 8.5 million claims calls.
• Our Claims area received the Investors in Excellence award while our garage network achieved the BSI
We are justifiably proud of how RBS Insurance responded to the floods of June and July. By any measure it was a major challenge. By invoking our Severe Weather Event Plan, we were able to handle the large increase in the numbers of calls and claims, ensuring our customers got the help they needed as quickly as possible.
Insurance dealt with more calls in one day than they usually receive in a typical summer month.
Compare, a website allowing customers to compare and buy motor insurance from more than 30 different brands in the UK.
• Our Property team managed the development of new offices in India, Singapore and Paris, as well as refurbishing and expanding the Ulster Bank branch network.
Payment technology. Manufacturing also supported the launch of mobile phone banking in September.
� Manufacturing supported the launch of contactless debit card when the AT&T Williams Formula 1
Van Gogh Preferred Banking, our relationship banking service for mass affluent clients.
• The number of credit cardholders in Asia grew by 18% to 3.3 million.
• Asia corporate banking income saw good growth across the region in 2007.
We have made good progress on integration. Appointments have been made to the Supervisory and Managing Boards and to senior management positions. We have confirmed which businesses RBS will retain. Migration to RBS brand and model has begun.
While credit market activities reflected the prevailing market conditions, equities, rates and financial institutions performed well. Transaction banking maintained good momentum, reflecting strong growth in cash management balances and significant expansion in trade finance. International retail banking businesses performed well over the whole of 2007.
� India is already an important market for ABN AMRO. It has a network of 28 branches.
RBS is a responsible company. We carry out rigorous research so that we can be confident we know the issues that are most important to our stakeholders and we take practical steps to respond to what they tell us. In 2007 we extended that research, engaging more fully the stakeholders of Ulster Bank and RBS Insurance, and stakeholders in the US. In this section we outline some of our stakeholders’ priorities and describe the actions we have taken in response.
Working with others, our contribution to industry initiatives in 2007 was equivalent to 14,000 days of police officers’ time.
Our focus on crime makes good business sense. In an independent survey of customers who had experienced fraud on their cards, the satisfaction score for RBS and NatWest was over 80%.
When people have been educated about money and how to work with financial services firms they are more likely to make the right decisions and to avoid difficulties. Our commitment to building financial capability began over 14 years ago with the
� In June we launched the YourWorld employee website. There is a carbon calculator, energy efficiency tips and discounted offers on products which reduce their carbon footprint.
In supplying money advice, our work aims to improve the quality and availability of information for people facing difficulties managing their finances. Of course, much of what we do in this area is part of the service we routinely offer to customers. In addition to general advice, available through
We also support the money advice sector. Our efforts here are channelled through the Money Advice Trust (‘MAT’), a charity formed in 1991 to improve the supply of free and independent money advice. We continue to be the largest corporate sponsor of MAT. Our support allows the MAT to train Debt Advisers.
More than 90% of the free money advice sector is trained using RBS funded materials and our funding supports 5,000 free places on training courses each year. We have chosen to focus our support specifically on face-to-face advice because it is the preferred channel for those on lowest incomes.
In the US, Citizens’ Individual Development Account offers low income families incentives to save for home ownership, postsecondary education or business ownership. This anti-poverty strategy combines learning about financial management with incentives to save for long-term assets that improve the economic security and lifetime earning power of participants.
Face2Face with Finance for Schools programme. During that time we have invested more than £40 million in related activities, from providing lessons to almost 1.5 million school children to supporting 20,000 free training courses for debt advisers. In 2007 our employees delivered more than 16,000 lessons to over 635,000 pupils.
The work we do to build financial capability extends beyond young people in schools. In October, Face2Face with Finance was brought even more firmly into the heart of our business and rebranded as MoneySense.
Advice sought to help people better understand their finances and encouraged those with concerns to seek help early. Our partnership with the Daily Mail offered its readers a free guide on How to Take Control of Your Money.
Our consistent leadership among the main high street banks in customer satisfaction is a consequence of our desire to make it as easy as possible to use our services. We operate the largest branch network in Britain and the second largest in the island of Ireland and continue to extend them in both locations.
In January we launched a new product designed to meet the needs of the UK’s growing Polish community. The NatWest
In the US, Citizens has a proud tradition of community involvement and investment. During 2007, we invested $25 million with more than 4,000 non-profit organisations and over the last six years
� Ulster Bank’s musical outreach programme is designed to nurture young primary school talent across the island of Ireland. Children from
Our footprint Financial services is an industry with a low carbon footprint and RBS has one of the lowest among UK banks. We are committed to reducing further the carbon intensity of our operations and the initiatives we have taken should reduce our carbon dioxide emissions by as much as one-fifth by 2011.
We will achieve that in a number of ways. Since October 2007, all of our electricity in the UK and Ireland has come from renewable sources. Phase one of our £55 million property our charitable investments have grown by 500%. We extended our UK Give As You Earn programme to the US; under the
Colleague Matching Gift Program launched in August, Citizens matches the charitable donations qualifying employees make to eligible organisations up to $1,000 per year.
The Community Reinvestment Act (CRA) in the US encourages financial institutions to help meet the needs of low and moderate income communities. There are four CRA ratings: Outstanding,
Citizens has Outstanding ratings in every state where it operates and we have retained the Outstanding CRA rating throughout all of our acquisitions.
Involvement in voluntary work is one example of how our employees support the communities in which they work.
Colleagues in Action in Citizens to give greater prominence to the voluntary work of our employees. More than half of our employees report that the Group does ‘a very good job’ in supporting charitable giving and almost nine out of ten say we are socially responsible in the communities in which we operate.
say we are good at keeping them informed more generally. In all of these instances, and more, our results exceed the Global
Since we believe that our people are the source of our enduring success we invest to develop them. The RBS Business School is central to our commitment to our people to bring out the best
R e s p o n s ib il it y investment programme is nearing completion and will cut our annual carbon dioxide emissions by 97,000 tonnes. We are piloting energy efficient technologies at our ‘Building for the
Future’ sites in Blackpool and Rotherham in England. Last year the Group recycled 21,000 tonnes of paper and the introduction of e-statements in November will reduce significantly the 15 million statements we send through the post each month.
Dow Jones and FTSE4GOOD sustainability indices. RBS was included in the Carbon Disclosure Project’s Climate Disclosure
Business review 28 Presentation of information 29 Forward-looking statements 30 Description of business 32 Risk factors 34 Financial highlights 35 Summary consolidated income statement 38 Analysis of results 48 Divisional performance 66 Consolidated balance sheet 68 Cash flow 69 Capital resources 70 Risk and capital management
In the Report and Accounts, and unless specified otherwise, the term ‘company’ means The Royal Bank of Scotland Group plc, ‘RBS’ or the ‘Group’ means the company and its subsidiary undertakings, ‘the Royal Bank’ means The Royal Bank of
The company publishes its financial statements in pounds sterling (“£” or “sterling”). The abbreviations ‘£m’ and ‘£bn’
As required by the Companies Act 1985 and Article 4 of the
International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting
The Group’s published 2004 financial statements were prepared in accordance with then current UK generally accepted accounting principles (“UK GAAP” or “previous GAAP”)
Board, pronouncements of the Urgent Issues Task Force, relevant Statements of Recommended Accounting Practice and provisions of the Companies Act 1985.
Banco Santander S.A. (the “Consortium Banks”) and controlled by RBS, completed the acquisition of ABN AMRO Holding N.V.
retaining the following ABN AMRO business units: • Continuing businesses of Business Unit North America; • Business Unit Global Clients and wholesale clients in the
Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’,
Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of
Governors of the Federal Reserve System and other G-7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing.
For a further discussion of certain risks faced by the Group, see Risk factors on pages 32 and 33.
The Royal Bank of Scotland Group plc is the holding company of one of the world’s largest banking and financial services groups, with a market capitalisation of £44.4 billion at the end of 2007.
Bank and NatWest. Both the Royal Bank and NatWest are major
UK clearing banks whose origins go back over 275 years. In the
The Group’s activities are organised in the following business divisions: Corporate Markets (comprising Global Banking &
Insurance and Manufacturing. A description of each of the divisions is given below.
UK Corporate Banking is the largest provider of banking, finance and risk management services to UK corporate customers.
In core retail banking, Retail offers a comprehensive product range across the personal and small business market: money transmission, savings, loans, mortgages and insurance.
Customer choice and product flexibility are central to the retail banking proposition and customers are able to access services through a full range of channels, including the largest network of branches and ATMs in the UK, the internet and the telephone.
Wealth Management provides private banking and investment services to its clients through a number of leading UK and overseas private banking subsidiaries and offshore banking businesses. Coutts is one of the world's leading international wealth managers with offices in Switzerland, Dubai, Monaco,
Ulster Bank Group including First Active, provides a comprehensive range of retail and wholesale financial services in the Republic of Ireland and Northern Ireland, supported by an extensive network of branch and business centres. Retail Markets operates in the personal and affluent banking sectors. Corporate
Jersey, New York state, Pennsylvania, Rhode Island and Vermont and the Charter One brand in Illinois, Indiana, Michigan and Ohio.
B u s in e s s r e v ie w brokers and partnerships. Direct Line, Churchill and Privilege sell general insurance products direct to the customer. Through its
Manufacturing supports the customer-facing businesses and provides operational, technology and customer support in telephony, account management, lending and money transmission, global purchasing, property and other services.
Consortium Banks in October 2007 through the Group's subsidiary, RFS Holdings. The ABN AMRO business units that will be retained by RBS are principally the global wholesale businesses and international retail businesses in Asia and the
Middle East. In due course, these will be integrated with the
Group's existing business and will further diversify the Group's global reach.
banks and building societies, major retailers, life assurance companies and internet-only players. In the mortgage market the Group competes with UK banks and building societies. The
In a number of these markets there are regulatory barriers to entry or expansion, and the state ownership of banks.
In Wealth Management, The Royal Bank of Scotland International competes with other UK and international banks to offer offshore banking services. Coutts and Adam & Company compete as private banks with UK clearing and private banks, and with international private banks. Competition in wealth management activities has intensified as banks have increased their focus on competing for affluent and high net worth customers.
Competition in the UK motor market remains particularly intense, and price comparison internet sites now play a major role in the marketplace. RBS Insurance also competes with local insurance companies in the direct motor insurance markets in Spain, Italy and Germany.
In the United States, where competition is intense, Citizens competes in the New England, Mid-Atlantic and Mid West retail and mid-corporate banking markets with local and regional banks and other financial institutions. The Group also competes in the US in large corporate lending and specialised finance markets, and in fixed-income trading and sales.
Set out below are certain risk factors which could affect the
The financial performance of the Group is affected by borrower credit quality
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of the Group’s businesses. Adverse changes in the credit quality of the Group’s borrowers and counterparties or a general deterioration in UK, US, European or global economic conditions, or arising from systemic risks in the financial systems, could affect the recoverability and value of the Group’s assets and require an increase in the provision for impairment losses and other provisions.
The most significant market risks the Group faces are interest rate, foreign exchange and bond and equity price risks. Changes in interest rate levels, yield curves and spreads may affect the interest rate margin realised between lending and borrowing costs. Changes in currency rates, particularly in the sterling-dollar and sterling-euro exchange rates, affect the value of assets and liabilities denominated in foreign currencies and affect earnings reported by the Group’s non-UK subsidiaries, mainly Citizens,
RBS Greenwich Capital and Ulster Bank, and may affect income from foreign exchange dealing. The performance of financial markets may cause changes in the value of the Group’s investment and trading portfolios. The Group has implemented risk management methods to mitigate and control these and other market risks to which the Group is exposed. However, it is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on the Group’s financial performance and business operations.
UK and in other jurisdictions in which it undertakes regulated activities to maintain adequate capital resources. The Group mitigates the risk by careful management of its balance sheet and capital resources, through capital raising activities, disciplined capital allocation and the hedging of capital currency exposures.
Liquidity risk is the risk that the Group will be unable to meet its obligations as they fall due. This risk is inherent in banking operations and can be heightened by a number of enterprise specific factors such as an over reliance on a particular source of funding, changes in credit ratings or by market-wide phenomena such as market dislocation and major disasters. The Group’s liquidity management focuses on maintaining a diverse and appropriate funding strategy for its assets, in controlling the mis-match of maturities and from carefully monitoring its undrawn commitments and contingent liabilities.
Financial markets are sometimes subject to significant stress conditions where steep falls in perceived or actual asset values are accompanied by severe reduction in market liquidity, such as recent events in the U.S. sub-prime residential mortgage market.
In dislocated markets, hedging and other risk management strategies may not be as effective as they are in normal market conditions. Severe market events are difficult to foresee and, if they occur, could result in the Group incurring significant losses. In 2007, the Group recorded significant write-downs on its credit market positions, principally on its US sub-prime exposures. The
Group continues to have exposure to this market and as market conditions change the fair value of the Group’s instruments could fall further. Furthermore, recent market volatility and illiquidity has made it difficult to value certain of the Group’s financial instruments. Valuations in future periods, reflecting prevailing market conditions, may result in significant changes in the fair values of these instruments. In addition, the value ultimately realised by the Group will depend on the market price at that time and may be materially lower than current fair value. Any of these factors could require the Group to recognise further write-downs which may adversely affect the Group’s future results.
Future claims in the Group’s general and life assurance business may be higher than expected as a result of changing trends in claims experience resulting from catastrophic weather conditions, demographic developments, changes in mortality and other causes outside the Group’s control. Such changes would affect the profitability of current and future insurance products and services. The Group re-insures some of the risks it has assumed.
Operational losses can result from fraud, errors by employees, failure to document transactions properly or to obtain proper authorisation, failure to comply with regulatory requirements and
Conduct of Business rules, equipment failures, natural disasters or the failure of external systems, for example, the Group’s suppliers or counterparties. Although the Group has implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures and to staff training, it is only possible to be reasonably, but not absolutely, certain that such procedures will be effective in controlling each of the operational risks faced by the Group.
The Group devotes substantial management and planning resources to the development of strategic plans for organic growth and identification of possible acquisitions, supported by substantial expenditure to generate growth in customer business.
If these strategic plans do not meet with success, the Group’s earnings could grow more slowly or decline.
In the ordinary course of the Group’s business, legal actions, claims against and by the Group and arbitrations arise; the outcome of such legal proceedings could affect the financial performance of the Group.
Revisions to tax legislation or to its interpretation might also affect the Group's results in the future.
Financial highlights for the year ended 31 December £m £m £m
(3) Prior year per share data have been restated to reflect the bonus issue of ordinary shares in May 2007.
(4) Adjusted earnings per share is based on earnings adjusted for purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries.
Profit before tax, purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries 10,282 9,414 8,251
Net gain on sale of strategic investments and subsidiaries — — (1.8p)
Profit before tax was up 8%, from £9,186 million to £9,900 million. Profit before tax, purchased intangibles amortisation and integration costs increased by 9% or £868 million, from £9,414 million to £10,282 million. The results of ABN AMRO
Non-interest income increased by £1,041 million to £18,447 million and represents 59% of total income (2006 – 62%).
Impairment losses rose 13% to £2,128 million, compared with £1,878 million in 2006.
Risk elements in lending and potential problem loans represented 1.64% of gross loans and advances to customers excluding reverse repos at 31 December 2007 (2006 – 1.57%).
Integration costs were £108 million compared with £134 million in 2006.
Total assets were £1,900.5 billion at 31 December 2007. The acquisition of ABN AMRO in October 2007 increased assets by £774.2 billion, with the balance accounted for largely by growth in our lending to customers and in trading assets.
Lending to customers, excluding repurchase agreements and stock borrowing (“reverse repos”), increased in 2007 by 70%
The adjusted after-tax return on ordinary shareholders’ equity, which is based on profit attributable to ordinary shareholders before discontinued operations, purchased intangibles amortisation and integration costs, and average ordinary shareholders’ equity, was 19.9% compared with 19.0% in 2006.
Profit before tax, purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries increased by 14% or £1,163 million, from £8,251 million to £9,414 million.
The Group’s net interest margin at 2.47% was down from 2.55% in 2005, due mainly to the business mix effect of growth in corporate and mortgage lending and the impact of the flatter US dollar yield curve.
Operating expenses, excluding purchased intangibles amortisation and integration costs, rose by 8% to £12,252 million.
Bancassurance and general insurance claims, after reinsurance, increased by 3% to £4,458 million reflecting volume growth.
Integration costs were £134 million compared with £458 million in 2005. Included are costs relating to the integration of First
Active and Charter One, as well as the amortisation of software costs relating to the integration of Churchill. Integration costs in 2005 included software costs relating to the acquisition of
UK GAAP but under IFRS were capitalised and amortised. All such software was fully amortised by the end of 2005.
A final dividend of 22.1p per ordinary share was paid, giving a total dividend for the year of 30.2p, an increase of 25%. The total dividend was covered 2.2 times by earnings before purchased intangibles amortisation and integration costs.
or £35.7 billion to £404.0 billion. Customer deposits, excluding repurchase agreements and stock lending (“repos”), grew by 9% or £26.1 billion to £320.2 billion.
The Royal Bank of Scotland plc base rate (average) 5.51 4.64 4.65
London inter-bank three month offered rates (average): Notes: (1) Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance assets and liabilities attributable to policyholders, in view of their distinct nature.
Loans and advances to banks – UK 20,999 1,028 4.90 15,850 697 4.40
Loans and advances to customers – UK 269,460 18,541 6.88 239,469 15,204 6.35
Customer accounts: demand deposits – UK 93,764 3,296 3.52 86,207 2,428 2.82
Customer accounts: savings deposits – UK 36,334 1,658 4.56 30,933 1,058 3.42
Customer accounts: other time deposits – UK 88,702 4,202 4.74 67,806 2,807 4.14
Debt securities in issue – UK 67,310 3,582 5.32 55,912 2,670 4.78
Treasury bills and other eligible bills – UK 3,160 138 4.37
Total interest-earning assets – banking business (2, 3) 383,690 21,505 5.60
(2) Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance assets and liabilities attributable to policyholders, in view of their distinct nature.
As a result, net interest income has been adjusted by £59 million.
Analysis of change in net interest income – volume and rate analysis
Income from trading activities was down from £2,675 million to £1,327 million. Interest rate and currency trading activities benefitted from increased volatility and there was good growth from a broadening product range. These improvements were, however, more than offset by credit markets write downs (see credit market exposures on page 43).
Other operating income increased by 36%, £1,293 million to £4,857 million. This was principally due to growth in income from rental and asset-backed activities and principal investments in Corporate Markets.
General insurance premium income, after reinsurance, rose by 3%, or £194 million to £5,973 million with good growth in motor policies in the UK and Continental Europe.
for subsequent sale to investors. The Group retains exposure to some of the super senior tranches of these CDOs which are all carried at fair value.
At 31 December 2007 the Group’s exposure to these super senior tranches, net of hedges and write-downs, totalled £2.6 billion to high grade CDOs, which include commercial loan collateral as well as prime and sub-prime mortgage collateral, and £1.3 billion to mezzanine CDOs, which are based primarily on residential mortgage collateral. Both categories of CDO
have high attachment points. There was also £1.2 billion of exposure to sub-prime mortgages through a trading inventory of mortgage-backed securities and CDOs and £100 million through securitisation residuals.
Trading book exposures and residuals are marked to market on the basis of direct prices, where available, or observable market benchmarks.
Operating expenses, excluding purchased intangibles amortisation and integration costs, increased by 15%, £1,801 million to £14,053 million including £1,880 million relating to
ABN AMRO. Adjusting for this, operating expenses were down £79 million, 1% reflecting tight cost management and the benefits of the Group’s manufacturing platform. Further improvements in productivity have supported growth in business volumes, and allowed the Group to maintain high levels of customer satisfaction.
The Group’s ratio of operating expenses (excluding purchased intangibles amortisation and integration costs and after netting operating lease depreciation against rental income) to total income was 43.9% compared with 42.1% in 2006.
Operating expenses, excluding purchased intangibles amortisation and integration costs, rose by 8% to £12,252 million to support the strong growth in business volumes.
At Charge Utilised At 31 December to income during 31 December 2006 statement the year 2007 £m £m £m £m
Impairment losses were £2,128 million compared with £1,878 million. Impairment losses in ABN AMRO in the period since acquisition were £263 million. Adjusting for this, impairment losses fell by £13 million, 1%. This reflected improvement in
Total provision coverage (the ratio of total balance sheet provisions for impairment to total risk elements in lending)
Markets reflecting a benign credit environment partly offset higher impairment losses in Retail Markets and Citizens.
Total balance sheet provisions for impairment amounted to £3,935 million compared with £3,887 million in 2005.
decreased from 65% to 62%. The ratio of total balance sheet provisions for impairment to total risk elements in lending and potential problem loans also decreased to 62% compared with 65% in 2005. This reflects amounts written-off and the changing mix from unsecured to secured exposure.
corporation tax of 30% principally due to certain non-taxable capital gains, changes to deferred tax balances following the change in rate of corporation tax and release of tax provisions following the finalisation of prior year issues.
‘operating profit’ in the divisional analyses that follow. The allocations of Manufacturing costs are shown separately in the results for each division.
Corporate Markets grew operating profit in 2007 by 2% to £5,648 million, notwithstanding difficult conditions in global credit markets. Total income was flat at £10,322 million, as the credit market deterioration in the second half of the year resulted in substantial write-downs in Global Banking &
Corporate Markets achieved a strong performance in 2006, with excellent results across many of our businesses. Total income, after deducting operating lease depreciation, rose by 19% to £9,557 million with contribution growing by 18% to £6,116 million. Operating profit rose by 20% to £5,541 million.
Average loans and advances grew by 19% and average customer deposits by 17%. Our portfolio remains well diversified by counterparty, sector and geography and balanced in credit distribution. Assets grew strongly outside the UK, particularly in Western Europe. Overall credit conditions remained benign, and impairment losses represented 0.14% of loans and advances to customers.
Income from rental assets (net of related funding costs) 679 677 622
Other operating income (net of related funding costs) 1,899 1,279 744
Operating profit was £3,687 million, 2% lower than 2006’s record result.
The strength of GBM and the successful diversification of its product capabilities resulted in a continuation of the strong growth we have achieved in Asia and continental Europe in recent years. In Asia we have now established a solid platform, with good product capabilities and client relationships. In 2007 this resulted in Asian income growing by 96%, with outstanding growth in our activities in China and Japan. In Europe, income grew by 39%, with particularly good results in the Nordic region and in the Iberian Peninsula, where GBM further expanded its strong position in the provision of financing and risk management services to corporates and financial institutions. Income in the UK grew by 21%, while results in
North America declined as a result of credit market conditions affecting GBM’s asset-backed and structured credit businesses.
Average loans and advances to customers, excluding reverse repos, increased by 22% as we expanded our customer base outside the UK and average customer deposits increased by 25%.
Net fee income rose by 33% to £1,368 million, reflecting our top tier position in arranging, structuring and distributing large scale financings. We achieved particularly strong growth in non-US loan markets.
Global Banking & Markets performed strongly in 2006, delivering excellent growth in income while continuing to build our strong international franchise. Total income rose by 22% to £6,831 million, contribution by 23% to £3,923 million and operating profit by 24% to £3,779 million.
GBM is a leading provider of debt financing and risk management solutions covering the origination, structuring and distribution of a wide range of assets. In 2006 we arranged over $450 billion of financing for our corporate and institutional customers, up 17% from 2005. We ranked first among managers of global asset-backed and mortgage-backed securitisations and fourth among managers of global syndicated loans, while among managers of international bonds we moved from thirteenth place to eighth. These league table positions demonstrate our success in broadening and deepening our franchise.
In 2006 we have further invested in extending our product capabilities and our worldwide reach. Income in North America rose by 18% in local currency, despite flat revenues in our US
residential mortgage-backed securities business, as the investments we have made in our debt capital markets, loan markets, rates and credit trading businesses have borne fruit.
Net interest income from banking activities rose by 10% to £1,632 million, representing 24% of total GBM income.
Income from trading activities continued to grow steadily, rising by 13% to £2,211 million as a result of good volumes of debt and risk management products provided to our customers. A
strong performance in credit products was supplemented by growth in our broadening product range, including equity derivatives and structured credit, partially offset by the impact of a slower US mortgage-backed securities market. Average trading book value at risk remained modest at £14.2 million.
We have maintained good cost discipline while continuing to invest in extending our geographical footprint, our infrastructure and our product range. Net of operating lease depreciation our cost:income ratio was 39.9%. Total expenses grew by 22% to £2,967 million. Variable performance-related compensation increased and now accounts for 41% of total costs.
Costs were reduced by 4% to £2,854 million, in line with income. We continued to invest in expanding our geographical footprint, our infrastructure and our product range.
There has been good growth in customer volumes, with average loans and advances up 11% and average deposits up 14%. Net interest income from banking activities increased by 7% to £2,326 million as net interest margin narrowed slightly from the prior year. In recent months we have seen firmer margins in some areas.
Total expenses rose by 6% to £1,601 million, with investment targeted towards improving customer service. Around 600 new front line roles were created and major new functionality was added to the Bankline electronic banking platform. These initiatives have contributed to strongly favourable customer satisfaction scores in 2007.
UK Corporate Banking had a successful year across all its businesses, strengthening its market leading positions in corporate and commercial banking and building good momentum in the provision of a broadening range of financing and risk management services to its customer base. As a result UKCB increased its total income by 9% to £3,462 million and contribution by 10% to £2,193 million. Operating profit rose by 12% to £1,762 million.
Net interest income from banking activities grew by 11% to £2,173 million. We achieved an 18% increase in average loans and advances to customers, with good growth across all customer segments. We increased average customer deposits by 21%, demonstrating the attractiveness of our range of deposit products for commercial and corporate customers.
Changes in the deposit mix and some narrowing of lending margins, principally in the first half of the year, led to a modest decline in UKCB’s net interest margin.
Non-interest income rose by 6% to £1,289 million, reflecting good growth in origination fees and improved distribution of trade and invoice finance and interest rate and foreign exchange products.
Impairment losses were 4% lower than in 2005 at £189 million.
Risk-weighted assets 80.8 77.0 79.2 * customer deposits exclude bancassurance 2007 compared with 2006
Retail Markets delivered a strong performance in 2007 with operating profit rising by 12% to £2,883 million as a result of good income growth, tight expense control and reduced impairment costs. Total income rose 4% to £8,790 million, and income net of claims also grew by 4% to £8,272 million.
These strong results reflect the emphasis on savings and investment products, our focus on profitability rather than volume in consumer lending, and significant investment in our
Expenses have been kept under tight control, with efficiency gains allowing us to invest and grow the business. Impairment losses maintained the improvement witnessed in the first half of the year, falling by 8% for the year as a whole. Arrears trends on credit cards and unsecured personal loans continued to improve, as did the quality of our asset base.
Risk-weighted assets rose by 5% to £80.8 billion at the end of 2007.
We have accelerated the expansion of our consumer banking franchise, opening more than 975,000 new personal current accounts in 2007 and maintaining the Group’s joint number one position in the current account market. RBS and NatWest continue to lead the other major high street banks in Great
Average customer deposit balances were 9% higher, driven by accelerating growth in both personal savings, up 12%, and business deposits, up 11%, alongside modest growth in current account balances. Savings balance growth was helped by good sales of new accounts to branch customers, with
Net interest income increased by 2% to £4,191 million, with strong growth in deposits helping to mitigate the impact of lower unsecured lending volumes and lower average card
We have advanced in personal banking, with good growth in savings and investment products combined with effective cost control and improvements in the quality of our lending book.
Credit card recruitment and unsecured personal lending continues to be focused on lower risk segments, with reduced emphasis on acquisition through direct marketing.
We have continued to expand our customer franchise, growing our personal current account base by 232,000 in 2006 as a result of our sustained focus on quality and customer service.
We continue to have the highest share of customers switching current accounts from other banks, and are now joint leader in the personal current account market. RBS is first and NatWest is joint second among major high street banks in Great Britain for the percentage of main current account customers that are
Net interest income increased by 4% to £4,108 million, with faster growth in deposits helping to mitigate lower unsecured lending volumes. Net interest margin improved slightly in the second half.
market share of net lending in that period. Our offset mortgage product continues to perform well. For the year as a whole, average personal unsecured lending and credit card lending was flat, reflecting the slower UK consumer demand and our concentration on quality business with existing customers. In the second half we further reduced our activity in the direct loans market, but unsecured balances from our RBS and NatWest customers are broadly in line with the first half. Average business lending rose 5%, reflecting our cautious credit stance.
Non-interest income rose by 4% to £3,458 million. There was strong growth in our investments and private banking businesses as well as business banking fees, mitigating the slowdown in personal loan related insurance income.
Bancassurance has had an excellent year with sales increasing by 56% to £267 million annual premium equivalent.
The growth reflects the continued increase in focus on the recruitment of Financial Planning Managers, up 25% and productivity levels, up 43%. Increased sales of collective investments on the back of a successful ISA season and strong individual pensions growth, boosted by A-Day, helped underpin the outturn. Sales of guaranteed bonds were also particularly strong, and helped support a new business margin which improved significantly over the period. The product proposition was strengthened across all lines. Latest market share data shows an increase from 6.6% to 9.0%. On a UK
GAAP embedded value basis for life assurance, investment contracts and open ended investment companies, adjusted for investment market volatility, pre tax profit was £78 million compared with £42 million in 2005.
balances. Net interest margin declined modestly, in line with previous guidance, with savings margins consistent with 2006, despite increased competition for deposits.
Non-interest income was £3,571 million, 3% ahead of 2006, with strong growth in investment income offset by lower levels of direct lending and reduced instances of current account fees.
Total expenses rose by 2% to £3,578 million, driven by increased investment in customer-facing staff in branches and in our bancassurance and investment businesses. Other costs reduced by 1% to £614 million.
Impairment losses decreased by 9% to £1,196 million, reflecting the improvement in arrears trends on both credit cards and unsecured personal loans. Mortgage arrears remained very low, and we have maintained conservative lending criteria – the average loan-to-value ratio of Retail’s mortgages was 46% overall and 63% on new mortgages written in 2007, and this improved as the year progressed.
International has been re-branded as RBS Coutts to leverage the global brand strength of the Group in the continental
European and Asia-Pacific markets and RBS Coutts has maintained its momentum in the Asia-Pacific region, succeeding in growing customer numbers by 27% and income by 51% in US dollar terms.
Total expenses rose by 7% to £611 million, with direct expense up 9% at £466 million, reflecting continued investment in the
Wealth Management’s offering of private banking and investment services delivered robust organic income growth in 2006. Our continuing investment in Coutts UK, Adam &
Non-interest income grew by 14% to £393 million, reflecting higher investment management fees and performance fees, as well as strong growth in new business volumes, particularly in the UK. Assets under management rose by 11%, to £28.2 billion at the year-end.
Spot exchange rate – €/£ 1.361 1.490 1.457 2007 compared with 2006
Net interest income increased by 12% to £979 million, reflecting good growth in both loans and deposits. Average loans and advances to customers increased by 24%, with particular strength in business lending, with a 29% increase spread across a variety of industrial sectors. Our mortgage book also saw very good growth in 2007, in spite of the slowdown in the housing market, with average balances up 17%. We achieved particular success in attracting remortgagers with our Switcher package. We were also successful in the current account switching market, winning 100,000 new current account customers during the year. This, together with new product launches such as the eSavings
Account and Reward Reserve savings accounts, contributed to a 17% increase in average customer deposits. Net interest margin tightened, reflecting more competitive market conditions and increased funding costs.
Non-interest income rose by 26% to £318 million, driven by strong performances in Corporate Markets and credit cards.
We successfully launched our new wealth business in the course of the year.
Total expenses increased by 13% to £680 million, as we continued our investment programme to support the future growth of the business. We continued to expand our branch and business centre footprint and recruited additional customer-facing staff, particularly in Corporate Markets.
Contribution increased by 12% to £636 million and operating profit by 17% to £421 million.
in Northern Ireland. This contributed to strong growth in both corporate lending, where average loans and advances increased by 32%, and deposits, with Ulster Bank winning a share of new business current accounts well in excess of its historic market share, particularly in the Republic of Ireland.
Non-interest income rose by 3% to £252 million. Ulster Bank achieved good growth in fees from credit cards and ATMs as well as in sales of investment products, which was only partially offset by the introduction of Ulster Bank’s new range of current accounts, which are free of transaction fees.
The credit environment remains benign. Impairment losses rose by £9 million to £104 million, consistent with growth in lending.
Against the background of weaker housing and credit market conditions, Citizens’ franchise demonstrated resilience in 2007, with a particularly good performance in corporate and commercial banking. Modest growth in net interest margins and strong fee growth in several products lifted income by 2%
to $6,249 million which, coupled with tight cost control, resulted in contribution before impairment losses growing by 2% to $3,329 million. However, impairment losses increased from 0.31% of loans and advances to 0.60%, resulting in a decrease in operating profit of 9% to $2,647 million. In sterling terms, total income decreased by 6% to £3,122 million and operating profit fell by 16% to £1,323 million.
Corporate Markets. Good progress was also made in credit card issuing, where we increased our customer base by 20%, and in merchant acquiring, where RBS Lynk achieved significant growth, processing 30% more transactions than in 2006 and expanding its merchant base by 5%.
In response to more difficult market conditions Citizens intensified cost discipline, with a reduction in headcount helping to limit total expense growth to 2%, despite enhancements to infrastructure and processes as well as continued investment in growth opportunities including midcorporate banking, contactless debit cards and merchant acquiring.
Rising losses and increased provisions lifted impairment costs from $333 million in 2006 to $682 million in 2007. Against a background of weaker economic activity the Citizens portfolio is performing well, although we have experienced a reversion from the very low levels of impairment seen in recent years, reflecting both the planned expansion of our commercial loan book and the impact of a softer housing market. There has also been an increase in reserving. The average FICO scores on our consumer portfolios, including home equity lines of credit, remain in excess of 700, with 97% of lending secured.
Average loan-to-value ratios at the end of 2007 were 58% on our residential mortgage book and 74% on our home equity book.
Citizens grew its total income by 3% to $6,115 million and its operating profit by 2% to $2,917 million. In sterling terms,
Citizens total income increased by 2% to £3,317 million, while its operating profit rose slightly to £1,582 million.
We have achieved good growth in lending volumes, with average loans and advances to customers increasing by 10%.
In business lending, average loans excluding finance leases increased by 15%, reflecting Citizens’ success in adding new mid-corporate customers and increasing its total number of business customers by 4% to 467,000. In personal lending,
We increased average customer deposits by 4%, although spot balances at the end of 2006 were little changed from the end of 2005. As interest rates rose further and the US yield curve inverted, we saw migration from low-cost checking and liquid savings to higher-cost term and time deposits. This migration is a principal reason for the decline in Citizens’ net interest margin to 2.72% in 2006, compared with 3.00% in 2005. The decline slowed over the course of the year, with net interest margin in the second half 6 basis points lower than in the first. Lower net interest margins more than offset the benefit of higher average loans and deposits, leaving net interest income marginally lower at $3,844 million.
Non-interest income rose by 9% to $2,271 million. Business and corporate fees rose strongly, with good results especially in foreign exchange, interest rate derivatives and cash management benefiting from increased activity with Corporate
Tight cost control and a 5% reduction in headcount limited the increase in total expenses to only 1%, despite continued investment in growth opportunities such as mid-corporate banking, contactless debit cards, merchant acquiring and supermarket banking.
Citizens continued to expand its branch network. Our partnership with Stop & Shop Supermarkets has helped us to expand our supermarket banking franchise into New York, while in October we announced the purchase of GreatBanc,
Impairment losses totalled $333 million, representing just 0.31% of loans and advances to customers and illustrating the prime quality of our portfolio. Underlying strong credit quality remained unchanged as our portfolio grew, with risk elements in lending and problem loans representing 0.32% of loans and advances, the same level as in 2005. Our consumer lending is to prime customers with average FICO scores on our portfolios, including home equity lines of credit, in excess of 700, and 95% of lending is secured.
– Partnerships and broker (motor, home, rescue, SMEs, pet, HR24) 9,302 11,242 11,317
Our own-brand businesses have performed well, with income rising by 1% and contribution growing by 4%. Excluding the impact of the floods, own-brand contribution grew by 24%. In the UK motor market we have pursued a strategy of targeting lower risk drivers and have increased premium rates to offset claims inflation, improving profitability by implementing heavier price increases in higher risk categories. Our international businesses performed well, with Spain delivering strong profit growth while, in line with plan, our German and Italian businesses also achieved profitability in 2007. Home insurance grew across all of our own brands in the second half, and we achieved particular success in the distribution of home policies through our bank branches, with sales up 40%.
We also pulled back from some less profitable segments of the broker market. This resulted in a 17% reduction in in-force policies, but income fell by only 2%. Contribution from partnerships and brokers fell by 22% as a result of floodrelated claims. Excluding the impact of the floods, contribution from partnerships and brokers increased by 18%.
For RBS Insurance as a whole, insurance premium income, net of fees and commissions, was 2% lower at £4,922 million, reflecting modest growth in our own brands offset by a 5%
decline in the partnerships and broker segment. Other income rose by 11% to £734 million, reflecting increased investment income.
Net claims rose by 1% to £4,010 million. Gross claims relating to the floods in June and July cost more than £330 million, with a net impact, after allowing for profit sharing and reinsurance, of £274 million. Excluding the impact of the floods, net claims costs were reduced by 7%. In the motor book, while average claims costs have continued to rise, this has been mitigated by improvements in risk selection and management and by continuing efficiencies in claims handling.
The UK combined operating ratio for 2007, including manufacturing costs, increased to 98.0%, reflecting a higher loss ratio and the reduction in partnership income. Excluding the impact of the floods, the combined operating ratio was 91.9%.
RBS Insurance increased total income by 3% to £5,679 million, with contribution also rising by 3% to £964 million and operating profit by the same percentage to £749 million.
In the UK we have grown our own-brand motor book by 3%
We implemented price rises in motor insurance in the second half of the year, and average motor premium rates across the market increased in the fourth quarter. Higher premium rates will, however, take time to feed through into income, and competition on prices remains strong.
SME has also performed well with policies sold through our intermediary business growing by 10%.
However, some of our partnership books continue to age and we did not renew a number of other partnerships. As a result, the number of partnership policies in force fell by 1%.
Total expenses rose by 3% to £960 million. Good cost discipline held direct expenses to £745 million, up 2%. Staff costs rose by 1%, reflecting improved efficiency despite continued investment in service standards. A 4% rise in nonstaff costs included increased marketing expenditure to support growth in continental Europe.
Manufacturing costs, was 94.6%, compared with 93.4% in 2005, reflecting a higher loss ratio and the discontinuation of some partnerships.
Analysis of Manufacturing costs: Customer Support and other operations 968 966 960
Group Property costs rose by 3% to £962 million, reflecting refurbishment and expansion of the Ulster Bank network and continuing investment to support the strong growth of our business in Europe and Asia, including the opening of a new
Customer Support and other operations costs remained broadly flat at £968 million, with further significant improvements in productivity enabling us to continue to absorb significant increases in service volumes. At the same time we maintained our focus on service quality, and our UK-based telephony centres continued to record market-leading customer satisfaction scores. Our investment in process re-engineering across our operational centres under the ‘Work-
Group Technology costs were 2% higher at £974 million, as we achieved significant improvements in productivity balanced by investment in software development. In the biggest integration project undertaken since NatWest, we brought Ulster Bank onto the RBS technology platform.
Group Property costs increased by 9% to £932 million, reflecting the continuation of our branch improvement programme and ongoing investment in major operational centres, including Manchester, Birmingham and Glasgow.
Central costs were substantially lower, reflecting in part the gains realised on a number of planned disposals that formed part of the Group’s funding arrangements for the acquisition of
ABN AMRO. These gains contributed to a reduction of £717 million in funding and corporate costs, which also benefited from a reduction of £152 million in the carrying value of our own debt accounted for at fair value and the receipt of a dividend on our investment in Bank of China. These benefits were partially offset by goodwill payments amounting to £119 million in respect of current account administration fees.
Excluding realised gains totalling £475 million, funding and corporate costs were £620 million, 28% lower than in 2006.
This largely reflects the centralisation of certain functions and increased regulatory requirements.
Funding and corporate costs were 9% lower at £862 million, largely reflecting a year on year reduction of £41 million in
Departmental and other costs were 10% higher at £442 million largely attributable to additional pension costs and higher securitisation costs.
Treasury and other eligible bills increased by £12.7 billion to £18.2 billion. Excluding ABN AMRO, treasury and other eligible bills grew £11.0 billion to £16.5 billion due to increased trading activity.
Loans and advances to customers rose by £362.4 billion to £829.3 billion. Within this, reverse repos increased by £79.4 billion to £142.4 billion. Excluding ABN AMRO, loans and advances to customers were up £76.9 billion, 16%, to £543.8 billion with reverse repos increasing by £16.1 billion, 26% to £79.1 billion. Excluding reverse repos, lending rose by £60.8 billion, 15% to £464.7 billion, reflecting growth across all divisions.
Equity shares rose by £39.5 billion to £53.0 billion primarily reflecting the acquisition of ABN AMRO, partially offset by a £0.8 billion reduction in the value of the Bank of China shareholding.
Intangible assets increased by £29.6 billion to £48.5 billion due to the acquisition of ABN AMRO and represented goodwill of £24.5 billion and other intangible assets of £5.1 billion.
Property, plant and equipment were up £0.3 billion, 2% to £18.8 billion. Excluding ABN AMRO, property, plant and equipment were down £1.9 billion, 10% to £16.6 billion mainly as a result of the sale of the Canary Wharf investment properties and sale and leaseback transactions in the UK and US.
ABN AMRO, settlement balances were down £2.1 billion, 28% to £5.3 billion as a result of reduced customer activity.
Prepayments, accrued income and other assets were up £10.9 billion to £19.1 billion primarily reflecting the acquisition of ABN AMRO.
Assets and liabilities of disposal groups comprise those business units of ABN AMRO that were acquired exclusively with a view to disposal, including Banca Antonveneta, Asset
Customer accounts were up £298.1 billion to £682.4 billion with repos up £70.9 billion to £134.9 billion. Excluding ABN AMRO, customer accounts were up £57.8 billion, 15% at £442.1 billion with repos up £11.0 billion, 17% to £75.0 billion. Excluding repos, deposits rose by £46.8 billion, 15%, to £367.1 billion with good growth in all divisions.
Settlement balances and short positions were up £41.5 billion to £91.0 billion. Excluding ABN AMRO, the increase in settlement balances and short positions was £4.4 billion, 9% to £53.8 billion reflecting growth in customer activity.
Accruals, deferred income and other liabilities increased £18.4 billion to £34.0 billion largely reflecting the acquisition of
Deferred taxation liabilities rose by £2.2 billion, 69% to £5.5 billion largely due to the acquisition of ABN AMRO.
Excluding ABN AMRO, subordinated liabilities were unchanged at £27.7 billion. The issue of £1.0 billion dated loan capital and £0.7 billion movement in exchange rates was offset by the redemption of £0.7 billion dated loan capital, £0.4 billion undated loan capital and £0.6 billion non-cumulative preference shares.
The profit for the year of £7.6 billion, issue of £2.7 billion of ordinary share capital, £3.2 billion of non-cumulative fixed rate equity preference shares and £1.1 billion of other paid-in equity to fund the Group's investment in ABN AMRO, together with other issues of £0.4 billion non-cumulative fixed rate equity preference shares and £0.1 billion of ordinary shares in respect of the exercise of share options, a £1.5 billion net decrease after tax in the Group's pension liability and £0.4 billion resulting from the effect of exchange rates, were partly offset by the payment of the 2006 final ordinary dividend and the 2007 interim dividend, £3.0 billion and preference dividends of £0.3 billion, £0.5 billion reduction in available-for-sale reserves, and a £0.4 billion decrease in cash flow hedging reserve.
Effects of exchange rate changes on cash and cash equivalents 6,010 (3,468) 1,703
Net sales and maturities of securities of £8,000 million was partially offset by net purchases of property, plant and equipment of £1,292 million, resulting in the net cash inflow from investing activities of £6,645 million.
The issue of £671 million of equity preference shares, £3,027 million of subordinated liabilities and proceeds of £1,354 million from minority interests issued were more than offset by dividend payments of £2,727 million, purchase of ordinary shares amounting to £991 million, repayment of £1,318 million of subordinated liabilities and interest on subordinated liabilities of £1,409 million, resulting in a net cash outflow from financing activities of £1,516 million.
Less: investments in insurance subsidiaries, associated undertakings and other supervisory deductions (10,283) (10,583) (7,282) (5,165) (4,618)
Banking book: Note: The comparative data for 2003 and 2004 in the table above are under UK GAAP as previously published and regulated.
As from 1 January 2005, the Group is regulated on an IFRS basis.
It is the Group’s policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, the Group has regard to the supervisory requirements of the Financial Services Authority (“FSA”). The FSA uses Risk
Asset Ratio (“RAR”) as a measure of capital adequacy in the
Internal Audit, which provides an independent assessment of the design, adequacy and effectiveness of internal controls.
• Advances Committee (“AC”), reporting to the Board, deals with transactions that exceed the Group Credit Committee’s delegated authority.
• Group Executive Management Committee (“GEMC”), an executive committee, ensures that implementation of strategy and operations are in line with the agreed risk appetite. GEMC is supported by the following: – Group Risk Committee (“GRC”) recommends and approves limits, processes and policies that ensure the effective management of all material non-balance sheet risks across the Group.
– Group Credit Committee (“GCC”) approves credit proposals under authority delegated to it by the Board and/or Advances Committee.
The allocation of capital resources to divisions is determined as part of the annual business and financial planning process.
Risk appetite is generally defined through both quantitative and qualitative techniques including stress testing, risk concentration, value-at-risk and risk underwriting criteria, ensuring that appropriate principles, policies and procedures are in place and applied.
• Credit risk: is the risk arising from the possibility that the
• Funding and liquidity risk: is the risk the Group is unable to meet its obligations as they fall due.
Group’s various defined benefit pension schemes will exceed their assets as a result of which the Group is required or chooses to make additional contributions to schemes.
• Insurance risk: the Group is exposed to insurance risk, either directly through its businesses or through using insurance as a tool to mitigate other risk exposures.
• Regulatory risk: is the risk arising from failing to meet the requirements and expectations of the Group’s many regulators, or from a failure to address or implement any change in these requirements or expectations.
These risk and capital management processes performed well throughout 2007, and continued working through the market disruption seen since August 2007.
Following its acquisition by RFS Holdings, ABN AMRO is subject to the Group’s high level controls and oversight by RBS’ control functions. Although its risk systems are not yet integrated with those of the Group, the data relating to ABN AMRO are presented on a consistent basis. In order to facilitate comparisons with prior years the data relating to the Group excluding ABN AMRO are separately identified. ABN AMRO
• Policies and risk appetite: policies provide clarity around the required Group framework for the assessment, approval, monitoring and management of credit risk where risk appetite sets the tolerance of loss. Limits are used to manage concentration risk by single name, sector and country.
• Decision makers: credit authority is granted to independent persons or committees with the appropriate experience, seniority and commercial judgement. Credit authority is not extended to relationship managers. Specialist internal credit risk departments independently oversee the credit process and make credit decisions or recommendations to the appropriate credit committee.
Default (see below) and Expected Loss are calculated using duly authorised models. All credit models are subject to independent review prior to implementation and existing models are reviewed on at least an annual basis.
• Mitigation techniques to reduce the potential for loss: credit risk may be mitigated by the taking of financial or physical security, the assignment of receivables or the use of credit derivatives, guarantees, risk participations, credit insurance, set off or netting.
• Provisioning: independent assessment using best practice models for collective and latent loss. Professional evaluation is applied to individual cases, to ensure that such losses are comprehensively identified and adequately provided for.
• Recovery: maximising the return to the Group through the recovery process.
(including overdraft facilities), instalment credit, finance lease receivables, debt securities and other traded instruments across all customer types.
Expressed as an annual probability of default, the upper and lower boundaries and the midpoint for each of these Group level asset quality grades are as follows: Distribution of credit risk assets by asset quality
AQ5 5.01 52.50 100.00 B and below 2007 including ABN AMRO
As at 31 December 2007, including ABN AMRO net of minority interest, 21% of credit risk assets (2006 – 28%) related to individuals and includes mortgage lending and other smaller loans that are intrinsically well-diversified. Corporate industry exposure comprised 40% of credit risk assets (2006 – 36%), which are well diversified across a range of sectors. Banks and financial services account for 24% of credit risk assets (2006 – 20%) and public sector and quasi government credit risk assets make up the remaining 15%
The Group also monitors its credit portfolio by customer type and product type. Including ABN AMRO net of minority interest, the largest category is lending to banks, corporates, sovereigns and quasi governments which represented 48% of credit risk assets as at 31 December 2007 (2006 – 41%). Lending to individuals accounted for 20% (2006 – 26%).
The table below sets out the Group’s loans that are classified as REIL and PPL: Including
ABN AMRO minority interest, show an improving trend, amounting to 1.49% of customer loans and advances at 31 December 2007
During 2007, REIL in Retail Markets increased by £210 million, Ulster Bank by £169 million and Citizens by £142 million.
The Group classifies impaired assets as either Risk Elements in Lending (REIL) or Potential Problem Loans (PPL). REIL
Provisions for loan impairment charged to the income statement in 2007 were £2,106 million. Excluding ABN AMRO minority interest, the charge was £1,938 million, up £61 million (3%) from 2006 and as a percentage of customer lending, the impairment charge was
Total provision as a % of customer loans and advances – gross (2) 0.9% 0.9% 0.9% 1.0% 1.0%
Notes: (1) Excludes provisions against loans and advances to banks of £3 million (2006 – £2 million; 2005 – £3 million).
The Group’s provision coverage ratios are shown in the table below. Including
Total provision expressed as a: The coverage ratio of closing provisions to REIL and PPL decreased from 62% to 56% during 2007. Excluding ABN AMRO minority interest, the coverage ratio was 59%. The lower coverage ratio reflects amounts written-off and the changing mix from unsecured to secured exposures.
(2) Includes provisions against loans and advances to banks of £3 million (2006 – £2 million).
Total customer accounts (excluding repos) 547,449 38 366,538 43 320,238 45 294,113 46
has added £253.5 billion to that total at 31 December 2007 to represent 53% of total funding in the enlarged balance sheet.
Term debt securities in issue with an outstanding term of over one year increased £11.4 billion (26%) to represent 7% of the
Group’s funding at 31 December 2007 excluding ABN AMRO, reflecting the activity of the Group in raising term funds through its securitisation and Euro and US Medium Term Note programmes.
to represent 18% of the Group’s funding at 31 December 2007. Including ABN AMRO collateralised borrowing by repo has added £147.8 billion to that figure, to represent 21% of total funding in the enlarged balance sheet.
Liquidity management within the Group focuses on overall balance sheet structure and the control, within prudent limits, of risk arising from the mismatch of maturities across the balance sheet and from exposure to undrawn commitments and other contingent obligations. The management of liquidity risk within the Group is undertaken within limits and other policy parameters set by GALCO. Compliance is monitored and coordinated by Group Treasury both in respect of internal policy and the regulatory requirements of the Financial
The structure of the Group’s balance sheet is managed to maintain substantial diversification, to minimise concentration across its various deposit sources, and to limit the reliance on total short-term wholesale sources of funds (gross and net of repos) within prudent levels.
B u s in e s s r e v ie w 81RBS Group • Annual Report and Accounts 2007
Greenwich Capital in the US, RBS Global Banking & Markets and by ABN AMRO Global Markets. Excluding ABN AMRO, the level of funding from short term unsecured debt issuance, bank deposits (excluding repos) and short positions has increased by £62.0 billion (44%) to represent 23% of total funding at 31 December 2007. Including ABN AMRO, such short-term wholesale borrowing has added £175.3 billion to that figure, to represent 26% of total funding in the enlarged balance sheet.
Excluding ABN AMRO, net customer lending, excluding repos, rose by £14.7 billion (17%) over the course of 2007 as the growth in loans and advances to customers continued to exceed growth in customer accounts, thus increasing commensurately the reliance on wholesale market funding to support loan growth.
Including ABN AMRO, net customer lending, excluding repos, has added £43.5 billion, reducing the ratio of loans and advances to customer accounts to 126.6%.
Loans and advances to customers (gross, excluding reverse repos) 693,331 468,942 407,918 372,223
In August 2007, a systemic liquidity stress event was triggered by difficulties in the US sub-prime mortgage market which then spread more widely to the global asset-backed market and impacted adversely the overall supply and cost of funding and liquidity for other than very short-term maturities. RBS has managed its liquidity position through those market conditions, increased its liquidity cushion and remains able fully to meet its funding needs.
The Group performs stress tests to simulate how events may impact its funding and liquidity capabilities. Such tests inform the overall balance sheet structure and help define prudent limits for control of the risk arising from the mismatch of maturities across the balance sheet and from undrawn commitments and other contingent obligations. The nature of stress tests is kept under review in line with evolving market conditions.
Contingency funding plans are maintained to anticipate and respond to any approaching or actual material deterioration in market conditions. The Group remains confident that it can manage its liquidity requirements effectively under such circumstances.
The primary focus of the daily management activity is to ensure access to sufficient liquidity to meet cash flow obligations within key time horizons, in particular out to one month ahead.
The short-term maturity structure of the Group’s liabilities and assets is managed daily to ensure that all material or potential cash flow obligations, arising from undrawn commitments and other contingent obligations can be met. Potential sources include cash inflows from maturing assets, new borrowing or the sale of various debt securities held (after allowing for appropriate haircuts).
Short-term liquidity risk is generally managed on a consolidated basis with internal liquidity mismatch limits set for all subsidiaries and non-UK branches which have material local treasury activities, thereby assuring that the daily maintenance of the Group’s overall liquidity risk position is not compromised. ABN AMRO, Citizens Financial Group and RBS
Reverse repo agreements with banks and customers 318,298 146,675 117,060 90,691
By remaining maturity up to one month: Deposits by banks (excluding repos) 112,181 38,470 36,089 35,153
Net wholesale liabilities due within one month 152,861 45,521 34,877 39,349
Net surplus of marketable assets over wholesale liabilities due within one month 84,563 62,849 19,080 31,394
Excluding ABN AMRO, over 36% of the Group’s total assets are denominated in sterling, where the FSA requires the Group, on a consolidated basis, to maintain daily a minimum ratio of 100% between: • a stock of qualifying high quality liquid assets (primarily UK
• the sum of: sterling wholesale net outflows contractually due within five working days (offset up to a limit of 50%, by 85%
of sterling certificates of deposit held which mature beyond five working days); and 5% of retail deposits with a residual contractual maturity of five working days or less.
The level of contingent risk from the potential drawing of undrawn or partially drawn commitments, back-up lines, standby lines and other similar facilities is also actively monitored and reflected in the measures of the Group’s nonsterling liquidity risk. Particular attention is given to the US
The Group also provides liquidity back-up facilities to its own conduits and has small exposures to other selected conduits which take funding from the asset-backed commercial paper
The RBS conduits are multi-seller ABCP conduits rated at A1 or A1+/P1 levels. During the difficult market conditions since
conduits are also rated A1 or A1+/P1 and they experienced similar trading conditions to the RBS conduits although they saw two small conduits draw liquidity. ABN AMRO Bank and
There are two sources of market risk for the Group: • Trading: the principal risk factors for the Group are interest rates, credit spreads, equity prices and foreign exchange.
For a discussion of the Group’s accounting policies for, and information with respect to, its exposures to derivative financial instruments, see Accounting policies and Note 13 on the accounts.
The Group’s portfolios of non-trading financial instruments mainly comprise loans (including finance leases), debt securities, equity shares, deposits, certificates of deposit and other debt securities issued, loan capital and derivatives. To reflect their distinct nature, the Group’s longterm assurance assets and liabilities attributable to policyholders have been excluded from these market risk disclosures.
GEMC approves the Group’s trading book market risk appetite, expressed in value-at-risk (VaR) and stress testing limits. These limits are delegated to individual trading businesses within the
The market risk function is independent of the Group’s trading businesses and is responsible for: • effective application and compliance with the Group’s
Market Risk Policy Statement (MRPS), aligning the market risk taken by the Group with the risk limits set by GEMC; • identification, measurement, monitoring, analysis and reporting of the market risk generated by the various businesses; and
The Group uses a number of approaches to measure market risk in its trading and treasury portfolios. These approaches include: (i) VaR
VaR is a technique that produces estimates of the potential negative change in the market value of a portfolio over a specified time horizon at given confidence levels. For internal risk management purposes, the Group’s VaR assumes a time horizon of one trading day and a confidence level of 95%. The
B u s in e s s r e v ie w 85RBS Group • Annual Report and Accounts 2007
N u m b e r o f tr a d in g d a y s
The Group’s trading activities are carried out principally by Global Banking & Markets. The chart below depicts the number of days on which Global Banking & Markets’ trading income fell within stated ranges.
Historical stress tests calculate the loss that would be generated if the market movements that occurred during a historical market event were to be repeated. Hypothetical stress tests calculate the loss that would be generated if a specific set of adverse market movements were to occur.
In addition to the VaR and stress testing measures discussed above, the Group calculates a wide range of sensitivity and position risk measures, for example interest rate ladders or option revaluation matrices. These measures provide valuable additional controls, often at individual desk or strategy level.
Limits form part of the dealing authorities and constitute one of the cornerstones of the market risk management framework.
Their breach must be followed by appropriate action, as specified in detail in the MRPS. Upon notification of a limit breach, the appropriate body must take either of the following actions: • instructions can be given to reduce positions so as to bring the Group within the agreed limits, or
Group’s businesses. Money market portfolios include cash instruments (principally debt securities, loans and deposits)
£1.5 million). During the year the maximum VaR was £6.4 million (2006 – £4.4 million), the minimum £1.3 million (2006 –
A static maturity gap report is produced as at the month-end for each business, in each functional currency based on the behaviouralised repricing for each product. It is Group policy to include in the gap report, non-financial assets and liabilities, mainly property, plant and equipment and the Group’s capital and reserves, spread over medium and longer term maturities.
Any residual non-trading interest rate exposures are controlled by limiting repricing mismatches in the individual business balance sheets. Potential exposures to interest rate movements in the medium to long term are measured and controlled using a version of the same VaR methodology that is used for the
Risk is managed within VaR limits approved by GALCO, through the execution of cash and derivative instruments.
VaR, like all interest rate risk measures, has limitations when applied to retail banking books and the management of
Citizens Financial Group’s interest rate exposures involves a number of other interest rate risk measures and related limits.
Board are: • The sensitivity of net accrual earnings to a series of parallel movements in interest rates; and
• Economic value of equity (“EVE”) sensitivity to a series of parallel movements in interest rates.
2% parallel upward 2% parallel downward movement in movement in US interest rates
For the Group, the other major structural interest rate risk arises from a low interest rate environment, particularly in sterling, sustained for a number of years. In such a scenario, deposit pricing may reach effective floors below which it is not practical to reduce rates further whilst variable rate asset pricing continues to decline. A sustained low rate scenario would also generate progressively reduced income from the medium and long term hedging of non-interest bearing liabilities.
The Group is also exposed to risk from its defined benefit pension schemes. The schemes’ assets comprise investment portfolios which are held to meet projected liabilities to the scheme members. Risk arises from the schemes because returns from these portfolios may be less than expected and because there may be greater than expected increases in the estimated value of the schemes’ liabilities. In these circumstances, the Group could be obliged, or may choose, to make additional contributions to the schemes.
The types, nature and amounts of exchange-traded exposures, private equity exposures, and other exposures vary significantly.
Effectively, an insurance contract transfers risk from the policyholder to the insurer, whereby, in return for a premium paid, the insurer indemnifies the policyholder on the occurrence of specified events. Insurance risk arises through fluctuations in the timing, frequency and/or severity of insured events, relative to the expectations at the time of underwriting.
Claims management risk: arises if claims are handled or paid inappropriately. Claims are managed using a range of IT
system controls and manual processes conducted by experienced staff. These, together with a range of detailed policies and procedures, ensure that claims are handled in a timely, appropriate and accurate manner. The processes include controls to avoid claims staff handling or paying claims beyond their level of authority, as well as controls to avoid paying invalid claims. Loss adjustors are used to handle certain claims to conclusion.
Acceptable reinsurers are rated at A- or better unless specifically authorised by the RBS Insurance Group Board.
• Excess of loss ‘per individual risk’ reinsurance to protect against significantly large individual losses.
Other forms of reinsurance may also be utilised, subject to approval by senior management.
Reserving risk: arises when reserves are assessed incorrectly, so that insufficient funds are retained to pay (or handle) claims as they fall due either for claims which have already occurred in relation to the claims reserves (including claims handling expense reserves) or will occur in future periods of insurance
B u s in e s s r e v ie w 89RBS Group • Annual Report and Accounts 2007
The Group’s focus in its insurance operation is on high volume and relatively straightforward products, for example home and motor. This facilitates the generation of comprehensive underwriting and claims data, which are used to accurately price and monitor the risks accepted. This attention to data analysis is reinforced by tight controls on costs and claims handling procedures.
b) Property insurance contracts (residential and commercial): short-term uncertainty is mainly driven by weather conditions.
Over a longer period, the strength of the economy is also a factor.
Westminster Life Assurance Limited, Royal Scottish Assurance plc and Direct Line Life Insurance Company Limited, are required to meet minimum capital requirements at all times under the Financial Service Authority’s Prudential Sourcebook.
The capital resources covering the regulatory requirement are not transferable to other areas of the Group. To ensure that the capital requirement is satisfied at all times, each company holds a voluntary buffer above the regulatory minimum.
This is where the primary responsibility resides for the identification, management and mitigation of the risks associated with the products and processes of the business.
• The second line of defence is the Operational Risk community. The Group Operational Risk department is responsible for the design and ownership of the ORPP. The
• The third line of defence is audit. Group Internal Audit is responsible for assessing compliance with the ORPP and for providing independent evaluation of the adequacy and effectiveness of the risk and control framework.
Basel II introduces for the first time, a specific capital charge for operational risk. From launch in 2008, the Group will initially apply the Standardised Approach.
Group addresses the risks arising from such changes and implement them appropriately.
• Monitoring of compliance with existing rules and regulations and mitigating the consequences of any inadvertent noncompliance.
• Management of effective relationships with regulators to ensure open two-way communication.
The Group and its subsidiaries are fully engaged with regulatory authorities in all the jurisdictions in which they operate, in response to regulators’ on-going supervisory requirements.
The Group works with domestic and international trade associations, and proactively engages with regulators, especially the UK Financial Services Authority (FSA), as well as with other influential stakeholders such as the Basel
The Group has co-operated fully with various regulatory reviews of the operation of retail banking and consumer credit industries in the UK and elsewhere.
Bank Secrecy Act compliance matters. ABN AMRO has cooperated and continues to cooperate fully with the investigation. Prior to the acquisition by the Group, ABN AMRO
Certain of the Group’s subsidiaries have received requests for information from various U.S. governmental agencies and selfregulatory organisations including in connection with sub-prime mortgages and securitisations, collateralised debt obligations and synthetic products related to sub-prime mortgages. The
BP p.l.c., and president of the Science Council. He was formerly chief executive of AstraZeneca PLC, and was previously president of the European Federation of
Appointed to the Board in August 1998, Sir Fred is a Chartered Accountant. He was formerly chief executive and director, Clydesdale Bank PLC and
Citigroup. He was formerly the Group treasurer based in New York and prior to that had held a number of management positions within the financial markets business based in London.
Institution, and a director of Textron Inc. and numerous community organisations in the USA.
Manufacturing with various responsibilities including the integration of RBS and NatWest systems platforms.
Chief Executive, Retail Markets 7. Gordon Pell (age 58) FCIBS, FCIB
European Commission with responsibility for the EU’s environmental policy and director general for Customs and Excise and Indirect Taxation. He is currently a director of Total Upstream UK Limited, The Met Office and Vimetco N.V. as well as an international adviser to
Appointed to the Board in March 2006, Bill Friedrich is the former deputy chief executive of BG Group plc. He previously served as general counsel for British Gas plc and is a former partner of Shearman & Sterling where he practised as a general corporate lawyer working for several of the world's leading financial institutions.
Hunter is a Chartered Accountant. He was Scottish senior partner of KPMG between 1992 and 1999 and president of The Institute of Chartered Accountants of
Scotland in 1997/1998. He has extensive professional experience in the UK and North and South America. He is currently chairman of Macfarlane Group plc, a director of Edinburgh US Tracker Trust plc and a governor of the Beatson Institute for Cancer Research.
Appointed to the Board in September 2004, Bud Koch is an American national. He has extensive professional experience in the USA and is immediate past chairman of the board of John Carroll University and a trustee of
One Bank, N.A. between 1973 and 2004. He is also a director of Assurant, Inc and a public interest director of the Federal Home Loan Bank of Cincinnati.
Limited, chairman of Heathrow Express Limited and a director of BAA plc. She is currently a non-executive director of Kingfisher plc and Portmeirion Group plc.
Morgan between 1979 and 2001 and was latterly chief executive of J P Morgan Europe, Middle East and
Appointed to the Board in July 2001, Sir Steve is a former senior UK civil servant, who had responsibility for a wide variety of Treasury matters. His early career included the post of private secretary to the Chancellor of the Exchequer and secondment to
Trust, an adviser to Duke Street Capital Private Equity and a board member of Pension Insurance Corporation
Sutherland is an Irish national. He is a former attorney general of Ireland and from 1985 to 1989 was the
Annual General Meeting, a final dividend of 23.1p per ordinary share totalling £2.3 billion (2006 – £2.1 billion) be paid on 6 June 2008 to members on the register at the close of business on 7 March 2008.
The company is a holding company owning the entire issued ordinary share capital of The Royal Bank of Scotland, the principal direct operating subsidiary undertaking of the company. The “Group” comprises the company and all its subsidiary and associated undertakings, including The Royal
The Group is engaged principally in providing a wide range of banking, insurance and other financial services. Further details of the organisational structure and business overview of the
Group’s critical accounting policies and key sources of accounting judgements are included in the Accounting policies on pages 131 to 138.
As at 31 December 2007, the Group employed over 226,000 employees (full-time equivalent basis) throughout the world including almost 90,000 employees in ABN AMRO. Details of employee related costs are included in Note 2 on the accounts on page 140.
Across the Group worldwide, over 30,000 employees are recruited at different levels every year. The Group utilises a wide range of recruitment channels including its in-house search function, external executive search suppliers, general advertising, an open internal jobs market, talent reviews and detailed succession planning to ensure that the recruitment and development of its employees is fully aligned to its organisational requirements.
The Group recognises that its continuing success is closely linked to the performance, skills and individual commitment of its employees.
The Group aims to attract and retain the most talented people.
To stay ahead of the market, salaries are routinely compared with those paid for similar roles by competitors, and individual performance is recognised and rewarded.
The Group offers a comprehensive remuneration and benefits package, Total Reward, to all employees. Total Reward is externally recognised as offering one of the most innovative and flexible remuneration and benefits programmes in the financial services sector.
The Group maintains a strong commitment to creating and providing learning opportunities for all its employees through a variety of personal development and training programmes and learning networks. The Group’s employees are encouraged to volunteer to work with its community partners. The Group continues to invest in leadership and management development which is consistent with its objective of being the employer of choice: attracting, rewarding and retaining the very best talent.
Many of the Group’s development programmes are delivered at the RBS Business School based on the Gogarburn Campus.
These channels provide access to news and information in a number of ways, including the intranet, magazines, team meetings led by line managers, briefings held by senior managers and regular dialogue with employees and employee representatives.
Research (TP-ISR). The survey provides a channel for employees to express their views and opinions about the
This represents over 129,000 employees participating in the survey across 36 countries and in nine languages. Online coverage of the survey increased to 95% globally.
The survey results are presented to the Board and at divisional and team levels. Action plans are developed to address any issues identified.
The Group recognises employer representative organisations such as trade unions and work councils in a number of businesses and countries. The Group has a European
Employee Communication Council that provides elected representatives with an opportunity to better understand the impact on its European operations.
The Group’s Managing Diversity policy sets a framework for broadening the Group’s talent base, achieving the highest levels of performance and enabling all employees to reach their full potential irrespective of age, disability, gender, marital status, political opinion, race, religious belief or sexual orientation.
The health, safety, wellbeing and security of employees and customers continues to be a priority for the Group. Regular reviews are undertaken of both policies and processes to ensure compliance with current legislation and best practice.
The Group has a comprehensive pre-employment screening policy to guard against possible infiltration and employeerelated fraud. In addition to existing workplace security measures, all people engaged in the Group are screened prior to commencing employment.
The Group has a code of ethics applicable to all employees in every country of its operations and is available in eleven languages.
Business excellence requires that the Group meets changing customer, shareholder, investor, employee and supplier expectations. The Group believes that meeting high standards of environmental, social and ethical responsibility is key to the way it does business.
In 2007, the Group undertook a survey to identify and prioritise the issues that stakeholders care about in relation to the financial services sector. This allows the Group to focus corporate responsibility activities on issues which matter most to stakeholders. Financial crime and corruption is the primary focus, followed by consumer banking issues, employee practices, direct environmental impact, community investment, global lending and project finance, financial inclusion and capability and support for small businesses. The Group takes all these responsibilities seriously, continually monitoring and managing them through policies and practices across the
Further details of the Group’s corporate responsibility policies will be contained in the 2007 Corporate Responsibility Report.
The directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future.
The company is committed to high standards of corporate governance. Details are given on pages 99 to 104.
In May 2007, the company capitalised £1,576 million of its share premium account by way of a bonus issue of two new ordinary shares of 25p each for every one ordinary share held by shareholders at close of business on 4 May 2007. As of 8 May 2007, the authorised ordinary share capital of the company increased by £1,609 million (6,434,972,616 ordinary shares of 25p each) and the allotted, called-up and fully paid ordinary share capital increased by £1,576 million
Details of issues and redemptions of preference shares during the year and the authorised and issued preference share capital at 31 December 2007 are shown in Note 26 on the accounts.
Where not provided previously in the Report of the directors, the following provides the additional information required to be disclosed by Part 7 of the Companies Act 1985 as amended.
Financial Services Authority certain employees of the company require the approval of the company to deal in the company’s shares.
Share Trust are used to hold shares on behalf of the Group’s executive share plans. The voting rights are exercisable by the
Trustees, however, in accordance with investor protection guidelines, the Trustees abstain from voting. The Trustees would take independent advice before accepting any offer for the company in a takeover bid situation.
The rules governing the appointment of directors is set out in the Corporate Governance Report on page 99. The company’s
Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
The names and brief biographical details of the directors are shown on pages 92 and 93. All directors served throughout the year and to the date of signing of the financial statements.
Details of the service agreement for Guy Whittaker are set out on pages 108 and 109. No other director seeking election or re-election has a service agreement.
In terms of section 236 of the Companies Act 2006, the directors of the company, members of the Group Executive
In terms of section 236 of the Companies Act 2006, Qualifying
Group’s pension schemes. The intention is to issue QPSIPs to all pension trustees of the Group’s pension schemes during 2008.
This confirmation is given and should be interpreted in accordance with the provisions of section 234ZA of the
In 2007 the contribution to the Group’s Community Investment programmes was £57.7 million (2006 – £58.6 million).
The Group is committed to maintaining a sound commercial relationship with its suppliers. Consequently, it is the Group’s policy to negotiate and agree terms and conditions with its suppliers, which includes the giving of an undertaking to pay suppliers within 30 days of receipt of a correctly prepared invoice submitted in accordance with the terms of the contract or such other payment period as may be agreed.
The table below shows the shareholders that have notified us that they hold more than 3% of the voting rights in the undernoted classes of shares.
Ordinary shares: 51⁄2% cumulative preference shares: Legal & General Group plc 504,686,799 5.04 Mr P S and Mrs J M Allen; 11% cumulative preference shares: Miss C L Allen, and Miss J C Allen 451,796 28.23
Guardian Royal Exchange Assurance plc 129,830 25.97 Commercial Union Assurance plc 91,429 22.86
Windsor Life Assurance Company Limited 51,510 10.30 Bassett-Patrick Securities Limited* 46,255 11.56
Mr S. J. and Mrs J. A. Cockburn 15,520 3.10 E M Behrens Charitable Trust 20,000 5.00
Mr Stephen J Cockburn 15,290 3.06 Mrs Gina Wild 19,800 4.95
Mr W. T. Hardison Jr. 13,532 3.38 *Notification has been received on behalf of Mr A. W. R. Medlock and Mrs H. M. Medlock that they each have an interest in the holding of 51⁄2% cumulative preference shares registered in the name of Bassett-Patrick Securities Limited noted above and that there are further holdings of 5,300 and 5,000 shares, respectively, of that class registered in each of their names.
Throughout the year ended 31 December 2007, the company has complied with all of the provisions of the revised
June 2006 (the “Code”) except in relation to the authority reserved to the Board to make the final determination of the remuneration of the executive directors, which is explained in the paragraph headed ‘Remuneration Committee’.
Under the US Sarbanes-Oxley Act of 2002 (the “Act”), specific standards of corporate governance and business and financial disclosures apply to companies with securities registered in the US. The company complies with all applicable sections of the Act.
NYSE’s corporate governance listing practices, with the exception of the following. The Nominations Committee is chaired by the Chairman of the Board, who may not be currently considered independent under the UK Combined
UK Combined Code (since the Chairman was considered independent on appointment). The company’s Audit,
Nomination and Remuneration Committees are otherwise composed solely of non-executive directors deemed by the
Remuneration Committee, reserves the authority to make the final determination of the remuneration of the Group Chief
Executive, which is explained on page 101 in the paragraph headed ‘Remuneration Committee’.
The Board is the principal decision-making forum for the company. It has overall responsibility for leading and controlling the company and is accountable to shareholders for financial and operational performance. The Board approves
The roles of the Chairman and Group Chief Executive are distinct and separate, with a clear division of responsibilities.
All directors participate in discussing strategy, performance and the financial and risk management of the company.
There were nine scheduled Board meetings during 2007. The directors were supplied with comprehensive papers in advance of each Board meeting covering the Group’s principal business activities. Members of executive management attend and make regular presentations at meetings of the Board. In addition to scheduled meetings, 20 ad hoc Board meetings and Chairman’s Committee meetings were held during 2007 to consider the acquisition of ABN AMRO. These meetings were attended by the majority of directors.
The Board is aware of the other commitments of its directors and is satisfied that these do not conflict with their duties as directors of the company.
May 2008, and the change in role of Larry Fish to nonexecutive director of the company, the Board will comprise the
Chairman, five executive directors and eleven non-executive directors). The Board functions effectively and efficiently, and is considered to be of an appropriate size in view of the scale of the company and the diversity of its businesses. The directors provide the Group with the knowledge, mix of skills, experience and networks of contacts required. The Board
The Board considers that all non-executive directors are independent for the purposes of the Code, with the exception of Bud Koch who was formerly Chairman, President and Chief
Executive Officer of Charter One Financial, Inc. which was acquired by Citizens Financial Group, Inc. in 2004. Larry Fish will not be considered an independent non-executive director from 1 May 2008.
At each Annual General Meeting, one third of the directors retire and offer themselves for re-election and each director must stand for re-election at least once every three years. Any non-executive directors who have served for more than nine years will also stand for annual re-election and the Board will consider their independence at that time. The proposed re-election of directors is subject to prior review by the Board.
All directors receive accurate, timely and clear information on all relevant matters. All directors have access to the advice and services of the Group Secretary and General Counsel who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. In addition, all directors are able, if necessary, to obtain independent professional advice at the company’s expense.
Nominations Committee was undertaken in the autumn of 2007. This was conducted internally using a detailed questionnaire and individual meetings with each director.
Amongst the areas reviewed were the role of the Board, Board composition, Board meetings and processes, Board performance and reporting, external relationships and Board
The Board evaluation involved detailed consideration of Board composition, Board engagement in risk management and capital planning and the format of the Board meetings. The
Board has established a number of Board Committees with particular responsibilities. The Committee chairmanship and membership are reviewed on a regular basis. The names and biographies of all Board Committee members are set out on pages 92 and 93.
All members of the Audit Committee are independent nonexecutive directors. The Audit Committee holds at least five meetings each year. The Audit Committee’s report is set out on pages 103 and 104.
The members of the Remuneration Committee comprise independent non-executive directors, together with the
Chairman of the Board. The Remuneration Committee holds at least three meetings each year.
Responsibility for determining the remuneration of executive directors has not been delegated to the Remuneration
The Nominations Committee comprises independent nonexecutive directors, under the chairmanship of the Chairman of the Board. The Nominations Committee meets as required.
In addition, the Nominations Committee considers succession planning for the Chairman, Group Chief Executive and nonexecutive directors. The Nominations Committee takes into account the knowledge, mix of skills, experience and networks of contacts which are anticipated to be needed on the Board in the future. The Chairman, Group Chief Executive and non-executive directors meet to consider executive succession planning. No director is involved in decisions regarding his or her own succession.
Group at any time throughout the year. Shareholders are given the opportunity to ask questions at the Annual General Meeting or submit written questions in advance. The chairmen of the
Audit, Remuneration and Nominations Committees are available to answer questions at the Annual General Meeting.
The effectiveness of the Group’s internal control system is reviewed regularly by the Board and the Audit Committee.
Executive management committees or boards of directors in each of the Group’s businesses receive regular reports on significant risks facing their business and how they are being controlled. In addition, the Group Board receives monthly risk management reporting. Additional details of the Group’s approach to risk management are given in the ‘Risk management’ section of the ‘Business review’ on pages 70 to 90. The Audit Committee also receives regular reports from
Group’s regulatory oversight are given in the ‘Supervision and regulation’ section on pages 231 to 233.
The Group is required to comply with Section 404 of the US
Sarbanes-Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2007.
Management has excluded from its assessment the internal control over financial reporting of ABN AMRO Holdings N.V., which was acquired on 17 October 2007. ABN AMRO
Holdings N.V. represented 40.7% of the Group’s total assets, a negligible proportion of the shareholders’ total equity, 7.7% of the Group’s total income and 0.2% of the Group’s profit after tax as of and for the year ended 31 December 2007.
As required by US regulations, the effectiveness of the company’s disclosure controls and procedures (as defined in the rules under the US Securities Exchange Act of 1934) have been evaluated. This evaluation has been considered and approved by the Board which has instructed the Group Chief
There was no change in the company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
Steve Robson. All members of the Audit Committee are independent non-executive directors. The Audit Committee holds at least five meetings each year, two of which are held immediately prior to submission of the interim and annual financial statements to the Group Board. This core programme is supplemented by additional meetings as required, four being added in 2007. Audit Committee meetings are attended by relevant executive directors, the internal and external auditors and finance and risk management executives. At least twice per annum the Audit Committee meets privately with the external auditors. Since 2000, the Audit Committee has undertaken an annual programme of visits to the Group's business divisions and control functions. The object of the programme is to allow the Audit Committee to gain a better understanding of the risk and control issues facing the Group and an invitation to attend is extended to all non-executive directors. The programme of future visits is considered annually and the norm is for three or four visits to be undertaken each year.
Committee is an ‘Audit Committee Financial Expert’ and is independent, each as defined in the SEC rules under the US
‘Audit Committee Financial Expert’ does not impose on any such director, any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such director as a member of the Audit Committee and Board in the absence of such a designation. Nor does the designation of a director as an ‘Audit Committee Financial Expert’
• monitoring the Group’s processes for internal audit, risk management and external audit.
The Audit Committee has adopted a policy on the engagement of the external auditors to supply audit and non-audit services, which takes into account relevant legislation regarding the provision of such services by an external audit firm. The Audit
Annual audit services include all services detailed in the annual engagement letter including the annual audit and interim reviews (including US reporting requirements), periodic profit verifications and reports to regulators including skilled persons reports commissioned by the Financial Services
The Audit Committee approves all other permitted non-audit services on a case by case basis before their commencement.
In addition, the Audit Committee reviews and monitors the independence and objectivity of the external auditors when it approves non-audit work to be carried out by them, taking into consideration relevant legislation and ethical guidance.
The Audit Committee is responsible for making recommendations to the Board, for it to submit the Audit
Remuneration Committee comprise independent non-executive directors, together with the Chairman of the Board.
During 2007 the Remuneration Committee continued to review policy in light of business needs, market changes and shareholder comments.
The objective of the executive remuneration policy is to provide, in the context of the company’s business strategy, remuneration in form and amount which will attract, motivate and retain high-calibre executives. In order to achieve this objective, the policy is framed around the following core principles: • Total rewards will be set at levels that are competitive within the relevant market, taking each executive director’s remuneration package as a whole. The relevant market is FTSE top 20 companies and major UK, European and
• Remuneration arrangements will strike an appropriate balance between fixed and performance-related rewards.
• Remuneration arrangements will be designed to support the company’s business strategy, to promote teamwork and to conform to best practice standards.
Board, on the recommendation of its Chairman. The level of remuneration reflects the responsibility and time commitment of directors and the level of fees paid to non-executive directors of comparable major UK companies. Non-executive directors do not participate in any incentive or performance plan.
Pension Fund (“the RBS Fund”), a non-contributory defined benefit fund for employees (including executive directors) who joined the Group prior to 1 October 2006. Any new executive directors will not be eligible to participate in the RBS Fund unless they were already a member prior to 1 October 2006; instead they will receive a cash allowance.
Earn and the Profit Sharing scheme. These schemes are not subject to performance conditions since they are operated on an all-employee basis.
UK-based executive directors normally have a maximum annual incentive potential of between 160% and 200% of salary. For exceptional performance, as measured by the achievement of additional challenging objectives, executive directors may be awarded incentive payments of up to 200%
of salary, or 250% of salary, in the case of the Group Chief
In respect of 2007, the Remuneration Committee reviewed the annual incentive payments for all executive directors taking into account performance against targets set at the beginning of the year and covering Group financial performance, each director’s operational targets, and where appropriate, divisional financial targets. For all directors operational targets included specified strategic developments and improvement in customer and employee satisfaction scores.
agreed annual incentive payments of up to 112.5% of normal maximum levels. Levels of incentive payments to executive directors covered a wide range, reflecting variations in divisional performance.
The company provides long-term incentives in the form of share options and share or share equivalent awards. Their objective is to encourage the creation of value over the long term and to align the rewards of the executive directors with the returns to shareholders.
Total Shareholder Return (“TSR”) measure and 50% vests on growth in adjusted earnings per share (“EPS”) over the three year performance period.
For the TSR element, vesting is based on the level of outperformance by the Group of the median of the comparator group TSR over the performance period. Awards made under the plan will not vest if the company’s TSR is below the median of the comparator group. Achievement of median TSR
performance by up to 9% will result in vesting on a straight-line basis from 25% to 125%, outperformance by 9% to 18% will result in vesting on a straight-line basis from 125% to 200%.
Vesting at 200% will occur if the company outperforms the median TSR performance of the comparator group by at least 18%. For awards made in 2006 and 2007, the companies in the comparator group were ABN AMRO Holdings N.V.; Banco
Santander Central Hispano, S.A.; Barclays PLC; Citigroup Inc; HBOS plc; HSBC Holdings plc; Lloyds TSB Group plc and
A new executive share option plan was approved by shareholders at the company’s 2007 Annual General Meeting.
The performance condition is based on the average annual growth in the Group’s adjusted EPS over the three year performance period commencing in the year of grant. The calibration of the EPS growth measure is agreed by the
Remuneration Committee at the time of each grant having regard to the business plan, prevailing economic conditions and analysts’ forecasts.
In 2006, the Remuneration Committee reviewed the policy on shareholding requirements and the Group has now adopted shareholding guidelines for executive directors.
He will participate in the Citizens medical insurance plan to this date, after which he is eligible to join the Citizens retiree medical plan.
Information regarding executive directors’ service contracts is summarised in the table and note below. (1)
Where a longer period of notice is initially approved on appointment, it will normally be structured such that it will automatically reduce to 12 months in due course.
The original date of appointment as a director of the company and the latest date for the next re-election are as follows: Latest date for
Group Pension Fund (‘the RBS Fund’) and are contractually entitled to receive all pension benefits in accordance with its terms. The RBS Fund rules allow all members who retire early at the request of their employer to receive a pension based on accrued service with no discount applied for early retirement.
The Remuneration Committee has reviewed this provision of the RBS Fund, which applies equally to executive directors and other employees. The Remuneration Committee concluded that a change to the terms of the RBS Fund in respect of early retirement at the company’s request would not be a cost effective route to take at this time. The RBS Fund is closed to employees, including any executive directors, joining the
The non-executive directors do not have service contracts or notice periods although they have letters of engagement reflecting their responsibilities and commitments. Under the company’s Articles of Association, all directors must retire by rotation and seek re-election by shareholders at least every three years. The dates in the table above reflect the latest date for re-election. However, in 2008, at least one-third of the Board will retire by rotation as required by the company’s Articles of
Association. No compensation would be paid to the Chairman or to any non-executive director in the event of early termination.
The tables and explanatory notes on pages 110 to 114 report the remuneration of each director for the year ended 31 December 2007 and have been audited by the company’s auditors, Deloitte & Touche LLP
(2) Mr Fish is a non-executive director of Textron Inc. and retains the fees paid to him in this respect. For 2007, he received a remuneration package from Textron Inc. equivalent to approximately US$87,565.
Notes: (1) In addition to his role as a non-executive director, Mr Koch had an agreement with Citizens Financial Group, Inc. to provide consulting services for a period of three years, which ended on 1 September 2007, following the acquisition by Citizens of Charter One Financial, Inc. For these services Mr Koch received $268,333 in 2007.
The non-executive directors did not receive any bonus payments or benefits.
Options to subscribe for ordinary shares of 25p each in the company granted to, and exercised by, directors during the year to 31 December 2007 are included in the table below. Options held at 1 January 2007 and the related option price have been restated to reflect the bonus issue of ordinary shares in May 2007.
Options held at Options Market price at 1 January granted in date of exercise Option price Options held at 31 December 2007 2007 2007 Number £ £ Number Exercise period
Note: (1) Options held under the sharesave schemes, which are not subject to performance conditions.
No options had their terms and conditions varied during the accounting period to 31 December 2007. No payment is required on the award of an option.
The performance condition applying to executive share options granted in 2007 and exercisable in August 2010 is outlined on page 107.
Index (RPI) plus 9%. In respect of executive share options exercisable before March 2002, the performance condition is that the growth in the company’s EPS over three years has exceeded the growth in the RPI plus 6%.
In the ten year period to 31 December 2007, awards made that could require new issue shares under the company’s share plans represented 5.5% of the company’s issued ordinary share capital, leaving an available dilution headroom of 4.5%.
Scheme interests at 1 January 2007 and the related market price on award in the table below have been restated to reflect the bonus issue of ordinary shares in May 2007.
(share equivalents) at granted award vested in exercised equivalents) at conditions to 1 January 2007 in 2007 £ 2007(1) in 2007 31 December 2007 be fulfilled
(2) The end period for qualifying conditions is subject to any restrictions on dealing in the Group’s shares which may be in place and to which Mr Whittaker may be subject. As a result of the close period prior to the announcement of the Group’s results, the end of the period for qualifying conditions to be fulfilled in 2008 is 28 February 2008.
Interests at 1 January 2007 Awards granted during year during year Interests at 31 December 2007
Johnny Cameron’s benefits are based on salary limited to the pensions earning cap and he receives a cash allowance in place of pension on salary above this cap.
Mark Fisher opted to cease future accrual of pension benefit within the RBS Fund with effect from 6 April 2006. The increase in pension shown in the table arises from his increase in pensionable salary over the year. He is provided with a cash allowance in place of further pension benefits.
Age at 31 December 31 December 31 December 31 December 31 December 31 December 31 December * net of statutory revaluation applying to deferred pensions
(4) The proportion of benefits represented by funded pension schemes for Gordon Pell and Larry Fish is 53% and 2% respectively. All benefits for Johnny Cameron, Mark Fisher and
US$0.01 each at 31 December 2007 (2006 – 20,000) and Mr
No director held a non-beneficial interest in the shares of the company at 31 December 2007, at 1 January 2007 or date of appointment if later.
Shares beneficially owned at 1 January 2007 in the tables below have been restated to reflect the bonus issue of ordinary shares in
Shares Vested Value as at beneficially Shares MPP shares Vested 31 December owned at owned or share share 2007(2,3)
(2) The value is based on the share price at 31 December 2007, which was £4.44. During the year ended 31 December 2007 the share price ranged from £3.97 to £7.20.
(3) The notional value of the vested share options has been calculated on the ‘in the money’ value using the share price of £4.44 as at 31 December 2007 less the option prices of vested options.
(4) As at 31 December 2007, the executive directors held a technical interest as potential beneficiaries in The Royal Bank of Scotland Group plc 2001 Employee Share Trust
(9,570,456 shares) and The Royal Bank of Scotland plc 1992 Employee Share Trust (904,326 shares), being trusts operated for the benefit of employees of the company and its subsidiaries.
On 7 January 2008 and 7 February 2008, 29 and 33 ordinary shares of 25p each, respectively, were acquired by both
The directors are required by Article 4 of the IAS Regulation
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the Annual Report and Accounts complies with the
Companies Act 1985. They are also responsible for safeguarding the assets of the company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
We have audited the financial statements of The Royal Bank of
We review whether the corporate governance statement reflects the company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the
Board or management’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
In our opinion: • the Group financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2007 and of its profit and cash flows for the year then ended; • the company financial statements give a true and fair view, in accordance with IFRS as adopted by the European
Union as applied in accordance with the provisions of the companies Act 1985, of the state of affairs of the company as at 31 December 2007; • the financial statements and the part of the directors’
In our opinion the financial statements give a true and fair view, in accordance with IFRS, of the state of the Group’s affairs as at 31 December 2007 and of its profit and cash flows for the year then ended.
Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as at 31 December 2007, based on the criteria established in
Our report dated 27 February 2008 which will be included in the Annual Report on Form 20-F for the year ended 31 December 2007 to be filed with the Securities and
Profit before other operating charges and impairment losses 16,680 15,522 13,956
Debt securities subject to repurchase agreements 29 100,561 58,874 — —
Accruals, deferred income and other liabilities 21 34,024 15,660 8 15
Exchange differences on translation of foreign operations 2,210 (1,681) 842 — — —
Actuarial gains/(losses) on defined benefit plans 2,189 1,781 (799) — — —
Income/(expense) before tax on items recognised direct in equity 2,546 4,330 (571) 3 3 6
Tax on items recognised direct in equity (170) (1,173) 478 (1) (1) (2)
Total recognised income and expense for the year 10,088 9,654 5,465 2,501 3,501 2,078
Charge for defined benefit pension schemes 489 580 462 — — —
Net cash flows from operating activities 34 25,604 17,441 4,140 18,353 3,648 4,413
Purchase of property, plant and equipment (5,080) (4,282) (4,812) — — —
Net investment in business interests and intangible assets 35 13,640 (63) (296) — — —
Net cash flows from investing activities 15,999 6,645 (2,612) (18,035) (550) (2,115)
Issue of other equity interests 3,600 671 1,649 3,600 671 1,649
Issue of paid up equity 1,073 — — 1,073 — —
Net cash flows from financing activities 29,691 (1,516) (703) 536 (3,515) (1,523)
Effects of exchange rate changes on cash and cash equivalents 6,010 (3,468) 1,703 62 (52) 42
Cash and cash equivalents 31 December 148,955 71,651 52,549 1,573 657 1,126
Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations
European Union (“EU”). The EU has not adopted the complete text of IAS 39 ‘Financial Instruments: Recognition and
Measurement’; it has relaxed some of the standard’s hedging requirements. The Group has not taken advantage of this relaxation and has adopted IAS 39 as issued by the IASB: the
in its filings with the Securities and Exchange Commission in the US.
Scotland. The accounts are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, held-fortrading financial assets and financial liabilities, financial assets and financial liabilities that are designated as at fair value through profit or loss, available-for-sale financial assets and investment property. Recognised financial assets and financial liabilities in fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged.
The consolidated financial statements incorporate the financial statements of the company and entities (including certain special purpose entities) that continue to be controlled by the
Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those at fair value through profit or loss are determined using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument’s initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable, that are an integral part of the instrument’s yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows.
Card related services: fees from credit card business include: Commission received from retailers for processing credit and debit card transactions: income is accrued to the income statement as the service is performed.
(interchange) each time a cardholder purchases goods and services. The Group also receives interchange fees from other card issuers for providing cash advances through its branch and Automated Teller Machine networks.
Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.
Acquired goodwill being the excess of the cost of an acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary, associate or joint venture acquired is initially recognised at cost and subsequently at cost less any accumulated impairment losses. Goodwill arising on the acquisition of subsidiaries and joint ventures is included in the balance sheet caption ‘Intangible assets’ and that on associates within their carrying amounts. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill.
Depreciation is charged to profit or loss on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment (including assets owned and let on operating leases (except investment property – see accounting policy 21 below)) over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Land is not depreciated. Estimated useful lives are as follows: Freehold and long leasehold buildings 50 years
Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If an asset does not generate cash flows that are independent from those of other assets or groups of assets, recoverable amount is determined for the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of its fair value less cost to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash generating unit that have not been reflected in the estimation of future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss.
Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale non-monetary financial assets, for example equity shares, which are included in the available-for-sale reserve in equity unless the asset is the hedged item in a fair value hedge.
Premiums from general insurance contracts are recognised in the accounting period in which they begin. Unearned premiums represent the proportion of the net premiums that relate to periods of insurance after the balance sheet date and are calculated over the period of exposure under the policy, on a daily basis, 24th’s basis or allowing for the estimated incidence of exposure under policies which are longer than twelve months. Provision is made where necessary for the estimated amount of claims over and above unearned premiums including that in respect of future written business on discontinued lines under the run-off of delegated underwriting authority arrangements. The provision is designed to meet future claims and related expenses and is calculated across related classes of business on the basis of a separate carry forward of deferred acquisition expenses after making allowance for investment income.
Provision is made for taxation at current enacted rates on taxable profits, arising in income or in equity, taking into account relief for overseas taxation where appropriate.
Deferred taxation is accounted for in full for all temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes, except in relation to overseas earnings where remittance is controlled by the Group, and goodwill.
Held-to-maturity investments – a financial asset may be classified as a held-to-maturity investment only if it has fixed or determinable payments, a fixed maturity and the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see accounting policy 3 above) less any impairment losses.
Group manages and evaluates on a fair value basis; or (c)
Financial assets that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss and are subsequently measured at fair value. Gains and losses on financial assets that are designated as at fair value through profit or loss are recognised in profit or loss as they arise.
Loans and receivables are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets classified as held-to-maturity, available-for-sale or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.
A financial liability is classified as held-for-trading if it is incurred principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of shortterm profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses are recognised in profit or loss as they arise.
Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts; and it intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. The Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities but where it does not intend to settle the amounts net or simultaneously and therefore the assets and liabilities concerned are presented gross.
The Group classifies a financial instrument that it issues as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. The components of a compound financial instrument issued by the Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate.
The Group grants options over shares in The Royal Bank of
Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. It is not depreciated but is stated at fair value based on valuations by independent registered valuers.
Fair value is based on current prices for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is recognised on a straightline basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Group’s financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting
and customer loan impairment provisions amounted to £6,438 million (2006 – £3,933 million).
Individual component – all impaired loans that exceed specific thresholds are individually assessed for impairment.
Individually assessed loans principally comprise the Group’s portfolio of commercial loans to medium and large businesses.
Impairment losses are recognised as the difference between the carrying value of the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held. These estimates take into
Financial instruments classified as held-for-trading or designated as at fair value through profit or loss and financial assets classified as available-for-sale are recognised in the financial statements at fair value. All derivatives are measured at fair value. Gains or losses arising from changes in the fair value of financial instruments classified as held-for-trading or designated as at fair value through profit or loss are included in the income statement. Unrealised gains and losses on available-for-sale financial assets are recognised directly in equity unless an impairment loss is recognised.
Financial instruments measured at fair value include: Loans and advances (held-for-trading and designated as at fair value though profit or loss) – principally comprise reverse repurchase agreements (reverse repos) and syndicated loans.
In repurchase agreements one party agrees to sell securities to another and simultaneously agrees to repurchase the securities at a future date for a specified price. The repurchase price is fixed at the outset, usually being the original sale price plus an amount representing interest for the period from the sale to the repurchase. Syndicated loans measured at fair value are amounts retained, from syndications where the
Short positions (held-for-trading) – arise in dealing and market making activities where treasury and other eligible bills, debt securities and equity shares are sold which the Group does not currently possess.
Derivatives – these include swaps, forwards, futures and options. They may be traded on an organised exchange
Forward rate agreements are contracts under which two counterparties agree on the interest to be paid on a notional deposit of a specified term starting on a specific future date; there is no exchange of principal.
standardised amounts of underlying physical or financial commodities. The Group buys and sells currency, interest rate and equity futures. Options include exchange-traded options on currencies, interest rates and equities and equity indices and OTC currency and equity options, interest rate caps and floors and swaptions. They are contracts that give the holder the right but not the obligation to buy (or sell) a specified amount of the underlying physical or financial commodity at an agreed price on an agreed date or over an agreed period.
Fair value for a net open position in a financial asset or financial liability in an active market is the current bid or offer price times the number of units of the instrument held. Where a trading portfolio contains both financial assets and financial liabilities which are derivatives of the same underlying instrument, fair value is determined by valuing the gross long and short positions at current mid market prices, with an adjustment at portfolio level to the net open long or short position to amend the valuation to bid or offer as appropriate.
Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data.
The table below shows financial instruments carried at fair value at 31 December 2007, by valuation method.
Quoted prices based on other than in active observable observable markets(1) market data(2) market data(3) Total
Treasury and other eligible bills and debt securities 32.1 62.4 1.1 95.6
(2) Financial assets and financial liabilities valued using techniques based on observable market data. Instruments in this category are valued using: (a) quoted prices for similar assets or liabilities, or identical assets or liabilities in markets which are considered to be less than active; or
Financial assets and financial liabilities in this category include repos, reverse repos, structured and US commercial mortgage loans, structured deposits, investment contracts issued by the Group’s life assurance businesses, corporate and municipal debt securities, most debt securities in issue, certain unlisted equity shares for which recent market data are available, the majority of the Group’s OTC derivatives and certain instruments listed in (1) above where markets are considered to be less than active.
No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.
(4) Other financial liabilities comprise subordinated liabilities and provisions relating to undrawn syndicated loan facilities.
• Credit spreads – where available, these are derived from prices of credit default swaps or other credit based instruments, such as debt securities. For others, credit spreads are obtained from pricing services.
and quoted interest rates in the swap, bond and futures markets.
• Commodity prices – many commodities are actively traded in spot, forward and futures on exchanges in London, New
• Counterparty credit spreads – adjustment is made to market prices (or parameters) when the creditworthiness of the counterparty differs from that of the assumed counterparty in the market price (or parameter), for example many OTC derivative price quotations are for transactions with a counterparty with an ‘AA’ credit rating.
While the Group believes its valuation techniques are appropriate and consistent with other market participants, the use of different methodologies or assumptions could result in different estimates of fair value at the balance sheet date.
Debt Other Loans and securities financial advances Securities Derivatives Total Deposits in issue Derivatives liabilities Total
Syndicated loans – syndicated loans are valued by considering recent syndication prices in the same or similar assets, prices in the secondary loan market, and with reference to relevant indices for credit products and credit default swaps such as the LevX,
The fair value of drawn syndicated loans valued using techniques other than by considering recent syndication prices in the same or similar assets and prices in the secondary loan market was £4,624 million. Using reasonably possible alternative assumptions about refinancing periods (which were stressed by one year) and the value attributed to potentially favourable flexible loan conditions (which are attributed no value in reported figures) would reduce the fair value by up to £46 million or increase the fair value by up to £83 million.
Commercial mortgages – senior and mezzanine commercial mortgages are loans secured on commercial land and buildings that were originated or acquired by the Group for securitisation. Senior commercial mortgages carry a variable interest rate and mezzanine or more junior commercial mortgages may carry a fixed or variable interest rate. Factors affecting the value of these loans may include, but are not limited to, loan type, underlying property type and geographic location, loan interest rate, loan to value ratios, debt service coverage ratios, prepayment rates, cumulative loan loss information, yields, investor demand, market volatility since the last securitisation, and credit enhancement.
Where observable market prices for a particular loan are not available, the fair value will typically be determined with reference to observable market transactions in other loans or credit related products including debt securities and credit derivatives. Assumptions are made about the relationship between the loan and the available benchmark data. Using reasonably possible alternative assumptions for credit spreads
for sale to investors. The Group retains exposure to some of the super senior tranches of these CDOs. In the second half of 2007, rising mortgage delinquencies and expectations of declining house prices in the US led to a deterioration of the estimated fair value of these exposures.
Note: (1) Attachment point is the minimum level of losses in a portfolio to which a tranche is exposed, as a percentage of the total notional size of the portfolio. For example, a 5-10%
tranche has an attachment point of 5% and a detachment point of 10%. When the accumulated loss of the reference pool is no more than 5% of the total initial notional of the pool, the tranche will not be affected. However, when the loss has exceeded 5%, any further loss will be deducted from the tranche’s notional principal until the detachment point, 10%, is reached.
exposures takes into consideration outputs from a proprietary model, market data and appropriate valuation adjustments.
Alternative valuations have been produced using reasonably possible alternative assumptions about macroeconomic conditions including house price appreciation and depreciation, and the effect of regional variations. In addition, the discount rate applied to the model output has been stressed. The output from using these alternative assumptions has been compared with inferred pricing from other published data.
The Group believes that reasonably possible alternative assumptions could reduce or increase predicted cumulative losses from the model by up to 20%. Using these alternative assumptions would reduce the fair value by up to £385 million or increase the fair value by up to £235 million.
Unobservable inputs used are based on estimates taking into account a range of available information including historic analysis, historic traded levels, market practice, comparison to other relevant benchmark observable data and consensus pricing data. Using reasonably possible alternative assumptions, principally correlations, including the relative impact of unobservable inputs as compared to those which may be observed, would reduce the fair value by up to £80 million or increase the fair value by up to £80 million.
Other portfolios – other than the portfolios discussed above, there are other financial instruments which are held at fair value determined from data which are not market observable, or incorporating material adjustments to market observed data.
Using reasonably possible alternative assumptions appropriate to the financial asset or liability in question, such as credit spreads, derivative inputs and equity correlations, would reduce the fair value by up to £119 million or increase the fair value by up to £117 million.
The Group capitalises goodwill arising on the acquisition of businesses, as discussed in accounting policy 5. The carrying value of goodwill as at 31 December 2007 was £42,369 million
Share Transactions’ in November 2006. Entities which buy their own shares, or whose shareholders buy shares in the reporting entity, in order to provide incentives to employees must account for those incentives on an equity-settled basis.
Arrangements’ in November 2006. Entities providing infrastructure and services to governments under concession arrangements must account for each component of the arrangement separately. Infrastructure provided under these arrangements may be recognised as either a financial asset or an intangible asset. The interpretation is effective for accounting periods beginning on or after 1 January 2008 and is not expected to have a material effect on the Group or company.
8 requires entities to report segment information as reported to management and reconcile it to the financial statements and is not expected to have a material effect on the Group or company.
January 2009 and is not expected to have a material effect on the
Programmes’ in June 2007. Entities that provide customers with benefits ancillary to a sale of goods or services should apportion the sales proceeds to those benefits on the basis of relative fair values. The interpretation is effective for accounting periods beginning on or after 1 July 2008 and is not expected to have a material effect on the Group or company.
The IFRIC issued interpretation IFRIC 14 ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ in July 2007. The net pension asset that may be recognised by a sponsoring entity is limited to the amount to which it has an unconditional right of refund or can be recovered through the settlement of plan liabilities. Entities legally bound to minimum funding requirements are required to take account of those obligations when recognising the net asset or liability for an employee benefit scheme. The interpretation is effective for accounting periods beginning on or after 1 January 2008 and is not expected to have a material effect on the Group or company.
Statements’ in September 2007 effective for accounting periods beginning on or after 1 January 2009. The amendments to the presentation requirements for financial statements are not expected to have a material effect on the Group or company.
The changes are effective for accounting periods beginning on or after 1 July 2009 but both standards may be adopted together for accounting periods beginning on or after 1 July 2007. These changes will affect the Group's accounting for future acquisitions and disposals of subsidiaries.
(2) Interest rate: interest rate swaps, forward foreign exchange contracts, forward rate agreements, interest rate options, interest rate futures and related hedges and funding.
(4) Equities and commodities: equity derivatives, commodity contracts and related hedges and funding.
Integration costs included in operating expenses comprise expenditure incurred in respect of cost reduction and revenue enhancement programmes set in connection with the various acquisitions made by the Group: Group £m £m £m
Principal actuarial assumptions at 31 December 2007 2006 2005 2007 2006 2005 weighted average
Rate of increase in salaries 4.5% 4.2% 4.0% 4.0% 4.1% 3.9%
Rate of increase in pensions in payment 3.2% 2.9% 2.7% 2.8% 2.8% 2.6%
Members of the Group sponsor a number of pension schemes in the UK and overseas, predominantly defined benefit schemes, whose assets are independent of the Group’s finances. The Group’s defined benefit schemes generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years. Employees do not make contributions for basic pensions but may make voluntary contributions to secure additional benefits on a money-purchase basis. Since October 2006 The
Interim valuations of the Group’s schemes were prepared to 31 December by independent actuaries, using the following assumptions: 3 Pension costs
Net assets of schemes in surplus (included in Prepayments, accrued income and other assets, Note 19) (836)
Acquisition of subsidiaries includes fair value of plan assets of £6,118 million and present value of defined benefit obligations £5,962 million in respect of ABN AMRO's principal pension scheme in the Netherlands. At 31 December 2007, these were £6,417 million and £6,189 million respectively. The principal actuarial assumptions at 31 December 2007 were: discount rate 5.4%; expected return on plan assets
The Group expects to contribute £481 million to its defined benefit pension schemes in 2008 (Main scheme – £413 million).
Cumulative net actuarial gains of £1,570 million (2006 – £619 million losses; 2005 – £2,400 million losses) have been recognised in the statement of recognised income and expense, of which £1,579 million (2006 – £521 million losses; 2005 – £2,150 million losses) relate to the Main scheme.
History of defined benefit schemes £m £m £m £m £m £m £m £m
Fair value of plan assets 18,575 17,374 15,914 13,569 27,662 18,959 17,388 14,798
Experience losses on plan liabilities (256) (4) (41) (624) (210) (19) (68) (631)
Amounts paid to the company’s auditors for statutory audit and other services were as follows: Group £m £m
Fees payable for the audit of the Group’s annual accounts 1.2 0.8
(2) Includes fees for work relating to Section 404 of the US Sarbanes-Oxley Act.
Reduction in deferred tax liability following change in the rate of UK Corporation Tax (189) — —
The effective tax rate for the year was 20.7% (2006 – 29.3%; 2005 – 30.0%). The tax rate benefited from a reduction of £189 million in the
F in a n c ia l s ta te m e n ts 6 Profit attributable to other owners Group £m £m £m
Dividends paid to other owners: Non-cumulative preference shares of US$0.01 152 99 58
Group p per share p per share p per share £m £m £m
Total dividends paid on ordinary equity shares 32.2 25.8 20.2 3,044 2,470 1,927
Final dividends are not accounted for until they have been ratified by members in a general meeting. At the Annual General Meeting on 23 April 2008, a final dividend will be proposed in respect of 2007 of 23.1 pence per share (2006 – 22.1 pence per share) amounting to a total of £2.3 billion (2006 – £2.1 billion). The financial statements for the year ended 31 December 2007 do not reflect this dividend which, if approved, will be accounted for in owners’ equity as an appropriation of retained profits in the year ending 8 Profit dealt with in the accounts of the company
Add back dividends on dilutive convertible non-equity shares 60 64 65
Number of ordinary shares: Weighted average number of ordinary shares in issue during the year 9,557 9,555 9,549
All convertible preference shares have a dilutive effect in 2007, 2006 and 2005 and have been included in the computation of diluted earnings per share.
Cash and balances at central banks — — — 17,866 — 17,866
Treasury and other eligible bills (1) 18,027 — 202 — — 18,229
Loans and advances to banks (2) 71,639 — — 147,821 — 219,460
Loans and advances to customers (3) 104,387 3,067 — 709,226 12,570 829,250
Prepayments, accrued income and other assets — — — 877 — 18,189 19,066
F in a n c ia l s ta te m e n ts 10 Financial instruments (continued) Group
(2) Includes reverse repurchase agreements of £175,941 million (2006 – £54,152 million) and items in the course of collection from other banks of £3,095 million (2006 – £3,471 million).
(4) Includes repurchase agreements of £163,038 million (2006 – £76,376 million) and items in the course of transmission to other banks of £372 million (2006 – £799 million).
During the year net gains of £67 million (2006 – £3 million) were deferred and £10 million (2006 – £4 million) released to profit or loss.
The following tables analyse the company’s financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown separately.
Loans and advances to banks (1) — — 7,686 — 7,686
Loans and advances to banks (1) — — 7,252 — 7,252
Loans and advances to customers (2) — — 286 — 286
Prepayments, accrued income and other assets — — — 3 3
Accruals, deferred income and other liabilities — — — 15 15
Notes: (1) Includes amounts due from subsidiaries of £7,130 million (2006 – £7,252 million).
F in a n c ia l s ta te m e n ts 10 Financial instruments (continued)
Carrying Fair Carrying Fair Carrying Fair Carrying Fair value value value value value value value value £m £m £m £m £m £m £m £m
Loans and advances to customers 396,453 432,797 829,250 263,504 203,389 466,893
Settlement balances and short positions 44,466 46,555 91,021 26,450 23,026 49,476
Loans and advances to banks 1,655 6,031 7,686 1,171 6,081 7,252
Loans and advances to customers 307 — 307 286 — 286
Internal reporting and oversight of risk assets is principally differentiated by credit ratings. Internal ratings are used to assess the credit quality of borrowers. Customers are assigned an internal credit grade based on various credit grading models that reflect the probability of default. All credit ratings across the Group map to a Group level asset quality scale.
Loans and advances to banks* 204,083 5,797 4,937 407 1,119 — 25 (3) 216,365
Loans and advances to customers 275,926 174,249 221,701 84,896 55,343 13,236 10,337 (6,438) 829,250
Loans and advances to banks* 77,513 748 416 346 111 1 2 (2) 79,135
The following table analyses financial assets by location of office and by industry type.
Service industries and business activities 46,500 540 481 — 47,521 24,648
Loans and Treasury bills, advances to banks debt securities Netting and and customers and equity shares Derivatives Other(1) Total offset(2)
Service industries and business activities 10,678 1,267 168 — 12,113 22
Finance leases and instalment credit 1,325 — — — 1,325 —
Finance leases and instalment credit 10 — — — 10 —
Total Rest of the World 11,546 7,594 153 9 19,302 2,277
Finance leases and instalment credit 17,835 5 — — 17,840 189
F in a n c ia l s ta te m e n ts 12 Past due and impaired financial assets
The following table shows the movement in the provision for impairment losses for loans and advances.
Individually Collectively Total assessed assessed Latent 2007 2006 2005 £m £m £m £m £m £m
Currency translation and other adjustments 58 61 18 137 (61) 51
Recoveries of amounts previously written-off 129 261 — 390 215 172
Loans and advances to banks (1) 25 3 22 2 2 —
Loans and advances to customers (2) 10,337 5,388 4,949 6,230 3,340 2,890
The following loans and advances to customers were past due at the balance sheet date but not considered impaired: Group
Loans that have been renegotiated in the past 12 months that would otherwise have been past due or impaired amounted to £930 million as at 31 December 2007 (2006 – £744 million).
Companies in the Group transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk.
Official Bank Rate. The financial assets are customer loans and the financial liabilities are customer deposits and LIBOR linked medium-term notes and other issued securities.
For fair value hedge relationships of interest rate risk the hedged items are typically large corporate fixed-rate loans, fixed-rate finance leases, fixed-rate medium-term notes or preference shares classified as debt. The initial and ongoing prospective effectiveness of fair value hedge relationships is assessed on a cumulative basis by comparing movements in the fair value of the hedged item attributable to the hedged risk with changes in the fair value of the hedging interest rate swap or by comparing the respective changes in the price value of a basis point. Retrospective effectiveness is assessed by comparing the actual movements in the fair value of the hedged items attributable to the hedged risk with actual movements in the fair value of the hedging derivative over the life to date of the hedging relationship.
Included above are derivatives held for hedging purposes as follows: Fair value hedging: Exchange rate contracts 62 344 — —
Fair value hedging: Gains on the hedged items attributable to the hedged risk 81 219 56
F in a n c ia l s ta te m e n ts 14 Debt securities
The following tables analyse by issuer the Group’s available-for-sale debt securities by remaining maturity and the related yield (based on weighted averages).
US government, state, and federal agency 11 4.8 627 4.8 22 4.7 5,574 5.1 6,234 5.1
US government, state, and federal agency 2,704 38 2,146 24 4,850 62
Gross gains of £60 million (2006 – £34 million) and gross losses of £12 million (2006 – £19 million) were realised on the sale of available-for-sale securities.
Interest receivable includes £2,197 million (2006 – £1,559 million; 2005 – £1,624 million) in respect of debt securities.
(redeemable at cost) in the Federal Home Loans Bank and the
Federal Reserve Bank of £0.5 billion (2006 – £0.8 billion) that the Group’s banking subsidiaries in the US are required to hold; and a number of individually small shareholdings in unlisted companies. Disposals in the year generated gains of £0.5 million (2006 – £56 million; 2005 – £85 million) based on cost of sales of £4 million (2006 – £14 million; 2005 – £17 million).
Designated as at fair value through profit or loss 1,856 6,010 7,866 2,051 559 2,610
(4) RFS Holdings B.V. (RFS) owns 99% of the outstanding shares of ABN AMRO Holding N.V. (ABN AMRO). The company owns 38% of RFS; the balance of shares is held by Fortis
B.V. are directly owned by the company, and all of the other subsidiary undertakings are owned directly, or indirectly through intermediate holding companies, by these companies.
All of these subsidiaries are included in the Group’s consolidated financial statements and have an accounting reference date of 31 December.
F in a n c ia l s ta te m e n ts 17 Intangible assets Group
Cost: Currency translation and other adjustments 1,199 98 136 48 1,481
Disposals and write-off of fully amortised assets — — (3) (84) (87)
Accumulated amortisation: Currency translation and other adjustments — 1 3 3 7
Cost: Currency translation and other adjustments (924) (34) (47) (1) (1,006)
Disposals and write-off of fully amortised assets — — — (8) (8)
Other CGUs where goodwill is significant were as follows: Goodwill at 30 September
Global Banking & Markets Fair value less costs to sell 2,346 2,341
(2006 – 5%) and a discount rate of 11% (2006 – 10%) was used. The recoverable amount of Citizens exceeds its carrying value by over $5 billion. The profit growth rate would have to be approximately half the projected rate to cause the value in use of the unit to equal its carrying amount.
Expenditure on investment properties 41 — — — — — 41
Disposals and write-off of fully depreciated assets (2,332) (533) (120) (44) (197) (2,713) (5,939)
Net book value at 31 December 2007 3,431 3,259 141 1,252 1,977 8,690 18,750
Cost or valuation: Currency translation and other adjustments 14 (38) (1) (29) (98) (587) (739)
Change in fair value of investment properties 486 — — — — — 486
Disposals and write-off of fully depreciated assets — (5) (26) (15) (539) (528) (1,113)
F in a n c ia l s ta te m e n ts £m £m
Investment properties are valued to reflect fair value, that is, the market value of the Group’s interest at the reporting date excluding any special terms or circumstances relating to the use or financing of the property and transaction costs that would be incurred in making a sale. Observed market data such as rental yield, replacement cost and useful life, reflect relatively few transactions involving property that, necessarily, is not identical to property owned by the Group.
Property, plant and equipment, excluding investment properties, include £717 million (2006 – £607 million) assets in the course of construction.
Freehold and long leasehold properties with a net book value of £451 million (2006 – £164 million; 2005 – £63 million) were sold subject to operating leases.
Equity shares 7,143 411 21 Accruals, deferred income and other liabilities Group Company £m £m £m £m
Note: (1) Other liabilities include £9 million (2006 – £10 million) in respect of share-based compensation.
Provision for deferred taxation has been made as follows: Group Company £m £m £m £m
Deferred tax asset (included in Prepayments, accrued income and other assets, Note 19) (2,944) (156) — (3)
Accelerated value of Cash losses capital Deferred IAS financial flow carried
At 1 January 2006, 31 December 2006 and 1 January 2007 (3)
Notes: (1) Deferred tax assets of £687 million (2006 – £86 million) have not been recognised in respect of tax losses carried forward of £2,043 million (2006 – £254 million) as it is not considered probable that taxable profits will arise against which they could be utilised. Of these losses, £75 million will expire within one year, £238 million within five years and £1,376 million thereafter. The balance of tax losses carried forward has no time limit.
Cash paid for claims settled in the year (3,687) 106 (3,581)
Account balances paid on surrender and other terminations in the year (429) (296)
Changes in assumptions during the year were not material to the profit recognised. Group
Currently 2008 2009 2010-2012 2013-2017 Thereafter Perpetual Total 2007 – call date £m £m £m £m £m £m £m £m
The Royal Bank of Scotland plc £150 million 8.375% subordinated notes 2007 (redeemed January 2007) — 162
US$350 million floating rate subordinated notes 2012 (redeemed July 2007) — 184
US$500 million floating rate subordinated notes 2012 (redeemed July 2007) — 254 €130 million floating rate subordinated notes 2012 (redeemed July 2007) — 88 €1,000 million floating rate subordinated notes 2013 (callable October 2008) 744 677
US$1,250 million floating rate subordinated notes 2014 (callable July 2009) 630 643
CHF200 million 2.75% subordinated notes 2017 (callable December 2012) 89 84 €100 million floating rate subordinated notes 2017 73 67 €500 million floating rate subordinated notes 2017 (callable June 2012) 371 337 €750 million 4.35% subordinated notes 2017 (callable October 2017) 548 502
AUD450 million floating rate subordinated notes 2017 (callable February 2012) 199 182
US$170 million subordinated loan capital floating rate notes 2008 85 87
US$100 million 5.575% senior subordinated revolving credit 2009 (issued June 2007) 50 —
US$35 million 7.24% subordinated bonds 2012 (redeemed December 2007) — 22 £60 million 6.375% subordinated bonds 2018 (callable April 2013) 65 65
€13 million zero coupon subordinated notes 2029 (callable June 2009) 2 —
€15 million CMS linked floating rate subordinated lower tier 2 notes 2020 11 —
€1,500 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable June 2010) 1,087 —
€5 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) 4 —
€65 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) 48 —
US$100 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) 50 —
AUD575 million 6.50% Bermudan callable subordinated lower tier 2 notes 2018 (callable May 2013) 231 —
£25 million 9.18% amortising MTN subordinated lower tier 2 notes 2011 15 —
US$500 million primary capital floating rate notes, Series B (callable on any interest payment date) 256 267
US$500 million primary capital floating rate notes, Series C (callable on any interest payment date) 255 254
ABN AMRO and subsidiaries €9 million 4.65% perpetual convertible financing preference shares (callable January 2011) 7 —
€1,000 million 4.310% perpetual Bermudan callable subordinated tier 1 notes (callable March 2016) 598 —
(2) The company can satisfy interest payment obligations by issuing ordinary shares to appointed Trustees sufficient to enable them, on selling these shares, to settle the interest payment.
Note: (1) The trust preferred securities issued by subsidiaries have no maturity date and are not redeemable at the option of the holders at any time. These securities may with the consent of the UK Financial Services Authority be redeemed, by the issuer on the dates specified above or on any interest payment date thereafter. They may also be redeemed in whole, but not in part, upon the occurrence of certain tax and regulatory events. The company classifies its obligations to these subsidiaries as dated loan capital.
F in a n c ia l s ta te m e n ts 25 Minority interests Group £m £m
Included in minority interests are the following trust preferred securities (1): £m £m
US$1,000 million 3 month US$ LIBOR plus 0.80% (redeemable September 2014) 555 555
Non-cumulative convertible preference shares of US$0.01 — — — — —
Non-cumulative convertible preference shares of £0.01 — — — — —
Additional Value Shares of £0.01 — — — 2,700,000 2,700,000 2,700,000
Non-cumulative preference shares of €0.01 2,526 2,500 2,500 66,000 66,000 66,000
Non-cumulative convertible preference shares of £0.25 — — — 900,000 900,000 900,000
Non-cumulative preference shares of £1 750 — — 300,000 300,000 300,000
Shares issued in respect of the acquisition of ABN AMRO 530,621
In May 2007, the company capitalised £1,576 million of its share premium account by way of a bonus issue of two new ordinary shares of 25p each for every one ordinary share held by shareholders at close of business on 4 May 2007.
In addition, the following issues of ordinary shares were made during the year ended 31 December 2007: (a) 530.6 million ordinary shares issued to former shareholders of ABN AMRO; and
(b) 19.1 million ordinary shares following the exercise of options under the company’s share schemes.
Consideration of £77 million was received on the issue of ordinary shares for cash.
non-cumulative preference shares of US$0.01 at US$25 each, the net proceeds being US$1,550 million.
These securities entitle the holders to interest which may be deferred at the sole discretion of the company. Repayment of the securities is at the sole discretion of the company on giving between 30 and 60 days notice.
Class of preference share in issue rate or after per share equity (1)
Notes: (1) Those preference shares where the Group has an obligation to pay dividends are classified as debt; those where distributions are discretionary are classified as equity.
The conversion rights attaching to the convertible preference shares may result in the Group delivering a variable number of equity shares to preference shareholders; these convertible preference shares are treated as debt.
On a winding-up or liquidation of the company, the holders of the non-cumulative preference shares will be entitled to receive, out of any surplus assets available for distribution to the company’s shareholders (after payment of arrears of dividends on the cumulative preference shares up to the date of repayment) pari passu with the cumulative preference shares and all other shares of the company ranking pari passu with the non-cumulative preference shares as regards participation in the surplus assets of the company, a liquidation distribution per share equal to the applicable redemption price detailed in the table above, together with an amount equal to dividends for the then current dividend period accrued to the date of payment, before any distribution or payment may be made to holders of the ordinary shares as regards participation in the surplus assets of the company.
Series U non-cumulative dollar preference shares and the noncumulative convertible sterling preference shares, the holders shall be entitled to receive notice of, attend, speak and vote at such meeting on all matters together with the holders of the ordinary shares, and in these circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears.
(subject to the terms of issue) to receive periodic noncumulative cash dividends at specified fixed rates for each
Implementation of IAS 32 on 1 January 2005 — — (2) — — (2)
Bonus issue of ordinary shares (1,576) — — (1,576) — —
Shares issued during the year 6,257 815 1,972 6,257 815 1,972
Shares repurchased during the year — (381) — — (381) —
Redemption of preference shares classified as debt 159 271 — 159 271 —
Implementation of IAS 32 and IAS 39 on 1 January 2005 — — 289 — — —
Unrealised (losses)/gains in the year (191) 2,609 39 — — —
Amount recognised in equity during the year (460) (109) 18 — — —
Shares repurchased during the year — 13 — — 13 —
Shares repurchased during the year — (624) — — (624) —
Shares purchased during the year (65) (254) — — — —
Shares issued under employee share schemes 119 146 — — 7 —
ordinary shares of 25p each of the company were held by
Employee Share Trusts in respect of share awards and options granted to employees.
Finance lease assets: Present value amounts receivable 884 3,058 8,173 12,115
Operating lease obligations: Future minimum lease payables: Finance lease assets: Present value amounts receivable 760 2,603 7,761 11,124
Of the assets above, £62.0 billion (2006 – £30.1 billion) relate to securitisations (see Note 30). The remaining balances mainly relate to assets charged as security against deposits from central and federal banks and other public sector bodies.
The fair value (and carrying value) of securities transferred under repurchase transactions included within securities on the balance sheet were as follows: All of the above securities could be sold or repledged by the holder. Securities received as collateral under reverse repurchase agreements amounted to £373.7 billion (2006 – £124.7 billion), of which £337.8 billion (2006 – £107.2 billion) had been resold or repledged as collateral for the Group’s own transactions.
The table below sets out the asset categories together with the carrying amounts of the assets and associated liabilities for those securitisations and other asset transfers where substantially all the risks and rewards of the assets have been retained by the Group.
SPEs are vehicles set up for a specific, limited purpose, usually do not carry out a business or trade and typically have no employees. They take a variety of legal forms – trusts, partnerships and companies – and fulfil many different functions. As well as being a key element of securitisations,
Residential mortgages securitisations – the Group has securitised portfolios of residential mortgages. Mortgages have been transferred to SPEs, held ultimately by charitable trusts, funded principally through the issue of floating rate notes. The Group has entered into arm’s length fixed/floating interest rate swaps and cross-currency swaps with the securitisation SPEs and provides mortgage management and agency services to the SPEs. On repayment of the financing, any further amounts generated by the mortgages will be paid to the Group. The SPEs are consolidated and the mortgages remain on the Group’s balance sheet.
have been securitised. Notes have been issued by an SPE. The note holders have a proportionate interest in a pool of credit card receivables that have been equitably assigned by the
Group to a receivables trust. The Group continues to be exposed to the risks and rewards of the transferred receivables through its right to excess spread (after chargeoffs ). The SPE is consolidated and the credit card receivables remain on the Group’s balance sheet.
Group after deduction of expenses. The SPEs are consolidated and the loans remain on the Group’s balance sheet.
Commercial paper conduits – the Group sponsors commercial paper conduits. Customer assets are transferred into SPEs which issue notes in the commercial paper market. The Group supplies certain services and contingent liquidity support to these SPEs on an arm’s length basis as well as programme credit enhancement. The SPEs are consolidated.
(leveraged leases) in the US involve the Group as lessor obtaining non-recourse funding from third parties. This financing is secured on the underlying leases and the provider of the finance has no recourse whatsoever to the other assets of the Group. The transactions are recorded gross of thirdparty financing.
(2006 – £694 million) and related liabilities £314 million (2006 –
qualify for derecognition as substantially all the risks and rewards of the assets have been transferred. The Group continues to recognise any retained interests in the securitisation vehicles.
It is the Group’s policy to optimise return to shareholders while maintaining a strong capital base and credit rating to support business growth and meet regulatory capital requirements at all times.
The main financial risks facing the Group are as follows: • Credit risk: is the risk arising from the possibility that the
Group will incur losses from the failure of customers to meet their obligations.
• Funding and liquidity risk: is the risk that the Group is unable to meet its obligations as they fall due.
Credit risk is managed to achieve sustainable and superior risk-reward performance while maintaining exposures within acceptable risk appetite parameters. This is achieved through the combination of governance, policies, systems and controls, underpinned by sound commercial judgement as described below.
Limits are used to manage concentration risk by single name, sector and country.
Default (see page 186) and Expected Loss are calculated using duly authorised models. All credit models are subject to independent review prior to implementation and existing models are reviewed on at least an annual basis.
• Analysis and reporting: portfolio analysis and reporting are used to ensure the identification of emerging concentration risks and adverse movements in credit risk quality.
• Credit stewardship: customer transaction monitoring and management is a continuous process, ensuring performance is satisfactory and that documentation, security and valuations are complete and up to date.
• Probability of default (“PD”): the likelihood that a customer will fail to make full and timely repayment of credit obligations over a one year time horizon. Customers are assigned an internal credit grade which corresponds to probability of default. Every customer credit grade across all grading scales in the Group can be mapped to a Group level credit grade (see page 74).
represents non-accrual loans, loans that are accruing but are past due 90 days and restructured loans. PPL represents impaired assets which are not included in REIL but where information about possible credit problems cause management to have serious doubts about the future ability of the borrower to comply with loan repayment terms.
The table below sets out the Group’s loans that are classified as REIL and PPL: REIL and PPL £m £m
(2) Loans where an impairment event has taken place but no impairment recognised. This category is used for fully collateralised non-revolving credit facilities.
Collectively assessed provisions are provisions on impaired credits below an agreed threshold which are assessed on a portfolio basis, to reflect the homogeneous nature of the assets, such as credit cards or personal loans. The provision is determined from a quantitative review of the relevant portfolio, taking account of the level of arrears, security and average loss experience over the recovery period.
Group operates a provisions governance framework which sets thresholds whereby suitable oversight and challenge is undertaken. These opinions and levels of provision are overseen by each division’s Provision Committee. Significant cases are presented to, and challenged by, the Group Problem
Total customer accounts and long term funds 756,339 53 432,125 61
The degree of maturity mismatch within the overall long-term structure of the Group’s assets and liabilities is managed within internal policy guidelines, to ensure that term asset commitments may be funded on an economic basis over their life. In managing its overall term structure, the Group analyses and takes into account the effect of retail and corporate customer behaviour on actual asset and liability maturities where they differ materially from the underlying contractual maturities.
The short-term maturity structure of the Group’s liabilities and assets is managed daily to ensure that all material or potential cash flow obligations arising from undrawn commitments and other contingent obligations, can be met. Potential sources include cash inflows from maturing assets, new borrowing or the sale of various debt securities held (after allowing for appropriate haircuts).
ABN AMRO’s businesses within the Group proceeds, the liquidity risk policies, parameters and metrics used will be progressively aligned within a single framework.
Loans and advances to customers (gross, excluding reverse repos) 693,331 407,918
The following table shows cash flows payable on financial liabilities up to a period of 20 years including future payments of interest.
Debt securities, listed held-for-trading equity shares, treasury and other eligible bills 328,352 135,775
Net surplus of marketable assets over wholesale liabilities due within one month 84,563 19,080
Group 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2007 £m £m £m £m £m £m
Settlement balances and other liabilities 7,142 20 26 16 9 4
The tables above show the timing of cash outflows to settle financial liabilities. They have been prepared on the following basis: Prepayable liabilities – where a financial liability can be prepaid by the counterparty, the cash outflow has been included at the earliest date on which the counterparty can require repayment regardless of whether or not such early repayment results in a penalty. If the repayment of a financial liability is triggered by, or is subject to, specific criteria such as market price hurdles being reached, it is included at the earliest possible date that the conditions could be fulfilled without considering the probability of the conditions being met.
For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period whatever the level of the index at the year end. The settlement date of debt securities in issue issued by certain securitisation vehicles consolidated by the Group depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date.
Liabilities with a contractual maturity of greater than 20 years –
Held-for-trading liabilities – held-for-trading liabilities amounting to £538.4 billion (2006 – £267.5 billion) have been excluded from the table in view of their short term nature.
Funds can be raised in the short-term from highly liquid securities held by the Group by sale or by disposal or by sale and repurchase transactions regardless of their stated maturity.
As explained above the table is prepared on the basis that prepayable liabilities are called at the earliest possible date. In practice, the average maturity of these liabilities significantly exceeds that shown in the table. In addition, although many customer accounts are contractually repayable on demand or at short notice, the Group’s short-term deposit base is stable over the long term as deposit rollovers and new deposits offset cash outflows.
The following table shows the expected maturity of insurance liabilities up to 20 years excluding those linked directly to the financial assets backing these contracts (2007 – £4,398 million; 2006 – £1,713 million).
The Group’s VaR should be interpreted in light of the limitations of the methodology used. These limitations include: • Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements which have not occurred in the historical window used in the calculations.
The Group largely computes the VaR of trading portfolios at the close of business and positions may change substantially during the course of the trading day. Further controls are in place to limit the Group’s intra-day exposure; such as the calculation of the VaR for selected portfolios. These limitations and the nature of the VaR measure mean that the Group cannot guarantee that losses will not exceed the VaR amounts indicated. The Group undertakes stress testing to identify the potential for losses in excess of VaR.
Contractual obligations to purchase goods or services 378 449 969 101 114 39
The Group’s undrawn formal facilities, credit lines and other commitments to lend were £335,688 million (2006 – £242,655 million).
The Group’s strategic investment in Bank of China, venture capital portfolio and investments held by its general insurance business are the principal sources of non-trading equity price risk.
Non-trading interest rate risk arises from the Group’s treasury activities and retail and commercial banking businesses.
A static maturity gap report is produced as at the month-end for each division, in each functional currency based on the behaviouralised repricing for each product. It is Group policy to include in the gap report, non-financial assets and liabilities, mainly property, plant and equipment and the Group’s capital and reserves, spread over medium and longer term maturities.
– quoting firm bid (buy) and offer (sell) prices with the intention of profiting from the spread between the quotes; arbitrage –
entering into offsetting positions in different but closely related markets in order to profit from market imperfections; and proprietary activity – taking positions in financial instruments as principal in order to take advantage of anticipated market conditions. The principal risk factors are interest rates, credit spreads, equity prices and foreign exchange. Financial instruments held in the Group’s trading portfolios include, but are not limited to, debt securities, loans, deposits, equity shares, securities sale and repurchase agreements and derivative financial instruments (futures, forwards, swaps and options). For a discussion of the Group’s accounting policies for derivative financial instruments, see Accounting policies on page 130.
The tables below set out the Group’s structural foreign currency exposures.
Net investments Net foreign in foreign investment currency operations hedges exposures
Such exposures may take the form of listed and unlisted equity shares, equity warrants and options, linked equity fund investments, private equity and venture capital investments, preference shares classified as equity and capital stock in the
Non-trading interest rate VaR for the Group’s treasury and retail and commercial banking activities was £42.9 million at 31 December 2007 (2006 – £40.2 million) with the major exposure being to changes in longer term US dollar interest rates. During the year, the maximum VaR was £53.6 million £40.2 million) and the average £43.2 million (2006 – £76.6 million).
Citizens was the main contributor to overall non-trading interest rate VaR. It invests in a portfolio of highly rated and liquid investments, principally mortgage-backed securities issued by
The Group does not maintain material non-trading open currency positions other than the structural foreign currency translation exposures arising from its investments in foreign subsidiaries and associated undertakings and their related currency funding. The Group’s policy in relation to structural positions is to match fund the structural foreign currency exposure arising from net asset value, including goodwill, in foreign subsidiaries, equity accounted investments and branches, except where doing so would materially increase the sensitivity of either the Group’s or the subsidiary’s regulatory capital ratios to currency movements. The policy requires structural foreign exchange positions to be reviewed regularly by GALCO. Foreign exchange differences arising on the translation of foreign operations are recognised directly in equity together with the effective portion of foreign exchange differences arising on hedging instruments.
Equity classification of foreign currency denominated preference share issuances requires that these shares be held on the balance sheet at historic cost. Consequently, these share issuances have the effect of increasing the Group’s structural foreign currency position.
Insurance claims – net of reinsurance £m £m £m £m £m £m £m
The Group manages underwriting and pricing risk through the use of underwriting guidelines which detail the class, nature and type of business that may be accepted; pricing policies by product line and by brand; and centralised control of policy wordings and any subsequent changes.
The risk that claims are handled or paid inappropriately is managed using a range of IT system controls and manual processes conducted by experienced staff. These, together with a range of detailed policies and procedures ensure that all claims are handled in a timely, appropriate and accurate manner.
Reinsurance is used to protect against the impact of major catastrophic events or unforeseen volumes of, or adverse trends in, large individual claims and to transfer risk that is outside the Group’s current risk appetite.
The Group has no interest rate exposure from general insurance liabilities because provisions for claims under short-term insurance contracts are not discounted.
(including reserves to cover claims which have been incurred but not reported (IBNR reserves)) for all classes at a sufficient level to meet all liabilities as they fall due.