Corporate Responsibility 22 Combating crime 22 Building financial capability 23 Promoting financial inclusion 24 Customer service 24 Citizens in the community 25 Our employees 25 RBS and the environment
M e a s u ri n g o u r s u c c e s s
The Group’s cost:income ratio was 43.9%. Excluding ABN AMRO, the Group’s cost:income ratio improved by 1.4 percentage points to 40.7%. The cost:income ratio is calculated excluding purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries in 2005, and after netting operating lease depreciation against rental income.
Group operating profit increased by 9% to £10,282 million in 2007.
Earnings per share increased by 18% to 78.7p for 2007, adjusted for purchased intangibles amortisation, integration costs, and net gain on sale of strategic investments and subsidiaries in 2005.
The directors have recommended a final dividend of 23.1p per ordinary share which, when added to the interim dividend of 10.1p, makes a total for 2007 of 33.2p, an increase of 10%.
Financial Reporting Standards. Certain standards relating to financial instruments were not adopted until January 2005.
The Group has provided comparative information on a pro forma basis that includes the estimated effect of these standards for the year ended 31 December 2004.
Work-Out is designed to remove unnecessary process from the organisation, improve team performance and customer service.
The entire Work-Out programme is driven by our employees who identify the potential areas for improvement. The programme has had a significant impact and in 2007 we had a record number of events taking place.
The RBS Employee Opinion Survey is conducted independently every year by ISR and circulated to all employees. Last year we achieved our highest response rate ever, ahead of the Global
Total employees 226,400 £57.7m 1m 40m No.1 invested in our communities.
• Citizens is the ninth largest bank in the US ranked by deposits.
• RBS Greenwich Capital’s Interest Rate Derivatives business is ranked in the top five in the US.
England & Wales and Scotland while RBS and NatWest rank first and second among major high street banks for customers who say they are
As well as RBS and NatWest, our brands include Direct Line, Churchill,
Coutts and Lombard. Last year saw the tenth anniversary of our Tesco
Citizens Financial Group (‘CFG’) was a small Rhode Island company when RBS acquired it in 1988. It has since grown to become the ninth largest US commercial banking group based on deposits. With the
Middle East had a combined population of more than 750 million people.
Their GDP of over $15,000 billion makes the region more than seven times the size of the UK.
RBS has grown organically in Asia-Pacific, building on our strengths in businesses such as wealth management and project finance. In 2005 we entered into a strategic partnership with the Bank of China. The acquisition of ABN AMRO enhances our presence in the fastest-growing region of the world economy.
With GDP of more than $27,500 billion, its economy is already more than twice the size of the US. Between 2000 and 2007, these countries are estimated to have grown by 86%. Despite their rapid growth, and including
Japan, GDP per person in the Asia-Pacific countries in which we operate stood at only 17% of the US level in 2007, implying that there remains scope for continued growth over the long term.
Corporate Markets is focused on the provision of debt and risk management services to medium and large businesses and financial institutions in the UK and around the world. Its activities have been organised into two businesses, Global Banking &
Global Banking & Markets is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt financing, risk management and investment services to its customers.
Finance. It is the leading merchant acquirer in Europe and ranks third globally.
Wealth Management provides private banking and investment services to its global clients through Coutts
Banking has a network of branches and operates in the personal, commercial and wealth management sectors.
� A ComPeer survey found Adam & Company market leading in providing investment operations, reporting and performance services to wealth managers
RBS Insurance sells and underwrites retail and SME insurance over the telephone and internet, as well as through brokers and partnerships. Direct Line, Churchill and Privilege sell general insurance products direct to the customer. Through its
Manufacturing drives efficiencies and supports income growth across multiple brands and channels by using a single, scalable platform and common processes wherever possible.
It also leverages the Group’s purchasing power and has become the centre of excellence for managing large-scale and complex change.
Latin America and Asia. The businesses of ABN AMRO to be retained by RBS comprise principally its global wholesale businesses and its international retail businesses in Asia,
Citizens is engaged in retail and corporate banking activities through its branch network in 13 states in the US and through non-branch offices in other states. Citizens was ranked the ninth largest commercial banking organisation in the US based on deposits as at 30 September 2007. Citizens Financial Group includes the two Citizens Banks, RBS Lynk, our US merchant acquiring business, and Kroger Personal Finance, our credit card joint venture with the second largest US
� Home insurance grew across all of our own brands in the second half, with sales of home policies through our bank branches up 40%.
� As a founder signatory in 2007 of the ClimateWise principles, we will work with government and customers to embed environmentally-friendly behaviour.
� We helped to launch mobile phone banking in September, allowing customers to access mini-statements and account balances through text alerts.
� Transaction banking income rose 7%, reflecting strong growth in cash management balances and significant expansion in trade finance.
� RBS Lynk, our US merchant acquiring business, processed 30% more transactions than in 2006.
RBS enjoyed another successful year in 2007 despite some of the most challenging market conditions in the financial and credit markets for some time. The hard work of our employees allowed us to deliver a strong financial and operational performance as well as successfully completing the acquisition of ABN AMRO, the largest banking acquisition ever undertaken.
(2006 – £9,414 million), with adjusted earnings per ordinary share rising 18% to 78.7p. The Board is recommending a total dividend of 33.2p, 10%
The Group entered 2007 focused on continued organic growth, for which we had created a range of attractive options. When it emerged that ABN AMRO was seeking alternative options for that company’s growth, it was incumbent on us to consider the implications and opportunities raised by that decision.
Following very thorough analysis and debate by the Board, and consultation with shareholders, the Group decided to bid for
ABN AMRO will deliver good, long-term value enhancement to shareholders. The businesses which the Group has secured will enable us to accelerate the implementation of our growth strategy and also provide the Group with a significant presence and options for expansion in the world’s most rapidly growing economies.
Rising mortgage delinquencies and declining house prices in the US combined to trigger a significant disruption to credit markets in the second half of the year. One consequence has been a decline in the value of a range of assets and resultant, often substantial write-downs for banks around the world.
I was pleased that others have recognised the seriousness of the Group’s approach to the environment. RBS was included in the Carbon Disclosure Project’s Climate Disclosure Leadership
for our management of social and environmental risks and opportunities, culminating in RBS being named as one of the 100 most sustainable companies globally at the Davos World
Economic Forum in 2008. Our commitment to the environment is also good for our business and in 2007 we remained one of the world’s leading financiers of renewable energy projects.
For The Royal Bank of Scotland Group, 2007 was defined by another strong operating performance and by the acquisition of ABN AMRO.
The diversity and quality of our business platform enabled us to deliver good financial results, with operating profit for the enlarged RBS Group rising by 9% to £10,282 million. Our earnings momentum remained powerful, notwithstanding the impact of challenging credit market conditions in the second half of the year.
Banking & Markets (‘GBM’) and Citizens. Later in the summer began the dislocation in credit markets, which made the second half a turbulent period for the financial services sector.
Manufacturing is central to the way we operate, underpinning our determination to deliver service to our customers while deriving scale benefits achievable from sharing infrastructure, processes and services across our businesses. We held cost growth to just 1%, despite continued investment in technology and property to support increased transaction volumes and the development of our business.
This decade has seen considerably stronger economic growth in the developing world, especially Asia, than in the
West. Trade and capital flows have been the main drivers of rising prosperity. This growth has spurred demand for many commodities, notably energy. Within the dynamic Asian economies, the number of wealthy people is growing and around the world affluence is increasingly common.
Economic development requires infrastructure investment, playing to our strengths in project finance. Growing demand for commodities was among the factors prompting our forthcoming joint venture with Sempra Commodities. We increased the number of private bankers in Coutts Asia to capitalise on the region’s growing wealth management market.
The quality and hard work of our employees are the source of the Group’s success. Each year we seek their views, benchmark their responses against our peers and then act on what they tell us. While the weakening external environment and the demands of the ABN AMRO transaction made 2007 a challenging year for many employees, a record 90% of our employees participated in Your Feedback 2007. We made progress on all of the 15 measures, exceeding the Global
RBS’s organisational architecture has remained largely unchanged since 2000. It now needs to evolve to recognise the fact that we are present in over 50 countries and to facilitate the integration and operation of the ABN AMRO businesses.
This new organisational structure will give us the right framework for managing the enlarged Group in a way that fully capitalises on the enhanced range of attractive growth opportunities now available to us.
It is tempting to think of the task before us in 2008 only in terms of the integration of ABN AMRO, and delivery of the substantial cost and revenue synergies. To do so, however, would overlook the real opportunities for the enlarged Group.
Whilst the future seems as difficult as ever to predict, it is clear that we enter 2008 with real momentum behind our organic growth, and with our product range, distribution capabilities and customer franchises materially enhanced.
UK and Europe and number five in the US and Asia-
European and Asian businesses in particular. We took full advantage of market volatility in the second half to deliver excellent performances in interest rate and currency trading, with income growth of 78% and 48%, respectively. These same market conditions resulted in significantly lower origination volumes in the credit markets as well as write-downs on US
mortgage-related exposures. Overall, we continued to benefit from the diversity of our income streams.
will extend our presence to more than 50 countries, improving our ability to meet clients’ needs around the globe. Integration of ABN AMRO’s wholesale businesses within GBM brings considerable strengths in equities, corporate finance and advisory services, emerging markets and transaction services, including cash management and trade finance.
� GBM was the sole bookrunner for a €266 million infrastructure facility for EDF Energies Nouvelles to fund construction of six wind farms in France.
Scotland rising to 46%. Even where we have a significant presence, we can grow if we deliver a high quality of service.
• RBS is the No.1 brand for service in England & Wales and Scotland according to an independent survey.
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.
needs. We greatly improved delivery channels with the launch of new Bankline, our advanced web-based electronic banking platform. 50,000 corporate and business customers enjoyed access to new Bankline and gave us strongly positive feedback about it. Lombard introduced a vehicle carbon offset scheme, while our services to businesses that trade internationally were enhanced by Supplier Finance – a new global supply chain finance product – and Tradeflow – an automated online trade finance service.
We maintained our rigorous focus on credit quality and risk management. As a result, while the amount we lent increased the quality of the portfolio remained stable and impairment losses fell.
• Among major high street banks, RBS and NatWest are number one and number two, respectively, for customers who say they are ‘extremely satisfied’ with their main current account provider.
Our focus on customer service, strong products and a measured approach to risk were the foundations for success in 2007. We originated more personal loans through branches and fewer through direct channels. Recognising consumers’
shift from borrowing to saving we focused on selling savings and investment products and NatWest opening more than one million new savings accounts.
SME market and invested in people, technology and service quality to secure future growth, including returning 500 managers to branches where they can work more closely with customers.
These helped boost transactions by 11%, with online purchases up 39%.
Insurance, Retail Markets has made excellent progress in selling home insurance through the RBS and
• Euromoney ranked Coutts & Co Best in the UK for Super
� We have recently re-branded our Coutts International branches, such as this one in Singapore to
RBS Coutts. This allows us to draw on the strength of the global brand.
• With more than 1,100 machines our ATM network is now the second largest on the island of Ireland.
Ulster Bank Group achieved impressive results while expanding its footprint and introducing innovative new products. Across
Ireland we opened seven joint Ulster Bank branch and business centres, three First Active stores and refurbished 46 locations.
Two new mobile branches enabled us to improve further the service provided to customers in rural locations.
We built on our integration with the RBS IT platform to launch new products including a number unique to the Irish market.
First Active delivered a record year in investments, capitalising on the opportunity presented by the maturity of the Special
Ulster Bank Group continued to expand its footprint across the island of Ireland. In 2007, we opened seven new joint branch and business centres for Ulster Bank and three new First Active stores.
• We remained No.1 US Small Business Administration lender in New England, Pennsylvania and Delaware.
• We introduced e-Statements in 2007 and expect to save at least 10 million sheets of paper in 2008.
Kroger Personal Finance, our joint venture with the second largest US supermarket group, sold over two million products, including 1-2-3 Rewards® MasterCards®, and prepaid and gift cards.
Our colleagues who serve customers every day often know best what we can do to improve our service. So last year we undertook a range of activities to make sure those ideas came to the fore. This resulted in more than 270 improvements to service provision. Our investment was rewarded with an increase in the customer satisfaction score to 85%.
� ePrize LLC, the world’s largest interactive promotions agency, was one of the first recipients of
Program, a $200 million loan commitment to companies that create jobs in Michigan.
• Typically we receive 350 flood claims in a summer month.
Working closely with Retail Markets, we have made excellent progress in selling home insurance through the RBS and
NatWest brands. We continued to develop our low cost operating model, streamlining our processes by bringing together the
Sales, Service and Claims functions, enabling us to provide efficient and consistent service standards to our customers.
We continued to diversify our income streams from the traditional core of UK household and motor insurance. Direct
Line ‘Open for Business’ was introduced in September offering simple, accessible insurance products for small businesses, while our International division returned strong growth, with motor policies up by 7%.
� In the last two weeks of June, the flood claims team at RBS
• If a customer’s debit card is lost or stolen, we can help them access emergency cash from over 7,000 ATMs.
Our Manufacturing division had a very strong year, supporting the development of our businesses while continuing our rigorous focus on cost control.
We invested significantly to protect our customers from fraud in 2007, introducing Chip & PIN to our branches in the UK and
Ireland and launching 2 Factor Authentication for online banking transactions. Our Identity Theft Support Team now helps victims of crime in the UK; and the introduction of improved processes means we now aim to refund those customers who have suffered fraud within 24 hours of contact.
In August, RBS became the first UK bank to use Contactless
Our eSourcing programme continues to deliver savings, helping us limit total cost growth to 1%. This online tool is used across all divisions and geographies to source goods and services. Savings are realised more quickly through reducing tender time, helping to make this programme one of the top ten in the world.
� We launched a new customer service commitment, where we aim to refund customers who have been innocent victims of fraud within 24 hours of contact.
• Retail banking customer numbers in Asia increased by 12% to 3.7 million, with growth driven principally by
Since we completed the acquisition of ABN AMRO in October our confidence in the opportunities it offers the Group has deepened. It brings many excellent people, strong franchises and products, and extends our presence in the world’s fastest growing markets, as well as further diversifying our income streams. We expect to secure greater cost savings and revenue benefits than originally anticipated.
RBS is now the leading corporate bank in Europe in terms of relationships with large corporates and financial institutions. This is the Paris office of ABN AMRO.
Stakeholders have told us that financial crime is their leading concern. This reflects the fact that identity fraud is the UK’s fastest-growing crime and the media coverage that high profile cases receive. We understand the reasons for stakeholders’
concerns and work hard to achieve our vision of RBS being the safest place to do business.
RBS was among the first banks to load data onto the new
Fraud Intelligence Sharing System. Our internal team dedicated to improving security and combating fraud employs more than 900 people in the UK alone. During 2007 the Group implemented 30 initiatives to tackle fraud. In the US, Citizens’ Fraud Stopper
Program rewards employees who go above and beyond their normal job responsibilities to prevent fraud against the Group.
� Ben Morris took advantage of our YourWorld bike-to-work scheme that allows employees to make considerable savings on the cost of a cycle. He also uses YourWorld carbon offsets and tax free bus season tickets.
MoneySense, our research shows that customers value tailored money management advice that helps them when they are making specific decisions. In 2007, our response included recruiting an additional 1,000 Customer Service Advisers in our RBS and NatWest branches and undertaking 1.2 million personal financial reviews with our customers.
To ensure we have a sound evidence base for our activities in this field we have established the MoneySense Research
We reached beyond our customer base in building capability through media partnerships with two UK national newspapers.
Some people can find it difficult to access financial services, with challenges in three areas: bank accounts, credit and debt advice. We are the UK’s largest provider of Basic Bank
Accounts, which are designed for customers who have had difficulty in entering the banking system.
was chosen as the main banking partner of Scotcash, a new
Community Development Finance Institution set up to provide access to affordable credit to people in Glasgow who have not had full access to mainstream financial services.
� 100% of electricity purchased in the UK and for the island of Ireland came from renewable energy sources
� Employee double matching programmes extended to the US, Europe and Asia-Pacific
Management spent a week working with charity, Habitat for Humanity, constructing five houses for a rural community near Bangalore, India.
We operate one in five of all free-to-use ATMs in the UK, the largest free-to-use network in the country. However, our stakeholders told us that some communities in the UK do not have reasonable access to a free-to-use ATM. To address this, we committed to installing additional free-to-use ATMs in neighbourhoods without existing provision and with 494 in place we will soon reach our target of 500 machines.
People living in remote communities across Scotland, England and Wales, often distant from a branch and other services, can use one of our 20 mobile branches. They make more than 25,000 stops each year and cover in excess of 190,000 miles.
Welcome Account provides easy access to banking services for Polish speakers in the UK. Since we know that sending money home is important to them, we have made arrangements with PKO Bank Polski, Poland’s largest retail bank, so that customers can make free money transfers between their NatWest Welcome Account and any account at PKO Bank Polski. The Welcome Account won the Best
Ulster Bank has added foreign language specialists to a number of its branches, as well as publishing a ‘Welcome
� In December, we gave £1 million to 91 children’s charities, chosen by staff and readers of the Daily Mail.
in them. It also helps us to develop the products and services to meet our customers’ needs, and to sustain and enhance the value we return to our shareholders. Last year we convened the new Strategic Advisory Board of our Business School, with membership drawn from some of the world’s leaders in executive education. Our Senior Manager Development Programme, designed and delivered for us by Harvard Business School, was supplemented by the Executive Leadership Programme which was developed by Duke Corporate Education.
We recognise the threats posed by climate change and endeavour to make a difference where we can. That involves reducing the Group’s carbon footprint and wider environmental impacts, helping our employees as they change their behaviour and lending responsibly to the highest internationally-agreed standards. In 2007 we elevated the priority given to the environment and brought greater coherence to our activities with the establishment of the Group Environment Programme.
We give employees more hours off work to participate in charitable activities than any company in the UK. We launched
Our supportive approach to community involvement is one of the reasons for the consistently strong results achieved in the annual Employee Opinion Survey where we consistently exceed the performance of our peers. More than 80% of employees feel they are treated with respect at work. Two out of three employees believe RBS does a good job in developing our people to their full potential. We seem to get right the balance between work and home life, with eight in ten employees saying the hours they put in to get the job done are reasonable.
Almost nine out of ten employees feel they are sufficiently informed about the Group’s performance and more than 80%
High Performance Norm, the results achieved by the world’s best performing companies.
� RBS achieved the highest AAA rating from Innovest for managing social and environmental risks
Action programme has assisted more than 90 small non-profit agencies who support their local communities. Near West Theatre,
Cleveland, Ohio provides local youngsters with the chance to engage in creative activities and was the first to benefit when the programme was extended to the
Our employees Our employees have told us that they take seriously their personal impact on the environment and strive to minimise it where they can. We took a major step to helping them with the launch of ‘Your World’. Through this web-based service, employees in the UK, Ireland and the US can calculate their carbon footprint, obtain advice about how to reduce it and buy competitively-priced energy and transport services that will also help them to reduce their emissions.
Our lending RBS is one of the ten initial adopters of the Equator Principles, a benchmark for managing the social and environmental impact of financing projects. We lend only to projects which satisfy these exacting standards. Our regard for the environment also makes good business sense and the Group is among the largest funders of renewable energy projects in the world.
Leadership Index and we were one of only four banks globally to receive a score of 95% or higher. At the World Economic
Forum in Davos, we were included among the world’s 100 most sustainable companies for the first time.
� Barbara Norris is one of the 6,000 members of staff who have delivered MoneySense lessons to 1,500 schools across the UK. Here she is helping pupils at Ramsey
� Sharon Johnson who has worked for RBS since leaving school 17 years ago, took a two month sabbatical to work at the
represent millions and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (“UK”). Reference to ‘dollars’ or
‘$’ are to United States of America (“US”) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’
and ‘€bn’ represent millions and thousands of millions of euros, respectively.
European Union IAS Regulation, the consolidated financial statements of the Group are prepared in accordance with
Interpretations Committee of the IASB (together “IFRS’) as adopted by the European Union. It also complies with IFRS as issued by the IASB. On implementation of IFRS on 1 January 2005, the Group took advantage of the option in IFRS 1 ‘Firsttime Adoption of International Financial Reporting Standards’
On 17 October 2007, RFS Holdings B.V. (“RFS Holdings”), a company jointly owned by RBS, Fortis N.V., Fortis SA/NV and
In due course, RFS Holdings will implement an orderly separation of the business units of ABN AMRO with RBS
RFS Holdings is jointly owned by the Consortium Banks. It is controlled by the company and is therefore fully consolidated in its financial statements. Consequently, the statutory results of the Group for the year ended 31 December 2007 include the results of ABN AMRO for the period from 17 October 2007 to 31 December 2007. The interests of Fortis and Santander are included in minority interests.
Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private
‘optimistic’, ‘prospects’ and similar expressions or variations on such expressions including, but not limited to, sections such as
In particular, this document includes forward-looking statements relating, but not limited, to the Group’s potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. Such statements are subject to risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.
US, the Group’s subsidiary Citizens is ranked the ninth largest commercial banking organisation by deposits. The Group has a large and diversified customer base and provides a wide range of products and services to personal, commercial and large corporate and institutional customers.
The Group had total assets of £1,900.5 billion and owners’ equity of £53.0 billion at 31 December 2007. It is strongly capitalised with a total capital ratio of 11.2% and tier 1 capital ratio of 7.3%
Corporate Markets is focused on the provision of debt and risk management services to medium and large businesses and financial institutions in the UK and around the world.
Global Banking & Markets (‘GBM’) is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt financing, risk management and investment services to its customers. GBM has a wide range of clients across its chosen markets. It has relationships with an overwhelming majority of the largest UK, European and US
Through its network of relationship managers across the country it distributes the full range of Corporate Markets’ products and services to companies.
Retail Markets leads the co-ordination and delivery of our multibrand retail strategy across our product range and comprises
Retail also includes the Group’s non-branch based retail businesses that issue a comprehensive range of credit and charge cards to personal and corporate customers and provides card processing services for retail businesses. Retail is the leading merchant acquirer in Europe and ranks third globally.
Hong Kong and Singapore, as well as its premier position in the
International and NatWest Offshore – deliver retail banking services to local and expatriate customers, principally in the
Markets provides a wide range of services in the commercial, corporate and wealth markets. RBS’s European Consumer
Finance (‘ECF’) activities, previously part of RBS Retail Markets, are now managed within Ulster Bank. ECF provides consumer finance products, particularly card-based revolving credits and fixed-term loans, in Germany and the Benelux countries.
New England and the ninth largest commercial banking organisation in the US measured by deposits. Citizens provides retail and corporate banking services under the Citizens brand in
Through its branch network Citizens provides a full range of retail and corporate banking services, including personal banking, residential mortgages and cash management.
In addition, Citizens engages in a wide variety of commercial lending, consumer lending, commercial and consumer deposit products, merchant credit card services, trust services and retail investment services. Citizens includes RBS Lynk, our merchant acquiring business, and Kroger Personal Finance, our credit card joint venture with the second largest US supermarket group.
RBS Insurance is the second largest general insurer in the UK, by gross written premiums. It sells and underwrites retail and SME
International Division, RBS Insurance sells general insurance, mainly motor, in Spain, Germany and Italy. The Intermediary and
Manufacturing drives optimum efficiencies and supports income growth across multiple brands and channels by using a single, scalable platform and common processes wherever possible. It also leverages the Group’s purchasing power and has become the centre of excellence for managing large-scale and complex change.
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 and commercial financial services around the world via regional business units in Europe, the Netherlands, North America,
As discussed on page 28, ABN AMRO was acquired by the
The Group faces intense competition in all the markets it serves. In the UK, the Group’s principal competitors are the other UK retail and commercial banks, building societies and the other major international banks represented in London.
is from UK banks and from large foreign financial institutions who are also active and offer combined investment and commercial banking capabilities. In asset finance, the Group competes with banks and specialised asset finance providers, both captive and non-captive. In European and Asian corporate and institutional banking markets the Group competes with the large domestic banks active in these markets and with the major international banks.
In the UK credit card market large retailers and specialist card issuers, including major US operators, are active in addition to the UK banks. Competitive activity is across a number of dimensions including introductory and longer term pricing, loyalty and reward schemes, and packaged benefits. In addition to physical distribution channels, providers compete through direct marketing activity and the internet. The market remains competitive, both between issuers and with other payment methods.
In Europe, Asia and the Middle East, the enlarged Group now competes in retail banking with local and international banks.
Competition is generally intensifying as more players enter markets that are perceived to be de-regulating and offer significant growth potential.
Group’s future results and cause them to be materially different from expected results. The Group’s results are also affected by competition and other factors. The factors discussed in this report should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties.
The Group's business and earnings are affected by general business and geopolitical conditions
The performance of the Group is influenced by economic conditions particularly in the UK, US and Europe. Downturns in these economies could result in a general reduction in business activity and a consequent loss of income for the Group. It could also cause a higher incidence of credit losses and losses in the
Group’s trading portfolios. Geopolitical conditions can also affect the Groups earnings. Terrorist acts and threats and the response of governments in the UK, US and elsewhere to them could affect the level of economic activity. The Group’s business is also exposed to the risk of business interruption and economic slowdown following the outbreak of a pandemic.
Changes in interest rates, foreign exchange rates, equity prices and other market factors affect the Group’s business
The Group’s business performance could be affected if its capital resources are not managed effectively
The Group’s capital is critical to its ability to operate its businesses, to grow organically and to take advantage of strategic opportunities. The Group is required by regulators in the
The Group’s businesses are dependent on the ability to process a very large number of transactions efficiently and accurately.
Each of the Group’s businesses is subject to substantial regulation and regulatory oversight. Any significant regulatory developments could have an effect on how the Group conducts its business and on the results of operations
Future growth in the Group’s earnings and shareholder value depends on strategic decisions regarding organic growth and potential acquisitions
The Group is exposed to the risk of changes in tax legislation and its interpretation and to increases in the rate of corporate and other taxes in the jurisdictions in which it operates
The Group’s activities are subject to tax at various rates around the world computed in accordance with local legislation and practice. Action by governments to increase tax rates or to impose additional taxes would reduce the profitability of the Group.
ABN AMRO are complex and may not realise the anticipated benefits for the Group
The restructuring plan is complex, involving substantial reorganisation of ABN AMRO’s operations and legal structure.
Notes: (1) Total income in 2005 excludes gains on sale of strategic investments and subsidiaries. In the statutory consolidated income statement on page 120, these items are included in total income.
(2) Cost:income ratio represents operating expenses excluding purchased intangibles amortisation, integration costs and loss on sale of subsidiaries, expressed as a percentage of total income excluding gain on sale of strategic investments and after netting operating lease depreciation against rental income.
(5) Adjusted after-tax return on equity is based on profit attributable to ordinary shareholders adjusted for purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries, and average ordinary equity shareholders’ funds.
As discussed on page 28, the results of ABN AMRO are fully consolidated in the Group's financial statements. Consequently, the statutory results of the RBS for the year ended 31 December 2007 include the results of ABN AMRO for the period from 17 October 2007 to 31 December 2007. The interests of Fortis and Santander are included in minority interests.
Summary consolidated income statement for the year ended 31 December 2007
The income statement set out below shows purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries separately. In the statutory consolidated income statement on page 120, these items are included in non-interest income and operating expenses as appropriate.
Net gain on sale of strategic investments and subsidiaries — — 240
Adjusted earnings per ordinary share* 78.7p 66.7p 58.6p * Prior year per share data have been restated to reflect the bonus issue of ordinary shares in May 2007.
Total income was up 11% or £3,113 million to £31,115 million, notwithstanding the significant impact of the developments in global credit markets in the second half of 2007.
Net interest income increased by 20% to £12,668 million and represents 41% of total income (2006 – 38%). Average loans and advances to customers and average customer deposits both grew by 26%.
Operating expenses, excluding purchased intangibles amortisation and integration costs, increased by 15% to £14,053 million.
Bancassurance and general insurance claims, after reinsurance, increased by 4% to £4,652 million reflecting adverse weather conditions in the summer of 2007. Excluding the impact of the floods in the summer, net general insurance claims decreased by 7%.
Provision coverage of risk elements in lending and potential problem loans was 56% (2006 – 62%).
Basic earnings per ordinary share increased by 18%, from 64.9p to 76.4p. Earnings per ordinary share adjusted for purchased intangibles amortisation and integration costs also increased by 18%, from 66.7p to 78.7p.
A final dividend of 23.1p per ordinary share is recommended, giving a total dividend for the year of 33.2p, an increase of 10%. If approved, the final dividend will be paid on 6 June 2008 to shareholders registered on 7 March 2008. The total dividend is covered 2.4 times by earnings before purchased intangibles amortisation and integration costs.
Capital ratios at 31 December 2007 were 7.3% (Tier 1) and 11.2% (Total).
In May 2007, the Group 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 held.
Total income was up 10% or £2,433 million to £28,002 million.
Impairment losses were £1,878 million compared with £1,707 million in 2005, an increase of 10%.
Risk elements in lending and potential problem loans represented 1.57% of gross loans and advances to customers excluding reverse repos at 31 December 2006 (2005 – 1.60%).
*restated for the effect of the bonus issue of ordinary shares in
higher than total assets of £776.8 billion at 31 December 2005.
Lending to customers, excluding repurchase agreements and stock borrowing (“reverse repos”), increased in 2006 by 10%
The adjusted after-tax return on ordinary equity, which is based on profit attributable to ordinary shareholders before purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries, and average ordinary equity, was 19.0% compared with 18.2% in 2005.
Gross yield on interest-earning assets of the banking business 6.32 5.93 5.60
Treasury bills and other eligible bills – UK 357 16 4.48 2,059 90 4.37
Total interest-earning assets – banking business (2, 3) 535,158 33,818 6.32 421,136 24,966 5.93
As a result, net interest income has been adjusted by £85 million (2006 – £63 million).
(3) Interest income has been adjusted by £313 million (2006 – £215 million) and interest expense by £536 million (2006 – £465 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
Total interest-bearing liabilities – banking business (2, 3) 349,610 11,720 3.35
(3) Interest income has been adjusted by £115 million and interest expense by £307 million to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
Non-interest income increased by 6%, £1,041 million to £18,447 million, including £960 million from the acquisition of
Within non-interest income, fees and commissions receivable increased by 19% or £1,349 million, to £8,465 million, while fees and commissions payable increased by 20%, £389 million to £2,311 million.
General insurance premium income, after reinsurance, increased by 2% to £6,109 million with good growth in policies in the core businesses, particularly in Continental Europe.
Non-interest income increased by £1,755 million, 11% to £17,406 million reflecting strong organic growth in all divisions especially Global Banking & Markets, up 26% and Wealth
of total income (2005 – 61%). Excluding general insurance premium income, non-interest income rose by 16% or £1,561 million to £11,433 million.
Income from trading activities, which primarily arises from providing customers with debt and risk management products in interest rate, currency and credit, was up £332 million, 14%, reflecting increased customer volumes.
The Group has a leading position in structuring, distributing and trading asset-backed securities (ABS). These activities include buying mortgage-backed securities, including securities backed by US sub-prime mortgages, and repackaging them into collateralised debt obligations (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 value of these exposures. Our valuations of the ABS CDO super senior exposures take into consideration outputs from our proprietary model, observable market benchmarks and prudent valuation adjustments.
December 2007. Positions 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 such as the LevX, LCDX and ITraxx and
The Group has £2.2 billion of US Alt-A residential mortgage trading inventory, of which more than 85% is investment grade.
Commercial mortgage exposure, consisting of loans originated for the purposes of securitisation, totalled £8.8 billion at 31
Staff costs were up £803 million, 14% to £6,647 million reflecting growth and expansion of activities in Corporate
AMRO, amounted to £6,441 million compared with £3,935 million in 2006.
decreased from 62% to 60%. The ratio of total balance sheet provisions for impairment to total risk elements in lending and potential problem loans also decreased to 56% compared with 62% in 2006. This reflects amounts written-off and the slightly lower risk profile of the portfolio.
Impairment losses were £1,878 million compared with £1,707 million in 2005. New impairment losses were up 11%, £214 million to £2,093 million. Recoveries of amounts previously written-off were up £43 million, 25% to £215 million.
Consequently the net charge to the income statement was up £171 million, 10% to £1,878 million. Improvements in Corporate
New impairment losses 2,518 2,093 1,879 less: recoveries of amounts previously written-off (390) (215) (172)
The actual tax charge differs from the expected tax charge computed by applying the standard rate of UK corporation tax as follows: £m £m £m
Unutilised losses – brought forward and carried forward (9) 14 (5)
The effective tax rate for the year was 20.7% (2006 – 29.3%; 2005 – 30.0%). The headline rate is lower than the standard rate of UK
The profit before amortisation of purchased intangible assets, integration costs and net gain on sale of strategic investments and subsidiaries and after allocation of Manufacturing costs where appropriate, of each division is detailed below, and is described as
Profit before amortisation of purchased intangible assets, integration costs and net gain on sale of strategic investments and subsidiaries 10,282 9,414 8,251
The performance of each of the divisions is reviewed on pages 49 to 64.
Markets income, but good progress in UK Corporate Banking combined with tight expense control and declining impairments lifted profits.
Average loans and advances to customers, excluding reverse repos, grew by 17% and average customer deposits
(excluding repos) by 19%. The portfolio remains well diversified by counterparty, sector and geography, and the average credit grade continues to improve. Assets grew strongly outside the UK, particularly in Western Europe and
Average risk-weighted assets rose by 12%, with disciplined capital allocation and increasing returns. The ratio of operating profit to average risk-weighted assets improved from 2.3% to 2.5%.
Risk-weighted assets 257.2 231.2 202.6 * excluding repos and reverse repos
These losses were partially offset by a reduction of £123 million in the carrying value of our own debt and by a gain of £950 million realised on the sale of Southern Water. The resulting reduction in profit, net of write-downs, gains and variable costs, was £484 million. Excluding these effects, underlying income rose by 8% and underlying operating profit by 10%, reflecting the business’s continued operating momentum.
Interest rate and currency trading activities took advantage of increased volatility leading to income growth of 78% and 48%
respectively. These strong performances were supplemented by good growth in our broadening product range, including equity derivatives and retail investor products. However, in
In Europe, income increased by 26% in local currency as a result of good performances in Germany, France, Spain, Italy and the Nordic region. We participated in many of the largest cross-border financings in 2006. Asia-Pacific, too, showed marked progress, with income increasing by 35% in US dollar terms. We have established a promising presence in the region, building our product capability and client relationships.
Net fee income rose by 26% to £1,032 million, reflecting our top tier position in arranging, structuring and distributing large scale private and public financings. We have increased our customer penetration, and in 2006 were the third most active underwriter of bonds for European, including UK, corporates.
Average risk-weighted assets grew by 11% and the ratio of operating profit to average risk-weighted assets improved from credit markets, write-downs reflecting the weakening of the
Rental and other asset-based activities achieved continuing success in originating, structuring, financing and managing physical assets such as aircraft, trains, ships and real estate for our customers. Income from rental assets, net of related funding costs and operating lease depreciation, increased by 16% to £314 million.
Other operating income increased to £1,899 million, net of related funding costs, including the successful sale of
Southern Water concluded during the second half. The majority of our remaining private equity portfolio has been sold into a fund, managed by RBS, thereby improving capital efficiency while offering more predictable and stable returns.
Portfolio credit risk remained stable and impairment losses declined to £39 million in 2007, with no deterioration in overall corporate credit quality. The liquidity and profitability of our corporate customers remains generally strong.
Total assets increased to £579.4 billion, primarily reflecting an increase of £128.8 billion in derivative assets (mostly rates and currencies) accompanied by a corresponding increase in derivative liabilities. The increase was a result of the strong growth in client-driven interest rate and currency trading activities in a more volatile market environment. Careful risk and capital management held our risk-weighted assets to £152.6 billion, an increase of 10% over the prior year.
Risk-weighted assets 104.6 93.1 82.6 * excluding repos and reverse repos 2007 compared with 2006
Non-interest income rose by 10% to £1,416 million, as a result of growth in fees and continued progress in the distribution of trade and invoice finance products as well as of interest rate and foreign exchange products.
Impairment losses totalled £180 million, 5% lower than in 2006, reflecting the strong quality of the portfolio. Corporate credit metrics remained stable.
Total expenses rose by 8% to £1,511 million. The increase in direct expenses, excluding operating lease depreciation, reflected the recruitment of additional relationship managers and other staff to strengthen the quality of service provided to our expanding customer base, as well as further investment in our electronic banking proposition.
Wealth Management business in the UK and Asia. Customer deposits increased by 13% to £130.4 billion, while loans and advances grew by 5% to £122.1 billion.
The full year results show momentum developing in the business, with operating profit in the second half of the year 14% higher than in the same period of 2006.
Retail Markets achieved a good performance in 2006, with total income rising by 5% to £8,455 million. Contribution before impairment losses increased by 6% to £5,603 million, contribution by 4% to £4,292 million and operating profit by 5% to £2,568 million.
Markets has added to its capabilities in deposits and investment products and has been rewarded by strong growth in these areas. Lending growth has been centred on high quality residential mortgages and small business loans, while personal unsecured lending was flat, as we limited our activity in the direct loans market and customer demand remained subdued. We have used our full range of brands to address markets flexibly, focusing on the most appropriate products and channels in the light of prevailing market conditions. Expenses have been kept under tight control, with additional investment in our business offset by efficiency gains and the benefits of combining Retail
Average risk-weighted assets fell by 3%, reflecting a change in business mix toward mortgage lending as well as careful balance sheet management, including increased use of securitisations.
Retail achieved strong results in 2007, increasing operating profit by 10% to £2,470 million as a result of good income growth in both consumer and business banking combined with tight cost control and a reduction in impairment losses. Total income grew by 3% to £7,762 million, while income net of claims grew by 2% to £7,244 million and contribution by 6% to £4,073 million.
Britain for customer satisfaction. We continue to focus on sales through the branch channel, and by adding more customer advisers in our branches have achieved a significant uplift in volumes.
Bancassurance continued its excellent progress with sales growth of 28% to £342 million annual premium equivalent, representing a doubling of 2005 sales. We invested further in our sales force, ending the year with more than 1,000 financial planning managers.
In business banking we strengthened our management team and improved operational processes, producing good results.
During 2007 we placed an additional 500 business managers back in branches, launched additional products to support the start-up market, and added new roles supporting ethnic minorities, women in business and community banking.
Average loans and advances to customers increased by 3%, with average mortgage lending up 5% and average business lending up 9%. Mortgage activity focused on branch channels, where net lending was 14% higher than in the previous year.
We also took advantage of improved margins in the intermediary segment in the latter part of the year to improve volumes. Direct loan balances declined over the year as we maintained our strategy of focussing unsecured personal lending on profitability rather than volume, although we continued to grow lending through the branch channel. After a decline in credit card balances in the first half of the year we improved recruitment and retention in the second half.
Retail has delivered a good performance in 2006, achieving 4% growth in total income to £7,566 million. Contribution before impairment losses was up by 6% to £5,140 million, contribution by 3% to £3,830 million, and operating profit by 2% to £2,250 million.
Average customer deposit balances were 9% higher, driven by personal savings balances up 12% and accelerating growth in business deposits, up 7%. Average mortgage lending was up 8%, with stronger volumes in the second half leading to a 7%
Despite investments for future growth, total expenses rose by just 1%, to £3,518 million, whilst direct expenses were held flat at £1,938 million. Staff costs increased by 3% to £1,317 million, reflecting sustained investment in customer service and the expansion of our bancassurance and investment businesses. We continue to make efficiency gains as a result of the consolidation of our retail businesses. Other costs, such as marketing expenses, fell by 6% to £621 million, also benefiting from consolidation.
Impairment losses increased by 15% to £1,310 million, but were lower in the second half of the year than in the first. The year-on-year change in impairment losses slowed from 19% in the first half to 12% in the second half. Credit card arrears have stabilised, while the rate of increase in arrears on unsecured personal loans continued to slow. Mortgage arrears remain very low – the average loan-to-value ratio of Retail’s mortgages was 46% overall and 64% on new mortgages written in 2006. Small business credit quality remains steady.
We have continued Coutts & Co’s UK regional expansion programme, and this has helped us to grow customer numbers by 7% and income by 22%. Outside the UK, Coutts
Growth in banking volumes contributed to a 15% rise in net interest income to £569 million. Average loans and advances to customers rose by 13% and average deposits by 17%.
UK and continental Europe along with a further significant expansion of our team of private bankers in Asia. Total headcount increased by 12%.
Wealth Management delivered strong growth, with total income rising by 13% to £889 million. Contribution grew by 19% to £462 million and operating profit by 28% to £318 million.
Growth in banking volumes contributed to a 13% rise in net interest income to £496 million. Average loans and advances to customers rose by 14% and average deposits by 10%, with net interest margin maintained at close to 2005 levels.
Total expenses rose by 9% to £570 million. In a highly competitive recruitment market, headcount was successfully increased by 7%, reflecting our continued investment in the UK
Ulster Bank maintained its success in building its personal and corporate banking business in the island of Ireland, with total income rising by 15% to £1,297 million, contribution by 15% to £732 million and operating profit by 22% to £513 million. These results reflect solid sales growth across all activities, driven by an enhanced range of innovative products and an expanded distribution network.
Despite tighter housing market conditions, arrears trends saw no deterioration in 2007 and impairment losses remained stable at £104 million.
Net interest income increased by 15% to £873 million, reflecting good growth in both loans and customer deposits.
Average loans and advances to customers increased by 28%, and average customer deposits by 15%. A principal focus during 2006 was the expansion of our corporate banking franchise, and we succeeded in increasing corporate customer numbers by 7% in the Republic of Ireland and by 4%
Average mortgage balances grew by 26%, although the rate of growth was slower in the second half when there was some evidence of a more subdued pace of expansion in the mortgage market. The change in business mix resulting from strong growth in corporate lending and mortgages, together with some competitive pressures, led to a modest reduction in net interest margin in the first half, with margin stabilising in the second half.
During 2006 we successfully completed the migration of our core systems to the RBS Group manufacturing model and, as a result, we now have access to the complete RBS
Spot exchange rate – US$/£ 2.004 1.965 1.721 2007 compared with 2006
Net interest income rose by 3% to $3,954 million. Average loans and advances to customers increased by 4%, with strong growth in corporate and commercial lending, up 13%, with close attention being paid to our risk appetite in light of prevailing market conditions. Average customer deposits increased by 1% but deposit margins narrowed as a result of deposit pricing competition and continued migration from lowcost checking accounts and liquid savings to higher-cost products. Notwithstanding this migration, Citizens’ net interest margin increased slightly to 2.80% in 2007, compared with 2.72% in 2006, thanks in part to improved lending spreads in the latter part of the year.
Citizens increased average mortgage and home equity lending by 14%, though the mortgage market slowed in the second half. Average credit card receivables, while still relatively small, increased by 19%.
Markets. There was good progress in debit cards, where issuance has been boosted by the launch in September of our “Everyday Rewards” programme. Citizens has also become the US’s leading issuer of Paypass™ contactless debit cards, with 3.65 million cards issued. Our credit card customers increased by 20%, whilst RBS Lynk, our merchant acquiring business, also achieved significant growth, processing 40% more transactions than it did in 2005 and expanding its merchant base by 11%.
General insurance reserves – total (£m) 8,192 8,068 7,776 2007 compared with 2006
RBS Insurance has made good progress in 2007 in competitive markets. Total income was maintained at £5,656 million, in line with 2006 levels, with growth in our own-brand businesses offset by a decline in partnerships.
Operating profit declined by 9% to £683 million, reflecting the impact of the severe flooding experienced in June and July.
Excluding the £274 million impact of the floods, contribution grew by 22% and operating profit by 28%, supported by strong claims management and the benefits of improved risk selection in this and prior years. We have continued to focus on selective underwriting of more profitable business.
In our partnerships and broker business, providing underwriting and processing services to third parties, we have concentrated on more profitable opportunities and have consequently not renewed a number of large rescue contracts.
Total expenses were held flat at £963 million. Within this, staff costs reduced by 7%, reflecting our continued focus on improving efficiency whilst maintaining service standards. A
5% rise in non-staff costs reflects increased marketing investment in our own brands.
We achieved overall policy growth of 1% in our businesses including excellent progress in our European businesses.
Our joint venture in Spain grew policy numbers by 14% to 1.34 million.
whilst focusing on more profitable customers acquired through our direct brands, with good results achieved through the internet channel, which accounted for half of all new ownbrand motor policies last year.
Our own-brand non-motor personal lines policies were flat, despite particularly good progress in Tesco Personal Finance.
Net fees and commissions payable increased by 8% to £486 million, whilst other income rose by 22% to £664 million, reflecting increased investment income.
Manufacturing costs increased by 1% to £2,914 million, as further improvements in productivity enabled us to support growth in business volumes and to maintain high levels of customer satisfaction while continuing to invest in the further development of our business. Staff costs were flat, as salary inflation was offset by reduced headcount in Operations, resulting from process efficiencies. Other costs increased by 2%, reflecting property investment and continued growth in the volumes of transactions handled.
Group Technology costs remained under tight control, increasing by only 1% to £984 million, as significant improvements in productivity were balanced by investment in software development.
Corporate Markets office in Paris and further development of our office portfolio in India and Singapore.
Manufacturing costs increased by 3% to £2,872 million, benefiting from investment in efficiency programmes while supporting business growth and maintaining high levels of customer satisfaction. Staff costs rose by 5%, with increases in
IFRS-related volatility. The Group hedges its economic risks, and volatility attributable to derivatives in economic hedges that do not meet the criteria in IFRS for hedge accounting is transferred to the Group’s central treasury function.
Excluding ABN AMRO, the number of employees at 31 December 2007 was 136,600, an increase of 1,600 compared with the previous year.
The acquisition of ABN AMRO by RFS Holdings added 89,800 employees to the Group total at 31 December 2007. In due course, this number will reduce as business units are transferred to the other Consortium Banks.
The number of employees at 31 December 2006 was 135,000, a decrease of 2,000 compared with the prior year.
ABN AMRO, total assets were up £254.9 billion, 29% to £1,126.3 billion largely reflecting an increase in derivative assets, which was accompanied by a corresponding increase in derivative liabilities, and secured financing through reverse repos and lending growth across all divisions.
Loans and advances to banks increased by £136.9 billion to £219.5 billion with reverse repurchase agreements and stock borrowing ("reverse repos") up by £121.8 billion to £175.9 billion.
Excluding ABN AMRO, loans and advances to banks increased by £14.8 billion, 18%, to £97.4 billion of which reverse repos increased by £13.5 billion, 25% to £67.6 billion and bank placings increased by £1.3 billion, 5%, to £29.8 billion.
Debt securities increased by £149.2 billion to £276.4 billion of which £121.8 billion related to the acquisition of ABN AMRO.
Excluding ABN AMRO, debt securities increased by £27.4 billion, 22%, to £154.6 billion principally due to increased trading book holdings in Corporate Markets.
Derivatives, assets and liabilities increased reflecting the acquisition of ABN AMRO, growth in trading volumes and the effects of interest and exchange rate movements amidst current market conditions.
Debt securities in issue have increased by £187.7 billion to £273.6 billion. Excluding ABN AMRO, the increase was £58.7 billion, 68% to £144.7 billion.
Equity minority interests increased by £33.1 billion to £38.4 billion reflecting £33.8 billion in respect of the acquisition of
ABN AMRO, partially offset by a reduction of £0.4 billion in the value of the investment in Bank of China.
Net cash flows from financing activities of £29,691 million primarily relate to the cash injection of £31,019 million from the consortium partners in relation to the acquisition of ABN AMRO, together with the issue of £4,829 million of equity securities and £1,018 million of subordinated liabilities, offset in part by dividend payments of £3,411 million, the repayment of £1,708 million subordinated liabilities, interest on subordinated liabilities of £1,522 million and the redemption of £545 million of minority interests.
The issue of £1,649 million preference shares and £1,234 million subordinated debt were more than offset by dividend payments of £2,007 million and the repayment of £1,553 million of subordinated liabilities, resulting in a net cash outflow from financing activities of £703 million.
UK banking sector, comparing a bank’s capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit and other risks); by international agreement, the RAR should be not less than 8% with a tier 1 component of not less than 4%.
The Group Board of directors sets the overall risk appetite and philosophy; the risk and capital framework underpins delivery of the
Board’s strategy. The Board is supported by three committees: Risk and capital management
• Group Audit Committee (“GAC”), comprising independent non-executive directors, focuses on financial reporting and application of accounting policies as part of the internal control and risk assessment framework. GAC monitors the identification, evaluation and management of all significant risks throughout the Group. This work is supported by Group
(“GALCO”) is responsible for identifying, managing and controlling the Group balance sheet risks. These risks are managed by setting limits and controls for capital adequacy, funding and liquidity, intra-group exposures, and nontrading interest rate, equity and foreign currency risk.
The Group currently uses a target range for the tier 1 capital ratio of 7.0% to 8.0% for its long-term capital planning with the aim of operating around the mid-point of this range. This is in excess of minimum regulatory requirements.
The Group undertakes a regular assessment of its internal capital requirement based on a quantification of the material risks to which it is exposed. This assessment includes the use of stress tests to assess whether the Group’s capital resources are adequate to remain above minimum requirements during a macroeconomic recession. The results of this internal capital assessment are reviewed by the Group Board and are used to ensure the adequacy of the Group’s available capital resources, to measure risk-adjusted returns, to inform the annual business and financial planning process and to inform the Board’s approval of risk appetite limits.
The main risks facing the Group are shown below. These should be considered in conjunction with the Risk factors set out on pages 32 and 33 which could affect the Group’s performance.
• Equity risk: reflects the variability in the value of equity investments resulting in gains or losses.
• Operational risk: is the risk arising from the Group’s people, processes, systems, physical assets and external events.
All staff have a role to play in the day to day management of risk in their division, in line with Group policy, which is set and managed by specialist staff in; • Risk Management: credit, market, regulatory, enterprise and insurance risk, together with risk analytics.
• Group Treasury: balance sheet, capital management, intragroup credit exposure, funding and liquidity and hedging policies.
Independence underpins the approach to risk management, which is reinforced throughout the Group by appropriate reporting lines.
Credit risk is managed to achieve sustainable and superior risk-reward performance whilst 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.
Ratings Based (AIRB) approach for calculating capital requirements for the majority of the business with effect from 1 January 2008. The Group, therefore, will be one of a small number of banks whose risk systems and approaches have achieved the advanced standard for credit, the most sophisticated available under the new Basel II framework.
• Exposure at default (“EAD”): such models estimate the expected level of utilisation of a credit facility at the time of a borrower’s default. The EAD is typically higher than the current utilisation (e.g. in the case where further drawings are made on a revolving credit facility prior to default) but will not typically exceed the total facility limit.
B u s in e s s r e v ie w 73RBS Group • Annual Report and Accounts 2007
Excluding reverse repurchase agreements, credit risk assets as at 31 December 2007 were £1,006.6 billion (2006 – £539.2 billion), an increase of £467.4 billion during the year of which £337.8 billion arose from the acquisition of ABN AMRO.
Credit risk assets are an internal risk measure of the Group’s exposure to customers. These consist of loans and advances
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 grading models that reflect the probability of default. All credit ratings across the Group map to a Group level asset quality scale.
As at 31 December 2007, including ABN AMRO net of minority interest, exposure to investment grade counterparties (AQ1)
accounted for 48% (2006 – 46%) of credit risk assets and 97% (2006 – 97%) of exposures were to counterparties rated AQ4 or higher. The exposure to the lowest asset quality (AQ5) remained at 3%.
B u s in e s s r e v ie w 75RBS Group • Annual Report and Accounts 2007
The acquisition of ABN AMRO in October 2007 has also changed the risk profile of the Group, with benefits arising from increased diversification available from the Group’s wider global reach.
B u s in e s s r e v ie w
Accrual loans past due 90 days (2) 369 302 256 105 9
REIL and PPL as % of customer loans and advances – gross (5) 1.64% 1.49% 1.49% 1.57% 1.60%
REIL as at 31 December 2007 was £10,731 million (2006 – £6,337 million). Excluding ABN AMRO minority interest, REIL was £8,251 million, an increase of £1,914 million (30%) during the year. As a percentage of customer lending, REIL and PPL in aggregate, excluding
The Group’s consumer portfolios, which consist of small value, high volume credits, have highly efficient largely automated processes for identifying problem credits and very short timescales, typically three months, before resolution or adoption of various recovery methods.
Corporate portfolios consist of higher value, low volume credits, which tend to be structured to meet individual customer requirements. Provisions are assessed on a case by case basis by experienced specialists, with input from professional valuers and accountants as appropriate. The
Charge as a % of customer loans and advances – gross (1) 0.30% 0.34% 0.39% 0.46% 0.46%
B u s in e s s r e v ie w 79RBS Group • Annual Report and Accounts 2007
The movement in provisions balance is shown in the table below.
Total customer accounts and long term funds 756,339 53 502,828 59 432,125 61 380,115 59
Deposits by banks (excluding repos) 149,595 10 67,301 8 55,767 8 62,502 10
Customer accounts (excluding repos) and long term funds (term debt securities in issue of over one year remaining maturity and capital) continue to represent the core of the Group’s funding.
Excluding ABN AMRO, these core funds in total increased by £70.7 billion (16%) over the course of 2007 to represent 59% of total funding at 31 December 2007. The inclusion of ABN AMRO
Customer accounts comprise a well diversified and stable source of funds from a wide range of retail, corporate and nonbank institutional customers. Excluding ABN AMRO, customer accounts grew by £46.3 billion (14%) to represent 43% of total funding at 31 December 2007. The inclusion of ABN AMRO has added £180.9 billion to that total at 31 December 2007, to represent 38% of total funding in the enlarged balance sheet.
Including ABN AMRO, term debt issuance through its similar programmes has added £62.4 billion to that figure, to represent 8% of total funding in the enlarged balance sheet.
Repo borrowing collateralised by a range of debt securities and other assets is undertaken with a range of corporate and institutional customers and banks. Excluding ABN AMRO, collateralised borrowing by repo increased by £9.8 billion (7%)
Short term wholesale funds (with up to one year residual maturity) are taken on an uncollateralised basis from a wide range of counterparties and debt investors, with the largest single depositor continuing to represent less than 1% of the
The Group’s liquidity policy is designed to ensure that it can at all times meet its obligations as they fall due.
Loans and advances to customers as a % of customer accounts (excluding repos) 126.6% 127.9% 127.4% 126.6%
Insurance manage liquidity locally, given different regulatory regimes, subject to review by Group Treasury. As integration of
Debt securities, listed held-for-trading equity shares, treasury and other eligible bills 328,352 174,724 135,775 129,440
Debt securities charged as security for liabilities (29,709) (8,911) (8,560) (9,578)
Less: loans and advances to banks (gross, excluding reverse repos) (25,609) (21,763) (21,136) (16,381)
and EU government securities, treasury bills and cash held in branches); and
The FSA also sets an absolute minimum level for the stock of qualifying liquid assets that the Group is required to maintain each day. Internal processes ensure that the Group achieves or exceeds these minimum requirements at all times.
The Group also recognises the importance of non-sterling liquidity, which is managed daily within various limits. This takes into account the marketability, within a short period, of the wide range of debt securities held, if required to meet unexpected outflows.
Group’s bank and corporate counterparties who are active in raising funds from that market to switch to utilising facilities offered by the Group in the event of either counterparty specific difficulties or a significant widening of interest spreads generally in the commercial paper market.
B u s in e s s r e v ie w 83RBS Group • Annual Report and Accounts 2007
(“ABCP”) market. The short-term contingent liquidity risk in providing such backup facilities is mitigated by the spread of maturity dates of the commercial paper taken by the conduits.
Limits sanctioned for such facilities totalled approximately £64 billion at 31 December 2007, of which £16 billion related to the RBS conduits and £48 billion to ABN AMRO conduits.
ABN AMRO Corp act as dealers to the programmes and have held generally non material CP on inventory. The conduits are consolidated by the Group.
New liquidity regulation was also introduced by a number of local regulators, notably in the Republic of Ireland. The Group had no difficulties in meeting the new requirements.
Further regulatory developments are expected through 2008, including progress in harmonising liquidity requirements.
Central Banks are also expected to continue to work to coordinate their liquidity supply arrangements in order to mitigate market conditions. The Group has been, and continues to be, actively involved in working with the various regulatory policy makers and central banks to assist the development of an appropriate future liquidity regime which takes into account both national considerations and the integrated cross-border approach to the management of liquidity risk within integrated banking groups such as the
Market risk is defined as the risk of loss resulting from adverse changes in risk factors such as interest rates, foreign currency and equity prices, together with related factors such as market volatilities.
Treasury activity and mismatches between the repricing of assets and liabilities in its retail and commercial banking operations account for most of the non-trading interest rate risk. Non-trading currency risk derives from the Group’s investments in overseas subsidiaries, associates and branches.
Group. The Board, GEMC and GRC review monthly reports, which provide summary information on VaR, trading positions and stress tests.
Excluding ABN AMRO £m £m £m £m £m £m £m £m
• determination of appropriate policies and methodologies to measure and control market risk.
Group also calculates VaR at a confidence interval of 99% and a time horizon of ten trading days for the purposes of calculating trading book market risk capital.
The Group’s method, however, does not make any assumption about the nature or type of underlying loss distribution. The Group typically uses the previous 500 trading days of market data.
The Group calculates both general market risk (i.e. the risk due to movement in general market benchmarks) and idiosyncratic market risk (i.e. the risk due to movements in the value of securities by reference to specific issuers) using its VaR models.
Stress testing measures the impact of abnormal changes in market rates and prices on the fair value of the Group’s trading portfolios. GEMC approves the high-level market risk stress test limit for the Group.
The Group calculates a range of market risk stress tests each day. The objective of stress testing is to identify the loss that the Group’s current portfolio of trading book exposures would generate in plausible but adverse market events. The Group calculates historical stress tests and hypothetical stress tests.
All divisions which incur market risk in the course of their business are required to comply with the requirements of the
Group’s MRPS. The main risk management tools are delegated authorities, specifically hard limits and discussion triggers.
• a temporary increase in the limit (for instance, in order to allow orderly unwinding of positions) can be granted, or
The Group’s treasury activities include its money market business and the management of internal funds flow within the
and related hedging derivatives. VaR for the Group’s treasury portfolios, which relates mainly to interest rate risk including credit spreads, was £5.5 million at 31 December 2007 (2006 –
Non-trading interest rate risk is calculated in each business on the basis of establishing the repricing behaviour of each asset, liability and off-balance sheet product. For many products, the actual interest rate repricing characteristics differ from the contractual repricing. In most cases, the repricing maturity is determined by the market interest rate that most closely fits the historical behaviour of the product interest rate. For non interest bearing current accounts, the repricing maturity is determined by the stability of the portfolio. The repricing maturities used are approved by Group Treasury and divisional asset and liability committees at least annually. Key conventions are reviewed annually by GALCO.
Execution of the hedging is carried out by the relevant division through the Group’s treasury functions. The residual risk position is reported to divisional asset and liability committees,
Non-trading interest rate VaR for the Group’s treasury and retail and commercial banking activities, including ABN AMRO on a fully consolidates basis, 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 (2006 – £98.7 million), the minimum £32.9 million (2006 – £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 portfolios of highly rated and liquid investments, principally mortgage-backed securities issued by US Government-backed entities. This balance sheet management approach is common for US retail banks where mortgages are originated and then sold to Federal agencies for funding through the capital markets.
B u s in e s s r e v ie w 87RBS Group • Annual Report and Accounts 2007
EVE is the present value of the cash flows generated by the current balance sheet. EVE sensitivity to a 2% parallel movement upwards and downwards in US interest rates is shown below.
Group’s non-trading income and reserves arising from changes in equity prices/income. These movements may crystallise during the course of normal business activities or in stress market conditions.
Group’s non-trading book, including achieving strategic objectives, expected capital gain and supporting venture capital transactions. These investments are carried at fair value with changes in fair value recorded in profit or loss, or in equity.
Insurance risk is managed in four distinct ways: • Underwriting and pricing risk
Overall, insurance risk is predictable, supported by large volumes of data over time. Uncertainty does exist, especially around predictions, for example, variations in weather. Risk is minimised through the application of documented risk policies, coupled with governance frameworks.
The specific characteristics of each of the risks highlighted above are as follows: Underwriting and pricing risk: the Group manages underwriting and pricing risk through a wide range of processes which include: • Underwriting guidelines that detail the class, nature and type of business that may be accepted; • Pricing policies which are set by senior management; • Centralised control of policy wordings and any subsequent changes.
Reinsurance risk: the following types of reinsurance are 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. Reinsurance of risks above the Group’s risk appetite is only effective if the reinsurance premium payable makes economic sense and the counterparty is financially secure. Before entering a contract with a new reinsurer, it must satisfy the Credit Risk Approval process that uses information derived internally and from security ratings agencies.
(in relation to the premium reserves). The Group holds undiscounted claims reserves (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, having regard to actuarial estimates and the volatility observed and expected in the claims in each class. Group policy ensures that the net unearned premium reserves are adequate to meet the expected cost of claims and associated expenses in relation to the exposure after the balance sheet date. To the extent that the unearned premium reserves, net of reinsurance and deferred acquisition costs are inadequate, a liability adequacy provision will be held.
The Group’s policy is to hold appropriate levels of provisions, typically in excess of the actuarial best estimate, for the major classes of business.
Most general insurance contracts are written on an annual basis, which means that the Group’s liability extends for a twelve month period, after which the Group is entitled to decline or renew or can impose renewal terms by amending the premium, terms and/or conditions.
c) Other commercial insurance contracts: claims may arise from business interruption and loss arising from the negligence of the insured (liability insurance). Business interruption losses come from the loss of income, revenue and/or profit as a result of property damage claims. Liability insurance includes employers liability and public/products liability.
The Group is not exposed to price, currency, credit, or interest risk on unit linked life contracts but it is exposed to variation in management fees. A decrease of 10% in the value of the assets would reduce the asset management fees by £2 million per annum (2006 – £5 million). The Group also writes insurance contracts with minimum guaranteed death benefits that expose it to the risk that declines in the value of underlying investments may increase the Group’s net exposure to death risk.
Operational risk losses occur as the result of fraud, human error, missing or inadequately designed processes, failed systems, damage to physical assets, improper behaviour or from external events.
To ensure appropriate responsibility is allocated for the management, reporting and escalation of operational risk, the
Group operates a three lines of defence model which outlines principles for the roles, responsibilities and accountabilities for operational risk management: • The first line of defence is the business line management.
ORPP provides the principles and minimum standards for delivering effective operational risk management. It incorporates key processes including risk and control assessment, scenario analysis, loss data collection, new product approval process, key risk indicators, notifiable events process, and the self certification process.
Divisional Operational Risk teams who provide expert support and advice as well as oversight and challenge to business line management.
The approach to regulatory risk has three distinct elements: • Review of potential changes in regulation to ensure the
Under a Group-wide framework of high-level policies, regulatory risk is managed by developing, maintaining and implementing local policies and systems to ensure effective compliance. The Group‘s operating processes are designed so as to meet all regulatory and legal requirements in all jurisdictions that the Group operates in.
Committee, the Committee of European Banking Supervisors and the EU Commission, to gain an appropriate understanding of planned changes and to contribute to regulatory policy formulation.
Following the acquisition of ABN AMRO, the Group operates in over 50 countries.
The OFT is also inquiring into credit and debit card interchange fees and has decided to undertake a fact find into unauthorised overdraft fees. In the EU, the European
Department of Justice has been conducting a criminal investigation into ABN AMRO’s dollar clearing activities, Office of Foreign Assets Control compliance procedures and other
Justice that would resolve all presently known aspects of the ongoing investigation by way of a Deferred Prosecution
The outcome of these reviews is outside the Group’s control and it is not possible to predict the effect, if any, on the
Governance 92 Board of directors and secretary 94 Report of the directors 99 Corporate governance 105 Directors’ remuneration report 115 Directors’ interests in shares 116 Statement of directors’
Pharmaceutical Industries and Associations and chairman of the British Pharma Group. He is a trustee of the Council for Industry and Higher Education.
Appointed to the Board in January 1993, Lawrence Fish is an American national. He is a career banker and was previously a director of the Federal Reserve Bank of
Appointed to the Board in June 2002, Colin Buchan was educated in South Africa and spent the early part of his career in South Africa and the Far East. He has considerable international investment banking experience, as well as experience in very large risk management in the equities business. He was formerly a member of the group management board of UBS AG
and head of equities of UBS Warburg, and was the former chairman of UBS Securities Canada Inc. He is a director of Standard Life plc, Merrill Lynch World Mining
G o v e rn a n c e 10. Bill Friedrich* (age 59)
Case Western Reserve University. He was chairman, president and chief executive officer of Charter One
Appointed to the Board in January 2006, Janis Kong was formerly executive chairman of Heathrow Airport
She is also chairman of Forum for the Future and a member of the board of Visit Britain.
Crucible plc, a non-executive director and chairman of the remuneration committee of Brit Insurance Holdings plc, and a trustee of MacMillan Cancer Support. He held a number of senior executive positions with J P
ICFC (now 3i). He was also a second permanent secretary of HM Treasury, where he was managing director of the Finance and Regulation Directorate. He is a non-executive director of JP Morgan Cazenove
Appointed to the Board in January 2001, Bob Scott is an Australian national. He is the senior independent director. He has many years’ experience in the international insurance business and played a leading role in the consolidation of the UK insurance industry.
Association of British Insurers. He is currently chairman of Yell Group plc and a non-executive director of Swiss
European Commissioner responsible for competition policy. He is chairman of BP p.l.c. and Goldman Sachs
Parliament and Business Exchange and president of the Chartered Institute of Bankers in Scotland.
The directors have pleasure in presenting their report together with the audited accounts for the year ended 31 December 2007.
The profit attributable to the ordinary shareholders of the company for the year ended 31 December 2007 amounted to £7,303 million compared with £6,202 million for the year ended 31 December 2006, as set out in the consolidated income statement on page 120.
An interim dividend of 10.1p per ordinary share was paid on
Bank of Scotland and NatWest. Details of the principal subsidiary undertakings of the company are shown in Note 16 on the accounts.
Group, including the products and services provided by each of its divisions and the competitive markets in which they operate, is contained on pages 30 to 32 of the Business review.
The Group’s future performance and results could be materially different from expected results depending on the outcome of certain potential risks and uncertainties. Details of the principal risk factors the Group faces are given on pages 32 and 33 of the Business review.
The reported results of the Group are also sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Details of the
The Group’s approach to risk management, including its financial risk management objectives and policies and information on the Group’s exposure to price, credit, liquidity and cash flow risk is discussed in Note 31 on the accounts.
A review of the Group’s performance during the year ended 31 December 2007, including details of each division, and the Group’s financial position as at that date is contained in the Business review on pages 34 to 69.
In October 2007, RFS Holdings B.V. (“RFS Holdings”), a company jointly owned by the company, Fortis N.V., Fortis
Latin America (excluding Brazil); • Business Unit Asia (excluding Saudi Hollandi); and
Within this package, RBSelect, the Group’s benefits choice programme, aims to provide employees with a wide range of benefits to choose from that suits their needs and lifestyle. Its aim is to make sure there are choices to suit everyone right across the Group, and during 2007 this approach was extended to a number of non-UK employees.
Employee engagement is encouraged through a range of communication channels, at both a divisional and Group level.
The Group Chief Executive and other senior Group executives regularly communicate with employees through ‘Question Time’
Employee Opinion Survey. The survey is confidential and independently managed by Towers-Perrin Independent Survey
In 2007, the response rate was 90%. This is the highest it has ever been, and 20% higher than the financial services norm.
The Group outperformed the ‘global financial services norm’ in every one of the 15 categories for the third year in succession.
The Group focus is on ensuring that these policies are closely linked to the operational needs of the business. Health and safety standards within high risk areas and activities have been reviewed and action taken to further improve performance.
Group. The Board regularly considers corporate responsibility issues and receives a formal report on these each year.
During the year, the ordinary share capital was also increased by 530.6 million ordinary shares issued to former ABN AMRO
shareholders and 19.1 million ordinary shares allotted as a result of the exercise of options under the company’s share schemes.
Details of the authorised and issued ordinary share capital at 31 December 2007 are shown in Note 26 on the accounts.
At the Annual General Meeting in 2007, shareholders renewed the authority for the company to make market purchases of up to 958,712,195 ordinary shares. The directors have not exercised this authority to date. Shareholders will be asked to renew this authority at the Annual General Meeting in April 2008.
The rights and obligations attaching to the company’s ordinary shares and preference shares are set out in the company’s
On a show of hands at a general meeting of the company every holder of ordinary shares and cumulative preference shares present in person or by proxy and entitled to vote shall have one vote. On a poll, every holder of ordinary shares present in person or by proxy and entitled to vote shall have one vote for every share held. On a poll, holders of cumulative preference shares present in person or by proxy and entitled to vote shall have four votes for every share held. The Notice of the Annual General Meeting specifies the deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the general meeting.
The cumulative preference shares represent less than 0.04% of the total voting rights of the company, the remaining being represented by the ordinary shares.
There are no restrictions on the transfer of ordinary shares in the company other than certain restrictions which may from time to time be imposed by laws and regulations (for example, insider trading laws). Pursuant to the Listing Rules of the
The rights and obligations of holders of non-cumulative preference shares are set out in Note 26 on the accounts on page 179.
A change of control of the company following a takeover bid may cause a number of agreements to which the company is party to take effect, alter or terminate. In addition, a number of executive directors' service agreements may be affected on a change of control. All of the company’s employee share plans contain provisions relating to a change of control. Outstanding awards and options may vest and become exercisable on change of control, subject where appropriate to the satisfaction of any performance conditions at that time and pro-rating of awards. In the context of the company as a whole, these agreements are not considered to be significant.
On 1 May 2008, he will become a non-executive director of the company and will continue in the role of non-executive
(under the Financial Services and Markets Act 2000) have been granted Qualifying Third Party Indemnity Provisions by the company.
Pension Scheme Indemnity Provisions (‘QPSIP’) have been issued by the company to a number of pension trustees/directors of in-house corporate trustees of the
(b) the director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the company’s auditors are aware of that information.
At the Annual General Meeting in 2006, shareholders gave authority for the company to make political donations and incur political expenditure up to a maximum aggregate sum of £500,000 as a precautionary measure in light of the wide definitions in The Political Parties, Elections and Referendums
Act 2000, for a period of four years. These authorities have not been used.
No political donations were made during the year and it is not proposed that the Group’s longstanding policy of not making contributions to any political party be changed.
At 31 December 2007, the Group’s trade creditors represented 30 days (2006 – 28 days) of amounts invoiced by suppliers.
The auditors, Deloitte & Touche LLP, have indicated their willingness to continue in office. A resolution to re-appoint
Deloitte & Touche LLP as the company’s auditor will be proposed at the forthcoming Annual General Meeting.
representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (“NYSE”), the company must disclose any significant ways in which its corporate governance practices differ from those followed by
US companies under the NYSE’s corporate governance listing standards. In addition, the company must comply fully with the provisions of the listing standards that relate to the composition, responsibilities and operation of audit committees. These provisions incorporate the relevant rules concerning audit committees of the US Securities Exchange
The company has reviewed its corporate governance arrangements and is satisfied that these are consistent with the
Code, and the Chairman of the Board is a member of the
Board to be independent. The NYSE’s corporate governance listing standards also require that a compensation committee has direct responsibility to review and approve Group Chief
NYSE’s corporate governance listing standards that relate to the composition, responsibilities and operation of audit committees. In May 2007, the company submitted its required annual written affirmation to the NYSE confirming its full compliance with those and other applicable provisions. In addition, following the listing of ADS representing common shares on the NYSE, an interim written affirmation was required and was filed in October 2007. More detailed information about the Audit Committee and its work during 2007 is set out in the
The Chairman leads the Board and ensures the effective engagement and contribution of all non-executive and executive directors. The Group Chief Executive has responsibility for all Group businesses and acts in accordance with the authority delegated by the Board. Responsibility for the development of policy and strategy and operational management is delegated to the Group Chief Executive and other executive directors.
The Board currently comprises the Chairman, six executive directors and ten non-executive directors (with effect from 1
Committees contain directors with a variety of relevant skills and experience so that no undue reliance is placed on any individual.
The composition of the Board is subject to continuing review and the provisions of the Code will be taken into account in respect of the balance of the Board. The Code requires the
The Board comprises nine independent and seven non-independent directors (including executive directors), in addition to the Chairman. Bob Scott has been nominated as the senior independent director.
Annual General Meeting are contained on page 97 and further information will be given in the Chairman’s letter to shareholders in relation to the company’s Annual General Meeting.
Board, including visits to the Group’s major businesses and meetings with directors and senior management. The induction is tailored to the director’s specific requirements. Directors are advised of appropriate training and professional development opportunities and undertake the training and professional development they consider necessary in assisting them to carry out their duties as a director.
The performance evaluation of the operation and effectiveness of the Board, the Remuneration Committee and the
The report on the Board evaluation, which was designed to assist the Board in further improving its performance, was considered and discussed by the Board as a whole and a separate report on the outcomes of the evaluation of the Audit
Board also considered the range and balance of its activities and was content that it was allocating appropriate time to such key matters as monitoring business performance, risk appetite and strategy.
Taking into account their review and discussions the directors have concluded that the Board is effective in meeting its objectives and fulfilling its duties and obligations. The directors are also satisfied that each of the Board’s Committees (Audit,
In addition, each director discussed his or her own performance as a director and their Board evaluation questionnaire with the Chairman. The senior independent director canvassed the views of the executive directors and met with the non-executive directors as a group without the
The Board is satisfied that each director continues to contribute effectively to the Board and the Group and demonstrates commitment to his or her role as a director.
Nominations Committees and the standard terms and conditions of appointment of non-executive directors are available on the Group’s website (www.rbs.com) and copies are available on request.
Board in discharging its responsibilities and making all relevant disclosures in relation to the formulation and review of the
Chairman. The Directors’ Remuneration Report is contained on pages 105 to 114.
Committee, and in that respect the provisions of the Code have not been complied with. The Board as a whole reserves the authority to make the final determination of the remuneration of directors as it considers that this two stage process allows greater consideration and evaluation and is consistent with the unitary nature of the Board. No director is involved in decisions regarding his or her own remuneration.
Board in the formal selection and appointment of directors. It considers potential candidates and recommends appointments of new directors to the Board. The appointments are based on merit against objective criteria, including the time available of the potential director and the commitment which will be required.
Annual General Meeting. Individual shareholders can raise matters relating to their shareholdings and the business of the
Communication with the company’s largest institutional shareholders is undertaken as part of the company’s investor relations programme. The Chairman meets with the Group’s top 20 investors once every 12 to 18 months to receive their feedback on issues such as strategy, business performance and corporate governance. During the year, the directors received copies of analysts’ reports and a monthly report from the Group’s investor relations department which includes an analysis of share price movements, the Group’s performance against the sector, and key broker comments. In addition, information on major investor relations activities and changes to external ratings is provided. The senior independent director would be available to shareholders if concerns could not be addressed through the normal channels. The arrangements used to ensure that directors develop an understanding of the views of major shareholders are considered as part of the annual Board performance evaluation.
The Chairman, Group Chief Executive, Group Finance Director and, if appropriate, the senior independent director communicate shareholder views to the Board as a whole.
The Board of directors is responsible for the Group’s system of internal control that is designed to facilitate effective and efficient operations and to ensure the quality of internal and external reporting and compliance with applicable laws and regulations. In devising internal controls, the Group has regard to the nature and extent of the risk, the likelihood of it crystallising and the cost of controls. A system of internal control is designed to manage, but not eliminate, the risk of failure to achieve business objectives and can only provide reasonable, and not absolute, assurance against the risk of material misstatement, fraud or losses.
Guidance for Directors on the Combined Code’ issued by the Financial Reporting Council in October 2005.
Committee reports that include details of any significant internal control matters which they have identified. The system of internal controls of the authorised institutions and other regulated entities in the Group is also subject to regulatory oversight in the UK and overseas. Additional details of the
Based on its assessment, management has concluded that, as of 31 December 2007, the Group’s internal control over financial reporting is effective.
Group’s internal control over financial reporting and have given an unqualified opinion.
The Board is satisfied that all the Audit Committee members have recent and relevant financial experience. Although the
affect the duties, obligations or liability of any other member of the Board.
Full details of the responsibilities of the Audit Committee are available at www.rbs.com
Committee reviews the policy annually and prospectively approves the provision of audit services and certain non-audit services by the external auditors.
Annual audit services also include statutory or non-statutory audits required by any Group companies that are not incorporated in the UK. Terms of engagement for these audits are agreed separately with management, and are consistent with those set out in the audit engagement letter, as local regulations permit.
The prospectively approved non-audit services include the following classes of service: • capital raising, including consents, comfort letters and relevant reviews of registration statements; • provision of accounting opinions relating to the financial statements of the Group; • provision of reports that, according to law or regulation, must be rendered by the external auditors; • tax compliance services; • corporate finance services relative to companies that will remain outside the Group; and
Information on the audit and non-audit services carried out by the external auditors is detailed in Note 4 to the Group’s accounts.
The Audit Committee undertakes an annual evaluation to assess the independence and objectivity of the external auditors and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements. The results of this evaluation are reported to the Board.
Committee’s recommendations to shareholders for their approval at the Annual General Meeting in relation to the appointment, reappointment and removal of the external auditors. The Board has endorsed the Audit Committee’s recommendation that shareholders be requested to approve the reappointment of Deloitte & Touche LLP as external auditors at the Annual General Meeting in April 2008.
The Audit Committee also fixes the remuneration of the external auditors as authorised by shareholders at the Annual
It is intended that there will be an external review of the effectiveness of Group Internal Audit every three to five years, in line with best practice, with internal reviews continuing in the intervening years. In 2007, KPMG conducted a review of the effectiveness of Group Internal Audit and concluded that the function operated effectively. The Board considered the external review findings and also concluded that the Group
It is intended that there will be an external review of the effectiveness of the Audit Committee every three to five years, with internal reviews by the Board continuing in the intervening years. PricewaterhouseCoopers conducted an external review of the effectiveness of the Audit Committee in 2005. An internal review of the Audit Committee’s performance was undertaken in 2007 and a separate report on the outcome was considered and discussed by the Board which concluded that it effectively discharged its responsibilities.
Since 2005, divisional audit committees have been responsible for reviewing each division’s business. These committees report to the Audit Committee which has concluded that they operate effectively.
During the year, the Remuneration Committee received advice from Watson Wyatt and Mercer on matters relating to directors’
remuneration in the UK (Watson Wyatt) and US (Mercer), together with advice from the Group Director, Human
Committee has taken account of the views of the Group Chief
Committee operate independently of the consulting teams undertaking other work with the Group.
The Remuneration Committee conducted a comprehensive review of all aspects of the remuneration package in 2005, and the executive remuneration policy outcome was approved by shareholders at the company’s Annual General Meeting in 2006. A new executive share option plan was approved by shareholders at the company’s 2007 Annual General Meeting.
Performance-related elements will comprise the major part of executive remuneration packages. See illustrative charts below.
• Incentive plans and performance metrics will be structured to be robust through the business cycle.
The above diagram has been prepared to illustrate the use of performance metrics in the total direct compensation package. For the Group Chief Executive, 21% of the package is fixed and 79% is performance related. For the executive directors, 27% is fixed and 73% is performance related. Values are shown on the basis of ontarget annual performance with long term incentives at the approximate fair value at grant (80% of the face value of the shares for the MPP and 12% for the ESOP). In 2007 the MPP grant due to vest lapsed in its entirety having not met the required performance conditions. The executive share options due to vest in 2007 vested in full. At the date of vesting the share price was £6.96 and the exercise price was £5.78. Pension and other benefits have been excluded from this diagram. Financial metrics include profit growth, cost control and return on equity.
Salaries are reviewed annually as part of total remuneration, having regard to remuneration packages received by executives of comparable companies. The Remuneration
Committee uses a range of survey data from published and proprietary sources and reaches individual salary decisions taking account of the remuneration environment and the performance and responsibilities of the individual director.
Details of pension arrangements of directors are shown on page 114. Where cash allowances are paid in place of pension accrual (or of pension accrual on salary over the pension earnings cap), they are shown on page 110. Executive directors also receive additional cover for death-in-service benefits.
Executive directors are eligible to receive a choice of various employee benefits or a cash equivalent, on a similar basis to other employees. In addition, as employees, executive directors are eligible to participate in Sharesave, Buy As You
Chief Executive, Retail Markets. Awards will normally be based on the delivery of a combination of appropriate Group and individual financial and operational targets approved each year by the Remuneration Committee.
For the other executive directors, a proportion of the annual incentive is based on Group financial performance and a proportion on divisional financial performance. The remainder of each individual’s annual incentive opportunity is dependent on achievement of a range of non-financial measures, specific objectives and key result areas. Divisional performance includes measures such as operating income, costs, loan impairments or operating profit. Non-financial measures include customer measures (e.g. customer numbers, customer satisfaction), staff measures (e.g. employee engagement) and efficiency and change objectives.
Group operating profit targets were met in full notwithstanding the impact of challenging credit market conditions in the second half of the year, and customer and employee satisfaction scores showed improvement in line with or above expectations. Financial performance in most divisions exceeded target. As a result, the Remuneration Committee proposed and the Board (excluding executive directors)
The Medium-term Performance Plan (“MPP”) was approved by shareholders in April 2001. Each executive director is eligible for an annual award under the plan in the form of share or share equivalent awards. Whilst the rules of the plan allow awards over shares worth up to one and a half times earnings, the Remuneration Committee has adopted a policy of granting awards based on a multiple of salary. Normally awards are made at one times salary to executive directors, with one and a half times salary being granted in the case of the Group Chief
Executive. No changes will be made to this policy without prior consultation with shareholders. All awards under the plan are subject to three-year performance targets.
Awards made in 2006 and 2007 are subject to two performance measures; 50% of the award vests on a relative
performance against comparator companies will result in vesting of 25% of the award. Outperformance of median TSR
The EPS element ensures a clear line of sight for executives to improve long-term financial performance. For this element, the level of EPS growth over the three year period is calculated by comparing the adjusted EPS in the year prior to the year of grant with that in the final year of the performance period.
Each year the vesting schedule for the EPS growth measure is agreed by the Remuneration Committee at the time of grant, having regard to the business plan, performance relative to comparators and analysts’ forecasts.
Options were subsequently granted to executive directors over shares worth up to a maximum of three times salary with an
In respect of the grant to executive directors in 2007, options will only be exercisable if, over the three year period, the growth in the company’s adjusted EPS has been at least 6%
per annum (‘the threshold level’). The percentage of options that vest is then determined on a straight line basis between 30% at the threshold level and 100% at the maximum level for growth in adjusted EPS of 12% per annum.
Officer of Citizens Financial Group, Inc. From 23 March 2007, he was appointed Chairman, RBS America and Citizens. With effect from 1 January 2008 he has undertaken that role in a non-executive capacity and is being paid a fixed fee of
US$600,000 per annum (inclusive of fees as a non-executive director of the company with effect from 1 May 2008).
He will not participate in any annual bonus plan nor will he be eligible for further grants under any long term incentive plans.
Existing long term incentive awards will vest to him, subject to achievement of all relevant service and performance conditions, at the completion of the appropriate performance period.
Note: (1) With effect from 1 May 2008, Mr Fish will become a non-executive director of the company. In line with other non-executive directors, his appointment will be covered by a letter of engagement. The appointment will be for an initial term expiring on 9 October 2009 and is terminable earlier by either party upon written notice.
The undernoted performance graph illustrates the performance of the company over the past five years in terms of total shareholder return compared with that of the companies comprising the FTSE 100 Index. This Index has been selected because it represents a cross-section of leading UK
The company’s policy in relation to the duration of contracts with directors is that executive directors’ contracts generally continue until termination by either party, subject to the required notice, or until retirement. The notice period under the service contracts of executive directors will not normally exceed 12 months. In relation to newly recruited executive directors, subject to the prior approval of the Remuneration Committee, the notice period from the employing company may be extended beyond 12 months if there is a clear case for this.
All new service contracts for executive directors are subject to approval by the Remuneration Committee. Those contracts normally include standard clauses covering the performance review process, the company’s normal disciplinary procedure, and terms for dismissal in the event of failure to perform or in situations involving actions in breach of the Group’s policies.
Except as noted below, in the event of severance where any contractual notice period is not worked, the employing company may pay a sum to the executive in lieu of this period of notice. Any such payment would, at maximum, comprise base salary and a cash value in respect of fixed benefits
(including pension plan contributions). In the event of situations involving breach of the employing company’s policies resulting in dismissal, reduced or no payments may be made to the executive. Depending on the circumstances of the termination of employment, the executive may be entitled, or the Remuneration Committee may exercise its discretion to allow, the executive to exercise outstanding awards under longterm incentive arrangements subject to the rules of the relevant plan. All UK based directors, with the exception of
Salary/ Performance Pension 2007 2006 fees bonus(1) allowance Benefits Total Total
(3) On his appointment as Chairman of the Managing Board of ABN AMRO on 1 November 2007, Mr Fisher transferred to the Netherlands. In line with the Group’s international assignment policy he was eligible for assistance in moving his home and family to the Netherlands and for ongoing tax equalisation, cost of living, housing and other secondment benefits, the value of which is £15,419 and is included under benefits, above.
No director received any expense allowances chargeable to UK income tax or compensation for loss of office/termination payment.
The performance conditions for options granted in 2007 are detailed on page 107.
For executive share options where the first exercisable date is between March 2002 and March 2009 inclusive, options are exercisable only if, over a three year period, the growth in the company’s EPS has exceeded the growth in the Retail Prices
The market price of the company’s ordinary shares at 31 December 2007 was £4.44 and the range during the year to 31 December 2007 was £3.97 to £7.20.
Note: (1) Awards were granted on 28 April 2005 and these awards have now lapsed.
Interests at 1 January 2007 and the related prices on award and vesting in the table below have been restated to reflect the bonus issue of ordinary shares in May 2007.
Awards Market Market Value of Awards period for held at price on Awards price on awards held at qualifying 1 January award vested in vesting vested 31 December conditions to
Notes: (1) Awards were granted to Mr Whittaker in lieu of unvested share awards from his previous employer.
Mr Fish LTIP awards for the LTIP award for the LTIP award for the LTIP awards for the 3 year periods: 3 year period: 3 year period: 3 year periods: was US$1,389,148
Note: (1) A new cash LTIP was approved by shareholders at the company’s Annual General Meeting in April 2005. Performance is measured on a combination of growth in Profit before tax and Relative Return on Equity based on a comparison of Citizens with comparator US banks.
Fund is a defined benefit fund registered with HM Revenue &
Sir Fred Goodwin and Gordon Pell are provided with additional pension benefits on a defined benefit basis outwith the RBS
Fund. The figures shown below include the accrual in respect of these arrangements. A funded, non-registered, arrangement has been set up to provide Sir Fred Goodwin’s benefits to the extent they are not provided by the RBS Fund.
Larry Fish accrues pension benefits under a number of arrangements in the US. Defined benefits are built up under the Citizens’ Qualified Plan, Excess Plan and Supplemental
Executive Retirement Arrangement. In addition, he is a member of two defined contribution arrangements: a Qualified 401(k) Plan and an Excess 401(k) Plan. He will continue to accrue benefits under these plans until 30 April 2008.
Of the total transfer value shown as at 31 December 2007, 54% relates to benefits in funded pension schemes.
Additional Additional for the additional pension pension Increase pension earned earned in transfer earned
(3) No allowance is made in these transfer values for any enhanced benefits that may become payable on early retirement.
(5) In accordance with US market practice, Larry Fish’s pensionable remuneration is limited to US$4 million per annum.
(6) Larry Fish’s executive director service contract effective from February 2004 provides that he may retire at any age between 60 and 65. As noted on page 107, he will cease pension accrual with effect from 1 May 2008 and draw his pension from that date. The valuation of his benefits in the table above as at the end of 2007 allow for this payment date; previous figures assumed retirement at age 65.
Contributions and allowances paid in the year ended 31 December 2007 under defined contribution arrangements were: Mr Cameron — £46
US$0.01 each at 31 December 2007 (2006 – 20,000). No other director had an interest in the preference shares during the year.
Notes: (1) The numbers shown in this table are taken from the audited disclosures shown elsewhere in this Annual Report.
Shares Shares beneficially beneficially owned at owned at 1 January 31 December
Sir Fred Goodwin and Mr Fisher under the Group’s Buy As You Earn share scheme.
Group accounts, and as permitted by the Companies Act 1985 have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting
Standards as adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of the
Group and the company. In preparing those accounts, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; and
Financial statements 118 Independent auditors’ report 120 Consolidated income statement 121 Balance sheets 122 Statements of recognised income and expense 123 Cash flow statements 124 Accounting policies 140 Notes on the accounts
(together “the Group”) for the year ended 31 December 2007 which comprise the accounting policies, the balance sheets as at 31 December 2007 and 2006, the consolidated income statements, the cash flow statements, the statements of recognised income and expense for each of the three years in the period ended 31 December 2007 and the related Notes 1 to 43. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the part of the directors’ remuneration report that is described as having been audited.
The directors’ responsibilities for preparing the annual report, the directors’ remuneration report and the financial statements in accordance with applicable law and International Financial
Our responsibility is to audit the financial statements and the part of the directors’ remuneration report described as having been audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the directors’ remuneration report described as having been audited have been properly prepared in accordance with the Companies Act 1985, and as regards the Group’s consolidated financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion, the information given in the directors’ report is consistent with the financial statements. The information given in the directors’ report includes that specific information presented in the Business review that is cross referred from the business review section of the directors’ report.
The Listing Rules do not require us to consider whether the
We read the other information contained in the Annual Report and Accounts 2007 as described in the contents section, including the unaudited part of the directors’ remuneration report, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any further information outside the Annual Report and Accounts 2007.
Accounting Oversight Board (United States). An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the directors’ remuneration report described as having been audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the company and the Group, consistently applied and adequately disclosed.
remuneration report described as having been audited have been properly prepared in accordance with the
Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation; and
As explained in the accounting policies, the Group, in addition to complying with its legal obligation to comply with IFRS as adopted by the European Union, has also complied with IFRS
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended 31 December 2007, in conformity with IFRS as adopted for use in the European Union and IFRS as issued by the IASB.
We have also audited, in accordance with the standards of the
Commission. Management excluded from its assessment the internal control over financial reporting of ABN AMRO Holding
N.V., and its subsidiaries which was acquired on 17 October 2007. Accordingly, our audit did not include the internal control over financial reporting in ABN AMRO Holding N.V. and its subsidiaries. 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.
Exchange Commission, expressed an unqualified opinion on the effectiveness of the Group’s internal control over financial reporting of the Group excluding ABN AMRO Holding N.V. and its subsidiaries.
Neither an audit nor a review provides assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular whether any changes may have occurred to the financial information since first published. These matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area. Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions.
Treasury and other eligible bills subject to repurchase agreements 29 7,090 1,426 — —
Prepayments, accrued income and other assets 19 19,066 8,136 127 3
The accounts were approved by the Board of directors on 27 February 2008 and signed on its behalf by: Sir Tom McKillop Sir Fred Goodwin Guy Whittaker
Statements of recognised income and expense for the year ended 31 December 2007
Net valuation (losses)/gains taken direct to equity (776) 4,792 35 — — —
Net profit taken to income on sales (513) (313) (582) — — —
Net (losses)/gains taken direct to equity (426) (109) 18 — — —
Adjustments for: Depreciation and amortisation 1,970 1,678 1,825 — — —
Changes in operating assets and liabilities 28,261 3,980 (519) 15,562 (508) 2,050
Net cash flows from operating activities before tax 28,046 19,670 6,051 18,347 3,494 4,431
Sale and maturity of securities 63,007 27,126 39,472 — — —
Sale of property, plant and equipment 5,786 2,990 2,220 — — —
Proceeds of minority interests issued 31,095 1,354 1,264 — — —
Shares purchased by employee trusts (65) (254) — — — —
Shares issued under employee share schemes 79 108 — — 7 —
Net increase/(decrease) in cash and cash equivalents 77,304 19,102 2,528 916 (469) 817
F in a n c ia l s ta te m e n ts 1. Presentation of accounts
IFRS as issued by the IASB. The date of transition to IFRS for the Group and the company (The Royal Bank of Scotland
Group plc) and the date of their opening IFRS balance sheets was 1 January 2004.
The Group has adopted IFRS 7 ‘Financial Instruments: Disclosures’ for the accounting period beginning 1 January 2007. This has had no effect on the results, cash flows or financial position of the Group or the company. However, there are changes to the notes on the accounts and comparative information is presented accordingly.
Group (its subsidiaries). Control exists where the Group has the power to govern the financial and operating policies of the entity; generally conferred by holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. Any excess of the cost (the fair value of assets given, liabilities incurred or assumed and equity instruments issued by the Group plus any directly attributable costs) of an acquisition over the fair value of the net assets acquired is recognised as goodwill. The interest of minority shareholders is stated at their share of the fair value of the subsidiary’s net assets.
The results of subsidiaries acquired are included in the consolidated income statement from the date control passes to the Group. The results of subsidiaries are included up until the Group ceases to control them through a sale or significant change in circumstances.
Payment services: this comprises income received for payment services including cheques cashed, direct debits, Clearing
House Automated Payments (the UK electronic settlement system) and BACS payments (the automated clearing house that processes direct debits and direct credits). These are generally charged on a per transaction basis. The income is earned when the payment or transaction occurs. Charges for payment services are usually debited to the customer’s account, monthly or quarterly in arrears. Accruals are raised for services provided but not charged at period end.
An annual fee payable by a credit card holder is deferred and taken to profit or loss over the period of the service i.e.
Insurance brokerage: this is made up of fees and commissions received from the agency sale of insurance. Commission on the sale of an insurance contract is earned at the inception of the policy as the insurance has been arranged and placed.
Investment management fees: fees charged for managing investments are recognised as revenue as the services are provided. Incremental costs that are directly attributable to securing an investment management contract are deferred and charged as expense as the related revenue is recognised.
The Group provides post-retirement benefits in the form of pensions and healthcare plans to eligible employees.
estimated economic lives using methods that best reflect the pattern of economic benefits and is included in depreciation and amortisation. The estimated useful economic lives are as follows: Core deposit intangibles 6 to 10 years
On implementation of IFRS, the Group did not restate business combinations that occurred before January 2004. Under previous GAAP, goodwill arising on acquisitions after 1 October 1998 was capitalised and amortised over its estimated useful economic life. Goodwill arising on acquisitions before 1 October 1998 was deducted from equity. The carrying amount of goodwill in the Group’s opening IFRS balance sheet
Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses.
Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for separately. Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified as investment property.
At each reporting date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the
(excluding goodwill) or property, plant and equipment is recognised as it arises provided the increased carrying value does not exceed that which it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed.
The Group’s consolidated financial statements are presented in sterling which is the functional currency of the company.
Transactions in foreign currencies are translated into sterling at the foreign exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Foreign exchange differences arising on translation are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations. Nonmonetary items denominated in foreign currencies that are stated at fair value are translated into sterling at foreign exchange rates ruling at the dates the values were determined.
Contracts to lease assets are classified as finance leases if they transfer substantially all the risks and rewards of ownership of the asset to the customer. Other contracts to lease assets are classified as operating leases.
Rental income from operating leases is credited to the income statement on a receivable basis over the term of the lease.
Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives (see accounting policy 6 above).
General insurance comprises short-duration contracts, principally property and liability insurance contracts. Due to the nature of the products sold – retail-based property and casualty, motor, home and personal health insurance contracts
– the insurance protection is provided on an even basis throughout the term of the policy.
The Group’s long-term assurance contracts include whole-life term assurance, endowment assurance, flexible whole-life, pension and annuity contracts that are expected to remain in force for an extended period of time. Long-term assurance contracts under which the Group does not accept significant insurance risk are classified as financial instruments.
The Group recognises the value of in-force long-term assurance contracts as an asset. Cash flows associated with in-force contracts and related assets, including reinsurance cash flows, are projected, using appropriate assumptions as to future mortality, persistency and levels of expenses and excluding the value of future investment margins, to estimate future surpluses attributable to the Group. These surpluses, discounted at a risk-adjusted rate, are recognised as a separate asset. Changes in the value of this asset are included in profit or loss.
Premiums on long-term insurance contracts are recognised as income when receivable. Claims on long-term insurance contracts reflect the cost of all claims arising during the year, including claims handling costs. Claims are recognised when the Group becomes aware of the claim.
On initial recognition financial assets are classified into heldto -maturity investments; available-for-sale financial assets; heldfor -trading; designated as at fair value through profit or loss; or loans and receivables.
Designated as at fair value through profit or loss – financial assets may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the
Loans and receivables – non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables except those that are classified as available-for-sale or as held-fortrading, or designated as at fair value through profit or loss.
Financial assets carried at amortised cost – if there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables or as held-to-maturity investments has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition.
Impairment losses are recognised in profit or loss and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously
F in a n c ia l s ta te m e n ts recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.
Financial liabilities may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
A financial asset is derecognised when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive the asset’s cash flows; or (b) retains the right to the asset’s cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains on the balance sheet. If substantially all the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not it has retained control of the asset. If it has not retained control, the asset is derecognised. Where the Group has retained control of the asset, it continues to recognise the asset to the extent of its continuing involvement.
Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a deposit. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration is recorded in Loans and advances to banks or Loans and advances to customers as appropriate.
Securities borrowing and lending transactions are usually secured by cash or securities advanced by the borrower.
Borrowed securities are not recognised on the balance sheet or lent securities derecognised. Cash collateral received or given is treated as a loan or deposit; collateral in the form of securities is not recognised. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded.
A derivative embedded in a contract is accounted for as a stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the entire contract is carried at fair value through profit or loss.
The Group enters into three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a forecast transaction (cash flow hedges); and hedges of the net investment in a foreign operation.
Hedge relationships are formally documented at inception. The documentation includes identification of the hedged item and the hedging instrument, details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued.
Cash flow hedge – where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability or a highly probable forecast transaction, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity. The ineffective portion is recognised in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity in the same periods in which the asset or liability affects profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same time as the hedged transaction. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no longer expected to occur; or if hedge designation is revoked. On the discontinuance of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss recognised in equity is recognised in profit or loss when the hedged cash flow occurs or, if the forecast transaction results in the recognition of a financial asset or financial liability, in the same periods during which the asset or liability affects profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is recognised in profit or loss immediately.
Scotland Group plc to its employees under various share option schemes. The Group has applied IFRS 2 ‘Share-based
The company’s investments in its subsidiaries are stated at cost less any impairment.
Policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB’s Framework for the
At 31 December 2007, gross loans and advances to customers totalled £835,688 million (2006 – £470,826 million)
F in a n c ia l s ta te m e n ts account the customer’s debt capacity and financial flexibility; the level and quality of its earnings; the amount and sources of cash flows; the industry in which the counterparty operates; and the realisable value of any security held. Estimating the quantum and timing of future recoveries involves significant judgement. The size of receipts will depend on the future performance of the borrower and the value of security, both of which will be affected by future economic conditions; additionally, collateral may not be readily marketable.
The actual amount of future cash flows and the date they are received may differ from these estimates and consequently actual losses incurred may differ from those recognised in these financial statements.
Collective component – this is made up of two elements: loan impairment provisions for impaired loans that are below individual assessment thresholds (collective impaired loan provisions) and for loan losses that have been incurred but have not been separately identified at the balance sheet date
(latent loss provisions). These are established on a portfolio basis using a present value methodology taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates and the related average life. These portfolios include credit card receivables and other personal advances including mortgages. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends.
The Group operates a number of defined benefit pension schemes as described in Note 3 on the accounts. The assets of the schemes are measured at their fair value at the balance sheet date. Scheme liabilities are measured using the projected unit method, which takes account of projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. These cash flows are discounted at the interest rate applicable to high-quality corporate bonds of the same currency and term as the liabilities. Any recognisable surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). In determining the value of scheme liabilities, assumptions are made as to price inflation, dividend growth, pension increases, earnings growth and employees. There is a range of assumptions that could be adopted in valuing the schemes’ liabilities. Different assumptions could significantly alter the amount of the surplus or deficit recognised in the balance sheet and the pension cost charged to the income statement. The assumptions adopted for the Group’s pension schemes are set out in Note 3 on the accounts. A pension asset of £836 million and a liability of £496 million were recognised in the balance sheet at 31 December 2007
Treasury and other eligible bills and debt securities (held-fortrading, designated as at fair value though profit or loss and available-for-sale) – treasury bills are UK and foreign government treasury bills and other bank bills eligible for refinancing with central banks. Debt securities include those issued by governments, municipal bodies, mortgage agencies and financial institutions as well as corporate bonds, debentures and residual interests in securitisations.
Debt securities in issue (held-for-trading and designated as at fair value though profit or loss) – measured at fair value and principally comprise medium term notes.
Forwards include forward foreign exchange contracts and forward rate agreements. A forward contract is a contract to buy (or sell) a specified amount of a physical or financial commodity, at an agreed price, on an agreed future date.
Forward foreign exchange contracts are contracts for the delayed delivery of currency on a specified future date.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available.
Treasury and other eligible bills and debt securities 83.1 101.7 11.6 196.4
Notes: (1) Financial assets and financial liabilities valued using unadjusted quoted prices in active markets for identical assets or liabilities. This category includes listed equity shares, exchange-traded derivatives, UK, US and certain other government securities, and US agency securities in active markets.
(b) valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data.
(3) Valuation techniques incorporating information other than observable market data are used for instruments where at least one input (which could have a significant effect on the instrument’s valuation) cannot be based on observable market data. Where inputs can be observed from market data without undue cost and effort, the observed input is used; if not, the input is estimated. Financial assets and liabilities in this category include certain syndicated and commercial mortgage loans, unlisted equity shares, certain residual interests in securitisations, super senior tranches of high grade and mezzanine collateralised debt obligations (CDOs) and other sub-prime trading inventory, less liquid debt securities, certain structured debt securities in issue and OTC derivatives where valuation depends upon unobservable inputs such as certain long dated and exotic contracts.
The Group uses a number of methodologies to determine the fair value of financial instruments for which observable prices in active markets for identical instruments are not available.
These techniques include: relative value methodologies based on observable prices for similar instruments; present value approaches where future cash flows from the asset or liability are estimated and then discounted using a risk-adjusted interest rate; and Black-Scholes, Monte-Carlo and binomial option pricing models. The principal inputs to these valuation techniques are listed below. Values between and beyond available data points are obtained by interpolation and extrapolation.
• Interest rates – these are principally benchmark interest rates such as the London Inter-Bank Offered Rate (LIBOR)
• Foreign currency exchange rates – there are observable markets both spot and forward and in futures in the world’s major currencies.
• Price volatilities and correlations – volatility is a measure of the tendency of a price to change with time. Correlation measures the degree to which two or more prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation.
Volatility is a key input in valuing options and the value of certain products such as derivatives with more than one underlying variable that is correlation-dependent. Volatility and correlation values are obtained from broker quotations, pricing services or derived from option prices.
• Prepayment rates – the fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. In valuing prepayable instruments that are not quoted in active markets the Group incorporates the value of the prepayment option.
The Group refines and modifies its valuation techniques as markets and products develop and the pricing for individual products becomes more transparent.
Portfolios whose fair values are based on valuation techniques incorporating information other than observable market data and related sensitivity analysis on portfolios at 31 December 2007 are summarised in the table below.
LCDX, ITraxx and CDX. Assumptions relating to the expected refinancing period are based on market experience and market convention. Adjustments to observed prices are made for differences between instruments, such as counterparty creditworthiness, term, and quality of any collateral.
(taking into account all other applicable factors) would reduce the fair value by up to £52 million or increase the fair value by up to £49 million.
Super senior tranches of asset-backed CDOs – the Group is a participant in the US asset-backed securities market: buying residential mortgage-backed securities (‘RMBS’), including securities backed by US sub-prime mortgages, and repackaging them into collateralised debt obligations (‘CDOs’)
An analysis of the Group’s super senior tranche exposures to these CDOs is shown below: High grade Mezzanine
Of which originated in: Collateral by rating: – investment grade 98% 31%
The Group’s proprietary model predicts the expected cash flows of the underlying mortgages using assumptions about future macroeconomic conditions (including house price appreciation and depreciation) and defaults/delinquencies on these underlying mortgages derived from publicly available data. The resulting cash flows are discounted using a risk adjusted rate.
Other debt securities – where observable market prices for a particular debt security are not available, the fair value will typically be determined with reference to observable market transactions in other credit related products including debt securities and credit derivatives. Assumptions are made about the relationship between the individual debt security and the available benchmark data. Using differing assumptions about this relationship would result in different fair values for these assets. Using reasonably possible alternative assumptions for credit spread (taking into account the underlying currency, tenor and rating) would reduce the fair value by up to £88 million or increase the fair value by up to £109 million.
Derivatives – derivatives are priced using quoted prices for the same or similar instruments where these are available.
However, the majority of derivatives are valued using pricing models. Inputs for these models are usually observed directly in the market, or derived from observed prices. However, it is not always possible to observe or corroborate all model inputs.
The Group makes provision for the full cost of settling outstanding claims arising from its general insurance business at the balance sheet date, including claims estimated to have been incurred but not yet reported at that date and claims handling expenses. General insurance claims provisions amounted to
Goodwill is the excess of the cost of an acquired business over the fair value of its net assets. The determination of the fair value of assets and liabilities of businesses acquired requires the exercise of management judgement; for example those financial assets and liabilities for which there are no quoted prices, and those non-financial assets where valuations reflect estimates of market conditions such as property.
Different fair values would result in changes to the goodwill arising and to the post-acquisition performance of the acquisition. Goodwill is not amortised but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s cashgenerating units or groups of cash-generating units expected to benefit from the combination. Goodwill impairment testing involves the comparison of the carrying value of a cashgenerating unit or group of cash generating units with its recoverable amount. The recoverable amount is the higher of the unit’s fair value and its value in use. Value in use is the present value of expected future cash flows from the cashgenerating unit or group of cash-generating units. Fair value is the amount obtainable for the sale of the cash-generating unit in an arm’s length transaction between knowledgeable, willing parties.
The IASB issued IFRS 8 ‘Operating Segments’ in November 2006. This will replace IAS 14 ‘Segment Reporting’ for accounting periods beginning on or after 1 January 2009. IFRS
Financial Statements’ following the completion in January 2008 of its project on the acquisition and disposal of subsidiaries.
The standards improve convergence with US GAAP and provide new guidance on accounting for changes in interests in subsidiaries. The cost of an acquisition will comprise only consideration paid to vendors for equity; other costs will be expensed immediately. Groups will only account for goodwill on acquisition of a subsidiary; subsequent changes in interest will be recognised in equity and only on a loss of control will there be a profit or loss on disposal to be recognised in income.
The IASB published revisions to IAS 32 ‘Financial Instruments: Presentation’ and consequential revisions to other standards in
February 2008 to improve the accounting for and disclosure of puttable financial instruments. The revisions are effective for accounting periods beginning on or after 1 January 2009 but together they may be adopted earlier. They are not expected to have a material affect on the Group or the company.
(3) Credit: asset-backed securities, corporate bonds, credit derivatives and related hedges and funding.
The average number of persons employed in the continuing operations of the Group during the year, excluding temporary staff, was 164,700 (2006 – 142,600; 2005 – 144,900); on the same basis the discontinued operations employed 5,800 (2006 and 2005 – nil).
The average number of temporary employees during 2007 was 4,900. The number of persons employed in the continuing operations of the Group at 31 December, excluding temporary staff, was as follows: Group
Expected return on plan assets (weighted average) 6.9% 6.9% 6.5% 6.8% 6.9% 6.5%
Major classes of plan assets as a percentage of total plan assets 2007 2006 2005 2007 2006 2005
These post-retirement mortality assumptions are derived from standard mortality tables used by the scheme actuary to value the liabilities for the main scheme. Following a comprehensive review of the mortality experience of the main scheme over the last three years by the scheme actuary, different standard mortality tables (adjusted as appropriate) have been used in valuing the scheme liabilities as at 31 December 2007.
The Group also provides post-retirement benefits other than pensions, principally through subscriptions to private healthcare schemes in the UK and the US and unfunded postretirement benefit plans. Provision for the costs of these benefits is charged to the income statement over the average remaining future service lives of eligible employees. The amounts are not material.
F in a n c ia l s ta te m e n ts 3 Pension costs (continued) Main scheme All schemes
Changes in value of net pension deficit/(surplus) £m £m £m £m £m £m
Currency translation and other adjustments — — — (59) (65) (6)
Income statement: Statement of recognised income and expense: Expenses included in service cost (26) (26) — (28) (28) —
Currency translation and other adjustments — — — 381 385 4
Income statement: Statement of recognised income and expense: Acquisition of subsidiaries — — — 6,997 6,960 (37)
(weighted average) 6.2%; rate of increase in salaries 2.5%; rate of increase in pensions in payment 2.0%; and inflation assumption 2.0%.
Of the net liabilities of schemes in deficit, £212 million (2006 – £106 million) relates to unfunded schemes.
Present value of defined benefit obligations 18,099 19,004 19,118 16,051 27,322 20,951 21,123 17,738
Experience gains on plan assets 163 552 1,556 392 19 587 1,660 408
Actual return on pension schemes assets 1,345 1,574 2,486 1,230 1,413 1,660 2,677 1,328
F in a n c ia l s ta te m e n ts 4 Auditors’ remuneration
Fees payable to the auditors and their associates for other services to the Group: – The audit of the company’s subsidiaries pursuant to legislation(1) 15.8 10.8
– Services relating to corporate finance transactions, including securitisations, entered into by the Group 5.5 2.4
Fees payable to the auditors and their associates in respect of pension schemes: Notes: (1) Excluding fees paid in respect of ABN AMRO Holding B.V. which is audited by another firm.
Group’s deferred tax liability following the change in the rate of UK Corporation Tax from 30% to 28% from 1 April 2008.
(2) Between 1 January 2008 and the date of approval of these accounts, dividends amounting to US$161 million have been declared in respect of equity preference shares for payment on 31 March 2008.
Prior year ordinary dividends per share in the table below have been restated for the effect of the bonus issue of ordinary shares in May 2007.
As permitted by section 230(3) of the Companies Act 1985, the primary financial statements of the company do not include an income statement. Condensed information is set out below: Company £m £m £m
F in a n c ia l s ta te m e n ts 9 Earnings per ordinary share
The earnings per share are based on the following: Group £m £m £m
Effect of dilutive share options and convertible non-equity shares 166 174 180
Diluted weighted average number of ordinary shares during the year 9,723 9,729 9,729
The numbers of ordinary shares in issue in prior years have been restated for the effect of the bonus issue of ordinary shares in May 2007.
The following tables analyse the Group’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.
trading profit or loss derivatives for-sale receivables cost) leases liabilities Total 2006 £m £m £m £m £m £m £m £m £m
Cash and balances at central banks — — — 6,121 — 6,121
Treasury and other eligible bills (1) 4,516 — 975 — — 5,491
Loans and advances to banks (2) 52,736 376 — 29,494 — 82,606
Loans and advances to customers (3) 72,462 1,327 — 381,583 11,521 466,893
Prepayments, accrued income and other assets — — — 953 — 7,183 8,136
(3) Includes reverse repurchase agreements of £142,357 million (2006 – £62,908 million).
(5) Includes repurchase agreements of £134,916 million (2006 – £63,984 million).
(6) The carrying amount of other customer accounts designated as at fair value through profit or loss is £77 million (2006 – £140 million) greater than the principal amount. No amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial measured as the change in fair value from movements in the period in the credit risk premium payable. The amounts include investment contracts with a carrying value of £5,555 (2006 – £2,246 million).
(8) £162 million (2006 – nil) has been recognised in profit or loss for changes in credit risk associated with these liabilities measured as the change in fair value from movements in the period in the credit risk premium payable by the Group. The carrying amount is £317 million (2006 – £383 million) lower than the principal amount.
Gains on financial assets/liabilities designated as at fair value through profit or loss 1,074 573 364
Gains on disposal or settlement of loans and receivables 3 21 25
On the initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in profit or loss over the life of the transaction; when market data become observable; or when the transaction matures or is closed out as appropriate. At 31 December 2007, net gains of £72 million (2006 – £15 million) were carried forward in the balance sheet.
trading derivatives receivables cost) liabilities Total 2007 £m £m £m £m £m £m
Loans and advances to customers (2) — — 307 — 307
Accruals, deferred income and other liabilities — — — 8 8
The following table shows the carrying values and the fair values of financial instruments on the balance sheets carried at amortised cost.
Cash and balances at central banks 17,866 17,866 6,121 6,121 — — — —
Less than More than Less than More than 12 months 12 months Total 12 months 12 months Total £m £m £m £m £m £m
Cash and balances at central banks 17,866 — 17,866 6,121 — 6,121
Treasury and other eligible bills 18,108 121 18,229 5,491 — 5,491
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: The following table provides an analysis of the credit quality of financial assets by the Group’s internal credit ratings.
AQ1 AQ2 AQ3 AQ4 AQ5 past due accrual provision Total 2007 £m £m £m £m £m £m £m £m £m
Cash and balance at central banks 17,866 — — — — — — — 17,866
Treasury and other eligible bills 18,218 — 11 — — — — — 18,229
Cash and balance at central banks 6,121 — — — — — — — 6,121
Treasury and other eligible bills 5,491 — — — — — — — 5,491
Loans and advances to customers 149,221 85,511 124,215 72,622 24,703 8,324 6,230 (3,933) 466,893 * Excluding items in the course of collection of £3,095 million (2006 – £3,471 million).
Finance leases and instalment credit 15,632 131 27 — 15,790 5
Service industries and business activities 16,474 2,190 233 1 18,898 18
Finance leases and instalment credit 1,620 — — — 1,620 —
Service industries and business activities 14,449 1,825 661 — 16,935 103
F in a n c ia l s ta te m e n ts 11 Asset quality (continued)
Service industries and business activities 151,822 21,356 5,786 1 178,965 31,456
Finance leases and instalment credit 19,498 131 281 45 19,955 5
Service industries and business activities 9,607 100 7 7 9,721 —
Implementation of IAS 39 on 1 January 2005 — — — — — (29)
Charged to the income statement 274 1,744 88 2,106 1,877 1,703
Notes: (1) Amounts written-off include £2 million in 2005 relating to loans and advances to banks.
(2) Impairment losses at 31 December 2007 include £3 million relating to loans and advances to banks (2006 – £2 million; 2005 – £3 million).
(2) Impairment provisions individually assessed on balances of £3,178 million (2006 – £1,196 million).
The Group holds collateral in respect of certain loans and advances to banks and to customers that are past due or impaired. Such collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower.
Past due Past due Past due 90 days 1-29 days 30-59 days 60-89 days or more Total £m £m £m £m £m
These balances include loans and advances to customers that are past due through administrative and other delays in recording payments or in finalising documentation and other events unrelated to credit quality.
The Group enters into fair value hedges, cash flow hedges and hedges of net investments in foreign operations. Fair value hedges principally involve interest rate swaps hedging the interest rate risk in recognised financial assets and financial liabilities. Similarly, the majority of the Group’s cash flow hedges relate to exposure to variability in future interest payments and receipts on forecast transactions and on recognised financial assets and financial liabilities and hedged by interest rate swaps for periods of up to 25 years. The Group hedges its net investments in foreign operations with currency borrowings and forward foreign exchange contracts.
For cash flow hedge relationships of interest rate risk the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to LIBOR, EURIBOR or the Bank of England
Included above are fair value hedging derivatives liabilities of £54 million (2006 – nil).
Note: (1) Excludes securities issued by US federal agencies and government sponsored entities.
Within 1 year within 5 years within 10 years After 10 years Total
The tables below show the fair value of available-for-sale debt securities that were in an unrealised loss position.
Fair value losses Fair value losses Fair value losses 2007 £m £m £m £m £m £m
US government, state, and federal agency 829 10 4,215 78 5,044 88
Gross gains of £475 million (2006 – £357 million) and gross losses of £9 million (2006 – £3 million) were realised on the sale of available-for-sale equity shares.
In December 2007, the Group disposed of a significant proportion of its private equity portfolio to private equity funds managed by the Group.
Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale financial assets. They include capital stock
F in a n c ia l s ta te m e n ts 16 Investments in Group undertakings
N.V., Fortis SA/NV, and Banco Santander S.A. (the consortium banks). Although the company does not control a majority of the voting rights in RFS, through the terms of the
Consortium and Shareholders’ Agreement and RFS’s Articles of Association, it controls the board of RFS and RFS is a subsidiary of the company. The capital and income rights of shares issued by RFS are linked to the net assets and income of the ABN AMRO business units which the individual consortium banks have agreed to acquire.
The above information is provided in relation to the principal related undertakings as permitted by Section 231(5) of the Companies
Act 1985. Full information on all related undertakings will be included in the Annual Return delivered to the Registrar of Companies for Scotland.
Net book value at 31 December 2007 42,369 1,967 2,643 1,513 48,492
Disposals and write-off of fully amortised assets — — (21) (33) (54)
Accumulated amortisation: Currency translation and other adjustments — (12) (7) — (19)
The Group’s goodwill acquired in business combinations is reviewed annually at 30 September for impairment by comparing the recoverable amount of each cash generating unit (CGU) to which goodwill has been allocated with its carrying value.
UK Corporate Banking Fair value less costs to sell 1,630 1,630
The recoverable amounts for all CGUs, except for Citizens were based on fair value less costs to sell. Fair value was based upon a price-earnings methodology using current earnings for each unit. Approximate price earnings multiples, validated against independent analyst information were applied to each
CGU. The multiples used for both 2007 and 2006 were in the range 9.5 – 13.0 times earnings after charging manufacturing costs.
Corporate Banking, Retail and Wealth Management principally arose from the acquisition of NatWest in 2000. The recoverable amount of these cash generating units exceeds their carrying value by over £15 billion. The goodwill allocated to RBS
Insurance principally arose from the acquisition of Churchill in 2003. The recoverable amount for RBS Insurance exceeds the carrying value by over £1.5 billion. The multiples or earnings would have to be less than one third of those used to cause the value in use of the units to equal their carrying value.
Further developments in the Group’s US businesses have led to divisionalisation on a product basis instead of the geographical basis used in 2006. The recoverable amount was based on a value in use methodology using management forecasts to 2012 (2006 – 2014). A terminal growth rate of 5%
F in a n c ia l s ta te m e n ts 18 Property, plant and equipment
Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2007 £m £m £m £m £m £m £m
Cost or valuation: Currency translation and other adjustments 96 65 1 11 12 (10) 175
Transfers to disposal groups — (4) (13) — — (422) (439)
Change in fair value of investment properties 288 — — — — — 288
Accumulated depreciation and amortisation: Currency translation and other adjustments — (4) — (1) (1) 2 (4)
Transfers to disposal groups — — — — — (52) (52)
Disposals and write-off of fully depreciated assets — (122) (32) (25) (132) (610) (921)
Expenditure on investment properties 16 — — — — — 16
Disposals and write-off of fully depreciated assets (610) (353) (44) (40) (693) (1,947) (3,687)
Accumulated depreciation and amortisation: Currency translation and other adjustments — (2) — (11) (41) (95) (149)
Contracts for future capital expenditure not provided for in the accounts at the year end (excluding investment properties and operating lease assets) 201 117
Valuations are carried out by qualified surveyors who are members of the Royal Institution of Chartered Surveyors, or an equivalent overseas body. The valuation as at 31 December 2007 for a significant majority of the Group’s investment properties was undertaken by external valuers.
(2006 – £278 million; 2005 – £250 million). Direct operating expenses of investment properties were £49 million (2006 –
19 Prepayments, accrued income and other assets Group Company £m £m £m £m
(2) Deferred tax liabilities of £977 million (2006 – £649 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation.
No taxation is expected to arise in the foreseeable future in respect of held-over gains.
F in a n c ia l s ta te m e n ts 23 Insurance liabilities
Cash paid for claims settled in the year (3,876) 94 (3,782)
Account balances paid on surrender and other terminations in the year (468) (320)
The associated liabilities are: Linked contracts classified as insurance contracts 4,398 1,713
F in a n c ia l s ta te m e n ts 24 Subordinated liabilities
The following tables analyse the remaining maturity of subordinated liabilities by (1) the final redemption date; and (2) the next callable date. Group 2007 – final redemption £m £m £m £m £m £m £m
Currently 2007 2008 2009–2011 2012–2016 Thereafter Perpetual Total 2006 – call date £m £m £m £m £m £m £m £m
F in a n c ia l s ta te m e n ts 24 Subordinated liabilities (continued)
AUD590 million 6% subordinated notes 2014 (callable October 2009) 254 235
AUD410 million floating rate subordinated notes 2014 (callable October 2009) 182 167
CAD700 million 4.25% subordinated notes 2015 (callable March 2010) 358 307
US$750 million floating rate subordinated notes 2015 (callable September 2010) 374 381 €750 million floating rate subordinated notes 2015 564 531
US$500 million floating rate subordinated notes 2016 (callable October 2011) 252 257
US$1,500 million floating rate subordinated notes 2016 (callable April 2011) 757 773
AUD450 million 6.5% subordinated notes 2017 (callable February 2012) 202 184
US$1,500 million floating rate subordinated callable step up notes due August 2017 (issued May 2007; callable August 2012) 752 —
US$125.6 million floating rate subordinated notes 2020 64 65 €1,000 million 4.625% subordinated notes 2021 (callable September 2016) 724 687 €300 million CMS linked floating rate subordinated notes due June 2022 (issued June 2007) 228 —
US$500 million subordinated loan capital 2010 floating rate notes (callable on any interest payment date) 249 256
£m £m €250 million 4.70% CMS linked subordinated notes 2019 131 —
€100 million 5.13% flip flop Bermudan callable subordinated notes 2017 (callable December 2012) 75 —
€500 million floating rate Bermudan callable subordinated lower tier 2 notes 2018 (callable May 2013) 350 —
€1,000 million floating rate Bermudan callable subordinated lower tier 2 notes 2016 (callable September 2011) 710 —
€103 million floating rate subordinated lower tier 2 notes 2020 68 —
US$1,000 million floating rate Bermudan callable subordinated lower tier 2 notes 2017 (callable January 2012) 479 —
AUD175 million 7.46% Bermudan callable subordinated lower tier 2 notes 2018 (callable May 2013) 73 —
£750 million 5% Bermudan callable subordinated upper tier 2 notes 2016 642 —
* In addition the company has issued 0.5 million subordinated loan notes of €1,000 each, 1.95 million subordinated loan notes of US$1,000 each and 0.4 million subordinated loan notes of £1,000 each. These loan notes are included in the company balance sheet as loan capital but are reclassified as minority interest Trust Preferred Securities on consolidation (see Note 25).
(3) In the event of certain changes in tax laws, dated loan capital issues may be redeemed in whole, but not in part, at the option of the issuer, at the principal amount thereof plus accrued interest, subject to prior regulatory approval.
US$350 million undated floating rate primary capital notes (callable on any interest payment date) (1) 175 178
US$1,200 million 7.648% perpetual regulatory tier one securities (callable September 2031) (1, 2) 606 618
The Royal Bank of Scotland plc £150 million 5.625% undated subordinated notes (callable June 2032) 144 144 £175 million 7.375% undated subordinated notes (callable August 2010) 183 183 €152 million 5.875% undated subordinated notes (callable October 2008) 114 105 £350 million 6.25% undated subordinated notes (callable December 2012) 354 350 £500 million 6% undated subordinated notes (callable September 2014) 517 512 €500 million 5.125% undated subordinated notes (callable July 2014) 371 350 €1,000 million floating rate undated subordinated notes (callable July 2014) 742 675 £500 million 5.125% undated subordinated notes (callable March 2016) 499 493 £200 million 5.625% subordinated upper tier 2 notes (callable September 2026) 210 210 £600 million 5.5% undated subordinated notes (callable December 2019) 595 594 £500 million 6.2% undated subordinated notes (callable March 2022) 543 546 £200 million 9.5% undated subordinated bonds (callable August 2018) (3) 228 229 £400 million 5.625% subordinated upper tier 2 notes (callable September 2026) 397 397 £300 million 5.625% undated subordinated notes (callable September 2026) 318 326 £350 million 5.625% undated subordinated notes (callable June 2032) 363 362 £150 million undated subordinated floating rate step-up notes (redeemed March 2007) — 150 £400 million 5% undated subordinated notes (callable March 2011) 402 395
JPY25 billion 2.605% undated subordinates notes (callable November 2034) 103 99
US$500 million primary capital floating rate notes, Series A (callable on any interest payment date) 251 256
First Active plc £20 million 11.75% perpetual tier two capital 23 23 €38 million 11.375% perpetual tier two capital 39 36 £1.3 million floating rate perpetual tier two capital 2 2
(5) Except as stated above, claims in respect of the Group’s undated loan capital are subordinated to the claims of other creditors. None of the Group’s undated loan capital is secured.
(7) Interest on all floating rate subordinated notes is calculated by reference to market rates.
Series F US$200 million 7.65% (redeemable at option of issuer) 100 102
Series H US$300 million 7.25% (redeemable at option of issuer) 150 153
Notes: (1) Further details of the contractual terms of the preference shares are given in Note 26 on page 179.
(2) Series C preference shares each carry a gross dividend of 8.625% inclusive of associated tax credit. Redeemable at the option of the issuer at par.
US$1,285 million 6.03% Trust Preferred V (redeemable July 2008) 438 —
US$200 million 6.25% Trust Preferred VI (redeemable September 2008) 79 —
US$1,800 million 6.08% Trust Preferred VII (redeemable February 2009) 727 —
F in a n c ia l s ta te m e n ts 26 Share capital
Allotted, called up and fully paid Authorised 1 January Issued 31 December 31 December 31 December £m £m £m £m £m
Non-cumulative convertible preference shares of £0.25 — — — 225 225
Non-voting deferred shares of £0.01 2,660,556 2,660,556 2,660,556 32,300,000 32,300,000 32,300,000
Non-cumulative preference shares of US$0.01 308,015 240,000 206,000 419,500 419,500 419,500
Non-cumulative convertible preference shares of US$0.01 1,000 1,000 1,000 3,900 3,900 3,900
Non-cumulative convertible preference shares of €0.01 — — — 3,000 3,000 3,000
Non-cumulative convertible preference shares of £0.01 200 200 200 1,000 1,000 1,000
During the year ended 31 December 2007, options were granted over 44.8 million ordinary shares under the company’s executive and sharesave schemes. At 31 December 2007, options granted under the company’s various schemes, exercisable up to 2017 at prices ranging from 260p to 700p per share, were outstanding in respect of 188.7 million ordinary shares.
In addition, options granted under the NatWest executive scheme were outstanding in respect of 1 million ordinary shares exercisable up to 2009 at prices ranging from 228p to 308p per share.
Employee share trusts purchased 10.8 million ordinary shares at a cost of £65.3 million and awarded 19.8 million ordinary shares on receipt of £79 million on the exercise of awards under employee share schemes.
The employee share trusts incurred costs of £0.4 million in purchasing the company’s ordinary shares.
E, the 10 million Series G and the 16 million Series K, noncumulative preference shares of US$0.01 each at US$25 per share.
In June 2007, the company issued 38 million Series S noncumulative preference shares of US$0.01 at US$25 each, the net proceeds being US$920 million.
In October 2007, the company issued: (a) 26,000 Series 3 non-cumulative preference shares of €0.01 at €50,000 each, the net proceeds being €1,287 million; (b) 750,000 Series 1 non-cumulative preference shares of £1 at £1,000 each, the net proceeds being £742 million; and
The costs of issue and discounts allowed on preference shares issued during the year were £64 million.
Under IFRS certain of the Group’s preference shares are classified as debt and are included in subordinated liabilities on the balance sheet.
In October 2007, the company issued the following subordinated securities in the legal form of debt that are classified as equity under IFRS: (a) US$1,600 million fixed/floating rate preferred capital securities, the net proceeds being US$1,584 million; and
(b) CAD600 million innovative tier 1 bonds, the net proceeds being CAD594 million.
Under existing arrangements, no redemption or purchase of any non-cumulative preference shares may be made by the company without the prior consent of the UK Financial
Holders of the non-cumulative preference shares are not entitled to receive notice of or attend general meetings of the company except if any resolution is proposed for adoption by the shareholders of the company to vary or abrogate any of the rights attaching to the non-cumulative preference shares or proposing the winding-up or liquidation of the company. In any such case, they are entitled to receive notice of and to attend the general meeting of shareholders at which such resolution is to be proposed and are entitled to speak and vote on such resolution (but not on any other resolution). In addition, in the event that, prior to any general meeting of shareholders, the company has failed to pay in full the three most recent quarterly dividend payments due on the non-cumulative dollar preference shares (other than Series U), the two most recent semi-annual dividend payments due on the non-cumulative convertible dollar preference shares and the most recent dividend payments due on the non-cumulative euro preference shares, the non-cumulative sterling preference shares, the
Bonus issue of ordinary shares 1,576 — — 1,576 — —
Shares issued during the year 139 2 6 139 2 6
Shares repurchased during the year — (13) — — (13) —
Securities issued during the year 1,073 — — 1,073 — —
Realised gains in the year (513) (313) (582) — — —
Implementation of IAS 32 and IAS 39 on 1 January 2005 — — 67 — — (13)
Amount transferred from equity to earnings in the year (1) (138) (140) (85) 3 3 6
Foreign currency (losses)/gains on hedges of net assets (963) 818 (799) — — —
Note: (1) Of the amount transferred to earnings, £138 million (2006 – £140 million; 2005 – £85 million) was recorded in net interest income and nil (2006 and 2005 – nil) in other operating income.
Implementation of IAS 32 and IAS 39 on 1 January 2005 — — (1,078) — — 81
Profit attributable to ordinary and equity preference shareholders 7,549 6,393 5,501 2,499 3,499 2,074
Redemption of preference shares classified as debt (159) (271) — (159) (271) —
Actuarial gains/(losses) recognised in retirement benefit schemes, net of tax 1,517 1,262 (561) — — —
Net cost of shares bought and used to satisfy share-based payments (40) (38) — — — —
Share-based payments, net of tax 8 80 112 — — —
Paid-in equity represents notes issued under the company’s euro medium term note programme with par value of
US$1,600 million and CAD600 million that are classified as equity under IFRS. The notes attract coupons of 6.99% and 6.666% respectively until October 2017 when they increase to 2.67% above the London interbank offered rate for 3-month US
Within 1 but within After 5 year 5 years years Total 2007 £m £m £m £m
Contracts for future capital expenditure not provided for at the year end
F in a n c ia l s ta te m e n ts
The tables below give details of the unguaranteed residual values included in the carrying value of finance lease receivables
(see page 148) and operating lease assets (see page 164). Year in which residual value will be recovered
Within 1 but within but within After 5 year 2 years 5 years years Total
The Group enters into securities repurchase agreements and securities lending transactions under which it receives or transfers collateral in accordance with normal market practice. Generally, the agreements require additional collateral to be provided if the value of the securities fall below a predetermined level.
and US markets, the recipient of collateral has an unrestricted right to sell or repledge it, subject to returning equivalent securities on settlement of the transaction.
In the normal course of business, the Group arranges securitisations to facilitate client transactions and undertakes securitisations to sell financial assets or to fund specific portfolios of assets. The Group also acts as an underwriter and depositor in securitisation transactions involving both client and proprietary transactions. In a securitisation, assets, or interests in a pool of assets, are transferred generally to a special purpose entity (“SPE”) which then issues liabilities to third party investors.
SPEs are also used in fund management activities to segregate custodial duties from the fund management advice provided by the Group.
Securitisations may, depending on the individual arrangement, result in continued recognition of the securitised assets; continued recognition of the assets to the extent of the
Other securitisations – other loans originated by the Group have been transferred to SPEs funded through the issue of notes. Any proceeds from the loans in excess of the amounts required to service and repay the notes are payable to the
In certain securitisations of US residential mortgages, substantially all the risks and rewards have been neither transferred nor retained, but the Group has retained control, as defined by IFRS, of the assets and continues to recognise the assets to the extent of its continuing involvement which takes the form of retaining certain subordinated bonds issued by the securitisation SPEs. These bonds have differing rights and, depending on their terms, they may expose the Group to interest rate risk where they carry a fixed coupon or to credit risk depending on the extent of their subordination. Certain bonds entitle the Group to additional interest if the portfolio performs better than expected and others give the Group the right to prepayment penalties received on the securitised mortgages. At 31 December 2007, securitised assets were £18.1 billion (2006 – £37.3 billion); retained interests £1,037 million (2006 – £930 million); subordinated assets £314 million
The Group Board of directors sets the overall risk appetite and philosophy; the risk and capital framework underpins delivery of the Board’s strategy.
Risk appetite is measured as the maximum level of retained risk the Group will accept to deliver its business objectives.
• Market risk: the Group is exposed to market risk because of positions held in its trading portfolios and its non-trading businesses.
• Policies and risk appetite: policies provide a clear framework for the assessment, approval, monitoring and management of credit risk where risk appetite sets the tolerance of loss.
• Models: credit models are used to measure and assess risk decisions and to aid on-going monitoring. Measures, such as Probability of Default, Exposure at Default, Loss Given
• Risk systems and data quality: systems are well organised to produce timely, accurate and complete inputs for risk reporting and to administer key credit processes.
• Stress testing: stress testing forms an integral part of portfolio analysis, providing a measure of potential vulnerability to exceptional but plausible economic and geopolitical events which assists management in the identification of risk not otherwise apparent in more benign circumstances. Stress testing informs risk appetite decisions.
• Problem debt identification: policies and systems encourage the early identification of problems and the employment of specialised staff focused on collections and problem debt management.
Credit risk models are used throughout the Group to support the analytical elements of the credit risk management framework, in particular the risk assessment part of the credit approval process, ongoing monitoring as well as portfolio analysis and reporting. Credit risk models used by the Group can be broadly grouped into three categories.
REIL and PPL as % of customer loans and advances – gross (5) 1.64% 1.57%
(3) Troubled debt restructurings represent loans that have been restructured following the granting of a concession by the Group to the borrower.
Provisions for impairment losses are assessed under three categories as described below: Individually assessed provisions are the provisions required for individually significant impaired assets which are assessed on a case by case basis, taking into account the financial condition of the counterparty and any guarantor. This incorporates an estimate of the discounted value of any recoveries and realisation of security or collateral. The asset continues to be assessed on an individual basis until it is repaid in full, transferred to the performing portfolio or written-off.
The following table shows an analysis of the loan impairment charge.
Charge as a % of customer loans and advances – gross (1) 0.30% 0.46% 0.46%
Liquidity management within the Group focuses on overall balance sheet structure and the control, within prudent limits, of risk arising from exposure to the mismatch of maturities across the balance sheet and from undrawn commitments and other contingent obligations. The management of liquidity risk within the Group is undertaken within limits and other policy parameters set by Group Asset and Liability Management
Committee (GALCO). Compliance is monitored and coordinated by Group Treasury both in respect of internal policy and the regulatory requirements of the Financial
During 2007, the Group’s funding sources remained well diversified by counterparty, instrument and maturity, both before and after the acquisition of ABN AMRO in October 2007.
Loans and advances to customers as a % of customer accounts (excluding repos) 126.6% 127.4%
By remaining maturity up to one month: Deposits by banks (excluding repos) 112,181 36,089
Less: loans and advances to banks (gross, excluding reverse repos) (25,609) (21,136)
Company 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
the principal amounts of financial liabilities that are repayable after 20 years or where the counterparty has no right to repayment of the principal are excluded from the table as are interest payments after 20 years.
Group’s life assurance businesses with a carrying value of £5.6 billion (2006 – £2.2 billion) are excluded from this analysis as their repayment is linked directly to the financial assets backing these contracts.
Market risk is defined as the risk of loss resulting from adverse changes in risk factors such as interest rates, foreign currency and equity prices together with related factors such as market volatilities.
Group uses historical simulation models in computing VaR. This approach, in common with many other VaR models, assumes that risk factor changes observed in the past are a good estimate of those likely to occur in the future and is, therefore, limited by the relevance of the historical data used. The Group’s method, however, does not make any assumption about the nature or type of underlying loss distribution. The Group typically uses the previous 500 trading days of market data.
The table below summarises the Group’s other contractual cash obligations by payment date.
Contractual obligations to purchase goods or services 441 1,007 748 199 5 2
While the Group has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the counterparty. The Group does not expect all facilities to be drawn, and some may lapse before drawdown.
£0.6 million) and the average £3.7 million (2006 – £2.4 million).
Group’s trading portfolios but without discount factors. Net accrual income exposures are measured and controlled in terms of sensitivity over time to movements in interest rates.
The primary focus of the Group’s trading activities is client facilitation – providing products to the Group’s client base at competitive prices. The Group also undertakes: market making
The exposure in Chinese RMB arises from the Group’s strategic investment in Bank of China.
Retranslation gains and losses on the Group’s net investments in operations together with those on instruments hedging these investments are recognised directly in equity. Changes in foreign currency exchange rates will affect equity in proportion to the structural foreign currency exposure. A five percent strengthening of foreign currencies would result in a loss of £1,140 million (2006 – £670 million) recognised in equity. A five percent weakening of foreign currencies would result in a gain of £1,200 million (2006 – £710 million) recognised in equity.
Group’s non-trading income and reserves arising from changes in equity prices/income.
Risk is managed within limits approved by GALCO through the execution of cash and derivative instruments. Execution of the hedging is carried out by the relevant division through the
Group’s treasury function. The residual risk position is reported to divisional asset and liability committees, GALCO and the
Reserving risk relates to both premiums and claims. It is the risk that reserves are assessed incorrectly such that insufficient funds have been retained to pay or handle claims as the amounts fall due. Claims development data provides information on the historical pattern of reserving risk.
Current estimate of cumulative claims 3,057 3,310 3,351 4,026 3,994 4,621 22,359
Estimate of ultimate claims costs: At end of accident year 2,584 3,215 3,514 4,168 4,215 4,572 22,268
Claims experience is quite variable, due to a wide range of factors, but the principal ones are age, sex and driving experience of the driver, type and nature of vehicle, use of vehicle and area.
Group’s experience under motor insurance, including operational risk, reserving risk, premium rates not matching claims inflation rates, the weather, the social, economic and legislative environment and reinsurance failure risk.
Liability insurance is written on an occurrence basis, and is subject to claims that are identified over a substantial period of time, but where the loss event occurred during the life of the policy.
In 2007 the Group moved from the UK 80 series to the 00 series for mortality. In Europe there is an aggregate mortality rate of 1,117 deaths per million per annum (aged 40).
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 an additional voluntary buffer above the regulatory minimum.
Contracts under which the Group does not accept significant insurance risk are classified as investment contracts. Long term business provisions are calculated in accordance with the UK accounting standard FRS 27 ‘Life Assurance’.
Estimations (assumptions) including future mortality, morbidity, persistency and levels of expenses are made in calculating actuarial reserves. Key metrics include:
Assurance mortality/morbidity Increase in mortality/morbidity rates for assurance contracts of 5%
Annuitant mortality Reduction in mortality rates for annuity contracts of 5%
AMRO are not material). In reality, such an occurrence is unlikely, due to correlation between the assumptions and other factors. It should also be noted that these sensitivities are nonlinear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that assets and liabilities are actively managed and may vary at the time that any actual market movement occurs.
F in a n c ia l s ta te m e n ts 32 Capital resources
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 FSA. The FSA uses Risk Asset Ratio (“RAR”) as a measure of capital adequacy in the UK banking sector, comparing a bank’s capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are
with a tier 1 component of not less than 4%. The Group has complied with the FSA’s capital requirements throughout the year.
A number of subsidiaries and sub-groups within the Group, principally banking and insurance entities, are subject to various individual regulatory capital requirements in the UK
Commitments to lend – under a loan commitment the Group agrees to make funds available to a customer in the future.
Loan commitments, which are usually for a specified term may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived.
In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group’s financial statements.