Divisional review 13 Corporate Markets 15 Retail Markets 17 Ulster Bank 18 Citizens 19 RBS Insurance 20 Manufacturing 21 ABN AMRO
Group operating profit 10,282 9,414 * operating profit for each division is profit before tax, purchased intangibles amortisation and integration costs and after allocation of Manufacturing costs where appropriate.
** prior year data have been restated to reflect the two for one bonus issue of ordinary shares in May 2007.
Personal Finance joint venture. In 2007 we expanded our UK businesses and see attractive options for continued organic growth.
Ulster Bank became part of RBS on the acquisition of NatWest in 2000, giving the Group a presence in retail and corporate banking across the island of Ireland. In recent years we have achieved strong organic growth in corporate markets in continental Europe and the Nordic region through
GBM. With the acquisition of ABN AMRO, GBM ranks number one in
SME banking. Retail issues credit and charge cards and other financial products through RBS, NatWest and other brands, including MINT, First Active UK and Tesco Personal
Ulster Bank, including First Active, provides a comprehensive range of financial services across the island of Ireland. Retail
� Business lending grew by 29%, spread across a variety of industrial sectors.
At the time of the bid for ABN AMRO we indicated our intention to rebuild our capital ratios. We remain committed to this goal, and the improved financial returns now expected on the acquisition will help to accelerate delivery of the Group’s capital regeneration commitments.
We continued to build GBM around the globe, making significant investments in people, infrastructure and technology to support growth and develop new product capabilities. Our Beijing office attained branch status, enabling us to deliver a wider range of products to clients in China. We moved to new premises in Paris to accommodate growth.
Tesco Personal Finance celebrated its tenth birthday, attracting 1.6 million new accounts, taking the total above 5.2 million.
Coutts’ UK regional expansion programme continued and outside the UK, momentum was maintained particularly in the Asia-Pacific region. From the beginning of 2008 we have re-branded Coutts International as RBS Coutts to draw on the global brand strength of the Group.
D iv is io n a l re v ie w
R e s p o n s ib il it y
We recognise that some people’s financial needs may be better fulfilled by organisations outside the banking sector and we work with Third Sector bodies to improve the provision of affordable credit to people on low incomes. In January, RBS
Presentation’ and IFRS 4 ‘Insurance Contracts’ from 1 January 2005 without restating its 2004 income statement and balance sheet. The date of transition to IFRS for the Group and the company and the date of their opening IFRS balance sheets was 1 January 2004.
corporations and institutions. GBM’s principal activity in the US is conducted through RBS Greenwich Capital.
First Active UK, Direct Line Financial Services and Lombard Direct, all of which offer products to customers through direct channels principally in the UK. In continental Europe, Retail offers a similar range of products through the RBS and Comfort Card brands.
In addition, it contemplates activities taking place simultaneously in a number of businesses and jurisdictions. Implementation of the reorganisation and the realisation of the forecast benefits within the planned timescales will be challenging. Execution of the restructuring requires management resource previously devoted to Group businesses and the retention of appropriately skilled ABN AMRO staff. The Group may not realise the benefits of the restructuring when expected or at all.
Basic earnings per ordinary share increased by 15%, from 56.5p to 64.9p. Earnings per ordinary share adjusted for purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries increased by 14%, from 58.6p to 66.7p.
As a result, net interest income has been adjusted by £85 million (2006 – £63 million; 2005 – £59 million).
(2) Interest income has been adjusted by £313 million (2006 – £215 million; 2005 – £115 million) and interest expense by £536 million (2006 – £465 million; 2005 – £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.
Global Banking & Markets in respect of US mortgage-related and leveraged finance exposures. Non-interest income represents 59% of total income (2006 – 62%). Excluding general insurance premium income, non-interest income rose by 8%, £905 million to £12,338 million.
December 2007. The portfolio consisted predominantly of commercial mortgages originated in Europe. The Group hedges some of its positions with counterparties including financial guarantors. At 31 December 2007 the Group had £2.5 billion of derivative exposure to financial guarantors.
Integration costs in 2007 were £108 million compared with £134 million in 2006 and £458 million in 2005 comprising amortisation of internally developed software and other expenditure. Software costs were previously written-off as incurred under UK GAAP but under IFRS are now amortised over 3-5 years. All software relating to the NatWest integration was fully amortised by the end of 2005. The balance of integration costs principally relates to the integration of
B u s in e s s r e v ie w 2007 compared with 2006
Asia. Overall corporate credit conditions remained benign, and impairment losses represented 0.1% of loans and advances to customers. Risk-weighted assets rose by 11%.
Global Banking & Markets (GBM) achieved strong performances in many of its businesses in 2007, with particularly strong growth in interest rate and currency trading activities, but financial results were held back by challenging credit market conditions in the second half of the year.
In our cards and direct finance business, we have maintained our focus on credit card sales through the branch channel, where new business sales were up 47% on 2006, while continuing to take a cautious view on direct sales. Our cards acquiring business continued to grow market share, strengthening its market leading position with an 11% increase in transactions in 2007.
Wealth Management’s offering of private banking and investment services continued to deliver very strong growth in income, up 16% in 2007 to £1,028 million. Contribution grew by 21% to £558 million and operating profit by 30% to £413 million.
Non-interest income grew by 17% to £459 million, reflecting higher investment management fees and new product sales, including new investment vehicles specialising in private equity and natural resources, as well as continued growth in underlying new business volumes, particularly in the UK and
Company and our offshore businesses helped us to achieve an overall increase in client numbers of 5%. Coutts UK customers rose by 9%. Outside the UK, Coutts International was successful in the Asia-Pacific region in recruiting additional experienced private bankers. We grew customer numbers in the region by 13% and income by 24%.
Ulster Bank made strong progress in both personal and corporate banking in the Republic of Ireland and in Northern
Total expenses increased by 10% to £600 million, as we continued our investment programme to support the future growth of the business. We recruited additional customerfacing staff, particularly in corporate banking, opened three new business centres and continued with our branch improvement programme. By the end of 2006, 70% of
Non-interest income rose by 1% to $2,295 million. Business and corporate fees rose strongly, with good results especially in foreign exchange, interest rate derivatives and cash management, driven by increasing cooperation with RBS
Customer Support and other operations held costs virtually flat at £966 million and, like Group Technology, achieved significant improvements in productivity. At the same time we maintained our focus on service quality, and our UK-based telephony centres continued to record market-leading customer satisfaction scores. Our investment in ‘lean manufacturing’
approaches across our operational centres is expected to deliver further improvements in efficiency.
Total assets of £1,900.5 billion at 31 December 2007 were up £1,029.1 billion compared with 31 December 2006, of which £774.2 billion relates to the acquisition of ABN AMRO. Excluding
Deposits by banks rose by £180.5 billion to £312.6 billion of which repurchase agreements and stock lending (“repos”) were up £86.7 billion to £163.0 billion. Excluding ABN AMRO, deposits by banks rose by £10.7 billion, 8% to £142.8 billion. Inter-bank deposits were up £11.9 billion, 21% at £67.7 billion, partially offset by a reduction in repos down £1.2 billion, 2% to £75.1 billion.
The major factors contributing to the net cash inflow of £4,140 million from operating activities in 2005 were the profit before tax of £7,936 million less elimination of foreign exchange differences of £3,060 million, increases in deposits and debt securities in issue of £56,571 million, and increases in short positions and settlement balances of £10,326 million, partially offset by increases in securities of £28,842 million and increases in loans and advances of £36,778 million.
The following table analyses the Group’s regulatory capital resources at 31 December: £m £m £m £m £m
Reverse repurchase agreements as at 31 December 2007 were £318.3 billion (2006 – £117.1 billion), an increase of £201.2 billion of which £171.6 billion arose from the acquisition of ABN AMRO.
Excluding ABN AMRO, the Group’s net surplus of marketable assets over net short-term wholesale liabilities due within one month increased by £43.8 billion, reflecting actions taken by the Group to increase its liquidity cover in response to market conditions. Including ABN AMRO, the net surplus of marketable assets over net short-term wholesale liabilities due within one month was £84.6 billion.
August 2007 the conduits were generally able to continue to issue rated CP albeit at generally shorter maturities and higher price levels than previously. There was an increased shortage of market liquidity, particularly in November and December, for longer dated issuance (i.e. over 1 month) as the year end approached. RBS and RBS Greenwich Capital Markets act as dealers to the conduits’ CP issuance programmes and have purchased CP in that capacity but such holdings have not generally been material. The majority of the ABN AMRO
During 2007, increased regulatory focus and the need for international coordination of liquidity risk management has been highlighted by external market conditions.
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.
Stress test exposures are discussed with senior management and are reported to GRC, GEMC and the Board. Breaches in the Group’s market risk stress testing limit are reported to GRC,
The limits applied to these measures are set to parallel movements of +/-1% and +/-2%. The EVE methodology captures deposit re-pricing strategies and the embedded option risks that exist within both the investment portfolio of mortgage-backed securities and the consumer loan portfolio.
The Group is exposed to insurance risk, either directly through its businesses or through using insurance as a tool to reduce other risk exposures.
Commission is inquiring into MasterCard cross border interchange fees and has announced that its inquiry into retail banking has identified barriers to competition in certain areas of retail banking, payment systems and cards.
Trust, a non-executive director of Bank of China Limited and a former president of the Chartered Institute of
Appointed to the Board in March 2000, Gordon Pell was formerly group director of Lloyds TSB UK Retail
Banking before joining National Westminster Bank Plc as a director in February 2000 and then becoming
Chief Executive, Retail Banking. He is also a director of Race for Opportunity and a member of the FSA
MacHale is currently the senior independent director and chairman of the audit committee of Morgan
He is a former group chief executive of CGNU plc (now
Employees also participate in bonus incentive plans specific to their business and share in the Group’s ongoing success through the Profit Share, Buy As You Earn and Sharesave schemes, which align their interests with those of shareholders.
During 2007, the development of global health, safety and wellbeing arrangements has been a key priority, to ensure equitable standards of health and safety for all Group employees. The Employee Assistance Programme, which provides advice on a range of personal and work related matters, has been further enhanced and the coverage extended during the year.
Companies House in the UK or by writing to the Group
Steve Robson and Guy Whittaker will retire and offer themselves for re-election at the company’s Annual General
The interests of the directors in the shares of the company at 31 December 2007 are shown on page 115. None of the directors held an interest in the loan capital of the company or in the shares and loan capital of any of the subsidiary undertakings of the company, during the period from 1
The total amount given for charitable purposes by the company and its subsidiary undertakings during the year ended
Group strategy and monitors performance. The Board has adopted a formal schedule of matters detailing key aspects of the company’s affairs reserved to it for its decision. This schedule is reviewed annually.
The Board has undertaken a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
Committee was also undertaken internally in late 2007 using a detailed questionnaire and meetings with Audit Committee members and attendees.
The Board has established a process for the identification, evaluation and management of the significant risks faced by the Group, which operated throughout the year ended 31 December 2007 and to 27 February 2008, the date the directors approved the Report and Accounts. This process is regularly reviewed by the Board and meets the requirements of the guidance ‘Internal Control: Revised
RBS Risk Management and Group Internal Audit. In addition, the Group’s independent auditors present to the Audit
Executive and the Group Finance Director to certify that, as at 31 December 2007, the company’s disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the company and its consolidated subsidiaries would be made known to them by others within those entities.
Resources and the Group Secretary and General Counsel on general remuneration matters. In addition, the Remuneration
Wyatt provided professional services in the ordinary course of business, including actuarial advice and benefits administration services to subsidiaries of the Group and investment consulting and actuarial advice to the trustees of some of the Group’s pension funds. Mercer provided advice and support in connection with a range of compensation benefits, pension actuarial and investment matters. The advisers to the Remuneration Committee are appointed independently by the Committee, which reviews its selection of advisers annually. The Committee is satisfied that the consultants from Watson Wyatt and Mercer who advise the
Board on the remuneration arrangements for the executive directors and the Chairman. The Remuneration Committee also approves the remuneration arrangements of senior executives below Board level who are members of the Group Executive
ABN AMRO in the comparator group for awards made in 2006 and 2007, and also for awards to be made in 2008.
Performance Plan. Executive directors have a period of five years in which to build up their shareholdings to meet the guideline levels.
(2) Mr Scott’s senior independent director fee covers all Board and Board Committee work including Chairmanship of the Remuneration Committee.
No variation was made to any of the terms of the plan during the year. The performance measures are detailed on pages 106 and 107.
Listing Rules of the Financial Services Authority, and we report if it does not.
Net (gains)/losses taken to earnings (138) (140) (85) 3 3 6
Net cash (outflow)/inflow from trading activities (215) 15,690 6,570 2,785 4,002 2,381
Gains and losses arising from changes in the fair value of a derivative are recognised as they arise in profit or loss unless the derivative is the hedging instrument in a qualifying hedge.
There are two components to the Group’s loan impairment provisions: individual and collective.
Equity securities (held-for-trading, designated as at fair value though profit or loss and available-for-sale) – comprise equity shares of companies or corporations both listed and unlisted.
(exchange-traded) or over-the-counter (OTC). Holders of exchange traded derivatives are generally required to provide margin daily in the form of cash or other collateral.
Swaps include currency swaps, interest rate swaps, credit default swaps, total return swaps and equity and equity index swaps. A swap is an agreement to exchange cash flows in the future in accordance with a pre-arranged formula. In currency swap transactions, interest payment obligations are exchanged on assets and liabilities denominated in different currencies; the exchange of principal may be notional or actual. Interest rate swap contracts generally involve exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts.
Fair value defined pension Fair value defined pension of plan benefit deficit/ of plan benefit deficit/ assets obligations (surplus) assets obligations (surplus)
Notes: (1) Comprises treasury bills and similar securities of £16,315 million (2006 – £5,407 million) and other eligible bills of £1,914 million (2006 – £84 million).
Loans and advances to banks 187,969 31,491 219,460 82,193 413 82,606
(3) There is no provision for impairment losses in the company.
US government, state, and federal agency 99 4.6 167 4.9 1,431 4.2 5,170 5.2 6,867 5.0
Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows: Company £m £m
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary and preference shares which are unlisted with the exception of certain preference shares issued by NatWest. The Royal Bank of
Disposals and write-off of fully amortised assets — — (1) (80) (81)
US$36 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) 18 —
US$75 million floating rate perpetual capital securities (redeemed October 2007) — 38
Actuarial gains recognised in retirement benefit schemes, net of tax 19 —
• Portfolio management: active management of portfolio concentrations as measured by risk reporting and stress testing, where credit risk may be mitigated through promoting asset sales, buying credit protection or curtailing risk appetite for new transactions.
• Loss given default (“LGD”): models estimate the economic loss that may occur in the event of default, being the debt that cannot be recovered. The Group’s LGD models take into account the type of borrower, facility and any risk mitigation such as security or collateral held.
The sub-categories of REIL and PPL are calculated as described in notes 1 to 4 below.
Services Authority. In addition, all subsidiaries and branches outside the UK ensure compliance with any local regulatory liquidity requirements and are subject to Group Treasury oversight.
The Group is exposed to market risk because of positions held in its trading portfolios as well as its non-trading business including the Group’s treasury operations.
The Group’s portfolios of non-trading financial instruments mainly comprise loans (including finance leases), debt securities, equity shares, deposits, certificates of deposit and other debt securities issued, loan capital and derivatives. To reflect their distinct nature, the Group’s long-term assurance assets and liabilities attributable to policyholders have been excluded from these market risk disclosures.
Estimate of ultimate claims costs: At end of accident year 3,013 3,658 3,710 4,265 4,269 4,621 23,536
Contingent liabilities: Guarantees and assets pledged as collateral security 27,943 5,626 2,226 10,646 46,441 10,725
in its interim financial statements for the six months ended 30
Loans and advances written-off net of recoveries (1,781) (1,626) (1,870) — — —
(4) Valued at an average price of 512p per ordinary 25p share based on the closing price on the trading day immediately prior to the date of exchange.
RFS Holdings minority interest 3,114 (399) 2,715 — — — — — —
The captions in the Group’s primary financial statements include the following amounts attributable, in aggregate, to key management: 41 Transactions with directors, officers and others
However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under
Loans and advances to customers – net 829,250 466,893 417,226 347,251
The Group’s loan control and review procedures do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the
Ltd, which is run as a separate division within the Group.
Bishopsgate and the Drummond House administration centre located at South Gyle, Edinburgh.
US. All other shares were predominantly held by shareholders registered outside the US.
receipt of the dividend. The amount of any dividend income paid in pounds sterling or euros will be a US dollar amount calculated by reference to the relevant exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into US dollars. If the dividend is converted into US dollars on the date of receipt, the US Holder generally should not be required to recognise foreign currency gain or loss in respect of the dividend income. If the amount of such dividend is not converted into US dollars on the date of receipt, the US Holder may have foreign currency gain or loss.
Holder carries on a trade, profession or vocation in the UK
A US Holder who is liable for both UK and US tax on a gain recognised on the disposal of an ordinary share, a noncumulative dollar preference share, an ordinary ADS or a preference ADS will generally be entitled, subject to certain limitations, to credit the UK tax against its US federal income tax liability in respect of such gain.
in an amount equal to the difference between the amount realised (excluding any amount in respect of mandatory interest and any missed payments which are to be satisfied on a missed payment satisfaction date, which would be treated as ordinary income) and the US Holder’s tax basis in the PRO.
A US Holder who is liable for both UK and US tax on gain recognised on the disposal of PROs will generally be entitled, subject to certain limitations, to credit the UK tax against its US
(ii) the undated nature of the PROs, provided that at the time an interest payment is made, the PROs are not held by a company which is ‘associated’ with the company or by a
A foreign corporation will be a PFIC in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable