As
filed with the Securities and Exchange Commission on May 14, 2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
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(Mark
One)
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o
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
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OR
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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OR
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o
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Date of
event requiring this shell company report ___________
For the
transition period from ___________ to ___________
Commission
file number 001-10306
THE
ROYAL BANK OF SCOTLAND GROUP plc
(Exact
name of Registrant as specified in its charter)
United
Kingdom
(Jurisdiction
of incorporation or organization)
RBS
Gogarburn, PO Box 1000, Edinburgh EH12 1HQ
(Address
of principal executive offices)
Miller
McLean, Group General Counsel and Group Secretary, Tel: +44 (0) 131 523 2333,
Fax: +44 (0) 131 626 3081,
PO Box
1000, Gogarburn, Edinburgh EH12 1HQ
(Name, Telephone, E-mail
and/or Facsimile number
and Address of Company
Contact Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Name
of each exchange on which registered
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American
Depositary Shares, each representing one ordinary share, nominal value
£0.25 per share
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New
York Stock Exchange
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Ordinary
shares, nominal value £0.25 per share
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New
York Stock Exchange**
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American
Depositary Shares Series E*, F, G*, H, K*, L, M, N, P, Q, R, S, T and U
each representing one Non-Cumulative Dollar Preference Share, Series E, F,
G, H, K, L, M, N, P, Q, R, S, T and U respectively
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New
York Stock Exchange
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Dollar
Perpetual Regulatory tier one securities, Series 1
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New
York Stock Exchange
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* Redeemed
on January 16, 2007
** Not for
trading, but only in connection with the registration of American Depositary
Shares representing such ordinary shares pursuant to the requirements of the
Securities and Exchange Commission.
Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of December 31, 2007, the close of the period covered by the
annual report:
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Ordinary
shares of 25 pence each
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10,006,215,087
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Non-cumulative
dollar preference shares, Series F, H and L to U
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308,015,000
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Non-voting
Deferred Shares
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2,660,556,304
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Non-cumulative
convertible dollar preference shares, Series 1
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1,000,000
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11%
cumulative preference shares
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500,000
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Non-cumulative
euro preference shares, Series 1 to 3
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2,526,000
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5½%
cumulative preference shares
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400,000
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Non-cumulative
convertible sterling preference shares, Series 1
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200,000
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| Non-cumulative sterling preference shares, Series 1 | 750,000 |
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act
Yes
x
No
o
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes
o
No
x
Note —
checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
x
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Accelerated
filer
o
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Non-accelerated
filer
o
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Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP
o
International
Financial Reporting Standards as issued by the International Accounting
Standards Board
x
Other
o
If “Other”
has been checked in response to the previous question, indicate by check mark
which
financial
statement item the registrant has elected to follow.
Item 17
o
Item 18
o
If this is
an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
(APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes
o
No
o
SEC
Form 20-F cross reference guide
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Item
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Item
Caption
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Pages
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9
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The Offer and
Listing
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Offer and
listing details
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224-225
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Plan of
distribution
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Not
applicable
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Markets
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223
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Selling
shareholders
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Not
applicable
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Dilution
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Not
applicable
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Expenses of
the issue
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Not
applicable
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10
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Additional
Information
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Share
capital
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Not
applicable
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Memorandum and
articles of association
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231-235
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Material
contracts
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218
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Exchange
controls
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231
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Taxation
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227-230
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Dividends and
paying agents
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Not
applicable
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Statement of
experts
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Not
applicable
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Documents on
display
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236
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Subsidiary
information
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Not
applicable
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11
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Quantitative
and Qualitative Disclosure about Market Risk
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51-71,
127-135, 138-139, 167-180
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12
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Description of
Securities other than Equity Securities
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Not
applicable
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Business
review
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2
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Presentation
of information
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3
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Forward-looking
statements
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4
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Description of
business
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13
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Risk
factors
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16
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Financial
highlights
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17
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Summary
consolidated income statement
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20
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Analysis of
results
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29
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Divisional
performance
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47
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Consolidated
balance sheet
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49
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Cash
flow
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50
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Capital
resources
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51
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Risk and
capital management
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Presentation
of information
In
this document, and unless specified otherwise, the term ‘company’ means The
Royal Bank of Scotland Group plc, ‘RBS’ or the ‘Group’ means the company and its
subsidiary undertakings, ‘the Royal Bank’ means The Royal Bank of Scotland plc
and ‘NatWest’ means National Westminster Bank Plc.
The
company publishes its financial statements in pounds sterling (“£” or
“sterling”). The abbreviations ‘£m’ and ‘£bn’ 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’ represent cents in the US. The abbreviation ‘€’ represents
the ‘euro’, the European single currency and the abbreviations ‘€m’ and ‘€bn’
represent millions and thousands of millions of euros,
respectively.
Certain information
in this report is presented separately for domestic and foreign activities.
Domestic activities primarily consist of the UK domestic transactions of the
Group. Foreign activities comprise the Group’s transactions conducted through
those offices in the UK specifically organised to service international banking
transactions and transactions conducted through offices outside the
UK.
The
geographic analysis in the average balance sheet and interest rates, changes in
net interest income and average interest rates, yields, spreads and margins in
this report have been compiled on the basis of location of office – UK and
overseas. Management believes that this presentation provides more useful
information on the Group’s yields, spreads and margins of the Group’s activities
than would be provided by presentation on the basis of the domestic and foreign
activities analysis used elsewhere in this report as it more closely reflects
the basis on which the Group is managed. ‘UK’ in this context includes domestic
transactions and transactions conducted through the offices in the UK which
service international banking transactions.
The
results, assets and liabilities of individual business units are classified as
trading or non-trading based on their predominant activity. Although this method
may result in some non-trading activity being classified as trading, and vice
versa, the Group believes that any resulting misclassification is not
material.
International
Financial Reporting Standards
As
required by the Companies Act 1985 and Article 4 of the European Union IAS
Regulation, the consolidated financial statements of the Group are prepared in
accordance with International Financial Reporting Standards issued by the
International Accounting Standards Board (“IASB”) and interpretations issued by
the International Financial Reporting 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 ‘First-time Adoption of International
Financial Reporting Standards’
to implement IAS 39
‘Financial Instruments: Recognition and Measurement’, IAS 32 ‘Financial
Instruments: Disclosure and 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.
The
Group’s published 2004 financial statements were prepared in accordance with
then current UK generally accepted accounting principles (“UK GAAP” or “previous
GAAP”) comprising standards issued by the UK Accounting Standards Board,
pronouncements of the Urgent Issues Task Force, relevant Statements of
Recommended Accounting Practice and provisions of the Companies Act
1985.
Acquisition
of ABN AMRO
On
17 October 2007, RFS Holdings B.V. (“RFS Holdings”), a company jointly owned by
RBS, Fortis N.V., Fortis SA/NV and Banco Santander S.A. (the “Consortium Banks”)
and controlled by RBS, completed the acquisition of ABN AMRO Holding N.V. (“ABN
AMRO”).
In
due course, RFS Holdings will implement an orderly separation of the business
units of ABN AMRO with RBS retaining the following ABN AMRO business
units:
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·
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Continuing
businesses of Business Unit North
America;
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·
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Business Unit
Global Clients and wholesale clients in the Netherlands (including former
Dutch wholesale clients) and Latin America (excluding
Brazil);
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·
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Business Unit
Asia (excluding Saudi Hollandi);
and
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·
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Business Unit
Europe (excluding Antonveneta).
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Certain other assets
will continue to be shared by the Consortium Banks.
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 in RFS Holdings are
included in minority interests.
Forward-looking
statements
Certain sections in
this document contain ‘forward-looking statements’ as that term is defined in
the United States Private Securities Litigation Reform Act of 1995, such as
statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’,
‘believes’, ‘should’, ‘could’, ‘intend’, ‘plan’, ‘probability’, ‘risk’,
‘Value-at-Risk (“VaR”)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘will’,
‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar
expressions.
In
particular, this document includes forward-looking statements relating, but not
limited, to possible future write-downs and RBS's capital planning projections,
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.
Other factors that
could cause actual results to differ materially from those estimated by the
forward-looking statements contained in this document include, but are not
limited to:
the extent and
nature of future developments in the credit markets, including the sub-prime
market, and their impact on the financial industry in general and the Group in
particular; the effect on the Group’s capital of write downs in respect of
credit market exposures; successful consummation of the proposed rights issue;
the Group’s ability to achieve revenue benefits and cost savings from the
integration of certain of ABN AMRO’s businesses and assets;
general
economic conditions in the UK and in other countries in which the Group has
significant business activities or investments, including the United States; the
monetary and
interest rate
policies of the Bank of England, the Board of Governors of the Federal Reserve
System and other G-7 central banks; inflation; deflation; unanticipated
turbulence in interest rates, foreign currency exchange rates, commodity prices
and equity prices; changes in UK and foreign laws, regulations and taxes;
changes in competition and pricing environments; natural and other disasters;
the inability to hedge certain risks economically; the adequacy of loss
reserves; acquisitions or restructurings; technological changes; changes in
consumer spending and saving habits; and the success of the Group in managing
the risks involved in the foregoing.
The
information set out in “Business review – Recent developments” relating to the
estimated capital effect of RBS’s estimated capital market exposures constitutes
“forward looking information” and is subject to risks and uncertainties, as set
out under “Risk Factors”. In particular, there are a number of assumptions and
judgements that underpin such estimates, including assumptions and judgements
about the underlying performance of RBS’s operations, the state of the current
and future credit markets (including credit markets in the United Kingdom, the
United States and Europe), asset valuations, default rates, access to liquidity,
the timing of disposals relating to the ABN AMRO restructuring and general
economic conditions. Such information was prepared for capital planning purposes
and not to predict future results and although RBS’s management believes that it
has taken reasonable care in producing such estimations and projections, there
can be no assurance that the estimated capital effect of the projected capital
market exposures will be equivalent to any actual write downs or credit market
exposures appearing in RBS’s reports and accounts to be prepared in the future.
Any additional write downs may have a material adverse impact on RBS’s reported
financial condition and results of operations.
The
forward-looking statements contained in this document speak only as of the date
of this report, and the Group does not undertake to update any forward-looking
statement to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
For
a further discussion of certain risks faced by the Group, see Risk factors on
pages 13 to 15.
Business review
Description
of business
Introduction
The
Royal Bank of Scotland Group plc is the holding company of one of the world’s
largest banking and financial services groups, with a market capitalisation of
£44.4 billion at the end of 2007. Headquartered in Edinburgh, the Group operates
in the UK, US and internationally through its two principal subsidiaries, the
Royal Bank and NatWest. Both the Royal Bank and NatWest are major UK clearing
banks whose origins go back over 275 years. In the 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% as at 31 December 2007.
Organisational
structure and business overview for 2007
For
the year ended 31 December 2007, the Group’s activities were organised in the
following business divisions: Corporate Markets (comprising Global Banking &
Markets and UK Corporate Banking), Retail Markets (comprising Retail and Wealth
Management), Ulster Bank, Citizens, RBS Insurance and Manufacturing. A
description of each of the divisions is given below.
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 corporations and institutions. GBM’s
principal activity in the US is conducted through RBS Greenwich
Capital.
UK Corporate Banking
is the
largest provider of banking, finance and risk management services to UK
corporate customers. Through its network of relationship managers across the
country it distributes the full range of Corporate Markets’ products and
services to companies.
Retail Markets
leads the
co-ordination and delivery of our multi-brand retail strategy across our product
range and comprises Retail (including our direct channels businesses) and Wealth
Management.
Retail
comprises both the
Royal Bank and NatWest retail brands, and a number of direct providers offering
a full range of banking products and related financial services to the personal,
premium and small business markets across several distribution
channels.
In
core retail banking, Retail offers a comprehensive product range across the
personal and small business market: money transmission, savings, loans,
mortgages and insurance. Customer choice and product flexibility are central to
the retail
banking proposition
and customers are able to access services through a full range of channels,
including the largest network of branches and ATMs in the UK, the internet and
the telephone.
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.
It
also includes Tesco Personal Finance, The One account, MINT, 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.
Wealth Management
provides
private banking and investment services to its clients through a number of
leading UK and overseas private banking subsidiaries and offshore banking
businesses. Coutts is one of the world's leading international wealth managers
with offices in Switzerland, Dubai, Monaco, Hong Kong and Singapore, as well as
its premier position in the UK. Adam & Company is the major private bank in
Scotland. The offshore banking businesses – The Royal Bank of Scotland
International and NatWest Offshore – deliver retail banking services to local
and expatriate customers, principally in the Channel Islands, the Isle of Man
and Gibraltar.
Ulster Bank Group
including
First Active, provides a comprehensive range of retail and wholesale financial
services in the Republic of Ireland and Northern Ireland, supported by an
extensive network of branch and business centres. Retail Markets operates in the
personal and affluent banking sectors. Corporate 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.
Citizens
is the second largest
commercial banking organisation in 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 Connecticut,
Delaware, Massachusetts, New Hampshire, New Jersey, New York state,
Pennsylvania, Rhode Island and Vermont and the Charter One brand in Illinois,
Indiana, Michigan and Ohio. 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 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 International
Division, RBS Insurance sells general insurance, mainly motor, in Spain, Germany
and Italy. The Intermediary and Broker Division sells general insurance products
through independent brokers.
Manufacturing
supports the
customer-facing businesses and provides operational, technology and customer
support in telephony, account management, lending and money transmission, global
purchasing, property and other services.
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.
The
expenditure incurred by Manufacturing relates to costs principally in respect of
the Group’s banking and insurance operations in the UK and Ireland. These costs
reflect activities that are shared between the various customer-facing divisions
and consequently cannot be directly attributed to individual divisions. Instead,
the Group monitors and controls each of its customer-facing divisions on revenue
generation and direct costs whilst in Manufacturing such control is exercised
through appropriate efficiency measures and targets. For financial reporting
purposes the Manufacturing costs have been allocated to the relevant
customer-facing divisions on a basis management considers to be
reasonable.
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, Latin America and Asia.
As
discussed on page 2, ABN AMRO was acquired by the consortium banks in October
2007 through the Group's subsidiary, RFS Holdings.
RFS Holdings excluding minority interests
comprises those ABN AMRO business units that will be retained by RBS and are
principally the global wholesale businesses and international retail businesses
in Asia and the Middle East. In due course, these will be integrated with the
Group's existing business and will further diversify the Group's global reach.
RFS Holdings minority interests
comprises
those activities of ABN AMRO that are attributable to the other consortium
banks, including retail banking in the Netherlands and
Brazil.
The Centre
comprises group and
corporate functions, such as capital raising, finance, risk management, legal,
communications and human resources. The Centre manages the Group’s capital
requirements and Group-wide regulatory projects and provides services to the
operating divisions.
Organisational
structure and business overview as of 28 February 2008
On
28 February 2008, the company announced changes to its organisational structure
which are aimed at recognising RBS’s presence in over 50 countries and
facilitating the integration and operation of its expanded footprint. Following
the acquisition of ABN AMRO in October 2007, the Group’s new organisational
structure incorporates those ABN AMRO businesses to be retained by the Group but
excludes the ABN AMRO businesses to be acquired by Fortis and Santander. This
new organisational structure is expected to give RBS the appropriate framework
for managing the enlarged Group in a way that fully capitalises on the enhanced
range of attractive growth opportunities now available to it. The Group’s
organisational structure as of 28 February 2008 comprises the following
divisions:
Global
Markets
Global Markets is
focused on the provision of debt financing, risk management and transaction
banking services to large businesses and financial institutions in the United
Kingdom and around the world. Its activities have been organised into two
divisions, GBM and Global Transaction Services, in order to best serve RBS’s
customers whose financial needs are global.
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. It includes the global banking and markets
business of ABN AMRO, with the exception of its transaction banking
division.
On 1 April 2008, RBS
and Sempra Energy announced the formation of the commodities marketing joint
venture, RBS Sempra Commodities LLP, which has become part of RBS’s GBM
business. Under the joint venture, RBS Sempra Commodities LLP purchased Sempra
Commodities. RBS’s initial equity investment in the joint venture was US$1.7bn
and RBS will continue to provide any additional funding required for the ongoing
operating expenses of the businesses.
Global Transaction
Services combines the RBS and ABN AMRO franchises to create a new top 5 global
transaction services business. The new division offers global payments, cash and
liquidity management, as well as trade finance, merchant acquiring and
commercial card products and services. Global Transaction Services includes the
transaction banking units of RBS and ABN AMRO, the money transmission activities
of the former UK Corporate Banking, the corporate money transmission function of
Citizens, the UK commercial cards business and UK and international merchant
acquiring.
5
Regional
Markets
Regional Markets is
organised around the provision of retail and commercial banking to customers in
four regions: the United Kingdom, the United States, Europe and the Middle East
and Asia. This includes the provision of wealth management services both in the
United Kingdom and internationally.
UK
Retail and Commercial Banking
This comprises the
former Retail division, UK Wealth Management and the former UK Corporate Banking
division. However, merchant acquiring, commercial cards and corporate money
transmission activities are now part of Global Transaction
Services.
RBS UK supplies
financial services through both the RBS and NatWest brands, offering a full
range of banking products and related financial services to the personal,
premium and small business (“SMEs”) markets through the largest network of
branches and ATMs in the United Kingdom, as well as by telephone and internet.
Together, RBS and NatWest hold the joint number one position in personal current
accounts and are the UK market leader in SME banking. The division also issues
credit and charge cards and other financial products, including through other
brands such as MINT, First Active UK and Tesco Personal Finance.
The UK wealth
management arm provides private banking and investment services to clients
through Coutts, Adam & Company, RBS International and NatWest
Offshore.
UK Commercial
Banking is the largest provider of banking, finance and risk management services
in the United Kingdom. Through its network of relationship managers across the
country, it distributes the full range of RBS Group products and services to
companies.
US
Retail and Commercial Banking
This comprises
Citizens Financial Group, with the exception of its corporate money transmission
activities and RBS Lynk, which are now part of Global Transaction Services. It
also excludes manufacturing operations, which are now part of Group
Manufacturing. Citizens Financial Group provides financial services through the
Citizens and Charter One brands as well as through Kroger Personal Finance, its
credit card joint venture with the second largest US supermarket
group.
Citizens is engaged
in retail and corporate banking activities through its branch network in 13
states in the United States and through non-branch offices in other states.
Citizens was ranked the ninth largest commercial banking organisation in the
United States based on deposits as at 31 December 2007.
Europe
& Middle East Retail and Commercial Banking
This comprises
Ulster Bank and the retail and commercial businesses of ABN AMRO in Europe and
the Middle East.
Ulster Bank,
including First Active, provides a comprehensive range of financial services
across the island of Ireland. Its retail banking arm has a network of branches
and operates in the personal, commercial and wealth management sectors, while
its corporate markets operations provides services in the corporate and
institutional markets.
The retail and
commercial businesses in Europe and the Middle East offer services in Romania,
Russia, Kazakhstan and the United Arab Emirates.
Asia
Retail and Commercial Banking
Asia Retail and
Commercial Banking is a significant force in a number of important economies in
Asia with prominent market positions in India, Pakistan, China and Taiwan in
addition to its presence in Hong Kong, Indonesia, Malaysia and Singapore. The
international wealth management arm offers private banking and investment
services to clients in selected markets through the RBS Coutts
brand.
RBS
Insurance
RBS Insurance sells
and underwrites retail and SME insurance over the telephone and internet, as
well as through brokers and partnerships. Its brands include Direct Line,
Churchill, Privilege, Green Flag and NIG. Direct Line, Churchill and Privilege
sell general insurance products direct to the customer. Through its
international division, RBS Insurance sells general insurance, mainly motor, in
Spain, Germany and Italy. The Intermediary and Broker division sells general
insurance products through independent brokers.
Group
Manufacturing
Group Manufacturing
comprises the RBS and ABN AMRO manufacturing operations, including the ACES
operation in India, as well as Citizens’ manufacturing and card operations. It
supports the customer facing businesses and provides operational technology,
customer support in telephony, account management, lending and money
transmission, global purchasing, property and other services. 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.
The
Centre
The
Centre comprises group and corporate functions, such as capital raising,
finance, risk management, legal, communications and human resources. The Centre
manages the Group’s capital requirements and Group-wide regulatory projects and
provides services to the operating divisions.
6
Recent
developments
On 22 April 2008,
RBS announced a rights issue to raise proceeds of £12bn, net of expenses, to
increase its capital base. RBS also announced revised targets for its capital
ratios, estimated write downs for capital planning purposes, planned disposals
and proposals relating to the 2008 interim dividend, and gave details of its
current trading performance.
RBS’s capital plan
had assumed that it would maintain its Tier 1 capital ratio in the range 7 per
cent. to 8 per cent. and that it would rebuild its core Tier 1 capital ratio
towards 5 per cent. by 2010. At the time of its 2007 results announcement RBS
confirmed that it was operating within the parameters of this plan.
The balance of risks and opportunities inherent in this plan have
been under continual review. However, in the light of developments during March
including the severe and increasing deterioration in credit market conditions,
the worsening economic outlook and the increased likelihood that credit markets
could remain difficult for some time, the Board has concluded that it is now
appropriate for RBS to accelerate its plans to increase its capital ratios and
to move to a higher target range to reflect the generally weakened business
environment.
Reflecting these
factors, the Board has raised its target range for the Group’s Tier 1 capital
ratio to 7.5 per cent. to 8.5 per cent. and has set a target for the core Tier 1
capital ratio of in excess of 6 per cent. at 31 December 2008 on a proportional
consolidated basis
1
.
For capital planning
purposes, the Board has used the values detailed below under “– Credit market
exposures” as the basis for its estimates of write-downs in 2008 in respect of
certain credit market exposures. These estimates are based on what the Board
considers to be prudent assumptions reflecting the further sharp deterioration
in market conditions and outlook in credit markets at this point.
As part of an
ongoing exercise, in the context of its decision to increase capital levels, the
Board has identified for possible whole or partial disposal RBS Insurance and
other smaller assets which are not central to the very strong UK and
international banking franchises that RBS has built. RBS is determined to
achieve full and fair value in respect of any such disposals. At this stage RBS
has assumed in its capital plan that a £4bn increase in core Tier 1 capital by
the end of 2008 can be achieved in this way, although there is scope for fewer
disposals to be made, whilst still exceeding the target core Tier 1 ratio of 6
per cent.
In addition, RBS
envisages containing the capital demands of certain business lines, including
GBM, through active management of its balance sheet.
Taking the above
into account and having regard to the outlook for retained profits and the
impact of active balance sheet management, the Board has determined that it is
appropriate to raise £12bn through the rights issue, with the effect of
achieving a Tier 1 capital ratio in excess of 8 per cent. and a core Tier 1
capital ratio in excess of 6 per cent. by year end on a proportional
consolidated basis.
Rights
issue
Pursuant to the
rights issue, the Company is proposing to offer 6,123,010,462 new Ordinary
Shares(representing approximately 61.1 per cent. of the existing issued share
capital and 37.9 per cent. of the enlarged issued share capital immediately
following completion of the rights issue) by way of rights to qualifying
shareholders at 200 pence per share. The rights issue has been fully
underwritten and is expected to raise approximately £12bn, net of expenses. The
rights issue price represents a 34.9 per cent. discount to the theoretical ex
rights price based on the closing middle market price on the London Stock
Exchange of 372.5 pence per Ordinary Share on 21 April 2008 (being the last
business day before the announcement of the terms of the rights
issue).
The rights issue
will be made on the basis of 11 new Ordinary Shares at 200 pence per share for
every 18 existing Ordinary Shares held by qualifying shareholders at the close
of business on the applicable record date.
The rights issue is
conditional, among other things, upon:
|
1
|
Previous
guidance referred to 7 per cent. to 8 per cent. for Tier 1 capital ratio,
with 25 per cent. to 30 per cent. preference share content, but with no
target set for core Tier 1 capital
ratio.
|
|
·
|
shareholder
approval which was granted at the general meeting held on 14 May 2008 (the
“general meeting”);
|
|
·
|
the
underwriting agreement for the rights issue become unconditional in all
respects save for the condition relating to admission of the new Ordinary
Shares, nil paid, to the Official List of the UKLA and to trading on the
London Stock Exchange; and
|
|
·
|
such admission
becoming effective by not later than 8.00 a.m. on 19 May 2008 (or such
later time and date as the parties to the underwriting agreement may
agree).
|
The new Ordinary
Shares, when issued and fully paid, will rank
pari passu
in all respects
with the existing issued Ordinary Shares including the right to receive
dividends or distributions made, paid or declared after the date of this
document, except in respect of the 2007 final dividend of 23.1 pence per
Ordinary Share announced by RBS on 28 February 2008. The new Ordinary
Shares, fully paid, are expected to be admitted to the Official List of the UKLA
and to trading on the London Stock Exchange on or around 9 June
2008.
Credit
market exposures
For capital planning
purposes RBS has used the values detailed below as the basis for its estimates
of write-downs in 2008 in respect of the credit market exposures set out in the
table below. These estimates are based on what the Board considers to be prudent
assumptions reflecting the further sharp deterioration in market conditions and
outlook in credit markets at this point. The capital effect of these estimated
write-downs is £4.3bn net of tax (£5.9bn before tax).
Fair value gains on
own liabilities are estimated to be £0.6bn and are not included in the estimated
capital effect.
The estimated
write-downs before tax which have been used for RBS’s capital planning purposes,
are as follows.
|
£
millions
|
Net
exposure
at 31 December 2007
(1)
|
Average
price
%
|
Current
estimated
net
exposure
(2)
|
Average
price
%
|
Estimated
write-downs
before
tax
(3)
|
|||||||||||||||
|
ABS
CDOs
|
||||||||||||||||||||
|
High grade
CDOs
|
2,581 | 84 | 1,608 | 52 | (990 | ) | ||||||||||||||
|
Mezzanine
CDOs
|
1,253 | 70 | 361 | 20 | (902 | ) | ||||||||||||||
|
Monoline
exposures
(4)
|
2,547 | n/a | 3,174 | n/a | (1,752 | ) | ||||||||||||||
|
US
Residential Mortgages
|
||||||||||||||||||||
|
Subprime
(5)
|
1,292 | 72 | 600 | 38 | (405 | ) | ||||||||||||||
|
Alt-A
|
2,233 | 83 | 1,007 | 50 | (666 | ) | ||||||||||||||
|
Other
non-agency
|
794 | 94 | 660 | 82 | (100 | ) | ||||||||||||||
|
US commercial
mortgages
|
1,809 | 97 | 1,397 | 83 | (201 | ) | ||||||||||||||
|
Leveraged
Loans
|
||||||||||||||||||||
|
Funded and
unfunded
(6)
|
14,506 | 96 | 12,354 | 88 | (1,250 | ) | ||||||||||||||
|
CLOs
|
1,386 | 93 | 1,214 | 87 | (106 | ) | ||||||||||||||
|
CDS
hedging
|
470 | |||||||||||||||||||
|
Total
net of CDS hedging
|
(5,902 | ) | ||||||||||||||||||
Notes:
|
(1)
|
Net of hedges
and write-downs.
|
|
(2)
|
Current
exposure net of hedges and estimated
write-downs.
|
|
(3)
|
Estimated
write-downs before tax in 2008.
|
|
(4)
|
Monoline
exposures relate to credit protection purchased on credit assets,
including CDOs. As the value of the instruments underlying the hedges has
fallen, the mark-to-market value of the hedges, and hence of the Group’s
exposure, has increased. A credit valuation adjustment of £1,752m has been
estimated reflecting the monolines’ weakening credit profile. Further
information relating to exposures to monolines is set out
below.
|
|
(5)
|
Includes
investment grade, non-investment grade and
residuals.
|
|
(6)
|
Funded
exposures at 31 December 2007 were
£8,698m.
|
The following table
sets out certain information in relation to RBS’s exposures to monoline insurers
by counterparty credit quality.
|
Current
Estimates
|
||||||||||||||||||||||||
|
Monoline
exposures by
counterparty
credit quality
(1)
£ billions
|
Notional
|
Fair
value of underlying asset
|
Gross
exposure
|
Credit
valuation
adjustments (pre-tax)
|
Hedge
|
Net
exposure
|
||||||||||||||||||
|
AAA /
AA
|
19.8 | 15.6 | 4.2 | (1.1 | ) | (0.4 | ) | 2.7 | ||||||||||||||||
|
A /
BBB
|
2.6 | 2.2 | 0.4 | (0.3 | ) | 0.2 | ||||||||||||||||||
|
Non-investment
grade
|
2.6 | 1.0 | 1.6 | (1.3 | ) | 0.3 | ||||||||||||||||||
|
Total
|
25.0 | 18.8 | 6.2 | (2.7 | ) | (0.4 | ) | 3.2 | ||||||||||||||||
|
Credit
valuation adjustments taken in 2007
|
0.9 | |||||||||||||||||||||||
|
Estimated
credit valuation adjustments before tax in 2008
|
(1.8 | ) | ||||||||||||||||||||||
The following table
sets out certain information in relation to RBS’s exposures to monoline insurers
by collateral type.
|
Monoline
exposures by collateral
type
(1)
£ billions
|
Notional
|
Fair
value of underlying asset
|
%
Split underlying asset value
|
Underlying
asset value as % of notional
|
Mark
to market
|
|||||||||||||||
|
RMBS and CDO
of RMBS
|
6.1 | 2.5 | 13 | % | 41 | % | 3.6 | |||||||||||||
|
Other
ABS
|
4.5 | 4.1 | 22 | % | 91 | % | 0.3 | |||||||||||||
|
CMBS
|
3.7 | 2.6 | 14 | % | 70 | % | 1.0 | |||||||||||||
|
Non ABS (incl
CLOs)
|
10.8 | 9.6 | 51 | % | 88 | % | 1.2 | |||||||||||||
|
Total
|
25.0 | 18.8 | 100 | % | 75 | % | 6.2 | |||||||||||||
The following table
sets out certain information in relation to RBS’s exposures to super senior
tranches of ABS CDOs.
|
CDO
exposures – Super senior tranches of ABS CDO’s
(1)
|
High
Grade
|
Mezzanine
|
Total
|
|||||||||
|
Gross open
exposures at 31 December 2007 (£bn)
|
6.4 | 3.1 | 9.5 | |||||||||
|
Net open
exposures at 31 December 2007 (£bn)
|
2.6 | 1.3 | 3.8 | |||||||||
|
Effective
attachment point at 31 December 2007
|
40 | % | 62 | % | 50 | % | ||||||
|
Attachment
point after estimated write-downs
|
63 | % | 89 | % | 74 | % | ||||||
|
% of
underlying RMBS sub-prime assets
|
69 | % | 91 | % | 79 | % | ||||||
|
– originated
in 2005 and earlier
|
24 | % | 23 | % | 24 | % | ||||||
|
– originated
in 2006
|
28 | % | 69 | % | 46 | % | ||||||
|
– originated
in 2007
|
48 | % | 8 | % | 30 | % | ||||||
|
Net open
exposures after estimated write-downs (£bn)
|
1.6 | 0.4 | 2.0 | |||||||||
Note:
|
(1)
|
The financial
information presented has been rounded to the nearest whole number or the
nearest decimal. Therefore, the sum of the numbers in a column may not
conform exactly to the total figure given for that column. In addition,
certain percentages presented in the tables in this document reflect
calculations based upon the underlying information prior to rounding, and,
accordingly, may not conform exactly to the percentages that would be
derived if the relevant calculations were based upon the rounded
numbers.
|
Dividends
and dividend policy
The Board of RBS
believes that the 2007 dividend payout ratio of around 45 per cent.
remains sustainable over the medium-term, given the strength and diversity of
the Group. The Board will assess future dividends based on circumstances at the
time. Subject to this, the Board’s target for 2008 is that there would be a
similar dividend payout ratio to 2007, based on earnings adjusted to exclude
credit market-related write-downs and non-recurring items such as gains on
disposals and integration costs.
It should be noted
that the capital raised in the rights issue is not expected to generate the same
return as existing capital in the business. This effect alone is likely to
result in a reduction in dividend per share in 2008, after taking into account
an adjustment in respect of the bonus element of the rights issue.
The Board believes
that it would be prudent to issue new Ordinary Shares in the Company instead of
paying the 2008 interim dividend. Accordingly, at the general meeting
shareholders authorised the capitalisation of reserves which will allow the
Company to issue such new Ordinary Shares instead of paying the interim dividend
later this year. It is, however, RBS’s current intention that the 2008 final
dividend be paid in cash.
Shareholders
approved the 2007 final dividend at the Company’s annual general meeting on
23 April 2008. As previously announced, the 2007 final dividend will be
paid in cash. The dividend payment date was previously 6 June 2008 but the
Company will now pay the 2007 final dividend on 23 May 2008 so that
shareholders will receive the cash dividend before the end of the rights issue
offer period and be able to use such amounts after allowing for any tax in
taking up their rights under the rights issue if they wish to do so. Until
further notice, the Company’s dividend reinvestment plan (“DRIP”) will not be
operated.
Capital
Taking into account
the estimated write-downs, the rights issue and retentions, including
conservative estimates in respect of other capital and strategic steps outlined
herein, the Group’s capital ratios at 30 June 2008 and 31 December
2008 are expected to be approximately as set out below.
|
Core
Tier 1 capital ratio
(1)
|
Tier 1
capital
ratio
(1)
|
||
|
Fully
consolidated basis
|
|||
|
30 June
2008
|
>6%
|
>8%
|
|
|
31 December
2008
|
>6%
|
>8%
|
|
|
Proportional
consolidated basis
|
|||
|
30 June
2008
|
>5%
|
>7.5%
|
|
|
31 December
2008
|
>6%
|
>8%
|
Note:
|
(1)
|
Prepared using
Basel II methodology.
|
2008
Annual General Meeting
On
23 April 2008, the Group held its Annual General Meeting. At the meeting,
shareholders voted to (i) approve a final dividend of 23.1p per ordinary share,
(ii) re-elect Colin Buchan, Jim Currie, Janis Kong, Sir Tom McKillop, Sir Steve
Robson and Guy Whittaker as directors of the Group, (iii) re-appoint Deloitte
& Touche LLP as the company’s auditor and (iv) authorise the Audit Committee
to fix the remuneration of the auditors. All other resolutions presented to
shareholders at the Annual General Meeting were also approved by
shareholders.
10
Current trading and
prospects
The following
discussion reflects the change to the Group’s organisational structure announced
on 28 February 2008.
The operating
performance of many of RBS’s businesses since the beginning of 2008 has remained
good, but results have been held back by the effects of the continuing
deterioration in credit markets, which has resulted in additional write downs on
credit market exposures in the first quarter. Some Global Banking & Markets
(“GBM”) businesses have experienced a reduced level of activity, although others
continue to perform well, as do Global Transaction Services and Regional
Markets. Overall, the Group’s underlying results, excluding write downs, have
remained satisfactory.
In a more uncertain
environment for its customers, RBS has continued to benefit from strong growth
in personal and corporate deposits and good growth in lending. Group net
interest margin in the quarter was slightly lower, reflecting increased funding
costs partially offset by stronger new business margins in some lending
products.
Overall credit risk
metrics have remained stable in the first quarter, with a continued decline in
UK personal sector impairment losses but increased delinquencies in a specific
US retail portfolio. Corporate credit quality remains broadly
stable.
RBS
divisions
Global
Markets
Global Banking &
Markets has been acutely affected by credit market conditions, particularly in
March, with further write downs in credit markets during the quarter. There were
good performances in rates and currencies, but lower business volumes in credit
markets and equities, with corresponding reductions in costs. Credit impairments
have remained low.
GBM has made a good
start on exploiting the potential of ABN AMRO, with a significant number of
deals already recorded as a result of combining the product expertise and
customer franchises of the two businesses.
In response to the
difficulties in its credit markets business, RBS has made significant changes to
its North American management structure and has strengthened the control
environment within GBM. It intends to reduce its headcount globally by more than
originally envisaged through the ABN AMRO integration process.
Certain structured
credit activities have been discontinued and problematic US sub prime mortgage
related assets are now managed by a dedicated work out unit with a view to
minimising risk and reducing positions at an appropriate pace. GBM remains
focused on effective management of its capital and has accelerated other balance
sheet management actions.
Global Transaction
Services has delivered good growth in income and profit, despite a reduced
benefit from non-interest bearing deposits as a result of lower interest rates.
Transaction volumes have increased and the product strength and international
capabilities of this new division have attracted significant new business,
winning a number of notable new mandates in cash management, trade finance and
financial institutions. Global Transaction Services continues to expand its
international reach in merchant acquiring. Expense growth has remained under
control.
Regional
Markets
UK Retail &
Commercial Banking has achieved steady growth in income, net of claims. Retail
and commercial deposits have grown strongly, increasing by 12 per cent. in the
first quarter, and there has been continued excellent progress in UK Wealth
Management, where assets under management increased by 15 per cent. After two
years in which RBS has had a limited appetite for the returns available in the
UK mortgage market, it is now seeing competitors withdrawing from the market and
has taken advantage of opportunities to write good credit quality mortgages at
attractive margins. In the first quarter of 2008, RBS has achieved an 11 per
cent. share of net new mortgage lending at an average loan to value of 64 per
cent.
Retail impairment
losses have continued to decline, reflecting our continued cautious approach to
the personal unsecured credit market, while commercial credit quality has
remained stable. We continue to monitor our exposure to commercial property
carefully, and remain satisfied with the performance of our portfolio. Only 1
per cent. of commitments secured on commercial property is for speculative
commercial property development.
US Retail &
Commercial Banking has continued to achieve modest income growth while
maintaining good cost discipline, but overall results have been held back by
increased impairments in one specific loan portfolio. RBS continues to diversify
its business, achieving good growth in commercial banking volumes and in cards.
Deposit volumes are stable, but margins have been eroded by competitive
pressure. Consumer lending volumes have contracted as underwriting standards
have been tightened and consumer spending has slowed. Investment is being
focused on the development of commercial banking activities and other selected
opportunities.
Citizens’ credit
portfolio continues to perform satisfactorily, with the exception of a specific
portfolio within its home equity book. Delinquencies on this portfolio have
risen markedly as the housing market has continued to weaken and the Group has
continued to increase provisions.
Excluding this
portfolio, delinquencies in consumer lending represented only 0.7 per cent. of
balances in the first quarter, unchanged from the level of a year
earlier.
Europe and Middle
East Retail & Commercial Banking has continued to deliver good profit
growth, though income growth within Ulster Bank has moderated in line with the
slower pace of Irish economic expansion. Credit quality remains stable. Results
in sterling terms have benefited from the movement in the euro exchange rate.
The business in the UAE continues to make good progress with record sales of
credit cards and personal loans in March and continued strong performance in
affluent banking.
Asia Retail &
Commercial Banking has continued to generate very strong growth in both income
and operating profit. RBS Coutts has maintained its momentum with deposits 18
per cent. ahead and assets under management 16 per cent. higher in March. In
China, the affluent banking business is making excellent progress, with client
funds doubling. The division is pressing ahead with continued focused investment
in its retail and commercial banking franchise in the region.
RBS
Insurance
RBS Insurance has
achieved strong new business volumes and good renewal rates in its own motor and
home brands. Expenses reflect accelerated marketing activity, while claims costs
were lower as a result of enhanced risk selection as well as more favourable
weather conditions. International businesses in Spain, Italy and Germany
continued to make good progress.
Group
Manufacturing
Group Manufacturing
has continued to deliver good productivity gains in support of business growth
in our customer facing divisions while continuing to invest in our
infrastructure in the UK and internationally. Technology and operations costs
remain tightly controlled.
Acquisitions
and disposals
On 1 April 2008, RBS
completed the formation of a commodities market making joint venture with Sempra
Energy, RBS Sempra Commodities.
ABN
AMRO integration
Integration benefits
and headcount reductions achieved during the first quarter are slightly ahead of
RBS’s initial expectations. Cost benefits are slightly ahead of schedule, while
revenue benefits are slightly behind.
Implementation teams
are now in place, with, for example, 44 separate workstreams established in GBM,
covering products, clients, regions, functions and migration, involving 1,200
staff from RBS and ABN AMRO.
The
ABN AMRO businesses acquired by RBS have been restructured to mirror the new RBS
Group structure. Future single management appointments have been made and the
co-location of GBM teams has begun, with rebranding of ABN AMRO buildings
already under way. The combined GBM and Global Transaction Services teams have
already achieved a significant number of deals in which ABN AMRO customers gain
access to RBS product capabilities, such as US Treasury bonds, while RBS
customers benefit from ABN AMRO product expertise in areas such as cash
management and trade finance.
Competition
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.
Competition for
corporate and institutional customers in the UK 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 small business banking market, the Group competes with other UK clearing
banks, specialist finance providers and building societies.
In
the personal banking segment the Group competes with UK banks and building
societies, major retailers, life assurance companies and internet-only players.
In the mortgage market the Group competes with UK banks and building societies.
The Group’s life assurance businesses compete with Independent Financial
Advisers and life assurance companies.
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. In a number of these markets there
are regulatory barriers to entry or expansion, and the state ownership of banks.
Competition is generally intensifying as more players enter markets that are
perceived to be de-regulating and offer significant growth
potential.
In
Wealth Management, The Royal Bank of Scotland International competes with other
UK and international banks to offer offshore banking services. Coutts and Adam
& Company compete as private banks with UK clearing and private banks, and
with international private banks. Competition in wealth management activities
has intensified as banks have increased their focus on competing for affluent
and high net worth customers.
RBS
Insurance competes in personal lines insurance and, to a limited extent, in
commercial insurance. There is strong competition from a range of insurance
companies which now operate telephone and internet direct sales businesses.
Competition in the UK motor market remains particularly intense, and price
comparison internet sites now play a major role in the marketplace. RBS
Insurance also competes with local insurance companies in the direct motor
insurance markets in Spain, Italy and Germany.
In
Ireland, Ulster Bank and First Active compete in retail and commercial banking
with the major Irish banks and building societies, and with other UK and
international banks and building societies active in the market. Competition is
intensifying as UK, Irish and other European institutions seek to expand their
businesses.
In
the United States, where competition is intense, Citizens competes in the New
England, Mid-Atlantic and Mid West retail and mid-corporate banking markets with
local and regional banks and other financial institutions. The Group also
competes in the US in large corporate lending and specialised finance markets,
and in fixed-income trading and sales. Competition is principally with the large
US commercial and investment banks and international banks active in the
US.
Risk
factors
Set
out below are certain risk factors which could
affect the 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 may be affected by general business and
geopolitical conditions.
The performance of
the Group is significantly influenced by the economic conditions of the
countries in which it operates, particularly the United Kingdom, the United
States and Europe. A downturn in these economies, including any further
deterioration in the US real estate or other markets, 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 impairments and trading losses in the
Group’s lending, trading and other portfolios. Geopolitical conditions can also
affect the Group’s earnings. Terrorist acts and threats and the response of
governments in the United Kingdom, the United States and elsewhere to them could
affect the level of economic activity. The Group’s businesses could also be
exposed to the risk of business interruption and economic slowdown following the
outbreak of a pandemic.
Changes
in interest rates, foreign exchange rates, bond and equity prices, and other
market factors have affected and will continue to affect the Group’s
business.
The most significant
market risks the Group faces are interest rate, foreign exchange and bond and
equity price risks. Changes in interest rate levels, yield curves and spreads
may affect the interest rate margin realised between lending and borrowing
costs. Changes in currency rates, particularly in the sterling-US dollar and
sterling-euro exchange rates, affect the value of assets and liabilities
denominated in foreign currencies and the reported earnings of the Group’s
non-UK subsidiaries (principally ABN AMRO, Citizens, RBS Greenwich Capital and
Ulster Bank) and may affect income from foreign exchange dealing. The
performance of financial markets may affect bond and equity prices and,
therefore, cause changes in the value of the Group’s investment and trading
portfolios. While the Group has implemented risk management methods to mitigate
and control these and other market risks to which it is exposed, it is difficult
to predict with accuracy changes in economic or market conditions and to
anticipate the effects that such changes could have on the Group’s financial
performance and business operations.
The
Group’s borrowing costs and its access to the debt capital markets depend
significantly on its credit ratings.
On 22 April 2008,
Standard & Poor’s rating service affirmed the long-term rating of the Group
as ‘‘AA-’’ with a negative outlook. However, on that same day, Moody’s rating
service announced that it was placing the long-term ratings of NatWest, the
Royal Bank, the subsidiaries of Citizens and the Group under review for possible
downgrade and Fitch Ratings downgraded the Group to ‘‘AA’’ with a stable
outlook. A reduction in the long-term credit ratings of the company or one of
its principal subsidiaries may increase its borrowing costs, limit its access to
the capital markets and trigger additional collateral requirements in derivative
contracts and other secured funding arrangements. Credit ratings are also
important to the Group when competing in certain markets, such as longer-term
over-the-counter derivatives. Therefore, further reductions in the Group’s
credit ratings could adversely affect its access to liquidity and competitive
position and, hence, negatively impact its earnings.
The
Group’s business performance could be affected if its capital is 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 United Kingdom, the United States and the Netherlands, and in other
jurisdictions in which it undertakes regulated activities, to maintain adequate
capital. Although the Group mitigates the risk of not meeting capital adequacy
requirements by careful management of its balance sheet and capital, through
capital-raising activities, disciplined capital allocation and the hedging of
capital currency exposures, any change that limits its ability effectively to
manage such resources (including, for example, reductions in profits and
retained earnings as a result of write-downs or otherwise, delays in the
disposal of certain assets or the inability to syndicate loans as a result of
market conditions or otherwise) could have a material adverse impact on its
financial condition and regulatory capital position.
The
value of certain financial instruments recorded at fair value is determined
using financial models incorporating assumptions, judgements and estimates which
may change over time.
Under IFRS, the
Group recognises at fair value: (i) financial instruments classified as
‘‘held-for-trading’’ or ‘‘designated as at fair value through profit or loss’’,
(ii) financial assets classified as ‘‘available-for-sale’’ and (iii)
derivatives, each as further described in the notes to our financial statements.
Generally, in order to establish the fair value of these instruments, the Group
relies on quoted market prices or, where the market for a financial instrument
is not sufficiently active, internal valuation models that utilise observable
market data. In certain circumstances, the data for individual financial
instruments or classes of financial instrument utilised by such valuation models
may not be available or may become unavailable due to changes in market
conditions, as has been the case over the past several months. In such
circumstances, the Group’s internal valuation models require the Group to make
assumptions, judgements and estimates in order to establish fair value. In
common with other financial institutions, these internal valuation models are
complex, and the assumptions, judgements and estimates the Group is required to
make often relate to matters that are inherently uncertain, such as expected
cash flows, the ability of borrowers to service debt, house price appreciation
and depreciation, and relative levels of defaults and deficiencies. Such
assumptions, judgements and estimates may need to be updated to reflect changing
trends and market conditions. The resulting change in the fair values of the
financial instruments could have a material adverse effect on the Group’s
earnings.
The
Group’s future earnings could be affected by depressed asset valuations
resulting from poor market conditions.
Financial markets
are sometimes subject to significant stress conditions where steep falls in
perceived or actual asset values are accompanied by a severe reduction in market
liquidity, as exemplified by recent events affecting asset-backed CDOs, the US
sub-prime residential mortgage market and leveraged finance. In dislocated
markets, hedging and other risk management strategies may not be as effective as
they are in normal market conditions due, in part, to the decreasing credit
quality of hedge counterparties, including monoline insurers. Severe market
events are difficult to foresee and, if they continue to occur, could result in
the Group incurring significant losses. In 2007, the Group recorded material
write-downs on its credit market positions, principally on its US residential
mortgage and monoline exposures. For capital planning purposes, the Group has
estimated, based on current information, further significant write-downs in
these and other exposures, as further described under "– Recent developements
– Credit market exposures." As market conditions change, the fair value of
these exposures could fall further than currently estimated and therefore result
in additional write-downs. Moreover, recent market volatility and illiquidity
has made it difficult to value certain of the Group’s exposures. Valuations in
future periods, reflecting then-prevailing market conditions, may result in
significant changes in the fair values of the Group’s exposures, even in respect
of exposures, such as credit market exposures, for which the Group has
previously recorded or estimated write-downs. In addition, the value ultimately
realised by the Group will depend on the fair value as determined at that time
and may be materially different from the current or estimated fair value. Any of
these factors could require the Group to recognise further write-downs or
realise impairment charges, any of which may adversely affect its financial
condition and results of operations.
The
value or effectiveness of any credit protection which the Group has purchased
from monoline insurers may fluctuate depending on the financial condition of the
insurer.
The Group’s credit
exposure to the monoline sector arises from over-the-counter derivative
contracts – mainly credit default swaps (‘‘CDS’’) which are carried at fair
value. The fair value of these CDSs, and the Group’s exposure to the risk of
default by the underlying counterparties, depends on the valuation and the
perceived credit risk of the instrument against which protection has been
bought. Towards the end of 2007, monoline insurers were adversely affected by
their exposure to US residential mortgage-linked products. If the financial
condition of these counterparties or their perceived credit worthiness
deteriorates further, the Group could record further credit valuation
adjustments on the CDSs bought from monoline insurers in addition to those
already recorded, as described "– Recent developments – Credit market
exposures."
Liquidity
risk is inherent in the Group’s operations.
Liquidity risk is
the risk that the Group will be unable to meet its obligations as they fall due.
This risk is inherent in banking operations and can be heightened by a number of
enterprise-specific factors such as an over-reliance on a particular source of
funding, changes in credit ratings or by market-wide phenomena such as market
dislocation and major disasters. The Group’s liquidity management focuses on
maintaining a diverse and appropriate funding strategy for its operations, in
controlling the mismatch of maturities and on carefully monitoring its undrawn
commitments and contingent liabilities. However, the Group’s ability to access
sources of liquidity during periods of liquidity stress (such as have been
experienced in recent months), including through the issue or sale of complex
financial and other instruments, may be constrained as a result of current and
future market conditions. Furthermore, there is a risk that corporate and
institutional counterparties with credit exposures may look to consolidate their
exposure to the enlarged Group.
The
financial performance of the Group may be affected by borrower credit
quality.
Risks arising from
changes in credit quality and the recoverability of loans and amounts due from
counterparties are inherent in a wide range of the Group’s businesses. Adverse
changes in the credit quality of the Group’s borrowers and counterparties, or in
their behaviour, or a general deterioration in the UK, US, European or global
economic conditions, or arising from systemic risks in the financial systems,
could affect the recoverability and value of the Group’s assets and require an
increase in the provision for impairment losses and other
provisions.
Each
of the Group’s businesses is subject to substantial regulation and oversight.
Any significant regulatory developments could have an effect on how the Group
conducts its business and on its results of operations.
The Group is subject
to financial services laws, regulations, administrative actions and policies in
each location in which it operates, all of which are subject to change. For
example, the move from Basel I to Basel II on 1 January 2008 resulted in certain
definitional changes in the way risk-weighted assets are calculated and the
Group continues to work with regulators to refine the methods by which the
calculation of risk-weighted assets is made. The change also impacted the way
certain deductions to regulatory capital were applied.
Other areas where
governmental policies and regulatory changes could have an adverse impact
include, but are not limited to:
·
the
monetary, interest rate and other policies of central banks and regulatory
authorities;
·
general
changes in government or regulatory policy or changes in regulatory regimes that
may significantly influence investor decisions in particular markets in which
the Group operates or may increase the costs of doing business in those
markets;
·
other
general changes in the regulatory requirements, such as prudential rules
relating to the capital adequacy framework;
·
changes
in competition and pricing environments;
·
further
developments in the financial reporting environment;
·
expropriation,
nationalisation, confiscation of assets and changes in legislation relating to
foreign ownership; and
·
other
unfavourable political, military or diplomatic developments producing social
instability or legal uncertainty which, in turn, may affect demand for the
Group’s products and services.
Further changes to
the regulatory requirements applicable to the Group, in particular in the United
Kingdom, the United States and the Netherlands, whether resulting from recent
events in the credit markets or otherwise, could materially affect its business,
the products and services it offers and the value of its assets.
The
Group is subject to litigation and regulatory investigations which may impact
its business.
The company and its
subsidiaries operate in a legal and regulatory environment that exposes them to
potentially significant litigation and regulatory risks. As a result, the
company and its subsidiaries are involved in various disputes and legal
proceedings in the United Kingdom, the United States and other jurisdictions,
including litigation and regulatory investigations. Such cases are subject to
many uncertainties, and their outcome is often difficult to predict,
particularly in the earlier stages of a case or investigation. Adverse
regulatory action against the Group or adverse judgements in litigation to which
the Group is a party could result in restrictions or limitations on the Group’s
operations or result in a material adverse effect on the Group’s reputation or
results of operations. Currently, the Group is responding to regulatory
inquiries and investigations and is involved in litigation arising from its
operations. For details about certain litigation and regulatory investigations
in which the Group is involved, see pages 215 to 217.
Operational
risks are inherent in the Group’s operations.
The Group’s
operations are dependent on the ability to process a very large number of
transactions efficiently and accurately. Operational losses can result from
fraud, errors by employees, failure to document transactions properly or to
obtain proper authorisation, failure to comply with regulatory requirements and
conduct of business rules, equipment failures, natural disasters or the failure
of external systems, including those of the Group’s suppliers or counterparties.
Although the Group has implemented risk controls and loss mitigation actions,
and substantial resources are devoted to developing efficient procedures and to
staff training, it is not possible to be certain that such procedures will be
effective in controlling each of the operational risks faced by the Group.
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. Revisions to tax legislation or to its interpretation might also
affect the Group’s results in the future.
The
Group’s insurance businesses are subject to inherent risks involving
claims.
Future claims in the
Group’s general and life assurance business may be higher than expected as a
result of changing trends in claims experience resulting from catastrophic
weather conditions, demographic developments, changes in mortality and other
causes outside the Group’s control. Such changes would affect the profitability
of current and future insurance products and services. The Group reinsures some
of the risks it has assumed and is accordingly exposed to the risk of loss
should its reinsurers become unable or unwilling to pay claims made by the Group
against them.
The
Group’s future earnings and shareholder value in part depend on strategic
decisions regarding organic growth and potential acquisitions and
disposals.
The Group devotes
substantial management and planning resources to the development of strategic
plans for organic growth and identification of possible acquisitions and
disposals. In addition, the Group’s strategic plans are also supported by
substantial expenditure to generate organic growth in customer business. If
these strategic plans, including the planned disposals discussed under "Recent
developments", do not meet with success or fail to achieve the results
expected, the Group’s earnings could grow more slowly or decline and its growth
prospects may be impaired.
Proposals
for the restructuring of ABN AMRO are complex and may not realise the
anticipated benefits for the Group.
The restructuring
plan in place for the integration and separation of ABN AMRO into and among the
businesses and operations of the Consortium Banks is complex involving
substantial reorganisation of ABN AMRO’s operations and legal structure. 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 resources
previously devoted to the Group's businesses and the retention of appropriately
skilled ABN AMRO staff. The Group may not realise the benefits of the
acquisition or the restructuring when expected or to the extent
projected.
If
the Company is unable to complete the rights issue, it may be required to find
alternative methods of increasing its core Tier 1 and Tier 1 capital
ratios.
The
purpose of the rights issue is to allow the Company to strengthen its capital
position and to achieve a core Tier 1 capital ratio in excess of 6 per cent. and
a Tier 1 capital ratio in excess of 8 per cent. by the end of 2008 on a
proportional consolidated basis, which the Company believes are appropriate
levels in light of current market conditions. If the Company is unable to
complete the rights issue, it will need to assess its capital position and may
be required to find alternative methods for achieving requisite capital ratios.
Such methods could include a reduction in dividends, a reduction in the rate of
growth of risk weighted assets, disposal of certain businesses or increased
issuance of Tier 1 securities. There can be no assurance that any of these
alternative methods would be successful in increasing the Company’s capital
ratios sufficiently or on the timetable currently envisaged. If the Company is
unable to increase its capital ratios sufficiently, its credit ratings may drop,
its cost of funding may increase and its share price may
decline.
Business review
continued
Financial
highlights
|
for
the year ended 31 December
|
2007
£m
|
2006
£m
|
2005
£m
|
|||||||
|
Total
income
|
31,115 | 28,002 | 25,902 | |||||||
|
Operating
profit before tax
|
9,900 | 9,186 | 7,936 | |||||||
|
Profit
attributable to ordinary shareholders
|
7,303 | 6,202 | 5,392 | |||||||
|
Cost:income
ratio (1)
|
46.4% | 44.6% | 46.1% | |||||||
|
Basic earnings
per share (pence) (2)
|
76.4 | 64.9 | 56.5 | |||||||
|
Return on
equity (3)
|
18.8% | 18.5% | 17.5% |
|
2007
|
2006
|
2005
|
||||||||
|
at
31 December
|
£m | £m | £m | |||||||
|
Total
assets
|
1,900,519 | 871,432 | 776,827 | |||||||
|
Loans and
advances to customers
|
829,250 | 466,893 | 417,226 | |||||||
|
Deposits
|
994,998 | 516,365 | 453,274 | |||||||
|
Owners’
equity
|
53,038 | 40,227 | 35,435 | |||||||
|
Risk asset
ratio – tier 1
|
7.3% | 7.5% | 7.6% | |||||||
|
–
total
|
11.2% | 11.7% | 11.7% | |||||||
|
Notes:
|
|
|
(1)
|
Cost:income
ratio represents operating expenses expressed as a percentage of total
income.
|
|
(2)
|
Prior year per
share data have been restated to reflect the bonus issue of ordinary
shares in May 2007.
|
|
(3)
|
Return on
equity represents profit attributable to ordinary shareholders expressed
as a percentage of average ordinary shareholders’
equity.
|
Overview
of results
As
discussed on page 2, 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
in RFS Holdings are included in minority interests.
Summary
consolidated income statement for the year ended 31 December 2007
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net
interest income
|
12,668 | 10,596 | 9,918 | |||||||||
|
Fees and
commissions receivable
|
8,465 | 7,116 | 6,750 | |||||||||
|
Fees and
commissions payable
|
(2,311 | ) | (1,922 | ) | (1,841 | ) | ||||||
|
Other
non-interest income
|
6,184 | 6,239 | 5,296 | |||||||||
|
Insurance
premium income
|
6,398 | 6,243 | 6,076 | |||||||||
|
Reinsurers’
share
|
(289 | ) | (270 | ) | (297 | ) | ||||||
|
Non-interest
income
|
18,447 | 17,406 | 15,984 | |||||||||
|
Total
income
|
31,115 | 28,002 | 25,902 | |||||||||
|
Operating
expenses
|
14,435 | 12,480 | 11,946 | |||||||||
|
Profit
before other operating charges and impairment losses
|
16,680 | 15,522 | 13,956 | |||||||||
|
Insurance
claims
|
4,770 | 4,550 | 4,413 | |||||||||
|
Reinsurers’
share
|
(118 | ) | (92 | ) | (100 | ) | ||||||
|
Impairment
losses
|
2,128 | 1,878 | 1,707 | |||||||||
|
Operating
profit before tax
|
9,900 | 9,186 | 7,936 | |||||||||
|
Tax
|
2,052 | 2,689 | 2,378 | |||||||||
|
Profit
from continuing operations
|
7,848 | 6,497 | 5,558 | |||||||||
|
Loss from
discontinued operations, net of tax
|
136 | — | — | |||||||||
|
Profit
for the year
|
7,712 | 6,497 | 5,558 | |||||||||
|
Minority
interests
|
163 | 104 | 57 | |||||||||
|
Other
owners
|
246 | 191 | 109 | |||||||||
|
Profit
attributable to ordinary shareholders
|
7,303 | 6,202 | 5,392 | |||||||||
|
Basic earnings per ordinary
share
*
|
76.4p | 64.9p | 56.5p | |||||||||
|
Diluted
earnings per ordinary share*
|
75.7p | 64.4p | 56.1p | |||||||||
*
Prior year per share data have been restated to reflect the bonus issue of
ordinary shares in May 2007.
Business review
continued
2007
compared with 2006
Profit
Profit before tax
was up 8%, from £9,186 million to £9,900 million. The results of ABN AMRO are
included from the date of acquisition, 17 October 2007.
Total
income
The
Group achieved strong growth in income during 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 grew by 26% and average customer
deposits grew by 27%.
Non-interest income
increased
by £1,041 million to £18,447 million and represents 59% of total income (2006 –
62%).
Net
interest margin
The
Group’s net interest margin at 2.39% was down from 2.53% in 2006.
Operating
expenses
Operating expenses
increased by 16% to £14,435 million.
Integration costs
were £108 million compared with £134 million in 2006.
Cost:income
ratio
The
Group’s cost:income ratio was 46.4% compared with 44.6% in 2006.
Net
insurance claims
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%.
Impairment
losses
Impairment losses
rose 13% to £2,128 million, compared with £1,878 million in 2006.
Risk elements in
lending and potential problem loans represented 1.64% of gross loans and
advances to customers excluding reverse repos at 31 December 2007 (2006 –
1.57%).
Provision coverage
of risk elements in lending and potential problem loans was 56% (2006 –
62%).
Taxation
The
effective tax rate for 2007 was 20.7% (2006 – 29.3%). The headline rate is lower
than the standard rate of UK corporation tax of 30% principally due to certain
non-taxable capital gains and changes to deferred tax balances following the
change in rate of corporation tax.
Earnings
and dividends
Basic earnings per
ordinary share increased by 18%, from 64.9p to 76.4p.
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.
Balance
sheet
Total assets were
£1,900.5 billion at 31 December 2007. The acquisition of ABN AMRO in October
2007 increased assets by £774.2 billion, with the balance accounted for largely
by growth in our lending to customers and in trading assets.
Lending to
customers, excluding repurchase agreements and stock borrowing (“reverse
repos”), increased in 2007 by 70% or £283.0 billion to £686.9 billion. Customer
deposits, excluding repurchase agreements and stock lending (“repos”), grew by
71% or £227.2 billion to £547.5 billion.
Capital ratios at 31
December 2007 were 7.3% (Tier 1) and 11.2% (Total).
Bonus
issue
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.
Profitability
The
after-tax return on ordinary shareholders’ equity, which is based on profit
attributable to ordinary shareholders and average ordinary shareholders’ equity,
was 18.8% compared with 18.5% in 2006.
2006
compared with 2005
Profit
Profit before tax
was up 16%, from £7,936 million to £9,186 million, reflecting strong organic
income growth in all divisions.
Total
income
The
Group achieved strong growth in income during 2006. Total income was up 8% or
£2,100 million to £28,002 million.
Net interest income
increased
by 7% to £10,596 million and represents 38% of total income (2005 – 38%).
Average loans and advances to customers and average customer
deposits grew by 14%
and 11% respectively.
Non-interest income
increased
by 9% to £17,406 million and represents 62% of total income (2005 –
62%).
Net
interest margin
The
Group’s net interest margin at 2.53% was down from 2.60% in 2005, due mainly to
the business mix effect of growth in corporate and mortgage lending and the
impact of the flatter US dollar yield curve.
Operating
expenses
Operating expenses
rose by 4% to £12,480 million.
Integration
Integration costs
were £134 million compared with £458 million in 2005. Included are costs
relating to the integration of First Active and Charter One, as well as the
amortisation of software costs relating to the integration of Churchill.
Integration costs in 2005 included software costs relating to the acquisition of
NatWest which were previously written-off as incurred under UK GAAP but under
IFRS were capitalised and amortised. All such software was fully amortised by
the end of 2005.
Cost:income
ratio
The
Group’s cost:income ratio was 44.6% compared with 46.1% in 2005.
Net
insurance claims
Bancassurance and
general insurance claims, after reinsurance, increased by 3% to £4,458 million
reflecting volume growth.
Impairment
losses
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%).
Provision coverage
of risk elements in lending and potential problem loans was 62% compared with
65% at 31 December 2005. This reflects amounts written-off and the changing mix
from unsecured to secured exposures.
Earnings
and dividends*
Basic earnings per
ordinary share increased by 15%, from 56.5p to 64.9p.
A
final dividend of 22.1p per ordinary share was paid, giving a total
dividend for the year of 30.2p, an increase of 25%.
*restated
for the effect of the bonus issue of ordinary shares in May 2007.
Balance
sheet
Total assets were
£871.4 billion at 31 December 2006, 12% 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% or £35.7 billion to £404.0 billion. Customer
deposits, excluding repurchase agreements and stock lending (“repos”), grew by
9% or £26.1 billion to £320.2 billion.
Capital ratios at 31
December 2006 were 7.5% (Tier 1) and 11.7% (Total).
Profitability
The
after-tax return on ordinary equity, which is based on profit attributable to
ordinary shareholders and average ordinary equity, was 18.5% compared with 17.5%
in 2005.
Business review
continued
Analysis
of results
Net
interest income
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Interest
receivable
|
33,420 | 24,688 | 21,331 | |||||||||
|
Interest
payable
|
(20,752 | ) | (14,092 | ) | (11,413 | ) | ||||||
|
Net interest
income
|
12,668 | 10,596 | 9,918 | |||||||||
|
%
|
%
|
%
|
||||||||||
|
Gross yield on
interest-earning assets of the banking business
|
6.30 | 5.90 | 5.59 | |||||||||
|
Cost of
interest-bearing liabilities of the banking business
|
(4.39 | ) | (3.85 | ) | (3.36 | ) | ||||||
|
Interest
spread of the banking business
|
1.91 | 2.05 | 2.23 | |||||||||
|
Benefit from
interest-free funds
|
0.48 | 0.48 | 0.37 | |||||||||
|
Net interest
margin of the banking business
|
2.39 | 2.53 | 2.60 | |||||||||
|
Yields,
spreads and margins of the banking business
|
%
|
%
|
%
|
|||||||||
|
Gross yield
(1)
|
||||||||||||
|
Group
|
6.30 | 5.90 | 5.59 | |||||||||
|
UK
|
6.69 | 6.13 | 6.06 | |||||||||
|
Overseas
|
5.79 | 5.50 | 4.74 | |||||||||
|
Interest
spread
(2)
|
||||||||||||
|
Group
|
1.91 | 2.05 | 2.23 | |||||||||
|
UK
|
2.30 | 2.37 | 2.45 | |||||||||
|
Overseas
|
1.39 | 1.47 | 1.87 | |||||||||
|
Net interest
margin
(3)
|
||||||||||||
|
Group
|
2.39 | 2.53 | 2.60 | |||||||||
|
UK
|
2.55 | 2.68 | 2.75 | |||||||||
|
Overseas
|
2.17 | 2.26 | 2.32 | |||||||||
|
The Royal Bank
of Scotland plc base rate (average)
|
5.51 | 4.64 | 4.65 | |||||||||
|
London
inter-bank three month offered rates (average):
|
||||||||||||
|
Sterling
|
6.00 | 4.85 | 4.76 | |||||||||
|
Eurodollar
|
5.29 | 5.20 | 3.56 | |||||||||
|
Euro
|
4.28 | 3.08 | 2.18 | |||||||||
|
Notes:
|
|
|
(1)
|
Gross yield is
the interest rate earned on average interest-earning assets of the banking
business.
|
|
(2)
|
Interest
spread is the difference between the gross yield and the interest rate
paid on average interest-bearing liabilities of the banking
business.
|
|
(3)
|
Net interest
margin is net interest income of the banking business as a percentage of
average interest-earning assets of the banking
business.
|
Average
balance sheet and related interest
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||||||||||
|
balance
|
Interest
|
Rate
|
balance
|
Interest
|
Rate
|
balance
|
Interest
|
Rate
|
||||||||||||||||||||||||||
| £m | £m |
%
|
£m | £m |
%
|
£m | £m |
%
|
||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||
|
Treasury bills
and other eligible
bills
–
UK
|
357 | 16 | 4.48 | 2,059 | 90 | 4.37 | 3,160 | 138 | 4.37 | |||||||||||||||||||||||||
|
–
Overseas
|
131 | 5 | 3.82 | 70 | 3 | 4.29 | 55 | 2 | 3.64 | |||||||||||||||||||||||||
|
Loans and
advances to
banks
–
UK
|
21,133 | 1,024 | 4.85 | 15,934 | 681 | 4.27 | 15,477 | 649 | 4.19 | |||||||||||||||||||||||||
|
–
Overseas
|
13,798 | 626 | 4.54 | 7,237 | 237 | 3.27 | 9,422 | 259 | 2.75 | |||||||||||||||||||||||||
|
Loans and
advances to
customers
–
UK
|
268,911 | 18,506 | 6.88 | 239,086 | 15,141 | 6.33 | 212,156 | 13,453 | 6.34 | |||||||||||||||||||||||||
|
–
Overseas
|
183,186 | 11,046 | 6.03 | 121,092 | 6,977 | 5.76 | 104,579 | 5,206 | 4.98 | |||||||||||||||||||||||||
|
Debt
securities
–
UK
|
10,526 | 584 | 5.55 | 10,757 | 508 | 4.72 | 14,731 | 630 | 4.28 | |||||||||||||||||||||||||
|
–
Overseas
|
32,333 | 1,613 | 4.99 | 21,962 | 1,051 | 4.79 | 22,299 | 994 | 4.46 | |||||||||||||||||||||||||
|
Total interest-earning assets
–
banking
business
(2,
3)
|
530,375 | 33,420 | 6.30 | 418,197 | 24,688 | 5.90 | 381,879 | 21,331 | 5.59 | |||||||||||||||||||||||||
|
– trading
business
(4)
|
313,204 | 202,408 | 172,990 | |||||||||||||||||||||||||||||||
|
Total
interest-earning assets
|
843,579 | 620,605 | 554,869 | |||||||||||||||||||||||||||||||
|
Non-interest-earning
assets
(2,
3)
|
316,697 | 213,297 | 182,179 | |||||||||||||||||||||||||||||||
|
Total
assets
|
1,160,276 | 833,902 | 737,048 | |||||||||||||||||||||||||||||||
|
Percentage of
assets applicable to overseas operations
|
38.0 | % | 35.2 | % | 35.3 | % | ||||||||||||||||||||||||||||
|
Liabilities
and owners’ equity
|
||||||||||||||||||||||||||||||||||
|
Deposits by
banks
–
UK
|
52,951 | 2,234 | 4.22 | 35,985 | 1,393 | 3.87 | 34,742 | 1,192 | 3.43 | |||||||||||||||||||||||||
|
–
Overseas
|
34,559 | 1,417 | 4.10 | 28,772 | 1,228 | 4.27 | 27,383 | 891 | 3.25 | |||||||||||||||||||||||||
|
Customer
accounts: demand deposits
–
UK
|
93,764 | 3,296 | 3.52 | 86,207 | 2,428 | 2.82 | 73,653 | 2,057 | 2.79 | |||||||||||||||||||||||||
|
–
Overseas
|
30,739 | 1,035 | 3.37 | 13,113 | 441 | 3.36 | 13,823 | 299 | 2.16 | |||||||||||||||||||||||||
|
Customer
accounts: savings deposits
–
UK
|
36,334 | 1,658 | 4.56 | 30,933 | 1,058 | 3.42 | 26,727 | 778 | 2.91 | |||||||||||||||||||||||||
|
–
Overseas
|
29,908 | 1,005 | 3.36 | 19,766 | 529 | 2.68 | 21,700 | 381 | 1.76 | |||||||||||||||||||||||||
|
Customer
accounts: other time deposits
–
UK
|
88,089 | 4,201 | 4.77 | 67,126 | 2,807 | 4.18 | 60,350 | 2,325 | 3.85 | |||||||||||||||||||||||||
|
–
Overseas
|
46,284 | 2,282 | 4.93 | 36,177 | 1,636 | 4.52 | 32,024 | 979 | 3.06 | |||||||||||||||||||||||||
|
Debt
securities in issue
–
UK
|
57,140 | 3,060 | 5.36 | 45,829 | 2,210 | 4.82 | 42,745 | 1,771 | 4.14 | |||||||||||||||||||||||||
|
–
Overseas
|
50,064 | 2,650 | 5.29 | 25,249 | 1,076 | 4.26 | 19,621 | 633 | 3 .23 | |||||||||||||||||||||||||
|
Subordinated
liabilities
–
UK
|
23,502 | 1,300 | 5.53 | 23,873 | 1,226 | 5.14 | 23,948 | 1,117 | 4.66 | |||||||||||||||||||||||||
|
–
Overseas
|
4,763 | 242 | 5.08 | 2,639 | 160 | 6.06 | 2,642 | 154 | 5.83 | |||||||||||||||||||||||||
|
Internal
funding of trading business
–
UK
|
(68,395 | ) | (3,307 | ) | 4.84 | (44,475 | ) | (1,893 | ) | 4.26 | (37,628 | ) | (1,125 | ) | 2.99 | |||||||||||||||||||
|
–
Overseas
|
(7,454 | ) | (321 | ) | 4.31 | (4,930 | ) | (207 | ) | 4.20 | (2,186 | ) | (39 | ) | 1.78 | |||||||||||||||||||
|
Total interest-bearing
liabilities
– banking
business
(2,
3)
|
472,248 | 20,752 | 4.39 | 366,264 | 14,092 | 3.85 | 339,544 | 11,413 | 3.36 | |||||||||||||||||||||||||
|
– trading
business
(4)
|
316,540 | 204,810 | 172,744 | |||||||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
788,788 | 571,074 | 512,288 | |||||||||||||||||||||||||||||||
|
Non-interest-bearing
liabilities
|
||||||||||||||||||||||||||||||||||
|
Demand
deposits
–
UK
|
18,416 | 17,909 | 17,484 | |||||||||||||||||||||||||||||||
|
–
Overseas
|
14,455 | 11,668 | 11,181 | |||||||||||||||||||||||||||||||
|
Other
liabilities
(3,
4)
|
295,258 | 196,375 | 163,147 | |||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
43,359 | 36,876 | 32,948 | |||||||||||||||||||||||||||||||
|
Total
liabilities & shareholders' equity
|
1,160,276 | 833,902 | 737,048 | |||||||||||||||||||||||||||||||
|
Percentage of
liabilities applicable to overseas operations
|
35.9 | % | 32.3 | % | 33.5 | % | ||||||||||||||||||||||||||||
|
Notes:
|
|
|
(1)
|
The analysis
into UK and Overseas has been compiled on the basis of location of
office.
|
|
(2)
|
Interest-earning
assets and interest-bearing liabilities include the Retail bancassurance
assets and liabilities attributable to policyholders.
|
|
(3)
|
Interest
income and interest expense do not include interest on financial
assets and liabilities designated as at fair value through profit or loss.
|
|
(4)
|
Interest
receivable and interest payable on trading assets and liabilities are
included in income from trading
activities.
|
Analysis
of change in net interest income – volume and rate analysis
Volume and rate
variances have been calculated based on movements in average balances over the
period and changes in interest rates on average interest-earning assets and
average interest-bearing liabilities. Changes due to a combination of volume and
rate are allocated pro rata to volume and rate movements.
|
2007 over
2006
|
2006 over
2005
|
|||||||||||||||||||||||
|
Increase/(decrease)
due to changes in:
|
Increase/(decrease)
due to changes in:
|
|||||||||||||||||||||||
|
Average
|
Average
|
Net
|
Average
|
Average
|
Net
|
|||||||||||||||||||
|
volume
|
rate
|
change
|
volume
|
rate
|
change
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Interest-earning
assets
|
||||||||||||||||||||||||
|
Treasury bills
and other eligible bills
|
||||||||||||||||||||||||
|
UK
|
(76 | ) | 2 | (74 | ) | (48 | ) | — | (48 | ) | ||||||||||||||
|
Overseas
|
2 | — | 2 | 1 | — | 1 | ||||||||||||||||||
|
Loans and
advances to banks
|
||||||||||||||||||||||||
|
UK
|
243 | 100 | 343 | 19 | 13 | 32 | ||||||||||||||||||
|
Overseas
|
273 | 116 | 389 | (66 | ) | 44 | (22 | ) | ||||||||||||||||
|
Loans and
advances to customers
|
||||||||||||||||||||||||
|
UK
|
1,985 | 1,380 | 3,365 | 1,705 | (17 | ) | 1,688 | |||||||||||||||||
|
Overseas
|
3,730 | 339 | 4,069 | 887 | 884 | 1,771 | ||||||||||||||||||
|
Debt
securities
|
||||||||||||||||||||||||
|
UK
|
(11 | ) | 87 | 76 | (183 | ) | 61 | (122 | ) | |||||||||||||||
|
Overseas
|
516 | 46 | 562 | (15 | ) | 72 | 57 | |||||||||||||||||
|
Total interest
receivable of the banking business
|
||||||||||||||||||||||||
|
UK
|
2,141 | 1,569 | 3,710 | 1,493 | 57 | 1,550 | ||||||||||||||||||
|
Overseas
|
4,521 | 501 | 5,022 | 807 | 1,000 | 1,807 | ||||||||||||||||||
| 6,662 | 2,070 | 8,732 | 2,300 | 1,057 | 3,357 | |||||||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||
|
Deposits by
banks
|
||||||||||||||||||||||||
|
UK
|
(706 | ) | (135 | ) | (841 | ) | (44 | ) | (157 | ) | (201 | ) | ||||||||||||
|
Overseas
|
(239 | ) | 50 | (189 | ) | (47 | ) | (290 | ) | (337 | ) | |||||||||||||
|
Customer
accounts: demand deposits
|
||||||||||||||||||||||||
|
UK
|
(227 | ) | (641 | ) | (868 | ) | (353 | ) | (18 | ) | (371 | ) | ||||||||||||
|
Overseas
|
(593 | ) | (1 | ) | (594 | ) | 16 | (158 | ) | (142 | ) | |||||||||||||
|
Customer
accounts: savings deposits
|
||||||||||||||||||||||||
|
UK
|
(206 | ) | (394 | ) | (600 | ) | (133 | ) | (147 | ) | (280 | ) | ||||||||||||
|
Overseas
|
(318 | ) | (158 | ) | (476 | ) | 37 | (185 | ) | (148 | ) | |||||||||||||
|
Customer
accounts: other time deposits
|
||||||||||||||||||||||||
|
UK
|
(962 | ) | (432 | ) | (1,394 | ) | (274 | ) | (208 | ) | (482 | ) | ||||||||||||
|
Overseas
|
(488 | ) | (158 | ) | (646 | ) | (140 | ) | (517 | ) | (657 | ) | ||||||||||||
|
Debt
securities in issue
|
||||||||||||||||||||||||
|
UK
|
(587 | ) | (263 | ) | (850 | ) | (134 | ) | (305 | ) | (439 | ) | ||||||||||||
|
Overseas
|
(1,263 | ) | (311 | ) | (1,574 | ) | (209 | ) | (234 | ) | (443 | ) | ||||||||||||
|
Subordinated
liabilities
|
||||||||||||||||||||||||
|
UK
|
19 | (93 | ) | (74 | ) | 4 | (113 | ) | (109 | ) | ||||||||||||||
|
Overseas
|
(111 | ) | 29 | (82 | ) | — | (6 | ) | (6 | ) | ||||||||||||||
|
Internal
funding of trading business
|
||||||||||||||||||||||||
|
UK
|
1,129 | 285 | 1,414 | 231 | 537 | 768 | ||||||||||||||||||
|
Overseas
|
109 | 5 | 114 | 81 | 87 | 168 | ||||||||||||||||||
|
Total interest
payable of the banking business
|
||||||||||||||||||||||||
|
UK
|
(1,540 | ) | (1,673 | ) | (3,213 | ) | (703 | ) | (411 | ) | (1,114 | ) | ||||||||||||
|
Overseas
|
(2,903 | ) | (544 | ) | (3,447 | ) | (262 | ) | (1,303 | ) | (1,565 | ) | ||||||||||||
| (4,443 | ) | (2,217 | ) | (6,660 | ) | (965 | ) | (1,714 | ) | (2,679 | ) | |||||||||||||
|
Movement
in net interest income
|
||||||||||||||||||||||||
|
UK
|
601 | (104 | ) | 497 | 790 | (354 | ) | 436 | ||||||||||||||||
|
Overseas
|
1,618 | (43 | ) | 1,575 | 545 | (303 | ) | 242 | ||||||||||||||||
| 2,219 | (147 | ) | 2,072 | 1,335 | (657 | ) | 678 | |||||||||||||||||
Business review
continued
Non-interest
income
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Fees and
commissions receivable
|
8,465 | 7,116 | 6,750 | |||||||||
|
Fees and
commissions payable
|
(2,311 | ) | (1,922 | ) | (1,841 | ) | ||||||
|
Income from
trading activities
|
1,327 | 2,675 | 2,343 | |||||||||
|
Other
operating income
|
4,857 | 3,564 | 2,953 | |||||||||
| 12,338 | 11,433 | 10,205 | ||||||||||
|
Insurance
premium income
|
6,398 | 6,243 | 6,076 | |||||||||
|
Reinsurers’
share
|
(289 | ) | (270 | ) | (297 | ) | ||||||
| 6,109 | 5,973 | 5,779 | ||||||||||
| 18,447 | 17,406 | 15,984 | ||||||||||
2007
compared with 2006
Non-interest income
increased by 6%, £1,041 million to £18,447 million, including £960 million from
the acquisition of ABN AMRO. Good organic growth was offset by write-downs in
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.
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.
Income from trading
activities was down from £2,675 million to £1,327 million. Interest rate and
currency trading activities benefitted from increased volatility and there was
good growth from a broadening product range. These improvements were, however,
more than offset by credit markets write downs (see credit market exposures on
page 24
).
Other operating
income increased by 36%, £1,293 million to £4,857 million. This was principally
due to growth in income from rental and asset-backed activities and principal
investments in Corporate Markets.
General insurance
premium income, after reinsurance, increased by 2% to £6,109 million with good
growth in policies in the core businesses, particularly in Continental
Europe.
2006
compared with 2005
Non-interest income
increased by £1,422 million, 9% to £17,406 million reflecting strong organic
growth in all divisions especially Global Banking & Markets, up 25% and
Wealth Management, up 14%. Non-interest income represents 62% of total income
(2005 – 62%). Excluding general insurance premium income, non-interest income
rose by 12% or £1,228 million to £11,433 million.
Within non-interest
income, fees and commissions receivable increased by 5% or £366 million, to
£7,116 million, while fees and commissions payable increased by 4%, £81 million
to £1,922 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.
Other operating
income increased by 21%, £611 million to £3,564 million. This was principally
due to growth in income from rental and asset-backed activities and principal
investments in Corporate Markets.
General insurance
premium income, after reinsurance, rose by 3%, or £194 million to £5,973 million
with good growth in motor policies in the UK and Continental
Europe.
Credit
market exposures
|
Net exposure
at
|
Average
|
|||||||
|
31 December
2007
|
price
|
|||||||
|
|
£m |
%
|
||||||
|
Super senior
tranches of ABS CDOs
|
||||||||
|
High grade
CDOs
|
2,581 | 84 | ||||||
|
Mezzanine
CDOs
|
1,253 | 70 | ||||||
|
CDO
squared
|
— | — | ||||||
|
Sub-prime
trading inventory
|
||||||||
|
Investment
grade
|
937 | 79 | ||||||
|
Non-investment
grade
|
255 | 54 | ||||||
|
Residuals
|
100 | 50 | ||||||
|
Leveraged
finance
|
8,698 | 95 | ||||||
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) for subsequent sale
to investors. The Group retains exposure to some of the super senior tranches of
these CDOs which are all carried at fair value.
At
31 December 2007 the Group’s exposure to these super senior tranches, net of
hedges and write-downs, totalled £2.6 billion to high grade CDOs, which include
commercial loan collateral as well as prime and sub-prime mortgage collateral,
and £1.3 billion to mezzanine CDOs, which are based primarily on residential
mortgage collateral. Both categories of CDO have high attachment points. There
was also £1.2 billion of exposure to sub-prime mortgages through a trading
inventory of mortgage-backed securities and CDOs and £100 million through
securitisation residuals.
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. Trading book exposures and
residuals are marked to market on the basis of direct prices, where available,
or observable market benchmarks.
Drawn leveraged
finance positions totalled £8.7 billion at 31 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 CDX credit default swap
indices.
|
Exposure
net
|
||||
|
of hedges
at
|
||||
|
31 December
2007
|
||||
|
|
£m | |||
|
Alt-A
|
||||
|
Investment
grade
|
1,972 | |||
|
Non-investment
grade
|
261 | |||
|
CLOs
|
1,386 | |||
|
Commercial
mortgages
|
8,808 | |||
|
Financial
guarantors
|
2,547 | |||
At
31 December 2007, the Group had £2.2 billion of US Alt-A residential mortgage
trading inventory, of which more than 85% is investment grade. Collateralised
loan obligation exposures totalled £1.4 billion. Commercial mortgage exposure,
consisting of loans originated for the purposes of securitisation, totalled £8.8
billion at 31 December 2007. The portfolio consisted predominantly of
commerc
ial
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. All of the above
exposures are ca
r
ried
at fair value.
Business review
continued
Operating
expenses
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Administrative
expenses:
|
||||||||||||
|
Staff
costs
|
7,552 | 6,723 | 5,992 | |||||||||
|
Premises and
equipment
|
1,766 | 1,421 | 1,313 | |||||||||
|
Other
administrative expenses
|
3,147 | 2,658 | 2,816 | |||||||||
|
Total
administrative expenses
|
12,465 | 10,802 | 10,121 | |||||||||
|
Depreciation
and amortisation
|
1,970 | 1,678 | 1,825 | |||||||||
| 14,435 | 12,480 | 11,946 | ||||||||||
2007
compared with 2006
Operating expenses
increased by 16%, £1,955 million to £14,435 million including £1,880 million
relating to ABN AMRO. Adjusting for this, operating expenses increased by just
£75 million, 1%, reflecting tight cost management and the benefits of the
Group’s manufacturing platform. Further improvements in productivity have
supported growth in business volumes, and allowed the Group to maintain high
levels of customer satisfaction.
The
Group’s ratio of operating expenses to total income was 46.4% compared with
44.6% in 2006.
2006
compared with 2005
Operating expenses
rose by 4% to £12,480 million to support the strong growth in business
volumes.
Staff costs were up
£731 million, 12% to £6,723 million reflecting growth and expansion of
activities in Corporate Markets, where the number of staff increased by
1,600.
Premises and
equipment expenses increased by £108 million, 8% to £1,421 million reflecting
the continuation of our branch network improvement programme and ongoing
investment in our major operational centres.
Other administrative
expenses, down 6%, £158 million to £2,658 million reflected efficiency
improvements whilst supporting higher business volumes and lower costs in
relation to the integration of Churchill, First Active and Citizens’
acquisitions.
The
Group’s ratio of operating expenses to total income was 44.6% compared with
46.1% in 2005.
Integration
costs
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Staff
costs
|
18 | 76 | 148 | |||||||||
|
Premises and
equipment
|
4 | 10 | 39 | |||||||||
|
Other
administrative expenses
|
26 | 32 | 131 | |||||||||
|
Depreciation
and amortisation
|
60 | 16 | 140 | |||||||||
| 108 | 134 | 458 | ||||||||||
2007
compared with 2006 and 2005
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 the expected useful lives of up to
five 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 Churchill, First Active and Citizens’ acquisitions, including
Charter One which was acquired in August 2004.
Accruals in relation
to integration costs are set out below.
|
At
|
Charge
|
Utilised
|
At
|
|||||||||||||
|
31
December
|
to
income
|
during
|
31
December
|
|||||||||||||
|
2006
|
statement
|
the
year
|
2007
|
|||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Staff
costs
|
23 | 18 | (37 | ) | 4 | |||||||||||
|
Premises and
equipment
|
— | 4 | (2 | ) | 2 | |||||||||||
|
Other
|
8 | 86 | (93 | ) | 1 | |||||||||||
| 31 | 108 | (132 | ) | 7 | ||||||||||||
Business review
continued
Impairment
losses
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
New impairment
losses
|
2,518 | 2,093 | 1,879 | |||||||||
|
less:
recoveries of amounts previously written-off
|
(390 | ) | (215 | ) | (172 | ) | ||||||
|
Charge to
income statement
|
2,128 | 1,878 | 1,707 | |||||||||
|
Comprising:
|
||||||||||||
|
Loan
impairment losses
|
2,106 | 1,877 | 1,703 | |||||||||
|
Other
impairment losses
|
22 | 1 | 4 | |||||||||
|
Charge to
income statement
|
2,128 | 1,878 | 1,707 | |||||||||
2007
compared with 2006
Impairment losses
were £2,128 million compared with £1,878 million. Impairment losses in ABN AMRO
in the period since acquisition were £263 million. Adjusting for this,
impairment losses fell by £13 million, 1%. This reflected improvement in
Corporate Markets and Retail Markets partially offset by higher impairment in
Citizens. New impairment losses were up 20%, £425 million to £2,518 million.
Recoveries of amounts previously written-off were up £175 million, 81% to £390
million. Consequently the net charge to the income statement was up £250
million, 13% to £2,128 million.
Total balance sheet
provisions for impairment, including ABN AMRO, amounted to £6,441 million
compared with £3,935 million in 2006.
Total provision
coverage (the ratio of total balance sheet provisions for impairment to total
risk elements in lending) 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.
2006
compared with 2005
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 Markets reflecting a benign credit environment partly
offset higher impairment losses in Retail Markets and Citizens.
Total balance sheet
provisions for impairment amounted to £3,935 million compared with £3,887
million in 2005.
Total provision
coverage (the ratio of total balance sheet provisions for impairment to total
risk elements in lending) decreased from 65% to 62%. The ratio of total balance
sheet provisions for impairment to total risk elements in lending and potential
problem loans also decreased to 62% compared with 65% in 2005. This reflects
amounts written-off and the changing mix from unsecured to secured
exposure.
Taxation
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Tax
|
2,052 | 2,689 | 2,378 | |||||||||
|
%
|
%
|
%
|
||||||||||
|
UK corporation
tax rate
|
30.0 | 30.0 | 30.0 | |||||||||
|
Effective tax
rate
|
20.7 | 29.3 | 30.0 | |||||||||
The
actual tax charge differs from the expected tax charge computed by applying the
standard rate of UK corporation tax as follows:
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Expected tax
charge
|
2,970 | 2,756 | 2,381 | |||||||||
|
Non-deductible
items
|
263 | 288 | 309 | |||||||||
|
Non-taxable
items
|
(595 | ) | (251 | ) | (166 | ) | ||||||
|
Taxable
foreign exchange movements
|
16 | 5 | (10 | ) | ||||||||
|
Reduction in
deferred tax liability following change in the rate of UK Corporation
Tax
|
(189 | ) | — | — | ||||||||
|
Foreign
profits taxed at other rates
|
(37 | ) | 63 | 77 | ||||||||
|
Unutilised
losses – brought forward and carried forward
|
(9 | ) | 14 | (5 | ) | |||||||
|
Adjustments in
respect of prior periods
|
(367 | ) | (186 | ) | (208 | ) | ||||||
|
Actual tax
charge
|
2,052 | 2,689 | 2,378 | |||||||||
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 corporation tax of 30%
principally due to certain non-taxable capital gains, changes to deferred tax
balances following the change in rate of corporation tax and release of tax
provisions following the finalisation of prior year issues.
Business review
continued
Divisional
performance
The
following discussion reflects the organization of the Group's operations as at
31 December 2007.
The
profit of each division 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 (“Operating profit
before tax”) are shown below. The Group continues to manage costs where they
arise, with customer-facing divisions controlling their direct expenses whilst
Manufacturing is responsible for shared costs. The Group does not allocate these
shared costs between divisions in the day-to-day management of its businesses,
and the way in which divisional results are presented reflects this. The results
below include an allocation of Manufacturing costs to the customer-facing
divisions on a basis management considers to be reasonable.
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Global Banking
& Markets
|
3,687 | 3,779 | 3,053 | |||||||||
|
UK Corporate
Banking
|
1,961 | 1,762 | 1,571 | |||||||||
|
Retail
Markets
|
||||||||||||
|
-
Retail
|
2,470 | 2,250 | 2,207 | |||||||||
|
- Wealth
Management
|
413 | 318 | 249 | |||||||||
|
Total Retail
Markets
|
2,883 | 2,568 | 2,456 | |||||||||
|
Ulster
Bank
|
513 | 421 | 361 | |||||||||
|
Citizens
|
1,323 | 1,582 | 1,575 | |||||||||
|
RBS
Insurance
|
683 | 749 | 727 | |||||||||
|
Manufacturing
|
- | - | - | |||||||||
|
Central
Items
|
(896 | ) | (1,447 | ) | (1,492 | ) | ||||||
|
RFS Holdings
excluding minority interests
|
(115 | ) | - | - | ||||||||
|
RFS Holdings
minority interests
|
243 | - | - | |||||||||
|
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 | |||||||||
|
Amortisation
of purchased intangible assets
|
(274 | ) | (94 | ) | (97 | ) | ||||||
|
Integration
costs
|
(108 | ) | (134 | ) | (458 | ) | ||||||
|
Net gain on
sale of strategic investments and subsidiaries
|
- | - | 240 | |||||||||
|
Operating
profit before tax
|
9,900 | 9,186 | 7,936 | |||||||||
The
performance of each of the divisions is reviewed on pages 30 to
45.
Business review
continued
Corporate
Markets – Global Banking & Markets
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net interest
income from banking activities
|
1,544 | 1,632 | 1,487 | |||||||||
|
Funding costs
of rental assets
|
(495 | ) | (519 | ) | (452 | ) | ||||||
|
Net interest
income
|
1,049 | 1,113 | 1,035 | |||||||||
|
Net fees and
commissions receivable
|
1,193 | 895 | 704 | |||||||||
|
Income from
trading activities
|
1,006 | 2,348 | 2,061 | |||||||||
|
Income from
rental assets
|
1,174 | 1,196 | 1,074 | |||||||||
|
Other
operating income
|
2,158 | 1,279 | 744 | |||||||||
|
Non-interest
income
|
5,531 | 5,718 | 4,583 | |||||||||
|
Total
Income
|
6,580 | 6,831 | 5,618 | |||||||||
|
Direct
expenses
|
||||||||||||
|
- staff
costs
|
1,826 | 1,975 | 1,518 | |||||||||
|
-
other
|
518 | 442 | 371 | |||||||||
|
-
operating lease depreciation
|
365 | 406 | 398 | |||||||||
| 2,709 | 2,823 | 2,287 | ||||||||||
|
Impairment
losses
|
39 | 85 | 139 | |||||||||
|
Contribution
|
3,832 | 3,923 | 3,192 | |||||||||
|
Allocation of
Manufacturing costs
|
145 | 144 | 139 | |||||||||
|
Operating
profit before tax
|
3,687 | 3,779 | 3,053 | |||||||||
|
£bn
|
£bn
|
£bn
|
||||||||||
|
Total
assets*
|
579.4 | 383.7 | 330.9 | |||||||||
|
Loans and
advances to customers - gross*
|
||||||||||||
|
-
banking book
|
121.1 | 94.3 | 82.0 | |||||||||
|
-
trading book
|
20.0 | 15.4 | 11.8 | |||||||||
|
Rental
assets
|
10.2 | 12.2 | 11.9 | |||||||||
|
Customer
deposits*
|
72.9 | 54.1 | 44.7 | |||||||||
|
Risk-weighted
assets
|
152.6 | 138.1 | 120.0 | |||||||||
*
excluding repos and reverse repos
2007
compared with 2006
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. Operating profit before tax was
£3,687 million, 2% lower than 2006’s record result.
While many parts of
GBM grew strongly, total income of £6,580 million was 4% lower than in 2006,
reflecting both cumulative 2007 write-downs of our sub-prime-related and
leveraged finance positions and an additional £456 million in response to the
weakening credit profile of certain financial guarantors.
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.
The
strength of GBM and the successful diversification of its product capabilities
resulted in a continuation of the strong growth we have achieved in Asia and
continental Europe in recent years. In Asia we have now established a solid
platform, with good product capabilities and client relationships. In 2007 this
resulted in Asian income growing by 96%, with outstanding growth in our
activities in China and Japan. In Europe, income grew by 39%, with particularly
good results in the Nordic region and in the Iberian Peninsula, where GBM
further expanded its strong position in the provision of financing and risk
management services to corporates and financial institutions. Income in the UK
grew by 21%, while results in North America declined as a result of credit
market conditions affecting GBM’s asset-backed and structured credit
businesses.
Net
interest income fell by 6% to £1,049 million. Average loans and advances to
customers, excluding reverse repos, increased by 22% as we expanded our customer
base outside the UK and average customer deposits increased by 25%.
Net
fee income rose by 33% to £1,193 million, reflecting our top tier position in
arranging, structuring and distributing large scale financings. We achieved
particularly strong growth in non-US loan markets.
Income from trading
activities declined by £1,342 million. 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
credit markets,
write-downs reflecting the weakening of the US housing market led to a sharp
fall in income.
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 decreased by 2% to £1,174
million.
Other operating
income increased to £2,158 million, 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.
Costs were reduced
by 4% to £2,854 million, in line with income. We continued to invest in
expanding our geographical footprint, our infrastructure and our product
range.
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.
2006
compared with 2005
Global Banking &
Markets performed strongly in 2006, delivering excellent growth in income while
continuing to build our strong international franchise. Total income rose by 22%
to £6,831 million, contribution by 23% to £3,923 million and operating profit
before tax by 24% to £3,779 million.
GBM
is a leading provider of debt financing and risk management solutions covering
the origination, structuring and distribution of a wide range of assets. In 2006
we arranged over $450 billion of financing for our corporate and institutional
customers, up 17% from 2005. We ranked first among managers of global
asset-backed and mortgage-backed securitisations and fourth among managers of
global syndicated loans, while among managers of international bonds we moved
from thirteenth place to eighth. These league table positions demonstrate our
success in broadening and deepening our franchise.
In
2006 we have further invested in extending our product capabilities and our
worldwide reach. Income in North America rose by 18% in local currency, despite
flat revenues in our US residential mortgage-backed securities business, as the
investments we have made in our debt capital markets, loan markets, rates and
credit trading businesses have borne fruit.
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
interest income rose by 8% to £1,113 million, representing 16% of total GBM
income. Average loans and advances to customers increased by 20% as we further
expanded our customer base outside the UK.
Net
fee income rose by 27% to £895 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.
Income from trading
activities continued to grow steadily, rising by 14% to £2,348 million as a
result of good volumes of debt and risk management products provided to our
customers. A strong performance in credit products was supplemented by growth in
our broadening product range, including equity derivatives and structured
credit, partially offset by the impact of a slower US mortgage-backed securities
market. Average trading book value at risk remained modest at £14.2
million.
Our
rental and other asset-based activities have achieved continuing success in
originating, structuring, financing and managing physical assets such as
aircraft, trains, ships and real estate for our customers. This success has
driven good growth in income from rental assets, which increased to £1,196
million from £1,074 million.
These businesses
also generate value through the ownership of a portfolio of assets which we
manage actively. Good results from these activities, as well as from principal
investments where we work with our corporate customers and with financial
sponsors, leveraging our financial capability to structure and participate in a
wide variety of investment opportunities, were reflected in other operating
income, which increased to £1,279 million from £744 million in
2005.
We
have maintained good cost discipline while continuing to invest in extending our
geographical footprint, our infrastructure and our product range. Total expenses
grew by 22% to £2,967 million. Variable performance-related compensation
increased and now accounts for 41% of total costs.
Portfolio risk
remained stable and the corporate credit environment remained benign. Impairment
losses fell to £85 million, with the distribution of impairments over the course
of the year reflecting recoveries in the first half.
Average
risk-weighted assets grew by 11% and the ratio of operating profit to average
risk-weighted assets improved from 2.6% to 2.9%.
Business review
continued
Corporate
Markets – UK Corporate Banking
|
2007
|
2006
|
2005
|
||||||||
| £m | £m | £m | ||||||||
|
Net interest
income
|
2,260 | 2,115 | 1,906 | |||||||
|
Non-interest
income
|
1,482 | 1,347 | 1,266 | |||||||
|
Total
income
|
3,742 | 3,462 | 3,172 | |||||||
|
Direct
expenses
|
||||||||||
|
- staff
costs
|
631 | 564 | 489 | |||||||
|
-
other
|
214 | 186 | 165 | |||||||
|
-
operating lease
depreciation
|
319 | 330 | 335 | |||||||
| 1,164 | 1,080 | 989 | ||||||||
|
Impairment
losses
|
180 | 189 | 196 | |||||||
|
Contribution
|
2,398 | 2,193 | 1,987 | |||||||
|
Allocation of
Manufacturing costs
|
437 | 431 | 416 | |||||||
|
Operating
profit before tax
|
1,961 | 1,762 | 1,571 | |||||||
|
£bn
|
£bn
|
£bn
|
||||||||
|
Total
assets*
|
102.7 | 88.7 | 78.3 | |||||||
|
Loans and
advances to customers - gross*
|
100.6 | 86.8 | 76.7 | |||||||
|
Customer
deposits*
|
86.6 | 78.5 | 66.4 | |||||||
|
Risk-weighted
assets
|
104.6 | 93.1 | 82.6 | |||||||
*
excluding repos and reverse repos
2007
compared with 2006
UK
Corporate Banking (‘UKCB’) had another successful year of profitable growth,
building further on our market-leading position and achieving significant
improvements in customer satisfaction. Total income rose by 8% to £3,742 million
and contribution by 9% to £2,398 million. Operating profit before tax rose by
11% to £1,961 million.
There has been good
growth in customer volumes, with average loans and advances up 11% and average
deposits up 14%. Net interest income increased by 7% to £2,260 million as net
interest margin narrowed slightly from the prior year. In recent months we have
seen firmer margins in some areas.
Non-interest income
rose by 10% to £1,482 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.
Total expenses rose
by 6% to £1,601 million, with investment targeted towards improving customer
service. Around 600 new front line roles were created and major new
functionality was added to the Bankline electronic banking platform. These
initiatives have contributed to strongly favourable customer satisfaction scores
in 2007.
Impairment losses
totalled £180 million, 5% lower than in 2006, reflecting the strong quality of
the portfolio. Corporate credit metrics remained stable.
2006
compared with 2005
UK
Corporate Banking had a successful year across all its businesses, strengthening
its market leading positions in corporate and commercial banking and building
good momentum in the provision of a broadening range of financing and risk
management services to its customer base. As a result UKCB increased its total
income by 9% to £3,462 million and contribution by 10% to £2,193 million.
Operating profit before tax rose by 12% to £1,762 million.
Net
interest income grew by 11% to £2,115 million. We achieved an 18% increase in
average loans and advances to customers, with good growth across all customer
segments. We increased average customer deposits by 21%, demonstrating the
attractiveness of our range of deposit products for commercial and corporate
customers. Changes in the deposit mix and some narrowing of lending margins,
principally in the first half of the year, led to a modest decline in UKCB’s net
interest margin.
Non-interest income
rose by 6% to £1,347 million, reflecting good growth in origination fees and
improved distribution of trade and invoice finance and interest rate and foreign
exchange products.
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.
Impairment losses
were 4% lower than in 2005 at £189 million. Portfolio risk remained stable and
the credit environment benign.
Retail
Markets
|
2007
|
2006
|
2005
|
||||||||
| £m | £m | £m | ||||||||
|
Net interest
income
|
4,760 | 4,604 | 4,404 | |||||||
|
Non-interest
income
|
4,030 | 3,851 | 3,678 | |||||||
|
Total
income
|
8,790 | 8,455 | 8,082 | |||||||
|
Direct
expenses
|
||||||||||
|
– staff
costs
|
1,699 | 1,616 | 1,539 | |||||||
|
–
other
|
742 | 748 | 788 | |||||||
| 2,441 | 2,364 | 2,327 | ||||||||
|
Insurance net
claims
|
518 | 488 | 486 | |||||||
|
Impairment
losses
|
1,200 | 1,311 | 1,148 | |||||||
|
Contribution
|
4,631 | 4,292 | 4,121 | |||||||
|
Allocation of
Manufacturing costs
|
1,748 | 1,724 | 1,665 | |||||||
|
Operating
profit before tax
|
2,883 | 2,568 | 2,456 | |||||||
|
£bn
|
£bn
|
£bn
|
||||||||
|
Total banking
assets
|
125.1 | 118.4 | 113.0 | |||||||
|
Loans and
advances to customers – gross
|
||||||||||
|
–
mortgages
|
72.0 | 69.7 | 64.6 | |||||||
|
–
personal
|
21.5 | 20.5 | 21.0 | |||||||
|
–
cards
|
8.4 | 8.2 | 8.7 | |||||||
|
–
business
|
20.2 | 18.1 | 16.7 | |||||||
|
Customer
deposits*
|
130.4 | 115.5 | 105.2 | |||||||
|
Investment
management assets – excluding deposits
|
42.1 | 34.9 | 31.4 | |||||||
|
Risk-weighted
assets
|
80.8 | 77.0 | 79.2 | |||||||
*
customer deposits exclude bancassurance
2007
compared with 2006
Retail Markets
delivered a strong performance in 2007 with operating profit rising by 12% to
£2,883 million as a result of good income growth, tight expense control and
reduced impairment costs. Total income rose 4% to £8,790 million, and income net
of claims also grew by 4% to £8,272 million.
These strong results
reflect the emphasis on savings and investment products, our focus on
profitability rather than volume in consumer lending, and significant investment
in our 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 before tax in the second half of the year 14% higher than in the same
period of 2006.
Expenses have been
kept under tight control, with efficiency gains allowing us to invest and grow
the business. Impairment losses maintained the improvement witnessed in the
first half of the year, falling by 8% for the year as a whole. Arrears trends on
credit cards and unsecured personal loans continued to improve, as did the
quality of our asset base.
Risk-weighted assets
rose by 5% to £80.8 billion at the end of 2007.
2006
compared with 2005
Retail Markets
achieved a good performance in 2006, with total income rising by 5% to £8,455
million. Contribution increased by 4% to £4,292 million and operating profit
before tax by 5% to £2,568 million.
Responding to
evolving demand from its customers, Retail 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 Banking and Direct Channels into a unified
business.
Customer recruitment
has been centred on our branch channels, where we have achieved good growth in
savings accounts and are joint market leader for personal current accounts. Our
commitment to customer service, through the largest network of branches and ATMs
in the UK, is reflected in our industry-leading customer satisfaction
ratings.
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.
Business review
continued
Retail
|
2007
|
2006
|
2005
|
||||||||
| £m | £m | £m | ||||||||
|
Net interest
income
|
4,191 | 4,108 | 3,965 | |||||||
|
Non-interest
income
|
3,571 | 3,458 | 3,333 | |||||||
|
Total
income
|
7,762 | 7,566 | 7,298 | |||||||
|
Direct
expenses
|
||||||||||
|
– staff
costs
|
1,361 | 1,317 | 1,281 | |||||||
|
–
other
|
614 | 621 | 663 | |||||||
| 1,975 | 1,938 | 1,944 | ||||||||
|
Insurance net
claims
|
518 | 488 | 486 | |||||||
|
Impairment
losses
|
1,196 | 1,310 | 1,135 | |||||||
|
Contribution
|
4,073 | 3,830 | 3,733 | |||||||
|
Allocation of
Manufacturing costs
|
1,603 | 1,580 | 1,526 | |||||||
|
Operating
profit before tax
|
2,470 | 2,250 | 2,207 | |||||||
|
£bn
|
£bn
|
£bn
|
||||||||
|
Total banking
assets
|
111.1 | 107.4 | 102.9 | |||||||
|
Loans and
advances to customers – gross
|
||||||||||
|
–
mortgages
|
67.3 | 65.6 | 61.1 | |||||||
|
–
personal
|
17.3 | 17.2 | 17.2 | |||||||
|
–
cards
|
8.3 | 8.1 | 8.6 | |||||||
|
–
business
|
18.7 | 16.9 | 16.3 | |||||||
|
Customer
deposits*
|
96.5 | 87.1 | 79.8 | |||||||
|
Risk-weighted
assets
|
73.3 | 70.6 | 73.2 | |||||||
*
customer deposits exclude bancassurance
2007
compared with 2006
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.
We
have accelerated the expansion of our consumer banking franchise, opening more
than 975,000 new personal current accounts in 2007 and maintaining the Group’s
joint number one position in the current account market. RBS and NatWest
continue to lead the other major high street banks in Great 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.
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.
Average customer
deposit balances were 9% higher, driven by accelerating growth in both personal
savings, up 12%, and business deposits, up 11%, alongside modest growth in
current account balances. Savings balance growth was helped by good sales of new
accounts to branch customers, with NatWest opening more than 1 million new
savings accounts.
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.
Net
interest income increased by 2% to £4,191 million, with strong growth in
deposits helping to mitigate the impact of lower unsecured lending volumes and
lower average card
balances. Net
interest margin declined modestly, in line with previous guidance, with savings
margins consistent with 2006, despite increased competition for
deposits.
Non-interest income
was £3,571 million, 3% ahead of 2006, with strong growth in investment income
offset by lower levels of direct lending and reduced instances of current
account fees.
Total expenses rose
by 2% to £3,578 million, driven by increased investment in customer-facing staff
in branches and
in our bancassurance
and investment businesses. Other costs reduced by 1% to £614
million.
Impairment losses
decreased by 9% to £1,196 million, reflecting the improvement in arrears trends
on both credit cards and unsecured personal loans. Mortgage arrears remained
very low, and we have maintained conservative lending criteria – the average
loan-to-value ratio of Retail’s mortgages was 46% overall and 63% on new
mortgages written in 2007, and this improved as the year progressed. Small
business credit quality remained good.
2006
compared with 2005
Retail has delivered
a good performance in 2006, achieving 4% growth in total income to £7,566
million. Contribution was up by 3% to £3,830 million, and operating profit
before tax by 2% to £2,250 million.
We
have advanced in personal banking, with good growth in savings and investment
products combined with effective cost control and improvements in the quality of
our lending book. Credit card recruitment and unsecured personal lending
continues to be focused on lower risk segments, with reduced emphasis on
acquisition through direct marketing.
We
have continued to expand our customer franchise, growing our personal current
account base by 232,000 in 2006 as a result of our sustained focus on quality
and customer service. We continue to have the highest share of customers
switching current accounts from other banks, and are now joint leader in the
personal current account market. RBS is first and NatWest is joint second among
major high street banks in Great Britain for the percentage of main current
account customers that are “extremely satisfied” overall.
Net
interest income increased by 4% to £4,108 million, with faster growth in
deposits helping to mitigate lower unsecured lending volumes. Net interest
margin improved slightly in the second half.
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% market share of net
lending in that period. Our offset mortgage product continues to perform well.
For the year as a whole, average personal unsecured lending and credit card
lending was flat, reflecting the slower UK consumer demand and our concentration
on quality business with existing customers. In the second half we further
reduced our activity in the direct loans market, but unsecured balances from our
RBS and NatWest customers are broadly in line with the first half. Average
business lending rose 5%, reflecting our cautious credit stance.
Non-interest income
rose by 4% to £3,458 million. There was strong growth in our investments and
private banking businesses as well as business banking fees, mitigating the
slowdown in personal loan related insurance income.
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.
Bancassurance
Bancassurance has
had an excellent year with sales increasing by 56% to £267 million annual
premium equivalent. The growth reflects the continued increase in focus on the
recruitment of Financial Planning Managers, up 25% and productivity levels, up
43%. Increased sales of collective investments on the back of a successful ISA
season and strong individual pensions growth, boosted by A-Day, helped underpin
the outturn. Sales of guaranteed bonds were also particularly strong, and helped
support a new business margin which improved significantly over the period. The
product proposition was strengthened across all lines. Latest market share data
shows an increase from 6.6% to 9.0% . On a UK GAAP embedded value basis for life
assurance, investment contracts and open ended investment companies, adjusted
for investment market volatility, pre tax profit was £78 million compared with
£42 million in 2005.
Net
claims, which include maturities, surrenders and liabilities to policyholders,
were stable at £488 million compared with £486 million in 2005.
Business review
continued
Wealth
Management
|
2007
|
2006
|
2005
|
||||||||
| £m | £m | £m | ||||||||
|
Net interest
income
|
569 | 496 | 439 | |||||||
|
Non-interest
income
|
459 | 393 | 345 | |||||||
|
Total
income
|
1,028 | 889 | 784 | |||||||
|
Direct
expenses
|
||||||||||
|
– staff
costs
|
338 | 299 | 258 | |||||||
|
–
other
|
128 | 127 | 125 | |||||||
| 466 | 426 | 383 | ||||||||
|
Impairment
losses
|
4 | 1 | 13 | |||||||
|
Contribution
|
558 | 462 | 388 | |||||||
|
Allocation of
Manufacturing costs
|
145 | 144 | 139 | |||||||
|
Operating
profit before tax
|
413 | 318 | 249 | |||||||
|
£bn
|
£bn
|
£bn
|
||||||||
|
Loans and
advances to customers – gross
|
10.5 | 8.8 | 7.8 | |||||||
|
Investment
management assets – excluding deposits
|
35.1 | 28.2 | 25.4 | |||||||
|
Customer
deposits
|
33.9 | 28.4 | 25.4 | |||||||
|
Risk-weighted
assets
|
7.5 | 6.4 | 6.0 | |||||||
2007
compared with 2006
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 before tax by 30% to £413
million.
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 International has been re-branded as RBS Coutts to leverage the global
brand strength of the Group in the continental European and Asia-Pacific markets
and RBS Coutts has maintained its momentum in the Asia-Pacific region,
succeeding in growing customer numbers by 27% and income by 51% in US dollar
terms.
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%.
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 Asia. Assets under management rose
to £35.1 billion at 31 December 2007, up 24% from a year earlier.
Total expenses rose
by 7% to £611 million, with direct expense up 9% at £466 million, reflecting
continued investment in the UK and continental Europe along with a further
significant expansion of our team of private bankers in Asia. Total headcount
increased by 12%.
2006
compared with 2005
Wealth Management
delivered strong growth, with total income rising by 13% to £889 million.
Contribution grew by 19% to £462 million and operating profit before tax by 28%
to £318 million.
Wealth Management’s
offering of private banking and investment services delivered robust organic
income growth in 2006. Our continuing investment in Coutts UK, Adam &
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%.
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.
Non-interest income
grew by 14% to £393 million, reflecting higher investment management fees and
performance fees, as well as strong growth in new business volumes, particularly
in the UK. Assets under management rose by 11%, to £28.2 billion at the
year-end.
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 and
further expansion in Asia.
Impairment losses
returned to historic levels, following a number of specific items in prior
years.
Ulster
Bank
|
2007
|
2006
|
2005
|
||||||||
| £m | £m | £m | ||||||||
|
Net interest
income
|
923 | 812 | 713 | |||||||
|
Non-interest
income
|
374 | 313 | 290 | |||||||
|
Total
income
|
1,297 | 1,125 | 1,003 | |||||||
|
Direct
expenses
|
||||||||||
|
– staff
costs
|
302 | 254 | 217 | |||||||
|
–
other
|
159 | 131 | 122 | |||||||
| 461 | 385 | 339 | ||||||||
|
Impairment
losses
|
104 | 104 | 95 | |||||||
|
Contribution
|
732 | 636 | 569 | |||||||
|
Allocation of
Manufacturing costs
|
219 | 215 | 208 | |||||||
|
Operating
profit before tax
|
513 | 421 | 361 | |||||||
|
£bn
|
£bn
|
£bn
|
||||||||
|
Total
assets
|
54.8 | 44.5 | 37.2 | |||||||
|
Loans and
advances to customers – gross
|
||||||||||
|
–
mortgages
|
18.3 | 15.0 | 13.2 | |||||||
|
–
corporate
|
24.8 | 19.6 | 13.7 | |||||||
|
–
other
|
4.0 | 3.6 | 2.6 | |||||||
|
Customer
deposits
|
21.8 | 18.1 | 15.9 | |||||||
|
Risk-weighted
assets
|
36.0 | 29.7 | 23.8 | |||||||
|
Average
exchange rate – €/£
|
1.461 | 1.467 | 1.463 | |||||||
|
Spot exchange
rate – €/£
|
1.361 | 1.490 | 1.457 | |||||||
2007
compared with 2006
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 before tax 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.
Net
interest income increased by 14% to £923 million, reflecting good growth in both
loans and deposits. Average loans and advances to customers increased by 24%,
with particular strength in business lending, with a 29% increase spread across
a variety of industrial sectors. Our mortgage book also saw very good growth in
2007, in spite of the slowdown in the housing market, with average balances up
17%. We achieved particular success in attracting remortgagers with our Switcher
package. We were also successful in the current account switching market,
winning 100,000 new current account customers during the year. This,
together with new
product launches such as the eSavings Account and Reward Reserve savings
accounts, contributed to a 17% increase in average customer deposits. Net
interest margin tightened, reflecting more competitive market conditions and
increased funding costs.
Non-interest income
rose by 19% to £374 million, driven by strong performances in Corporate Markets
and credit cards. We successfully launched our new wealth business in the course
of the year.
Total expenses
increased by 13% to £680 million, as we continued our investment programme to
support the future growth of the business. We continued to expand our branch and
business centre footprint and recruited additional customer-facing staff,
particularly in Corporate Markets.
Despite tighter
housing market conditions, arrears trends saw no deterioration in 2007 and
impairment losses remained stable at £104 million.
Business review
continued
2006
compared with 2005
Ulster Bank made
strong progress in both personal and corporate banking in the Republic of
Ireland and in Northern Ireland, with total income rising by 12% to £1,125
million. Contribution increased by 12% to £636 million and operating profit
before tax by 17% to £421 million.
Net
interest income increased by 14% to £812 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% in
Northern Ireland. This contributed to strong growth in both corporate lending,
where average loans and advances increased by 32%, and deposits, with Ulster
Bank winning a share of new business current accounts well in excess of its
historic market share, particularly in the Republic of Ireland. 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.
Non-interest income
rose by 8% to £313 million. Ulster Bank achieved good growth in fees from credit
cards and ATMs as well as in sales of investment products, which was only
partially offset by the introduction of Ulster Bank’s new range of current
accounts, which are free of transaction fees.
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
customer-facing staff, particularly in corporate banking, opened three new
business centres and continued with our branch improvement programme. By the end
of 2006, 70% of Ulster Bank branches had been upgraded.
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
product range.
The
credit environment remains benign. Impairment losses rose by £9 million to £104
million, consistent with growth in lending.
Citizens
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
| £m | £m | £m | $m | $m | $m | |||||||||||||||||||
|
Net interest
income
|
1,975 | 2,085 | 2,122 | 3,954 | 3,844 | 3,861 | ||||||||||||||||||
|
Non-interest
income
|
1,147 | 1,232 | 1,142 | 2,295 | 2,271 | 2,079 | ||||||||||||||||||
|
Total
income
|
3,122 | 3,317 | 3,264 | 6,249 | 6,115 | 5,940 | ||||||||||||||||||
|
Direct
expenses
|
||||||||||||||||||||||||
|
- staff
costs
|
741 | 803 | 819 | 1,483 | 1,480 | 1,490 | ||||||||||||||||||
|
-
other
|
717 | 751 | 739 | 1,437 | 1,385 | 1,344 | ||||||||||||||||||
| 1,458 | 1,554 | 1,558 | 2,920 | 2,865 | 2,834 | |||||||||||||||||||
|
Impairment
losses
|
341 | 181 | 131 | 682 | 333 | 239 | ||||||||||||||||||
|
Operating
profit before tax
|
1,323 | 1,582 | 1,575 | 2,647 | 2,917 | 2,867 | ||||||||||||||||||
|
£bn
|
£bn
|
£bn
|
US$bn
|
US$bn
|
US$bn
|
||||||||||||||||
|
Total
assets
|
80.4
|
82.6 | 92.2 | 161.1 | 162.2 | 158.8 | |||||||||||||||
|
Loans and
advances to customers - gross
|
|||||||||||||||||||||
|
-
mortgages
|
9.5
|
9.5 | 10.9 | 19.1 | 18.6 | 18.8 | |||||||||||||||
|
- home
equity
|
17.9
|
17.6 | 18.5 | 35.9 | 34.5 | 31.8 | |||||||||||||||
|
- other
consumer
|
10.9
|
11.7 | 14.4 | 21.7 | 23.2 | 24.8 | |||||||||||||||
|
-
corporate and commercial
|
18.7
|
16.7 | 17.0 | 37.6 | 32.7 | 29.2 | |||||||||||||||
|
Customer
deposits
|
57.4
|
54.3 | 61.7 | 115.0 | 106.8 | 106.3 | |||||||||||||||
|
Customer
deposits (excluding wholesale funding)
|
52.4
|
51.8 | 61.1 | 105.0 | 101.8 | 105.2 | |||||||||||||||
|
Risk-weighted
assets
|
57.1
|
57.6 | 61.8 | 114.4 | 113.1 | 106.4 | |||||||||||||||
|
Average
exchange rate - US$/£
|
2.001
|
1.844 | 1.820 | ||||||||||||||||||
|
Spot exchange
rate - US$/£
|
2.004
|
1.965 | 1.721 | ||||||||||||||||||
2007
compared with 2006
Against the background of weaker housing
and credit market conditions, Citizens
’
franchise demonstrated resilience in
2007, with a particularly good performance in corporate and commercial banking.
Despite m
odest growth in net interest margins
an
d strong fee growth in
several products
,
total income fell by 6% to £
3,122 million due mainly to the
weak dollar exchange rate
but, i
n dollar terms, total
income increased
by 2% to
$6,249 million
.
T
ight cost control
helped limit the fall
in operating profit.
However, impairment losses increased
from 0.31% of loans and advances to 0.60%, resulting in a decrease i
n operating profit
before tax
of
16% to £
1,323 million
, or 9% to $2,647 million in dollar
terms
.
Net interest income fell by 5% to
£
1,975 million
due
mainly
to the
unfavourable dollar
exchange
rate
. In dollar terms, n
et interest income rose by 3% to $3,954
milli
on. 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 low-cost
checking accounts and liquid savings to higher-cost products. Notwithstanding
this migration, Citizens
’
net interest margin increased
sligh
t
ly 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.
Non-interest income fell by 7% to
£
1,147 million. In dollar
terms, n
on-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 Corporate Markets. Good
progress was also made in credit card issuing, where we increa
s
ed our customer base by 20%, and in
merchant acquiring, where RBS Lynk achieved significant growth, processing 30%
more transactions than in 2006 and expanding its merchant base by
5%.
In response to more difficult market
conditions Citizens intensified c
ost discipline, with a reduction in
headcount helping to
reduce
total
expense
s by 6%. In dollar
terms, total expense
growth
was limited
to 2%, despite enhancements to
infrastructure and processes as well as continued investment in growth
opportunities incl
uding
mid
-
corporate banking, contactless debit
cards and merchant acquiring.
Rising losses and increased provisions
lifted impairment costs from
£
181 million in 2006 to £
341 million in 2007. In dollar terms,
impairment losses rose from
$333 million in 200
6 to $682 million in 2007. Against a
background of weaker economic activity the Citizens portfolio is performing
well, although we have experienced a reversion from the very low levels of
impairment seen in recent years,
reflecting both the planned
expansi
on of our commercial
loan book and the impact of a softer housing market. There has also been an
increase in reserving. The average FICO scores on our consumer portfolios,
including home equity lines of credit, remain in excess of 700, with 97% of
lending
secured. Average loan-to-value ratios at
the end of 2007 were 58% on our residential mortgage book and 74% on our home
equity book.
Business review
continued
2006
compared with 2005
Citizens grew its
total income by 2% to £3,317 million, while its operating profit rose slightly
to £1,582 million. In dollar terms, Citizens total income increased by 3% to
$6,115 million and its operating profit before tax by 2% to $2,917
million.
We
have achieved good growth in lending volumes, with average loans and advances to
customers increasing by 10%. In business lending, average loans excluding
finance leases increased by 15%, reflecting Citizens’ success in adding new
mid-corporate customers and increasing its total number of business customers by
4% to 467,000. In personal lending, 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%.
We
increased average customer deposits by 4%, although spot balances at the end of
2006 were little changed from the end of 2005. As interest rates rose further
and the US yield curve inverted, we saw migration from low-cost checking and
liquid savings to higher-cost term and time deposits. This migration is a
principal reason for the decline in Citizens’ net interest margin to 2.72% in
2006, compared with 3.00% in 2005. The decline slowed over the course of the
year, with net interest margin in the second half 6 basis points lower than in
the first. Lower net interest margins more than offset the benefit of higher
average loans and deposits, leaving net interest income marginally lower at
$3,844 million.
Non-interest income
rose by 8% to £1,232 million. In dollar terms, non-interest income rose by 9% to
$2,271 million. Business and corporate fees rose strongly, with good results
especially in foreign exchange, interest rate derivatives and cash management
benefiting from increased activity with Corporate 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%.
Total expenses were
flat, reflecting tight cost control and a 5% reduction in headcount, despite
continued investment in growth opportunities such as mid-corporate banking,
contactless debit cards, merchant acquiring and supermarket
banking.
Citizens continued
to expand its branch network. Our partnership with Stop & Shop Supermarkets
has helped us to expand our supermarket banking franchise into New York, while
in October we announced the purchase of GreatBanc, Inc., strengthening our
position in the Chicago market and making us the 4th largest bank in the Chicago
area, based on deposits. The acquisition was completed in February
2007.
Impairment losses
totalled £181 million ($333 million), representing just 0.31% of loans and
advances to customers and illustrating the prime quality of our portfolio.
Underlying strong credit quality remained unchanged as our portfolio grew, with
risk elements in lending and problem loans representing 0.32% of loans and
advances, the same level as in 2005. Our consumer lending is to prime customers
with average FICO scores on our portfolios, including home equity lines of
credit, in excess of 700, and 95% of lending is secured.
RBS
Insurance
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Earned
premiums
|
5,607 | 5,713 | 5,641 | |||||||||
|
Reinsurers’
share
|
(220 | ) | (212 | ) | (246 | ) | ||||||
|
Insurance
premium income
|
5,387 | 5,501 | 5,395 | |||||||||
|
Net fees and
commissions
|
(465 | ) | (486 | ) | (449 | ) | ||||||
|
Other
income
|
734 | 664 | 543 | |||||||||
|
Total
income
|
5,656 | 5,679 | 5,489 | |||||||||
|
Direct
expenses
|
||||||||||||
|
– staff
costs
|
297 | 319 | 316 | |||||||||
|
–
other
|
447 | 426 | 411 | |||||||||
| 744 | 745 | 727 | ||||||||||
|
Gross
claims
|
4,091 | 4,030 | 3,903 | |||||||||
|
Reinsurers’
share
|
(81 | ) | (60 | ) | (76 | ) | ||||||
|
Net
claims
|
4,010 | 3,970 | 3,827 | |||||||||
|
Contribution
|
902 | 964 | 935 | |||||||||
|
Allocation of
Manufacturing costs
|
219 | 215 | 208 | |||||||||
|
Operating
profit before tax
|
683 | 749 | 727 | |||||||||
|
In-force
policies (000’s)
|
||||||||||||
|
– Own-brand
motor
|
6,713 | 6,790 | 6,580 | |||||||||
|
– Own-brand
non-motor (home, rescue, pet, HR24)
|
3,752 | 3,759 | 3,762 | |||||||||
|
– Partnerships
and broker (motor, home, rescue, SMEs, pet, HR24)
|
9,302 | 11,242 | 11,317 | |||||||||
|
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
before tax 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.
Our
own-brand businesses have performed well, with income rising by 1% and
contribution growing by 4%. Excluding the impact of the floods, own-brand
contribution grew by 24%. In the UK motor market we have pursued a strategy of
targeting lower risk drivers and have increased premium rates to offset claims
inflation, improving profitability by implementing heavier price increases in
higher risk categories. Our international businesses performed well, with Spain
delivering strong profit growth while, in line with plan, our German and Italian
businesses also achieved profitability in 2007. Home insurance grew across all
of our own brands in the second half, and we achieved particular success in the
distribution of home policies through our bank branches, with sales up
40%.
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. We also
pulled back from some less profitable segments of the
broker market. This
resulted in a 17% reduction in in-force policies, but income fell by only 2%.
Contribution from partnerships and brokers fell by 22% as a result of
flood-related claims. Excluding the impact of the floods, contribution from
partnerships and brokers increased by 18%.
For
RBS Insurance as a whole, insurance premium income, net of fees and commissions,
was 2% lower at £4,922 million, reflecting modest growth in our own brands
offset by a 5% decline in the partnerships and broker segment. Other income rose
by 11% to £734 million, reflecting increased investment income.
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.
Net
claims rose by 1% to £4,010 million. Gross claims relating to the floods in June
and July cost more than £330 million, with a net impact, after allowing for
profit sharing and reinsurance, of £274 million. Excluding the impact of the
floods, net claims costs were reduced by 7%. In the motor book, while average
claims costs have continued to rise, this has been mitigated by improvements in
risk selection and management and by continuing efficiencies in claims
handling.
The
UK combined operating ratio for 2007, including manufacturing costs, increased
to 98.0%, reflecting a higher loss ratio and the reduction in partnership
income. Excluding the impact of the floods, the combined operating ratio was
91.9%.
Business review
continued
2006
compared with 2005
RBS
Insurance increased total income by 3% to £5,679 million, with contribution also
rising by 3% to £964 million and operating profit before tax by the same
percentage to £749 million.
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.
In
the UK we have grown our own-brand motor book by 3% 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
own-brand motor policies last year.
We
implemented price rises in motor insurance in the second half of the year, and
average motor premium rates across the market increased in the fourth quarter.
Higher premium rates will, however, take time to feed through into income, and
competition on prices remains strong.
Our
own-brand non-motor personal lines policies were flat, despite particularly good
progress in Tesco Personal Finance. SME has also performed well with policies
sold through our intermediary business growing by 10%.
However, some of our
partnership books continue to age and we did not renew a number of other
partnerships. As a result, the number of partnership policies in force fell by
1%.
Insurance premium
income was up 2% to £5,501 million, reflecting a modest overall increase in the
total number of in-force policies.
Net
fees and commissions payable increased by 8% to £486 million, whilst other
income rose by 22% to £664 million, reflecting increased investment
income.
Total expenses rose
by 3% to £960 million. Good cost discipline held direct expenses to £745
million, up 2%. Staff costs rose by 1%, reflecting improved efficiency despite
continued investment in service standards. A 4% rise in non-staff costs included
increased marketing expenditure to support growth in continental
Europe.
Net
claims rose by 4% to £3,970 million. The environment for home claims remained
benign, whilst underlying increases in average motor claims costs were partially
offset by purchasing efficiencies and improvements in risk
management.
The
UK combined operating ratio for 2006, including Manufacturing costs, was 94.6%,
compared with 93.4% in 2005, reflecting a higher loss ratio and the
discontinuation of some partnerships.
Manufacturing
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Staff
costs
|
763 | 762 | 724 | |||||||||
|
Other
costs
|
2,151 | 2,110 | 2,052 | |||||||||
|
Total
Manufacturing costs
|
2,914 | 2,872 | 2,776 | |||||||||
|
Allocated to
divisions
|
(2,914 | ) | (2,872 | ) | (2,776 | ) | ||||||
| — | — | — | ||||||||||
|
Analysis of
Manufacturing costs:
|
||||||||||||
|
Group
Technology
|
984 | 974 | 959 | |||||||||
|
Group
Property
|
962 | 932 | 857 | |||||||||
|
Customer
Support and other operations
|
968 | 966 | 960 | |||||||||
|
Total
Manufacturing costs
|
2,914 | 2,872 | 2,776 | |||||||||
2007
compared with 2006
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.
Group Property costs
rose by 3% to £962 million, reflecting refurbishment and expansion of the Ulster
Bank network and continuing investment to support the strong growth of our
business in Europe and Asia, including the opening of a new Corporate Markets
office in Paris and further development of our office portfolio in India and
Singapore.
Customer Support and
other operations costs remained broadly flat at £968 million, with further
significant improvements in productivity enabling us to continue to absorb
significant increases in service volumes. At the same time we maintained our
focus on service quality, and our UK-based telephony centres continued to record
market-leading customer satisfaction scores. Our investment in process
re-engineering across our operational centres under the ‘Work-Out’ banner is
expected to deliver further improvements in efficiency.
2006
compared with 2005
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 Group
Technology partially offset by reduced headcount in Operations.
Group Technology
costs were 2% higher at £974 million, as we achieved significant improvements in
productivity balanced by investment in software development. In the biggest
integration project undertaken since NatWest, we brought Ulster Bank onto the
RBS technology platform.
Group Property costs
increased by 9% to £932 million, reflecting the continuation of our branch
improvement programme and ongoing investment in major operational centres,
including Manchester, Birmingham and Glasgow.
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.
RFS
Holdings
|
RFS
Holdings
excluding
minority
interest
|
RFS
Holdings
minority
interest
|
|||||||
| £m | £m | |||||||
|
Net interest
income
|
275 | 1,144 | ||||||
|
Non-interest
income
|
539 | 437 | ||||||
|
Total
income
|
814 | 1,581 | ||||||
|
Operating
expenses and insurance claims
|
864 | 1,140 | ||||||
| (50 | ) | 441 | ||||||
|
Impairment
losses
|
65 | 198 | ||||||
|
Contribution
and operating profit before tax
|
(115 | ) | 243 | |||||
|
£bn
|
£bn
|
|||||||
|
Total
assets
|
533.9 | 240.5 | ||||||
|
Total
liabilities
|
511.5 | 215.8 | ||||||
RFS
Holdings as a whole recorded income totalling £2,395 million and operating
profit from continuing activities of £128 million for the period from 17 October
to 31 December 2007. RFS Holdings excluding minority interests accounted
for total income of £814 million. Trading profits of these businesses totalled
£49 million offset by £91 million of credit market write-downs.
Business review
continued
Central
items
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Funding and
corporate costs
|
289 | 862 | 950 | |||||||||
|
Departmental
and other costs
|
461 | 442 | 402 | |||||||||
| 750 | 1,304 | 1,352 | ||||||||||
|
Allocation of
Manufacturing costs
|
146 | 143 | 140 | |||||||||
|
Total central
Items
|
896 | 1,447 | 1,492 | |||||||||
2007
compared with 2006
Central costs were
substantially lower, reflecting in part the gains realised on a number of
planned disposals that formed part of the Group’s funding arrangements for the
acquisition of ABN AMRO. These gains contributed to a reduction of £717 million
in funding and corporate costs, which also benefited from a reduction of £152
million in the carrying value of our own debt accounted for at fair value and
the receipt of a dividend on our investment in Bank of China. These benefits
were partially offset by funding costs of £144 million relating to ABN AMRO
and goodwill payments amounting to £119 million in respect of current
account administration fees. Funding and corporate costs, which include realised
gains totalling
£
475 million, were £289 million, 66%
lower than in 2006.
Departmental and
other costs increased by 4% to £461 million. This largely reflects the
centralisation of certain functions and increased regulatory
requirements.
2006
compared with 2005
Total central items
decreased by 3% to £1,447 million.
Funding and
corporate costs were 9% lower at £862 million, largely reflecting a year on year
reduction of £41 million 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.
Departmental and
other costs were 10% higher at £442 million largely attributable to additional
pension costs and higher securitisation costs.
Employee numbers at 31 December
(full time equivalents rounded to the nearest hundred)
|
2007
|
2006
|
2005
|
||||||||||
|
Global Banking
& Markets
|
10,300 | 8,600 | 7,400 | |||||||||
|
UK Corporate
Banking
|
9,500 | 8,800 | 8,400 | |||||||||
|
Retail
|
37,500 | 38,900 | 39,600 | |||||||||
|
Wealth
Management
|
5,000 | 4,500 | 4,200 | |||||||||
|
Ulster
Bank
|
6,400 | 5,600 | 5,100 | |||||||||
|
Citizens
|
22,500 | 23,100 | 24,400 | |||||||||
|
RBS
Insurance
|
17,300 | 17,500 | 19,300 | |||||||||
|
Manufacturing
|
25,200 | 25,400 | 26,100 | |||||||||
|
Centre
|
2,900 | 2,600 | 2,500 | |||||||||
| 136,600 | 135,000 | 137,000 | ||||||||||
|
RFS
Holdings
|
89,800 | — | — | |||||||||
|
Group
total
|
226,400 | 135,000 | 137,000 | |||||||||
2007
compared with 2006
The
number of employees at 31 December 2007 was 226,400, an increase of 91,400
compared with the previous year, of which the
acquisition of ABN
AMRO by RFS Holdings added 89,800 employees.
2006
compared with 2005
The
number of employees at 31 December 2006 was 135,000, a decrease of 2,000
compared with the prior year.
Business review
continued
Consolidated
balance sheet
at
31 December 2007
|
2007
|
2006
|
|||||||
| £m | £m | |||||||
|
Assets
|
||||||||
|
Cash and
balances at central banks
|
17,866 | 6,121 | ||||||
|
Treasury and
other eligible bills
|
18,229 | 5,491 | ||||||
|
Loans and
advances to banks
|
219,460 | 82,606 | ||||||
|
Loans and
advances to customers
|
829,250 | 466,893 | ||||||
|
Debt
securities
|
276,427 | 127,251 | ||||||
|
Equity
shares
|
53,026 | 13,504 | ||||||
|
Settlement
balances
|
16,589 | 7,425 | ||||||
|
Derivatives
|
337,410 | 116,681 | ||||||
|
Intangible
assets
|
48,492 | 18,904 | ||||||
|
Property,
plant and equipment
|
18,750 | 18,420 | ||||||
|
Prepayments,
accrued income and other assets
|
19,066 | 8,136 | ||||||
|
Assets of
disposal groups
|
45,954 | — | ||||||
|
Total
assets
|
1,900,519 | 871,432 | ||||||
|
Liabilities
|
||||||||
|
Deposits by
banks
|
312,633 | 132,143 | ||||||
|
Customer
accounts
|
682,365 | 384,222 | ||||||
|
Debt
securities in issue
|
273,615 | 85,963 | ||||||
|
Settlement
balances and short positions
|
91,021 | 49,476 | ||||||
|
Derivatives
|
332,060 | 118,112 | ||||||
|
Accruals,
deferred income and other liabilities
|
34,024 | 15,660 | ||||||
|
Retirement
benefit liabilities
|
496 | 1,992 | ||||||
|
Deferred
taxation
|
5,510 | 3,264 | ||||||
|
Insurance
liabilities
|
10,162 | 7,456 | ||||||
|
Subordinated
liabilities
|
37,979 | 27,654 | ||||||
|
Liabilities of
disposal groups
|
29,228 | — | ||||||
|
Total
liabilities
|
1,809,093 | 825,942 | ||||||
|
Minority
interests
|
38,388 | 5,263 | ||||||
|
Equity
owners
|
53,038 | 40,227 | ||||||
|
Total
equity
|
91,426 | 45,490 | ||||||
|
Total
liabilities and equity
|
1,900,519 | 871,432 | ||||||
|
Analysis
of repurchase agreements included above
|
||||||||
|
Reverse
repurchase agreements and stock borrowing
|
||||||||
|
Loans and
advances to banks
|
175,941 | 54,152 | ||||||
|
Loans and
advances to customers
|
142,357 | 62,908 | ||||||
| 318,298 | 117,060 | |||||||
|
Repurchase
agreements and stock lending
|
||||||||
|
Deposits by
banks
|
163,038 | 76,376 | ||||||
|
Customer
accounts
|
134,916 | 63,984 | ||||||
| 297,954 | 140,360 | |||||||
Overview of consolidated balance
sheet
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.
The remaining
increa
se in
total assets
,
up £
254.9 billion, 29% to £
1,126.3 billion, largely
reflect
ed
an increase in derivative assets, which
was accompanied by a corresponding increase in derivative liabilities, and
secured financing through reverse repurchase agreements and stock borrowing
("reverse repos") and lending growth
across all
divisions.
Treasury and other eligible bills
increased by £
12.7 billion
to £
18.2 billion.
The acquisition of
ABN AMRO
added £
1.7 billion with the remaining increase
of
£
11.0 billion to £
16.5 billion due to increased trading
activity.
Loans and
advances to banks increased by
£
136.9 billion to
£
219.5 billion with
reverse repos up by £
121.8 billion to £
175.9 billion.
The acquisition of ABN AMRO added
£
122.1
billion. The remaining increase in
lo
ans and advances to banks
was
£
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.
Loans and advances to customers rose by
£
362.4
billion to £
829.3 billion. Within this, reverse
repos increased by £
79.4
billion to £
142.4 billion.
The acquisition of ABN AMRO
added £
285.5
billion. The remaining increase in l
oans and advances to customers
w
as
£
76.9 billion, 16%, to £
543.8 billion with
reverse repos increasing by
£
16.1 billion, 26% to
£
79.1 billion. Excluding
reverse repos, lending rose by £
60.8 billion, 15% to £
464.7 billion, reflecting growth across
all divisions.
Debt securities increased by
£
149.2 billion to
£
276.4 billion of which
£
121.8 billion related to the acquisition
of ABN AMRO.
The remaining
increase of
£
27.4 billion, 22%, to £
154.6 billion
was
principally due to increased trading
book holdings in Corporate Markets.
Equity shares rose by £
39.5 billion to £
53.0 billion primar
ily reflecting the acquisition of ABN
AMRO, partially offset by a £
0.8 billion reduction in the value of
the Bank of China shareholding.
Intangible assets increased by
£
29.6 billion to
£
48.5 billion due to the
acquisition of ABN AMRO and represented goodw
ill of £
24.5 billion and other intangible assets
of £
5.1
billion.
Property, plant and equipment were up
£
0.3 billion, 2% to
£
18.8 billion.
The acquisition of
ABN AMRO
added £
2.2 billion which was largely offset by
the sale of the
Canary
Wharf
investment propertie
s and sale and leaseback transactions in
the
UK
and US.
Settlement balances rose £
9.2 billion to £
16.6 billion.
The acquisition of ABN AMRO added
£
11.3 billion, but was
partially offset by a reduction of
£
2.1 billion, 28% to £
5.3 billion as a result of reduced
cust
omer
activity.
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.
Prepayments, accrued income and
other
assets were up
£
10.9 billion to
£
19.1 billion primarily
reflecting the acquisition of ABN AMRO.
Assets and liabilities of disposal
groups comprise those business units of ABN AMRO that were acquired exclusively
with a view to disposal, including Banca An
tonveneta, Asset Management and Private
Equity.
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.
The acquisition of ABN AMRO added
£
169.8 billion
. The remaining increase in
deposits by banks
was
£
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.
Customer accounts wer
e up £
298.1 billion to £
682.4 billion with repos up
£
70.9 billion to
£
134.9 billion.
The acquisition of ABN AMRO
added £
240.3
billion. The remaining increase in
customer accounts w
as
£
57.8 billion, 15% at £
442.1 billion with repos up
£
11.0 billion, 17%
t
o £
75.0 billion. Excluding repos, deposits
rose by £
46.8 billion, 15%,
to £
367.1 billion with good
growth in all divisions.
Debt securities in issue have increased
by £
187.7 billion to
£
273.6 billion, of
which
£
129.0 billion related to the acquisition
of ABN AMRO
.
Set
tlement balances and short positions
were up £
41.5 billion to
£
91.0 billion.
The acquisition of ABN AMRO added
£
37.1 billion, with the
remaining
increase
of
£
4.4 billion, 9% to £
53.8 billion reflecting growth in
c
ustomer
activity.
Accruals, deferred income and other
liabilities increased £
18.4
billion to £
34.0 billion
largely reflecting the acquisition of ABN AMRO.
Deferred taxation liabilities rose by
£
2.2 billion, 69% to
£
5.5 billion largely due to
the acquisit
ion of ABN
AMRO.
Subordinated liabilities were up
£
10.3 billion, 37% to
£
38.0 billion
reflecting t
he
acquisition of ABN AMRO
.
The issue of £
1.0 billion
dated loan capital and
£
0.7 billion movement in
exchange rates was offset by the redemption of £
0.7 billion dated loan capital,
£
0.4 billion undated loan
capital and £
0.6 billion
non-cumulative preference shares.
Equity minority interests increased by
£
33.1 billion to
£
38.4 bi
llion 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.
Owners
’
equity increased by £
12.8 billion, 32%, to £
53.0 billion. The profit for
th
e year of £
7.6 billion, issue of £
2.7 billion of ordinary share capital,
£
3.2 billion of
non-cumulative fixed rate equity preference shares and £
1.1 billion of other paid-in equity to
fund the Group's investment in ABN AMRO, together with other issues of
£
0.4 billion non-cumulative fixed rate
equity preference shares and £
0.1 billion of ordinary shares in
respect of the exercise of share options, a £
1.5 billion net decrease after tax in
the Group's pension liability and £
0.4 billion resulting from the
effe
c
t of exchange rates, were partly offset
by the payment of the 2006 final ordinary dividend and the 2007 interim
dividend, £
3.0 billion and
preference dividends of £
0.3 billion, £
0.5 billion reduction in
available-for-sale reserves, and a £
0.4 billion decr
e
ase in cash flow hedging
reserve.
Business review
continued
Cash
flow
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net cash flows
from operating activities
|
25,604 | 17,441 | 4,140 | |||||||||
|
Net cash flows
from investing activities
|
15,999 | 6,645 | (2,612 | ) | ||||||||
|
Net cash flows
from financing activities
|
29,691 | (1,516 | ) | (703 | ) | |||||||
|
Effects of
exchange rate changes on cash and cash equivalents
|
6,010 | (3,468 | ) | 1,703 | ||||||||
|
Net increase
in cash and cash equivalents
|
77,304 | 19,102 | 2,528 | |||||||||
2007
The
major factors contributing to the net cash inflow from operating activities of
£25,604 million were the increase of £28,261 million in operating liabilities
less operating assets and the profit before tax of £9,900 million, partly offset
by the elimination of foreign exchange differences of £10,282 million and income
taxes paid of £2,442 million.
The
acquisition of ABN AMRO, included within net investment in business interests
and intangible assets of £13,640 million, was the largest element giving rise to
net cash flows from investing activities of £15,999 million, with cash and cash
equivalents acquired of £60,093 million more than offsetting the cash
consideration paid of £45,856 million. Net sales and maturities of securities of
£1,987 million and net disposals of property, plant and equipment, £706 million
less the net cash outflow of £597 million in respect of other acquisitions and
disposals represented the other principle factors.
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.
2006
The
major factors contributing to the net cash inflow from operating activities of
£17,441 million were the profit before tax of £9,186 million adjusted for the
elimination of foreign exchange differences of £4,516 million and depreciation
and amortisation of £1,678 million, together with an increase of £3,980 million
in operating liabilities less operating assets.
Net
sales and maturities of securities of £8,000 million was partially offset by net
purchases of property, plant and equipment of £1,292 million, resulting in the
net cash inflow from investing activities of £6,645 million.
The
issue of £671 million of equity preference shares, £3,027 million of
subordinated liabilities and proceeds of £1,354 million from minority interests
issued were more than offset by dividend payments of £2,727 million, purchase of
ordinary shares amounting to £991 million, repayment of £1,318 million of
subordinated liabilities and interest on subordinated liabilities of £1,409
million, resulting in a net cash outflow from financing activities of £1,516
million.
2005
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.
Net
purchases of property, plant and equipment of £2,592 million, including
operating lease assets and computer and other equipment, were the main
contributors to the net cash outflow from investing activities of £2,612
million.
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.
Capital
resources
The
following tables analyse the Group’s regulatory capital resources at 31
December:
|
IFRS
2007
|
IFRS
2006
|
IFRS
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Capital
base
|
||||||||||||
|
Tier 1
capital
|
44,364 | 30,041 | 28,218 | |||||||||
|
Tier 2
capital
|
33,693 | 27,491 | 22,437 | |||||||||
|
Tier 3
capital
|
200 | — | — | |||||||||
| 78,257 | 57,532 | 50,655 | ||||||||||
|
Less:
investments in insurance subsidiaries, associated
|
||||||||||||
|
undertakings
and other supervisory deductions
|
(10,283 | ) | (10,583 | ) | (7,282 | ) | ||||||
|
Total
capital
|
67,974 | 46,949 | 43,373 | |||||||||
|
Risk-weighted
assets
|
||||||||||||
|
Banking
book:
|
||||||||||||
|
On-balance
sheet
|
480,200 | 318,600 | 303,300 | |||||||||
|
Off-balance
sheet
|
84,600 | 59,400 | 51,500 | |||||||||
|
Trading
book
|
44,200 | 22,300 | 16,200 | |||||||||
| 609,000 | 400,300 | 371,000 | ||||||||||
|
Risk asset
ratios
|
%
|
%
|
%
|
|||||||||
|
Tier
1
|
7.3 | 7.5 | 7.6 | |||||||||
|
Total
|
11.2 | 11.7 | 11.7 | |||||||||
|
UK
GAAP
2004
|
UK
GAAP
2003
|
|||||||||
| £m | £m | |||||||||
|
Capital
base
|
||||||||||
|
Tier 1
capital
|
22,694 | 19,399 | ||||||||
|
Tier 2
capital
|
20,229 | 16,439 | ||||||||
| 42,923 | 35,838 | |||||||||
|
Less:
investments in insurance subsidiaries, associated
|
||||||||||
|
undertakings
and other supervisory deductions
|
(5,165 | ) | (4,618 | ) | ||||||
|
Total
capital
|
37,758 | 31,220 | ||||||||
|
Risk-weighted
assets
|
||||||||||
|
Banking
book:
|
||||||||||
|
On-balance
sheet
|
261,800 | 214,400 | ||||||||
|
Off-balance
sheet
|
44,900 | 36,400 | ||||||||
|
Trading
book
|
17,100 | 12,900 | ||||||||
| 323,800 | 263,700 | |||||||||
|
Risk asset
ratios
|
%
|
%
|
||||||||
|
Tier
1
|
7.0 | 7.4 | ||||||||
|
Total
|
11.7 | 11.8 | ||||||||
Note: The data
for 2003 and 2004 in the table above are under UK GAAP as previously published
and regulated. As from 1 January 2005, the Group is regulated on an IFRS
basis.
It
is the Group’s policy to maintain a strong capital base, to expand it as
appropriate and to utilise it efficiently throughout its activities to optimise
the return to shareholders while maintaining a prudent relationship between the
capital base and the underlying risks of the business. In carrying out this
policy, the Group has regard to the supervisory requirements of the Financial
Services Authority (“FSA”). The FSA uses Risk Asset Ratio (“RAR”) as a measure
of capital adequacy in the
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%. At 31 December 2007, the Group’s
total RAR was 11.2% (2006 – 11.7%) and the tier 1 RAR was 7.3% (2006 – 7.5%).
For details of
the Group’s current capital ratio targets, you should read “Business review –
Recent Developments – Capital”.
Business review
continued
Risk
and capital management
Governance
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:
|
·
|
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 Internal Audit,
which provides an independent assessment of the design, adequacy and
effectiveness of internal controls.
|
|
·
|
Advances Committee
(“AC”)
, reporting to the Board, deals with transactions that exceed
the Group Credit Committee’s delegated
authority.
|
|
·
|
Group Executive Management
Committee (“GEMC”)
, an executive committee, ensures that
implementation of strategy and operations are in line with the agreed risk
appetite. GEMC is supported by the
following:
|
|
|
-
|
Group Risk Committee
(“GRC”)
recommends and approves limits, processes and policies that
ensure the effective management of all material non-balance sheet risks
across the Group.
|
|
|
-
|
Group Credit Committee
(“GCC”)
approves credit proposals under authority delegated to it
by the Board and/or Advances
Committee.
|
|
|
-
|
Group Asset and Liability
Management Committee (“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 non-trading interest rate, equity
and foreign currency risk.
|
Risk
and capital
It
is the Group’s policy to optimise return to shareholders while maintaining a
strong capital base and credit rating to support business growth and meet
regulatory capital requirements at all times.
On
22 April 2008, the Group announced that the Board has raised its target range
for the Group’s Tier 1 capital ratio to 7.5 per cent. to 8.5 per cent. and has
set a target for the core Tier 1 capital ratio of in excess of 6 per cent. at 31
December 2008 on a proportional consolidated basis. Prior to that time, previous
guidance given by the Group referred to a 7 per cent. to 8 per cent. target
range for the Tier 1 capital ratio, with 25 per cent. to 30 per cent. preference
share content, but with no target range set for the core Tier 1 capital ratio.
The target ranges are in excess of minimum regulatory
requirements.
Capital adequacy and
risk management are closely aligned. 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
allocation of capital resources to divisions is determined as part of the annual
business and financial planning process.
Risk appetite is
measured as the maximum level of retained risk the Group will accept to deliver
its business objectives. Risk appetite is generally defined through both
quantitative and qualitative techniques including stress testing, risk
concentration, value-at-risk and risk underwriting criteria, ensuring that
appropriate principles, policies and procedures are in place and
applied.
The
main risks facing the Group are shown below. These should be considered in
conjunction with the Risk factors set out on pages 13 to 15 which could affect
the Group’s performance.
|
·
|
Credit risk:
is the risk
arising from the possibility that the Group will incur losses from the
failure of customers to meet their
obligations.
|
|
·
|
Funding and liquidity
risk:
is the risk the Group is unable to meet its obligations as
they fall due.
|
|
·
|
Market risk:
the Group
is exposed to market risk because of positions held in its trading
portfolios and its non-trading
businesses.
|
|
·
|
Pension obligation risk:
is the risk that the liabilities of the Group’s various defined benefit
pension schemes will exceed their assets as a result of which the Group is
required or chooses to make additional contributions to
schemes.
|
|
·
|
Equity risk:
reflects
the variability in the value of equity investments resulting in gains or
losses.
|
|
·
|
Insurance risk:
the
Group is exposed to insurance risk, either directly through its businesses
or through using insurance as a tool to mitigate other risk
exposures.
|
|
·
|
Operational risk:
is the
risk arising from the Group’s people, processes, systems, physical assets
and external events.
|
|
·
|
Regulatory risk:
is the
risk arising from failing to meet the requirements and expectations of the
Group’s many regulators, or from a failure to address or implement any
change in these requirements or
expectations.
|
These risk and
capital management processes performed well throughout 2007, and continued
working through the market disruption seen since August 2007.
Management
responsibilities
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, intra-group 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.
Business review
continued
Credit
risk
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.
|
·
|
Policies and risk
appetite:
policies provide clarity around the required Group
framework for the assessment, approval, monitoring and management of
credit risk where risk appetite sets the tolerance of loss. Limits are
used to manage concentration risk by single name, sector and
country.
|
|
·
|
Decision makers:
credit
authority is granted to independent persons or committees with the
appropriate experience, seniority and commercial judgement. Credit
authority is not extended to relationship managers. Specialist internal
credit risk departments independently oversee the credit process and make
credit decisions or recommendations to the appropriate credit
committee.
|
|
·
|
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 Default (see below) and Expected Loss are calculated using duly
authorised models. All credit models are subject to independent review
prior to implementation and existing models are reviewed on at least an
annual basis.
|
|
·
|
Mitigation techniques to reduce
the potential for loss:
credit risk may be mitigated by the taking
of financial or physical security, the assignment of receivables or the
use of credit derivatives, guarantees, risk participations, credit
insurance, set off or netting.
|
|
·
|
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.
|
|
·
|
A
nalysis and reporting:
portfolio analysis and reporting are used to ensure the identification of
emerging concentration risks and adverse movements in credit risk
quality.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
Credit stewardship:
customer transaction monitoring and management is a continuous process,
ensuring performance is satisfactory and that documentation, security and
valuations are complete and up to
date.
|
|
·
|
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.
|
|
·
|
Provisioning:
independent assessment using best practice models for collective and
latent loss. Professional evaluation is applied to individual cases, to
ensure that such losses are comprehensively identified and adequately
provided for.
|
|
·
|
Recovery:
maximising the return to the
Group through the recovery process.
|
Basel
II
RBS
has received agreement (called ‘a waiver’) from the UK Financial Services
Authority to adopt the Advanced Internal 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.
The
AIRB approach to Basel II is based on the following metrics.
|
·
|
Probability of default
(“PD”):
the likelihood that a customer will fail to make full and
timely repayment of credit obligations over a one year time horizon.
Customers are assigned an internal credit grade which corresponds to
probability of default. Every customer credit grade across all grading
scales in the Group can be mapped to a Group level credit grade (see page
55).
|
|
·
|
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.
|
|
·
|
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.
|
Credit
risk assets
Credit risk assets
are an internal risk measure of the Group’s exposure to customers. These consist
of loans and advances (including overdraft facilities), instalment credit,
finance lease receivables, debt securities and other traded instruments across
all customer types.
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.
An
analysis of reverse repurchase agreements is shown below.
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.
Business review
continued
Credit
risk asset quality
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.
Expressed as an
annual probability of default, the upper and lower boundaries and the midpoint
for each of these Group level asset quality grades are as follows:
Distribution
of credit risk assets by asset quality
As
at 31 December 2007, exposure to investment grade counterparties (AQ1)
accounted for 47% (2006 – 46%) of credit risk assets and 96% (2006 – 97%) of
exposures were to counterparties rated AQ4 or higher. The exposure to the lowest
asset quality (AQ5) was 4% (2006 – 3%).
Note: Graph data are
shown net of provisions and reverse repurchase agreements.
Distribution
of credit risk assets by industry sector
Industry analysis
plays an important part in assessing potential concentration risk from within
the loan portfolio. Particular attention is given to industry sectors where the
Group believes there is a high degree of risk or potential for volatility in the
future.
The
Group also uses scenario analysis and stress testing in order to monitor the
risk to clusters of correlated industry sectors.
Note: Graph data are shown net of provisions and reverse repurchase agreements.
As
at 31 December 2007, 26% of credit risk assets (2006 – 28%) related to
individuals and includes mortgage lending and other smaller loans that are
intrinsically well-diversified. Corporate industry exposure comprised 38% of
credit risk assets (2006 – 36%), which are well diversified across a range of
sectors. Banks and financial services account for 22% of credit risk assets
(2006 – 20%) and public sector and quasi government credit risk assets make up
the remaining 14% (2006 – 16%).
Business review
continued
Distribution
of credit risk assets by geography
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.
The
Group operates in over 50 countries, but with the majority of assets in the UK,
North America and Europe.
Distribution
of credit risk assets by product and customer type
The
Group also monitors its credit portfolio by customer type and product type. The
largest category is lending to banks, corporates, sovereigns and quasi
governments which represented 49% of credit risk assets as at 31 December 2007
(2006 – 41%). Lending to individuals accounted for 23% (2006 –
26%).
Loan
impairment
The
Group classifies impaired assets as either Risk Elements in Lending (REIL) or
Potential Problem Loans (PPL). REIL represents non-accrual loans, loans that are
accruing but are past due 90 days and restructured loans. PPL represents
impaired assets which are not included in REIL but where information about
possible credit problems cause management to have serious doubts about the
future ability of the borrower to comply with loan repayment terms.
Both REIL and PPL
are reported gross of the value of any security held, which could reduce the
eventual loss should it occur, and gross of any provision marked. Therefore
impaired assets which are highly collateralised, such as mortgages, will have a
low coverage ratio of provisions held against reported impaired
balance.
The
table below sets out the Group’s loans that are classified as REIL and
PPL:
|
2007
|
2006
|
2005
|
|||||||||
|
REIL
and PPL
|
£m | £m | £m | ||||||||
|
Non-accrual
loans
(1)
|
10,362 | 6,232 | 5,926 | ||||||||
|
Accrual loans
past due 90 days
(2)
|
369 | 105 | 9 | ||||||||
|
Troubled debt
restructurings
(3)
|
— | — | 2 | ||||||||
|
Total
REIL
|
10,731 | 6,337 | 5,937 | ||||||||
|
PPL
(4)
|
671 | 52 | 19 | ||||||||
|
Total REIL and
PPL
|
11,402 | 6,389 | 5,956 | ||||||||
|
REIL and PPL
as % of customer loans and advances – gross
(5)
|
1.64% | 1.57% | 1.60% | ||||||||
The
sub-categories of REIL and PPL are calculated as described in notes 1 to 4
below.
|
Notes:
|
|
|
(1)
|
All loans
against which an impairment provision is held are reported in the
non-accrual category.
|
|
(2)
|
Loans where an
impairment event has taken place but no impairment recognised. This
category is used for fully collateralised non-revolving credit
facilities.
|
|
(3)
|
Troubled debt
restructurings represent loans that have been restructured following the
granting of a concession by the Group to the borrower.
|
|
(4)
|
Loans for
which an impairment event has occurred but no impairment provision is
necessary. This category is used for fully collateralised advances and
revolving credit facilities where identification as 90 days overdue is not
feasible.
|
|
(5)
|
Gross of
provisions and excluding reverse repurchase
agreements.
|
REIL as at 31
December 2007 was £10,731 million (2006 – £6,337 million), an increase of
£4,394 million (69%) during the year, of which £3,807 million related to ABN
AMRO. As a percentage of customer lending, REIL and PPL in aggregate increased
to 1.64% of customer loans and advances at 31 December 2007 (2006 – 1.57%)
.
REIL
by division
The
table below shows REIL by division.
|
2007
|
2006
|
2005
|
|
|
REIL
|
£m
|
£m
|
£m
|
|
Corporate
Markets
|
|||
|
– Global
Banking & Markets
|
373
|
492
|
496
|
|
– UK Corporate
Banking
|
1,236
|
1,034
|
969
|
|
Retail
Markets
|
|||
|
–
Retail
|
4,286
|
4,078
|
3,783
|
|
– Wealth
Management
|
45
|
43
|
58
|
|
Ulster
Bank
|
667
|
498
|
436
|
|
Citizens
|
317
|
175
|
195
|
|
Other
|
—
|
17
|
—
|
|
RFS Holdings
excluding minority interest
|
1,327
|
—
|
—
|
|
RFS Holdings
minority interest
|
2,480
|
—
|
—
|
|
Total
REIL
|
10,731
|
6,337
|
5,937
|
During 2007, REIL in
Retail Markets increased by £210 million, Ulster Bank by £169 million and
Citizens by £142 million.
Business review
continued
Impairment
loss provision methodology
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.
Collectively assessed
provisions
are provisions on impaired credits below an agreed threshold
which are assessed on a portfolio basis, to reflect the homogeneous nature of
the assets, such as credit cards or personal loans. The provision is determined
from a quantitative review of the relevant portfolio, taking account of the
level of arrears, security and average loss experience over the recovery
period.
Latent loss provisions
are
provisions held against the estimated impairment in the performing portfolio
which have yet to be identified as at the balance sheet date. To assess the
latent loss within the portfolios, the Group has developed methodologies to
estimate the time that an asset can remain impaired within a performing
portfolio before it is identified and reported as such.
Provision
analysis
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 Group operates a provisions governance framework
which sets thresholds whereby suitable oversight and challenge is undertaken.
These opinions and levels of provision are overseen by each division’s Provision
Committee. Significant cases are presented to, and challenged by, the Group
Problem Exposure Review Forum.
Early and active
management of problem exposures ensures that credit losses are minimised.
Specialised units are used for different customer types to ensure that the
appropriate risk mitigation is taken in a timely manner.
Portfolio provisions
are reassessed regularly as part of the Group’s ongoing monitoring
process.
The
following table shows an analysis of the loan impairment charge.
|
2007
|
2006
|
2005
|
|||||||||
|
Loan
impairment charge
|
£m | £m | £m | ||||||||
|
Latent loss
provisions charge
|
88 | 87 | 14 | ||||||||
| Collectively assessed provisions charge | 1,744 | 1,573 | 1,399 | ||||||||
|
Individually
assessed provisions charge
|
274 | 217 | 290 | ||||||||
|
Total
charge to income statement
|
2,106 | 1,877 | 1,703 | ||||||||
|
Charge
as a % of customer loans and advances – gross
(1)
|
0.30% | 0.46% | 0.46% | ||||||||
|
Note:
|
|
|
(1)
|
Gross of
provisions and excluding reverse repurchase
agreements.
|
Provisions for loan
impairment charged to the income statement in 2007 were £2,106 million, up £229
million (12%) from 2006, of which £262 million relates to ABN AMRO. As
a percentage of customer lending, the impairment charge was 0.30% (2006 –
0.46%).
Summary
of loan impairment provisions
|
2007
|
2006
|
2005
|
|||||||||
|
Loan
impairment provisions
(1)
|
£m | £m | £m | ||||||||
|
Latent loss
provisions
|
1,050 | 593 | 543 | ||||||||
|
Collectively
assessed provisions
|
3,834 | 2,645 | 2,587 | ||||||||
|
Individually
assessed provisions
|
1,554 | 695 | 754 | ||||||||
|
Total
provisions
|
6,438 | 3,933 | 3,884 | ||||||||
|
Total
provision as a % of customer loans and advances – gross
(2)
|
0.9% | 1.0% | 1.0% | ||||||||
|
Notes:
|
|
|
(1)
|
Excludes
provisions against loans and advances to banks of £3 million (2006 – £2
million; 2005 – £3 million).
|
|
(2)
|
Gross of
provisions and excluding reverse repurchase agreements.
|
As
at 31 December 2007 total customer provisions were £6,438 million, up £2,505
million (64%) from 31 December 2006, of which £2,205 million related to ABN
AMRO.
Provisions
coverage
The
Group’s provision coverage ratios are shown in the table below.
|
2007
|
2006
|
2005
|
|||||||||
|
Total
provision expressed as a:
|
|||||||||||
|
% of
REIL
|
60% | 62% | 65% | ||||||||
|
% of REIL and
PPL
|
56% | 62% | 65% | ||||||||
The
coverage ratio of closing provisions to REIL and PPL decreased from 62% to 56%
during 2007. The lower coverage ratio reflects amounts written-off and the
changing mix from unsecured to secured exposures.
Movement
in loan impairment provisions balance
The
movement in provisions balance is shown in the table below.
|
2007
|
2006
|
|||||||
| £m | £m | |||||||
|
Balance as at
1 January
|
3,935 | 3,887 | ||||||
|
Currency
translation and other adjustments
|
137 | (61 | ) | |||||
|
Acquisition of
subsidiaries
|
||||||||
|
– RFS
Holdings excluding minority interest
|
657 | — | ||||||
|
– RFS
Holdings minority interest
|
1,547 | — | ||||||
|
–
Other
|
6 | — | ||||||
|
Amounts
written-off
|
(2,171 | ) | (1,841 | ) | ||||
|
Recoveries of
amounts previously written-off
|
390 | 215 | ||||||
|
Charge to
income statement
|
2,106 | 1,877 | ||||||
|
Discount
unwind
(1)
|
(166 | ) | (142 | ) | ||||
|
Balance
as at 31 December
(2)
|
6,441 | 3,935 | ||||||
|
Notes:
|
|
|
(1)
|
The impact of
discounting inherent within the provisions balance is unwound as the time
to receiving the expected recovery cash flows draws
nearer.
|
|
(2)
|
Includes
provisions against loans and advances to banks of £3 million (2006 – £2
million).
|
An
impairment provision calculated using the effective interest rate method leaves
a discounted asset; the discount unwinds at a constant effective rate until the
outstanding asset is completely realised.
Business review
continued
Liquidity
risk
The
Group’s liquidity policy is designed to ensure that it can at all times meet its
obligations as they fall due.
Liquidity management
within the Group focuses on overall balance sheet structure and the control,
within prudent limits, of risk arising from the mismatch of maturities across
the balance sheet and from exposure to undrawn commitments and other contingent
obligations. The management of liquidity risk within the Group is undertaken
within limits and other policy parameters set by GALCO. Compliance is monitored
and coordinated by Group Treasury both in respect of internal policy and the
regulatory requirements of the Financial 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.
Diversification
of funding sources
The
structure of the Group’s balance sheet is managed to maintain substantial
diversification, to minimise concentration across its various deposit sources,
and to limit the reliance on total short-term wholesale sources of funds (gross
and net of repos) within prudent levels.
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.
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Sources
of funding
|
£m |
%
|
£m |
%
|
£m |
%
|
||||||||||||||||||
|
Customer
accounts (excluding repos)
|
||||||||||||||||||||||||
|
Repayable on
demand
|
346,074 | 24 | 197,771 | 28 | 172,853 | 27 | ||||||||||||||||||
|
Time
deposits
|
201,375 | 14 | 122,467 | 17 | 121,260 | 19 | ||||||||||||||||||
|
Total customer
accounts (excluding repos)
|
547,449 | 38 | 320,238 | 45 | 294,113 | 46 | ||||||||||||||||||
|
Debt
securities in issue over one year
remaining
maturity
|
117,873 | 8 | 44,006 | 6 | 22,293 | 3 | ||||||||||||||||||
|
Subordinated
liabilities
|
37,979 | 3 | 27,654 | 4 | 28,274 | 4 | ||||||||||||||||||
|
Owners’
equity
|
53,038 | 4 | 40,227 | 6 | 35,435 | 6 | ||||||||||||||||||
|
Total customer
accounts and long term funds
|
756,339 | 53 | 432,125 | 61 | 380,115 | 59 | ||||||||||||||||||
|
Repo
agreements with customers
|
134,916 | 10 | 63,984 | 9 | 48,754 | 7 | ||||||||||||||||||
|
Repo
agreements with banks
|
163,038 | 11 | 76,376 | 11 | 47,905 | 7 | ||||||||||||||||||
|
Total customer
accounts, long term funds
|
||||||||||||||||||||||||
|
and
collateralised borrowing
|
1,054,293 | 74 | 572,485 | 81 | 476,774 | 73 | ||||||||||||||||||
|
Debt
securities in issue up to one year
remaining
maturity
|
155,742 | 11 | 41,957 | 5 | 68,127 | 11 | ||||||||||||||||||
|
Deposits by
banks (excluding repos)
|
149,595 | 10 | 55,767 | 8 | 62,502 | 10 | ||||||||||||||||||
|
Short
positions
|
73,501 | 5 | 43,809 | 6 | 37,427 | 6 | ||||||||||||||||||
|
Total
|
1,433,131 | 100 | 714,018 | 100 | 644,830 | 100 | ||||||||||||||||||
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. These core funds in total increased by £324.2 billion (75%)
over the course of 2007 to represent 53% of total funding at 31 December 2007.
The inclusion of ABN AMRO has added £253.5 billion.
Customer accounts
comprise a well diversified and stable source of funds from a wide range of
retail, corporate and non-bank institutional customers. Customer accounts grew
by £227.2 billion (71%) of which the acquisition of ABN AMRO added £180.9
billion to represent 38% of total funding at 31 December 2007.
Term debt securities
in issue with an outstanding term of over one year increased £73.9 billion to
represent 8% of the Group’s funding at 31 December 2007, reflecting the activity
of the Group in raising term funds through its securitisation and Euro and US
Medium Term Note programmes.
ABN AMRO term debt
issuance through its similar programmes has added £62.4 billion.
Capital (owners’
equity and subordinated debt) increased by £13.0 billion (19%) to provide 9% of
total funding at 31 December 2007.
Repo borrowing
collateralised by a range of debt securities and other assets is undertaken with
a range of corporate and institutional customers and banks. Collateralised
borrowing by repo increased by £157.6 billion to represent 21% of the Group’s
funding at 31 December 2007. ABN AMRO collateralised borrowing by repo has added
£147.8 billion.
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 Group’s total
funding.
Short positions in
various securities are held primarily by RBS Greenwich Capital in the US, RBS
Global Banking & Markets and by ABN AMRO Global Markets. The level of
funding from short term unsecured debt issuance, bank deposits (excluding repos)
and short positions has increased by £237.3 billion to represent 26% of total
funding at 31 December 2007. ABN AMRO short-term wholesale borrowing has added
£175.3 billion.
Net
customer activity
Net
customer lending, excluding repos, rose by £58.2 billion (66%) over the course
of 2007 as the growth in loans and advances to customers continued to exceed
growth in customer accounts, thus increasing commensurately the reliance on
wholesale market funding to support loan growth.
ABN
AMRO net customer lending, excluding repos, has added £43.5 billion, reducing
the ratio of loans and advances to customer accounts to 126.6% .
|
2007
|
2006
|
2005
|
||||||||||
|
Net
customer activity
|
£m | £m | £m | |||||||||
|
Loans and
advances to customers (gross, excluding reverse repos)
|
693,331 | 407,918 | 372,223 | |||||||||
|
Customer
accounts (excluding repos)
|
547,449 | 320,238 | 294,113 | |||||||||
|
Customer
lending less customer accounts
|
145,882 | 87,680 | 78,110 | |||||||||
|
Loans and
advances to customers as a % of customer accounts (excluding
repos)
|
126.6% | 127.4% | 126.6% | |||||||||
Management
of term structure
The
Group evaluates on a regular basis its structural liquidity risk and applies a
variety of balance sheet management and term funding strategies to maintain this
risk within its normal policy parameters.
The
degree of maturity mismatch within the overall long-term structure of the
Group’s assets and liabilities is managed within internal policy guidelines, to
ensure that term asset commitments may be funded on an economic basis over their
life. In managing its overall term structure, the Group analyses and takes into
account the effect of retail and corporate customer behaviour on actual asset
and liability maturities where they differ materially from the underlying
contractual maturities.
Stress
testing
In
August 2007, a systemic liquidity stress event was triggered by difficulties in
the US sub-prime mortgage market which then spread more widely to the global
asset-backed market and impacted adversely the overall supply and cost of
funding and liquidity for other than very short-term maturities. RBS has managed
its liquidity position through those market conditions, increased its liquidity
cushion and remains able fully to meet its funding needs.
The
Group performs stress tests to simulate how events may impact its funding and
liquidity capabilities. Such tests inform the overall balance sheet structure
and help define prudent limits for control of the risk arising from the mismatch
of maturities across the balance sheet and from undrawn commitments and other
contingent obligations. The nature of stress tests is kept under review in line
with evolving market conditions.
Contingency funding
plans are maintained to anticipate and respond to any approaching or actual
material deterioration in market conditions. The Group remains confident that it
can manage its liquidity requirements effectively under such
circumstances.
Daily
management
The
primary focus of the daily management activity is to ensure access to sufficient
liquidity to meet cash flow obligations within key time horizons, in particular
out to one month ahead.
The
short-term maturity structure of the Group’s liabilities and assets is managed
daily to ensure that all material or potential cash flow obligations, arising
from undrawn commitments and other contingent obligations can be met. Potential
sources include cash inflows from maturing assets, new borrowing or the sale of
various debt securities held (after allowing for appropriate
haircuts).
Short-term liquidity
risk is generally managed on a consolidated basis with internal liquidity
mismatch limits set for all subsidiaries and non-UK branches which have material
local treasury activities, thereby assuring that the daily maintenance of the
Group’s overall liquidity risk position is not compromised. ABN AMRO, Citizens
Financial Group and RBS Insurance manage liquidity locally, given different
regulatory regimes, subject to review by Group Treasury. As integration of ABN
AMRO’s businesses within the Group proceeds, the liquidity risk policies,
parameters and metrics used will be progressively aligned within a single
framework.
Business review
continued
|
2007
|
2006
|
2005
|
||||||||||
|
Net
short-term wholesale market activity
|
£m | £m | £m | |||||||||
|
Debt
securities, listed held-for-trading equity shares, treasury and other
eligible bills
|
328,352 | 135,775 | 129,440 | |||||||||
|
Reverse repo
agreements with banks and customers
|
318,298 | 117,060 | 90,691 | |||||||||
|
Less: repos
with banks and customers
|
(297,954 | ) | (140,360 | ) | (96,659 | ) | ||||||
|
Short
positions
|
(73,501 | ) | (43,809 | ) | (37,427 | ) | ||||||
|
Insurance
companies’ debt securities held
|
(8,062 | ) | (6,149 | ) | (5,724 | ) | ||||||
|
Debt
securities charged as security for liabilities
|
(29,709 | ) | (8,560 | ) | (9,578 | ) | ||||||
|
Net marketable
assets
|
237,424 | 53,957 | 70,743 | |||||||||
|
By remaining
maturity up to one month:
|
||||||||||||
|
Deposits by
banks (excluding repos)
|
112,181 | 36,089 | 35,153 | |||||||||
|
Less: loans
and advances to banks (gross, excluding reverse repos)
|
(25,609 | ) | (21,136 | ) | (16,381 | ) | ||||||
|
Debt
securities in issue
|
66,289 | 19,924 | 20,577 | |||||||||
|
Net wholesale
liabilities due within one month
|
152,861 | 34,877 | 39,349 | |||||||||
|
Net surplus of
marketable assets over wholesale liabilities due within one
month
|
84,563 | 19,080 | 31,394 | |||||||||
The
Group’s net surplus of marketable assets over net short-term wholesale
liabilities due within one month increased by £65.5 billion, reflecting actions
taken by the Group to increase its liquidity cover in response to market
conditions. ABN AMRO added £21.7 billion to the net surplus of marketable
assets over net short-term wholesale liabilities due within one month,
which was £84.6 billion at 31 December 2007.
Sterling
liquidity
Over 22% of the
Group’s total assets are denominated in sterling, where the FSA requires the
Group, on a consolidated basis, to maintain daily a minimum ratio of 100%
between:
|
·
|
a stock of
qualifying high quality liquid assets (primarily UK and EU government
securities, treasury bills and cash held in branches);
and
|
|
·
|
the sum of:
sterling wholesale net outflows contractually due within five working days
(offset up to a limit of 50%, by 85% of sterling certificates of deposit
held which mature beyond five working days); and 5% of retail deposits
with a residual contractual maturity of five working days or
less.
|
The
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.
Liquidity
in non-sterling currencies
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.
The
level of contingent risk from the potential drawing of undrawn or partially
drawn commitments, back-up lines, standby lines and other similar facilities is
also actively monitored and reflected in the measures of the Group’s
non-sterling liquidity risk. Particular attention is given to the US dollar
commercial paper market and the propensity of the 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.
The
Group also provides liquidity back-up facilities to its own conduits and has
small exposures to other selected conduits which take funding from the
asset-backed commercial paper (“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. The RBS conduits are multi-seller ABCP conduits rated at A1 or A1+/P1
levels. During the difficult market conditions since 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 conduits are also rated A1 or A1+/P1 and
they experienced similar trading conditions to the RBS conduits although they
saw two small conduits draw liquidity. ABN AMRO Bank and 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.
Developments
in liquidity risk management regulation
During 2007,
increased regulatory focus and the need for international coordination of
liquidity risk management has been highlighted by external market
conditions.
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
Group.
Market
risk
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.
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.
There are two
sources of market risk for the Group:
|
·
|
Trading
: the principal
risk factors for the Group are interest rates, credit spreads, equity
prices and foreign exchange.
|
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 – quoting firm bid (buy) and offer (sell) prices
with the intention of profiting from the spread between the quotes; arbitrage –
entering into offsetting positions in different but closely related markets in
order to profit from market imperfections; and proprietary activity – taking
positions in financial instruments as principal in order to take advantage of
anticipated market conditions.
Financial
instruments held in the Group’s trading portfolios include, but are not limited
to: debt securities, loans, deposits, equities, securities sale and repurchase
agreements and derivative financial instruments (futures, forwards, swaps and
options).
For
a discussion of the Group’s accounting policies for, and information with
respect to, its exposures to derivative financial instruments, see Accounting
policies and Note 13 on the accounts.
|
·
|
Non-trading:
the
principal market risks arising from the Group’s non-trading activities are
interest rate risk, currency risk and equity
risk.
|
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.
The
Group’s strategic investment in Bank of China, venture capital portfolio and
investments held by its general insurance business are the principal sources of
non-trading equity price risk.
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.
Strategy
and process
GEMC approves the
Group’s trading book market risk appetite, expressed in value-at-risk (VaR) and
stress testing limits. These limits are delegated to individual trading
businesses within the Group. The Board, GEMC and GRC review monthly reports,
which provide summary information on VaR, trading positions and stress
tests.
Business review
continued
The
market risk function is independent of the Group’s trading businesses and is
responsible for:
|
·
|
effective
application and compliance with the Group’s Market Risk Policy Statement
(MRPS), aligning the market risk taken by the Group with the risk limits
set by GEMC;
|
|
·
|
identification,
measurement, monitoring, analysis and reporting of the market risk
generated by the various businesses;
and
|
|
·
|
determination
of appropriate policies and methodologies to measure and control market
risk.
|
Market
risk measurement methodology
The
Group uses a number of approaches to measure market risk in its trading and
treasury portfolios. These approaches include:
(i)
VaR
VaR
is a technique that produces estimates of the potential negative change in the
market value of a portfolio over a specified time horizon at given confidence
levels. For internal risk management purposes, the Group’s VaR assumes a time
horizon of one trading day and a confidence level of 95%. The 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 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
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.
The
Group’s VaR should be interpreted in light of the limitations of the methodology
used. These limitations include:
|
·
|
Historical
data may not provide the best estimate of the joint distribution of risk
factor changes in the future and may fail to capture the risk of possible
extreme adverse market movements which have not occurred in the historical
window used in the calculations.
|
|
·
|
VaR using a
one-day time horizon does not fully capture the market risk of positions
that cannot be liquidated or hedged within one
day.
|
|
·
|
VaR using a
95% confidence level does not reflect the extent of potential losses
beyond that percentile.
|
The
Group largely computes the VaR of trading portfolios at the close of business
and positions may change substantially during the course of the trading day.
Further controls are in place to limit the Group’s intra-day exposure, such as
the calculation of the VaR for selected portfolios. These limitations and the
nature of the VaR measure mean that the Group cannot guarantee that losses will
not exceed the VaR amounts indicated. The Group undertakes stress testing to
identify the potential for losses in excess of the VaR.
The
VaR for the Group’s trading portfolios segregated by type of market risk
exposure, including idiosyncratic risk, is presented in the table
below.
|
2007
|
2006
|
||||||||
|
Average
|
Period
end
|
Maximum
|
Minimum
|
Average
|
Period
end
|
Maximum
|
Minimum
|
||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Interest
rate
|
12.5
|
15.0
|
21.8
|
7.6
|
8.7
|
10.2
|
15.0
|
5.7
|
|
|
Credit
spread
|
18.8
|
41.9
|
45.2
|
12.6
|
13.2
|
14.1
|
15.7
|
10.4
|
|
|
Currency
|
2.6
|
3.0
|
6.9
|
1.1
|
2.2
|
2.5
|
3.5
|
1.0
|
|
|
Equity
|
5.4
|
14.0
|
22.0
|
1.4
|
1.1
|
1.6
|
4.4
|
0.5
|
|
|
Commodity
|
0.2
|
0.5
|
1.6
|
—
|
0.2
|
—
|
1.1
|
—
|
|
|
Diversification
|
(28.7
|
)
|
(12.8
|
)
|
|||||
|
Total
trading VaR
|
21.6
|
45.7
|
50.1
|
13.2
|
14.2
|
15.6
|
18.9
|
10.4
|
|
Backtesting
The
Group undertakes a programme of daily backtesting, which compares the actual
profit or loss realised in trading activity to the VaR estimation. The results
of the backtesting process are one of the methods by which the Group monitors
the ongoing suitability of its VaR model. Backtesting exceptions are those
instances when a realised loss exceeds the predicted VaR. At the 99% confidence
level, no more than one backtesting exception is expected every 100 trading
days. The Group experienced three backtesting exceptions at the consolidated
Group level during 2007.
The
Group’s trading activities are carried out principally by Global Banking &
Markets. The chart below depicts the number of days on which Global Banking
& Markets’ trading income fell within stated ranges.
(ii)
Stress testing
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.
Historical stress
tests calculate the loss that would be generated if the market movements that
occurred during a historical market event were to be repeated. Hypothetical
stress tests calculate the loss that would be generated if a specific set of
adverse market movements were to occur.
In
addition to the Group-level consolidated market risk stress tests, stress
testing is also undertaken at key trading strategy level. Additional stress
tests are undertaken for those strategies where the associated market risks are
not adequately captured by VaR.
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, GEMC and the Board.
(iii)
Position risk and sensitivity analyses
In
addition to the VaR and stress testing measures discussed above, the Group
calculates a wide range of sensitivity and position risk measures, for example
interest rate ladders or option revaluation matrices. These measures provide
valuable additional controls, often at individual desk or strategy
level.
Market
risk controls
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.
Limits form part of
the dealing authorities and constitute one of the cornerstones of the market
risk management framework. Their breach must be followed by appropriate action,
as specified in detail in the MRPS. Upon notification of a limit breach, the
appropriate body must take either of the following actions:
|
·
|
instructions
can be given to reduce positions so as to bring the Group within the
agreed limits, or
|
|
·
|
a temporary
increase in the limit (for instance, in order to allow orderly unwinding
of positions) can be granted, or
|
|
·
|
a permanent
increase in the limit can be
granted.
|
Business review
continued
Treasury
The
Group’s treasury activities include its money market business and the management
of internal funds flow within the Group’s businesses. Money market portfolios
include cash instruments (principally debt securities, loans and deposits) 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 –£1.5 million). During the year the maximum VaR was
£6.4 million (2006 – £4.4 million), the minimum £1.3 million (2006 –£0.6
million) and the average £3.7 million (2006 – £2.4 million).
Retail
and commercial banking
Non-trading interest
rate risk can arise in these activities from a variety of sources, including
where assets, liabilities and off-balance sheet instruments have different
repricing dates.
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.
A
static maturity gap report is produced as at the month-end for each business, in
each functional currency based on the behaviouralised repricing for each
product. It is Group policy to include in the gap report, non-financial assets
and liabilities, mainly property, plant and equipment and the Group’s capital
and reserves, spread over medium and longer term maturities. This report also
includes hedge transactions, principally derivatives.
Any
residual non-trading interest rate exposures are controlled by limiting
repricing mismatches in the individual business balance sheets. Potential
exposures to interest rate movements in the medium to long term are measured and
controlled using a version of the same VaR methodology that is used for the
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.
Risk is managed
within VaR 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 functions. The residual risk position is
reported to divisional asset and liability committees, GALCO and the
Board.
Non-trading
interest rate VaR
Non-trading interest
rate VaR for the Group’s treasury and retail and commercial banking activities
was £42.9 million at 31 December 2007 (2006 – £40.2 million) with the major
exposure being to changes in longer term US dollar interest rates. During the
year, the maximum VaR was £53.6 million (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.
VaR, like all
interest rate risk measures, has limitations when applied to retail banking
books and the management of Citizens Financial Group’s interest rate exposures
involves a number of other interest rate risk measures and related limits. Two
measures that are reported both to Citizens ALCO and the Board are:
|
·
|
The
sensitivity of net accrual earnings to a series of parallel movements in
interest rates; and
|
|
·
|
Economic value
of equity (“EVE”) sensitivity to a series of parallel movements in
interest rates.
|
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.
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.
|
Percent
increase/(decrease) in Citizens EVE
|
|||
|
2% parallel
upward movement in US interest rates
|
2% parallel
downward movement in US interest rates (no negative rates
allowed)
|
||
|
2007
|
%
|
%
|
|
|
Period
end
|
(6.4)
|
(9.7)
|
|
|
Maximum
|
(10.1)
|
(10.3)
|
|
|
Minimum
|
(4.5)
|
(3.0)
|
|
|
Average
|
(8.0)
|
(7.6)
|
|
|
2006
|
|||
|
Period
end
|
(9.6)
|
(7.2)
|
|
|
Maximum
|
(10.1)
|
(10.3)
|
|
|
Minimum
|
(8.4)
|
(1.9)
|
|
|
Average
|
(9.4)
|
(6.0)
|
|
For
the Group, the other major structural interest rate risk arises from a low
interest rate environment, particularly in sterling, sustained for a number of
years. In such a scenario, deposit pricing may reach effective floors below
which it is not practical to reduce rates further whilst variable rate asset
pricing continues to decline. A sustained low rate scenario would also generate
progressively reduced income from the medium and long term hedging of
non-interest bearing liabilities.
Currency
risk
The
Group does not maintain material non-trading open currency positions other than
the structural foreign currency translation exposures arising from its
investments in foreign subsidiaries and associated undertakings and their
related currency funding. The Group’s policy in relation to structural positions
is to match fund the structural foreign currency exposure arising from net asset
value, including goodwill, in foreign subsidiaries, equity accounted investments
and branches, except where doing so would materially increase the sensitivity of
either the Group’s or the subsidiary’s regulatory capital ratios to currency
movements. The policy requires structural foreign exchange positions to be
reviewed regularly by GALCO. Foreign exchange differences arising on the
translation of foreign operations are recognised directly in equity together
with the effective portion of foreign exchange differences arising on hedging
instruments.
Equity
classification of foreign currency denominated preference share issuances
requires that these shares be held on the balance sheet at historic cost.
Consequently, these share issuances have the effect of increasing the Group’s
structural foreign currency position.
The
tables below set out the Group’s structural foreign currency
exposures.
|
Net
investments in foreign operations
|
Net investment
hedges
|
Structural
foreign currency exposures
|
|||
|
2007
|
£m
|
£m
|
£m
|
||
|
US
dollar
|
14,819
|
2,844
|
11,975
|
||
|
Euro
|
46,629
|
41,220
|
5,409
|
||
|
Swiss
franc
|
910
|
863
|
47
|
||
|
Chinese
RMB
|
2,600
|
1,938
|
662
|
||
|
Brazilian
real
|
3,755
|
—
|
3,755
|
||
|
Other
non-sterling
|
2,995
|
875
|
2,120
|
||
|
71,708
|
47,740
|
23,968
|
|||
|
2006
|
|||||
|
US
dollar
|
15,036
|
5,278
|
9,758
|
||
|
Euro
|
3,059
|
1,696
|
1,363
|
||
|
Swiss
franc
|
462
|
457
|
5
|
||
|
Chinese
RMB
|
3,013
|
—
|
3,013
|
||
|
Other
non-sterling
|
132
|
107
|
25
|
||
|
21,702
|
7,538
|
14,164
|
The
exposure in Chinese RMB arises from the Group’s strategic investment in Bank of
China.
Business review
continued
Pension
obligation risk
The
Group is also exposed to risk from its defined benefit pension schemes. The
schemes’ assets comprise investment portfolios which are held to meet projected
liabilities to the scheme members. Risk arises from the schemes because returns
from these portfolios may be less than expected and because there may be greater
than expected increases in the estimated value of the schemes’ liabilities. In
these circumstances, the Group could be obliged, or may choose, to make
additional contributions to the schemes.
Equity
risk
Non-trading equity
positions can result in changes in the 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.
There are several
reasons for retaining equity positions in the 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
The
types, nature and amounts of exchange-traded exposures, private equity
exposures, and other exposures vary significantly Such exposures may take the
form of listed and unlisted equity shares, equity warrants and options, linked
equity fund investments, private equity and venture capital investments,
preference shares classified as equity and capital stock in the Federal Home
Loans Bank and the Federal Reserve Bank.
Insurance
risk
The
Group is exposed to insurance risk, either directly through its businesses or
through using insurance as a tool to reduce other risk exposures.
Effectively, an
insurance contract transfers risk from the policyholder to the insurer, whereby,
in return for a premium paid, the insurer indemnifies the policyholder on the
occurrence of specified events. Insurance risk arises through fluctuations in
the timing, frequency and/or severity of insured events, relative to the
expectations at the time of underwriting. Insurance risk is managed in four
distinct ways:
|
·
|
Underwriting
and pricing risk
|
|
·
|
Claims
management risk
|
|
·
|
Reinsurance
risk
|
|
·
|
Reserving
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.
|
Claims management risk:
arises
if claims are handled or paid inappropriately. Claims are managed using a range
of IT system controls and manual processes conducted by experienced staff.
These, together with a range of detailed policies and procedures, ensure that
claims are handled in a timely, appropriate and accurate manner. The processes
include controls to avoid claims staff handling or paying claims beyond their
level of authority, as well as controls to avoid paying invalid claims. Loss
adjustors are used to handle certain claims to conclusion.
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. Acceptable reinsurers are rated
at A- or better unless specifically authorised by the RBS Insurance Group
Board.
|
·
|
Excess of loss
‘per individual risk’ reinsurance to protect against significantly large
individual losses.
|
|
·
|
Excess of loss
catastrophic ‘event’ reinsurance to protect against major events, for
example, windstorms or floods.
|
|
·
|
Quota share
reinsurance to protect against unforeseen adverse trends, where the
reinsurer takes an agreed percentage of premiums and
claims.
|
Other forms of
reinsurance may also be utilised, subject to approval by senior
management.
Reserving risk:
arises when
reserves are assessed incorrectly, so that insufficient funds are retained to
pay (or handle) claims as they fall due either for claims which have already
occurred in relation to the claims reserves (including claims handling expense
reserves) or will occur in future periods of insurance
(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.
Frequency
and severity of specific risks and sources of uncertainty
The
Group’s focus in its insurance operation is on high volume and relatively
straightforward products, for example home and motor. This facilitates the
generation of comprehensive underwriting and claims data, which are used to
accurately price and monitor the risks accepted. This attention to data analysis
is reinforced by tight controls on costs and claims handling
procedures.
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.
Uncertainty
regarding possible frequency and severity of claims arise as
follows:
a) Motor insurance contracts (private
and commercial):
claims experience varies, but the principal factors
include age, gender and driving experience, together with the type of vehicle
and location.
b) Property insurance contracts
(residential and commercial):
short-term uncertainty is mainly driven by
weather conditions. Over a longer period, the strength of the economy is also a
factor.
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.
Fluctuations in the
social, economic and legislative climate are a source of uncertainty in the
Group’s general liability account, and in particular court judgements and
legislation, significant events (for example terrorist attacks), any emerging
new heads of damage and types of claim that are not envisaged when the policy is
written.
Life
business
The
three regulated life companies of the Group, National Westminster Life Assurance
Limited, Royal Scottish Assurance plc and Direct Line Life Insurance Company
Limited, are required to meet minimum capital requirements at all times under
the Financial Service Authority’s Prudential Sourcebook.
The
capital resources covering the regulatory requirement are not transferable to
other areas of the Group. To ensure that the capital requirement is satisfied at
all times, each company holds a voluntary buffer above the regulatory
minimum.
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
Operational risks
are inherent in the Group’s business. 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. This is where the primary
responsibility resides for the identification, management and mitigation
of the risks associated with the products and processes of the business.
This accountability includes regular testing and certification of the
adequacy and effectiveness of controls and compliance with Group Policies
including the Group’s Operational Risk Policy and Principles
(“ORPP”).
|
|
·
|
The second
line of defence is the Operational Risk community. The Group Operational
Risk department is responsible for the design and ownership of the ORPP.
The 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. Implementation of the
ORPP is facilitated and overseen by Divisional Operational Risk teams who
provide expert support and advice as well as oversight and challenge to
business line management.
|
Business review
continued
|
·
|
The third line
of defence is audit. Group Internal Audit is responsible for assessing
compliance with the ORPP and for providing independent evaluation of the
adequacy and effectiveness of the risk and control
framework.
|
Basel II introduces
for the first time, a specific capital charge for operational risk. From launch
in 2008, the Group will initially apply the Standardised Approach.
Regulatory
risk and supervision
The
approach to regulatory risk has three distinct elements:
|
·
|
Review of
potential changes in regulation to ensure the Group addresses the risks
arising from such changes and implement them
appropriately.
|
|
·
|
Monitoring of
compliance with existing rules and regulations and mitigating the
consequences of any inadvertent non-
compliance.
|
|
·
|
Management of
effective relationships with regulators to ensure open two-way
communication.
|
The
Group and its subsidiaries are fully engaged with regulatory authorities in all
the jurisdictions in which they operate, in response to regulators’ on-going
supervisory requirements.
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.
The
Group works with domestic and international trade associations, and proactively
engages with regulators, especially the UK Financial Services Authority (FSA),
as well as with other influential stakeholders such as the Basel 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.
In
the normal course of business the Group and its subsidiaries co-operate with
regulatory authorities in various jurisdictions in their enquiries or
investigations into alleged or possible breaches of regulations.
The
Group has co-operated fully with various regulatory reviews of the operation of
retail banking and consumer credit industries in the UK and elsewhere.
The
outcome of these reviews is outside the Group’s control and it is not possible
to predict the effect, if any, on the Group’s operations of future changes in
regulatory actions and policies. For further details of certain investigation to
which the Group is subject, please read "Additional information -
Investigations".
Governance
|
73
|
Board of
directors
|
|
and
secretary
|
|
|
75
|
Report of the
directors
|
|
80
|
Corporate
governance
|
|
87
|
Directors’
remuneration report
|
|
97
|
Directors’
interests in shares
|
|
98
|
Statement of
directors’
|
|
responsibilities
|
Board
of directors and secretary
Chairman
1.
Sir Tom McKillop (age 64)
C,
N, R
Appointed to the
Board as Deputy Chairman in September 2005, Sir Tom is a non-executive director
of BP p.l.c., and president of the Science Council. He was formerly chief
executive of AstraZeneca PLC, and was previously president of the European
Federation of Pharmaceutical Industries and Associations and chairman of the
British Pharma Group. He is a trustee of the Council for Industry and Higher
Education.
Executive
directors
Group Chief
Executive
2.
Sir Fred Goodwin (age 49)
DUniv, FCIBS, FCIB,
FIB, LLD
C
Appointed to the
Board in August 1998, Sir Fred is a Chartered Accountant. He was formerly chief
executive and director, Clydesdale Bank PLC and Yorkshire Bank PLC. He is
chairman of The Prince’s Trust, a non-executive director of Bank of China
Limited and a former president of the Chartered Institute of Bankers in
Scotland.
Group Finance
Director
3.
Guy Whittaker (age 51)
C
Appointed to the
Board in February 2006, Guy Whittaker joined RBS after spending 25 years with
Citigroup. He was formerly the Group treasurer based in New York and prior to
that had held a number of management positions within the financial markets
business based in London.
Chief Executive,
Corporate Markets
4.
Johnny Cameron (age 53)
FCIBS
Appointed to the
Board in March 2006, Johnny Cameron joined RBS from Dresdner Kleinwort Benson in
1998. In 2000, he was appointed Deputy Chief Executive of Corporate Banking
& Financial Markets (CBFM) with responsibility for the integration of the
NatWest and RBS Corporate Banking businesses.
In October 2001 he
was appointed Chief Executive CBFM, subsequently renamed Corporate Markets in
January 2006.
Chairman, RBS
America and
Citizens Financial
Group, Inc.
5.
Lawrence Fish (age 63)
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 Boston. He
is a an incorporator of the Massachusetts Institute of Technology (MIT), a
trustee of The Brookings Institution, and a director of Textron Inc. and
numerous community organisations in the USA. Mr. Fish became a non - executive
director as of 1 May 2008.
Chairman, Managing
Board, ABN AMRO
6. Mark Fisher (age 47)
FCIBS
Appointed to the
Board in March 2006, Mark Fisher is a career banker having joined National
Westminster Bank Plc in 1981. In 2000, he was appointed Chief Executive,
Manufacturing with various responsibilities including the integration of RBS and
NatWest systems platforms. Mark Fisher is Chief Executive Officer of ABN AMRO
and was appointed as Chairman of the Managing Board in November
2007.
Chief Executive,
Retail Markets
7. Gordon Pell (age 58)
FCIBS,
FCIB
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 Practitioner Panel. He
was appointed chairman of the Business Commission on Racial Equality in the
Workplace in July 2006 and deputy chairman of the Board of the British Bankers
Association in September 2007.
Non-executive
directors
8.
Colin Buchan* (age 53)
A,
C, R
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 Trust Plc, Merrill Lynch Gold Limited, Royal
Scottish National Orchestra Society Limited and World Mining Investment Company
Limited.
9.
Jim Currie* (age 66) D.Litt
R
Appointed to the
Board in November 2001, Jim Currie is a highly experienced senior international
civil servant who spent many years working in Brussels and Washington. He was
formerly director general at the European Commission with responsibility for the
EU’s environmental policy and director general for Customs and Excise and
Indirect Taxation. He is currently a director of Total Upstream UK Limited, The
Met Office and Vimetco N.V. as well as an international adviser to
Eversheds.
10.
Bill Friedrich* (age 59)
A
Appointed to the
Board in March 2006, Bill Friedrich is the former deputy chief executive of BG
Group plc. He previously served as general counsel for British Gas plc and is a
former partner of Shearman & Sterling where he practised as a general
corporate lawyer working for several of the world's leading financial
institutions.
11.
Archie Hunter* (age 64)
A
(Chairman), C, N
Appointed to the
Board in September 2004, Archie Hunter is a Chartered Accountant. He was
Scottish senior partner of KPMG between 1992 and 1999 and president of The
Institute of Chartered Accountants of Scotland in 1997/1998. He has extensive
professional experience in the UK and North and South America. He is currently
chairman of Macfarlane Group plc, a director of Edinburgh US Tracker Trust plc
and a governor of the Beatson Institute for Cancer Research.
12.
Charles ‘Bud’ Koch (age 61)
Appointed to the
Board in September 2004, Bud Koch is an American national. He has extensive
professional experience in the USA and is immediate past chairman of the board
of John Carroll University and a trustee of Case Western Reserve University. He
was chairman, president and chief executive officer of Charter One Financial,
Inc. and its wholly owned subsidiary, Charter One Bank, N.A. between 1973 and
2004. He is also a director of Assurant, Inc and a public interest director of
the Federal Home Loan Bank of Cincinnati.
13. Janis Kong* (age 57)
OBE,
DUniv
R
Appointed to the
Board in January 2006, Janis Kong was formerly executive chairman of Heathrow
Airport Limited, chairman of Heathrow Express Limited and a director of BAA plc.
She is currently a non-executive director of Kingfisher plc and Portmeirion
Group plc. She is also chairman of Forum for the Future and a member of the
board of Visit Britain.
14.
Joe MacHale* (age 56)
A
Appointed to the
Board in September 2004, Joe MacHale is currently the senior independent
director and chairman of the audit committee of Morgan 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 Morgan between 1979 and 2001 and
was latterly chief executive of J P Morgan Europe, Middle East and Africa
Region.
15.
Sir Steve Robson* (age 64)
A
Appointed to the
Board in July 2001, Sir Steve is a former senior UK civil servant, who had
responsibility for a wide variety of Treasury matters. His early career included
the post of private secretary to the Chancellor of the Exchequer and secondment
to 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 Holdings, Xstrata Plc, The
Financial Reporting Council Limited and Partnerships UK plc, and a member of the
Chairman’s Advisory Committee of KPMG.
16. Bob Scott* (age 66)
CBE,
FCIBS
C,
N, R (Chairman)
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. He is a former group chief executive of CGNU plc (now Aviva
plc) and former chairman of the board of the Association of British Insurers. He
is currently chairman of Yell Group plc and a non-executive director of Swiss
Reinsurance Company and Jardine Lloyd Thompson Group plc. He is also a trustee
of the Crimestoppers Trust, an adviser to Duke Street Capital Private Equity and
a board member of Pension Insurance Corporation Holdings LLP.
17. Peter Sutherland* (age 61)
KCMG
C,
N, R
Appointed to the
Board in January 2001, Peter Sutherland is an Irish national. He is a former
attorney general of Ireland and from 1985 to 1989 was the European Commissioner
responsible for competition policy. He is chairman of BP p.l.c. and Goldman
Sachs International. He was formerly chairman of Allied Irish Bank and director
general of GATT and its successor, the World Trade Organisation.
Group
Secretary and General Counsel
18.
Miller McLean (age 58)
FCIBS,
FIB
C
Miller McLean was
appointed Group Secretary in August 1994. He is a trustee of the Industry and
Parliament Trust, non-executive chairman of The Whitehall and Industry Group,
director of The Scottish Parliament and Business Exchange and president of the
Chartered Institute of Bankers in Scotland.
|
A
|
member of the
Audit Committee
|
|
C
|
member of the
Chairman’s Advisory Group
|
|
N
|
member of the
Nominations Committee
|
|
R
|
member of the
Remuneration Committee
|
|
*
|
independent
non-executive director
|
Report
of the directors
The
directors have pleasure in presenting their report together with the audited
accounts for the year ended 31 December 2007.
Profit
and dividends
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 102.
An
interim dividend of 10.1p per ordinary share was paid on 5 October 2007
totalling £953 million (2006 – £771 million). The directors now recommend that,
subject to approval at the Annual General Meeting, a final dividend of 23.1p per
ordinary share totalling £2.3 billion (2006 – £2.1 billion) be paid on 6 June
2008 to members on the register at the close of business on 7 March
2008.
Business
review
Activities
The
company is a holding company owning the entire issued ordinary share capital of
The Royal Bank of Scotland, the principal direct operating subsidiary
undertaking of the company. The “Group” comprises the company and all its
subsidiary and associated undertakings, including The Royal Bank of Scotland and
NatWest. Details of the principal subsidiary undertakings of the company are
shown in Note 16 on the accounts.
The
Group is engaged principally in providing a wide range of banking, insurance and
other financial services. Further details of the organisational structure and
business overview of the Group, including the products and services provided by
each of its divisions and the competitive markets in which they operate, is
contained on pages 4 to 6 of the Business review.
Risk
factors
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 13 to 15 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 Group’s critical accounting policies and key sources
of accounting judgements are included in the Accounting policies on
pages 106 to 120.
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.
Financial
performance
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 16 to
50.
Business
developments
In
October 2007, RFS Holdings B.V. (“RFS Holdings”), a company jointly owned by the
company, Fortis N.V., Fortis SA/NV and Banco Santander S.A. (the “Consortium
Banks”) and controlled by the company, completed the acquisition of ABN AMRO
Holding N.V. (“ABN AMRO”).
In
due course, RFS Holdings will implement an orderly separation of the business
units of ABN AMRO with the company retaining the following ABN AMRO business
units:
|
·
|
Continuing
businesses of Business Unit North
America;
|
|
·
|
Business Unit
Global Clients and wholesale clients in the Netherlands (including former
Dutch wholesale clients) and Latin America (excluding
Brazil);
|
|
·
|
Business Unit
Asia (excluding Saudi Hollandi);
and
|
|
·
|
Business Unit
Europe (excluding Antonveneta).
|
Certain other assets
will continue to be shared by the Consortium Banks.
Employees
As
at 31 December 2007, the Group employed over 226,000 employees (full-time
equivalent basis) throughout the world including almost 90,000 employees in ABN
AMRO. Details of employee related costs are included in Note 2 on the accounts
on page 122.
Employee
recruitment
Across the Group
worldwide, over 30,000 employees are recruited at different levels every year.
The Group utilises a wide range of recruitment channels including its in-house
search function, external executive search suppliers, general advertising, an
open internal jobs market, talent reviews and detailed succession planning to
ensure that the recruitment and development of its employees is fully aligned to
its organisational requirements.
Employee
reward
The
Group recognises that its continuing success is closely linked to the
performance, skills and individual commitment of its employees.
The
Group aims to attract and retain the most talented people. To stay ahead of the
market, salaries are routinely compared with those paid for similar roles by
competitors, and individual performance is recognised and rewarded.
The
Group offers a comprehensive remuneration and benefits package, Total Reward, to
all employees. Total Reward is externally recognised as offering one of the most
innovative and flexible remuneration and benefits programmes in the financial
services sector.
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.
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.
Employee
learning and development
The
Group maintains a strong commitment to creating and providing learning
opportunities for all its employees through a variety of personal development
and training programmes and learning networks. The Group’s employees are
encouraged to volunteer to work with its community partners. The Group continues
to invest in leadership and management development which is consistent with its
objective of being the employer of choice: attracting, rewarding and retaining
the very best talent.
Many of the Group’s
development programmes are delivered at the RBS Business School based on the
Gogarburn Campus.
Employee
communication
Employee engagement
is encouraged through a range of communication channels, at both a divisional
and Group level. These channels provide access to news and information in a
number of ways, including the intranet, magazines, team meetings led by line
managers, briefings held by senior managers and regular dialogue with employees
and employee representatives.
The
Group Chief Executive and other senior Group executives regularly communicate
with employees through ‘Question Time’ style programmes, broadcast on the
Group’s internal television network.
Employee
consultation
Each year, all
employees are invited to complete the global Employee Opinion Survey. The survey
is confidential and independently managed by Towers-Perrin Independent Survey
Research (TP-ISR). The survey provides a channel for employees to express their
views and opinions about the Group on a range of key issues.
In
2007, the response rate was 90%. This is the highest it has ever been, and 20%
higher than the financial services norm. This represents over 129,000 employees
participating in the survey across 36 countries and in nine languages. Online
coverage of the survey increased to 95% globally.
The
Group outperformed the ‘global financial services norm’ in every one of the 15
categories for the third year in succession. The survey results are presented to
the Board and at divisional and team levels. Action plans are developed to
address any issues identified.
The
Group recognises employer representative organisations such as trade unions and
work councils in a number of businesses and countries. The Group has a European
Employee Communication Council that provides elected representatives with an
opportunity to better understand the impact on its European
operations.
Diversity
The
Group’s Managing Diversity policy sets a framework for broadening the Group’s
talent base, achieving the highest levels of performance and enabling all
employees to reach their full potential irrespective of age, disability, gender,
marital status, political opinion, race, religious belief or sexual
orientation.
The
Group is also committed to ensuring that all prospective applicants for
employment are treated fairly and equitably throughout the recruitment process.
Its comprehensive resourcing standards cover the attraction and retention of
individuals with disabilities. Reasonable adjustments are provided to support
applicants in the recruitment process where these are required. The Group
provides reasonable workplace adjustments for new entrants into the Group and
for existing employees who become disabled during their employment.
Health,
safety, wellbeing and security
The
health, safety, wellbeing and security of employees and customers continues to
be a priority for the Group. Regular reviews are undertaken of both policies and
processes to ensure compliance with current legislation and best practice. The
Group 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.
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.
Pre-employment
screening
The
Group has a comprehensive pre-employment screening policy to guard against
possible infiltration and employee-related fraud. In addition to existing
workplace security measures, all people engaged in the Group are screened prior
to commencing employment.
Code
of ethics
The
Group has a code of ethics applicable to all employees in every country of its
operations and is available in eleven languages and a copy is available on
request.
Report of the directors
continued
Corporate
responsibility
Business excellence
requires that the Group meets changing customer, shareholder, investor, employee
and supplier expectations. The Group believes that meeting high standards of
environmental, social and ethical responsibility is key to the way it does
business.
In
2007, the Group undertook a survey to identify and prioritise the issues that
stakeholders care about in relation to the financial services sector. This
allows the Group to focus corporate responsibility activities on issues which
matter most to stakeholders. Financial crime and corruption is the primary
focus, followed by consumer banking issues, employee practices, direct
environmental impact, community investment, global lending and project finance,
financial inclusion and capability and support for small businesses. The Group
takes all these responsibilities seriously, continually monitoring and managing
them through policies and practices across the Group. The Board regularly
considers corporate responsibility issues and receives a formal report on these
each year.
Further details of
the Group’s corporate responsibility policies will be contained in the 2007
Corporate Responsibility Report.
Going
concern
The
directors are satisfied that the Group has adequate resources to continue in
business for the foreseeable future. For this reason, they continue to adopt the
‘going concern’ basis for preparing the accounts.
Corporate
governance
The
company is committed to high standards of corporate governance. Details are
given on pages 80 to 86.
Ordinary
share capital
In
May 2007, the company capitalised £1,576 million of its share premium account by
way of a bonus issue of two new ordinary shares of 25p each for every one
ordinary share held by shareholders at close of business on 4 May 2007. As of 8
May 2007, the authorised ordinary share capital of the company increased by
£1,609 million (6,434,972,616 ordinary shares of 25p each) and the allotted,
called-up and fully paid ordinary share capital increased by £1,576 million
(6,304,298,670 ordinary shares of 25p each).
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.
Preference
share capital
Details of issues
and redemptions of preference shares during the year and the authorised and
issued preference share capital at 31 December 2007 are shown in Note 26 on the
accounts.
Authority
to repurchase shares
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.
Additional
information
Where not provided
previously in the Report of the directors, the following provides the additional
information required to be disclosed by Part 7 of the Companies Act 1985 as
amended.
Details of the
ordinary and preference share capital are provided in Note 26 on the accounts on
pages 159 to 161. The rights and obligations attaching to the company’s ordinary
shares and preference shares are set out in the company’s Articles of
Association, copies of which can be obtained from Companies House in the UK or
by writing to the Group Secretary and General Counsel.
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 Financial Services Authority certain employees of the company require the
approval of the company to deal in the company’s shares.
A
number of the company’s share plans include restrictions on transfers of shares
while the shares are subject to the plans, in particular the Employee Share
Ownership Plan.
The
rights and obligations of holders of non-cumulative preference shares are set
out in Note 26 on the accounts on page 161.
The
company is not aware of any agreements between shareholders that may result in
restrictions on the transfer of securities and/or voting rights. There are no
persons holding securities carrying special rights with regard to control of the
company.
Under the rules of
certain employee share plans, eligible employees are entitled to acquire shares
in the company, and shares are held in trust for participants by The Royal Bank
of Scotland and Ulster Bank Dublin Trust Company as Trustees. Voting rights are
exercised by the Trustees on receipt of participants’ instructions. If a
participant does not submit an instruction to the Trustee no vote is
registered.
The
Royal Bank of Scotland Group plc 2001 Employee Share Trust and The Royal Bank of
Scotland plc 1992 Employee Share Trust are used to hold shares on behalf of the
Group’s executive share plans. The voting rights are exercisable by the
Trustees, however, in accordance with investor protection guidelines, the
Trustees abstain from voting. The Trustees would take independent advice before
accepting any offer for the company in a takeover bid situation.
The
rules governing the appointment of directors is set out in the Corporate
Governance Report on page 80. The company’s Articles of Association may only be
amended by a special resolution at a general meeting of
shareholders.
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.
Directors
The
names and brief biographical details of the directors are shown on pages 73
and 74. All directors served throughout the year and to the date of signing of
the financial statements.
Larry Fish became
non-executive Chairman, RBS America and Citizens Financial Group, Inc. with
effect from 1 January 2008. On 1 May 2008, he will become a non-executive
director of the company and will continue in the role of non-executive Chairman,
RBS America and Citizens Financial Group, Inc.
Colin Buchan, Jim
Currie, Janis Kong, Sir Tom McKillop, Sir Steve Robson and Guy Whittaker will
retire and offer themselves for re-election at the company’s Annual General
Meeting on 23 April 2008.
Details of the
service agreement for Guy Whittaker are set out on pages 90 and 91. No
other director seeking election or re-election has a service
agreement.
Directors’
interests
The
interests of the directors in the shares of the company at 31 December 2007 are
shown on page 97. 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 January 2007 to 27
February 2008.
Directors'
indemnities
In
terms of section 236 of the Companies Act 2006, the directors of the company,
members of the Group Executive Management Committee and Approved Persons of the
Group (under the Financial Services and Markets Act 2000) have been granted
Qualifying Third Party Indemnity Provisions by the company.
In
terms of section 236 of the Companies Act 2006, Qualifying 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 Group’s pension
schemes. The intention is to issue QPSIPs to all pension trustees of the Group’s
pension schemes during 2008.
Directors'
disclosure to auditors:
Each of the
directors at the date of approval of this report confirms that:
(a)
so far as the director is aware, there is no relevant audit information of which
the company’s auditors are unaware;
and
(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.
This confirmation is
given and should be interpreted in accordance with the provisions of section
234ZA of the Companies Act 1985.
Report of the directors
continued
Shareholdings
The
table below shows the shareholders that have notified us that they hold more
than 3% of the voting rights in the undernoted classes of shares.
|
Number of
shares
|
%
held
|
Number of
shares
|
%
held
|
|||
|
Ordinary
shares:
|
5
½
% cumulative
preference shares:
|
|||||
|
Legal &
General Group plc
|
504,686,799
|
5.04
|
Mr P S and Mrs
J M Allen;
|
|||
|
11% cumulative
preference shares:
|
Miss C L
Allen, and Miss J C Allen
|
451,796
|
28.23
|
|||
|
Guardian Royal
Exchange Assurance plc
|
129,830
|
25.97
|
Commercial
Union Assurance plc
|
91,429
|
22.86
|
|
|
Windsor Life
Assurance Company Limited
|
51,510
|
10.30
|
Bassett-Patrick
Securities Limited*
|
46,255
|
11.56
|
|
|
Mr S. J. and
Mrs J. A. Cockburn
|
15,520
|
3.10
|
E M Behrens
Charitable Trust
|
20,000
|
5.00
|
|
|
Mr Stephen J
Cockburn
|
15,290
|
3.06
|
Mrs Gina
Wild
|
19,800
|
4.95
|
|
|
Cleaning
Tokens Limited
|
25,500
|
5.10
|
Trustees of
The Stephen Cockburn
|
|||
|
Limited
Pension Scheme
|
19,879
|
4.97
|
||||
|
Miss Elizabeth
Hill
|
16,124
|
4.03
|
||||
|
Mr W. T.
Hardison Jr.
|
13,532
|
3.38
|
*Notification has
been received on behalf of Mr A. W. R. Medlock and Mrs H. M. Medlock that they
each have an interest in the holding of 5
½
% cumulative
preference shares registered in the name of Bassett-Patrick Securities Limited
noted above and that there are further holdings of 5,300 and 5,000 shares,
respectively, of that class registered in each of their names.
Charitable
contributions
In
2007 the contribution to the Group’s Community Investment programmes was £57.7
million (2006 – £58.6 million).
The total amount
given for charitable purposes by the company and its subsidiary undertakings
during the year ended 31 December 2007 was £32.1 million (2006 – £25.4
million).
Political
donations
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.
Policy
and practice on payment of creditors
The
Group is committed to maintaining a sound commercial relationship with its
suppliers. Consequently, it is the Group’s policy to negotiate and agree terms
and conditions with its suppliers, which includes the giving of an undertaking
to pay suppliers within 30 days of receipt of a correctly prepared invoice
submitted in accordance with the terms of the contract or such other payment
period as may be agreed.
At
31 December 2007, the Group’s trade creditors represented 30 days (2006 – 28
days) of amounts invoiced by suppliers.
Auditors
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.
By
order of the Board.
Miller
McLean
Secretary
27
February 2008
The
Royal Bank of Scotland Group plc is registered in Scotland No.
45551.
Corporate
governance
The
company is committed to high standards of corporate governance, business
integrity and professionalism in all its activities.
Throughout the year
ended 31 December 2007, the company has complied with all of the provisions of
the revised Combined Code issued by the Financial Reporting Council in June 2006
(the “Code”) except in relation to the authority reserved to the Board to make
the final determination of the remuneration of the executive directors, which is
explained in the paragraph headed ‘Remuneration Committee’.
The
company has also complied with the Smith Guidance on Audit Committees in all
material respects.
Under the US
Sarbanes-Oxley Act of 2002 (the “Act”), specific standards of corporate
governance and business and financial disclosures apply to companies with
securities registered in the US. The company complies with all applicable
sections of the Act.
The
New York Stock Exchange
As
a foreign issuer with American Depositary Shares (“ADS”) 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 Act of 1934.
The
company has reviewed its corporate governance arrangements and is satisfied that
these are consistent with the NYSE’s corporate governance listing practices,
with the exception of the following. The Nominations Committee is chaired by the
Chairman of the Board, who may not be currently considered independent under the
UK Combined Code, and the Chairman of the Board is a member of the Remuneration
Committee, both of which are permitted by the UK Combined Code (since the
Chairman was considered independent on appointment). The company’s Audit,
Nomination and Remuneration Committees are otherwise composed solely of
non-executive directors deemed by the 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 Executive
remuneration. The Board, rather than the Remuneration Committee, reserves the
authority to make the final determination of the remuneration of the Group Chief
Executive, which is explained on page 82 in the paragraph headed
‘Remuneration Committee’.
The
Group Audit Committee complies with the provisions of the 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 Audit Committee’s
Report on
pages 83
and
84.
Board
of directors
The
Board is the principal decision-making forum for the company. It has overall
responsibility for leading and controlling the company and is accountable to
shareholders for financial and operational performance. The Board approves 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
roles of the Chairman and Group Chief Executive are distinct and separate, with
a clear division of responsibilities. 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.
All
directors participate in discussing strategy, performance and the financial and
risk management of the company. Meetings of the Board are structured to allow
open discussion.
There were nine
scheduled Board meetings during 2007. The directors were supplied with
comprehensive papers in advance of each Board meeting covering the Group’s
principal business activities. Members of executive management attend and make
regular presentations at meetings of the Board. In addition to scheduled
meetings, 20 ad hoc Board meetings and Chairman’s Committee meetings were held
during 2007 to consider the acquisition of ABN AMRO. These meetings were
attended by the majority of directors.
The
Board is aware of the other commitments of its directors and is satisfied that
these do not conflict with their duties as directors of the
company.
Board
balance and independence
The
Board currently comprises the Chairman, six executive directors and ten
non-executive directors (with effect from 1 May 2008, and the change in role of
Larry Fish to non-executive director of the company, the Board will comprise the
Chairman, five executive directors and eleven non-executive directors). The
Board functions effectively and efficiently, and is considered to be of an
appropriate size in view of the scale of the company and the diversity of its
businesses. The directors provide the Group with the knowledge, mix of skills,
experience and networks of contacts required. The Board Committees contain
directors with a variety of relevant skills and experience so that no undue
reliance is placed on any individual.
Corporate governance
continued
The
non-executive directors combine broad business and commercial experience with
independent and objective judgement. The balance between non-executive and
executive directors enables the Board to provide clear and effective leadership
and maintain the highest standards of integrity across the company’s business
activities. The names and biographies of all Board members are set out on
pages 73 and 74.
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 Board to determine whether its non-executive members are
independent.
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.
The
Board considers that all non-executive directors are independent for the
purposes of the Code, with the exception of Bud Koch who was formerly Chairman,
President and Chief Executive Officer of Charter One Financial, Inc. which was
acquired by Citizens Financial Group, Inc. in 2004. Larry Fish will not be
considered an independent non-executive director from 1 May 2008.
Re-election
of directors
At
each Annual General Meeting, one third of the directors retire and offer
themselves for re-election and each director must stand for re-election at least
once every three years. Any non-executive directors who have served for more
than nine years will also stand for annual re-election and the Board will
consider their independence at that time. The proposed re-election of directors
is subject to prior review by the Board.
The
names of directors standing for re-election at the 2008 Annual General Meeting
are contained on page 78 and further information will be given in the
Chairman’s letter to shareholders in relation to the company’s Annual General
Meeting.
Information,
induction and professional development
All
directors receive accurate, timely and clear information on all relevant
matters. All directors have access to the advice and services of the Group
Secretary and General Counsel who is responsible to the Board for ensuring that
Board procedures are followed and that applicable rules and regulations are
complied with. In addition, all directors are able, if necessary, to obtain
independent professional advice at the company’s expense.
Each new director
receives a formal induction on joining the 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.
Performance
evaluation
The
Board has undertaken a formal and rigorous annual evaluation of its own
performance and that of its committees and individual directors.
The
performance evaluation of the operation and effectiveness of the Board, the
Remuneration Committee and the Nominations Committee was undertaken in the
autumn of 2007. This was conducted internally using a detailed questionnaire and
individual meetings with each director. Amongst the areas reviewed were the role
of the Board, Board composition, Board meetings and processes, Board performance
and reporting, external relationships and Board Committees. A separate
performance evaluation of the Audit Committee was also undertaken internally in
late 2007 using a detailed questionnaire and meetings with Audit Committee
members and attendees.
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
Committee was also considered and discussed by the Board. The Board evaluation
involved detailed consideration of Board composition, Board engagement in risk
management and capital planning and the format of the Board meetings. The Board
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,
Remuneration and Nominations) carries out its delegated duties
effectively.
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 Chairman present to consider the
Chairman’s performance. 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.
Board
Committees
In
order to provide effective oversight and leadership, the Board has established a
number of Board Committees with particular responsibilities. The Committee
chairmanship and membership are reviewed on a regular basis. The names and
biographies of all Board Committee members are set out on pages 73
and
74.
The
terms of reference of the Audit, Remuneration and 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.
Audit
Committee
All
members of the Audit Committee are independent non-executive directors. The
Audit Committee holds at least five meetings each year. The Audit Committee’s
report is set out on pages 83
and
84
.
Remuneration
Committee
The
members of the Remuneration Committee comprise independent non-executive
directors, together with the Chairman of the Board. The Remuneration Committee
holds at least three meetings each year.
The
Remuneration Committee is responsible for assisting the Board in discharging its
responsibilities and making all relevant disclosures in relation to the
formulation and review of the Group’s executive remuneration policy. The
Remuneration Committee makes recommendations to the Board on the remuneration
arrangements for the executive directors and the Chairman. The Directors’
Remuneration Report is contained on pages 8
7
to 96.
Responsibility for
determining the remuneration of executive directors has not been delegated to
the Remuneration 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.
Nominations
Committee
The
Nominations Committee comprises independent non-executive directors, under the
chairmanship of the Chairman of the Board. The Nominations Committee meets as
required.
The
Nominations Committee is responsible for assisting the 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.
In
addition, the Nominations Committee considers succession planning for the
Chairman, Group Chief Executive and non-executive directors. The Nominations
Committee takes into account the knowledge, mix of skills, experience and
networks of contacts which are anticipated to be needed on the Board in the
future. The Chairman, Group Chief Executive and non-executive directors meet to
consider executive succession planning. No director is involved in decisions
regarding his or her own succession.
Meetings
The
number of scheduled meetings of the Board and the Audit, Remuneration and
Nominations Committees and individual attendance by members is shown
below.
|
Board
|
Audit
|
Remuneration
|
Nominations
|
|
|
Total number
of meetings in 2007
|
9
|
6
|
3
|
2
|
|
Number of
meetings attended in 2007
|
||||
|
Sir Tom
McKillop
|
9
|
—
|
3
|
2
|
|
Sir Fred
Goodwin
|
9
|
—
|
—
|
—
|
|
Mr
Buchan
|
8
|
6
|
3
|
—
|
|
Mr
Cameron
|
8
|
—
|
—
|
—
|
|
Dr
Currie
|
9
|
—
|
3
|
—
|
|
Mr
Fish
|
9
|
—
|
—
|
—
|
|
Mr
Fisher
|
9
|
—
|
—
|
—
|
|
Mr
Friedrich
|
9
|
6
|
—
|
—
|
|
Mr
Hunter
|
9
|
6
|
—
|
2
|
|
Mr
Koch
|
9
|
—
|
—
|
—
|
|
Mrs
Kong
|
9
|
—
|
3
|
—
|
|
Mr
MacHale
|
9
|
6
|
—
|
—
|
|
Mr
Pell
|
9
|
—
|
—
|
—
|
|
Sir Steve
Robson
|
9
|
5
|
—
|
—
|
|
Mr
Scott
|
9
|
—
|
3
|
2
|
|
Mr
Sutherland
|
8
|
—
|
3
|
1
|
|
Mr
Whittaker
|
9
|
—
|
—
|
—
|
Relations
with shareholders
The
company communicates with shareholders through the Annual Report and by
providing information in advance of the Annual General Meeting. Individual
shareholders can raise matters relating to their shareholdings and the business
of the Group at any time throughout the year. Shareholders are given the
opportunity to ask questions at the Annual General Meeting or submit written
questions in advance. The chairmen of the Audit, Remuneration and Nominations
Committees are available to answer questions at the Annual General
Meeting.
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.
Corporate governance
continued
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 commissions a survey of investor perceptions periodically. The survey is
undertaken on behalf of the Board by independent consultants and the outcomes of
the study are considered by the Board.
Audit
Committee Report
The
members of the Audit Committee are Archie Hunter (Chairman), Colin Buchan, Bill
Friedrich, Joe MacHale and Sir Steve Robson. All members of the Audit Committee
are independent non-executive directors. The Audit Committee holds at least five
meetings each year, two of which are held immediately prior to submission of the
interim and annual financial statements to the Group Board. This core programme
is supplemented by additional meetings as required, four being added in 2007.
Audit Committee meetings are attended by relevant executive directors, the
internal and external auditors and finance and risk management executives. At
least twice per annum the Audit Committee meets privately with the external
auditors. Since 2000, the Audit Committee has undertaken an annual programme of
visits to the Group's business divisions and control functions. The object of
the programme is to allow the Audit Committee to gain a better understanding of
the risk and control issues facing the Group and an invitation to attend is
extended to all non-executive directors. The programme of future visits is
considered annually and the norm is for three or four visits to be undertaken
each year.
The
Board is satisfied that all the Audit Committee members have recent and relevant
financial experience. Although the Board has determined that each member of the
Audit Committee is an ‘Audit Committee Financial Expert’ and is independent,
each as defined in the SEC rules under the US Securities Exchange Act of 1934
and related guidance, the members of the Audit Committee are selected with a
view to the expertise and experience of the Audit Committee as a whole, and the
Audit Committee reports to the Board as a single entity. The designation of a
director or directors as an ‘Audit Committee Financial Expert’ does not impose
on any such director, any duties, obligations or liability that are greater than
the duties, obligations and liability imposed on such director as a member of
the Audit Committee and Board in the absence of such a designation. Nor does the
designation of a director as an ‘Audit Committee Financial Expert’ affect the
duties, obligations or liability of any other member of the Board.
The
Audit Committee is responsible for:
|
·
|
assisting the
Board in discharging its responsibilities and in making all relevant
disclosures in relation to the financial affairs of the
Group;
|
|
·
|
reviewing
accounting and financial reporting and regulatory
compliance;
|
|
·
|
reviewing the
Group’s systems of internal control;
and
|
|
·
|
monitoring the
Group’s processes for internal audit, risk management and external
audit.
|
Full details of the
responsibilities of the Audit Committee are available at
www.rbs.com
The
Audit Committee has adopted a policy on the engagement of the external auditors
to supply audit and non-audit services, which takes into account relevant
legislation regarding the provision of such services by an external audit firm.
The Audit 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 include all services detailed in the annual engagement letter including
the annual audit and interim reviews (including US reporting requirements),
periodic profit verifications and reports to regulators including skilled
persons reports commissioned by the Financial Services Authority (e.g. Reporting
Accountants Reports).
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
|
|
·
|
insolvency
work relating to the Group’s
customers.
|
The
Audit Committee approves all other permitted non-audit services on a case by
case basis before their commencement. In addition, the Audit Committee reviews
and monitors the independence and objectivity of the external auditors when it
approves non-audit work to be carried out by them, taking into consideration
relevant legislation and ethical guidance. Information on the audit and
non-audit services carried out by the external auditors is detailed in Note 4 to
the Group’s accounts.
Corporate governance
continued
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.
The
Audit Committee is responsible for making recommendations to the Board, for it
to submit the Audit 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 General Meeting.
The
Audit Committee approves the terms of engagement of the external
auditors.
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 Internal Audit function was
effective.
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.
Archie
Hunter
Chairman of the
Audit Committee
27
February 2008
Internal
Control
Management of The
Royal Bank of Scotland Group (“the Group”) 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.
Management’s
report on internal control over financial reporting
Management of the
Group is responsible for establishing and maintaining adequate internal control
over financial reporting for the Group.
The Group’s internal
control over financial reporting is a component of an overall system of internal
control.
The Group’s internal
control over financial reporting is a process designed to provide
reasonable assurance regarding the preparation, reliability and fair
presentation of financial statements for external purposes in accordance with
International Financial Reporting Standards (“IFRS”) and it
includes:
|
·
|
Policies and
procedures that relate to the maintenance of records that, in reasonable
detail, fairly and accurately reflect the transactions and disposition of
assets.
|
|
·
|
Controls
providing reasonable assurance that transactions are recorded as necessary
to permit the preparation of financial statements in accordance with IFRS,
and that receipts and expenditures are being made only as authorised by
management.
|
|
·
|
Controls
providing reasonable assurance regarding prevention or timely detection of
unauthorised acquisition, use or disposition of assets that could have a
material effect on the financial
statements.
|
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. In addition, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or because the degree of compliance with
policies or procedures may deteriorate.
Management assessed
the effectiveness of the Group’s internal control over financial reporting as of
31 December 2007 based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in “Internal Control – Integrated
Framework”. Management excluded from its assessment the internal
control over financial reporting of ABN AMRO Holdings N.V. (“ABN AMRO”), which
was acquired on 17 October 2007. ABN AMRO 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.
Based on its
assessment, management believes that, as of 31 December 2007, the Group’s
internal control over financial reporting is effective.
The effectiveness of
the Group’s internal control over financial reporting as of 31 December 2007 has
been audited by Deloitte & Touche LLP, the Group’s independent registered
public accounting firm. The report of the independent registered public
accounting firm to the directors of the Royal Bank of Scotland Group plc
expresses an unqualified opinion on the effectiveness of the Group’s internal
control over financial reporting as of 31 December 2007.
Disclosure
controls and procedures
As
required by US regulations, the effectiveness of the company’s disclosure
controls and procedures (as defined in the rules under the US Securities
Exchange Act of 1934) have been evaluated. This evaluation has been considered
and approved by the Board which has instructed the Group Chief 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.
Changes
in internal controls
There was no change
in the company’s internal control over financial reporting that occurred during
the period covered by this report that has materially affected, or is reasonably
likely to materially affect, the company’s internal control over financial
reporting.
Report
of Independent Registered Public Accounting Firm to the members of The
Royal Bank of Scotland Group plc
We have audited the
internal control over financial reporting of The Royal Bank of Scotland Group
plc and subsidiaries (‘’the Group”) as of 31 December 2007, based on criteria
established in
Internal
Control—Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management’s
report on internal control over financial reporting, management excluded from
its assessment the internal control over financial reporting at ABN AMRO
Holdings N.V., which was acquired on 17 October 2007. ABN AMRO Holdings N.V.
represented 40.7% of the Group’s total assets, a negligible proportion of the
shareholders’ total equity, 7.7% of the Group’s total income and 0.2% of the
Group’s profit after tax as of and for the year ended 31 December 2007.
Accordingly, the scope of our audit did not include the internal control over
financial reporting at ABN AMRO Holdings N.V..
The Group's
management is responsible for maintaining effective internal control over
financial reporting and for assessing its effectiveness. Our
responsibility is to express an opinion on the effectiveness of the Group's
internal control over financial reporting based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk of whether a material
weakness existed, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal
control over financial reporting is a process designed by, or under the
supervision of, the company's principal executive and principal financial
officers, or persons performing similar functions, and implemented by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorisations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorised acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of the
inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the
Group maintained, in all material respects, effective internal control over
financial reporting as of 31 December 2007, based on the criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as at and
for the year ended 31 December 2007 of the Group and our report dated 27
February 2008 expressed an unqualified opinion on those financial
statements.
DELOITTE
& TOUCHE LLP
Chartered
Accountants and Registered Auditors
Edinburgh,
United Kingdom
27
February 2008
Directors’
remuneration report
The
Remuneration Committee
The
members of the Remuneration Committee are Bob Scott (Chairman), Colin Buchan,
Jim Currie, Janis Kong, Sir Tom McKillop and Peter Sutherland. The members of
the Remuneration Committee comprise independent non-executive directors,
together with the Chairman of the Board.
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 Resources and the Group
Secretary and General Counsel on general remuneration matters. In addition, the
Remuneration Committee has taken account of the views of the Group Chief
Executive on performance assessment of the executive directors.
In
addition to advising the Remuneration Committee, Watson 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
Committee operate independently of the consulting teams undertaking other work
with the Group.
Compensation
Remuneration
policy
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. During 2007 the Remuneration Committee continued to
review policy in light of business needs, market changes and shareholder
comments.
The
objective of the executive remuneration policy is to provide, in the context of
the company’s business strategy, remuneration in form and amount which will
attract, motivate and retain high-calibre executives. In order to achieve this
objective, the policy is framed around the following core
principles:
|
·
|
Total rewards
will be set at levels that are competitive within the relevant market,
taking each executive director’s remuneration package as a whole. The
relevant market is FTSE top 20 companies and major UK, European and US
banks.
|
|
·
|
Total
potential rewards will be earned through achievement of demanding
performance targets based on measures consistent with shareholder
interests over the short, medium and longer
term.
|
|
·
|
Remuneration
arrangements will strike an appropriate balance between fixed and
performance-related rewards. 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.
|
|
·
|
Remuneration
arrangements will be designed to support the company’s business strategy,
to promote teamwork and to conform to best practice
standards.
|
UK-based
executive directors’ remuneration balance
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
on-target 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.
The
non-executive directors’ fees are reviewed annually by the Board, on the
recommendation of its Chairman. The level of remuneration reflects the
responsibility and time commitment of directors and the level of fees paid to
non-executive directors of comparable major UK companies. Non-executive
directors do not participate in any incentive or performance plan.
The
Remuneration Committee makes recommendations to 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 Management Committee, on the
recommendation of the Group Chief Executive, and maintains oversight of the
application of remuneration policy below this level. The Committee reviews all
long-term incentive arrangements operated by the Group.
Directors
’
remuneration report
continued
Components
of executive remuneration
UK
based directors
Salary
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.
Benefits
The
Group operates The Royal Bank of Scotland Group Pension Fund (“the RBS Fund”), a
non-contributory defined benefit fund for employees (including executive
directors) who joined the Group prior to 1 October 2006. Any new executive
directors will not be eligible to participate in the RBS Fund unless they were
already a member prior to 1 October 2006; instead they will receive a cash
allowance.
Details of pension
arrangements of directors are shown on page 96. 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 92. 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 Earn
and the Profit Sharing scheme. These schemes are not subject to performance
conditions since they are operated on an all-employee basis.
Short-term
annual incentives
UK-based executive
directors normally have a maximum annual incentive potential of between 160% and
200% of salary. For exceptional performance, as measured by the achievement of
additional challenging objectives, executive directors may be awarded incentive
payments of up to 200% of salary, or 250% of salary, in the case of the Group
Chief Executive, the Chief Executive, Corporate Markets and the 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 Group Chief Executive, the annual incentive is primarily based on specific
Group financial performance measures such as operating profit, earnings per
share growth and return on equity. The remainder of the Group Chief Executive’s
annual incentive is based on a range of non-financial measures which may include
measures relating to shareholders, customers and staff.
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.
In
respect of 2007, the Remuneration Committee reviewed the annual incentive
payments for all executive directors taking into account performance against
targets set at the beginning of the year and covering Group financial
performance, each director’s operational targets, and where appropriate,
divisional financial targets. For all directors operational targets included
specified strategic developments and improvement in customer and employee
satisfaction scores.
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)
agreed annual incentive payments of up to 112.5% of normal maximum levels.
Levels of incentive payments to executive directors covered a wide range,
reflecting variations in divisional performance.
Long-term
incentives
The
company provides long-term incentives in the form of share options and share or
share equivalent awards. Their objective is to encourage the creation of value
over the long term and to align the rewards of the executive directors with the
returns to shareholders.
Medium-term
Performance Plan
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 Total Shareholder Return (“TSR”) measure and 50% vests on growth in
adjusted earnings per share (“EPS”) over the three year performance
period.
For
the TSR element, vesting is based on the level of outperformance by the Group of
the median of the comparator group TSR over the performance period. Awards made
under the plan will not vest if the company’s TSR is below the median of the
comparator group. Achievement of median TSR performance against comparator
companies will result in vesting of 25% of the award. Outperformance of median
TSR performance by up to 9% will result in vesting on a straight-line basis from
25% to 125%, outperformance by 9% to 18% will result in vesting on a
straight-line basis from 125% to 200%. Vesting at 200% will occur if the company
outperforms the median TSR performance of the comparator group by at least 18%.
For awards made in 2006 and 2007, the companies in the comparator group were ABN
AMRO Holdings N.V.; Banco Santander Central Hispano, S.A.; Barclays PLC;
Citigroup Inc; HBOS plc; HSBC Holdings plc; Lloyds TSB Group plc and Standard
Chartered PLC. Following the acquisition of ABN AMRO by the Consortium Banks in
October 2007, the Remuneration Committee agreed that Fortis N.V. would replace
ABN AMRO in the comparator group for awards made in 2006 and 2007, and also for
awards to be made in 2008.
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.
For
the awards made in 2006 and 2007, the EPS element of the awards will not vest if
EPS growth is below 5% per annum compound over the three year period. Where EPS
growth is between 5% per annum and 10% per annum vesting will occur on a
straight-line basis from 25% to 100%. Vesting at 100% will occur if EPS growth
is at least 10% per annum compound.
Options
A
new executive share option plan was approved by shareholders at the company’s
2007 Annual General Meeting. Options were subsequently granted to executive
directors over shares worth up to a maximum of three times salary with an EPS
performance condition.
The
performance condition is based on the average annual growth in the Group’s
adjusted EPS over the three year performance period commencing in the year of
grant. The calibration of the EPS growth measure is agreed by the Remuneration
Committee at the time of each grant having regard to the business plan,
prevailing economic conditions and analysts’ forecasts.
In
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.
Shareholding
guidelines
In
2006, the Remuneration Committee reviewed the policy on shareholding
requirements and the Group has now adopted shareholding guidelines for executive
directors.
The
target shareholding level is 200% of gross annual salary for the Group Chief
Executive and 100% of gross annual salary for executive directors. Target
shareholding levels are determined by reference to ordinary shares held,
together with any vested awards under the Group’s Medium-term Performance Plan.
Executive directors have a period of five years in which to build up their
shareholdings to meet the guideline levels.
US
based director – Larry Fish
Larry Fish was
previously Chairman and Chief Executive 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.
Accrual of pension
entitlement will cease at 30 April 2008. He will participate in the Citizens
medical insurance plan to this date, after which he is eligible to join the
Citizens retiree medical plan.
Directors
’
remunerati
on report
continued
Total
shareholder return performance
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 companies. The total shareholder
return for FTSE banks for the same period has been added for comparison. The
total shareholder return for the company and the indices have been rebased to
100 for 2002.
Total shareholder
return
Service
contracts
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.
Where a longer period of notice is initially approved on appointment, it will
normally be structured such that it will automatically reduce to 12 months in
due course.
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.
Any
compensation payment made in connection with the departure of an executive
director will be subject to approval by the Remuneration Committee, having
regard to the terms of the service contract and the reasons for
termination.
Information
regarding executive directors’ service contracts is summarised in the table and
note below.
(1)
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.
|
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 long-term incentive
arrangements subject to the rules of the relevant plan. All UK based directors,
with the exception of Guy Whittaker, are members of The Royal Bank of Scotland
Group
Pension Fund (‘the RBS Fund’) and are contractually entitled to receive all
pension benefits in accordance with its terms. The RBS Fund rules allow all
members who retire early at the request of their employer to receive a pension
based on accrued service with no discount applied for early
retirement.
The
Remuneration Committee has reviewed this provision of the RBS Fund, which
applies equally to executive directors and other employees. The Remuneration
Committee concluded that a change to the terms of the RBS Fund in respect of
early retirement at the company’s request would not be a cost effective route to
take at this time. The RBS Fund is closed to employees, including any executive
directors, joining the Group after 30 September 2006.
Chairman
and non-executive directors
The
original date of appointment as a director of the company and the latest date
for the next re-election are as follows:
The
non-executive directors do not have service contracts or notice periods although
they have letters of engagement reflecting their responsibilities and
commitments. Under the company’s Articles of Association, all directors must
retire by rotation and seek re-election by shareholders at least every three
years. The dates in the table above reflect the latest date for re-election.
However, in 2008, at least one-third of the Board will retire by rotation as
required by the company’s Articles of Association. No compensation would be paid
to the Chairman or to any non-executive director in the event of early
termination.
Directors
’
remuneration report
continued
The
tables and explanatory notes on pages 92 to 96 report the remuneration of
each director for the year ended 31 December 2007 and have been audited by the
company’s auditors, Deloitte & Touche LLP.
Directors’
remuneration
|
Salary/
fees £000 |
Performance
bonus (1) £000 |
Pension
allowance £000 |
Benefits
£000 |
2007
Total £000 |
2006
Total £000 |
|||||||||||||||||||
|
Chairman
|
||||||||||||||||||||||||
|
Sir Tom
McKillop
|
750 | — | — | — | 750 | 471 | ||||||||||||||||||
|
Executive
directors
|
||||||||||||||||||||||||
|
Sir Fred
Goodwin
|
1,290 | 2,860 | — | 40 | 4,190 | 3,996 | ||||||||||||||||||
|
Mr
Cameron
|
988 | 1,900 | 341 | 27 | 3,256 | 3,496 | ||||||||||||||||||
|
Mr Fish
(2)
|
999 | 200 | — | 54 | 1,253 | 2,679 | ||||||||||||||||||
|
Mr Fisher
(3)
|
726 | 1,428 | 178 | 26 | 2,358 | 1,894 | ||||||||||||||||||
|
Mr
Pell
|
825 | 1,377 | — | 2 | 2,204 | 2,120 | ||||||||||||||||||
|
Mr
Whittaker
|
760 | 1,425 | 262 | 3 | 2,450 | 4,475 |
Notes:
|
(1)
|
Includes 10%
profit sharing.
|
|
(2)
|
Mr Fish is a
non-executive director of Textron Inc. and retains the fees paid to him in
this respect. For 2007, he received a remuneration package from Textron
Inc. equivalent to approximately
US$87,565.
|
|
(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.
|
|
Non-executive
directors
|
Board
fees £000 |
Board
committee fees £000 |
£000 | £000 | ||||||||||||
|
Mr
Buchan
|
70 | 52 | 122 | 120 | ||||||||||||
|
Dr
Currie
|
70 | 15 | 85 | 80 | ||||||||||||
|
Mr
Friedrich
|
70 | 30 | 100 | 69 | ||||||||||||
|
Mr
Hunter
|
70 | 92 | 162 | 158 | ||||||||||||
|
Mr Koch
(1)
|
70 | — | 70 | 65 | ||||||||||||
|
Mrs
Kong
|
70 | 15 | 85 | 73 | ||||||||||||
|
Mr
MacHale
|
70 | 30 | 100 | 95 | ||||||||||||
|
Sir Steve
Robson
|
70 | 30 | 100 | 95 | ||||||||||||
|
Mr Scott
(2)
|
160 | 155 | ||||||||||||||
|
Mr
Sutherland
|
70 | 27 | 97 | 88 |
Notes:
|
(1)
|
In addition to
his role as a non-executive director, Mr Koch had an agreement with
Citizens Financial Group, Inc. to provide consulting services for a period
of three years, which ended on 1 September 2007, following the acquisition
by Citizens of Charter One Financial, Inc. For these services Mr Koch
received $268,333 in 2007.
|
|
(2)
|
Mr Scott’s
senior independent director fee covers all Board and Board Committee work
including Chairmanship of the Remuneration
Committee.
|
No
director received any expense allowances chargeable to UK income tax or
compensation for loss of office/termination payment. The non-executive directors
did not receive any bonus payments or benefits.
Share
options
Options to subscribe
for ordinary shares of 25p each in the company granted to, and exercised by,
directors during the year to 31 December 2007 are included in the table below.
Options held at 1 January 2007 and the related option price have been restated
to reflect the bonus issue of ordinary shares in May 2007.
|
Options
exercised in 2007
|
||||||||||||||||||||||||||||
|
Options held
at 1 January
|
Options
granted in
|
Market price
at date of exercise
|
Option
price
|
Options held
at 31 December 2007
|
||||||||||||||||||||||||
|
2007
|
2007
|
Number
|
£ | £ |
Number
|
Exercise
period
|
||||||||||||||||||||||
|
Sir Fred
Goodwin
|
493,713 | 493,713 | 5.32 | 2.92 | — | |||||||||||||||||||||||
| 8,889 | 3.73 | 8,889 | 04.03.02 – 03.03.09 | |||||||||||||||||||||||||
| 81,918 | 3.99 | 81,918 | 03.06.02 – 02.06.09 | |||||||||||||||||||||||||
| 460,944 | 2.60 | 460,944 | 29.03.03 – 28.03.10 | |||||||||||||||||||||||||
| 131,100 | 5.73 | 131,100 | 14.08.04 – 13.08.11 | |||||||||||||||||||||||||
| 123,900 | 6.06 | 123,900 | 14.03.05 – 13.03.12 | |||||||||||||||||||||||||
| 218,400 | 4.12 | 218,400 | 13.03.06 – 12.03.13 | |||||||||||||||||||||||||
| 432,525 | 5.78 | 432,525 | 11.03.07 – 10.03.14 | |||||||||||||||||||||||||
| 477,153 | 5.76 | 477,153 | 10.03.08 – 09.03.15 | |||||||||||||||||||||||||
| 485,961 | 6.17 | 485,961 | 09.03.09 – 08.03.16 | |||||||||||||||||||||||||
| 3,801 | 4. 35 | 3,801 | 01.10.10 – 31.03.11 |
(1)
|
||||||||||||||||||||||||
| 695,188 | 5.61 | 695,188 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||
| 2,918,304 | 3,119,779 | |||||||||||||||||||||||||||
|
Mr
Cameron
|
57,582 | 3.73 | 57,582 | 04.03.02 – 03.03.09 | ||||||||||||||||||||||||
| 115,233 | 2.60 | 115,233 | 29.03.03 – 28.03.10 | |||||||||||||||||||||||||
| 450 | 450 | 6.77 | 5.21 | — | ||||||||||||||||||||||||
| 78,600 | 5.73 | 78,600 | 14.08.04 – 13.08.11 | |||||||||||||||||||||||||
| 95,400 | 6.06 | 95,400 | 14.03.05 – 13.03.12 | |||||||||||||||||||||||||
| 157,800 | 4.12 | 157,800 | 13.03.06 – 12.03.13 | |||||||||||||||||||||||||
| 151,383 | 5.78 | 151,383 | 11.03.07 – 10.03.14 | |||||||||||||||||||||||||
| 5,595 | 5,595 | 5.24 | 3.28 | — | ||||||||||||||||||||||||
| 242,916 | 5.76 | 242,916 | 10.03.08 – 09.03.15 | |||||||||||||||||||||||||
| 255,129 | 6.17 | 255,129 | 09.03.09 – 08.03.16 | |||||||||||||||||||||||||
| 374,332 | 5.61 | 374,332 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||
| 1,160,088 | 1,528,375 | |||||||||||||||||||||||||||
|
Mr
Fish
|
323,631 | 3.11 | 323,631 | 11.05.01 – 10.05.08 | ||||||||||||||||||||||||
| 112,809 | 5.76 | 112,809 | 10.03.08 – 09.03.15 | |||||||||||||||||||||||||
| 333,387 | 6.17 | 333,387 | 09.03.09 – 08.03.16 | |||||||||||||||||||||||||
| 523,640 | 5.61 | 523,640 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||
| 769,827 | 1,293,467 | |||||||||||||||||||||||||||
|
Mr
Fisher
|
42,843 | 3.08 | 42,843 | 01.04.02 – 31.03.09 | ||||||||||||||||||||||||
| 99,873 | 2.60 | 99,873 | 29.03.03 – 28.03.10 | |||||||||||||||||||||||||
| 65,400 | 5.73 | 65,400 | 14.08.04 – 13.08.11 | |||||||||||||||||||||||||
| 68,100 | 6.06 | 68,100 | 14.03.05 – 13.03.12 | |||||||||||||||||||||||||
| 121,500 | 4.12 | 121,500 | 13.03.06 – 12.03.13 | |||||||||||||||||||||||||
| 118,944 | 5.78 | 118,944 | 11.03.07 – 10.03.14 | |||||||||||||||||||||||||
| 182,187 | 5.76 | 182,187 | 10.03.08 – 09.03.15 | |||||||||||||||||||||||||
| 933 | 933 | 5.24 | 4.03 | — | ||||||||||||||||||||||||
| 435 | 4.35 | 435 | 01.10.08 – 31.03.09 |
(1)
|
||||||||||||||||||||||||
| 184,260 | 6.17 | 184,260 | 09.03.09 – 08.03.16 | |||||||||||||||||||||||||
| 262,033 | 5.61 | 262,033 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||
| 1,611 | 4.69 | 1,611 | 01.10.10 – 31.03.11 |
(1)
|
||||||||||||||||||||||||
| 884,475 | 1,147,186 | |||||||||||||||||||||||||||
|
Mr
Pell
|
153,648 | 153,648 | 4.40 | 2.60 | — | |||||||||||||||||||||||
| 87,300 | 5.73 | 87,300 | 14.08.04 – 13.08.11 | |||||||||||||||||||||||||
| 82,800 | 6.06 | 82,800 | 14.03.05 – 13.03.12 | |||||||||||||||||||||||||
| 149,400 | 4.12 | 149,400 | 13.03.06 – 12.03.13 | |||||||||||||||||||||||||
| 141,651 | 5.78 | 141,651 | 11.03.07 – 10.03.14 | |||||||||||||||||||||||||
| 151,821 | 5.76 | 151,821 | 10.03.08 – 09.03.15 | |||||||||||||||||||||||||
| 187,095 | 6.17 | 187,095 | 09.03.09 – 08.03.16 | |||||||||||||||||||||||||
| 259,894 | 5.61 | 259,894 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||
| 953,715 | 1,059,961 | |||||||||||||||||||||||||||
|
Mr
Whittaker
|
170,085 | 6.17 | 170,085 | 09.03.09 – 08.03.16 | ||||||||||||||||||||||||
| 3,705 | 4.61 | 3,705 | 01.10.13 – 31.03.14 |
(1)
|
||||||||||||||||||||||||
| 280,749 | 5.61 | 280,749 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||
| 173,790 | 454,539 | |||||||||||||||||||||||||||
|
Note:
|
|
|
(1)
|
Options held
under the sharesave schemes, which are not subject to performance
conditions.
|
The
performance conditions for options granted in 2007 are detailed on page
89.
Directors
’
remuneration report
continued
No
options had their terms and conditions varied during the accounting period to 31
December 2007. No payment is required on the award of an option.
The
performance condition applying to executive share options granted in 2007 and
exercisable in August 2010 is outlined on page 89.
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 Index (RPI) plus 9%. In respect of executive share options exercisable
before March 2002, the performance condition is that the growth in the company’s
EPS over three years has exceeded the growth in the RPI plus 6%.
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.
In
the ten year period to 31 December 2007, awards made that could require new
issue shares under the company’s share plans represented 5.5% of the company’s
issued ordinary share capital, leaving an available dilution headroom of 4.5%
.
Medium
Term Performance Plan
Scheme interests at
1 January 2007 and the related market price on award in the table below have
been restated to reflect the bonus issue of ordinary shares in May
2007.
|
Scheme
interests
(share
equivalents) at
1 January
2007
|
Awards
granted
in
2007
|
Market
price
on
award
£
|
Awards
vested
in
2007
|
(1)
|
Awards
exercised
in
2007
|
Share
interest
(share
equivalents)
at
31 December
2007
|
End of
period
for
qualifying
conditions
to
be
fulfilled
|
|||||||||||||||||
|
Sir Fred
Goodwin
|
279,120 | 5.45 | 279,120 |
vested
31.12.03
|
||||||||||||||||||||
| 101,565 | 6.20 | 101,565 |
vested
31.12.04
|
|||||||||||||||||||||
| 286,293 | 5.76 |
Nil
|
— |
lapsed
31.12.07
|
||||||||||||||||||||
| 291,579 | 6.17 | 291,579 | 31.12.08 | |||||||||||||||||||||
| 278,970 | 6.99 | 278,970 | 31.12.09 | |||||||||||||||||||||
| 958,557 | 951,234 | |||||||||||||||||||||||
|
Mr
Cameron
|
167,472 | 5.45 | 167,472 |
vested
31.12.03
|
||||||||||||||||||||
| 66,234 | 6.20 | 66,234 |
vested
31.12.04
|
|||||||||||||||||||||
| 138,810 | 5.76 |
Nil
|
– |
lapsed
31.12.07
|
||||||||||||||||||||
| 145,791 | 6.17 | 145,791 | 31.12.08 | |||||||||||||||||||||
| 143,064 | 6.99 | 143,064 | 31.12.09 | |||||||||||||||||||||
| 518,307 | 522,561 | |||||||||||||||||||||||
|
Mr
Fish
|
31,485 | 5.76 |
Nil
|
– |
lapsed
31.12.07
|
|||||||||||||||||||
| 93,351 | 6.17 | 93,351 | 31.12.08 | |||||||||||||||||||||
| 85,905 | 6.99 | 85,905 | 31.12.09 | |||||||||||||||||||||
| 124,836 | 179,256 | |||||||||||||||||||||||
|
Mr
Fisher
|
60,000 | 5.45 | 60,000 |
vested
31.12.03
|
||||||||||||||||||||
| 24,000 | 6.20 | 24,000 |
vested
31.12.04
|
|||||||||||||||||||||
| 104,109 | 5.76 |
Nil
|
– |
lapsed
31.12.07
|
||||||||||||||||||||
| 105,294 | 6.17 | 105,294 | 31.12.08 | |||||||||||||||||||||
| 100,146 | 6.99 | 100,146 | 31.12.09 | |||||||||||||||||||||
| 293,403 | 289,440 | |||||||||||||||||||||||
|
Mr
Pell
|
121,458 | 5.76 |
Nil
|
– |
lapsed
31.12.07
|
|||||||||||||||||||
| 124,731 | 6.17 | 124,731 | 31.12.08 | |||||||||||||||||||||
| 115,881 | 6.99 | 115,881 | 31.12.09 | |||||||||||||||||||||
| 246,189 | 240,612 | |||||||||||||||||||||||
|
Mr
Whittaker
|
113,391 | 6.17 | 113,391 | 31.12.08 | ||||||||||||||||||||
| 107,298 | 6.99 | 107,298 | 31.12.09 | |||||||||||||||||||||
| 113,391 | 220,689 | |||||||||||||||||||||||
|
Note:
|
|
|
(1)
|
Awards were
granted on 28 April 2005 and these awards have now
lapsed.
|
For
any awards that have vested, participants holding option-based awards can
exercise their right over the underlying share equivalents at any time up to ten
years from the date of grant.
No
variation was made to any of the terms of the plan during the year. The
performance measures are detailed on pages 88
and
89.
Restricted
Stock Award
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
held
at
1
January
2007
|
Market
price
on
award
£
|
Awards
vested
in
2007
|
Market
price
on
vesting
£
|
Value
of
awards
vested
£
|
Awards
held
at
31
December
2007
|
End of
the
period
for
qualifying
conditions
to
be
fulfilled
|
(2)
|
|||||||||||||||||||||
|
Mr
Whittaker
(1)
|
168,855 | 6.46 | 168,855 | 6.78 | 1,144,837 | — | ||||||||||||||||||||||
| 91,449 | 6.46 | 91,449 | 01.02.08 |
(3)
|
||||||||||||||||||||||||
| 75,966 | 6.46 | 75,966 | 01.02.09 | |||||||||||||||||||||||||
| 37,263 | 6.46 | 37,263 | 01.02.10 | |||||||||||||||||||||||||
| 373,533 | 204,678 | |||||||||||||||||||||||||||
Notes:
|
(1)
|
Awards were
granted to Mr Whittaker in lieu of unvested share awards from his previous
employer.
|
|
(2)
|
The end period
for qualifying conditions is subject to any restrictions on dealing in the
Group’s shares which may be in place and to which Mr Whittaker may be
subject. As a result of the close period prior to the announcement of the
Group’s results, the end of the period for qualifying conditions to be
fulfilled in 2008 is 28 February
2008.
|
|
(3)
|
Award has now
vested and shares will be released to Mr Whittaker on 28 February
2008.
|
Citizens
Long Term Incentive Plan (1)
|
Interests at 1
January 2007
|
Awards granted
during year
|
Benefits
received
during
year
|
Interests at
31 December 2007
|
|||||
| 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:
|
|||||
|
01.01.04 –
31.12.06
|
01.01.04 –
31.12.06
|
|||||||
|
was
US$1,389,148
|
||||||||
|
01.01.05 –
31.12.07
|
01.01.05 –
31.12.07
|
|||||||
|
01.01.06 –
31.12.08
|
01.01.06 –
31.12.08
|
|||||||
|
01.01.07 –
31.12.09
|
01.01.07 –
31.12.09
|
|
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.
|
No
variation was made to any of the terms of the plan during the year.
Directors
’
remuneration report
continued
Directors’
pension arrangements
During the year,
Johnny Cameron, Sir Fred Goodwin and Gordon Pell accrued pensionable service in
The Royal Bank of Scotland Group Pension Fund (“the RBS Fund”). The RBS Fund is
a defined benefit fund registered with HM Revenue & Customs under the
Finance Act 2004.
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.
Johnny Cameron’s
benefits are based on salary limited to the pensions earning cap and he receives
a cash allowance in place of pension on salary above this cap.
Mark Fisher opted to
cease future accrual of pension benefit within the RBS Fund with effect from 6
April 2006. The increase in pension shown in the table arises from his increase
in pensionable salary over the year. He is provided with a cash allowance in
place of further pension benefits.
Guy
Whittaker is provided with a cash allowance in place of pension
benefits.
The
cash allowances for Johnny Cameron, Mark Fisher and Guy Whittaker are
shown on page
92.
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.
Disclosure of these
benefits has been made in accordance with the United Kingdom Listing Authority
Listing Rules and with the Directors’ Remuneration Report Regulations
2002.
|
Defined
benefit arrangements
|
Age
at
31
December
2007
|
Accrued
entitlement
at
31
December
2007
£000
p.a.
|
Additional
pension
earned
during
the
year
ended
31
December
2007
£000
p.a.
|
Additional
pension
earned
during
the
year
ended
31
December
2007*
£000
p.a.
|
Transfer
value as
at
31
December
2007
£000
|
Transfer
value as
at
31
December
2006
£000
|
Increase
in
transfer
value
during
year
ended
31
December
2007
£000
|
Transfer
value
for the
additional
pension
earned
during
the
year
ended
31
December
2007*
£000
|
||||||||||||||||||||||||
|
Sir Fred
Goodwin
|
49 | 579 | 69 | 50 | 8,370 | 7,043 | 1,327 | 722 | ||||||||||||||||||||||||
|
Mr
Cameron
|
53 | 57 | 6 | 3 | 931 | 824 | 107 | 56 | ||||||||||||||||||||||||
|
Mr
Fish
|
63 | $2,080 | $251 | $251 | $24,101 | $17,800 | $6,301 | $2,915 | ||||||||||||||||||||||||
|
Mr
Fisher
|
47 | 337 | 35 | 24 | 4,562 | 3,904 | 658 | 323 | ||||||||||||||||||||||||
|
Mr
Pell
|
57 | 423 | 62 | 49 | 8,403 | 6,744 | 1,659 | 971 | ||||||||||||||||||||||||
*
net of statutory revaluation applying to deferred pensions
Notes:
|
(1)
|
There is a
significant difference in the form of disclosure required by the Combined
Code and the Directors’ Remuneration Report Regulations 2002. The former
requires the disclosure of the additional pension earned during the year
and the transfer value equivalent to this pension based on stock market
conditions at the end of the year. The latter requires the disclosure of
the difference between the transfer value at the start and end of the year
and is therefore dependent on the change in stock market conditions over
the course of the year. The above disclosure has been made in accordance
with the Combined Code and the Directors’ Remuneration Report Regulations
2002.
|
|
(2)
|
The transfer
values disclosed above do not represent a sum paid or payable to the
individual director. Instead they represent a potential liability of the
Group pension scheme.
|
|
(3)
|
No allowance
is made in these transfer values for any enhanced benefits that may become
payable on early retirement.
|
|
(4)
|
The proportion
of benefits represented by funded pension schemes for Gordon Pell and
Larry Fish is 53% and 2% respectively. All benefits for Johnny Cameron,
Mark Fisher and Sir Fred Goodwin are in funded pension
schemes.
|
|
(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
89
, 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:
Bob
Scott
Chairman of the
Remuneration Committee
27
February 2008
Directors’
interests in shares
Shares beneficially
owned at 1 January 2007 in the tables below have been restated to reflect the
bonus issue of ordinary shares in May 2007.
|
31 December
2007
|
||||||||||||||||||||||||
|
Executive
directors
|
Shares
beneficially
owned
at
1 January
2007
|
Shares
owned
beneficially
|
Vested
MPP
shares
or
share
equivalents
|
Vested
share
options
|
Total
|
Value as
at
31
December
2007
(2,3)
£ |
||||||||||||||||||
|
Sir Fred
Goodwin
|
200,532 | 694,498 | 380,685 | 1,457,676 | 2,532,859 | 5,732,777 | ||||||||||||||||||
|
Mr
Cameron
|
6,036 | 16,582 | 233,706 | 655,998 | 906,286 | 1,413,969 | ||||||||||||||||||
|
Mr
Fish
|
33,360 | 33,360 | — | 323,631 | 356,991 | 578,548 | ||||||||||||||||||
|
Mr
Fisher
|
13,494 | 21,345 | 84,000 | 516,660 | 622,005 | 747,907 | ||||||||||||||||||
|
Mr
Pell
|
1,746 | 155,394 | — | 461,151 | 616,545 | 737,259 | ||||||||||||||||||
|
Mr
Whittaker
|
154,815 | 278,191 | — | — | 278,191 | 1,235,168 | ||||||||||||||||||
Notes:
|
(1)
|
The numbers
shown in this table are taken from the audited disclosures shown elsewhere
in this Annual Report.
|
|
(2)
|
The value is
based on the share price at 31 December 2007, which was £4.44. During the
year ended 31 December 2007 the share price ranged from £3.97 to
£7.20.
|
|
(3)
|
The notional
value of the vested share options has been calculated on the ‘in the
money’ value using the share price of £4.44 as at 31 December 2007 less
the option prices of vested
options.
|
|
(4)
|
As at 31
December 2007, the executive directors held a technical interest as
potential beneficiaries in The Royal Bank of Scotland Group plc 2001
Employee Share Trust (9,570,456 shares) and The Royal Bank of Scotland plc
1992 Employee Share Trust (904,326 shares), being trusts operated for the
benefit of employees of the company and its
subsidiaries.
|
No
other director had an interest in the company’s ordinary shares during the
year.
On
7 January 2008 and 7 February 2008, 29 and 33 ordinary shares of 25p each,
respectively, were acquired by both Sir Fred Goodwin and Mr Fisher under the
Group’s Buy As You Earn share scheme.
Preference
shares
Mr
Fish held 20,000 non-cumulative preference shares of US$0.01 each at 31 December
2007 (2006 – 20,000) and Mr Koch held 20,000 non-cumulative preference shares of
US$0.01 each at 31 December 2007 (2006 – 20,000). No other director had an
interest in the preference shares during the year.
No
director held a non-beneficial interest in the shares of the company at 31
December 2007, at 1 January 2007 or date of appointment if later.
Statement
of directors’ responsibilities
The
directors are required by Article 4 of the IAS Regulation (European Commission
Regulation No 1606/2002) to prepare 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
|
|
·
|
state whether
applicable accounting standards have been followed, subject to any
material departures disclosed and explained in the
accounts.
|
The
directors are responsible for keeping proper accounting records which disclose
with reasonable accuracy at any time the financial position of the Group and to
enable them to ensure that the Annual Report and Accounts complies with the
Companies Act 1985. They are also responsible for safeguarding the assets of the
company and the Group and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
By
order of the Board.
Miller
McLean
Secretary
27
February
2008
Financial
statements
|
100
|
Report of
Independent Registered Public Accounting Firm
|
|
102
|
Consolidated
income statement
|
|
103
|
Balance
sheets
|
|
104
|
Statements of
recognised
|
|
income and
expense
|
|
|
105
|
Cash flow
statements
|
|
106
|
Accounting
policies
|
|
122
|
Notes on the
accounts
|
Report of Independent Registered Public Accounting Firm to the members
of The Royal Bank of Scotland Group plc
We
have audited the financial statements of The Royal Bank of Scotland Group plc
(“the company”) and its subsidiaries (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.
Respective
responsibilities of directors and auditors
The
directors’ responsibilities for preparing the annual report, the directors’
remuneration report and the financial statements in accordance with applicable
law and International Financial Reporting Standards (IFRS), as adopted by the
European Union, are set out in the statement of directors’
responsibilities.
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 Ireland).
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.
In
addition we report to you if, in our opinion, the company has not kept proper
accounting records, we have not received all the information and explanations we
require for our audit, or if information specified by law regarding directors’
remuneration and other transactions is not disclosed.
We
review whether the corporate governance statement reflects the company’s
compliance with the nine provisions of the 2006 Combined Code specified for our
review by the Listing Rules of the Financial Services Authority, and we report
if it does not.
The
Listing Rules do not require us to consider whether the Board or management’s
statements on internal control cover all risks and controls, or form an opinion
on the effectiveness of the Group’s corporate governance procedures or its risk
and control procedures.
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.
Basis
of audit opinion
We
conducted our audit in accordance with International Standards on Auditing (UK
and Ireland) issued by the Auditing Practices Board and with the standards of
the Public Company 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.
We
planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
and the part of the directors’ remuneration report described as having been
audited are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the financial statements and the
part of the directors’ remuneration report described as having been
audited.
UK
opinion
In
our opinion:
|
·
|
the Group
financial statements give a true and fair view, in accordance with IFRS as
adopted by the European Union, of the state of the Group’s affairs as at
31 December 2007 and of its profit and cash flows for the year then
ended;
|
|
·
|
the company
financial statements give a true and fair view, in accordance with IFRS as
adopted by the European Union as applied in accordance with the provisions
of the companies Act 1985, of the state of affairs of the company as at 31
December 2007;
|
|
·
|
the financial
statements and the part of the directors’ 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
|
|
·
|
the
information given in the directors’ report is consistent with the
financial statements.
|
Separate
opinion in relation to IFRS
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 as issued by the International Accounting Standards
Board (IASB).
In
our opinion the financial statements give a true and fair view, in accordance
with IFRS, of the state of the Group’s affairs as at 31 December 2007 and of its
profit and cash flows for the year then ended.
US
opinion
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 Public Company
Accounting Oversight Board (United States), the Group’s internal control over
financial reporting as at 31 December 2007, based on the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organisations of the Treadway 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.
Our
report dated 27 February 2008 which is included in this Annual Report on
Form 20-F for the year ended 31 December 2007 expresses 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.
Deloitte &
Touche LLP
Chartered
Accountants and Registered Auditors
Edinburgh, United
Kingdom
27
February 2008
Consolidated income statement
for the year ended 31 December 2007
|
2007
|
2006
|
2005
|
||||||||||||||
|
Note
|
£m | £m | £m | |||||||||||||
|
Interest
receivable
|
33,420 | 24,688 | 21,331 | |||||||||||||
|
Interest
payable
|
(20,752 | ) | (14,092 | ) | (11,413 | ) | ||||||||||
|
Net
interest income
|
12,668 | 10,596 | 9,918 | |||||||||||||
|
Fees and
commissions receivable
|
8,465 | 7,116 | 6,750 | |||||||||||||
|
Fees and
commissions payable
|
(2,311 | ) | (1,922 | ) | (1,841 | ) | ||||||||||
|
Income from
trading activities
|
1 | 1,327 | 2,675 | 2,343 | ||||||||||||
|
Other
operating income (excluding insurance premium income)
|
4,857 | 3,564 | 2,953 | |||||||||||||
|
Insurance
premium income
|
6,398 | 6,243 | 6,076 | |||||||||||||
|
Reinsurers’
share
|
(289 | ) | (270 | ) | (297 | ) | ||||||||||
|
Non-interest
income
|
18,447 | 17,406 | 15,984 | |||||||||||||
|
Total
income
|
31,115 | 28,002 | 25,902 | |||||||||||||
|
Staff
costs
|
7,552 | 6,723 | 5,992 | |||||||||||||
|
Premises and
equipment
|
1,766 | 1,421 | 1,313 | |||||||||||||
|
Other
administrative expenses
|
3,147 | 2,658 | 2,816 | |||||||||||||
|
Depreciation
and amortisation
|
1,970 | 1,678 | 1,825 | |||||||||||||
|
Operating
expenses
|
2 | 14,435 | 12,480 | 11,946 | ||||||||||||
|
Profit
before other operating charges and impairment losses
|
16,680 | 15,522 | 13,956 | |||||||||||||
|
Insurance
claims
|
4,770 | 4,550 | 4,413 | |||||||||||||
|
Reinsurers’
share
|
(118 | ) | (92 | ) | (100 | ) | ||||||||||
|
Impairment
losses
|
12 | 2,128 | 1,878 | 1,707 | ||||||||||||
|
Operating
profit before tax
|
9,900 | 9,186 | 7,936 | |||||||||||||
|
Tax
|
5 | 2,052 | 2,689 | 2,378 | ||||||||||||
|
Profit
from continuing operations
|
7,848 | 6,497 | 5,558 | |||||||||||||
|
Loss from
discontinued operations, net of tax
|
136 | — | — | |||||||||||||
|
Profit
for the year
|
7,712 | 6,497 | 5,558 | |||||||||||||
|
Profit
attributable to:
|
||||||||||||||||
|
Minority
interests
|
163 | 104 | 57 | |||||||||||||
|
Other
owners
|
6 | 246 | 191 | 109 | ||||||||||||
|
Ordinary
shareholders
|
7,303 | 6,202 | 5,392 | |||||||||||||
| 7,712 | 6,497 | 5,558 | ||||||||||||||
|
Per
25p ordinary share:
|
||||||||||||||||
|
Basic
earnings
|
9 | 76.4 | p | 64.9 | p | 56.5 | p | |||||||||
|
Diluted
earnings
|
9 | 75.7 | p | 64.4 | p | 56.1 | p | |||||||||
|
Dividends
|
7 | 32.2 | p | 25.8 | p | 20.2 | p | |||||||||
Balance sheets
at 31 December
2007
|
Group
|
Company
|
|||||
|
2007
|
2006
|
2007
|
2006
|
|||
|
Note
|
£m
|
£m
|
£m
|
£m
|
||
|
Assets
|
||||||
|
Cash and
balances at central banks
|
17,866
|
6,121
|
—
|
—
|
||
|
Treasury and
other eligible bills subject to repurchase agreements
|
29
|
7,090
|
1,426
|
—
|
—
|
|
|
Other treasury
and other eligible bills
|
11,139
|
4,065
|
—
|
—
|
||
|
Treasury and
other eligible bills
|
10
|
18,229
|
5,491
|
—
|
—
|
|
|
Loans and
advances to banks
|
10
|
219,460
|
82,606
|
7,686
|
7,252
|
|
|
Loans and
advances to customers
|
10
|
829,250
|
466,893
|
307
|
286
|
|
|
Debt
securities subject to repurchase agreements
|
29
|
100,561
|
58,874
|
—
|
—
|
|
|
Other debt
securities
|
175,866
|
68,377
|
—
|
—
|
||
|
Debt
securities
|
14
|
276,427
|
127,251
|
—
|
—
|
|
|
Equity
shares
|
15
|
53,026
|
13,504
|
—
|
—
|
|
|
Investments in
Group undertakings
|
16
|
—
|
—
|
43,542
|
21,784
|
|
|
Settlement
balances
|
16,589
|
7,425
|
—
|
—
|
||
|
Derivatives
|
13
|
337,410
|
116,681
|
173
|
—
|
|
|
Intangible
assets
|
17
|
48,492
|
18,904
|
—
|
—
|
|
|
Property,
plant and equipment
|
18
|
18,750
|
18,420
|
—
|
—
|
|
|
Prepayments,
accrued income and other assets
|
19
|
19,066
|
8,136
|
127
|
3
|
|
|
Assets of
disposal groups
|
45,954
|
—
|
—
|
—
|
||
|
Total
assets
|
1,900,519
|
871,432
|
51,835
|
29,325
|
||
|
Liabilities
|
||||||
|
Deposits by
banks
|
10
|
312,633
|
132,143
|
5,572
|
738
|
|
|
Customer
accounts
|
10
|
682,365
|
384,222
|
—
|
—
|
|
|
Debt
securities in issue
|
10
|
273,615
|
85,963
|
13,453
|
2,139
|
|
|
Settlement
balances and short positions
|
10
|
91,021
|
49,476
|
—
|
—
|
|
|
Derivatives
|
13
|
332,060
|
118,112
|
179
|
42
|
|
|
Accruals,
deferred income and other liabilities
|
21
|
34,024
|
15,660
|
8
|
15
|
|
|
Retirement
benefit liabilities
|
3
|
496
|
1,992
|
—
|
—
|
|
|
Deferred
taxation
|
22
|
5,510
|
3,264
|
3
|
—
|
|
|
Insurance
liabilities
|
23
|
10,162
|
7,456
|
—
|
—
|
|
|
Subordinated
liabilities
|
24
|
37,979
|
27,654
|
7,743
|
8,194
|
|
|
Liabilities of
disposal groups
|
29,228
|
—
|
—
|
—
|
||
|
Total
liabilities
|
1,809,093
|
825,942
|
26,958
|
11,128
|
||
|
Minority
interests
|
25
|
38,388
|
5,263
|
—
|
—
|
|
|
Equity
owners
|
26,
27
|
53,038
|
40,227
|
24,877
|
18,197
|
|
|
Total
equity
|
91,426
|
45,490
|
24,877
|
18,197
|
||
|
Total
liabilities and equity
|
1,900,519
|
871,432
|
51,835
|
29,325
|
||
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
|
|
Chairman
|
Group
Chief Executive
|
Group
Finance Director
|
Statements of recognised income and
expense
for the year ended 31 December 2007
|
Group
|
Company
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Available-for-sale
investments
|
||||||||||||||||||||||||
|
Net valuation
(losses)/gains taken direct to equity
|
(776 | ) | 4,792 | 35 | — | — | — | |||||||||||||||||
|
Net profit
taken to income on sales
|
(513 | ) | (313 | ) | (582 | ) | — | — | — | |||||||||||||||
|
Cash
flow hedges
|
||||||||||||||||||||||||
|
Net
(losses)/gains taken direct to equity
|
(426 | ) | (109 | ) | 18 | — | — | — | ||||||||||||||||
|
Net
(gains)/losses taken to earnings
|
(138 | ) | (140 | ) | (85 | ) | 3 | 3 | 6 | |||||||||||||||
|
Exchange
differences on translation of foreign operations
|
2,210 | (1,681 | ) | 842 | — | — | — | |||||||||||||||||
|
Actuarial
gains/(losses) on defined benefit plans
|
2,189 | 1,781 | (799 | ) | — | — | — | |||||||||||||||||
|
Income/(expense)
before tax on items recognised direct in equity
|
2,546 | 4,330 | (571 | ) | 3 | 3 | 6 | |||||||||||||||||
|
Tax on items
recognised direct in equity
|
(170 | ) | (1,173 | ) | 478 | (1 | ) | (1 | ) | (2 | ) | |||||||||||||
|
Net
income/(expense) recognised direct in equity
|
2,376 | 3,157 | (93 | ) | 2 | 2 | 4 | |||||||||||||||||
|
Profit for the
year
|
7,712 | 6,497 | 5,558 | 2,499 | 3,499 | 2,074 | ||||||||||||||||||
|
Total
recognised income and expense for the year
|
10,088 | 9,654 | 5,465 | 2,501 | 3,501 | 2,078 | ||||||||||||||||||
|
Attributable
to:
|
||||||||||||||||||||||||
|
Equity
owners
|
8,610 | 7,707 | 5,355 | 2,501 | 3,501 | 2,078 | ||||||||||||||||||
|
Minority
interests
|
1,478 | 1,947 | 110 | — | — | — | ||||||||||||||||||
| 10,088 | 9,654 | 5,465 | 2,501 | 3,501 | 2,078 | |||||||||||||||||||
Cash flow statements
for the
year ended 31 December 2007
|
Group
|
Company
|
|||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||
|
Note
|
£m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
|
Operating
activities
|
||||||||||||||||||||||||||||
|
Operating
profit before tax
|
9,900 | 9,186 | 7,936 | 2,372 | 3,486 | 1,932 | ||||||||||||||||||||||
|
Adjustments
for:
|
||||||||||||||||||||||||||||
|
Depreciation
and amortisation
|
1,970 | 1,678 | 1,825 | — | — | — | ||||||||||||||||||||||
|
Interest on
subordinated liabilities
|
1,542 | 1,386 | 1,271 | 470 | 520 | 583 | ||||||||||||||||||||||
|
Charge for
defined benefit pension schemes
|
489 | 580 | 462 | — | — | — | ||||||||||||||||||||||
|
Cash
contribution to defined benefit pension schemes
|
(599 | ) | (536 | ) | (452 | ) | — | — | — | |||||||||||||||||||
|
Elimination of
foreign exchange differences
|
(10,282 | ) | 4,516 | (3,060 | ) | (58 | ) | (22 | ) | (30 | ) | |||||||||||||||||
|
Other non-cash
items
|
(3,235 | ) | (1,120 | ) | (1,412 | ) | 1 | 18 | (104 | ) | ||||||||||||||||||
|
Net
cash (outflow)/inflow from trading activities
|
(215 | ) | 15,690 | 6,570 | 2,785 | 4,002 | 2,381 | |||||||||||||||||||||
|
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 | ||||||||||||||||||||||
|
Income taxes
(paid)/received
|
(2,442 | ) | (2,229 | ) | (1,911 | ) | 6 | 154 | (18 | ) | ||||||||||||||||||
|
Net
cash flows from operating activities
|
34 | 25,604 | 17,441 | 4,140 | 18,353 | 3,648 | 4,413 | |||||||||||||||||||||
|
Investing
activities
|
||||||||||||||||||||||||||||
|
Sale and
maturity of securities
|
63,007 | 27,126 | 39,472 | — | — | — | ||||||||||||||||||||||
|
Purchase of
securities
|
(61,020 | ) | (19,126 | ) | (39,196 | ) | — | — | — | |||||||||||||||||||
|
Investment in
subsidiaries
|
— | — | — | (18,510 | ) | (1,097 | ) | (2,961 | ) | |||||||||||||||||||
|
Disposal of
subsidiaries
|
— | — | — | 6 | — | — | ||||||||||||||||||||||
|
Sale of
property, plant and equipment
|
5,786 | 2,990 | 2,220 | — | — | — | ||||||||||||||||||||||
|
Purchase of
property, plant and equipment
|
(5,080 | ) | (4,282 | ) | (4,812 | ) | — | — | — | |||||||||||||||||||
|
Discontinued
activities
|
(334 | ) | — | — | — | — | — | |||||||||||||||||||||
|
Net investment
in business interests and intangible assets
|
35 | 13,640 | (63 | ) | (296 | ) | — | — | — | |||||||||||||||||||
|
Loans to
subsidiaries
|
— | — | — | — | — | (337 | ) | |||||||||||||||||||||
|
Repayments
from subsidiaries
|
— | — | — | 469 | 547 | 1,183 | ||||||||||||||||||||||
|
Net
cash flows from investing activities
|
15,999 | 6,645 | (2,612 | ) | (18,035 | ) | (550 | ) | (2,115 | ) | ||||||||||||||||||
|
Financing
activities
|
||||||||||||||||||||||||||||
|
Issue of
ordinary shares
|
77 | 104 | 163 | 77 | 104 | 163 | ||||||||||||||||||||||
|
Issue of other
equity interests
|
3,600 | 671 | 1,649 | 3,600 | 671 | 1,649 | ||||||||||||||||||||||
|
Issue of paid
up equity
|
1,073 | — | — | 1,073 | — | — | ||||||||||||||||||||||
|
Issue of
subordinated liabilities
|
1,018 | 3,027 | 1,234 | — | 399 | 337 | ||||||||||||||||||||||
|
Proceeds of
minority interests issued
|
31,095 | 1,354 | 1,264 | — | — | — | ||||||||||||||||||||||
|
Redemption of
minority interests
|
(545 | ) | (81 | ) | (121 | ) | — | — | — | |||||||||||||||||||
|
Repurchase of
ordinary shares
|
— | (991 | ) | — | — | (991 | ) | — | ||||||||||||||||||||
|
Shares
purchased by employee trusts
|
(65 | ) | (254 | ) | — | — | — | — | ||||||||||||||||||||
|
Shares issued
under employee share schemes
|
79 | 108 | — | — | 7 | — | ||||||||||||||||||||||
|
Repayment of
subordinated liabilities
|
(1,708 | ) | (1,318 | ) | (1,553 | ) | (469 | ) | (547 | ) | (1,183 | ) | ||||||||||||||||
|
Dividends
paid
|
(3,411 | ) | (2,727 | ) | (2,007 | ) | (3,290 | ) | (2,661 | ) | (1,912 | ) | ||||||||||||||||
|
Interest on
subordinated liabilities
|
(1,522 | ) | (1,409 | ) | (1,332 | ) | (455 | ) | (497 | ) | (577 | ) | ||||||||||||||||
|
Net
cash flows from financing activities
|
29,691 | (1,516 | ) | (703 | ) | 536 | (3,515 | ) | (1,523 | ) | ||||||||||||||||||
|
Effects of
exchange rate changes on cash and cash equivalents
|
6,010 | (3,468 | ) | 1,703 | 62 | (52 | ) | 42 | ||||||||||||||||||||
|
Net
increase/(decrease) in cash and cash equivalents
|
77,304 | 19,102 | 2,528 | 916 | (469 | ) | 817 | |||||||||||||||||||||
|
Cash and cash
equivalents 1 January
|
71,651 | 52,549 | 50,021 | 657 | 1,126 | 309 | ||||||||||||||||||||||
|
Cash
and cash equivalents 31 December
|
148,955 | 71,651 | 52,549 | 1,573 | 657 | 1,126 | ||||||||||||||||||||||
Accounting
policies
1.
Presentation of accounts
The
accounts are prepared in accordance with International Financial Reporting
Standards issued by the International Accounting Standards Board (“IASB”) and
interpretations issued by the International Financial Reporting Interpretations
Committee of the IASB (together “IFRS”) as adopted by the European Union (“EU”).
The EU has not adopted the complete text of IAS 39 ‘Financial Instruments:
Recognition and Measurement’; it has relaxed some of the standard’s hedging
requirements. The Group has not taken advantage of this relaxation and has
adopted IAS 39 as issued by the IASB: the Group’s financial statements are
prepared in accordance with 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.
The
Group is no longer required to include reconciliations of shareholders’ equity
and net income under IFRS and US GAAP in its filings with the Securities and
Exchange Commission in the US.
The
company is incorporated in the UK and registered in Scotland. The accounts are
prepared on the historical cost basis except that the following assets and
liabilities are stated at their fair value: derivative financial instruments,
held-for-trading financial assets and financial liabilities, financial assets
and financial liabilities that are designated as at fair value through profit or
loss, available-for-sale financial assets and investment property. Recognised
financial assets and financial liabilities in fair value hedges are adjusted for
changes in fair value in respect of the risk that is hedged.
The
company accounts are presented in accordance with the Companies Act
1985.
2.
Basis of consolidation
The
consolidated financial statements incorporate the financial statements of the
company and entities (including certain special purpose entities) that continue
to be controlled by the 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.
All
intra-group balances, transactions, income and expenses are eliminated on
consolidation. The consolidated accounts are prepared using uniform accounting
policies.
3.
Revenue recognition
Interest income on
financial assets that are classified as loans and receivables,
available-for-sale or held-to-maturity and interest expense on financial
liabilities other than those at fair value through profit or loss are determined
using the effective interest method. The effective interest method is a method
of calculating the amortised cost of a financial asset or financial liability
(or group of financial assets or liabilities) and of allocating the interest
income or interest expense over the expected life of the asset or liability. The
effective interest rate is the rate that exactly discounts estimated future cash
flows to the instrument’s initial carrying amount. Calculation of the effective
interest rate takes into account fees payable or receivable, that are an
integral part of the instrument’s yield, premiums or discounts on acquisition or
issue, early redemption fees and transaction costs. All contractual terms of a
financial instrument are considered when estimating future cash
flows.
Financial assets and
financial liabilities held-for-trading or designated as at fair value through
profit or loss are recorded at fair value. Changes in fair value are recognised
in profit or loss together with dividends and interest receivable and
payable.
Commitment and
utilisation fees are determined as a percentage of the outstanding facility. If
it is unlikely that a specific lending arrangement will be entered into, such
fees are taken to profit or loss over the life of the facility otherwise they
are deferred and included in the effective interest rate on the
advance.
Fees in respect of
services are recognised as the right to consideration accrues through the
provision of the service to the customer. The arrangements are generally
contractual and the cost of providing the service is incurred as the service is
rendered. The price is usually fixed and always determinable. The application of
this policy to significant fee types is outlined below.
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.
Card related services
: fees
from credit card business include:
Commission received
from retailers for processing credit and debit card transactions: income is
accrued to the income statement as the service is performed.
Interchange
received: as issuer, the Group receives a fee (interchange) each time a
cardholder purchases goods and services. The Group also receives interchange
fees from other card issuers for providing cash advances through its branch and
Automated Teller Machine networks. These fees are accrued once the transaction
has taken place.
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. 12 months.
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. However, provision is
made where commission is refundable in the event of policy cancellation in line
with estimated cancellations.
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.
Insurance premiums
– see
accounting policy 10 below.
4.
Pensions and other post-retirement benefits
The
Group provides post-retirement benefits in the form of pensions and healthcare
plans to eligible employees.
For
defined benefit schemes, scheme liabilities are measured on an actuarial basis
using the projected unit credit method and discounted at a rate that reflects
the current rate of return on a high quality corporate bond of equivalent term
and currency to the scheme liabilities. Scheme assets are measured at their fair
value. Any surplus or deficit of scheme assets over liabilities is recognised in
the balance sheet as an asset (surplus) or liability (deficit). The current
service cost and any past service costs together with the expected return on
scheme assets less the unwinding of the discount on the scheme liabilities is
charged to operating expenses. Actuarial gains and losses are recognised in full
in the period in which they occur outside profit or loss and presented in the
statement of recognised income and expense.
Contributions to
defined contribution pension schemes are recognised in the income statement when
payable.
5.
Intangible assets and goodwill
Intangible assets
that are acquired by the Group are stated at cost less accumulated amortisation
and impairment losses. Amortisation is charged to profit or loss over the
assets’ 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
|
|
Other acquired
intangibles
|
5 to 10
years
|
|
Computer
software
|
3 to 5
years
|
Expenditure on
internally generated goodwill and brands is written-off as incurred. Direct
costs relating to the development of internal-use computer software are
capitalised once technical feasibility and economic viability have been
established. These costs include payroll, the costs of materials and services,
and directly attributable overhead. Capitalisation of costs ceases when the
software is capable of operating as intended. During and after development,
accumulated costs are reviewed for impairment against the projected benefits
that the software is expected to generate. Costs incurred prior to the
establishment of technical feasibility and economic viability are expensed as
incurred as are all training costs and general overhead. The costs of licences
to use computer software that are expected to generate economic benefits beyond
one year are also capitalised.
Acquired goodwill
being the excess of the cost of an acquisition over the Group’s interest in the
net fair value of the identifiable assets, liabilities and contingent
liabilities of the subsidiary, associate or joint venture acquired is initially
recognised at cost and subsequently at cost less any accumulated impairment
losses. Goodwill arising on the acquisition of subsidiaries and joint ventures
is included in the balance sheet caption ‘Intangible assets’ and that on
associates within their carrying amounts. The gain or loss on the disposal of a
subsidiary, associate or joint venture includes the carrying value of any
related goodwill.
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 (1 January 2004) was £13,131 million, its
carrying value under previous GAAP.
6.
Property, plant and equipment
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.
Accounting policies
continued
Depreciation is
charged to profit or loss on a straight-line basis so as to write-off the
depreciable amount of property, plant and equipment (including assets owned and
let on operating leases (except investment property – see accounting policy 21
below)) over their estimated useful lives. The depreciable amount is the cost of
an asset less its residual value. Land is not depreciated. Estimated useful
lives are as follows:
|
Freehold and
long leasehold buildings
|
50
years
|
|
Short
leaseholds
|
unexpired
period
|
|
of the
lease
|
|
|
Property
adaptation costs
|
10 to 15
years
|
|
Computer
equipment
|
up to 5
years
|
|
Other
equipment
|
4 to 15
years
|
Under previous GAAP,
the Group’s freehold and long leasehold property occupied for its own use was
recorded at valuation on the basis of existing use value. The Group elected to
use this valuation as at 31 December 2003 (£2,391 million) as deemed cost for
its opening IFRS balance sheet (1 January 2004).
7.
Impairment of intangible assets and property, plant and equipment
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 Group estimates the recoverable amount of the asset and
the impairment loss if any. Goodwill is tested for impairment annually or more
frequently if events or changes in circumstances indicate that it might be
impaired. If an asset does not generate cash flows that are independent from
those of other assets or groups of assets, recoverable amount is determined for
the cash-generating unit to which the asset belongs. The recoverable amount of
an asset is the higher of its fair value less cost to sell and its value in use.
Value in use is the present value of future cash flows from the asset or
cash-generating unit discounted at a rate that reflects market interest rates
adjusted for risks specific to the asset or cash generating unit that have not
been reflected in the estimation of future cash flows. If the recoverable amount
of an intangible or tangible asset is less than its carrying value, an
impairment loss is recognised immediately in profit or loss and the carrying
value of the asset reduced by the amount of the loss. A reversal of an
impairment loss on intangible assets (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.
8.
Foreign currencies
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. Non-monetary 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. Translation differences arising on
non-monetary items measured at fair value are recognised in profit or loss
except for differences arising on available-for-sale non-monetary financial
assets, for example equity shares, which are included in the available-for-sale
reserve in equity unless the asset is the hedged item in a fair value
hedge.
The
assets and liabilities of foreign operations, including goodwill and fair value
adjustments arising on acquisition, are translated into sterling at foreign
exchange rates ruling at the balance sheet date. The revenues and expenses of
foreign operations are translated into sterling at average exchange rates unless
these do not approximate to the foreign exchange rates ruling at the dates of
the transactions. Foreign exchange differences arising on the translation of a
foreign operation are recognised directly in equity and included in profit or
loss on its disposal.
9.
Leases
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.
Finance lease
receivables are stated in the balance sheet at the amount of the net investment
in the lease being the minimum lease payments and any unguaranteed residual
value discounted at the interest rate implicit in the lease. Finance lease
income is allocated to accounting periods so as to give a constant periodic rate
of return before tax on the net investment. Unguaranteed residual values are
subject to regular review to identify potential impairment. If there has been a
reduction in the estimated unguaranteed residual value, the income allocation is
revised and any reduction in respect of amounts accrued is recognised
immediately.
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).
10.
Insurance
General
insurance
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.
Premiums from
general insurance contracts are recognised in the accounting period in which
they begin. Unearned premiums represent the proportion of the net premiums that
relate to periods of insurance after the balance sheet date and are calculated
over the period of exposure under the policy, on a daily basis, 24th’s basis or
allowing for the estimated incidence of exposure under policies which are longer
than twelve months. Provision is made where necessary for the estimated amount
of claims over and above unearned premiums including that in respect of future
written business on discontinued lines under the run-off of delegated
underwriting authority arrangements. The provision is designed to meet future
claims and related expenses and is calculated across related classes of business
on the basis of a separate carry forward of deferred acquisition expenses after
making allowance for investment income.
Acquisition expenses
relating to new and renewed business for all classes are expensed over the
period during which the premiums are earned. The principal acquisition costs so
deferred are commissions payable, costs associated with the telesales and
underwriting staff and prepaid claims handling costs in respect of delegated
claims handling arrangements for claims which are expected to occur after the
balance sheet date. Claims and the related reinsurance are recognised in the
accounting period in which the loss occurs. Provision is made for the full cost
of settling outstanding claims at the balance sheet date, including claims
estimated to have been incurred but not yet reported at that date, and claims
handling expenses. The related reinsurance receivable is recognised at the same
time.
Life
assurance
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.
Reinsurance
The
Group has reinsurance treaties that transfer significant insurance risk.
Liabilities for reinsured contracts are calculated gross of reinsurance and a
separate reinsurance asset recorded.
11.
Taxation
Provision is made
for taxation at current enacted rates on taxable profits, arising in income or
in equity, taking into account relief for overseas taxation where appropriate.
Deferred taxation is accounted for in full for all temporary differences between
the carrying amount of an asset or liability for accounting purposes and its
carrying amount for tax purposes, except in relation to overseas earnings where
remittance is controlled by the Group, and goodwill.
Deferred tax assets
are only recognised to the extent that it is probable that they will be
recovered.
12.
Financial assets
On
initial recognition financial assets are classified into held-to-maturity
investments; available-for-sale financial assets; held-for-trading; designated
as at fair value through profit or loss; or loans and receivables.
Held-to-maturity investments
– a financial asset may be classified as a held-to-maturity investment
only if it has fixed or determinable payments, a fixed maturity and the Group
has the positive intention and ability to hold to maturity. Held-to-maturity
investments are initially recognised at fair value plus directly related
transaction costs. They are subsequently measured at amortised cost using the
effective interest method (see accounting policy 3 above) less any impairment
losses.
Held-for-trading
– a
financial asset is classified as held-for-trading if it is acquired principally
for the purpose of selling in the near term, or forms part of a portfolio of
financial instruments that are managed together and for which there is evidence
of short-term profit taking, or it is a derivative (not in a qualifying hedge
relationship). Held-for-trading financial assets are recognised at fair value
with transaction costs being recognised in profit or loss. Subsequently they are
measured at fair value. Gains and losses on held-for-trading financial assets
are recognised in profit or loss as they arise.
Accounting policies
continued
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 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.
Financial assets
that the Group designates on initial recognition as being at fair value through
profit or loss are recognised at fair value, with transaction costs being
recognised in profit or loss and are subsequently measured at fair value. Gains
and losses on financial assets that are designated as at fair value through
profit or loss are recognised in profit or loss as they arise.
The
principal category of financial assets designated as at fair value through
profit or loss is policyholders’ assets underpinning insurance and investment
contracts issued by the Group's life assurance businesses. Fair value
designation significantly reduces the measurement inconsistency that would arise
if these assets were classified as available-for-sale.
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-for-trading, or
designated as at fair value through profit or loss. Loans and receivables are
initially recognised at fair value plus directly related transaction costs. They
are subsequently measured at amortised cost using the effective interest method
(see accounting policy 3 above) less any impairment losses.
Available-for-sale
–
financial assets that are not classified as held-to-maturity; held-for-trading;
designated as at fair value through profit or loss; or loans and receivables are
classified as available-for-sale. Financial assets can be designated as
available-for-sale on initial recognition. Available-for-sale financial assets
are initially recognised at fair value plus directly related transaction costs.
They are subsequently measured at fair value. Unquoted equity investments whose
fair value cannot be measured reliably are carried at cost and classified as
available-for-sale financial assets. Impairment losses and exchange differences
resulting from retranslating the amortised cost of currency monetary
available-for-sale financial assets are recognised in profit or loss together
with interest calculated using the effective interest method (see accounting
policy 3 above). Other changes in the fair value of available-for-sale financial
assets are reported in a separate component of shareholders’ equity until
disposal, when the cumulative gain or loss is recognised in profit or
loss.
Regular way
purchases of financial assets classified as loans and receivables are recognised
on settlement date; all other regular way purchases are recognised on trade
date.
Fair value for a net
open position in a financial asset that is quoted in an active market is the
current bid price times the number of units of the instrument held. Fair values
for financial assets not quoted in an active market are determined using
appropriate valuation techniques including discounting future cash flows, option
pricing models and other methods that are consistent with accepted economic
methodologies for pricing financial assets.
13.
Impairment of financial assets
The
Group assesses at each balance sheet date whether there is any objective
evidence that a financial asset or group of financial assets classified as
held-to-maturity, available-for-sale or loans and receivables is impaired. A
financial asset or portfolio of financial assets is impaired and an impairment
loss incurred if there is objective evidence that an event or events since
initial recognition of the asset have adversely affected the amount or timing of
future cash flows from the asset.
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 assessed individually for financial assets that are individually significant
and individually or collectively for assets that are not individually
significant. In making collective assessment of impairment, financial assets are
grouped into portfolios on the basis of similar risk characteristics. Future
cash flows from these portfolios are estimated on the basis of the contractual
cash flows and historical loss experience for assets with similar credit risk
characteristics. Historical loss experience is adjusted, on the basis of current
observable data, to reflect the effects of current conditions not affecting the
period of historical experience.
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
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 assets carried at fair
value
– when a decline in the fair value of a financial asset classified
as available-for-sale has been recognised directly in equity and there is
objective evidence that the asset is impaired, the cumulative loss is removed
from equity and recognised in profit or loss. The loss is measured as the
difference between the amortised cost of the financial asset and its current
fair value. Impairment losses on available-for-sale equity instruments are not
reversed through profit or loss, but those on available-for-sale debt
instruments are reversed, if there is an increase in fair value that is
objectively related to a subsequent event.
14.
Financial liabilities
A
financial liability is classified as held-for-trading if it is incurred
principally for the purpose of selling in the near term, or forms part of a
portfolio of financial instruments that are managed together and for which there
is evidence of short-term profit taking, or it is a derivative (not in a
qualifying hedge relationship). Held-for-trading financial liabilities are
recognised at fair value with transaction costs being recognised in profit or
loss. Subsequently they are measured at fair value. Gains and losses are
recognised in profit or loss as they arise.
Financial
liabilities that the Group designates on initial recognition as being at fair
value through profit or loss are recognised at fair value, with transaction
costs being recognised in profit or loss, and are subsequently measured at fair
value. Gains and losses on financial liabilities that are designated as at fair
value through profit or loss are recognised in profit or loss as they
arise.
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.
The
principal categories of financial liabilities designated as at fair value
through profit or loss are (a) structured liabilities issued by the Group:
designation significantly reduces the measurement inconsistency between these
liabilities and the related derivatives carried at fair value; and (b)
investment contracts issued by the Group's life assurance businesses: fair value
designation significantly reduces the measurement inconsistency that would arise
if these liabilities were measured at amortised cost.
All
other financial liabilities are measured at amortised cost using the effective
interest method (see accounting policy 3 above).
Fair value for a net
open position in a financial liability that is quoted in an active market is the
current offer price times the number of units of the instrument held or issued.
Fair values for financial liabilities not quoted in an active market are
determined using appropriate valuation techniques including discounting future
cash flows, option pricing models and other methods that are consistent with
accepted economic methodologies for pricing financial liabilities.
15.
Derecognition
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.
A
financial liability is removed from the balance sheet when the obligation is
discharged, or cancelled, or expires.
16.
Sale and repurchase transactions
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.
Accounting policies
continued
17.
Netting
Financial assets and
financial liabilities are offset and the net amount presented in the balance
sheet when, and only when, the Group currently has a legally enforceable right
to set off the recognised amounts; and it intends either to settle on a net
basis, or to realise the asset and settle the liability simultaneously. The
Group is party to a number of arrangements, including master netting agreements,
that give it the right to offset financial assets and financial liabilities but
where it does not intend to settle the amounts net or simultaneously and
therefore the assets and liabilities concerned are presented gross.
18.
Capital instruments
The
Group classifies a financial instrument that it issues as a financial asset,
financial liability or an equity instrument in accordance with the substance of
the contractual arrangement. An instrument is classified as a liability if it is
a contractual obligation to deliver cash or another financial asset, or to
exchange financial assets or financial liabilities on potentially unfavourable
terms. An instrument is classified as equity if it evidences a residual interest
in the assets of the Group after the deduction of liabilities. The components of
a compound financial instrument issued by the Group are classified and accounted
for separately as financial assets, financial liabilities or equity as
appropriate.
19.
Derivatives and hedging
Derivative financial
instruments are recognised initially, and subsequently measured, at fair value.
Derivative fair values are determined from quoted prices in active markets where
available. Where there is no active market for an instrument, fair value is
derived from prices for the derivative’s components using appropriate pricing or
valuation models.
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.
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. 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.
Fair value hedge
– in a fair
value hedge, the gain or loss on the hedging instrument is recognised in profit
or loss. The gain or loss on the hedged item attributable to the hedged risk is
recognised in profit or loss and adjusts the carrying amount of the hedged item.
Hedge accounting is discontinued if the hedge no longer meets the criteria for
hedge accounting or if the hedging instrument expires or is sold, terminated or
exercised or if hedge designation is revoked. If the hedged item is one for
which the effective interest rate method is used, any cumulative adjustment is
amortised to profit or loss over the life of the hedged item using a
recalculated effective interest rate.
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.
Hedge of net investment in a foreign
operation
– in the hedge of a net investment in a foreign operation, the
portion of foreign exchange differences arising on the hedging instrument
determined to be an effective hedge is recognised directly in equity. Any
ineffective portion is recognised in profit or loss. Non-derivative financial
liabilities as well as derivatives may be the hedging instrument in a net
investment hedge.
20.
Share-based payments
The
Group grants options over shares in The Royal Bank of Scotland Group plc to its
employees under various share option schemes. The Group has applied IFRS 2
‘Share-based Payment’ to grants under these schemes after 7 November 2002 that
had not vested on 1 January 2005. The expense for these transactions is measured
based on the fair value on the date the options are granted. The fair value is
estimated using valuation techniques which take into account the option’s
exercise price, its term, the risk-free interest rate and the expected
volatility of the market price of The Royal Bank of Scotland Group plc’s shares.
Vesting conditions are not taken into account when measuring fair value, but are
reflected by adjusting the number of options included in the measurement of the
transaction such that the amount recognised reflects the number that actually
vest. The fair value is expensed on a straight-line basis over the vesting
period.
21.
Investment property
Investment property
comprises freehold and leasehold properties that are held to earn rentals or for
capital appreciation or both. It is not depreciated but is stated at fair value
based on valuations by independent registered valuers. Fair value is based on
current prices for similar properties in the same location and condition. Any
gain or loss arising from a change in fair value is recognised in profit or
loss. Rental income from investment property is recognised on a straight-line
basis over the term of the lease. Lease incentives granted are recognised as an
integral part of the total rental income.
22.
Cash and cash equivalents
Cash and cash
equivalents comprises cash and demand deposits with banks together with
short-term highly liquid investments that are readily convertible to known
amounts of cash and subject to insignificant risk of change in
value.
23.
Shares in Group entities
The
company’s investments in its subsidiaries are stated at cost less any
impairment.
Critical
accounting policies and key sources of estimation uncertainty
The
reported results of the Group are sensitive to the accounting policies,
assumptions and estimates that underlie the preparation of its financial
statements. UK company law and IFRS require the directors, in preparing the
Group’s financial statements, to select suitable accounting policies, apply them
consistently and make judgements and estimates that are reasonable and prudent.
In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting
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 Preparation and
Presentation of Financial Statements.
The judgements and
assumptions involved in the Group’s accounting policies that are considered by
the Board to be the most important to the portrayal of its financial condition
are discussed below. The use of estimates, assumptions or models that differ
from those adopted by the Group would affect its reported results.
Loan
impairment provisions
The
Group’s loan impairment provisions are established to recognise incurred
impairment losses in its portfolio of loans classified as loans and receivables
and carried at amortised cost. A loan is impaired when there is objective
evidence that events since the loan was granted have affected expected cash
flows from the loan. The impairment loss is the difference between the carrying
value of the loan and the present value of estimated future cash flows at the
loan’s original effective interest rate.
At
31 December 2007, gross loans and advances to customers totalled £835,688
million (2006 – £470,826 million) and customer loan impairment provisions
amounted to £6,438 million (2006 – £3,933 million).
There are two
components to the Group’s loan impairment provisions: individual and
collective.
Individual component
– all
impaired loans that exceed specific thresholds are individually assessed for
impairment. Individually assessed loans principally comprise the Group’s
portfolio of commercial loans to medium and large businesses. Impairment losses
are recognised as the difference between the carrying value of the loan and the
discounted value of management’s best estimate of future cash repayments and
proceeds from any security held. These estimates take into
Accounting policies
continued
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.
Pensions
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 (2006 liability – £1,992
million).
Fair
value – financial instruments
Financial
instruments classified as held-for-trading or designated as at fair value
through profit or loss and financial assets classified as available-for-sale are
recognised in the financial statements at fair value. All derivatives are
measured at fair value. Gains or losses arising from changes in the fair value
of financial instruments classified as held-for-trading or designated as at fair
value through profit or loss are included in the income statement. Unrealised
gains and losses on available-for-sale financial assets are recognised directly
in equity unless an impairment loss is recognised.
Financial
instruments measured at fair value include:
Loans and advances (held-for-trading
and designated as at fair value though profit or loss)
– principally
comprise reverse repurchase agreements (reverse repos) and syndicated loans. In
repurchase agreements one party agrees to sell securities to another and
simultaneously agrees to repurchase the securities at a future date for a
specified price. The repurchase price is fixed at the outset, usually being the
original sale price plus an amount representing interest for the period from the
sale to the repurchase. Syndicated loans measured at fair value are amounts
retained, from syndications where the Group was lead manager or underwriter, in
excess of the Group’s intended long term participation.
Treasury and other eligible bills
and debt securities (held-for-trading, 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.
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.
Deposits by banks and customer
accounts (held-for-trading and designated as at fair value though profit or
loss)
– deposits measured at fair value principally include repurchase
agreements (repos) discussed above and investment contracts issued by the
Group’s life assurance businesses.
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.
Short positions (held-for-trading)
– arise in dealing and market making activities where treasury and other
eligible bills, debt securities and equity shares are sold which the Group does
not currently possess.
Derivatives –
these include
swaps, forwards, futures and options. They may be traded on an organised
exchange (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.
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. Forward rate agreements are contracts under which two
counterparties agree on the interest to be paid on a notional deposit of a
specified term starting on a specific future date; there is no exchange of
principal.
Futures are
exchange-traded forward contracts to buy (or sell) standardised amounts of
underlying physical or financial commodities. The Group buys and sells currency,
interest rate and equity futures. Options include exchange-traded options on
currencies, interest rates and equities and equity indices and OTC currency and
equity options, interest rate caps and floors and swaptions. They are contracts
that give the holder the right but not the obligation to buy (or sell) a
specified amount of the underlying physical or financial commodity at an agreed
price on an agreed date or over an agreed period.
Fair value 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. Fair value for a net open
position in a financial asset or financial liability in an active market is the
current bid or offer price times the number of units of the instrument held.
Where a trading portfolio contains both financial assets and financial
liabilities which are derivatives of the same underlying instrument, fair value
is determined by valuing the gross long and short positions at current mid
market prices, with an adjustment at portfolio level to the net open long or
short position to amend the valuation to bid or offer as appropriate. Where the
market for a financial instrument is not active, fair value is established using
a valuation technique. These valuation techniques involve a degree of
estimation, the extent of which depends on the instrument’s complexity and the
availability of market-based data.
Accounting policies
continued
The
table below shows financial instruments carried at fair value at 31 December
2007, by valuation method.
|
Quoted
prices
in
active
markets
(1)
|
Valuation
techniques
based
on
observable
market
data
(2)
|
Valuation
techniques
incorporating
information
other
than
observable
market
data(
3)
|
Total
|
|||||||||||||
|
Financial
instruments measured at fair value
|
£bn
|
£bn
|
£bn
|
£bn
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Fair
value though profit or loss
|
||||||||||||||||
|
Loans and
advances to banks
|
— | 71.5 | 0.1 | 71.6 | ||||||||||||
|
Loans and
advances to customers
|
— | 94.4 | 13.1 | 107.5 | ||||||||||||
|
Treasury and
other eligible bills and debt securities
|
83.1 | 101.7 | 11.6 | 196.4 | ||||||||||||
|
Equity
shares
|
36.5 | 8.1 | 0.8 | 45.4 | ||||||||||||
|
Derivatives
|
1.9 | 330.3 | 5.2 | 337.4 | ||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
Treasury and
other eligible bills and debt securities
|
32.1 | 62.4 | 1.1 | 95.6 | ||||||||||||
|
Equity
shares
|
5.8 | 1.0 | 0.8 | 7.6 | ||||||||||||
| 159.4 | 669.4 | 32.7 | 861.5 | |||||||||||||
|
Liabilities
|
||||||||||||||||
|
Deposits by
banks and customer accounts
|
— | 131.9 | 1.5 | 133.4 | ||||||||||||
|
Debt
securities in issue
|
— | 42.1 | 9.2 | 51.3 | ||||||||||||
|
Short
positions
|
63.6 | 9.9 | — | 73.5 | ||||||||||||
|
Derivatives
|
2.1 | 325.6 | 4.4 | 332.1 | ||||||||||||
|
Other
financial liabilities
(4)
|
— | 0.9 | 0.2 | 1.1 | ||||||||||||
| 65.7 | 510.4 | 15.3 | 591.4 | |||||||||||||
|
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.
|
|
|
(2)
|
Financial
assets and financial liabilities valued using techniques based on
observable market data. Instruments in this category are valued
using:
|
|
|
|
(a)
|
quoted prices
for similar assets or liabilities, or identical assets or liabilities in
markets which are considered to be less than active; or
|
|
|
(b)
|
valuation
techniques where all the inputs that have a significant effect on the
valuation are directly or indirectly based on observable market
data.
|
|
Financial
assets and financial liabilities in this category include repos, reverse
repos, structured and US commercial mortgage loans, structured deposits,
investment contracts issued by the Group’s life assurance businesses,
corporate and municipal debt securities, most debt securities in issue,
certain unlisted equity shares for which recent market data are available,
the majority of the Group’s OTC derivatives and certain instruments listed
in (1) above where markets are considered to be less than
active.
|
||
|
(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. No gain or loss is recognised on the initial recognition
of a financial instrument valued using a technique incorporating
significant unobservable data.
|
|
|
(4)
|
Other
financial liabilities comprise subordinated liabilities and provisions
relating to undrawn syndicated loan
facilities.
|
|
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.
|
·
|
Bond prices –
quoted prices are generally available for government bonds, certain
corporate securities and some mortgage-related
products.
|
|
·
|
Credit spreads
– where available, these are derived from prices of credit default swaps
or other credit based instruments, such as debt securities. For others,
credit spreads are obtained from pricing services.
|
|
·
|
Interest rates
– these are principally benchmark interest rates such as the London
Inter-Bank Offered Rate (LIBOR) and quoted interest rates in the swap,
bond and futures markets.
|
|
·
|
Foreign
currency exchange rates – there are observable markets both spot and
forward and in futures in the world’s major currencies.
|
|
·
|
Equity and
equity index prices – quoted prices are generally readily available for
equity shares listed on the world’s major stock exchanges and for major
indices on such shares.
|
|
·
|
Commodity
prices – many commodities are actively traded in spot, forward and futures
on exchanges in London, New York and other commercial
centres.
|
|
·
|
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.
|
|
·
|
Counterparty
credit spreads – adjustment is made to market prices (or parameters) when
the creditworthiness of the counterparty differs from that of the assumed
counterparty in the market price (or parameter), for example many OTC
derivative price quotations are for transactions with a counterparty with
an ‘AA’ credit rating.
|
The
Group refines and modifies its valuation techniques as markets and products
develop and the pricing for individual products becomes more
transparent.
While the Group
believes its valuation techniques are appropriate and consistent with other
market participants, the use of different methodologies or assumptions could
result in different estimates of fair value at the balance sheet date.
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.
|
Assets
|
Liabilities
|
|||||||||||||||||||||||||||
|
Debt
|
Other
|
|||||||||||||||||||||||||||
|
Loans
and
|
securities
|
financial
|
||||||||||||||||||||||||||
|
advances
|
Securities
|
Derivatives
|
Total
|
Deposits
|
in
issue
|
Derivatives
|
liabilities
|
Total
|
||||||||||||||||||||
|
Portfolio
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|||||||||||||||||||
|
Syndicated
loans
|
4.6 | 4.6 | ||||||||||||||||||||||||||
|
Commercial
mortgages
|
2.2 | 2.2 | ||||||||||||||||||||||||||
|
Super senior
tranches of
|
||||||||||||||||||||||||||||
|
asset-backed
CDOs
|
3.8 | 3.8 | ||||||||||||||||||||||||||
|
Other debt
securities
|
8.8 | 8.8 | ||||||||||||||||||||||||||
|
Exotic
derivatives
|
5.2 | 5.2 | 4.4 | 4.4 | ||||||||||||||||||||||||
|
Other
portfolios
|
6.4 | 1.7 | 8.1 |
1.5
|
9.2
|
0.2
|
10.9 | |||||||||||||||||||||
| 13.2 | 14.3 | 5.2 | 32.7 |
1.5
|
9.2
|
4.4 |
0.2
|
15.3 | ||||||||||||||||||||
Accounting policies
continued
Syndicated loans
– syndicated
loans are valued by considering recent syndication prices in the same or similar
assets, prices in the secondary loan market, and with reference to relevant
indices for credit products and credit default swaps such as the LevX, 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.
The
fair value of drawn syndicated loans valued using techniques other than by
considering recent syndication prices in the same or similar assets and prices
in the secondary loan market was £4,624 million. Using reasonably possible
alternative assumptions about refinancing periods (which were stressed by one
year) and the value attributed to potentially favourable flexible loan
conditions (which are attributed no value in reported figures) would reduce the
fair value by up to £46 million or increase the fair value by up to £83
million.
Commercial mortgages
– senior
and mezzanine commercial mortgages are loans secured on commercial land and
buildings that were originated or acquired by the Group for securitisation.
Senior commercial mortgages carry a variable interest rate and mezzanine or more
junior commercial mortgages may carry a fixed or variable interest rate. Factors
affecting the value of these loans may include, but are not limited to, loan
type, underlying property type and geographic location, loan interest rate,
loan to
value ratios, debt service coverage ratios, prepayment rates, cumulative loan
loss information, yields, investor demand, market volatility since the last
securitisation, and credit enhancement.
Where observable
market prices for a particular loan are not available, the fair value will
typically be determined with reference to observable market transactions in
other loans or credit related products including debt securities and credit
derivatives. Assumptions are made about the relationship between the loan and
the available benchmark data. Using reasonably possible alternative assumptions
for credit spreads (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’) for sale to investors. The Group
retains exposure to some of the super senior tranches of these CDOs. In the
second half of 2007, rising mortgage delinquencies and expectations of declining
house prices in the US led to a deterioration of the estimated fair value of
these exposures.
An
analysis of the Group’s super senior tranche exposures to these CDOs is shown
below:
|
High
grade
|
Mezzanine
|
|||||||
|
Exposure
(£m)
|
6,420 | 3,040 | ||||||
|
Exposure after
hedges (£m)
|
3,073 | 1,790 | ||||||
|
Weighted
average attachment point
(1)
|
29% | 46% | ||||||
|
% of
underlying RMBS sub-prime assets
|
69% | 91% | ||||||
|
Of which
originated in:
|
||||||||
|
|
||||||||
|
– 2005
and earlier
|
24% | 23% | ||||||
|
|
–
2006
|
28% | 69% | |||||
|
|
–
2007
|
48% | 8% | |||||
|
Collateral by
rating:
|
||||||||
|
– investment
grade
|
98% | 31% | ||||||
|
–
non-investment grade
|
2% | 69% | ||||||
|
Net exposure
(£m)
|
2,581 | 1,253 | ||||||
|
Effective
attachment point post write down
|
40% | 62% | ||||||
|
Note:
|
|
|
(1)
|
Attachment
point is the minimum level of losses in a portfolio to which a tranche is
exposed, as a percentage of the total notional size of the portfolio. For
example, a 5-10% tranche has an attachment point of 5% and a detachment
point of 10%. When the accumulated loss of the reference pool is no more
than 5% of the total initial notional of the pool, the tranche will not be
affected. However, when the loss has exceeded 5%, any further loss will be
deducted from the tranche’s notional principal until the detachment point,
10%, is reached.
|
The
Group’s valuation of the super senior asset-backed CDO exposures takes into
consideration outputs from a proprietary model, market data and appropriate
valuation adjustments. There is significant subjectivity in the valuation with
very little market activity to provide support for fair value levels at which
willing buyers and sellers would transact.
The
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.
Alternative
valuations have been produced using reasonably possible alternative assumptions
about macroeconomic conditions including house price appreciation and
depreciation, and the effect of regional variations. In addition, the discount
rate applied to the model output has been stressed. The output from using these
alternative assumptions has been compared with inferred pricing from other
published data.
The
Group believes that reasonably possible alternative assumptions could reduce or
increase predicted cumulative losses from the model by up to 20%. Using these
alternative assumptions would reduce the fair value by up to £385 million or
increase the fair value by up to £235 million.
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.
Unobservable inputs
used are based on estimates taking into account a range of available information
including historic analysis, historic traded levels, market practice, comparison
to other relevant benchmark observable data and consensus pricing data. Using
reasonably possible alternative assumptions, principally correlations, including
the relative impact of unobservable inputs as compared to those which may be
observed, would reduce the fair value by up to £80 million or increase the fair
value by up to £80 million.
Other portfolios
– other than
the portfolios discussed above, there are other financial instruments which are
held at fair value determined from data which are not market observable, or
incorporating material adjustments to market observed data. Using reasonably
possible alternative assumptions appropriate to the financial asset or liability
in question, such as credit spreads, derivative inputs and equity correlations,
would reduce the fair value by up to £119 million or increase the fair value by
up to £117 million.
Accounting policies
continued
General
insurance claims
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 £5,466
million at 31 December 2007 (2006 – £5,247 million).
Provisions are
determined by management based on experience of claims settled and on
statistical models which require certain assumptions to be made regarding the
incidence, timing and amount of claims and any specific factors such as adverse
weather conditions. In order to calculate the total provision required, the
historical development of claims is analysed using statistical methodology to
extrapolate, within acceptable probability parameters, the value of outstanding
claims at the balance sheet date. Also included in the estimation of outstanding
claims are other assumptions such as the inflationary factor used for bodily
injury claims which is based on historical trends and, therefore, allows for
some increase due to changes in common law and statute. Costs for both direct
and indirect claims handling expenses are also included. Outward reinsurance
recoveries are accounted for in the same accounting period as the direct claims
to which they relate. The outstanding claims provision is based on information
available to management and the eventual outcome may vary from the original
assessment. Actual claims experience may differ from the historical pattern on
which the estimate is based and the cost of settling individual claims may
exceed that assumed.
Goodwill
The
Group capitalises goodwill arising on the acquisition of businesses, as
discussed in accounting policy 5. The carrying value of goodwill as at 31
December 2007 was £42,369 million (2006 – £17,889 million).
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 cash-generating 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
cash-generating 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 cash-generating 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.
Impairment testing
inherently involves a number of judgmental areas: the preparation of cash flow
forecasts for periods that are beyond the normal requirements of management
reporting; the assessment of the discount rate appropriate to the business;
estimation of the fair value of cash-generating units; and the valuation of the
separable assets of each business whose goodwill is being reviewed.
Accounting
developments
International
Financial Reporting Standards
The
International Financial Reporting Interpretations Committee (‘IFRIC’) issued
interpretation IFRIC 11 ‘Group and Treasury Share Transactions’ in November
2006. Entities which buy their own shares, or whose shareholders buy shares in
the reporting entity, in order to provide incentives to employees must account
for those incentives on an equity-settled basis.
This principle
applies also to the accounting by subsidiaries. The interpretation is effective
for annual accounting periods beginning on or after 1 March 2007 and is not
expected to have a material effect on the Group or company.
The
IFRIC issued interpretation IFRIC 12 ‘Service Concession Arrangements’ in
November 2006. Entities providing infrastructure and services to governments
under concession arrangements must account for each component of the arrangement
separately. Infrastructure provided under these arrangements may be recognised
as either a financial asset or an intangible asset. The interpretation is
effective for accounting periods beginning on or after 1 January 2008 and is not
expected to have a material effect on the Group or company.
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 8 requires entities to report segment information as reported to
management and reconcile it to the financial statements and is not expected to
have a material effect on the Group or company.
The
IASB issued a revised IAS 23 ‘Borrowing Costs’ in March 2007. Entities are
required to capitalise borrowing costs attributable to the development or
construction of intangible assets or property plant or equipment. The standard
is effective for accounting periods beginning on or after 1 January 2009 and is
not expected to have a material effect on the Group or company.
The
IFRIC issued interpretation IFRIC 13 ‘Customer Loyalty Programmes’ in June 2007.
Entities that provide customers with benefits ancillary to a sale of goods or
services should apportion the sales proceeds to those benefits on the basis of
relative fair values. The interpretation is effective for accounting periods
beginning on or after 1 July 2008 and is not expected to have a material effect
on the Group or company.
The
IFRIC issued interpretation IFRIC 14 ‘IAS 19 – The Limit on a Defined Benefit
Asset, Minimum Funding Requirements and their Interaction’ in July 2007. The net
pension asset that may be recognised by a sponsoring entity is limited to the
amount to which it has an unconditional right of refund or can be recovered
through the settlement of plan liabilities. Entities legally bound to minimum
funding requirements are required to take account of those obligations when
recognising the net asset or liability for an employee benefit scheme. The
interpretation is effective for accounting periods beginning on or after 1
January 2008 and is not expected to have a material effect on the Group or
company.
The
IASB issued a revised IAS 1 ‘Presentation of Financial Statements’ in September
2007 effective for accounting periods beginning on or after 1 January 2009. The
amendments to the presentation requirements for financial statements are not
expected to have a material effect on the Group or company.
The
IASB published a revised IFRS 3 ‘Business Combinations’ and related revisions to
IAS 27 ‘Consolidated and Separate 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 changes are
effective for accounting periods beginning on or after 1 July 2009 but both
standards may be adopted together for accounting periods beginning on or after 1
July 2007. These changes will affect the Group's accounting for future
acquisitions and disposals of subsidiaries.
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.
Notes
on the accounts
1
Income from trading activities
|
Group
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Foreign
exchange
(1)
|
1,050 | 738 | 647 | |||||||||
|
Interest rate
(2)
|
1,466 | 973 | 943 | |||||||||
|
Credit
(3)
|
(1,430 | ) | 841 | 666 | ||||||||
|
Equities and
commodities
(4)
|
241 | 123 | 87 | |||||||||
| 1,327 | 2,675 | 2,343 | ||||||||||
The
analysis of trading income is based on how the business is organised and the
underlying risks managed.
|
Notes:
|
|
|
Trading income
comprises gains and losses on financial instruments held for trading, both
realised and unrealised, interest income and dividends and the related
funding costs. The types of instruments include:
|
|
|
(1)
|
Foreign
exchange: spot foreign exchange contracts, currency swaps and options,
emerging markets and related hedges and funding.
|
|
(2)
|
Interest rate:
interest rate swaps, forward foreign exchange contracts, forward rate
agreements, interest rate options, interest rate futures and related
hedges and funding.
|
|
(3)
|
Credit:
asset-backed securities, corporate bonds, credit derivatives and related
hedges and funding.
|
|
(4)
|
Equities and
commodities: equity derivatives, commodity contracts and related hedges
and funding.
|
2
Operating expenses
|
Group
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Wages,
salaries and other staff costs
|
6,387 | 5,652 | 5,084 | |||||||||
|
Social
security costs
|
522 | 389 | 354 | |||||||||
|
Share-based
compensation
|
65 | 65 | 44 | |||||||||
|
Pension costs
(see Note 3)
|
||||||||||||
|
– defined
benefit schemes
|
489 | 580 | 462 | |||||||||
|
– defined
contribution schemes
|
89 | 37 | 48 | |||||||||
|
Staff
costs
|
7,552 | 6,723 | 5,992 | |||||||||
|
Premises and
equipment
|
1,766 | 1,421 | 1,313 | |||||||||
|
Other
administrative expenses
|
3,147 | 2,658 | 2,816 | |||||||||
|
Property,
plant and equipment (see Note 18)
|
1,311 | 1,293 | 1,326 | |||||||||
|
Intangible
assets (see Note 17)
|
659 | 385 | 499 | |||||||||
|
Depreciation
and amortisation
|
1,970 | 1,678 | 1,825 | |||||||||
| 14,435 | 12,480 | 11,946 | ||||||||||
Integration costs
included in operating expenses comprise expenditure incurred in respect of cost
reduction and revenue enhancement programmes set in connection with the various
acquisitions made by the Group:
|
Group
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Staff
costs
|
18 | 76 | 148 | |||||||||
|
Premises and
equipment
|
4 | 10 | 39 | |||||||||
|
Other
administrative expenses
|
26 | 32 | 131 | |||||||||
|
Depreciation
and amortisation
|
60 | 16 | 140 | |||||||||
| 108 | 134 | 458 | ||||||||||
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
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Global Banking
& Markets
|
9,300 | 7,700 | 6,900 | |||||||||
|
RFS Holdings
excluding minority interest
|
31,100 | — | — | |||||||||
|
UK Corporate
Banking
|
9,600 | 8,800 | 8,200 | |||||||||
|
Retail
|
41,400 | 42,900 | 43,400 | |||||||||
|
Wealth
Management
|
5,000 | 4,600 | 4,300 | |||||||||
|
Ulster
Bank
|
6,400 | 5,600 | 5,200 | |||||||||
|
Citizens
|
23,900 | 24,600 | 26,000 | |||||||||
|
RBS
Insurance
|
18,000 | 18,500 | 20,500 | |||||||||
|
Manufacturing
|
26,300 | 26,600 | 26,700 | |||||||||
|
Centre
|
2,700 | 2,500 | 2,300 | |||||||||
|
RFS Holdings
minority interest
|
59,900 | — | — | |||||||||
|
Total
|
233,600 | 141,800 | 143,500 | |||||||||
|
UK
|
108,600 | 105,700 | 107,200 | |||||||||
|
US
|
27,100 | 26,200 | 27,400 | |||||||||
|
Europe
|
41,300 | 8,100 | 7,800 | |||||||||
|
Rest of the
World
|
56,600 | 1,800 | 1,100 | |||||||||
|
Total
|
233,600 | 141,800 | 143,500 | |||||||||
3
Pension costs
Members of the Group sponsor a number of pension schemes in the UK and overseas, predominantly defined benefit schemes, whose assets are independent of the Group’s finances. The Group’s defined benefit schemes generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years. Employees do not make contributions for basic pensions but may make voluntary contributions to secure additional benefits on a money-purchase basis. Since October 2006 The Royal Bank of Scotland Group Pension Fund (‘Main scheme’) has been closed to new entrants.
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 post-retirement 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.
Interim valuations
of the Group’s schemes were prepared to 31 December by independent actuaries,
using the following assumptions:
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||
|
Principal
actuarial assumptions at 31 December
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
weighted
average
|
||||||||||||||||||||||||
|
Discount
rate
|
6.0 | % | 5.3 | % | 4.8 | % | 5.8 | % | 5.3 | % | 4.8 | % | ||||||||||||
|
Expected
return on plan assets (weighted average)
|
6.9 | % | 6.9 | % | 6.5 | % | 6.8 | % | 6.9 | % | 6.5 | % | ||||||||||||
|
Rate of
increase in salaries
|
4.5 | % | 4.2 | % | 4.0 | % | 4.0 | % | 4.1 | % | 3.9 | % | ||||||||||||
|
Rate of
increase in pensions in payment
|
3.2 | % | 2.9 | % | 2.7 | % | 2.8 | % | 2.8 | % | 2.6 | % | ||||||||||||
|
Inflation
assumption
|
3.2 | % | 2.9 | % | 2.7 | % | 2.9 | % | 2.9 | % | 2.7 | % | ||||||||||||
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||
|
Major classes
of plan assets as a percentage of total plan assets
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
Equities
|
61.0 | % | 60.5 | % | 61.3 | % | 57.8 | % | 60.7 | % | 61.6 | % | ||||||||||||
|
Index-linked
bonds
|
18.2 | % | 17.3 | % | 18.1 | % | 13.1 | % | 16.1 | % | 16.8 | % | ||||||||||||
|
Government
fixed interest bonds
|
1.2 | % | 2.5 | % | 1.8 | % | 12.9 | % | 3.3 | % | 2.6 | % | ||||||||||||
|
Corporate and
other bonds
|
15.1 | % | 14.0 | % | 14.6 | % | 12.0 | % | 13.9 | % | 14.6 | % | ||||||||||||
|
Property
|
3.8 | % | 4.3 | % | 3.6 | % | 3.0 | % | 4.5 | % | 3.7 | % | ||||||||||||
|
Cash and other
assets
|
0.7 | % | 1.4 | % | 0.6 | % | 1.2 | % | 1.5 | % | 0.7 | % | ||||||||||||
Ordinary shares of
the company with a fair value of £69 million (2006 – £89 million; 2005 – £78
million) are held by the Group’s pension schemes; £65 million (2006 – £87
million; 2005 – £76 million) in the Main scheme which also holds other financial
instruments issued by the Group with a value of £606 million (2006 – £258
million; 2005 – £299 million).
The
expected return on plan assets at 31 December is based upon the weighted average
of the following assumed returns on the major classes of plan
assets:
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Equities
|
8.1 | % | 8.1 | % | 7.7 | % | 8.1% | 8.1 | % | 7.7 | % | |||||||||||||
|
Index-linked
bonds
|
4.5 | % | 4.5 | % | 4.1 | % | 4.5% | 4.5 | % | 4.1 | % | |||||||||||||
|
Government
fixed interest bonds
|
4.5 | % | 4.5 | % | 4.1 | % | 4.7% | 4.5 | % | 4.1 | % | |||||||||||||
|
Corporate and
other bonds
|
5.5 | % | 5.3 | % | 4.8 | % | 5.5% | 5.3 | % | 4.8 | % | |||||||||||||
|
Property
|
6.3 | % | 6.3 | % | 5.9 | % | 6.3% | 6.3 | % | 5.9 | % | |||||||||||||
|
Cash and other
assets
|
4.6 | % | 4.6 | % | 4.2 | % | 4.5% | 4.4 | % | 3.7 | % | |||||||||||||
|
Post-retirement
mortality assumptions (Main scheme)
|
2007
|
2006
|
2005
|
|||||||||
|
Longevity at
age 60 for current pensioners (years)
|
||||||||||||
|
Males
|
26.0 | 26.0 | 25.4 | |||||||||
|
Females
|
26.8 | 28.9 | 28.2 | |||||||||
|
Longevity at
age 60 for future pensioners (years)
|
||||||||||||
|
Males
|
28.1 | 26.8 | 26.2 | |||||||||
|
Females
|
28.2 | 29.7 | 29.0 | |||||||||
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.
Notes on the accounts
continued
3 Pension costs
(continued)
|
Main
scheme
|
All
schemes
|
||||||||||||||||||
|
Present
|
Present
|
||||||||||||||||||
|
value
of
|
Net
|
value
of
|
Net
|
||||||||||||||||
|
Fair
value
|
defined
|
pension
|
Fair
value
|
defined
|
pension
|
||||||||||||||
|
of
plan
|
benefit
|
deficit/
|
of
plan
|
benefit
|
deficit/
|
||||||||||||||
|
assets
|
obligations
|
(surplus)
|
assets
|
obligations
|
(surplus)
|
||||||||||||||
|
Changes in
value of net pension deficit/(surplus)
|
£m | £m | £m | £m | £m | £m | |||||||||||||
|
At 1 January
2006
|
15,914 | 19,118 | 3,204 | 17,388 | 21,123 | 3,735 | |||||||||||||
|
Currency
translation and other adjustments
|
— | — | — | (59 | ) | (65 | ) | (6 | ) | ||||||||||
|
Income
statement:
|
|||||||||||||||||||
|
Expected
return
|
1,022 | (1,022 | ) | 1,073 | (1,073 | ) | |||||||||||||
|
Interest
cost
|
918 | 918 | 985 | 985 | |||||||||||||||
|
Current
service cost
|
571 | 571 | 645 | 645 | |||||||||||||||
|
Past service
cost
|
15 | 15 | 23 | 23 | |||||||||||||||
| 1,022 | 1,504 | 482 | 1,073 | 1,653 | 580 | ||||||||||||||
|
Statement of
recognised income and expense:
|
|||||||||||||||||||
|
Actuarial
gains and losses
|
552 | (1,077 | ) | (1,629 | ) | 587 | (1,194 | ) | (1,781 | ) | |||||||||
|
Contributions
by employer
|
427 | — | (427 | ) | 536 | — | (536 | ) | |||||||||||
|
Benefits
paid
|
(515 | ) | (515 | ) | — | (538 | ) | (538 | ) | — | |||||||||
|
Expenses
included in service cost
|
(26 | ) | (26 | ) | — | (28 | ) | (28 | ) | — | |||||||||
|
At 1 January
2007
|
17,374 | 19,004 | 1,630 | 18,959 | 20,951 | 1,992 | |||||||||||||
|
Currency
translation and other adjustments
|
— | — | — | 381 | 385 | 4 | |||||||||||||
|
Income
statement:
|
|||||||||||||||||||
|
Expected
return
|
1,182 | (1,182 | ) | 1,394 | (1,394 | ) | |||||||||||||
|
Interest
cost
|
1,007 | 1,007 | 1,177 | 1,177 | |||||||||||||||
|
Current
service cost
|
566 | 566 | 684 | 684 | |||||||||||||||
|
Past service
cost
|
19 | 19 | 22 | 22 | |||||||||||||||
| 1,182 | 1,592 | 410 | 1,394 | 1,883 | 489 | ||||||||||||||
|
Statement of
recognised income and expense:
|
|||||||||||||||||||
|
Actuarial
gains and losses
|
163 | (1,937 | ) | (2,100 | ) | 19 | (2,170 | ) | (2,189 | ) | |||||||||
|
Acquisition of
subsidiaries
|
— | — | — | 6,997 | 6,960 | (37 | ) | ||||||||||||
|
Intra-group
transfers
|
30 | 30 | — | — | — | — | |||||||||||||
|
Contributions
by employer
|
416 | — | (416 | ) | 599 | — | (599 | ) | |||||||||||
|
Contributions
by plan participants
|
— | — | — | 5 | 5 | — | |||||||||||||
|
Benefits
paid
|
(551 | ) | (551 | ) | — | (652 | ) | (652 | ) | — | |||||||||
|
Expenses
included in service cost
|
(39 | ) | (39 | ) | — | (40 | ) | (40 | ) | — | |||||||||
|
At 31 December
2007
|
18,575 | 18,099 | (476 | ) | 27,662 | 27,322 | (340 | ) | |||||||||||
|
Net pension
surplus comprises:
|
£m | ||||||||||||||||||
|
Net assets of
schemes in surplus (included in Prepayments, accrued income and other
assets, Note 19)
|
(836 | ) | |||||||||||||||||
|
Net
liabilities of schemes in deficit
|
496 | ||||||||||||||||||
| (340 | ) | ||||||||||||||||||
Acquisition of
subsidiaries includes fair value of plan assets of £6,118 million and present
value of defined benefit obligations £5,962 million in respect of ABN AMRO's
principal pension scheme in the Netherlands. At 31 December 2007, these were
£6,417 million and £6,189 million respectively. The principal actuarial
assumptions at 31 December 2007 were: discount rate 5.4%; expected return on
plan assets (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%
.
The
Group expects to contribute £481 million to its defined benefit pension schemes
in 2008 (Main scheme – £413 million). Of the net liabilities of schemes in
deficit, £212 million (2006 – £106 million) relates to unfunded
schemes.
Cumulative net
actuarial gains of £1,570 million (2006 – £619 million losses; 2005 – £2,400
million losses) have been recognised in the statement of recognised income and
expense, of which £1,579 million (2006 – £521 million losses; 2005 – £2,150
million losses) relate to the Main scheme.
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||
|
History of
defined benefit schemes
|
£m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||
|
Fair value of
plan assets
|
18,575 | 17,374 | 15,914 | 13,569 | 27,662 | 18,959 | 17,388 | 14,798 | ||||||||||||||||||||||||
|
Present value
of defined benefit obligations
|
18,099 | 19,004 | 19,118 | 16,051 | 27,322 | 20,951 | 21,123 | 17,738 | ||||||||||||||||||||||||
|
Net
surplus/(deficit)
|
476 | (1,630 | ) | (3,204 | ) | (2,482 | ) | 340 | (1,992 | ) | (3,735 | ) | (2,940 | ) | ||||||||||||||||||
|
Experience
losses on plan liabilities
|
(256 | ) | (4 | ) | (41 | ) | (624 | ) | (210 | ) | (19 | ) | (68 | ) | (631 | ) | ||||||||||||||||
|
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 | ||||||||||||||||||||||||
4
Auditors’ remuneration
Amounts paid to the
company’s auditors for statutory audit and other services were as
follows:
|
Group
|
||||||||||||
|
2007
£
m
|
2006
£
m
|
2005
£
m
|
||||||||||
|
Audit
Services
|
||||||||||||
|
- Statutory audit
(1)
|
20.4 | 14.9 | 9.9 | |||||||||
|
- Audit related including regulatory
reporting
|
1.4 | 2.0 | 7.0 | |||||||||
| 21.8 | 16.9 | 16.9 | ||||||||||
|
Tax
Services
|
||||||||||||
|
- Compliance services
|
0.2 | 0.2 | 0.2 | |||||||||
|
- Advisory services
|
0.2 | 0.1 | — | |||||||||
| 0.4 | 0.3 | 0.2 | ||||||||||
|
All Other
Services
|
9.0 | 5.5 | 7.2 | |||||||||
|
Total
|
31.2 | 22.7 | 24.3 | |||||||||
Note:
(1) Excluding fees paid in respect of
ABN AMRO Holding B.V. which is audited by another firm.
5
Tax
|
Group
|
||||||||||||
|
2007
£m |
2006
£m |
2005
£m |
||||||||||
|
Current
taxation:
|
||||||||||||
|
Charge for the
year
|
2,522 | 2,626 | 2,280 | |||||||||
|
Over provision
in respect of prior periods
|
(39 | ) | (253 | ) | (101 | ) | ||||||
|
Relief for
overseas taxation
|
(198 | ) | (147 | ) | (171 | ) | ||||||
| 2,285 | 2,226 | 2,008 | ||||||||||
|
Deferred
taxation:
|
||||||||||||
|
Charge for the
year
|
95 | 396 | 477 | |||||||||
|
(Under)/over
provision in respect of prior periods
|
(328 | ) | 67 | (107 | ) | |||||||
|
Tax charge for
the year
|
2,052 | 2,689 | 2,378 | |||||||||
The
actual tax charge differs from the expected tax charge computed by applying the
standard rate of UK corporation tax of 30% as follows:
|
2007
£m |
2006
£m |
2005
£m |
||||||||||
|
Expected tax
charge
|
2,970 | 2,756 | 2,381 | |||||||||
|
Non-deductible
items
|
263 | 288 | 309 | |||||||||
|
Non-taxable
items
|
(595 | ) | (251 | ) | (166 | ) | ||||||
|
Taxable
foreign exchange movements
|
16 | 5 | (10 | ) | ||||||||
|
Foreign
profits taxed at other rates
|
(37 | ) | 63 | 77 | ||||||||
|
Reduction in
deferred tax liability following change in the rate of UK Corporation
Tax
|
(189 | ) | — | — | ||||||||
|
Unutilised
losses brought forward and carried forward
|
(9 | ) | 14 | (5 | ) | |||||||
|
Adjustments in
respect of prior periods
|
(367 | ) | (186 | ) | (208 | ) | ||||||
|
Actual tax
charge
|
2,052 | 2,689 | 2,378 |
The
effective tax rate for the year was 20.7% (2006 – 29.3%; 2005 – 30.0%) . The tax
rate benefited from a reduction of £189 million in the Group’s deferred tax
liability following the change in the rate of UK Corporation Tax from 30% to 28%
from 1 April 2008.
Notes on the accounts
continued
6
Profit attributable to other owners
|
Group
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Dividends paid
to other owners:
|
||||||||||||
|
Non-cumulative
preference shares of US$0.01
|
152 | 99 | 58 | |||||||||
|
Non-cumulative
preference shares of €0.01
|
94 | 92 | 51 | |||||||||
|
Total
|
246 | 191 | 109 | |||||||||
|
Notes:
|
|
|
(1)
|
In accordance
with IAS 32, certain preference share issued by the company are included
in subordinated liabilities and the related finance cost in interest
payable.
|
|
(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.
|
7
Ordinary dividends
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.
|
Group
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
p per
share
|
p per
share
|
p per
share
|
£m | £m | £m | |||||||||||||||||||
|
Final dividend
for previous year declared during the current year
|
22.1 | 17.7 | 13.7 | 2,091 | 1,699 | 1,308 | ||||||||||||||||||
|
Interim
dividend
|
10.1 | 8.1 | 6.5 | 953 | 771 | 619 | ||||||||||||||||||
|
Total
dividends paid on ordinary equity shares
|
32.2 | 25.8 | 20.2 | 3,044 | 2,470 | 1,927 | ||||||||||||||||||
Final dividends are
not accounted for until they have been ratified by members in a general meeting.
At the Annual General Meeting on 23 April 2008, a final dividend will be
proposed in respect of 2007 of 23.1 pence per share (2006 – 22.1 pence per
share) amounting to a total of £2.3 billion (2006 – £2.1 billion). The financial
statements for the year ended 31 December 2007 do not reflect this dividend
which, if approved, will be accounted for in owners’ equity as an appropriation
of retained profits in the year ending 31 December 2008.
8
Profit dealt with in the accounts of the company
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
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Dividends
received from banking subsidiary
|
2,330 | 3,502 | 2,082 | |||||||||
|
Dividends
received from other subsidiaries
|
415 | 229 | 100 | |||||||||
|
Total
income
|
2,745 | 3,731 | 2,182 | |||||||||
|
Interest
receivable from subsidiaries
|
460 | 516 | 577 | |||||||||
|
Interest
payable to subsidiaries
|
(307 | ) | (246 | ) | (189 | ) | ||||||
|
Other net
interest payable and operating expenses
|
(526 | ) | (515 | ) | (638 | ) | ||||||
|
Operating
profit before tax
|
2,372 | 3,486 | 1,932 | |||||||||
|
Tax
|
127 | 13 | 142 | |||||||||
|
Profit for the
year
|
2,499 | 3,499 | 2,074 | |||||||||
|
Profit
attributable to:
|
||||||||||||
|
Ordinary
shareholders
|
2,253 | 3,308 | 1,965 | |||||||||
|
Other
owners
|
246 | 191 | 109 | |||||||||
| 2,499 | 3,499 | 2,074 | ||||||||||
9
Earnings per ordinary share
The
earnings per share are based on the following:
|
Group
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
Earnings:
|
||||||||||||
|
Profit
attributable to ordinary shareholders
|
7,303 | 6,202 | 5,392 | |||||||||
|
Add back
dividends on dilutive convertible non-equity shares
|
60 | 64 | 65 | |||||||||
|
Diluted
earnings attributable to ordinary shareholders
|
7,363 | 6,266 | 5,457 | |||||||||
|
Number of
shares – millions
|
||||||||||||
|
Number of
ordinary shares:
|
||||||||||||
|
Weighted
average number of ordinary shares in issue during the year
|
9,557 | 9,555 | 9,549 | |||||||||
|
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. All convertible
preference shares have a dilutive effect in 2007, 2006 and 2005 and have been
included in the computation of diluted earnings per share.
The
effect of discontinued operations on earnings per share is not
material.
10
Financial instruments
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.
|
Group
|
||||||||||||||||||||||||||||
|
Held-for-
trading
|
Designated
as at
fair
value
through
profit or
loss
|
Hedging
derivatives
|
Available-
for-sale
|
Loans
and
receivables
|
Other
(amortised
cost)
|
Finance
leases
|
Non
financial
assets/
liabilities
|
Total
|
||||||||||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Cash and
balances at central banks
|
— | — | — | 17,866 | — | 17,866 | ||||||||||||||||||||||
|
Treasury and
other eligible bills
(1)
|
18,027 | — | 202 | — | — | 18,229 | ||||||||||||||||||||||
|
Loans and
advances to banks
(2)
|
71,639 | — | — | 147,821 | — | 219,460 | ||||||||||||||||||||||
|
Loans and
advances to customers
(3)
|
104,387 | 3,067 | — | 709,226 | 12,570 | 829,250 | ||||||||||||||||||||||
|
Debt
securities
|
172,644 | 5,777 | 95,334 | 2,672 | — | 276,427 | ||||||||||||||||||||||
|
Equity
shares
|
37,546 | 7,866 | 7,614 | — | — | 53,026 | ||||||||||||||||||||||
|
Settlement
balances
|
— | — | — | 16,589 | — | 16,589 | ||||||||||||||||||||||
|
Derivatives
|
334,857 | — | 2,553 | — | — | — | 337,410 | |||||||||||||||||||||
|
Intangible
assets
|
48,492 | 48,492 | ||||||||||||||||||||||||||
|
Property,
plant and equipment
|
18,750 | 18,750 | ||||||||||||||||||||||||||
|
Prepayments,
accrued income
|
||||||||||||||||||||||||||||
|
and other
assets
|
— | — | — | 877 | — | 18,189 | 19,066 | |||||||||||||||||||||
|
Assets of
disposal groups
|
45,954 | 45,954 | ||||||||||||||||||||||||||
| 739,100 | 16,710 | 2,553 | 103,150 | 895,051 | 12,570 | 131,385 | 1,900,519 | |||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||
|
Deposits by
banks
(4)
|
65,491 | — | 247,142 | — | 312,633 | |||||||||||||||||||||||
|
Customer
accounts
(5,
6)
|
60,425 | 7,505 | 614,435 | — | 682,365 | |||||||||||||||||||||||
|
Debt
securities in issue
(7,
8)
|
9,455 | 41,834 | 222,326 | — | 273,615 | |||||||||||||||||||||||
|
Settlement
balances
|
||||||||||||||||||||||||||||
|
and short
positions
|
73,501 | — | 17,520 | — | 91,021 | |||||||||||||||||||||||
|
Derivatives
|
329,351 | — | 2,709 | — | — | 332,060 | ||||||||||||||||||||||
|
Accruals,
deferred income
|
||||||||||||||||||||||||||||
|
and other
liabilities
|
210 | — | 1,545 | 19 | 32,250 | 34,024 | ||||||||||||||||||||||
|
Retirement
benefit liabilities
|
496 | 496 | ||||||||||||||||||||||||||
|
Deferred
taxation
|
5,510 | 5,510 | ||||||||||||||||||||||||||
|
Insurance
liabilities
|
10,162 | 10,162 | ||||||||||||||||||||||||||
|
Subordinated
liabilities
|
— | 898 | 37,081 | — | — | 37,979 | ||||||||||||||||||||||
|
Liabilities of
disposal groups
|
29,228 | 29,228 | ||||||||||||||||||||||||||
| 538,433 | 50,237 | 2,709 | 1,140,049 | 19 | 77,646 | 1,809,093 | ||||||||||||||||||||||
|
Equity
|
91,426 | |||||||||||||||||||||||||||
| 1,900,519 | ||||||||||||||||||||||||||||
Notes on the accounts
continued
10 Financial instruments
(continued)
|
Group
|
||||||||||||||||||||||||||||||||||||
|
Held-for-
trading
|
Designated
as at
fair
value
through
profit or
loss
|
Hedging
derivatives
|
Available-
for-sale
|
Loans
and
receivables
|
Other
(amortised
cost)
|
Finance
leases
|
Non
financial
assets/
liabilities
|
Total
|
||||||||||||||||||||||||||||
|
2006
|
£m
|
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
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 | ||||||||||||||||||||||||||||||
|
Debt
securities
|
95,192 | 5,989 | 25,509 | 561 | — | 127,251 | ||||||||||||||||||||||||||||||
|
Equity
shares
|
3,038 | 2,610 | 7,856 | — | — | 13,504 | ||||||||||||||||||||||||||||||
|
Settlement
balances
|
— | — | — | 7,425 | — | 7,425 | ||||||||||||||||||||||||||||||
|
Derivatives
|
115,500 | — | 1,181 | — | — | — | 116,681 | |||||||||||||||||||||||||||||
|
Intangible
assets
|
18,904 | 18,904 | ||||||||||||||||||||||||||||||||||
|
Property,
plant and equipment
|
18,420 | 18,420 | ||||||||||||||||||||||||||||||||||
|
Prepayments,
accrued income
|
||||||||||||||||||||||||||||||||||||
|
and other
assets
|
— | — | — | 953 | — | 7,183 | 8,136 | |||||||||||||||||||||||||||||
| 343,444 | 10,302 | 1,181 | 34,340 | 426,137 | 11,521 | 44,507 | 871,432 | |||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Deposits by
banks
(4)
|
57,452 | — | 74,691 | — | — | 132,143 | ||||||||||||||||||||||||||||||
|
Customer
accounts
(5,
6)
|
46,797 | 3,922 | 333,503 | — | — | 384,222 | ||||||||||||||||||||||||||||||
|
Debt
securities in issue
(7,
8)
|
2,141 | 10,499 | 73,323 | — | — | 85,963 | ||||||||||||||||||||||||||||||
|
Settlement
balances and
|
||||||||||||||||||||||||||||||||||||
|
short
positions
|
43,809 | — | 5,667 | — | — | 49,476 | ||||||||||||||||||||||||||||||
|
Derivatives
|
117,277 | — | 835 | — | — | — | 118,112 | |||||||||||||||||||||||||||||
|
Accruals,
deferred income
|
||||||||||||||||||||||||||||||||||||
|
and other
liabilities
|
— | — | 1,453 | 89 | 14,118 | 15,660 | ||||||||||||||||||||||||||||||
|
Retirement
benefit liabilities
|
1,992 | 1,992 | ||||||||||||||||||||||||||||||||||
|
Deferred
taxation
|
3,264 | 3,264 | ||||||||||||||||||||||||||||||||||
|
Insurance
liabilities
|
7,456 | 7,456 | ||||||||||||||||||||||||||||||||||
|
Subordinated
liabilities
|
— | 124 | 27,530 | — | — | 27,654 | ||||||||||||||||||||||||||||||
| 267,476 | 14,545 | 835 | 516,167 | 89 | 26,830 | 825,942 | ||||||||||||||||||||||||||||||
|
Equity
|
45,490 | |||||||||||||||||||||||||||||||||||
| 871,432 | ||||||||||||||||||||||||||||||||||||
|
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).
|
|
(2)
|
Includes
reverse repurchase agreements of £175,941 million (2006 – £54,152 million)
and items in the course of collection from other banks of £3,095 million
(2006 – £3,471 million).
|
|
(3)
|
Includes
reverse repurchase agreements of £142,357 million (2006 – £62,908
million).
|
|
(4)
|
Includes
repurchase agreements of £163,038 million (2006 – £76,376 million) and
items in the course of transmission to other banks of £372 million (2006 –
£799 million).
|
|
(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).
|
|
(7)
|
Comprises
bonds and medium term notes of £119,021 million (2006 – £43,408 million)
and certificates of deposit and other commercial paper of £154,594 (2006 –
£42,555 million).
|
|
(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.
|
|
Amounts
included in the consolidated income statement:
|
Group
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
| £m | £m | £m | ||||||||||
|
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. During the year net gains of £67 million (2006 – £3 million) were
deferred and £10 million (2006 – £4 million) released to profit or
loss.
The
following tables analyse the company’s financial assets and financial
liabilities in accordance with the categories of financial instruments in IAS
39. Assets and liabilities outside the scope of IAS 39 are shown
separately.
|
Company
|
|||||||||||||||||||
|
Held-for-
trading
|
Hedging
derivatives
|
Loans
and
receivables
|
Other
(amortised
cost)
|
Non
financial
assets/
liabilities
|
Total
|
||||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | |||||||||||||
|
Assets
|
|||||||||||||||||||
|
Loans and
advances to banks
(1)
|
— | — | 7,686 | — | 7,686 | ||||||||||||||
|
Loans and
advances to customers
(2)
|
— | — | 307 | — | 307 | ||||||||||||||
|
Investment in
Group undertakings
|
— | — | — | 43,542 | 43,542 | ||||||||||||||
|
Derivatives
|
173 | — | — | — | 173 | ||||||||||||||
|
Prepayments,
accrued income and other assets
|
— | — | — | 127 | 127 | ||||||||||||||
| 173 | — | 7,993 | 43,669 | 51,835 | |||||||||||||||
|
Liabilities
|
|||||||||||||||||||
|
Deposits by
banks
(3)
|
— | — | 5,572 | — | 5,572 | ||||||||||||||
|
Debt
securities in issue
|
— | — | 13,453 | — | 13,453 | ||||||||||||||
|
Derivatives
|
125 | 54 | — | — | 179 | ||||||||||||||
|
Accruals,
deferred income and other liabilities
|
— | — | — | 8 | 8 | ||||||||||||||
|
Deferred
taxation
|
— | — | — | 3 | 3 | ||||||||||||||
|
Subordinated
liabilities
|
— | — | 7,743 | — | 7,743 | ||||||||||||||
| 125 | 54 | 26,768 | 11 | 26,958 | |||||||||||||||
|
Equity
|
24,877 | ||||||||||||||||||
| 51,835 | |||||||||||||||||||
|
2006
|
|||||||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Loans and
advances to banks
(1)
|
— | — | 7,252 | — | 7,252 | ||||||||||||||
|
Loans and
advances to customers
(2)
|
— | — | 286 | — | 286 | ||||||||||||||
|
Investment in
Group undertakings
|
— | — | — | 21,784 | 21,784 | ||||||||||||||
|
Prepayments,
accrued income and other assets
|
— | — | — | 3 | 3 | ||||||||||||||
| — | — | 7,538 | 21,787 | 29,325 | |||||||||||||||
|
Liabilities
|
|||||||||||||||||||
|
Deposits by
banks
(3)
|
— | — | 738 | — | 738 | ||||||||||||||
|
Debt
securities in issue
|
— | — | 2,139 | — | 2,139 | ||||||||||||||
|
Derivatives
|
42 | — | — | — | 42 | ||||||||||||||
|
Accruals,
deferred income and other liabilities
|
— | — | — | 15 | 15 | ||||||||||||||
|
Subordinated
liabilities
|
— | — | 8,194 | — | 8,194 | ||||||||||||||
| 42 | — | 11,071 | 15 | 11,128 | |||||||||||||||
|
Equity
|
18,197 | ||||||||||||||||||
| 29,325 | |||||||||||||||||||
|
Notes:
|
|
|
(1)
|
Includes
amounts due from subsidiaries of £7,130 million (2006 – £7,252
million).
|
|
(2)
|
Due from
subsidiaries.
|
|
(3)
|
Due to
subsidiaries.
|
Notes on the accounts
continued
10 Financial instruments
(continued)
The
following table shows the carrying values and the fair values of financial
instruments on the balance sheets carried at amortised cost.
|
Group
|
Company
|
|||||||||||||||||||||||||||||
|
2007
|
2007
|
2006
|
2006
|
2007
|
2007
|
2006
|
2006
|
|||||||||||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||||||||||||
|
value
|
value
|
value
|
value
|
value
|
value
|
value
|
value
|
|||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||
|
Financial
assets
|
||||||||||||||||||||||||||||||
|
Cash and
balances at central banks
|
17,866 | 17,866 | 6,121 | 6,121 | — | — | — | — | ||||||||||||||||||||||
|
Loans and
advances to banks
|
||||||||||||||||||||||||||||||
|
Loans and
receivables
|
147,821 | 147,818 | 29,494 | 29,474 | 7,686 | 7,686 | 7,252 | 7,252 | ||||||||||||||||||||||
|
Loans and
advances to customers
|
||||||||||||||||||||||||||||||
|
Loans and
receivables
|
709,226 | 711,481 | 381,583 | 382,671 | 307 | 307 | 286 | 286 | ||||||||||||||||||||||
|
Finance
leases
|
12,570 | 12,376 | 11,521 | 11,504 | — | — | — | — | ||||||||||||||||||||||
|
Debt
securities
|
||||||||||||||||||||||||||||||
|
Loans and
receivables
|
2,672 | 2,644 | 561 | 561 | — | — | — | — | ||||||||||||||||||||||
|
Settlement
balances
|
16,589 | 16,589 | 7,425 | 7,425 | — | — | — | — | ||||||||||||||||||||||
|
Financial
liabilities
|
||||||||||||||||||||||||||||||
|
Deposits by
banks
|
||||||||||||||||||||||||||||||
|
Amortised
cost
|
247,142 | 246,966 | 74,691 | 74,510 | 5,572 | 5,572 | 738 | 738 | ||||||||||||||||||||||
|
Customer
accounts
|
||||||||||||||||||||||||||||||
|
Amortised
cost
|
614,435 | 614,069 | 333,503 | 333,286 | — | — | — | — | ||||||||||||||||||||||
|
Debt
securities in issue
|
||||||||||||||||||||||||||||||
|
Amortised
cost
|
222,326 | 222,206 | 73,323 | 73,580 | 13,453 | 13,453 | 2,139 | 2,139 | ||||||||||||||||||||||
|
Settlement
balances
|
17,520 | 17,520 | 5,667 | 5,667 | — | — | — | — | ||||||||||||||||||||||
|
Subordinated
liabilities
|
||||||||||||||||||||||||||||||
|
Amortised
cost
|
37,081 | 35,729 | 27,530 | 28,606 | 7,743 | 6,983 | 8,194 | 8,369 | ||||||||||||||||||||||
Remaining
maturity
|
Group
|
||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||
|
Less
than
|
More
than
|
Less
than
|
More
than
|
|||||||||||||||||||
|
12
months
|
12
months
|
Total
|
12
months
|
12
months
|
Total
|
|||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||
|
Assets
|
||||||||||||||||||||||
|
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 | ||||||||||||||||
|
Loans and
advances to banks
|
187,969 | 31,491 | 219,460 | 82,193 | 413 | 82,606 | ||||||||||||||||
|
Loans and
advances to customers
|
396,453 | 432,797 | 829,250 | 263,504 | 203,389 | 466,893 | ||||||||||||||||
|
Debt
securities
|
51,980 | 224,447 | 276,427 | 25,324 | 101,927 | 127,251 | ||||||||||||||||
|
Equity
shares
|
— | 53,026 | 53,026 | — | 13,504 | 13,504 | ||||||||||||||||
|
Settlement
balances
|
16,561 | 28 | 16,589 | 7,425 | — | 7,425 | ||||||||||||||||
|
Derivatives
|
56,668 | 280,742 | 337,410 | 27,984 | 88,697 | 116,681 | ||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||
|
Deposits by
banks
|
303,273 | 9,360 | 312,633 | 124,584 | 7,559 | 132,143 | ||||||||||||||||
|
Customer
accounts
|
650,687 | 31,678 | 682,365 | 372,604 | 11,618 | 384,222 | ||||||||||||||||
|
Debt
securities in issue
|
155,742 | 117,873 | 273,615 | 41,957 | 44,006 | 85,963 | ||||||||||||||||
|
Settlement
balances and short positions
|
44,466 | 46,555 | 91,021 | 26,450 | 23,026 | 49,476 | ||||||||||||||||
|
Derivatives
|
60,451 | 271,609 | 332,060 | 30,082 | 88,030 | 118,112 | ||||||||||||||||
|
Subordinated
liabilities
|
1,867 | 36,112 | 37,979 | 675 | 26,979 | 27,654 | ||||||||||||||||
|
Company
|
||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||
|
Less
than
|
More
than
|
Less
than
|
More
than
|
|||||||||||||||||||
|
12
months
|
12
months
|
Total
|
12
months
|
12
months
|
Total
|
|||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||
|
Assets
|
||||||||||||||||||||||
|
Loans and
advances to banks
|
1,655 | 6,031 | 7,686 | 1,171 | 6,081 | 7,252 | ||||||||||||||||
|
Loans and
advances to customers
|
307 | — | 307 | 286 | — | 286 | ||||||||||||||||
|
Derivatives
|
127 | 46 | 173 | — | — | — | ||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||
|
Deposits by
banks
|
5,572 | — | 5,572 | — | 738 | 738 | ||||||||||||||||
|
Debt
securities in issue
|
8,855 | 4,598 | 13,453 | 1,681 | 458 | 2,139 | ||||||||||||||||
|
Derivatives
|
102 | 77 | 179 | 23 | 19 | 42 | ||||||||||||||||
|
Subordinated
liabilities
|
119 | 7,624 | 7,743 | 104 | 8,090 | 8,194 | ||||||||||||||||
Notes on the accounts
continued
11
Asset quality
Asset
grades
Internal reporting
and oversight of risk assets is principally differentiated by credit ratings.
Internal ratings are used to assess the credit quality of borrowers. Customers
are assigned an internal credit grade based on various credit grading models
that reflect the probability of default. All credit ratings across the Group map
to a Group level asset quality scale.
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:
|
Asset
|
Annual
probability of default
|
|||||||||||
|
quality
|
Minimum
|
Midpoint
|
Maximum
|
|||||||||
|
grade
|
%
|
%
|
%
|
|||||||||
|
AQ1
|
0.00 | 0.10 | 0.20 | |||||||||
|
AQ2
|
0.21 | 0.40 | 0.60 | |||||||||
|
AQ3
|
0.61 | 1.05 | 1.50 | |||||||||
|
AQ4
|
1.51 | 3.25 | 5.00 | |||||||||
|
AQ5
|
5.01 | 52.50 | 100.00 | |||||||||
The
following table provides an analysis of the credit quality of financial assets
by the Group’s internal credit ratings.
| Group | ||||||||||||||||||||||||||||
|
AQ1
|
AQ2
|
AQ3
|
AQ4
|
AQ5
|
Accruing
past due
|
Non-
accrual
|
Impairment
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 | |||||||||||||||||||
|
Loans and
advances to banks*
|
204,083 | 5,797 | 4,937 | 407 | 1,119 | — | 25 | (3 | ) | 216,365 | ||||||||||||||||||
|
Loans and
advances to customers
|
275,926 | 174,249 | 221,701 | 84,896 | 55,343 | 13,236 | 10,337 | (6,438 | ) | 829,250 | ||||||||||||||||||
|
Debt
securities
|
240,677 | 15,688 | 2,328 | 1,372 | 16,361 | — | 5 | (4 | ) | 276,427 | ||||||||||||||||||
|
Settlement
balances
|
14,491 | 98 | 344 | 21 | 68 | 1,567 | — | — | 16,589 | |||||||||||||||||||
|
Derivatives
|
300,122 | 23,333 | 11,299 | 2,352 | 304 | — | — | — | 337,410 | |||||||||||||||||||
|
Other
financial instruments
|
649 | — | — | 20 | 143 | 65 | — | — | 877 | |||||||||||||||||||
| 1,072,032 | 219,165 | 240,620 | 89,068 | 73,338 | 14,868 | 10,367 | (6,445 | ) | 1,713,013 | |||||||||||||||||||
|
Commitments
|
131,750 | 89,682 | 74,126 | 25,320 | 17,301 | — | — | — | 338,179 | |||||||||||||||||||
|
Contingent
liabilities
|
26,120 | 16,314 | 11,740 | 4,032 | 3,714 | — | — | — | 61,920 | |||||||||||||||||||
|
Total
off-balance sheet
|
157,870 | 105,996 | 85,866 | 29,352 | 21,015 | — | — | — | 400,099 | |||||||||||||||||||
|
2006
|
||||||||||||||||||||||||||||
|
Cash and
balance at central banks
|
6,121 | — | — | — | — | — | — | — | 6,121 | |||||||||||||||||||
|
Treasury and
other eligible bills
|
5,491 | — | — | — | — | — | — | — | 5,491 | |||||||||||||||||||
|
Loans and
advances to banks*
|
77,513 | 748 | 416 | 346 | 111 | 1 | 2 | (2 | ) | 79,135 | ||||||||||||||||||
|
Loans and
advances to customers
|
149,221 | 85,511 | 124,215 | 72,622 | 24,703 | 8,324 | 6,230 | (3,933 | ) | 466,893 | ||||||||||||||||||
|
Debt
securities
|
122,152 | 2,707 | 1,206 | 345 | 841 | — | 3 | (3 | ) | 127,251 | ||||||||||||||||||
|
Settlement
balances
|
4,936 | 473 | 261 | 454 | — | 1,301 | — | — | 7,425 | |||||||||||||||||||
|
Derivatives
|
89,292 | 18,827 | 7,776 | 505 | 281 | — | — | — | 116,681 | |||||||||||||||||||
|
Other
financial instruments
|
604 | — | — | 29 | 269 | 51 | — | — | 953 | |||||||||||||||||||
| 455,330 | 108,266 | 133,874 | 74,301 | 26,205 | 9,677 | 6,235 | (3,938 | ) | 809,950 | |||||||||||||||||||
|
Commitments
|
112,505 | 52,279 | 46,742 | 18,954 | 14,577 | — | — | — | 245,057 | |||||||||||||||||||
|
Contingent
liabilities
|
6,172 | 7,870 | 3,453 | 1,468 | 883 | — | — | — | 19,846 | |||||||||||||||||||
|
Total
off-balance sheet
|
118,677 | 60,149 | 50,195 | 20,422 | 15,460 | — | — | — | 264,903 | |||||||||||||||||||
*
Excluding items in the course of collection of £3,095 million (2006 – £3,471
million).
Industry
risk – geographical analysis
The
following table analyses financial assets by location of office and by industry
type.
|
Group
|
||||||||||||||||||||||||
|
Loans
and
advances
to banks and customers
|
Treasury
bills,
debt securities
|
Derivatives
|
Other
(1)
|
Total
|
Netting
and
offset
(2)
|
|||||||||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
UK
|
||||||||||||||||||||||||
|
Central and
local government
|
4,728 | 30,285 | 3,912 | — | 38,925 | 1,531 | ||||||||||||||||||
|
Manufacturing
|
21,083 | 2,751 | 4,800 | — | 28,634 | 4,032 | ||||||||||||||||||
|
Construction
|
12,363 | 456 | 741 | — | 13,560 | 1,684 | ||||||||||||||||||
|
Finance
|
295,366 | 106,201 | 299,867 | 12,716 | 714,150 | 246,428 | ||||||||||||||||||
|
Service
industries and business activities
|
74,399 | 16,801 | 4,411 | — | 95,611 | 6,687 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
2,570 | 66 | 58 | — | 2,694 | 104 | ||||||||||||||||||
|
Property
|
63,715 | 640 | 969 | 7 | 65,331 | 2,033 | ||||||||||||||||||
|
Individuals
|
||||||||||||||||||||||||
|
Home
mortgages
|
73,916 | 1,795 | 5 | — | 75,716 | — | ||||||||||||||||||
|
Other
|
28,747 | 1,140 | 15 | 23 | 29,925 | 7 | ||||||||||||||||||
|
Finance leases
and instalment credit
|
15,632 | 131 | 27 | — | 15,790 | 5 | ||||||||||||||||||
|
Interest
accruals
|
3,512 | 1,607 | — | — | 5,119 | — | ||||||||||||||||||
|
Total
UK
|
596,031 | 161,873 | 314,805 | 12,746 | 1,085,455 | 262,511 | ||||||||||||||||||
|
US
|
||||||||||||||||||||||||
|
Central and
local government
|
386 | 23,506 | 10 | 212 | 24,114 | — | ||||||||||||||||||
|
Manufacturing
|
7,399 | 608 | 111 | — | 8,118 | 13 | ||||||||||||||||||
|
Construction
|
793 | 96 | — | — | 889 | — | ||||||||||||||||||
|
Finance
|
69,867 | 39,049 | 9,354 | 3,095 | 121,365 | 23,026 | ||||||||||||||||||
|
Service
industries and business activities
|
16,474 | 2,190 | 233 | 1 | 18,898 | 18 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
20 | 4 | — | — | 24 | — | ||||||||||||||||||
|
Property
|
6,456 | 4,089 | — | — | 10,545 | — | ||||||||||||||||||
|
Individuals
|
||||||||||||||||||||||||
|
Home
mortgages
|
27,882 | — | — | — | 27,882 | — | ||||||||||||||||||
|
Other
|
10,879 | — | — | — | 10,879 | — | ||||||||||||||||||
|
Finance leases
and instalment credit
|
2,228 | — | — | — | 2,228 | — | ||||||||||||||||||
|
Interest
accruals
|
1,421 | 379 | — | — | 1,800 | 2 | ||||||||||||||||||
|
Total
US
|
143,805 | 69,921 | 9,708 | 3,308 | 226,742 | 23,059 | ||||||||||||||||||
|
Europe
|
||||||||||||||||||||||||
|
Central and
local government
|
2,371 | 30,593 | 132 | — | 33,096 | 9 | ||||||||||||||||||
|
Manufacturing
|
15,159 | 13 | 361 | — | 15,533 | 214 | ||||||||||||||||||
|
Construction
|
4,779 | — | 13 | — | 4,792 | — | ||||||||||||||||||
|
Finance
|
40,498 | 42,418 | 6,285 | 157 | 89,358 | 84,200 | ||||||||||||||||||
|
Service
industries and business activities
|
46,500 | 540 | 481 | — | 47,521 | 24,648 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
4,650 | 2 | 42 | — | 4,694 | — | ||||||||||||||||||
|
Property
|
15,768 | 67 | 8 | — | 15,843 | — | ||||||||||||||||||
|
Individuals
|
||||||||||||||||||||||||
|
Home
mortgages
|
81,557 | 18 | — | — | 81,575 | — | ||||||||||||||||||
|
Other
|
16,292 | 3,292 | — | — | 19,584 | — | ||||||||||||||||||
|
Finance leases
and instalment credit
|
1,620 | — | — | — | 1,620 | — | ||||||||||||||||||
|
Interest
accruals
|
2,872 | 1,101 | — | — | 3,973 | — | ||||||||||||||||||
|
Total
Europe
|
232,066 | 78,044 | 7,322 | 157 | 317,589 | 109,071 | ||||||||||||||||||
|
Rest of the
World
|
||||||||||||||||||||||||
|
Central and
local government
|
2,592 | 18,821 | 94 | — | 21,507 | — | ||||||||||||||||||
|
Manufacturing
|
8,078 | 46 | 738 | — | 8,862 | — | ||||||||||||||||||
|
Construction
|
825 | 79 | 3 | — | 907 | 1 | ||||||||||||||||||
|
Finance
|
37,502 | 16,919 | 3,797 | 1,210 | 59,428 | 6,059 | ||||||||||||||||||
|
Service
industries and business activities
|
14,449 | 1,825 | 661 | — | 16,935 | 103 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
1,941 | — | — | — | 1,941 | — | ||||||||||||||||||
|
Property
|
2,898 | 217 | 28 | — | 3,143 | — | ||||||||||||||||||
|
Individuals
|
||||||||||||||||||||||||
|
Home
mortgages
|
1,740 | — | — | — | 1,740 | — | ||||||||||||||||||
|
Other
|
12,261 | — | — | — | 12,261 | 3 | ||||||||||||||||||
|
Finance leases
and instalment credit
|
18 | — | 254 | 45 | 317 | — | ||||||||||||||||||
|
Interest
accruals
|
945 | 11 | — | — | 956 | — | ||||||||||||||||||
|
Total Rest of
the World
|
83,249 | 37,918 | 5,575 | 1,255 | 127,997 | 6,166 | ||||||||||||||||||
Notes
on the accounts
continued
11
Asset quality
(continued)
Industry
risk – geographical analysis
|
Group
|
||||||||||||||||||
|
Loans
and
advances to
banks
and
customers
|
Treasury
bills,
debt
securities
and equity
shares
|
Derivatives
|
Other(1)
|
Total
|
Netting
and
offset
|
(2) | ||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | ||||||||||||
|
Total
|
||||||||||||||||||
|
Central and
local government
|
10,077 | 103,205 | 4,148 | 212 | 117,642 | 1,540 | ||||||||||||
|
Manufacturing
|
51,719 | 3,418 | 6,010 | — | 61,147 | 4,259 | ||||||||||||
|
Construction
|
18,760 | 631 | 757 | — | 20,148 | 1,685 | ||||||||||||
|
Finance
|
443,233 | 204,587 | 319,303 | 17,178 | 984,301 | 359,713 | ||||||||||||
|
Service
industries and business activities
|
151,822 | 21,356 | 5,786 | 1 | 178,965 | 31,456 | ||||||||||||
|
Agriculture,
forestry and fishing
|
9,181 | 72 | 100 | — | 9,353 | 104 | ||||||||||||
|
Property
|
88,837 | 5,013 | 1,005 | 7 | 94,862 | 2,033 | ||||||||||||
|
Individuals
|
||||||||||||||||||
|
Home
mortgages
|
185,095 | 1,813 | 5 | — | 186,913 |
—
|
||||||||||||
|
Other
|
68,179 | 4,432 | 15 | 23 | 72,649 | 10 | ||||||||||||
|
Finance leases
and instalment credit
|
19,498 | 131 | 281 | 45 | 19,955 | 5 | ||||||||||||
|
Interest
accruals
|
8,750 | 3,098 | — | — | 11,848 | 2 | ||||||||||||
| 1,055,151 | 347,756 | 337,410 | 17,466 | 1,757,783 | 400,807 | |||||||||||||
|
Notes:
|
|
|
(1)
|
Includes
settlement balances of £16,589 million.
|
|
(2)
|
This column
shows the amount by which the Group’s credit risk exposure is reduced
through arrangements, such as master netting agreements, which give the
Group a legal right to set-off the financial asset against a financial
liability due to the same counterparty. In addition, the Group holds
collateral in respect of individual loans and advances to banks and to
customers. This 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. The Group obtains collateral in the form of securities in
reverse repurchase agreements. Cash and securities are received as
collateral in respect of derivative
transactions.
|
|
Group
|
||||||||||||||||||
|
Loans
and
advances to
banks
and
customers
|
Treasury
bills,
debt
securities
and equity
shares
|
Derivatives
|
Other(1)
|
Total
|
Netting
and
offset
|
(2) | ||||||||||||
|
2006
|
£m | £m | £m | £m | £m | £m | ||||||||||||
|
UK
|
||||||||||||||||||
|
Central and
local government
|
7,629 | 28,211 | 345 | 1,624 | 37,809 | 1,553 | ||||||||||||
|
Manufacturing
|
15,259 | 521 | 915 | 49 | 16,744 | 4,540 | ||||||||||||
|
Construction
|
9,667 | 115 | 179 | 3 | 9,964 | 1,458 | ||||||||||||
|
Finance
|
128,463 | 47,274 | 80,577 | 2,199 | 258,513 | 93,403 | ||||||||||||
|
Service
industries and business activities
|
57,895 | 4,330 | 2,616 | 769 | 65,610 | 5,289 | ||||||||||||
|
Agriculture,
forestry and fishing
|
2,819 | 61 | 3 | — | 2,883 | 99 | ||||||||||||
|
Property
|
51,303 | 561 | 646 | 11 | 52,521 | 1,291 | ||||||||||||
|
Individuals
|
||||||||||||||||||
|
Home
mortgages
|
70,884 | — | 1 | — | 70,885 | — | ||||||||||||
|
Other
|
28,594 | 861 | 29 | 58 | 29,542 | 61 | ||||||||||||
|
Finance leases
and instalment credit
|
14,218 | 5 | — | — | 14,223 | 189 | ||||||||||||
|
Interest
accruals
|
1,890 | 62 | — | — | 1,952 | — | ||||||||||||
|
Total
UK
|
388,621 | 82,001 | 85,311 | 4,713 | 560,646 | 107,883 | ||||||||||||
|
US
|
||||||||||||||||||
|
Central and
local government
|
435 | 24,013 | — | 102 | 24,550 | 1 | ||||||||||||
|
Manufacturing
|
3,842 | 251 | 157 | — | 4,250 | 52 | ||||||||||||
|
Construction
|
790 | 48 | 12 | — | 850 | — | ||||||||||||
|
Finance
|
31,785 | 28,333 | 29,989 | 3,495 | 93,602 | 26,037 | ||||||||||||
|
Service
industries and business activities
|
10,678 | 1,267 | 168 | — | 12,113 | 22 | ||||||||||||
|
Agriculture,
forestry and fishing
|
64 | — | — | — | 64 | — | ||||||||||||
|
Property
|
5,781 | — | 24 | — | 5,805 | 19 | ||||||||||||
|
Individuals
|
||||||||||||||||||
|
Home
mortgages
|
34,230 | — | — | — | 34,230 | — | ||||||||||||
|
Other
|
11,643 | — | — | — | 11,643 | — | ||||||||||||
|
Finance leases
and instalment credit
|
2,282 | — | — | — | 2,282 | — | ||||||||||||
|
Interest
accruals
|
526 | 343 | — | — | 869 | 2 | ||||||||||||
|
Total
US
|
102,056 | 54,255 | 30,350 | 3,597 | 190,258 | 26,133 | ||||||||||||
|
Group
|
||||||||||||||||||
|
Loans
and
advances to
banks
and
customers
|
Treasury
bills,
debt
securities
and equity
shares
|
Derivatives
|
Other
|
(1) |
Total
|
Netting
and
offset
|
(2) | |||||||||||
|
2006
|
£m | £m | £m | £m | £m | £m | ||||||||||||
|
Europe
|
||||||||||||||||||
|
Central and
local government
|
488 | 423 | — | 3 | 914 | — | ||||||||||||
|
Manufacturing
|
4,067 | — | — | — | 4,067 | — | ||||||||||||
|
Construction
|
2,751 | — | — | — | 2,751 | — | ||||||||||||
|
Finance
|
6,067 | 1,938 | 860 | 49 | 8,914 | 7 | ||||||||||||
|
Service
industries and business activities
|
9,607 | 100 | 7 | 7 | 9,721 | — | ||||||||||||
|
Agriculture,
forestry and fishing
|
469 | 2 | — | — | 471 | — | ||||||||||||
|
Property
|
8,781 | 21 | — | — | 8,802 | — | ||||||||||||
|
Individuals
|
||||||||||||||||||
|
Home
mortgages
|
13,661 | — | — | — | 13,661 | — | ||||||||||||
|
Other
|
3,774 | — | — | — | 3,774 | — | ||||||||||||
|
Finance leases
and instalment credit
|
1,325 | — | — | — | 1,325 | — | ||||||||||||
|
Interest
accruals
|
221 | — | — | — | 221 | — | ||||||||||||
|
Total
Europe
|
51,211 | 2,484 | 867 | 59 | 54,621 | 7 | ||||||||||||
|
Rest of the
World
|
||||||||||||||||||
|
Central and
local government
|
185 | 921 | 16 | — | 1,122 | 1 | ||||||||||||
|
Manufacturing
|
129 | — | 3 | — | 132 | 3 | ||||||||||||
|
Construction
|
80 | — | — | — | 80 | — | ||||||||||||
|
Finance
|
6,116 | 6,652 | 106 | 7 | 12,881 | 2,271 | ||||||||||||
|
Service
industries and business activities
|
2,664 | 2 | 27 | 2 | 2,695 | 2 | ||||||||||||
|
Agriculture,
forestry and fishing
|
13 | — | — | — | 13 | — | ||||||||||||
|
Property
|
1,250 | 19 | 1 | — | 1,270 | — | ||||||||||||
|
Individuals
|
||||||||||||||||||
|
Home
mortgages
|
273 | — | — | — | 273 | — | ||||||||||||
|
Other
|
782 | — | — | — | 782 | — | ||||||||||||
|
Finance leases
and instalment credit
|
10 | — | — | — | 10 | — | ||||||||||||
|
Interest
accruals
|
44 | — | — | — | 44 | — | ||||||||||||
|
Total Rest of
the World
|
11,546 | 7,594 | 153 | 9 | 19,302 | 2,277 | ||||||||||||
|
Total
|
||||||||||||||||||
|
Central and
local government
|
8,737 | 53,568 | 361 | 1,729 | 64,395 | 1,555 | ||||||||||||
|
Manufacturing
|
23,297 | 772 | 1,075 | 49 | 25,193 | 4,595 | ||||||||||||
|
Construction
|
13,288 | 163 | 191 | 3 | 13,645 | 1,458 | ||||||||||||
|
Finance
|
172,431 | 84,197 | 111,532 | 5,750 | 373,910 | 121,718 | ||||||||||||
|
Service
industries and business activities
|
80,844 | 5,699 | 2,818 | 778 | 90,139 | 5,313 | ||||||||||||
|
Agriculture,
forestry and fishing
|
3,365 | 63 | 3 | — | 3,431 | 99 | ||||||||||||
|
Property
|
67,115 | 601 | 671 | 11 | 68,398 | 1,310 | ||||||||||||
|
Individuals
|
||||||||||||||||||
|
Home
mortgages
|
119,048 | — | 1 | — | 119,049 | — | ||||||||||||
|
Other
|
44,793 | 861 | 29 | 58 | 45,741 | 61 | ||||||||||||
|
Finance leases
and instalment credit
|
17,835 | 5 | — | — | 17,840 | 189 | ||||||||||||
|
Interest
accruals
|
2,681 | 405 | — | — | 3,086 | 2 | ||||||||||||
| 553,434 | 146,334 | 116,681 | 8,378 | 824,827 | 136,300 | |||||||||||||
Notes:
|
(1)
|
Includes
settlement balances of £7,425
million.
|
|
(2)
|
This column
shows the amount by which the Group’s credit risk exposure is reduced
through arrangements, such as master netting agreements, which give the
Group a legal right to set-off the financial asset against a financial
liability due to the same counterparty. In addition, the Group holds
collateral in respect of individual loans and advances to banks and to
customers. This 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. The Group obtains collateral in the form of securities in
reverse repurchase agreements. Cash and securities are received as
collateral in respect of derivative
transactions.
|
Notes on the accounts
continued
12
Past
due and impaired financial assets
The
following table shows the movement in the provision for impairment losses for
loans and advances.
|
Group
|
||||||||||||||||||
|
Individually
|
Collectively
|
Total
|
||||||||||||||||
|
assessed
|
assessed
|
Latent
|
2007
|
2006
|
2005
|
|||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||
|
At 1
January
|
697 | 2,645 | 593 | 3,935 | 3,887 | 4,174 | ||||||||||||
|
Implementation
of IAS 39 on 1 January 2005
|
— | — | — | — | — | (29 | ) | |||||||||||
|
Currency
translation and other adjustments
|
58 | 61 | 18 | 137 | (61 | ) | 51 | |||||||||||
|
Acquisition of
subsidiaries
|
952 | 907 | 351 | 2,210 | — | — | ||||||||||||
|
Amounts
written-off
(1)
|
(525 | ) | (1,646 | ) | — | (2,171 | ) | (1,841 | ) | (2,040 | ) | |||||||
|
Recoveries of
amounts previously written-off
|
129 | 261 | — | 390 | 215 | 172 | ||||||||||||
|
Charged to the
income statement
|
274 | 1,744 | 88 | 2,106 | 1,877 | 1,703 | ||||||||||||
|
Unwind of
discount
|
(28 | ) | (138 | ) | — | (166 | ) | (142 | ) | (144 | ) | |||||||
|
At 31
December
(2)
|
1,557 | 3,834 | 1,050 | 6,441 | 3,935 | 3,887 | ||||||||||||
|
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).
|
|
(3)
|
There is no
provision for impairment losses in the
company.
|
|
Group
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Impairment
losses charged to the income statement
|
£m | £m | £m | |||||||
|
Loans and
advances to customers
|
2,106 | 1,877 | 1,703 | |||||||
|
Debt
securities
|
20 | — | — | |||||||
|
Equity
shares
|
2 | 1 | 4 | |||||||
| 22 | 1 | 4 | ||||||||
| 2,128 | 1,878 | 1,707 | ||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Group
|
£m | £m | £m | |||||||
|
Gross income
not recognised but which would have been recognised under
the
|
||||||||||
|
original terms
of non-accrual and restructured loans
|
||||||||||
|
Domestic
|
390 | 370 | 334 | |||||||
|
Foreign
|
155 | 77 | 62 | |||||||
| 545 | 447 | 396 | ||||||||
|
Interest on
non-accrual and restructured loans included in net interest
income
|
||||||||||
|
Domestic
|
165 | 142 | 130 | |||||||
|
Foreign
|
16 | 15 | 14 | |||||||
| 181 | 157 | 144 | ||||||||
The
following table shows analysis of impaired financial assets.
|
2007
|
2006
|
||||||||||||||||||
|
Net
book
|
Net
book
|
||||||||||||||||||
|
Cost
|
Provision
|
value
|
Cost
|
Provision
|
value
|
||||||||||||||
|
Group
|
£m | £m | £m | £m | £m | £m | |||||||||||||
|
Impaired
financial assets
|
|||||||||||||||||||
|
Loans and
advances to banks
(1)
|
25 | 3 | 22 | 2 | 2 | — | |||||||||||||
|
Loans and
advances to customers
(2)
|
10,337 | 5,388 | 4,949 | 6,230 | 3,340 | 2,890 | |||||||||||||
|
Debt
securities
(1)
|
5 | 4 | 1 | 3 | 3 | — | |||||||||||||
|
Equity shares
(1)
|
142 | 70 | 72 | 182 | 85 | 97 | |||||||||||||
| 10,509 | 5,465 | 5,044 | 6,417 | 3,430 | 2,987 | ||||||||||||||
|
Notes:
|
|
|
(1)
|
Impairment
provisions individually
assessed.
|
|
(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.
The
following table shows financial and non-financial assets, recognised on the
Group's balance sheet, obtained during the year by taking possession of
collateral or calling on other credit enhancements.
|
2007
|
2006
|
|||||||
|
Group
|
£m | £m | ||||||
|
Residential
property
|
32 | 12 | ||||||
|
Other
property
|
8 | — | ||||||
|
Cash
|
18 | 9 | ||||||
|
Other
assets
|
5 | 3 | ||||||
| 63 | 24 | |||||||
In
general, the Group seeks to dispose of property and other assets obtained by
taking possession of collateral that are not readily convertible into cash as
rapidly as the market for the individual asset permits.
The
following loans and advances to customers were past due at the balance sheet
date but not considered impaired:
|
Group
|
||||||||||||||||
|
Past
due
|
||||||||||||||||
|
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 | ||||||||||||
|
2007
|
8,768 | 2,745 | 1,354 | 369 | 13,236 | |||||||||||
|
2006
|
6,254 | 1,300 | 665 | 105 | 8,324 | |||||||||||
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.
Loans that have been
renegotiated in the past 12 months that would otherwise have been past due or
impaired amounted to £930 million as at 31 December 2007 (2006 – £744
million).
Notes on the accounts
continued
13
Derivatives
Companies in the
Group transact derivatives as principal either as a trading activity or to
manage balance sheet foreign exchange, interest rate and credit
risk.
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 Official Bank Rate. The financial assets are customer loans and the
financial liabilities are customer deposits and LIBOR linked medium-term notes
and other issued securities.
For
cash flow hedging relationships, the initial and ongoing prospective
effectiveness is assessed by comparing movements in the fair value of the
expected highly probable forecast interest cash flows with movements in the fair
value of the expected changes in cash flows from the hedging interest rate swap
or by comparing the respective changes in the price value of a basis point.
Prospective effectiveness is measured on a cumulative basis i.e. over the entire
life of the hedge relationship. The method of calculating hedge ineffectiveness
is the hypothetical derivative method. Retrospective effectiveness is assessed
by comparing the actual movements in the fair value of the cash flows and actual
movements in the fair value of the hedged cash flows from the interest rate swap
over the life to date of the hedging relationship.
For
fair value hedge relationships of interest rate risk the hedged items are
typically large corporate fixed-rate loans, fixed-rate finance leases,
fixed-rate medium-term notes or preference shares classified as debt. The
initial and ongoing prospective effectiveness of fair value hedge relationships
is assessed on a cumulative basis by comparing movements in the fair value of
the hedged item attributable to the hedged risk with changes in the fair value
of the hedging interest rate swap or by comparing the respective changes in the
price value of a basis point. Retrospective effectiveness is assessed by
comparing the actual movements in the fair value of the hedged items
attributable to the hedged risk with actual movements in the fair value of the
hedging derivative over the life to date of the hedging
relationship.
|
Company
|
||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||
|
Notional
amounts
|
Assets
|
Liabilities
|
Notional
amounts
|
Assets
|
Liabilities
|
|||||||||||||
|
£bn
|
£m | £m |
£bn
|
£m | £m | |||||||||||||
|
Exchange
contracts
|
13 | 154 | 178 | 1 | — | 42 | ||||||||||||
|
Interest rate
contracts
|
1 | 19 | 1 | — | — | — | ||||||||||||
| 173 | 179 | — | 42 | |||||||||||||||
Included above are
fair value hedging derivatives liabilities of £54 million (2006 –
nil).
Notes on the accounts
continued
14
Debt
securities
|
Group
|
|||||||||||||||||||||||||||
|
UK
government
|
US
government,
state
and
federal
agency
|
Other
government
|
US
government
sponsored
entity
|
Bank
and
building
society
|
Mortgage-
backed
securities(1)
|
Corporate
|
Other
|
Total
|
|||||||||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Held-for-trading
|
9,163 | 12,791 | 43,743 | 18,422 | 7,830 | 43,680 | 35,769 | 1,246 | 172,644 | ||||||||||||||||||
|
Designated as
at fair value
|
|||||||||||||||||||||||||||
|
through profit
or loss
|
2,235 | 397 | 101 | — | 154 | 330 | 2,125 | 435 | 5,777 | ||||||||||||||||||
|
Available-for-sale
|
1,030 | 6,867 | 33,840 | 5,830 | 11,835 | 23,680 | 6,505 | 5,747 | 95,334 | ||||||||||||||||||
|
Loans and
receivables
|
— | — | 1,988 | — | — | 612 | — | 72 | 2,672 | ||||||||||||||||||
| 12,428 | 20,055 | 79,672 | 24,252 | 19,819 | 68,302 | 44,399 | 7,500 | 276,427 | |||||||||||||||||||
|
Available-for-sale
|
|||||||||||||||||||||||||||
|
Gross
unrealised gains
|
29 | 14 | 56 | 3 | 12 | 15 | 22 | 1 | 152 | ||||||||||||||||||
|
Gross
unrealised losses
|
— | (62 | ) | (276 | ) | (66 | ) | (42 | ) | (115 | ) | (22 | ) | (10 | ) | (593 | ) | ||||||||||
|
2006
|
|||||||||||||||||||||||||||
|
Held-for-trading
|
8,122 | 10,965 | 13,839 | 10,065 | 34 | 28,658 | 23,194 | 315 | 95,192 | ||||||||||||||||||
|
Designated as
at fair value
|
|||||||||||||||||||||||||||
|
through profit
or loss
|
1,730 | — | 85 | — | 609 | 98 | 2,867 | 600 | 5,989 | ||||||||||||||||||
|
Available-for-sale
|
843 | 6,234 | 1,218 | 6,651 | 4,584 | 3,434 | 2,211 | 334 | 25,509 | ||||||||||||||||||
|
Loans and
receivables
|
— | — | — | — | — | — | 21 | 540 | 561 | ||||||||||||||||||
| 10,695 | 17,199 | 15,142 | 16,716 | 5,227 | 32,190 | 28,293 | 1,789 | 127,251 | |||||||||||||||||||
|
Available-for-sale
|
|||||||||||||||||||||||||||
|
Gross
unrealised gains
|
— | 6 | 4 | 1 | 1 | 6 | 12 | — | 30 | ||||||||||||||||||
|
Gross
unrealised losses
|
(5 | ) | (88 | ) | (20 | ) | (142 | ) | (8 | ) | (47 | ) | (16 | ) | (13 | ) | (339 | ) | |||||||||
|
Note:
|
|
|
(1)
|
Excludes
securities issued by US federal agencies and government sponsored
entities.
|
The
following tables analyse by issuer the Group’s available-for-sale debt
securities by remaining maturity and the related yield (based on weighted
averages).
|
Within 1
year
|
After 1 but
within 5 years
|
After 5 but
within 10 years
|
After 10
years
|
Total
|
||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||
|
2007
|
£m |
%
|
£m |
%
|
£m |
%
|
£m |
%
|
£m |
%
|
||||||||||||||||||||
|
UK
government
|
96 | 4.9 | 306 | 5.5 | 625 | 4.2 | 3 | 5.2 | 1,030 | 4.7 | ||||||||||||||||||||
|
US government,
state, and federal agency
|
99 | 4.6 | 167 | 4.9 | 1,431 | 4.2 | 5,170 | 5.2 | 6,867 | 5.0 | ||||||||||||||||||||
|
Other
government
|
11,933 | 3.8 | 12,515 | 5.3 | 7,262 | 4.0 | 2,130 | 4.3 | 33,840 | 4.4 | ||||||||||||||||||||
|
US government
sponsored entity
|
— | — | — | — | 44 | 5.5 | 5,786 | 5.0 | 5,830 | 5.0 | ||||||||||||||||||||
|
Bank and
building society
|
9,023 | 5.3 | 1,795 | 4.4 | 445 | 3.3 | 572 | 3.8 | 11,835 | 5.0 | ||||||||||||||||||||
|
Mortgage-backed
securities
(1)
|
1,069 | 5.1 | 4,202 | 4.5 | 10,308 | 3.5 | 8,101 | 4.6 | 23,680 | 4.1 | ||||||||||||||||||||
|
Corporate
|
1,616 | 3.7 | 3,119 | 5.3 | 1,357 | 4.7 | 413 | 4.7 | 6,505 | 4.7 | ||||||||||||||||||||
|
Other
|
1,603 | 3.5 | 1,600 | 4.2 | 1,851 | 4.9 | 693 | 5.5 | 5,747 | 4.4 | ||||||||||||||||||||
|
Total fair
value
|
25,439 | 4.3 | 23,704 | 5.0 | 23,323 | 3.9 | 22,868 | 4.8 | 95,334 | 4.5 | ||||||||||||||||||||
|
2006
|
||||||||||||||||||||||||||||||
|
UK
government
|
562 | 5.6 | 146 | 5.7 | 97 | 5.0 | 38 | 4.7 | 843 | 5.5 | ||||||||||||||||||||
|
US government,
state, and federal agency
|
11 | 4.8 | 627 | 4.8 | 22 | 4.7 | 5,574 | 5.1 | 6,234 | 5.1 | ||||||||||||||||||||
|
Other
government
|
180 | 2.6 | 822 | 3.7 | 213 | 1.1 | 3 | 3.9 | 1,218 | 3.1 | ||||||||||||||||||||
|
US government
sponsored entity
|
— | — | 140 | 5.4 | 368 | 5.6 | 6,143 | 5.0 | 6,651 | 5.0 | ||||||||||||||||||||
|
Bank and
building society
|
2,427 | 5.1 | 1,368 | 4.8 | 28 | 5.4 | 761 | 6.9 | 4,584 | 5.3 | ||||||||||||||||||||
|
Mortgage-backed
securities
(1)
|
259 | 5.1 | 232 | 5.6 | 294 | 5.5 | 2,649 | 4.9 | 3,434 | 5.0 | ||||||||||||||||||||
|
Corporate
|
360 | 3.9 | 1,256 | 4.5 | 413 | 4.7 | 182 | 4.6 | 2,211 | 4.4 | ||||||||||||||||||||
|
Other
|
188 | 4.5 | 135 | 4.0 | 11 | 5.3 | — | — | 334 | 4.3 | ||||||||||||||||||||
|
Total fair
value
|
3,987 | 4.9 | 4,726 | 4.6 | 1,446 | 4.6 | 15,350 | 5.1 | 25,509 | 4.9 | ||||||||||||||||||||
|
Note:
|
|
|
(1)
|
Excludes
securities issued by US federal agencies and government sponsored
entities.
|
The
tables below show the fair value of available-for-sale debt securities that were
in an unrealised loss position.
|
Less than 12
months
|
More than 12
months
|
Total
|
||||||||||||||||
|
Fair
value
|
Gross
unrealised
losses
|
Fair
value
|
Gross
unrealised
losses
|
Fair
value
|
Gross
unrealised
losses
|
|||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | ||||||||||||
|
UK
government
|
— | — | 114 | — | 114 | — | ||||||||||||
|
US government,
state, and federal agency
|
2,704 | 38 | 2,146 | 24 | 4,850 | 62 | ||||||||||||
|
Other
government
|
18,802 | 275 | 655 | 1 | 19,457 | 276 | ||||||||||||
|
US government
sponsored entity
|
1,133 | 11 | 4,190 | 55 | 5,323 | 66 | ||||||||||||
|
Bank and
building society
|
715 | 26 | 671 | 16 | 1,386 | 42 | ||||||||||||
|
Mortgage-backed
securities
(1)
|
17,062 | 68 | 1,480 | 47 | 18,542 | 115 | ||||||||||||
|
Corporate
|
1,053 | 11 | 542 | 11 | 1,595 | 22 | ||||||||||||
|
Other
|
1,403 | 10 | — | — | 1,403 | 10 | ||||||||||||
| 42,872 | 439 | 9,798 | 154 | 52,670 | 593 | |||||||||||||
|
2006
|
||||||||||||||||||
|
UK
government
|
263 | 5 | — | — | 263 | 5 | ||||||||||||
|
US government,
state, and federal agency
|
829 | 10 | 4,215 | 78 | 5,044 | 88 | ||||||||||||
|
Other
government
|
63 | 3 | 633 | 17 | 696 | 20 | ||||||||||||
|
US government
sponsored entity
|
1,102 | 17 | 5,149 | 125 | 6,251 | 142 | ||||||||||||
|
Bank and
building society
|
2,245 | 3 | 268 | 5 | 2,513 | 8 | ||||||||||||
|
Mortgage-backed
securities
(1)
|
624 | 14 | 1,440 | 33 | 2,064 | 47 | ||||||||||||
|
Corporate
|
827 | 14 | 62 | 2 | 889 | 16 | ||||||||||||
|
Other
|
44 | 13 | — | — | 44 | 13 | ||||||||||||
| 5,997 | 79 | 11,767 | 260 | 17,764 | 339 | |||||||||||||
|
Note:
|
|
|
(1)
|
Excludes
securities issued by US federal agencies and government sponsored
entities.
|
Gross gains of £60
million (2006 – £34 million) and gross losses of £12 million (2006 – £19
million) were realised on the sale of available-for-sale
securities.
Interest receivable
includes £2,197 million (2006 – £1,559 million; 2005 – £1,624 million) in
respect of debt securities.
Notes on the accounts
continued
15
Equity
shares
|
Group
|
||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||
|
Listed
|
Unlisted
|
Total
|
Listed
|
Unlisted
|
Total
|
|||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||
|
Held-for-trading
|
33,696 | 3,850 | 37,546 | 3,033 | 5 | 3,038 | ||||||||||||
|
Designated as
at fair value through profit or loss
|
1,856 | 6,010 | 7,866 | 2,051 | 559 | 2,610 | ||||||||||||
|
Available-for-sale
|
5,622 | 1,992 | 7,614 | 6,367 | 1,489 | 7,856 | ||||||||||||
| 41,174 | 11,852 | 53,026 | 11,451 | 2,053 | 13,504 | |||||||||||||
|
Available-for-sale
|
||||||||||||||||||
|
Gross
unrealised gains
|
3,467 | 130 | 3,597 | 4,377 | 177 | 4,554 | ||||||||||||
|
Gross
unrealised losses
|
(3 | ) | (7 | ) | (10 | ) | — | (6 | ) | (6 | ) | |||||||
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.
Dividend income from
available-for-sale equity shares was £137 million (2006 – £92 million; 2005 –
£108 million).
The
Group’s private equity investments are generally unquoted. They are held for
capital appreciation over the medium term. 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
(redeemable at cost) in the Federal Home Loans Bank and the Federal Reserve Bank
of £0.5 billion (2006 – £0.8 billion) that the Group’s banking subsidiaries in
the US are required to hold; and a number of individually small shareholdings in
unlisted companies. Disposals in the year generated gains of £0.5 million (2006
– £56 million; 2005 – £85 million) based on cost of sales of £4 million (2006 –
£14 million; 2005 – £17 million).
16
Investments
in Group undertakings
Investments in Group
undertakings are carried at cost less impairment. Movements during the year were
as follows:
|
Company
|
|||||||
|
2007
|
2006
|
||||||
| £m | £m | ||||||
|
At 1
January
|
21,784 | 20,851 | |||||
|
Currency
translation and other adjustments
|
535 | (164 | ) | ||||
|
Additions
|
17,566 | — | |||||
|
Disposals
|
(6 | ) | — | ||||
|
Additional
investments in Group undertakings
|
3,663 | 1,097 | |||||
|
At 31
December
|
43,542 | 21,784 | |||||
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 Scotland plc,
RBS Insurance Group Limited and RFS Holdings B.V. are directly owned by the
company, and all of the other subsidiary undertakings are owned directly, or
indirectly through intermediate holding companies, by these companies. All of
these subsidiaries are included in the Group’s consolidated financial statements
and have an accounting reference date of 31 December.
|
Nature
of
business
|
Country
of
incorporation
and
principal
area of
operation
|
Group
interest
|
||||
|
The Royal Bank
of Scotland plc
|
Banking
|
Great
Britain
|
100% | |||
|
National
Westminster Bank Plc
(1)
|
Banking
|
Great
Britain
|
100% | |||
|
Citizens
Financial Group, Inc.
|
Banking
|
US
|
100% | |||
|
Coutts &
Co
(2)
|
Private
banking
|
Great
Britain
|
100% | |||
|
Greenwich
Capital Markets, Inc.
|
Broker
dealer
|
US
|
100% | |||
|
RBS Insurance
Group Limited
|
Insurance
|
Great
Britain
|
100% | |||
|
Ulster Bank
Limited
(3)
|
Banking
|
Northern
Ireland
|
100% | |||
|
ABN AMRO Bank
N.V.
(4)
|
Banking
|
The
Netherlands
|
38% | |||
|
Notes:
|
|
|
(1)
|
The company
does not hold any of the NatWest preference shares in
issue.
|
|
(2)
|
Coutts &
Co is incorporated with unlimited liability. Its registered office is 440
Strand, London WC2R 0QS.
|
|
(3)
|
Ulster Bank
Limited and its subsidiaries also operate in the Republic of
Ireland.
|
|
(4)
|
RFS Holdings
B.V. (RFS) owns 99% of the outstanding shares of ABN AMRO Holding N.V.
(ABN AMRO). The company owns 38% of RFS; the balance of shares is held by
Fortis 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.
Notes on the accounts
continued
17
Intangible
assets
|
Group
|
|||||||||||||||
|
Core
|
Other
|
Internally
|
|||||||||||||
|
deposit
|
purchased
|
generated
|
|||||||||||||
|
Goodwill
|
intangibles
|
intangibles
|
software
|
Total
|
|||||||||||
|
2007
|
£m | £m | £m | £m | £m | ||||||||||
|
Cost:
|
|||||||||||||||
|
At 1 January
2007
|
17,889 | 265 | 275 | 2,642 | 21,071 | ||||||||||
|
Currency
translation and other adjustments
|
1,199 | 98 | 136 | 48 | 1,481 | ||||||||||
|
Acquisition of
subsidiaries
|
23,321 | 1,842 | 2,452 | 717 | 28,332 | ||||||||||
|
Additions
|
— | — | 6 | 481 | 487 | ||||||||||
|
Impairment of
goodwill
|
(40 | ) | — | — | — | (40 | ) | ||||||||
|
Disposals and
write-off of fully amortised assets
|
— | — | (3 | ) | (84 | ) | (87 | ) | |||||||
|
At 31 December
2007
|
42,369 | 2,205 | 2,866 | 3,804 | 51,244 | ||||||||||
|
Accumulated
amortisation:
|
|||||||||||||||
|
At 1 January
2007
|
— | 127 | 97 | 1,943 | 2,167 | ||||||||||
|
Currency
translation and other adjustments
|
— | 1 | 3 | 3 | 7 | ||||||||||
|
Disposals and
write-off of fully amortised assets
|
— | — | (1 | ) | (80 | ) | (81 | ) | |||||||
|
Charge for the
year
|
— | 110 | 124 | 425 | 659 | ||||||||||
|
At 31 December
2007
|
— | 238 | 223 | 2,291 | 2,752 | ||||||||||
|
Net book value
at 31 December 2007
|
42,369 | 1,967 | 2,643 | 1,513 | 48,492 | ||||||||||
|
2006
|
|||||||||||||||
|
Cost:
|
|||||||||||||||
|
At 1 January
2006
|
18,823 | 299 | 325 | 2,294 | 21,741 | ||||||||||
|
Currency
translation and other adjustments
|
(924 | ) | (34 | ) | (47 | ) | (1 | ) | (1,006 | ) | |||||
|
Additions
|
— | — | 19 | 382 | 401 | ||||||||||
|
Disposal of
subsidiaries
|
(10 | ) | — | (1 | ) | — | (11 | ) | |||||||
|
Disposals and
write-off of fully amortised assets
|
— | — | (21 | ) | (33 | ) | (54 | ) | |||||||
|
At 31 December
2006
|
17,889 | 265 | 275 | 2,642 | 21,071 | ||||||||||
|
Accumulated
amortisation:
|
|||||||||||||||
|
At 1 January
2006
|
— | 85 | 64 | 1,660 | 1,809 | ||||||||||
|
Currency
translation and other adjustments
|
— | (12 | ) | (7 | ) | — | (19 | ) | |||||||
|
Disposals and
write-off of fully amortised assets
|
— | — | — | (8 | ) | (8 | ) | ||||||||
|
Charge for the
year
|
— | 54 | 40 | 291 | 385 | ||||||||||
|
At 31 December
2006
|
— | 127 | 97 | 1,943 | 2,167 | ||||||||||
|
Net book value
at 31 December 2006
|
17,889 | 138 | 178 | 699 | 18,904 | ||||||||||
Impairment
review
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.
The
Group recognised goodwill of £23.3 billion following the preliminary allocation
of fair values since acquiring ABN AMRO on 17 October 2007 (Note 35). Subsequent
events have not significantly affected the assumptions and estimates supporting
the consortium’s investment decision and the Group has therefore concluded that
there is no impairment of the goodwill recognised at 31 December
2007.
Other CGUs where
goodwill is significant were as follows:
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.
The
goodwill allocated to Global Banking & Markets, UK 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% (2006 – 5%) and a discount rate of 11% (2006 – 10%)
was used. The recoverable amount of Citizens exceeds its carrying value by over
$5 billion. The profit growth rate would have to be approximately half the
projected rate to cause the value in use of the unit to equal its carrying
amount.
Notes on the accounts
continued
18
Property,
plant and equipment
|
Group
|
|||||||||||||||||||||
|
Investment
properties
|
Freehold
premises
|
Long
leasehold
premises
|
Short
leasehold
premises
|
Computers
and
other
equipment
|
Operating
lease
assets
|
Total
|
|||||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | £m | ||||||||||||||
|
Cost or
valuation:
|
|||||||||||||||||||||
|
At 1 January
2007
|
4,885 | 2,579 | 310 | 1,254 | 3,069 | 11,589 | 23,686 | ||||||||||||||
|
Currency
translation and other adjustments
|
96 | 65 | 1 | 11 | 12 | (10 | ) | 175 | |||||||||||||
|
Acquisition of
subsidiaries
|
— | 955 | — | 157 | 191 | 202 | 1,505 | ||||||||||||||
|
Reclassifications
|
3 | (4 | ) | 3 | 1 | (3 | ) | — | — | ||||||||||||
|
Additions
|
450 | 592 | 34 | 309 | 857 | 2,791 | 5,033 | ||||||||||||||
|
Transfers to
disposal groups
|
— | (4 | ) | (13 | ) | — | — | (422 | ) | (439 | ) | ||||||||||
|
Expenditure on
investment properties
|
41 | — | — | — | — | — | 41 | ||||||||||||||
|
Change in fair
value of investment properties
|
288 | — | — | — | — | — | 288 | ||||||||||||||
|
Disposals and
write-off of fully depreciated assets
|
(2,332 | ) | (533 | ) | (120 | ) | (44 | ) | (197 | ) | (2,713 | ) | (5,939 | ) | |||||||
|
At 31 December
2007
|
3,431 | 3,650 | 215 | 1,688 | 3,929 | 11,437 | 24,350 | ||||||||||||||
|
Accumulated
depreciation and amortisation:
|
|||||||||||||||||||||
|
At 1 January
2007
|
— | 446 | 96 | 374 | 1,670 | 2,680 | 5,266 | ||||||||||||||
|
Currency
translation and other adjustments
|
— | (4 | ) | — | (1 | ) | (1 | ) | 2 | (4 | ) | ||||||||||
|
Transfers to
disposal groups
|
— | — | — | — | — | (52 | ) | (52 | ) | ||||||||||||
|
Reclassifications
|
— | (2 | ) | 2 | — | — | — | — | |||||||||||||
|
Disposals and
write-off of fully depreciated assets
|
— | (122 | ) | (32 | ) | (25 | ) | (132 | ) | (610 | ) | (921 | ) | ||||||||
|
Charge for the
year
|
— | 73 | 8 | 88 | 415 | 727 | 1,311 | ||||||||||||||
|
At 31 December
2007
|
— | 391 | 74 | 436 | 1,952 | 2,747 | 5,600 | ||||||||||||||
|
Net book value
at 31 December 2007
|
3,431 | 3,259 | 141 | 1,252 | 1,977 | 8,690 | 18,750 | ||||||||||||||
|
2006
|
|||||||||||||||||||||
|
Cost or
valuation:
|
|||||||||||||||||||||
|
At 1 January
2006
|
4,347 | 2,681 | 338 | 1,045 | 3,310 | 11,569 | 23,290 | ||||||||||||||
|
Currency
translation and other adjustments
|
14 | (38 | ) | (1 | ) | (29 | ) | (98 | ) | (587 | ) | (739 | ) | ||||||||
|
Reclassifications
|
— | (6 | ) | (9 | ) | 12 | — | 3 | — | ||||||||||||
|
Additions
|
632 | 295 | 26 | 266 | 553 | 2,551 | 4,323 | ||||||||||||||
|
Expenditure on
investment properties
|
16 | — | — | — | — | — | 16 | ||||||||||||||
|
Change in fair
value of investment properties
|
486 | — | — | — | — | — | 486 | ||||||||||||||
|
Disposals and
write-off of fully depreciated assets
|
(610 | ) | (353 | ) | (44 | ) | (40 | ) | (693 | ) | (1,947 | ) | (3,687 | ) | |||||||
|
Disposals of
subsidiaries
|
— | — | — | — | (3 | ) | — | (3 | ) | ||||||||||||
|
At 31 December
2006
|
4,885 | 2,579 | 310 | 1,254 | 3,069 | 11,589 | 23,686 | ||||||||||||||
|
Accumulated
depreciation and amortisation:
|
|||||||||||||||||||||
|
At 1 January
2006
|
— | 390 | 121 | 319 | 1,891 | 2,516 | 5,237 | ||||||||||||||
|
Currency
translation and other adjustments
|
— | (2 | ) | — | (11 | ) | (41 | ) | (95 | ) | (149 | ) | |||||||||
|
Reclassifications
|
— | 4 | (7 | ) | 3 | — | — | — | |||||||||||||
|
Disposals and
write-off of fully depreciated assets
|
— | (5 | ) | (26 | ) | (15 | ) | (539 | ) | (528 | ) | (1,113 | ) | ||||||||
|
Disposals of
subsidiaries
|
— | — | — | — | (2 | ) | — | (2 | ) | ||||||||||||
|
Charge for the
year
|
— | 59 | 8 | 78 | 361 | 787 | 1,293 | ||||||||||||||
|
At 31 December
2006
|
— | 446 | 96 | 374 | 1,670 | 2,680 | 5,266 | ||||||||||||||
|
Net book value
at 31 December 2006
|
4,885 | 2,133 | 214 | 880 | 1,399 | 8,909 | 18,420 | ||||||||||||||
Investment
properties are valued to reflect fair value, that is, the market value of the
Group’s interest at the reporting date excluding any special terms or
circumstances relating to the use or financing of the property and transaction
costs that would be incurred in making a sale. Observed market data such as
rental yield, replacement cost and useful life, reflect relatively few
transactions involving property that, necessarily, is not identical to property
owned by the Group.
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.
The
fair value of investment properties includes £234 million (2006 – £451 million)
of appreciation since purchase.
Rental income from
investment properties was £300 million (2006 – £278 million; 2005 – £250
million). Direct operating expenses of investment properties were £49 million
(2006 –£54 million; 2005 – £61 million).
Property, plant and
equipment, excluding investment properties, include £717 million (2006 – £607
million) assets in the course of construction.
Freehold and long
leasehold properties with a net book value of £451 million (2006 – £164 million;
2005 – £63 million) were sold subject to operating leases.
19
Prepayments,
accrued income and other assets
|
Group
|
Company
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
| £m | £m | £m | £m | |||||||||
|
Prepayments
|
2,187 | 946 | — | — | ||||||||
|
Accrued
income
|
1,214 | 668 | — | — | ||||||||
|
Deferred
expenses
|
385 | 367 | — | — | ||||||||
|
Deferred tax
asset
|
2,944 | 156 | — | 3 | ||||||||
|
Pension
schemes in net surplus
|
836 | — | — | — | ||||||||
|
Other
assets
|
11,500 | 5,999 | 127 | — | ||||||||
| 19,066 | 8,136 | 127 | 3 | |||||||||
Notes on the accounts
continued
20
Settlement
balances and short positions
|
Group
|
||||||
|
2007
|
2006
|
|||||
| £m | £m | |||||
|
Settlement
balances (amortised cost)
|
17,520 | 5,667 | ||||
|
Short
positions (held-for-trading):
|
||||||
|
Debt
securities – Government
|
40,376 | 36,901 | ||||
|
– Other
issuers
|
25,310 | 5,843 | ||||
|
Treasury and
other eligible bills
|
672 | 654 | ||||
|
Equity
shares
|
7,143 | 411 | ||||
| 91,021 | 49,476 | |||||
21
Accruals,
deferred income and other liabilities
|
Group
|
Company
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
| £m | £m | £m | £m | |||||||||
|
Notes in
circulation
|
1,545 | 1,453 | — | — | ||||||||
|
Current
taxation
|
1,630 | 789 | — | — | ||||||||
|
Accruals
|
8,193 | 4,412 | — | — | ||||||||
|
Deferred
income
|
6,289 | 3,377 | — | — | ||||||||
|
Other
liabilities
(1)
|
16,367 | 5,629 | 8 | 15 | ||||||||
| 34,024 | 15,660 | 8 | 15 | |||||||||
|
Note:
|
|
|
(1)
|
Other
liabilities include £9 million (2006 – £10 million) in respect of
share-based compensation.
|
Included in other
liabilities are provisions for liabilities and charges as follows:
|
Group
|
||||
| £m | ||||
|
At 1 January
2007
|
200 | |||
|
Currency
translation and other movements
|
(5 | ) | ||
|
Acquisition of
subsidiaries
|
39 | |||
|
Charge to
income statement
|
184 | |||
|
Releases to
income statement
|
(39 | ) | ||
|
Provisions
utilised
|
(211 | ) | ||
|
At 31 December
2007
|
168 | |||
|
Note:
|
|
|
(1)
|
Comprises
property provisions and other provisions arising in the normal course of
business.
|
22
Deferred
taxation
Provision for
deferred taxation has been made as follows:
|
Group
|
Company
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
| £m | £m | £m | £m | |||||||||
|
Deferred tax
liability
|
5,510 | 3,264 | 3 | — | ||||||||
|
Deferred tax
asset (included in Prepayments, accrued income and other assets, Note
19)
|
(2,944 | ) | (156 | ) | — | (3 | ) | |||||
|
Net deferred
tax
|
2,566 | 3,108 | 3 | (3 | ) | |||||||
|
Group
|
|||||||||||||||||||||||||||||||||
|
Pension
|
Accelerated
capital
allowances
|
Provisions
|
Deferred
gains
|
IAS
transition
|
Fair
value
of
financial
instruments
|
Intangibles
|
Cash
flow
hedging
|
Tax
losses
carried
forward
|
Other
|
Total
|
|||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||
|
At 1 January
2006
|
(1,182 | ) | 3,653 | (664 | ) | 121 | (327 | ) | (108 | ) | 148 | (45 | ) | — | (57 | ) | 1,539 | ||||||||||||||||
|
Charge to
income statement
|
57 | 254 | 360 | 131 | (365 | ) | (34 | ) | 127 | (1 | ) | — | (30 | ) | 499 | ||||||||||||||||||
|
Charge to
equity directly
|
519 | — | — | 666 | (2 | ) | 2 | — | (41 | ) | — | (14 | ) | 1,130 | |||||||||||||||||||
|
Other
|
(22 | ) | (89 | ) | 20 | 4 | 25 | 8 | (20 | ) | (10 | ) | — | 24 | (60 | ) | |||||||||||||||||
|
At 1 January
2007
|
(628 | ) | 3,818 | (284 | ) | 922 | (669 | ) | (132 | ) | 255 | (97 | ) | — | (77 | ) | 3,108 | ||||||||||||||||
|
Acquisition/(disposals)
|
|||||||||||||||||||||||||||||||||
|
of
subsidiaries
|
(35 | ) | (284 | ) | (539 | ) | 50 | — | (184 | ) | 1,076 | — | (867 | ) | 83 | (700 | ) | ||||||||||||||||
|
Charge to
income statement
|
43 | (138 | ) | (44 | ) | (141 | ) | 46 | 72 | (65 | ) | (48 | ) | (57 | ) | 99 | (233 | ) | |||||||||||||||
|
Charge to
equity directly
|
660 | — | — | (187 | ) | — | 17 | — | (107 | ) | — | 43 | 426 | ||||||||||||||||||||
|
Other
|
(2 | ) | (12 | ) | (19 | ) | (38 | ) | 4 | (6 | ) | 28 | — | 20 | (10 | ) | (35 | ) | |||||||||||||||
|
At 31 December
2007
|
38 | 3,384 | (886 | ) | 606 | (619 | ) | (233 | ) | 1,294 | (252 | ) | (904 | ) | 138 | 2,566 | |||||||||||||||||
|
Company
*
|
|||
| £m | |||
|
At 1 January
2006, 31 December 2006 and 1 January 2007
|
(3 | ) | |
|
Charge to
equity directly
|
6 | ||
|
At 31 December
2007
|
3 | ||
*
All relates to hedging.
|
Notes:
|
|
|
(1)
|
Deferred tax
assets of £687 million (2006 – £86 million) have not been recognised in
respect of tax losses carried forward of £2,043 million (2006 – £254
million) as it is not considered probable that taxable profits will arise
against which they could be utilised. Of these losses, £75 million will
expire within one year, £238 million within five years and £1,376 million
thereafter. The balance of tax losses carried forward has no time
limit.
|
|
(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.
|
Notes on the accounts
continued
23
Insurance
liabilities
|
Group
|
||||||
|
2007
|
2006
|
|||||
| £m | £m | |||||
|
Life assurance
business:
|
||||||
|
Unit linked
insurance contracts
|
364 | 379 | ||||
|
Other linked
insurance contracts
|
4,034 | 1,334 | ||||
|
Other
insurance contracts
|
298 | 496 | ||||
| 4,696 | 2,209 | |||||
|
General
insurance business
|
5,466 | 5,247 | ||||
| 10,162 | 7,456 | |||||
General
insurance business
(i)
Claims and loss adjustment expenses
|
Group
|
|||||||||
|
Gross
|
Reinsurance
|
Net
|
|||||||
| £m | £m | £m | |||||||
|
Notified
claims
|
3,465 | (208 | ) | 3,257 | |||||
|
Incurred but
not reported
|
1,448 | (140 | ) | 1,308 | |||||
|
At 1 January
2006
|
4,913 | (348 | ) | 4,565 | |||||
|
Cash paid for
claims settled in the year
|
(3,687 | ) | 106 | (3,581 | ) | ||||
|
Increase/(decrease)
in liabilities
|
|||||||||
|
– arising from
current year claims
|
4,267 | (53 | ) | 4,214 | |||||
|
– arising from
prior year claims
|
(242 | ) | 4 | (238 | ) | ||||
|
Net exchange
differences
|
(4 | ) | — | (4 | ) | ||||
|
At 31 December
2006
|
5,247 | (291 | ) | 4,956 | |||||
|
Notified
claims
|
3,735 | (205 | ) | 3,530 | |||||
|
Incurred but
not reported
|
1,512 | (86 | ) | 1,426 | |||||
|
At 1 January
2007
|
5,247 | (291 | ) | 4,956 | |||||
|
Cash paid for
claims settled in the year
|
(3,876 | ) | 94 | (3,782 | ) | ||||
|
Increase/(decrease)
in liabilities
|
|||||||||
|
– arising from
current year claims
|
4,643 | (49 | ) | 4,594 | |||||
|
– arising from
prior year claims
|
(573 | ) | (20 | ) | (593 | ) | |||
|
Net exchange
differences
|
25 | 3 | 28 | ||||||
|
At 31 December
2007
|
5,466 | (263 | ) | 5,203 | |||||
|
Notified
claims
|
3,894 | (264 | ) | 3,630 | |||||
|
Incurred but
not reported
|
1,572 | 1 | 1,573 | ||||||
|
At 31 December
2007
|
5,466 | (263 | ) | 5,203 | |||||
(ii) Provisions for
unearned premiums and unexpired short-term insurance risks
|
Group
|
|||||||||
|
Gross
|
Reinsurance
|
Net
|
|||||||
|
Unearned
premium provision
|
£m
|
£m | £m | ||||||
|
At 1 January
2006
|
2,883 | (27 | ) | 2,856 | |||||
|
Increase in
the year
|
— | (16 | ) | (16 | ) | ||||
|
Release in the
year
|
(33 | ) | — | (33 | ) | ||||
|
At 1 January
2007
|
2,850 | (43 | ) | 2,807 | |||||
|
Release in the
year
|
(98 | ) | 2 | (96 | ) | ||||
|
At 31 December
2007
|
2,752 | (41 | ) | 2,711 | |||||
|
Group
|
||||||
|
2007
|
2006
|
|||||
|
Gross
performance of life business (life contracts)
|
£m | £m | ||||
|
Opening net
assets
|
579 | 707 | ||||
|
Transfer to
shareholders funds
|
— | (185 | ) | |||
|
Profit from
existing business:
|
||||||
|
Expected
return
|
35 | 26 | ||||
|
Experience
variances
|
(23 | ) | (3 | ) | ||
| 12 | 23 | |||||
|
New business
contribution
(1)
|
5 | 12 | ||||
|
Operating
assumption changes
|
6 | 5 | ||||
|
Investment
return variances
|
(14 | ) | 1 | |||
|
Economic
assumption changes
|
— | (1 | ) | |||
|
Other
|
16 | 17 | ||||
|
Closing net
assets
|
604 | 579 | ||||
|
Note:
|
|
|
(1)
|
New business
contribution represents the present value of future profits on new
insurance contract business written during the
year.
|
|
Group
|
||||||
|
Life
|
Investment
|
|||||
|
contracts
|
contracts
|
|||||
|
Movement in
provision for liabilities under life contracts and under linked and other
investment contracts
|
£m | £m | ||||
|
At 1 January
2006
|
2,299 | 2,296 | ||||
|
Premiums
received
|
588 | 83 | ||||
|
Fees and
expenses
|
(30 | ) | (19 | ) | ||
|
Investment
return
|
235 | 182 | ||||
|
Actuarial
adjustments
|
(454 | ) | — | |||
|
Account
balances paid on surrender and other terminations in the
year
|
(429 | ) | (296 | ) | ||
|
At 1 January
2007
|
2,209 | 2,246 | ||||
|
Acquisition of
subsidiaries
|
2,275 | 3,245 | ||||
|
Premiums
received
|
784 | 140 | ||||
|
Fees and
expenses
|
(30 | ) | (25 | ) | ||
|
Investment
return
|
251 | 93 | ||||
|
Actuarial
adjustments
|
(493 | ) | — | |||
|
Account
balances paid on surrender and other terminations in the
year
|
(468 | ) | (320 | ) | ||
|
Exchange and
other adjustments
|
168 | 176 | ||||
|
At 31 December
2007
|
4,696 | 5,555 | ||||
Investment contracts
are presented within customer deposits.
Changes in
assumptions during the year were not material to the profit
recognised.
|
Group
|
||||||
|
2007
|
2006
|
|||||
|
Assets backing
linked liabilities
|
£m | £m | ||||
|
Debt
securities
|
2,899 | 1,540 | ||||
|
Equity
securities
|
6,863 | 2,243 | ||||
|
Cash and cash
equivalents
|
68 | 76 | ||||
|
The associated
liabilities are:
|
||||||
|
Linked
contracts classified as insurance contracts
|
4,398 | 1,713 | ||||
|
Linked
contracts classified as investment contracts
|
5,432 | 2,146 | ||||
There are no options
and guarantees relating to life assurance contracts that could in aggregate have
a material effect on the amount, timing and uncertainty of the Group’s future
cash flows.
Notes on the accounts
continued
24
Subordinated
liabilities
|
Group
|
Company
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
| £m | £m | £m | £m | |||||||||
|
Dated loan
capital
|
23,065 | 13,772 | 5,585 | 5,531 | ||||||||
|
Undated loan
capital
|
9,866 | 9,555 | 781 | 834 | ||||||||
|
Preference
shares
|
1,686 | 2,277 | 1,377 | 1,829 | ||||||||
|
Trust
preferred securities
|
3,362 | 2,050 | — | — | ||||||||
| 37,979 | 27,654 | 7,743 | 8,194 | |||||||||
Certain preference
shares issued by the company are classified as liabilities; these securities
remain subject to the capital maintenance rules of the Companies Act
1985.
The
following tables analyse the remaining maturity of subordinated liabilities by
(1) the final redemption date; and (2) the next callable date.
|
Group
|
||||||||||||||||||||||
|
2008
|
2009
|
2010-2012 | 2013-2017 |
Thereafter
|
Perpetual
|
Total
|
||||||||||||||||
|
2007 – final
redemption
|
£m | £m | £m | £m | £m | £m | £m | |||||||||||||||
|
Sterling
|
194 | — | 34 | 1,405 | 389 | 5,818 | 7,840 | |||||||||||||||
|
US$
|
874 | 1,505 | 620 | 5,477 | 743 | 3,985 | 13,204 | |||||||||||||||
|
Euro
|
764 | 1,312 | 1,405 | 5,711 | 1,674 | 3,164 | 14,030 | |||||||||||||||
|
Other
|
35 | — | 6 | 2,076 | 325 | 463 | 2,905 | |||||||||||||||
|
Total
|
1,867 | 2,817 | 2,065 | 14,669 | 3,131 | 13,430 | 37,979 | |||||||||||||||
|
Group
|
||||||||||||||||||||||||
|
Currently
|
2008
|
2009
|
2010-2012 | 2013-2017 |
Thereafter
|
Perpetual
|
Total
|
|||||||||||||||||
|
2007 – call
date
|
£m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||
|
Sterling
|
— | 194 | — | 1,497 | 2,456 | 3,527 | 166 | 7,840 | ||||||||||||||||
|
US$
|
1,347 | 1,463 | 2,550 | 4,485 | 1,678 | 1,681 | — | 13,204 | ||||||||||||||||
|
Euro
|
— | 1,612 | 1,685 | 4,992 | 5,091 | 611 | 39 | 14,030 | ||||||||||||||||
|
Other
|
— | 35 | 431 | 843 | 1,468 | 128 | — | 2,905 | ||||||||||||||||
|
Total
|
1,347 | 3,304 | 4,666 | 11,817 | 10,693 | 5,947 | 205 | 37,979 | ||||||||||||||||
|
Group
|
|||||||||||||||||||||||
|
2007
|
2008
|
2009-2011 | 2012-2016 |
Thereafter
|
Perpetual
|
Total
|
|||||||||||||||||
|
2006 – final
redemption
|
£m | £m | £m | £m | £m | £m | £m | ||||||||||||||||
|
Sterling
|
352 | — | — | 772 | 391 | 5,960 | 7,475 | ||||||||||||||||
|
US$
|
112 | 87 | 1,123 | 3,938 | 229 | 4,893 | 10,382 | ||||||||||||||||
|
Euro
|
187 | 173 | 955 | 2,656 | 1,578 | 2,381 | 7,930 | ||||||||||||||||
|
Other
|
24 | — | — | 984 | 445 | 414 | 1,867 | ||||||||||||||||
|
Total
|
675 | 260 | 2,078 | 8,350 | 2,643 | 13,648 | 27,654 | ||||||||||||||||
|
Group
|
||||||||||||||||||||||||
|
Currently
|
2007
|
2008
|
2009–2011 | 2012–2016 |
Thereafter
|
Perpetual
|
Total
|
|||||||||||||||||
|
2006 – call
date
|
£m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||
|
Sterling
|
— | 502 | — | 1,103 | 2,161 | 3,543 | 166 | 7,475 | ||||||||||||||||
|
US$
|
1,843 | 1,200 | 469 | 3,835 | 1,859 | 1,176 | — | 10,382 | ||||||||||||||||
|
Euro
|
— | 274 | 948 | 1,634 | 4,473 | 565 | 36 | 7,930 | ||||||||||||||||
|
Other
|
— | 24 | — | 701 | 1,043 | 99 | — | 1,867 | ||||||||||||||||
|
Total
|
1,843 | 2,000 | 1,417 | 7,273 | 9,536 | 5,383 | 202 | 27,654 | ||||||||||||||||
|
Company
|
||||||||||||||||||||||
|
2008
|
2009
|
2010-2012 | 2013-2017 |
Thereafter
|
Perpetual
|
Total
|
||||||||||||||||
|
2007 – final
redemption
|
£m | £m | £m | £m | £m | £m | £m | |||||||||||||||
|
Sterling
|
13 | — | — | — | 399 | 199 | 611 | |||||||||||||||
|
US$
|
61 | 199 | 148 | 1,204 | 2,259 | 1,935 | 5,806 | |||||||||||||||
|
Euro
|
45 | — | — | — | 1,281 | — | 1,326 | |||||||||||||||
|
Total
|
119 | 199 | 148 | 1,204 | 3,939 | 2,134 | 7,743 | |||||||||||||||
|
Company
|
||||||||||||||||||||||||
|
Currently
|
2008
|
2009
|
2010-2012 | 2013-2017 |
Thereafter
|
Perpetual
|
Total
|
|||||||||||||||||
|
2007 – call
date
|
£m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||
|
Sterling
|
— | 13 | — | 198 | 399 | — | 1 | 611 | ||||||||||||||||
|
US$
|
425 | 435 | 620 | 643 | 2,594 | 1,089 | — | 5,806 | ||||||||||||||||
|
Euro
|
— | 45 | — | 914 | 367 | — | — | 1,326 | ||||||||||||||||
|
Total
|
425 | 493 | 620 | 1,755 | 3,360 | 1,089 | 1 | 7,743 | ||||||||||||||||
|
Company
|
|||||||||||||||||||||||
|
2007
|
2008
|
2009-2011 | 2012-2016 |
Thereafter
|
Perpetual
|
Total
|
|||||||||||||||||
|
2006 – final
redemption
|
£m | £m | £m | £m | £m | £m | £m | ||||||||||||||||
|
Sterling
|
— | — | — | — | 399 | 199 | 598 | ||||||||||||||||
|
US$
|
63 | — | 355 | 1,227 | 2,301 | 2,440 | 6,386 | ||||||||||||||||
|
Euro
|
41 | — | — | — | 1,169 | — | 1,210 | ||||||||||||||||
|
Total
|
104 | — | 355 | 1,227 | 3,869 | 2,639 | 8,194 | ||||||||||||||||
|
Company
|
||||||||||||||||||||||||
|
Currently
|
2007
|
2008
|
2009–2011 | 2012–2016 |
Thereafter
|
Perpetual
|
Total
|
|||||||||||||||||
|
2006 – call
date
|
£m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||
|
Sterling
|
— | — | — | 198 | — | 399 | 1 | 598 | ||||||||||||||||
|
US$
|
762 | 203 | 380 | 1,287 | 2,643 | 1,111 | — | 6,386 | ||||||||||||||||
|
Euro
|
— | 41 | — | — | 1,169 | — | — | 1,210 | ||||||||||||||||
|
Total
|
762 | 244 | 380 | 1,485 | 3,812 | 1,510 | 1 | 8,194 | ||||||||||||||||
Notes on the accounts
continued
24
Subordinated liabilities
(continued)
Dated
loan capital
|
2007
|
2006
|
|||||
| £m | £m | |||||
|
The
company
|
||||||
|
US$400 million
6.4% subordinated notes 2009
(1)
|
202 | 206 | ||||
|
US$300 million
6.375% subordinated notes 2011
(1)
|
163 | 163 | ||||
|
US$750 million
5% subordinated notes 2013
(1)
|
382 | 375 | ||||
|
US$750 million
5% subordinated notes 2014
(1)
|
386 | 373 | ||||
|
US$250 million
5% subordinated notes 2014
(1)
|
123 | 125 | ||||
|
US$675 million
5.05% subordinated notes 2015
(1)
|
357 | 351 | ||||
|
US$350 million
4.7% subordinated notes 2018
(1)
|
173 | 169 | ||||
| 1,786 | * | 1,762 | * | |||
|
The
Royal Bank of Scotland plc
|
||||||
|
£150 million
8.375% subordinated notes 2007 (redeemed January 2007)
|
— | 162 | ||||
|
€255 million
5.25% subordinated notes 2008
|
192 | 177 | ||||
|
€300 million
4.875% subordinated notes 2009
|
228 | 212 | ||||
|
US$350 million
floating rate subordinated notes 2012 (redeemed July 2007)
|
— | 184 | ||||
|
US$500 million
floating rate subordinated notes 2012 (redeemed July 2007)
|
— | 254 | ||||
|
€130 million
floating rate subordinated notes 2012 (redeemed July 2007)
|
— | 88 | ||||
|
€1,000 million
floating rate subordinated notes 2013 (callable October
2008)
|
744 | 677 | ||||
|
US$50 million
floating rate subordinated notes 2013
|
26 | 25 | ||||
|
€1,000 million
6% subordinated notes 2013
|
790 | 745 | ||||
|
€500 million
6% subordinated notes 2013
|
374 | 342 | ||||
|
£150 million
10.5% subordinated bonds 2013
(2)
|
169 | 168 | ||||
|
US$1,250
million floating rate subordinated notes 2014 (callable July
2009)
|
630 | 643 | ||||
|
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 | ||||
|
£250 million
9.625% subordinated bonds 2015
|
286 | 287 | ||||
|
US$750 million
floating rate subordinated notes 2015 (callable September
2010)
|
374 | 381 | ||||
|
€750 million
floating rate subordinated notes 2015
|
564 | 531 | ||||
|
CHF400 million
2.375% subordinated notes 2015
|
166 | 160 | ||||
|
CHF100 million
2.375% subordinated notes 2015
|
41 | 43 | ||||
|
CHF200 million
2.375% subordinated notes 2015
|
86 | 81 | ||||
|
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 | ||||
|
€500 million
4.5% subordinated 2016 (callable January 2011)
|
379 | 350 | ||||
|
CHF200 million
2.75% subordinated notes 2017 (callable December 2012)
|
89 | 84 | ||||
|
€100 million
floating rate subordinated notes 2017
|
73 | 67 | ||||
|
€500 million
floating rate subordinated notes 2017 (callable June 2012)
|
371 | 337 | ||||
|
€750 million
4.35% subordinated notes 2017 (callable October 2017)
|
548 | 502 | ||||
|
AUD450 million
6.5% subordinated notes 2017 (callable February 2012)
|
202 | 184 | ||||
|
AUD450 million
floating rate subordinated notes 2017 (callable February
2012)
|
199 | 182 | ||||
|
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 | — | ||||
|
National
Westminster Bank Plc
|
||||||
|
US$1,000
million 7.375% subordinated notes 2009
|
507 | 516 | ||||
|
€600 million
6% subordinated notes 2010
|
474 | 440 | ||||
|
€500 million
5.125% subordinated notes 2011
|
376 | 343 | ||||
|
£300 million
7.875% subordinated notes 2015
|
349 | 350 | ||||
|
£300 million
6.5% subordinated notes 2021
|
330 | 332 | ||||
|
Charter
One Financial, Inc
|
||||||
|
US$400 million
6.375% subordinated notes 2012
|
212 | 218 | ||||
|
Greenwich
Capital Holdings, Inc
|
||||||
|
US$500 million
subordinated loan capital 2010 floating rate notes (callable on any
interest payment date)
|
249 | 256 | ||||
|
US$170 million
subordinated loan capital floating rate notes 2008
|
85 | 87 | ||||
|
US$100 million
5.575% senior subordinated revolving credit 2009 (issued June
2007)
|
50 | — | ||||
|
First
Active Plc
|
||||||
|
US$35 million
7.24% subordinated bonds 2012 (redeemed December 2007)
|
— | 22 | ||||
|
£60 million
6.375% subordinated bonds 2018 (callable April 2013)
|
65 | 65 | ||||
|
Other minority
interest subordinated issues
|
16 | 24 | ||||
|
ABN
AMRO and subsidiaries
|
||||||
|
€113 million
7.50% subordinated notes 2008
|
83 | — | ||||
|
€182 million
6.00% subordinated notes 2009
|
132 | — | ||||
|
€182 million
6.13% subordinated notes 2009
|
127 | — | ||||
Dated loan capital
(continued)
|
2007
|
2006
|
|||||
| £m | £m | |||||
|
€1,150 million
4.63% subordinated notes 2009
|
848 | — | ||||
|
€250 million
4.70% CMS linked subordinated notes 2019
|
131 | — | ||||
|
€800 million
6.25% subordinated notes 2010
|
598 | — | ||||
|
€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 | — | ||||
|
€13 million
zero coupon subordinated notes 2029 (callable June 2009)
|
2 | — | ||||
|
€82 million
floating rate subordinated notes 2017
|
55 | — | ||||
|
€103 million
floating rate subordinated lower tier 2 notes 2020
|
68 | — | ||||
|
€170 million
floating rate sinkable subordinated notes 2041
|
184 | — | ||||
|
€15 million
CMS linked floating rate subordinated lower tier 2 notes
2020
|
11 | — | ||||
|
€1,500 million
floating rate Bermudan callable subordinated lower tier 2 notes 2015
(callable June 2010)
|
1,087 | — | ||||
|
€5 million
floating rate Bermudan callable subordinated lower tier 2 notes 2015
(callable October 2010)
|
4 | — | ||||
|
€65 million
floating rate Bermudan callable subordinated lower tier 2 notes 2015
(callable October 2010)
|
48 | — | ||||
|
US$12 million
floating rate subordinated notes 2008
|
6 | — | ||||
|
US$12 million
floating rate subordinated notes 2008
|
6 | — | ||||
|
US$165 million
6.14% subordinated notes 2019
|
94 | — | ||||
|
US$72 million
5.98% subordinated notes 2019
|
7 | — | ||||
|
US$500 million
4.65% subordinated notes 2018
|
214 | — | ||||
|
US$500 million
floating rate Bermudan callable subordinated notes 2013 (callable
September 2008)
|
232 | — | ||||
|
US$1,500
million floating rate Bermudan callable subordinated notes 2015 (callable
March 2010)
|
717 | — | ||||
|
US$100 million
floating rate Bermudan callable subordinated lower tier 2 notes 2015
(callable October 2010)
|
50 | — | ||||
|
US$36 million
floating rate Bermudan callable subordinated lower tier 2 notes 2015
(callable October 2010)
|
18 | — | ||||
|
US$1,000
million floating rate Bermudan callable subordinated lower tier 2 notes
2017 (callable January 2012)
|
479 | — | ||||
|
AUD575 million
6.50% Bermudan callable subordinated lower tier 2 notes 2018 (callable May
2013)
|
231 | — | ||||
|
AUD175 million
7.46% Bermudan callable subordinated lower tier 2 notes 2018 (callable May
2013)
|
73 | — | ||||
|
€26 million
7.42% subordinated notes 2016
|
20 | — | ||||
|
€7 million
7.38% subordinated notes 2016
|
6 | — | ||||
|
€256 million
5.25% subordinated notes 2008
|
190 | — | ||||
|
€13 million
floating rate subordinated notes 2008
|
9 | — | ||||
|
£42 million
8.18% subordinated notes 2010
|
19 | — | ||||
|
£25 million
9.18% amortising MTN subordinated lower tier 2 notes 2011
|
15 | — | ||||
|
£750 million
5% Bermudan callable subordinated upper tier 2 notes 2016
|
642 | — | ||||
|
US$250 million
7.75% subordinated notes 2023
|
127 | — | ||||
|
US$150 million
7.13% subordinated notes 2093
|
76 | — | ||||
|
US$250 million
7.00% subordinated notes 2008
|
127 | — | ||||
|
US$68 million
floating rate subordinated notes 2009
|
34 | — | ||||
|
US$12 million
floating rate subordinated notes 2009
|
6 | — | ||||
|
BRL50 million
floating rate subordinated notes 2013
|
14 | — | ||||
|
BRL250 million
floating rate subordinated notes 2013
|
71 | — | ||||
|
BRL250 million
floating rate subordinated notes 2014
|
71 | — | ||||
|
BRL885 million
floating rate subordinated notes 2014
|
251 | — | ||||
|
BRL300 million
floating rate subordinated notes 2014
|
85 | — | ||||
|
PKR0.80
million floating rate subordinated notes 2012
|
6 | — | ||||
|
MYR200 million
subordinated notes 2017
|
30 | — | ||||
|
TRY60 million
subordinated notes
|
25 | — | ||||
| 23,065 | 13,772 | |||||
|
*
|
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).
|
|
Notes:
|
|
|
(1)
|
On-lent to The
Royal Bank of Scotland plc on a subordinated
basis.
|
|
(2)
|
Unconditionally
guaranteed by the company.
|
|
(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.
|
|
(4)
|
Except as
stated above, claims in respect of the Group’s dated loan capital are
subordinated to the claims of other creditors. None of the Group’s dated
loan capital is secured.
|
|
(5)
|
Interest on
all floating rate subordinated notes is calculated by reference to market
rates.
|
Notes on the accounts
continued
24
Subordinated liabilities
(continued)
Undated
loan capital
|
2007
|
2006
|
|||||
| £m | £m | |||||
|
The
company
|
||||||
|
US$350 million
undated floating rate primary capital notes (callable on any interest
payment date)
(1)
|
175 | 178 | ||||
|
US$75 million
floating rate perpetual capital securities (redeemed October
2007)
|
— | 38 | ||||
|
US$1,200
million 7.648% perpetual regulatory tier one securities (callable
September 2031)
(1,
2)
|
606 | 618 | ||||
| 781 | 834 | |||||
|
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 | ||||
|
CAD700 million
5.37% fixed rate undated subordinated notes (callable May
2016)
|
363 | 317 | ||||
|
National
Westminster Bank Plc
|
||||||
|
US$500 million
primary capital floating rate notes, Series A (callable on any interest
payment date)
|
251 | 256 | ||||
|
US$500 million
primary capital floating rate notes, Series B (callable on any interest
payment date)
|
256 | 267 | ||||
|
US$500 million
primary capital floating rate notes, Series C (callable on any interest
payment date)
|
255 | 254 | ||||
|
US$500 million
7.75% reset subordinated notes (redeemed October 2007)
|
— | 262 | ||||
|
€400 million
6.625% fixed/floating rate undated subordinated notes (callable October
2009)
|
303 | 280 | ||||
|
€100 million
floating rate undated step-up notes (callable October
2009)
|
74 | 68 | ||||
|
£325 million
7.625% undated subordinated step-up notes (callable January
2010)
|
357 | 359 | ||||
|
£200 million
7.125% undated subordinated step-up notes (callable October
2022)
|
205 | 205 | ||||
|
£200 million
11.5% undated subordinated notes (callable December 2022)
(4)
|
269 | 272 | ||||
|
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 | ||||
|
ABN
AMRO and subsidiaries
|
||||||
|
€9 million
4.65% perpetual convertible financing preference shares (callable January
2011)
|
7 | — | ||||
|
€1,000 million
4.310% perpetual Bermudan callable subordinated tier 1 notes (callable
March 2016)
|
598 | — | ||||
| 9,866 | 9,555 | |||||
|
Notes:
|
|
|
(1)
|
On-lent to The
Royal Bank of Scotland plc on a subordinated
basis.
|
|
(2)
|
The company
can satisfy interest payment obligations by issuing ordinary shares to
appointed Trustees sufficient to enable them, on selling these shares, to
settle the interest payment.
|
|
(3)
|
Guaranteed by
the company.
|
|
(4)
|
Exchangeable
at the option of the issuer into 200 million 8.392% (gross) non-cumulative
preference shares of £1 each of National Westminster Bank Plc at any
time.
|
|
(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.
|
|
(6)
|
In the event
of certain changes in tax laws, undated loan capital issues may be
redeemed in whole, but not in part, at the option of the Group, at the
principal amount thereof plus accrued interest, subject to prior
regulatory approval.
|
|
(7)
|
Interest on
all floating rate subordinated notes is calculated by reference to market
rates.
|
Preference
shares
|
2007
|
2006
|
|||||
| £m | £m | |||||
|
The
company
|
||||||
|
Non-cumulative
preference shares of US$0.01
(1)
|
||||||
|
Series E
US$200 million 8.1% (redeemed January 2007)
|
— | 102 | ||||
|
Series F
US$200 million 7.65% (redeemable at option of issuer)
|
100 | 102 | ||||
|
Series G
US$250 million 7.4% (redeemed January 2007)
|
— | 126 | ||||
|
Series H
US$300 million 7.25% (redeemable at option of issuer)
|
150 | 153 | ||||
|
Series K
US$400 million 7.875% (redeemed January 2007)
|
— | 203 | ||||
|
Series L
US$850 million 5.75% (redeemable September 2009)
|
421 | 429 | ||||
|
Non-cumulative
convertible preference shares of US$0.01
(1)
|
||||||
|
Series 1
US$1,000 million 9.118% (redeemable March 2010)
|
510 | 515 | ||||
|
Non-cumulative
convertible preference shares of £0.01
(1)
|
||||||
|
Series 1 £200
million 7.387% (redeemable December 2010)
|
201 | 200 | ||||
|
Cumulative
preference shares of £1
|
||||||
|
£0.5 million
11% (non-redeemable)
|
1 | 1 | ||||
|
£0.4 million
5.5% (non-redeemable)
|
— | — | ||||
| 1,383 | 1,831 | |||||
|
National
Westminster Bank Plc
|
||||||
|
Non-cumulative
preference shares of £1
|
||||||
|
Series A £140
million 9% (non-redeemable)
|
143 | 142 | ||||
|
Non-cumulative
preference shares of US$25
|
||||||
|
Series B
US$250 million 7.8752% (redeemed January 2007)
|
— | 141 | ||||
|
Series C
US$300 million 7.7628%
(2)
|
160 | 163 | ||||
| 1,686 | 2,277 | |||||
|
Notes:
|
|
|
(1)
|
Further
details of the contractual terms of the preference shares are given in
Note 26 on page
161.
|
|
(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.
|
Trust
preferred securities
|
2007
|
2006
|
||||||
| £m | £m | ||||||
|
€1,250 million
6.467% (redeemable June 2012)
(1)
|
979 | 918 | |||||
|
US$750 million
6.8% (redeemable March 2008)
(1)
|
374 | 382 | |||||
|
US$850 million
4.709% (redeemable July 2013)
(1)
|
421 | 409 | |||||
|
US$650 million
6.425% (redeemable January 2034)
(1)
|
344 | 341 | |||||
|
ABN
AMRO and subsidiaries
|
|||||||
|
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 | — | |||||
| 3,362 | 2,050 | ||||||
|
Note:
|
|
|
(1)
|
The trust
preferred securities issued by subsidiaries have no maturity date and are
not redeemable at the option of the holders at any time. These securities
may with the consent of the UK Financial Services Authority be redeemed,
by the issuer on the dates specified above or on any interest payment date
thereafter. They may also be redeemed in whole, but not in part, upon the
occurrence of certain tax and regulatory events. The company classifies
its obligations to these subsidiaries as dated loan
capital.
|
Notes on the accounts
continued
25
Minority
interests
|
Group
|
||||||
|
2007
|
2006
|
|||||
| £m | £m | |||||
|
At 1
January
|
5,263 | 2,109 | ||||
|
Currency
translation adjustments and other movements
|
1,834 | (297 | ) | |||
|
Acquisition of
ABN AMRO
|
32,245 | — | ||||
|
Profit
attributable to minority interests
|
163 | 104 | ||||
|
Dividends
paid
|
(121 | ) | (66 | ) | ||
|
(Losses)/gains
on available-for-sale securities, net of tax
|
(564 | ) | 2,140 | |||
|
Movements in
cash flow hedging reserves, net of tax
|
26 | — | ||||
|
Actuarial
gains recognised in retirement benefit schemes, net of tax
|
19 | — | ||||
|
Equity
raised
|
76 | 1,354 | ||||
|
Equity
withdrawn
|
(553 | ) | (81 | ) | ||
|
At 31
December
|
38,388 | 5,263 | ||||
|
Included in
minority interests are the following trust preferred securities
(1)
:
|
||||||
|
2007
|
2006
|
|||||
| £m | £m | |||||
|
US$950 million
5.512% (redeemable September 2014)
|
529 | 529 | ||||
|
US$1,000
million 3 month US$ LIBOR plus 0.80% (redeemable September
2014)
|
555 | 555 | ||||
|
€500 million
4.243% (redeemable January 2016)
|
337 | 337 | ||||
|
£400 million
5.6457% (redeemable June 2017)
|
400 | 400 | ||||
| 1,821 | 1,821 | |||||
|
Note:
|
|
|
(1)
|
The trust
preferred securities issued by subsidiaries have no maturity date and are
not redeemable at the option of the holders at any time. These securities
may, with the consent of the UK Financial Services Authority, be redeemed,
in whole or in part, by the issuer on the dates specified above or on any
interest payment date thereafter. They may also be redeemed in whole, but
not in part, upon the occurrence of certain tax and regulatory events. The
company classifies its obligations to these subsidiaries as dated loan
capital.
|
26
Share
capital
|
Allotted,
called up and fully paid
|
Authorised
|
||||||||||||||
|
1
January
|
Issued
|
31
December
|
31
December
|
31
December
|
|||||||||||
|
2007
|
during the
year
|
2007
|
2007
|
2006
|
|||||||||||
| £m | £m | £m | £m | £m | |||||||||||
|
Ordinary
shares of 25p
|
788 | 1,713 | 2,501 | 3,018 | 1,270 | ||||||||||
|
Non-voting
deferred shares of £0.01
|
27 | — | 27 | 323 | 323 | ||||||||||
|
Additional
Value Shares of £0.01
|
— | — | — | 27 | 27 | ||||||||||
|
Non-cumulative
preference shares of US$0.01
|
1 | 1 | 2 | 2 | 2 | ||||||||||
|
Non-cumulative
convertible preference shares of US$0.01
|
— | — | — | — | — | ||||||||||
|
Non-cumulative
preference shares of €0.01
|
— | — | — | — | — | ||||||||||
|
Non-cumulative
convertible preference shares of €0.01
|
— | — | — | — | — | ||||||||||
|
Non-cumulative
convertible preference shares of £0.25
|
— | — | — | 225 | 225 | ||||||||||
|
Non-cumulative
convertible preference shares of £0.01
|
— | — | — | — | — | ||||||||||
|
Cumulative
preference shares of £1
|
1 | — | 1 | 1 | 1 | ||||||||||
|
Non-cumulative
preference shares of £1
|
— | 1 | 1 | 300 | 300 | ||||||||||
|
Allotted,
called up and fully paid
|
Authorised
|
|||||||||||||||||||||||
|
Number of
shares – thousands
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
Ordinary
shares of 25p
|
10,006,215 | 3,152,844 | 3,196,544 | 12,070,492 | 5,079,375 | 5,079,375 | ||||||||||||||||||
|
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 | ||||||||||||||||||
|
Additional
Value Shares of £0.01
|
— | — | — | 2,700,000 | 2,700,000 | 2,700,000 | ||||||||||||||||||
|
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
preference shares of €0.01
|
2,526 | 2,500 | 2,500 | 66,000 | 66,000 | 66,000 | ||||||||||||||||||
|
Non-cumulative
convertible preference shares of €0.01
|
— | — | — | 3,000 | 3,000 | 3,000 | ||||||||||||||||||
|
Non-cumulative
convertible preference shares of £0.25
|
— | — | — | 900,000 | 900,000 | 900,000 | ||||||||||||||||||
|
Non-cumulative
convertible preference shares of £0.01
|
200 | 200 | 200 | 1,000 | 1,000 | 1,000 | ||||||||||||||||||
|
Cumulative
preference shares of £1
|
900 | 900 | 900 | 900 | 900 | 900 | ||||||||||||||||||
|
Non-cumulative
preference shares of £1
|
750 | — | — | 300,000 | 300,000 | 300,000 | ||||||||||||||||||
Movement in ordinary
shares in issue during the year:
|
Number of
shares
|
||||
|
—
thousands
|
||||
|
At 1 January
2007
|
3,152,844 | |||
|
Bonus issue in
May 2007
|
6,304,299 | |||
|
Shares issued
in respect of the acquisition of ABN AMRO
|
530,621 | |||
|
Other shares
issued during the year
|
19,146 | |||
|
Shares
cancelled during the year
|
(695 | ) | ||
|
At 31 December
2007
|
10,006,215 | |||
Notes on the accounts
continued
26
Share capital
(continued)
Ordinary
shares
In
May 2007, the company capitalised £1,576 million of its share premium account by
way of a bonus issue of two new ordinary shares of 25p each for every one
ordinary share held by shareholders at close of business on 4 May
2007.
In
addition, the following issues of ordinary shares were made during the year
ended 31 December 2007:
|
(a)
|
530.6 million
ordinary shares issued to former shareholders of ABN AMRO;
and
|
|
(b)
|
19.1 million
ordinary shares following the exercise of options under the company’s
share schemes.
|
Consideration of £77
million was received on the issue of ordinary shares for cash.
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.
Preference
shares
In
January 2007, the company redeemed the 8 million Series E, the 10 million Series
G and the 16 million Series K, non-cumulative preference shares of US$0.01 each
at US$25 per share.
In
June 2007, the company issued 38 million Series S non-cumulative preference
shares of US$0.01 at US$25 each, the net proceeds being US$920
million.
In
September 2007, the company issued 64 million Series T non-cumulative preference
shares of US$0.01 at US$25 each, the net proceeds being US$1,550
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
|
|
(c)
|
15,000 Series
U non-cumulative preference shares of US$0.01 at US$100,000 each, the net
proceeds being US$1,485 million.
|
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.
Other
securities
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$1,584 million; and
|
|
(b)
|
CAD600 million
innovative tier 1 bonds, the net proceeds being CAD594
million.
|
These securities
entitle the holders to interest which may be deferred at the sole discretion of
the company. Repayment of the securities is at the sole discretion of the
company on giving between 30 and 60 days notice.
Non-cumulative
preference shares
Non-cumulative
preference shares entitle the holders thereof (subject to the terms of issue) to
receive periodic non-cumulative cash dividends at specified fixed rates for each
Series payable out of distributable profits of the company.
The non-cumulative prefer
ence shares are redeemable at the option
of the company, in whole or in part from time to time at the rates detailed
below plus dividends otherwise payable for the then current dividend period
accrued to the date of
redemption.
|
Number
|
Redemption
|
Redemption | |||||||
|
of
shares
|
Interest
|
date
on
|
price |
Debt
or
|
|||||
|
Class of
preference share
|
in
issue
|
rate
|
or
after
|
per share |
equity
(1)
|
||||
|
Non-cumulative preference
shares of
US$
0.01
|
|||||||||
|
Series
F
|
8
million
|
7.65%
|
31 March
2007
|
|
US$
25
|
Debt
|
|||
|
Series
H
|
12
million
|
7.25%
|
31 March
2004
|
|
US$
25
|
Debt
|
|||
|
Series
L
|
34
million
|
5.75%
|
30 September
2009
|
|
US$
25
|
Debt
|
|||
|
Series
M
|
37
million
|
6.4%
|
30 September
2009
|
|
US$
25
|
Equity
|
|||
|
Series
N
|
40
million
|
6.35%
|
30 June
2010
|
|
US$
25
|
Equity
|
|||
|
Series
P
|
22
million
|
6.25%
|
31 December
2010
|
|
US$
25
|
Equity
|
|||
|
Series
Q
|
27
million
|
6.75%
|
30 June
2011
|
|
US$
25
|
Equity
|
|||
|
Series
R
|
26
million
|
6.125%
|
30 December
2011
|
|
US$
25
|
Equity
|
|||
|
Series
S
|
38
million
|
6.6%
|
30 June
2012
|
|
US$
25
|
Equity
|
|||
|
Series
T
|
64
million
|
7.25%
|
31 December
2012
|
|
US$
25
|
Equity
|
|||
|
Series
U
|
15,000
|
7.64%
|
29 September
2017
|
|
US$
100,000
|
Equity
|
|||
|
Non-cumulative convertible
preference shares of
US$
0.01
|
|||||||||
|
Series
1
|
1
million
|
9.118%
|
31 March
2010
|
|
US$
1,000
|
Debt
|
|||
|
Non-cumulative preference
shares of
€
0.01
|
|
||||||||
|
Series
1
|
1.25
million
|
5.5%
|
31 December
2009
|
|
€
1,000
|
Equity
|
|||
|
Series
2
|
1.25
million
|
5.25%
|
30 June
2010
|
|
€
1,000
|
Equity
|
|||
|
Series
3
|
26,000
|
7.0916%
|
29 September
2017
|
|
€
50,000
|
Equity
|
|||
|
Non-cumulative convertible
preference shares of
£
0.01
|
|||||||||
|
Series
1
|
200,000
|
7.387%
|
31 December
2010
|
|
£
1,000
|
Debt
|
|||
|
Non-cumulative preference
shares of
£
1
|
|
||||||||
|
Series
1
|
750,000
|
8.162%
|
5 October
2012
|
|
£
1,000
|
Equity
|
|||
|
Notes:
|
|
|
(1)
|
Those
preference shares where the Group has an obligation to pay dividends are
classified as debt; those where distributions are discretionary are
classified as equity. The conversion rights attaching to the
convertible preference shares may result in the Group delivering a
variable number of equity shares to preference shareholders;
these convertible preference shares are treated as
debt.
|
In
the event that the non-cumulative convertible preference shares are not redeemed
on or before the redemption date, the holder may convert the non-cumulative
convertible preference shares into ordinary shares in the company.
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
Services Authority.
On
a winding-up or liquidation of the company, the holders of the non-cumulative
preference shares will be entitled to receive, out of any surplus assets
available for distribution to the company’s shareholders (after payment of
arrears of dividends on the cumulative preference shares up to the date of
repayment) pari passu with the cumulative preference shares and all other shares
of the company ranking pari passu with the non-cumulative preference shares as
regards participation in the surplus assets of the company, a liquidation
distribution per share equal to the applicable redemption price detailed in the
table above, together with an amount equal to dividends for the then current
dividend period accrued to the date of payment, before any distribution or
payment may be made to holders of the ordinary shares as
regards participation in the surplus assets of the company.
Except as described
above, the holders of the non-cumulative preference shares have no right to
participate in the surplus assets of the company.
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 Series U
non-cumulative dollar preference shares and the non-cumulative convertible
sterling preference shares, the holders shall be entitled to receive notice of,
attend, speak and vote at such meeting on all matters together with the holders
of the ordinary shares, and in these circumstances only, the rights of the
holders of the non-cumulative preference shares so to vote shall continue until
the company shall have resumed the payment in full of the dividends in
arrears.
Notes on the accounts
continued
27
Owners’ equity
|
Group
|
Company
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Called-up
share capital
|
||||||||||||||||||||||||
|
At 1
January
|
815 | 826 | 822 | 815 | 826 | 822 | ||||||||||||||||||
|
Implementation
of IAS 32 on 1 January 2005
|
— | — | (2 | ) | — | — | (2 | ) | ||||||||||||||||
|
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 | ) | — | ||||||||||||||||
|
At 31
December
|
2,530 | 815 | 826 | 2,530 | 815 | 826 | ||||||||||||||||||
|
Paid-in
equity
|
||||||||||||||||||||||||
|
Securities
issued during the year
|
1,073 | — | — | 1,073 | — | — | ||||||||||||||||||
|
At 31
December
|
1,073 | — | — | 1,073 | — | — | ||||||||||||||||||
|
Share
premium account
|
||||||||||||||||||||||||
|
At 1
January
|
12,482 | 11,777 | 12,964 | 12,482 | 11,777 | 12,964 | ||||||||||||||||||
|
Reclassification
of preference shares on implementation
|
||||||||||||||||||||||||
|
of IAS 32 on 1
January 2005
|
— | — | (3,159 | ) | — | — | (3,159 | ) | ||||||||||||||||
|
Bonus issue of
ordinary shares
|
(1,576 | ) | — | — | (1,576 | ) | — | — | ||||||||||||||||
|
Shares issued
during the year
|
6,257 | 815 | 1,972 | 6,257 | 815 | 1,972 | ||||||||||||||||||
|
Shares
repurchased during the year
|
— | (381 | ) | — | — | (381 | ) | — | ||||||||||||||||
|
Redemption of
preference shares classified as debt
|
159 | 271 | — | 159 | 271 | — | ||||||||||||||||||
|
At 31
December
|
17,322 | 12,482 | 11,777 | 17,322 | 12,482 | 11,777 | ||||||||||||||||||
|
Merger
reserve
|
||||||||||||||||||||||||
|
At 1 January
and 31 December
|
10,881 | 10,881 | 10,881 | — | — | — | ||||||||||||||||||
|
Available-for-sale
reserve
|
||||||||||||||||||||||||
|
At 1
January
|
1,528 | (73 | ) | — | — | — | ||||||||||||||||||
|
Implementation
of IAS 32 and IAS 39 on 1 January 2005
|
— | — | 289 | — | — | — | ||||||||||||||||||
|
Unrealised
(losses)/gains in the year
|
(191 | ) | 2,609 | 39 | — | — | — | |||||||||||||||||
|
Realised gains
in the year
|
(513 | ) | (313 | ) | (582 | ) | — | — | — | |||||||||||||||
|
Taxation
|
208 | (695 | ) | 181 | — | — | — | |||||||||||||||||
|
At 31
December
|
1,032 | 1,528 | (73 | ) | — | — | — | |||||||||||||||||
|
Cash
flow hedging reserve
|
||||||||||||||||||||||||
|
At 1
January
|
(149 | ) | 59 | (7 | ) | (9 | ) | |||||||||||||||||
|
Implementation
of IAS 32 and IAS 39 on 1 January 2005
|
— | — | 67 | — | — | (13 | ) | |||||||||||||||||
|
Amount
recognised in equity during the year
|
(460 | ) | (109 | ) | 18 | — | — | — | ||||||||||||||||
|
Amount
transferred from equity to earnings in the year
(1)
|
(138 | ) | (140 | ) | (85 | ) | 3 | 3 | 6 | |||||||||||||||
|
Taxation
|
192 | 41 | 59 | (1 | ) | (1 | ) | (2 | ) | |||||||||||||||
|
At 31
December
|
(555 | ) | (149 | ) | 59 | (5 | ) | (7 | ) | (9 | ) | |||||||||||||
|
Foreign
exchange reserve
|
||||||||||||||||||||||||
|
At 1
January
|
(872 | ) | 469 | (320 | ) | — | — | — | ||||||||||||||||
|
Retranslation
of net assets
|
1,339 | (2,159 | ) | 1,588 | — | — | — | |||||||||||||||||
|
Foreign
currency (losses)/gains on hedges of net assets
|
(963 | ) | 818 | (799 | ) | — | — | — | ||||||||||||||||
|
Taxation
|
70 | — | — | — | — | — | ||||||||||||||||||
|
At 31
December
|
(426 | ) | (872 | ) | 469 | — | — | — | ||||||||||||||||
|
Capital
redemption reserve
|
||||||||||||||||||||||||
|
At 1
January
|
170 | 157 | 157 | 170 | 157 | 157 | ||||||||||||||||||
|
Shares
repurchased during the year
|
— | 13 | — | — | 13 | — | ||||||||||||||||||
|
At 31
December
|
170 | 170 | 157 | 170 | 170 | 157 | ||||||||||||||||||
|
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.
|
| Group | Company | |||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
| £ m | £m | £m | £ m | £m | £m | |||||||||||||||||||
|
Retained
earnings
|
||||||||||||||||||||||||
|
At 1
January
|
15,487 | 11,346 | 9,408 | 4,737 | 4,794 | 4,675 | ||||||||||||||||||
|
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 | ||||||||||||||||||
|
Ordinary dividends
paid
|
(3,044 | ) | (2,470 | ) | (1,927 | ) | (3,044 | ) | (2,470 | ) | (1,927 | ) | ||||||||||||
|
Equity preference dividends
paid
|
(246 | ) | (191 | ) | (109 | ) | (246 | ) | (191 | ) | (109 | ) | ||||||||||||
|
Shares repurchased during the
year
|
— | (624 | ) | — | — | (624 | ) | — | ||||||||||||||||
|
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 | — | — | — | ||||||||||||||||||
|
At 31
December
|
21,072 | 15,487 | 11,346 | 3,787 | 4,737 | 4,794 | ||||||||||||||||||
|
Own shares
held
|
||||||||||||||||||||||||
|
At 1
January
|
(115 | ) | (7 | ) | (7 | ) | — | (7 | ) | (7 | ) | |||||||||||||
|
Shares purchased during the
year
|
(65 | ) | (254 | ) | — | — | — | — | ||||||||||||||||
|
Shares issued under employee share
schemes
|
119 | 146 | — | — | 7 | — | ||||||||||||||||||
|
At 31
December
|
(61 | ) | (115 | ) | (7 | ) | — | — | (7 | ) | ||||||||||||||
|
Owners
’
equity at 31
December
|
53,038 | 40,227 | 35,435 | 24,877 | 18,197 | 17,538 | ||||||||||||||||||
The
merger reserve comprises the premium on shares issued to acquire NatWest less
goodwill amortisation charged under previous GAAP. No share premium was recorded
in the company financial statements through the operation of the merger relief
provisions of the Companies Act 1985.
UK
law prescribes that only the reserves of the company are taken into account for
the purpose of making distributions and in determining the permissible
applications of the share premium account.
The
Group optimises capital efficiency by maintaining reserves in subsidiaries,
including regulated entities. Certain preference shares and subordinated debt
are also included within regulatory capital. The remittance of reserves to the
parent or the redemption of shares or subordinated capital by regulated entities
may be subject to maintaining the capital resources required by the relevant
regulator.
At
31 December 2007, 10,474,782 (2006 – 19,492,506) ordinary shares of 25p each of
the company were held by Employee Share Trusts in respect of share awards and
options granted to employees.
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
e
quity 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
dollar deposits and 2.76% above the Canadian dollar offered rate
respectively
.
Notes on the accounts
continued
28 Leases
Minimum amounts receivable and payable
under non-cancellable leases.
|
Group
|
||||||||||||||||
|
Year in
which receipt or payment will occur
|
||||||||||||||||
|
After
1 year
|
||||||||||||||||
|
Within
1
|
but
within
|
After
5
|
||||||||||||||
|
year
|
5
years
|
years
|
Total
|
|||||||||||||
|
2007
|
£ m | £ m | £ m | £ m | ||||||||||||
| Finance lease assets: | ||||||||||||||||
|
Amounts
receivable
|
1,297 | 4,968 | 11,648 | 17,913 | ||||||||||||
|
Present value
adjustment
|
(390 | ) | (1,766 | ) | (3,187 | ) | (5,343 | ) | ||||||||
|
Other
movements
|
(23 | ) | (144 | ) | (288 | ) | (455 | ) | ||||||||
|
Present value amounts
receivable
|
884 | 3,058 | 8,173 | 12,115 | ||||||||||||
|
Operating lease
assets:
|
||||||||||||||||
|
Future minimum lease
receivables
|
1,073 | 3,046 | 1,473 | 5,592 | ||||||||||||
|
Operating lease
obligations:
|
||||||||||||||||
|
Future minimum lease
payables:
|
||||||||||||||||
|
Premises
|
350 | 1,210 | 3,017 | 4,577 | ||||||||||||
|
Equipment
|
9 | 14 | — | 23 | ||||||||||||
| 359 | 1,224 | 3,017 | 4,600 | |||||||||||||
|
2006
|
||||||||||||||||
|
Finance lease
assets:
|
||||||||||||||||
|
Amounts
receivable
|
1,235 | 4,331 | 11,166 | 16,732 | ||||||||||||
|
Present value
adjustment
|
(453 | ) | (1,648 | ) | (3,110 | ) | (5,211 | ) | ||||||||
|
Other
movements
|
(22 | ) | (80 | ) | (295 | ) | (397 | ) | ||||||||
|
Present value amounts
receivable
|
760 | 2,603 | 7,761 | 11,124 | ||||||||||||
|
Operating lease
assets:
|
||||||||||||||||
|
Future minimum lease
receivables
|
444 | 2,391 | 2,640 | 5,475 | ||||||||||||
|
Operating lease
obligations:
|
||||||||||||||||
|
Future minimum lease
payables:
|
||||||||||||||||
|
Premises
|
332 | 1,151 | 1,877 | 3,360 | ||||||||||||
|
Equipment
|
7 | 6 | — | 13 | ||||||||||||
| 339 | 1,157 | 1,877 | 3,373 | |||||||||||||
|
Group
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
| £ m | £m | |||||||||||||||
|
Nature of
operating lease assets in balance sheet
|
||||||||||||||||
|
Transportation
|
6,859 | 7,414 | ||||||||||||||
|
Cars and light commercial
vehicles
|
1, 390 | 1,204 | ||||||||||||||
|
Other
|
441 | 291 | ||||||||||||||
| 8,690 | 8,909 | |||||||||||||||
|
Amounts
recognised as income and expense
|
||||||||||||||||
|
Finance lease receivables
–
contingent rental
income
|
(23 | ) | (37 | ) | ||||||||||||
|
Operating lease payables
–
minimum
payments
|
322 | 366 | ||||||||||||||
|
Contracts
for future ca
pital
expenditure not provided for at the year
end
|
||||||||||||||||
|
Operating
leases
|
545 | 1,437 | ||||||||||||||
|
Finance lease
receivables
|
||||||||||||||||
|
Unearned finance
income
|
5,343 | 5,211 | ||||||||||||||
|
Accumulated allowance for
uncollectable minimum lease receivables
|
63 | 67 | ||||||||||||||
Residual value
exposures
The tables below give details of the
unguaranteed residual values included in the carrying value of finance lease
receivables (see page 130) and operating lease assets (see page
146).
|
Year in
which residual value will be recovered
|
||||||||||||||||||||
|
After
1 year
|
After
2 years
|
|||||||||||||||||||
|
Within
1
|
but
within
|
but
within
|
After
5
|
|||||||||||||||||
|
year
|
2
years
|
5
years
|
years
|
Total
|
||||||||||||||||
|
2007
|
£ m | £ m | £ m | £ m | £ m | |||||||||||||||
|
Operating
leases
|
||||||||||||||||||||
|
Transportation
|
485 | 253 | 1,762 | 2,505 | 5,005 | |||||||||||||||
|
Cars and ligh
t commercial
vehicles
|
331 | 467 | 118 | — | 916 | |||||||||||||||
|
Other
|
26 | 47 | 64 | 18 | 155 | |||||||||||||||
|
Finance
leases
|
23 | 29 | 115 | 288 | 455 | |||||||||||||||
| 865 | 796 | 2,059 | 2,811 | 6,531 | ||||||||||||||||
|
2006
|
||||||||||||||||||||
|
Operating
leases
|
||||||||||||||||||||
|
Transportation
|
1,054 | 180 | 1,339 | 2,517 | 5,090 | |||||||||||||||
|
Cars and light commercial
vehicles
|
168 | 295 | 329 | — | 792 | |||||||||||||||
|
Other
|
13 | 30 | 77 | 24 | 144 | |||||||||||||||
|
Finance
leases
|
22 | 22 | 58 | 295 | 397 | |||||||||||||||
| 1,257 | 527 | 1,803 | 2,836 | 6,423 | ||||||||||||||||
The Group provides asset finance to its
customers through acting as a lessor. It purchases plant, equipment and
intellectual property, renting them to customers under
lease arrangements that, depending on
their terms, qualify as either operating or finance leases.
29 Collateral
Securities repurchase agreements and
lending transactions
The Group enters into securities
repurchase agreements and securities lending trans
actions 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.
Under standard terms
for repurchase transactions in the UK
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.
The fair value (and carrying value) of
securi
ties transferred
under repurchase transactions included within securities on the balance sheet
were as follows:
|
2007
|
2006
|
|||||||
| £ m | £m | |||||||
|
Treasury and other eligible
bills
|
7,090 | 1,426 | ||||||
|
Debt
securities
|
100,561 | 58,874 | ||||||
| 107,651 | 60,300 | |||||||
All of the above securitie
s could be sold or repledged by the
holder. Securities received as collateral under reverse repurchase agreements
amounted to £
373.7 billion
(2006
–
£
124.7 billion), of which £
337.8 billion (2006
–
£
107.2 billion) had been resold or
repledged as collatera
l
for the Group
’
s own transactions.
|
Other collateral
given
|
||||||||
|
2007
|
2006
|
|||||||
|
Group
assets charged as security for liabilities
|
£ m | £m | ||||||
|
Loans and advances to
banks
|
753 | 469 | ||||||
|
Loans and advances to
customers
|
80,719 | 44,966 | ||||||
|
Debt
securities
|
29,709 | 8,560 | ||||||
|
Property, pl
ant and
equipment
|
935 | 1,222 | ||||||
|
Other
|
1,765 | 13 | ||||||
| 113,881 | 55,230 | |||||||
|
2007
|
2006
|
|||||||
|
Liabilities
secured by charges on Group assets
|
£ m | £m | ||||||
|
Deposits by
banks
|
21,693 | 11,680 | ||||||
|
Customer
accounts
|
6,670 | 7,095 | ||||||
|
Debt securities in
issue
|
65,080 | 27,607 | ||||||
|
Other
liabilities
|
— | 45 | ||||||
| 93,443 | 46,427 | |||||||
Of the assets above, £
62.0 billion (2006
–
£
30.1 billion) relate to securitisations
(see Note 30). The remaining balances mainly relate to assets charged as
security against deposits from central and federal banks and other public sector
b
odies.
Notes on the accounts
continued
30 Securitisations and other asset
transfers
In the normal course of business, the
Group arranges securitisations to facilitate client transactions and undertakes
s
ecuritisations 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
intere
s
ts in a pool of assets, are transferred
generally to a special purpose entity (“
SPE”
) which then issues liabilities to third
party investors.
SPEs are vehicles set up for a specific,
limited purpose, usually do not carry out a business or trade and
typica
lly have no
employees. They take a variety of legal forms
–
trusts,
partnerships and companies
–
and fulfil many different functions. As
well as being a key element of securitisations, SPEs are also used in fund
management activities to segregate custodia
l 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
Group
’
s conti
nuing involvement in those assets; or
derecognition of the assets and the separate recognition, as assets or
liabilities, of any rights and obligations created or retained in the transfer
(see Accounting policy on page 111). The Group has securitisations
i
n each of these
categories.
Continued
recognition
The table below sets out the asset
categories together with the carrying amounts of the assets and associated
liabilities for those securitisations and other asset transfers where
substantially all the ri
sks
and rewards of the assets have been retained by the Group.
|
2007
|
2006
|
|||||||||||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
|
Asset
type
|
£ m | £ m | £m | £m | ||||||||||||
|
Residential
mortgages
|
23,652 | 23,436 | 15,698 | 15,375 | ||||||||||||
|
Credit card
receivables
|
2,948 | 2,664 | 2,891 | 2,585 | ||||||||||||
|
Other loans
|
1, 703 | 1,149 | 1,931 | 1,346 | ||||||||||||
|
Commercial paper
conduits
|
32,613 | 31,193 | 8,360 | 8,284 | ||||||||||||
|
Finance lease
receivables
|
1,038 | 823 | 1,211 | 953 | ||||||||||||
Residential
mortgages securitisations
–
the Group has securitised portfolios of
residential mortgages. Mortgages have been transferr
ed to SPEs, held ultimately by
charitable trusts, funded principally through the issue of floating rate notes.
The Group has entered into arm
’
s length fixed/floating interest rate
swaps and cross-currency swaps with the securitisation SPEs and provides
mo
r
tgage management and agency services to
the SPEs. On repayment of the financing, any further amounts generated by the
mortgages will be paid to the Group. The SPEs are consolidated and the mortgages
remain on the Group
’
s balance sheet.
Credit card
securit
isations
–
credit card receivables in the
UK
have been securitised. Notes have been
issued by an SPE. The note holders have a proportionate interest in a pool of
credit card receivables that have been equitably assigned by the Group to a
receivables trust.
The
Group continues to be exposed to the risks and rewards of the transferred
receivables through its right to excess spread (after charge-offs). The SPE is
consolidated and the credit card receivables remain on the Group
’
s balance sheet.
Other
securitis
ations
–
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 Group after deduction of expenses.
The SPEs are consolidated and the loans
remain on the Group
’
s balance sheet.
Commercial paper
conduits
–
the Group sponsors commercial paper
conduits. Customer assets are transferred into SPEs which issue notes in the
commercial paper market. The Group s
upplies certain services and contingent
liquidity support to these SPEs on an arm
’
s length basis as well as programme
credit enhancement. The SPEs are consolidated.
Finance lease
receivables
–
certain finance lease receivables
(leveraged leases) in the
US
involve the Group as lessor obtaining
non-recourse funding from third parties. This financing is secured on the
underlying leases and the provider of the finance has no recourse whatsoever to
the other assets of the Group. The transactions are recorded g
r
oss of third-party
financing.
Continuing
involvement
In certain securitisations of US
residential mortgages, substantially all the risks and rewards have been neither
transferred nor retained, but the Grou
p 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 di
f
fering 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 po
r
tfolio 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
(2
0
06
–
£
930 million); subordinated assets
£
314 million (2006
–
£
694 million) and related liabilities
£
314 million (2006
–£
694 million).
Derecognition
Other securitisations of the
Group
’
s financial assets in the
US
qualify for derecognition as
substantially
all the risks
and rewards of the assets have been transferred. The Group continues to
recognise any retained interests in the securitisation
vehicles.
31 Risk management
Financial risk management policies and
objectives
The Group Board of directors
set
s the overall risk
appetite and philosophy; the risk and capital framework underpins delivery of
the Board
’
s strategy.
Risk and capital
It is the Group
’
s policy to optimise return to
shareholders while maintaining a strong capital base and credit
rating
to support business
growth and meet regulatory capital requirements at all
times.
Risk appetite is measured as the maximum
level of retained risk the Group will accept to deliver its business objectives.
Risk appetite is generally defined through both qu
antitative and qualitative techniques
including stress testing, risk concentration, value-at-risk and risk
underwriting criteria, ensuring that appropriate principles, policies and
procedures are in place and applied.
The main financial risks facing the
G
roup are as
follows:
|
•
|
Credit risk
:
is the risk arising from the
possibility that the Group will incur losses from the failure of customers
to meet their obligations.
|
|
•
|
Funding and liquidity risk
:
is the risk that the Group is
unable to meet its obligation
s as they fall
due.
|
|
•
|
Market risk
:
the Group is exposed to market
risk because of positions held in its trading portfolios and its
non-trading businesses.
|
|
•
|
Equity risk
:
gains or losses on equity
investments.
|
|
•
|
Insurance risk
:
the Group is exposed to
insur
ance risk,
either directly through its businesses or through using insurance as a
tool to mitigate other risk
exposures.
|
Credit risk
Credit risk is managed to achieve
sustainable and superior risk-reward performance while maintaining exposures
within ac
ceptable risk
appetite parameters. This is achieved through the combination of governance,
policies, systems and controls, underpinned by sound commercial judgement as
described below.
|
•
|
Policies and risk appetite
:
policies provide a clear framework
for th
e assessment,
approval, monitoring and management of credit risk where risk appetite
sets the tolerance of loss. Limits are used to manage concentration risk
by single name, sector and country.
|
|
•
|
Decision makers
:
credit authority is granted to
independe
nt persons
or committees with the appropriate experience, seniority and commercial
judgement. Credit authority is not extended to relationship managers.
Specialist internal credit risk departments independently oversee the
credit process and make credit d
e
cisions or recommendations to the
appropriate credit committee.
|
|
•
|
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 Default
(see
page
168
) and Expected Loss are calculated using duly authorised
models. All credit models are subject to independent review prior to
implementation and existing models are reviewed on at least an annual
basis.
|
Notes on the accounts
continued
31 Risk management
(continued)
|
•
|
Mitigation
techniques to reduce the potential for loss
:
credit
risk may be mitigated by the taking of financial or physical security, the
assignment of receivables or the use of credit der
ivatives,
guarantees, risk participations, credit insurance, set off or
netting.
|
|
•
|
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.
|
|
•
|
Analys
is
and reporting
:
portfolio analysis and reporting
are used to ensure the identification of emerging concentration risks and
adverse movements in credit risk quality.
|
|
•
|
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.
|
|
•
|
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 transactio
ns.
|
|
•
|
Credit stewardship
:
customer transaction monitoring
and management is a continuous process, ensuring performance is
satisfactory and that documentation, security and valuations are complete
and up to date.
|
|
•
|
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.
|
|
•
|
Provisioning
:
independent assessment using best
practice models for collective and latent loss. Professiona
l evaluation is applied to
individual cases, to ensure that such losses are comprehensively
identified and adequately provided for.
|
|
•
|
Recovery
:
maximising the return to the Group
through the recovery
process.
|
Credit risk
models
Credit risk models are us
ed 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 u
s
ed by the Group can be broadly grouped
into three categories.
|
•
|
Probability
of default (“
PD”
):
the
likelihood that a customer will fail to make full and timely repayment of
credit obligations over a one year time horizon. Customers are assigned an
internal
credit
grade which corresponds to probability of default. Every customer credit
grade across all grading scales in the Group can be mapped to a Group
level credit grade (see page 55
).
|
|
•
|
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.
|
|
•
|
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
mi
tigation
such as security or collateral
held.
|
Loan
impairment
The Group classifies impaired assets as
either Risk Elements in Lending (REIL) or Potential Problem Loans (PPL). REIL
represents non-accrual loans, loans that are accruing but are past due 90
days and restructured
loans. PPL represents impaired assets which are not included in REIL but where
information about possible credit problems cause management to have serious
doubts about the future ability of the borrower to comply with loan repayment
t
erms.
Both REIL and PPL are reported gross of
the value of any security held, which could reduce the eventual loss should it
occur, and gross of any provision marked. Therefore impaired assets which are
highly collateralised, such as mortgages, will have
a low coverage ratio of provisions held
against reported impaired balance.
The table below sets out the
Group
’
s loans that are classified as REIL and
PPL:
|
2007
|
2006
|
|||||||
|
REIL
and PPL
|
£ m | £m | ||||||
|
Non-accrual loans
(1)
|
10,362 | 6,232 | ||||||
|
Accrual loans past due 90 days
(2)
|
369 | 105 | ||||||
|
Troubled debt restructurings
(3)
|
— | — | ||||||
|
Total REIL
|
10,731 | 6,337 | ||||||
|
PPL
(4)
|
671 | 52 | ||||||
|
Total REIL and
PPL
|
11,402 | 6,389 | ||||||
|
REIL and PPL as % of customer
loans and adv
ances
–
gross
(5)
|
1.64 | % | 1.57 | % | ||||
The sub-categories of REIL and PPL are
calculated as described in notes 1 to 4 below.
|
Notes:
|
|
|
(1)
|
All
loans against which an impairment provision is held are reported in the
non-accrual category.
|
|
(2)
|
Loans
where an impairment
event
has taken place but no impairment recognised. This category is used for
fully collateralised non-revolving credit
facilities.
|
|
(3)
|
Troubled
debt restructurings represent loans that have been restructured following
the granting of a concession by the Group
to
the borrower.
|
|
(4)
|
Loans
for which an impairment event has occurred but no impairment provision is
necessary. This category is used for fully collateralised advances and
revolving credit facilities where identification as 90 days overdue is not
feasible.
|
|
(5)
|
Gr
oss
of provisions and excluding reverse repurchase
agreements.
|
Impairment loss
provision methodology
Provisions for impairment losses are
assessed under three categories as described below:
Individually assessed provisions
are the provisions required
fo
r 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
realisati
o
n 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.
Collectively assessed provisions
are provisions on impaired credits below
an agreed
threshold which
are assessed on a portfolio basis, to reflect the homogeneous nature of the
assets, such as credit cards or personal loans. The provision is determined from
a quantitative review of the relevant portfolio, taking account of the level of
ar
r
ears, security and average loss
experience over the recovery period.
Latent
loss provisions
are
provisions held against the estimated impairment in the performing portfolio
which have yet to be identified as at the balance sheet date. To assess the
latent
loss within the
portfolios, the Group has developed methodologies to estimate the time that an
asset can remain impaired within a performing portfolio before it is identified
and reported as such.
Provision
analysis
The Group
’
s consumer portfolios, whic
h 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 portfo
lios 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 app
r
opriate. The Group operates a provisions
governance framework which sets thresholds whereby suitable oversight and
challenge is undertaken. These opinions and levels of provision are overseen by
each division
’
s Provision Committee. Significant cases
are p
r
esented to, and challenged by, the Group
Problem Exposure Review Forum.
Early and active management of problem
exposures ensures that credit losses are minimised. Specialised units are used
for different customer types to ensure that the appropriate risk
mitigation is taken in a timely
manner.
Portfolio provisions are reassessed
regularly as part of the Group
’
s ongoing monitoring
process.
nts
Notes on the accounts
continued
31 Risk
manageme
nt
(continued)
The following table shows an analysis of
the loan impairment charge.
|
2007
|
2006
|
2005
|
||||||||||
|
Loan impairment
charge
|
£ m | £m | £m | |||||||||
|
Latent loss provisions
charge
|
88 | 87 | 14 | |||||||||
|
Collectively assessed provisions
charge
|
1,744 | 1,573 | 1,399 | |||||||||
|
Individua
lly assessed provisions
charge
|
274 | 217 | 290 | |||||||||
|
Total charge to
income statement
|
2,106 | 1,877 | 1,703 | |||||||||
|
Charge as a % of customer loans
and advances
–
gross
(1)
|
0.30% | 0.46% | 0.46% | |||||||||
|
Note:
|
|
|
(1)
|
Gross
of provisions and excluding reverse repurchase
agreements.
|
Liquidity
risk
The Group
’
s liquidity policy is designed to ensure
that it can at all times meet its obligations as they fall
due.
Liquidity management within the Group
focuses on overall balance sheet structure and the control, within prudent
limits, o
f 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 se
t
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 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.
Diversification of
funding sources
The structure of the Group
’
s balance sheet is managed to maintain
substantial dive
rsification, to minimise concentration
across its various deposit sources, and to limit the reliance on total
short-term wholesale sources of funds (gross and net of repos) within prudent
levels.
During 2007, the Group
’
s funding sources remained well
dive
rsified by
counterparty, instrument and maturity, both before and after the acquisition of
ABN AMRO in October 2007.
|
2007
|
2006
|
|||||||||||||||
|
Sources of
funding
|
£ m |
%
|
£m |
%
|
||||||||||||
|
Customer accounts (excluding
repos)
|
||||||||||||||||
|
Repayable on
demand
|
346,074 | 24 | 197,771 | 28 | ||||||||||||
|
Time depos
its
|
201,375 | 14 | 122,467 | 17 | ||||||||||||
|
Total customer accounts (excluding
repos)
|
547,449 | 38 | 320,238 | 45 | ||||||||||||
|
Debt
securities in issue over one year
remaining
maturity
|
117,873 | 8 | 44,006 | 6 | ||||||||||||
|
Subordinated
liabilities
|
37,979 | 3 | 27,654 | 4 | ||||||||||||
|
Owners
’
equity
|
53,038 | 4 | 40,227 | 6 | ||||||||||||
|
Tot
al customer accounts and long term
funds
|
756,339 | 53 | 432,125 | 61 | ||||||||||||
|
Repo agreements with
customers
|
134,916 | 10 | 63,984 | 9 | ||||||||||||
|
Repo agreements with
banks
|
163,038 | 11 | 76,376 | 11 | ||||||||||||
|
Total
customer accounts, long term funds
and collateralised
borrowing
|
1,054,293 | 74 | 572 ,485 | 81 | ||||||||||||
|
Debt
securities in issue up to one year
remaining
maturity
|
155,742 | 11 | 41,957 | 5 | ||||||||||||
|
Deposits by banks (excluding
repos)
|
149,595 | 10 | 55,767 | 8 | ||||||||||||
|
Short
positions
|
73,501 | 5 | 43,809 | 6 | ||||||||||||
|
T
otal
|
1,433,131 | 100 | 714,018 | 100 | ||||||||||||
Net customer
activity
|
2007
|
2006
|
|||||||
| £ m | £m | |||||||
|
Loans and advances to customers
(gross, excluding reverse repos)
|
693,331 | 407,918 | ||||||
|
Customer accounts (excluding
repos)
|
547,449 | 320,238 | ||||||
|
Customer lending less customer
acco
unts
|
145,882 | 87,680 | ||||||
|
Loans and advances to customers as
a % of customer accounts (excluding repos)
|
126.6% | 127.4% | ||||||
Management of term
structure
The Group evaluates on a regular basis
its structural liquidity risk and applies a variety of balance sheet
management and term funding strategies
to maintain this risk within its normal policy parameters.
The degree of maturity mismatch within
the overall long-term structure of the Group
’
s assets and liabilities is managed
within internal policy guidelines, t
o ensure that term asset commitments may
be funded on an economic basis over their life. In managing its overall term
structure, the Group analyses and takes into account the effect of retail and
corporate customer behaviour on actual asset and liability
m
aturities where they differ materially
from the underlying contractual maturities.
Stress
testing
The Group performs stress tests to
simulate how events may impact its funding and liquidity capabilities. Such
tests inform the overall balance sheet struct
ure and help define prudent limits for
control of the risk arising from the mismatch of maturities across the balance
sheet and from undrawn commitments and other contingent obligations. The nature
of stress tests is kept under review in line with evolvin
g
market conditions.
Daily
management
The short-term maturity structure of the
Group
’
s liabilities and assets is managed
daily to ensure that all material or potential cash flow obligations arising
from undrawn commitments and other contingent obligations
, can be met. Potential sources include
cash inflows from maturing assets, new borrowing or the sale of various debt
securities held (after allowing for appropriate haircuts).
Short-term liquidity risk is generally
managed on a consolidated basis with int
ernal liquidity mismatch limits set for
all subsidiaries and non-UK branches which have material local treasury
activities, thereby assuring that the daily maintenance of the Group
’
s overall liquidity risk position is not
compromised. ABN AMRO, Citizens F
i
nancial Group and RBS Insurance manage
liquidity locally, given different regulatory regimes, subject to review by
Group Treasury. As integration of ABN AMRO
’
s businesses within the Group proceeds,
the liquidity risk policies, parameters and metrics used
w
ill be progressively aligned within a
single framework.
|
2007
|
2006
|
|||||||
|
Net
short-term wholesale market activity
|
£m | £m | ||||||
|
Debt securi
ties, listed held-for-trading
equity shares, treasury and other eligible bills
|
328,352 | 135,775 | ||||||
|
Reverse repo agreements with banks
and customers
|
318,298 | 117,060 | ||||||
|
Less: repos with banks and
customers
|
(297,954 | ) | (140,360 | ) | ||||
|
Short
positions
|
(73,501 | ) | (43,809 | ) | ||||
|
Insurance companies
’
debt securities
held
|
(8,062 | ) | (6,149 | ) | ||||
|
Debt securities charged as
security for liabilities
|
(29,709 | ) | (8,560 | ) | ||||
|
Net marketable
assets
|
237,424 | 53,957 | ||||||
|
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 | ) | ||||
|
Debt securities in
issue
|
66,289 | 19,924 | ||||||
|
Net wholesale liabilities due
within one month
|
152,861 | 34,877 | ||||||
|
Net surplus of marketable assets
over wholesale liabilities due within one month
|
84,563 | 19,080 | ||||||
The following table shows cash flows
payable on financial liabilities up to a period of 20 years including future
payments of
interest.
|
Group
|
||||||||||||||||||||||||
|
0-3
months
|
3-12
months
|
1-3
years
|
3-5
years
|
5-10
years
|
10-20
years
|
|||||||||||||||||||
|
2007
|
£ m | £ m | £ m | £ m | £ m | £ m | ||||||||||||||||||
|
Deposits by
banks
|
220,914 | 21,580 | 3,206 | 2,225 | 1,509 | 434 | ||||||||||||||||||
|
Customer
accounts
|
561,003 | 30,539 | 9,430 | 4,509 | 11,615 | 9,052 | ||||||||||||||||||
|
Debt securities i
n issue
|
111,292 | 37,292 | 57,562 | 34,917 | 44,166 | 4,223 | ||||||||||||||||||
|
Derivatives held for
hedging
|
252 | 667 | 822 | 449 | 605 | 118 | ||||||||||||||||||
|
Subordinated
liabilities
|
641 | 3,720 | 5,603 | 3,466 | 22,735 | 6,354 | ||||||||||||||||||
|
Settlement balances and other
liabilities
|
17,998 | 5 | 14 | 6 | 12 | 7 | ||||||||||||||||||
| 912,100 | 93,803 | 76,637 | 45,572 | 80,642 | 20,188 | |||||||||||||||||||
|
2006
|
||||||||||||||||||||||||
|
Deposits by
banks
|
62,672 | 5,733 | 3,677 | 2,591 | 1,264 | 153 | ||||||||||||||||||
|
Customer
accounts
|
324,933 | 5,662 | 1,349 | 1,297 | 2,521 | 1,290 | ||||||||||||||||||
|
Debt securities in
issue
|
44,113 | 10,949 | 15,046 | 7,571 | 7,499 | 5,005 | ||||||||||||||||||
|
Derivatives held for
hed
ging
|
25 | 199 | 300 | 178 | 210 | 108 | ||||||||||||||||||
|
Subordinated
liabilities
|
953 | 1,140 | 3,689 | 4,606 | 12,788 | 15,934 | ||||||||||||||||||
|
Settlement balances and other
liabilities
|
7,142 | 20 | 26 | 16 | 9 | 4 | ||||||||||||||||||
| 439,838 | 23,703 | 24,087 | 16,259 | 24,291 | 22,494 | |||||||||||||||||||
Notes on the accounts
continued
|
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 | ||||||||||||||||||
|
Deposits by
banks
|
116 | 5,544 | — | — | — | — | ||||||||||||||||||
|
Debt securities in
issue
|
824 | 8,477 | 3,447 | 1,372 | — | — | ||||||||||||||||||
|
Der
ivatives held for
hedging
|
52 | 1 | — | 2 | — | — | ||||||||||||||||||
|
Subordinated
liabilities
|
116 | 347 | 1,119 | 1,045 | 3,282 | 3,909 | ||||||||||||||||||
| 1,108 | 14,369 | 4,566 | 2,419 | 3,282 | 3,909 | |||||||||||||||||||
|
2006
|
||||||||||||||||||||||||
|
Deposits by
banks
|
10 | 30 | 778 | — | — | — | ||||||||||||||||||
|
Debt securities in
issue
|
537 | 1,217 | 474 | — | — | — | ||||||||||||||||||
|
Subordinated
liabilities
|
5 53 | 336 | 1,145 | 1,503 | 3,117 | 3,542 | ||||||||||||||||||
| 1,100 | 1,583 | 2,397 | 1,503 | 3,117 | 3,542 | |||||||||||||||||||
The tables above show the timing of cash
outflows to settle financial liabilities. They have been prepared on the
following basis:
Prepayable
liabilities
–
where a financial liability
can be prepaid by the counterparty, the
cash outflow has been included at the earliest date on which the counterparty
can require repayment regardless of whether or not such early repayment results
in a penalty. If the repayment of a financial liability i
s
triggered by, or is subject to,
specific criteria such as market price hurdles being reached, it is included at
the earliest possible date that the conditions could be fulfilled without
considering the probability of the conditions being met. For example
,
if a structured note is automatically
prepaid when an equity index exceeds a certain level, the cash outflow will be
included in the less than three months period whatever the level of the index at
the year end. The settlement date of debt securities in
i
ssue issued by certain securitisation
vehicles consolidated by the Group depends on when cash flows are received from
the securitised assets. Where these assets are prepayable, the timing of the
cash outflow relating to securities assumes that each asset
w
ill be prepaid at the earliest possible
date.
Liabilities with a
contractual maturity of greater than 20 years
–
the principal amounts of financial
liabilities that are repayable after 20 years or where the counterparty has no
right to repayment of the pri
ncipal are excluded from the table as
are interest payments after 20 years.
Held-for-trading
liabilities
–
held-for-trading liabilities amounting
to £
538.4 billion (2006
–
£
267.5 billion) have been excluded from
the table in view of their short term natur
e.
Investment contracts
–
investment contracts issued by the
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
backin
g these
contracts.
Financial assets held by the Group to
meet these cash outflows include cash, balances at central banks and treasury
bills of £
36.1 billion
(2006
–
£
11.6 billion), loans to banks and
customers of £
1,048.7
billion (2006
–
£
549.5 billion)
including £
452.4 billion (2006
–
£
288.9 billion) repayable within three
months. The Group also held debt securities with a market value of £
276.4 billion (2006
–
£
127.3 billion) of which £
130.3 billion (2006
–
£
67.4 billion) were pledged to secure
liabili
t
ies. Funds can be raised in the
short-term from highly liquid securities held by the Group by sale or by
disposal or by sale and repurchase transactions regardless of their stated
maturity.
As explained above the table is prepared
on the basis that prepay
able liabilities are called at the
earliest possible date. In practice, the average maturity of these liabilities
significantly exceeds that shown in the table. In addition, although many
customer accounts are contractually repayable on demand or at short
notice, the Group
’
s short-term deposit base is stable over
the long term as deposit rollovers and new deposits offset cash
outflows.
The following table shows the expected
maturity of insurance liabilities up to 20 years excluding those linked directly
to
the financial assets
backing these contracts (2007
–
£
4,398 million; 2006
–
£
1,713 million).
|
Group
|
|||||||||||||||||||
|
0-3
months
|
3-12
months
|
1-3
years
|
3-5
years
|
5-10
years
|
10-20
years
|
||||||||||||||
| £ m | £ m | £ m | £ m | £ m | £ m | ||||||||||||||
|
2007
|
710 | 1,796 | 1,961 | 882 | 395 | 33 | |||||||||||||
|
2006
|
644 | 1,688 | 1,997 | 88 5 | 517 | 68 | |||||||||||||
Notes on the accounts
continued
31 Risk management
(continued)
Other contractual cash
obligations
The table below summarises the
Group
’
s other contractual cash
obligations
by payment
date.
|
Group
|
|||||||||||||||||||
|
0-3
months
|
3-12
months
|
1-3
years
|
3-5
years
|
5-10
years
|
10-20
years
|
||||||||||||||
|
2007
|
£ m | £ m | £ m | £ m | £ m | £ m | |||||||||||||
|
Operating
leases
|
90 | 268 | 655 | 569 | 1,060 | 1,958 | |||||||||||||
|
Contractual obligations to
purchase goods or services
|
441 | 1,007 | 748 | 199 | 5 | 2 | |||||||||||||
| 531 | 1,275 | 1,403 | 768 | 1,065 | 1,960 | ||||||||||||||
|
2006
|
|||||||||||||||||||
|
Operating
leases
|
85 | 254 | 624 | 533 | 804 | 1,073 | |||||||||||||
|
Contractual obligations to
purchase goods or services
|
378 | 449 | 969 | 101 | 114 | 39 | |||||||||||||
| 463 | 703 | 1,593 | 634 | 918 | 1,112 | ||||||||||||||
The Group
’
s undrawn formal facilities, credit
lines and other commit
ments
to lend were £
335,688
million (2006
–
£
242,655 million). 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.
Market risk
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
volat
ilities.
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.
Value-at-risk
(“
VaR”
)
VaR is a technique that produces
estimates of the poten
tial
negative change in the market value of a portfolio over a specified time horizon
at given confidence levels. For internal risk management purposes, the
Group
’
s VaR assumes a time horizon of one
trading day and a confidence level of 95%. The Group use
s
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 relevan
c
e 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 Group calculates both general
mar
ket 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.
The Group
’
s VaR should be interpreted
in
light of the limitations
of the methodology used. These limitations include:
|
•
|
Historical data may not provide
the best estimate of the joint distribution of risk factor changes in the
future and may fail to capture the risk of possible extreme adverse
mar
ket movements
which have not occurred in the historical window used in the
calculations.
|
|
•
|
VaR using a one-day time horizon
does not fully capture the market risk of positions that cannot be
liquidated or hedged within one day.
|
|
•
|
VaR using a 95% confidence
lev
el does not
reflect the extent of potential losses beyond that
percentile.
|
The Group largely computes the VaR of
trading portfolios at the close of business and positions may change
substantially during the course of the trading day. Further controls are
in place to limit the
Group
’
s intra-day exposure; such as the
calculation of the VaR for selected portfolios. These limitations and the nature
of the VaR measure mean that the Group cannot guarantee that losses will not
exceed the VaR amounts indicated. T
h
e Group undertakes stress testing to
identify the potential for losses in excess of VaR.
Trading
The primary focus of the
Group
’
s trading activities is client
facilitation
–
providin
g products to the Group
’
s client base at competitive prices. The
Group also undertakes: market making
–
quoting firm bid (buy) and offer (sell)
prices with the intention of profiting from the spread between the quotes;
arbitrage
–
entering into offsetting
p
ositions in different but closely
related markets in order to profit from market imperfections; and proprietary
activity
–
taking positions in financial
instruments as principal in order to take advantage of anticipated market
conditions. The principal ri
sk factors are interest rates, credit
spreads, equity prices and foreign exchange. Financial instruments held in the
Group
’
s trading portfolios include, but are
not limited to, debt securities, loans, deposits, equity shares, securities sale
and repurchas
e
agreements and derivative financial
instruments (futures, forwards, swaps and options). For a discussion of the
Group
’
s accounting policies for derivative
financial instruments, see Accounting policies on page 112.
The
VaR for the Group
’
s
trading portfolios segregated by type of market risk exposure, including
idiosyncratic risk, is presented in the t
able
below.
|
2007
|
2006
|
||||||||||||||||||||||||||||
|
Average
|
Period
end
|
Maximum
|
Minimum
|
Average
|
Period
end
|
Maximum
|
Minimum
|
||||||||||||||||||||||
|
Trading
|
£ m | £ m | £ m | £ m | £m | £m | £m | £m | |||||||||||||||||||||
|
Interest
rate
|
12.5 | 15.0 | 21.8 | 7.6 | 8.7 | 10.2 | 15.0 | 5.7 | |||||||||||||||||||||
|
Credit
spread
|
18.8 | 41.9 | 45.2 | 12.6 | 13.2 | 14.1 | 15.7 | 10.4 | |||||||||||||||||||||
|
Currency
|
2.6 | 3.0 | 6.9 | 1.1 | 2.2 | 2 .5 | 3.5 | 1.0 | |||||||||||||||||||||
|
Equity
|
5.4 | 14.0 | 22.0 | 1.4 | 1.1 | 1.6 | 4.4 | 0.5 | |||||||||||||||||||||
|
Commodity
|
0.2 | 0.5 | 1.6 | — | 0.2 | — | 1.1 | — | |||||||||||||||||||||
|
Diversification
|
(28.7 | ) | (12.8 | ) | |||||||||||||||||||||||||
|
Total trading
VaR
|
21.6 | 45.7 | 50.1 | 13.2 | 14.2 | 15.6 | 18.9 | 10.4 | |||||||||||||||||||||
Non-trading
The principal market risks arising from
the G
roup
’
s non-trading activities are interest
rate risk, currency risk and equity risk.
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 inter
est rate risk. Non-trading currency risk
derives from the Group
’
s investments in overseas subsidiaries,
associates and branches.
The Group
’
s strategic investment in Bank of China,
venture capital portfolio and investments held by its general insurance
bus
iness are the principal
sources of non-trading equity price risk.
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 deb
t 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.
Interest rate
risk
Non-tradin
g interest rate risk arises from the
Group
’
s treasury activities and retail and
commercial banking businesses.
Treasury
The Group
’
s treasury activities include its money
market business and the management of internal funds flow within the
Group
’
s busines
ses. Money market portfolios include
cash instruments (principally debt securities, loans and deposits) 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
–£
1.5 million). During the year the
maximum VaR was £
6.4
million (2006
–
£
4.4 million), the minimum £
1.3 million (2006
–£
0.6 million) and the average
£
3.7 million (2006
–
£
2.4 million).
Retail and commercial
banking
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 c
o
ntractual 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 determi
n
ed 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.
A static maturity gap report is produced
as
at the month-end for
each division, in each functional currency based on the behaviouralised
repricing for each product. It is Group policy to include in the gap report,
non-financial assets and liabilities, mainly property, plant and equipment and
the G
r
oup
’
s capital and reserves, spread over
medium and longer term maturities. This report also includes hedge transactions,
principally derivatives.
Any residual non-trading interest rate
exposures are controlled by limiting repricing mismatches in the
indiv
idual business balance
sheets. Potential exposures to interest rate movements in the medium to long
term are measured and controlled using a version of the same VaR methodology
that is used for the Group
’
s trading portfolios but without
discount f
actors. Net
accrual income exposures are measured and controlled in terms of sensitivity
over time to movements in interest rates.
Notes on the accounts
continued
31 Risk management
(continued)
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 Board.
Non-trading
interest rate VaR
Non-trading interest
rate VaR for the Group’s treasury and retail and commercial banking activities
was £42.9 million at 31 December 2007 (2006 – £40.2 million) with the major
exposure being to changes in longer term US dollar interest rates. During the
year, the maximum VaR was £53.6 million (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 a
portfolio 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.
Currency
risk
The
Group does not maintain material non-trading open currency positions other than
the structural foreign currency translation exposures arising from its
investments in foreign subsidiaries and associated undertakings and their
related currency funding. The Group’s policy in relation to structural positions
is to match fund the structural foreign currency exposure arising from net asset
value, including goodwill, in foreign subsidiaries, equity accounted investments
and branches, except where doing so would materially increase the sensitivity of
either the Group’s or the subsidiary’s regulatory capital ratios to currency
movements. The policy requires structural foreign exchange positions to be
reviewed regularly by GALCO. Foreign exchange differences arising on the
translation of foreign operations are recognised directly in equity together
with the effective portion of foreign exchange differences arising on hedging
instruments.
Equity
classification of foreign currency denominated preference share issuances
requires that these shares be held on the balance sheet at historic cost.
Consequently, these share issuances have the effect of increasing the Group’s
structural foreign currency position.
The
tables below set out the Group’s structural foreign currency
exposures.
|
Net
investments
in
foreign
operations
|
Net
investment
hedges
|
Structural
foreign
currency
exposures
|
|
|
2007
|
£m
|
£m
|
£m
|
|
US
dollar
|
14,819
|
2,844
|
11,975
|
|
Euro
|
46,629
|
41,220
|
5,409
|
|
Swiss
franc
|
910
|
863
|
47
|
|
Chinese
RMB
|
2,600
|
1,938
|
662
|
|
Brazilian
real
|
3,755
|
—
|
3,755
|
|
Other
non-sterling
|
2,995
|
875
|
2,120
|
|
71,708
|
47,740
|
23,968
|
|
|
2006
|
|||
|
US
dollar
|
15,036
|
5,278
|
9,758
|
|
Euro
|
3,059
|
1,696
|
1,363
|
|
Swiss
franc
|
462
|
457
|
5
|
|
Chinese
RMB
|
3,013
|
—
|
3,013
|
|
Other
non-sterling
|
132
|
107
|
25
|
|
21,702
|
7,538
|
14,164
|
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.
Equity
risk
Non-trading equity
positions can result in changes in the Group’s non-trading income and reserves
arising from changes in equity prices/income.
The
types, nature and amounts of exchange-traded exposures, private equity
exposures, and other exposures vary significantly. Such exposures may take the
form of listed and unlisted equity shares, equity warrants and options, linked
equity fund investments, private equity and venture capital investments,
preference shares classified as equity and capital stock in the Federal Home
Loans Bank and Federal Reserve Bank.
Insurance
risk
The
Group is exposed to insurance risk, either directly through its businesses or
through using insurance as a tool to reduce other risk exposures.
Insurance risk is
the risk of fluctuations in the timing, frequency or severity of insured events,
relative to the expectations of the Group at the time of
underwriting.
Underwriting
and pricing risk
The
Group manages underwriting and pricing risk through the use of underwriting
guidelines which detail the class, nature and type of business that may be
accepted; pricing policies by product line and by brand; and centralised control
of policy wordings and any subsequent changes.
Claims
management risk
The
risk that claims are handled or paid inappropriately is managed using a range of
IT system controls and manual processes conducted by experienced staff. These,
together with a range of detailed policies and procedures ensure that all claims
are handled in a timely, appropriate and accurate manner.
Reinsurance
risk
Reinsurance is used
to protect against the impact of major catastrophic events or unforeseen volumes
of, or adverse trends in, large individual claims and to transfer risk that is
outside the Group’s current risk appetite.
Reinsurance of risks
above the Group’s risk appetite is only effective if the reinsurance premium
makes economic sense and the counterparty is financially secure. Acceptable
reinsurers are rated A- or better unless specifically authorised.
Reserving
risk
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.
|
Accident
year
|
||||||||||||||||||||||||||||
|
Insurance
claims – gross
|
2002
£m
|
2003
£m
|
2004
£m
|
2005
£m
|
2006
£m
|
2007
£m
|
Total
£m
|
|||||||||||||||||||||
|
Estimate of
ultimate claims costs:
|
||||||||||||||||||||||||||||
|
At end of
accident year
|
3,013 | 3,658 | 3,710 | 4,265 | 4,269 | 4,621 | 23,536 | |||||||||||||||||||||
|
One year
later
|
91 | (140 | ) | (186 | ) | (92 | ) | (275 | ) | — | (602 | ) | ||||||||||||||||
|
Two years
later
|
1 | (106 | ) | (88 | ) | (147 | ) | — | — | (340 | ) | |||||||||||||||||
|
Three years
later
|
(12 | ) | (55 | ) | (85 | ) | — | — | — | (152 | ) | |||||||||||||||||
|
Four years
later
|
(17 | ) | (47 | ) | — | — | — | — | (64 | ) | ||||||||||||||||||
|
Five years
later
|
(19 | ) | — | — | — | — | — | (19 | ) | |||||||||||||||||||
|
Current
estimate of cumulative claims
|
3,057 | 3,310 | 3,351 | 4,026 | 3,994 | 4,621 | 22,359 | |||||||||||||||||||||
|
Cumulative
payments to date
|
(2,893 | ) | (2,972 | ) | (2,825 | ) | (3,272 | ) | (2,947 | ) | (2,306 | ) | (17,215 | ) | ||||||||||||||
| 164 | 338 | 526 | 754 | 1,047 | 2,315 | 5,144 | ||||||||||||||||||||||
|
Liability in
respect of prior years
|
202 | |||||||||||||||||||||||||||
|
Claims
handling costs
|
120 | |||||||||||||||||||||||||||
|
Gross general
insurance claims liability
|
5,466 | |||||||||||||||||||||||||||
|
Accident
year
|
||||||||||||||||||||||||||||
|
Insurance
claims – net of reinsurance
|
2002
£m
|
2003
£m
|
2004
£m
|
2005
£m
|
2006
£m
|
2007
£m
|
Total
£m
|
|||||||||||||||||||||
|
Estimate of
ultimate claims costs:
|
||||||||||||||||||||||||||||
|
At end of
accident year
|
2,584 | 3,215 | 3,514 | 4,168 | 4,215 | 4,572 | 22,268 | |||||||||||||||||||||
|
One year
later
|
59 | (106 | ) | (168 | ) | (67 | ) | (261 | ) | — | (543 | ) | ||||||||||||||||
|
Two years
later
|
(12 | ) | (103 | ) | (90 | ) | (161 | ) | — | — | (366 | ) | ||||||||||||||||
|
Three years
later
|
(3 | ) | (53 | ) | (81 | ) | — | — | — | (137 | ) | |||||||||||||||||
|
Four years
later
|
(21 | ) | (44 | ) | — | — | — | — | (65 | ) | ||||||||||||||||||
|
Five years
later
|
(24 | ) | — | — | — | — | — | (24 | ) | |||||||||||||||||||
|
Current
estimate of cumulative claims
|
2,583 | 2,909 | 3,175 | 3,940 | 3,954 | 4,572 | 21,133 | |||||||||||||||||||||
|
Cumulative
payments to date
|
(2,473 | ) | (2,648 | ) | (2,721 | ) | (3,226 | ) | (2,771 | ) | (2,379 | ) | (16,218 | ) | ||||||||||||||
| 110 | 261 | 454 | 714 | 1,183 | 2,193 | 4,915 | ||||||||||||||||||||||
|
Liability in
respect of prior years
|
168 | |||||||||||||||||||||||||||
|
Claims
handling costs
|
120 | |||||||||||||||||||||||||||
|
Net general
insurance claims liability
|
5,203 | |||||||||||||||||||||||||||
Notes on the accounts
continued
31 Risk management
(continued)
Claims
reserves
It
is the Group’s policy to hold 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.
The
Group’s focus is on high volume and relatively straightforward products, for
example home and motor. This facilitates the generation of comprehensive
underwriting and claims data, which are used to accurately price and monitor the
risks accepted.
The
following table indicates the diversity of risks underwritten and the
corresponding loss ratios for each major class of business, gross and net of
reinsurance.
|
2007
|
2006
|
2005
|
|||||||||
|
Earned
|
Claims
|
Loss
|
Earned
|
Loss
|
Earned
|
Loss
|
|||||
|
premiums
|
incurred
|
ratio
|
premiums
|
ratio
|
premiums
|
ratio
|
|||||
|
£m
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
|||||
|
Residential
property
|
Gross
|
1,087
|
894
|
82
|
1,121
|
56
|
1,098
|
55
|
|||
|
Net
|
1,020
|
878
|
86
|
1,061
|
59
|
1,037
|
56
|
||||
|
Personal
motor
|
Gross
|
3,254
|
2,616
|
80
|
3,384
|
84
|
3,312
|
79
|
|||
|
Net
|
3,161
|
2,560
|
81
|
3,279
|
85
|
3,257
|
80
|
||||
|
Commercial
property
|
Gross
|
211
|
116
|
55
|
218
|
37
|
212
|
39
|
|||
|
Net
|
191
|
115
|
60
|
198
|
38
|
193
|
40
|
||||
|
Commercial
motor
|
Gross
|
142
|
107
|
75
|
90
|
69
|
102
|
53
|
|||
|
Net
|
133
|
107
|
80
|
88
|
68
|
96
|
46
|
||||
|
Other
|
Gross
|
851
|
337
|
40
|
842
|
47
|
853
|
63
|
|||
|
Net
|
839
|
340
|
41
|
833
|
49
|
761
|
67
|
||||
|
Total
|
Gross
|
5,545
|
4,070
|
73
|
5,655
|
71
|
5,577
|
70
|
|||
|
Net
|
5,344
|
4,000
|
75
|
5,459
|
73
|
5,344
|
71
|
||||
The
Group has no interest rate exposure from general insurance liabilities because
provisions for claims under short-term insurance contracts are not
discounted.
Frequency
and severity of specific risks and sources of uncertainty
Most general
insurance contracts are written on an annual basis, which means that the Group’s
liability extends for a 12 month period, after which the Group is entitled to
decline or renew or can impose renewal terms by amending the premium, terms and
conditions, or both.
The
frequency and severity of claims and the sources of uncertainty for the key
classes that the Group is exposed to are as follows:
a) Motor
insurance contracts (private and commercial)
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.
There are many
sources of uncertainty that will affect the 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.
b) Property
insurance contracts (residential and commercial)
The
major causes of claims for property insurance are theft, flood, escape of water,
fire, storm, subsidence and various types of accidental damage.
The
major source of uncertainty in the Group’s property accounts is the volatility
of weather. Weather in the UK can affect most of the above perils. Over a longer
period, the strength of the economy is also a factor.
c) Other
commercial insurance contracts
Other commercial
claims come mainly 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. 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.
Fluctuations in the
social and economic climate are a source of uncertainty in the Group’s business
interruption and general liability accounts. Other sources of uncertainty are
changes in the law, or its interpretation, and reserving risk. Other
uncertainties are significant events (for example terrorist attacks) and any
emerging new heads of damage or types of claim that are not envisaged when the
policy is written.
Life
business
The
Group’s three UK regulated life companies, National Westminster Life Assurance
Limited, Royal Scottish Assurance plc (“RSA”) and Direct Line Life Insurance
Company Limited, are required to meet minimum capital requirements at all times
under the Financial Service Authority’s Prudential Sourcebook. The capital
resources covering the regulatory requirement are not transferable to other
areas of the Group. To ensure that the capital requirement is satisfied at all
times, each company holds an additional voluntary buffer above the regulatory
minimum.
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.
The
Group’s long-term assurance contracts include whole-life, term assurance,
endowment assurances, flexible whole life, pension and annuity contracts that
are expected to remain in force for an extended period of time.
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:
|
Europe
|
UK
|
||||
|
Assumptions
|
2007
|
2007
|
2006
|
2005
|
|
|
Valuation
interest rate
|
|||||
|
Term
assurance
|
3.00%
|
3.00%
|
2.85%
|
||
|
Interest
|
4.06%
|
3.00%
|
3.00%
|
2.85%
|
|
|
Unit
growth
|
5.38%
|
3.50%
|
3.50%
|
2.85%
|
|
|
Expense
inflation
|
3.00%
|
4.00%
|
4.00%
|
4.00%
|
|
Sample UK mortality
rates, expressed as deaths per million per annum, for term assurance products
(age 40).
|
Mortality
|
|||
|
Male
non-smoker
|
810
|
517
|
470
|
|
Male
smoker
|
1,830
|
983
|
893
|
|
Female
non-smoker
|
460
|
278
|
253
|
|
Female
smoker
|
1,310
|
618
|
563
|
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).
Expenses:
|
2007
|
2006
|
2005
|
|
|
Pre-2000
products – RSA
|
per
annum
|
per
annum
|
per
annum
|
|
Lifestyle
protection plan
|
£25.18
|
£28.96
|
£29.81
|
|
Mortgage
savings plan
|
£56.67
|
£65.15
|
£67.05
|
|
Pre-2000
products – NatWest Life
|
|||
|
Term
assurances
|
£26.01
|
£26.01
|
£26.79
|
|
Single premium
unit-linked bonds
|
£23.17
|
£23.17
|
£23.86
|
|
Post-2000
products
|
|||
|
Term
assurances
|
£23.16
|
£23.16
|
£23.97
|
|
Guaranteed
bonds
|
£25.71
|
£25.71
|
£26.92
|
Notes on the accounts
continued
31 Risk management
(continued)
Frequency and severity of claims
– for contracts where death is the insured risk, the most significant
factors that could increase the overall frequency of claims are epidemics or
widespread changes in lifestyle, resulting in earlier or more claims than
expected.
For
contracts where survival is the insured risk, the most significant factor is
continued improvement in medical science and social conditions that would
increase longevity.
For
contracts with fixed and guaranteed benefits and fixed future premiums, there
are no mitigating terms and conditions that reduce the insurance risk accepted.
Participating contracts can result in a significant portion of the insurance
risk being shared with the insured party.
Sources of uncertainty in the
estimation of future benefit payments and premium receipts
– the Group
uses base tables of standard mortality appropriate to the type of contract being
written and the territory in which the insured person resides. These are
adjusted to reflect the Group’s experience, mortality improvements and voluntary
termination behaviour.
|
Sensitivity
factor
|
Description
of sensitivity factor applied
|
|
Interest rate
and investment return
|
Change in
market interest rates of ±1%.
|
|
The test
allows consistently for similar changes to investment returns
and
|
|
|
movements in
the market value of backing fixed interest securities.
|
|
|
Expenses
|
Increase in
maintenance expenses of 10%
|
|
Assurance
mortality/morbidity
|
Increase in
mortality/morbidity rates for assurance contracts of 5%
|
|
Annuitant
mortality
|
Reduction in
mortality rates for annuity contracts of
5%
|
The
above UK sensitivity factors are applied via actuarial and statistical models,
with the following impact on the financial statements.
|
Impact on
profit and equity
|
||||||||||||
|
2007
|
2006
|
|||||||||||
|
Risk
factor
|
Variability
|
£m
|
£m
|
|||||||||
|
Interest
rates
|
+1% | (18 | ) | (19 | ) | |||||||
|
Interest
rates
|
–1% | 15 | 23 | |||||||||
|
Expenses
|
+10% | (5 | ) | (5 | ) | |||||||
|
Assurance
mortality/morbidity
|
+5% | (8 | ) | (6 | ) | |||||||
|
Annuitant
mortality
|
–5% | — | — | |||||||||
Limitations of sensitivity
analysis:
the above tables demonstrate the effect of a change in a key UK
assumption whilst other assumptions remain unaffected (assumptions related to
ABN 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 non-linear, 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.
32
Capital resources
The
Group’s regulatory capital resources at 31 December in accordance with Financial
Services Authority (‘FSA’) definitions were as follows:
|
2007
|
2006
|
|||||||
|
Composition of
regulatory capital
|
£m
|
£m | ||||||
|
Tier 1
capital:
|
||||||||
|
Owners' equity
and minority interests
|
88,311 | 41,700 | ||||||
|
Innovative
tier 1 securities and preference shares transferred from subordinated
liabilities
|
6,919 | 4,900 | ||||||
|
Goodwill
capitalised and other intangible assets
|
(48,492 | ) | (18,904 | ) | ||||
|
Regulatory and
other adjustments
|
(2,374 | ) | 2,345 | |||||
|
Total
qualifying tier 1 capital
|
44,364 | 30,041 | ||||||
|
Tier 2
capital:
|
||||||||
|
Unrealised
gains on available-for-sale equities
|
3,115 | 3,790 | ||||||
|
Collective
impairment allowances, net of taxes
|
2,582 | 2,267 | ||||||
|
Qualifying
subordinated debt
|
27,681 | 21,024 | ||||||
|
Minority and
other interests in tier 2 capital
|
315 | 410 | ||||||
|
Total
qualifying tier 2 capital
|
33,693 | 27,491 | ||||||
|
Total
qualifying tier 3 capital
|
200 | — | ||||||
|
Supervisory
deductions:
|
||||||||
|
Unconsolidated
investments
|
4,297 | 3,870 | ||||||
|
Investments in
other banks
|
463 | 5,203 | ||||||
|
Other
deductions
|
5,523 | 1,510 | ||||||
|
Total
regulatory capital
|
67,974 | 46,949 | ||||||
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 ‘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 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 and overseas.
Notes on the accounts
continued
33
Memorandum items
Contingent
liabilities and commitments
The
amounts shown in the table below are intended only to provide an indication of
the volume of business outstanding at 31 December. Although the Group is exposed
to credit risk in the event of non-performance of the obligations undertaken by
customers, the amounts shown do not, and are not intended to, provide any
indication of the Group’s expectation of future losses.
|
More
than
|
More
than
|
|||||
|
1 year
but
|
3 years
but
|
|||||
|
Less
than
|
less
than
|
less
than
|
Over
|
|||
|
1
year
|
3
years
|
5
years
|
5
years
|
2007
|
2006
|
|
|
Group
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Contingent
liabilities:
|
||||||
|
Guarantees and
assets pledged as collateral security
|
27,943
|
5,626
|
2,226
|
10,646
|
46,441
|
10,725
|
|
Other
contingent liabilities
|
7,954
|
2,073
|
1,456
|
3,996
|
15,479
|
9,121
|
|
35,897
|
7,699
|
3,682
|
14,642
|
61,920
|
19,846
|
|
|
Commitments:
|
||||||
|
Undrawn formal
standby facilities, credit lines and
|
||||||
|
other
commitments to lend
|
||||||
|
– less than
one year
|
184,791
|
—
|
—
|
—
|
184,791
|
140,742
|
|
– one year and
over
|
16,456
|
38,966
|
58,405
|
37,070
|
150,897
|
101,913
|
|
Other
commitments
|
2,001
|
324
|
165
|
1
|
2,491
|
2,402
|
|
203,248
|
39,290
|
58,570
|
37,071
|
338,179
|
245,057
|
Banking commitments
and contingent obligations, which have been entered into on behalf of customers
and for which there are corresponding obligations from customers, are not
included in assets and liabilities. The Group’s maximum exposure to credit loss,
in the event of non-performance by the other party and where all counterclaims,
collateral or security proves valueless, is represented by the contractual
nominal amount of these instruments included in the table. These commitments and
contingent obligations are subject to the Group’s normal credit approval
processes.
Contingent
liabilities
Guarantees – the
Group gives guarantees on behalf of customers. A financial guarantee represents
an irrevocable undertaking that the Group will meet a customer’s obligations to
third parties if the customer fails to do so. The maximum amount that the Group
could be required to pay under a guarantee is its principal amount as disclosed
in the table above. The Group expects most guarantees it provides to expire
unused.
Other contingent
liabilities – these include standby letters of credit, supporting customer debt
issues and contingent liabilities relating to customer trading activities such
as those arising from performance and customs bonds, warranties and
indemnities.
Commitments
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. Commitments to lend include commercial standby
facilities and credit lines, liquidity facilities to commercial paper conduits
and unutilised overdraft facilities.
Other commitments –
these include documentary credits, which are commercial letters of credit
providing for payment by the Group to a named beneficiary against presentation
of specified documents, forward asset purchases, forward deposits placed and
undrawn note issuance and revolving underwriting facilities, and other
short-term trade related transactions.
Regulatory
enquiries and investigations
In
the normal course of business the Group and its subsidiaries co-operate with
regulatory authorities in various jurisdictions in their enquiries or
investigations into alleged or possible breaches of regulations.
As
previously disclosed by ABN AMRO, the United States 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
Bank Secrecy Act compliance matters. ABN AMRO has cooperated and continues to
cooperate fully with the investigation. Prior to the acquisition by the Group,
ABN AMRO had reached an agreement in principle with the Department of Justice
that would resolve all presently known aspects of the ongoing investigation by
way of a Deferred Prosecution Agreement in return for a settlement payment by
ABN AMRO of US$500 million (which amount was accrued by ABN AMRO in its interim
financial statements for the six months ended 30 June 2007). Negotiations are
continuing to enable a written agreement to be concluded.
Certain of the
Group’s subsidiaries have received requests for information from various US
governmental agencies and self-regulatory organisations including in connection
with sub-prime mortgages and securitisations, collateralised debt obligations
and synthetic products related to sub-prime mortgages. The Group and its
subsidiaries are cooperating with these various requests for information and
investigations.
Trustee
and other fiduciary activities
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. The Group earned fee income of £695 million (2006 – £472 million;
2005 – £366 million) from these activities.
Litigation
Proceedings,
including consolidated class actions on behalf of former Enron securities
holders, have been brought in the United States against a large number of
defendants, including the Group, following the collapse of Enron. The claims
against the Group could be significant; the class plaintiff’s position is that
each defendant is responsible for an entire aggregate damage amount less
settlements – they have not quantified claimed damages against the Group in
particular. The Group considers that it has substantial and credible legal and
factual defences to these claims and will continue to defend them vigorously.
Recent Supreme Court and Fifth Circuit decisions provide further support for the
Group’s position. The Group is unable reliably to estimate the liability, if
any, that might arise or its effect on the Group’s consolidated net assets, its
operating results or cash flows in any particular period.
On
27 July 2007, following discussions between the Office of Fair Trading (‘OFT’),
the Financial Ombudsman Service, the Financial Services Authority and all the
major UK banks (including the Group) in the first half of 2007, the OFT issued
proceedings in a test case against the banks including the Group to determine
the legal status and enforceability of certain charges relating to unauthorised
overdrafts. The hearing of the test case commenced on 17 January 2008. The Group
maintains that its charges are fair and enforceable and is defending its
position vigorously. It cannot, however, at this stage predict with any
certainty the outcome of the test case and is unable reliably to estimate the
liability, if any, that may arise or its effect on the Group’s consolidated net
assets, operating results or cash flows in any particular period.
Members of the Group
are engaged in other litigation in the United Kingdom and a number of overseas
jurisdictions, including the United States, involving claims by and against them
arising in the ordinary course of business. The Group has reviewed these other
actual, threatened and known potential claims and proceedings and, after
consulting with its legal advisers, does not expect that the outcome of these
other claims and proceedings will have a material adverse effect on its
consolidated net assets, operating results or cash flows in any particular
period.
Additional
contingent liabilities arise in the normal course of the Group’s business. It is
not anticipated that any material loss will arise from these
transactions.
Notes on the accounts
continued
34
Net cash inflow from operating activities
|
Group
|
Company
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
£m
|
£m | £m | £m | £m | £m | |||||||||||||||||||
|
Operating
profit before tax
|
9,900 | 9,186 | 7,936 | 2,372 | 3,486 | 1,932 | ||||||||||||||||||
|
(Increase)/decrease
in prepayments and accrued income
|
(662 | ) | 322 | 1,064 | (1 | ) | — | 4 | ||||||||||||||||
|
Interest on
subordinated liabilities
|
1,542 | 1,386 | 1,271 | 470 | 520 | 583 | ||||||||||||||||||
|
(Decrease)/increase
in accruals and deferred income
|
(818 | ) | 515 | (1,200 | ) | — | (27 | ) | 8 | |||||||||||||||
|
Provisions for
impairment losses
|
2,128 | 1,877 | 1,707 | — | — | — | ||||||||||||||||||
|
Loans and
advances written-off net of recoveries
|
(1,781 | ) | (1,626 | ) | (1,870 | ) | — | — | — | |||||||||||||||
|
Unwind of
discount on impairment losses
|
(166 | ) | (142 | ) | (144 | ) | — | — | — | |||||||||||||||
|
Profit on sale
of property, plant and equipment
|
(741 | ) | (216 | ) | (91 | ) | — | — | — | |||||||||||||||
|
(Profit)/loss
on sale of subsidiaries and associates
|
(67 | ) | (44 | ) | 80 | — | — | — | ||||||||||||||||
|
Profit on sale
of securities
|
(544 | ) | (369 | ) | (667 | ) | — | — | — | |||||||||||||||
|
Charge for
defined benefit pension schemes
|
489 | 580 | 462 | — | — | — | ||||||||||||||||||
|
Cash
contribution to defined benefit pension schemes
|
(599 | ) | (536 | ) | (452 | ) | — | — | — | |||||||||||||||
|
Other
provisions utilised
|
(211 | ) | (42 | ) | (34 | ) | — | — | — | |||||||||||||||
|
Depreciation
and amortisation
|
1,970 | 1,678 | 1,825 | — | — | — | ||||||||||||||||||
|
Elimination of
foreign exchange differences
|
(10,282 | ) | 4,516 | (3,060 | ) | (58 | ) | (22 | ) | (30 | ) | |||||||||||||
|
Other non-cash
items
|
(373 | ) | (1,395 | ) | (257 | ) | 2 | 45 | (116 | ) | ||||||||||||||
|
Net cash
(outflow)/inflow from trading activities
|
(215 | ) | 15,690 | 6,570 | 2,785 | 4,002 | 2,381 | |||||||||||||||||
|
(Increase)/decrease
in loans and advances to banks and customers
|
(90,829 | ) | (44,525 | ) | (36,778 | ) | (8 | ) | 346 | (14 | ) | |||||||||||||
|
Increase in
securities
|
(26,167 | ) | (16,703 | ) | (28,842 | ) | — | — | — | |||||||||||||||
|
(Increase)/decrease
in other assets
|
(384 | ) | 671 | (2,390 | ) | — | 2 | 5 | ||||||||||||||||
|
(Increase)/decrease
in derivative assets
|
(134,356 | ) | (21,018 | ) | (5,758 | ) | (173 | ) | 55 | 50 | ||||||||||||||
|
Changes in
operating assets
|
(251,736 | ) | (81,575 | ) | (73,768 | ) | (181 | ) | 403 | 41 | ||||||||||||||
|
Increase/(decrease)
in deposits by banks and customers
|
81,645 | 63,091 | 32,424 | 4,677 | (164 | ) | 832 | |||||||||||||||||
|
Increase in
insurance liabilities
|
2,706 | 244 | 620 | — | — | — | ||||||||||||||||||
|
Increase/(decrease)
in debt securities in issue
|
59,735 | (4,457 | ) | 24,147 | 10,936 | (803 | ) | 1,328 | ||||||||||||||||
|
(Decrease)/increase
in other liabilities
|
(1,036 | ) | 935 | 571 | (7 | ) | 14 | (55 | ) | |||||||||||||||
|
Increase/(decrease)
in derivative liabilities
|
128,874 | 21,674 | 5,161 | 137 | 42 | (96 | ) | |||||||||||||||||
|
Increase in
settlement balances and short positions
|
8,073 | 4,068 | 10,326 | — | — | — | ||||||||||||||||||
|
Changes in
operating liabilities
|
279,997 | 85,555 | 73,249 | 15,743 | (911 | ) | 2,009 | |||||||||||||||||
|
Total income
taxes (paid)/received
|
(2,442 | ) | (2,229 | ) | (1,911 | ) | 6 | 154 | (18 | ) | ||||||||||||||
|
Net cash
inflow from operating activities
|
25,604 | 17,441 | 4,140 | 18,353 | 3,648 | 4,413 | ||||||||||||||||||
35
Analysis of the net investment in business interests and intangible
assets
(a)
Acquisition of ABN AMRO
On
17 October 2007, the Group, through its subsidiary RFS Holdings B.V. (‘RFS’),
acquired 99% of the ordinary shares of ABN AMRO Holding N.V., the holding
company of a major
European banking
group based in the Netherlands with subsidiaries that undertake commercial
banking operations, investment banking and other related financial activities.
The provisional fair values of ABN AMRO’s assets and liabilities at the date of
acquisition and the consideration paid were as follows:
|
Pre-acquisition
|
Provisional
|
Recognised
|
||||||||||||||
|
carrying
|
Disposal
|
fair
value
|
acquisition
|
|||||||||||||
|
amounts
|
groups
(1)
|
adjustments
(2)
|
values
(2)
|
|||||||||||||
|
£m
|
£m
|
£m
|
£m
|
|||||||||||||
|
Cash and
balances at central banks
|
7,263 | (186 | ) | — | 7,077 | |||||||||||
|
Loans and
advances to banks
|
120,120 | (3,646 | ) | — | 116,474 | |||||||||||
|
Loans and
advances to customers
|
314,287 | (26,158 | ) | (1,843 | ) | 286,286 | ||||||||||
|
Treasury and
other eligible bills and debt and equity securities
|
166,018 | (3,804 | ) | — | 162,214 | |||||||||||
|
Derivatives
|
86,695 | (322 | ) | — | 86,373 | |||||||||||
|
Intangible
assets
|
4,239 | (3,522 | ) | 4,282 | 4,999 | |||||||||||
|
Property,
plant and equipment
|
2,062 | (747 | ) | 175 | 1,490 | |||||||||||
|
Other
assets
|
32,710 | (7 | ) | 1,357 | 34,060 | |||||||||||
|
Assets of
disposal groups
(1)
|
2,987 | 38,392 | 787 | 42,166 | ||||||||||||
|
Deposits by
banks
|
(160,906 | ) | 2,808 | (321 | ) | (158,419 | ) | |||||||||
|
Customer
accounts
|
(253,583 | ) | 13,786 | (152 | ) | (239,949 | ) | |||||||||
|
Debt
securities in issue
|
(134,630 | ) | 5,937 | 776 | (127,917 | ) | ||||||||||
|
Settlement
balances and short positions
|
(44,748 | ) | 36 | — | (44,712 | ) | ||||||||||
|
Derivatives
|
(85,491 | ) | 417 | — | (85,074 | ) | ||||||||||
|
Subordinated
liabilities
|
(11,748 | ) | 868 | 685 | (10,195 | ) | ||||||||||
|
Other
liabilities
|
(21,268 | ) | 271 | (1,814 | ) | (22,811 | ) | |||||||||
|
Liabilities of
disposal groups
(1)
|
(2,377 | ) | (24,123 | ) | — | (26,500 | ) | |||||||||
|
Net
identifiable assets and liabilities
|
21,630 | — | 3,932 | 25,562 | ||||||||||||
|
Minority
interests
|
(242 | ) | ||||||||||||||
|
Goodwill on
acquisition
(3)
|
23,255 | |||||||||||||||
|
Consideration
|
48,575 | |||||||||||||||
|
Satisfied
by:
|
||||||||||||||||
|
Issue of 531
million ordinary shares of the company
(4)
|
2,719 | |||||||||||||||
|
Cash
|
45,786 | |||||||||||||||
|
Fees and
expenses relating to the acquisition
|
70 | |||||||||||||||
|
Consideration
|
48,575 | |||||||||||||||
|
Net
cash:
|
||||||||||||||||
|
Cash
consideration
|
45,856 | |||||||||||||||
|
Cash
acquired
|
(60,093 | ) | ||||||||||||||
| 14,237 | ||||||||||||||||
|
Notes:
|
|
|
(1)
|
Following an
agreement between Santander and Banca Monte dei Paschi di Siena S.p.A., it
was announced on 10 November 2007 that Banca Antonveneta SpA., excluding
its subsidiary Interbanca will be sold by ABN AMRO to Banca Monte dei
Paschi di Siena S.p.A. for consideration of €9 billion (£6.6 billion). The
sale of ABN AMRO’s asset management business to Fortis received approval
from the Managing Board of ABN AMRO on 23 November 2007. These businesses
and ABN AMRO’s private equity business have been classified as disposal
groups on the acquisition of ABN AMRO. In addition, under the terms of the
Consortium and Shareholders’ Agreement, consortium members other than the
Group have agreed to acquire, in due course, various ABN AMRO businesses
including operations in Brazil, the commercial and retail businesses in
the Netherlands, the private clients business and
Interbanca.
|
|
(2)
|
The initial
accounting for the acquisition has been determined provisionally because
of its complexity and the limited time available between the acquisition
and the preparation of these financial
statements.
|
|
(3)
|
Goodwill
arising on the acquisition is attributable to anticipated cost and revenue
synergies and long-term earnings potential of the acquired
businesses.
|
|
(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.
|
|
(5)
|
ABN AMRO made
a loss for the period since its acquisition of £123 million, of which £136
million was attributable to discontinued
operations.
|
Notes on the accounts
continued
35 Analysis of the net investment in
business interests and intangible assets
(continued)
(b)
Other acquisitions and disposals
|
Group
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
£m
|
£m
|
£m
|
||||||||||
|
Fair value
given for businesses acquired
|
(280 | ) | (21 | ) | (85 | ) | ||||||
|
Cash and cash
equivalents acquired
|
5 | — | — | |||||||||
|
Non-cash
consideration
|
— | — | 10 | |||||||||
|
Net outflow of
cash in respect of purchases
|
(275 | ) | (21 | ) | (75 | ) | ||||||
|
Cash and cash
equivalents in businesses sold
|
21 | 229 | 10 | |||||||||
|
Other assets
sold
|
16 | 36 | 208 | |||||||||
|
Non-cash
consideration
|
(2 | ) | (1 | ) | (30 | ) | ||||||
|
Profit/(loss)
on disposal
|
67 | 44 | (80 | ) | ||||||||
|
Net inflow of
cash in respect of disposals
|
102 | 308 | 108 | |||||||||
|
Dividends
received from joint ventures
|
11 | 29 | 16 | |||||||||
|
Cash
expenditure on intangible assets
|
(435 | ) | (379 | ) | (345 | ) | ||||||
|
Net
outflow
|
(597 | ) | (63 | ) | (296 | ) | ||||||
Excluding the impact
of the amortisation of fair value adjustments and funding costs, it is estimated
that the Group would have reported total income of £40.7 billion and profit
after tax from continuing operations for the year of £9.2 billion had all
acquisitions occurred on 1 January 2007.
36
Interest received and paid
|
Group
|
Company
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Interest
received
|
32,720 | 24,381 | 21,608 | 457 | 594 | 488 | ||||||||||||||||||
|
Interest
paid
|
(18,976 | ) | (14,656 | ) | (11,878 | ) | (746 | ) | (632 | ) | (704 | ) | ||||||||||||
| 13,744 | 9,725 | 9,730 | (289 | ) | (38 | ) | (216 | ) | ||||||||||||||||
37
Analysis of changes in financing during the year
|
Group
|
Company
|
|||||||||||||||||||||||||||||||
|
Share
capital,
share
premium
and paid-in
equity
|
Subordinated
liabilities
|
Share
capital,
share
premium
and paid-in
equity
|
Subordinated
liabilities
|
|||||||||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
At 1
January
|
13,297 | 12,603 | 27,654 | 28,274 | 13,297 | 12,603 | 8,194 | 9,242 | ||||||||||||||||||||||||
|
Issue of
ordinary shares
|
77 | 104 | 77 | 104 | ||||||||||||||||||||||||||||
|
Issue of other
equity securities
|
4,673 | 671 | 4,673 | 671 | ||||||||||||||||||||||||||||
|
Repurchase of
ordinary shares
|
— | (394 | ) | — | (394 | ) | ||||||||||||||||||||||||||
|
Net proceeds
from issue of
|
||||||||||||||||||||||||||||||||
|
subordinated
liabilities
|
1,018 | 3,027 | — | 399 | ||||||||||||||||||||||||||||
|
Repayment of
subordinated liabilities
|
(1,708 | ) | (1,318 | ) | (469 | ) | (547 | ) | ||||||||||||||||||||||||
|
Net cash
inflow/(outflow) from financing
|
4,750 | 381 | (690 | ) | 1,709 | 4,750 | 381 | (469 | ) | (148 | ) | |||||||||||||||||||||
|
Acquisition of
subsidiaries
|
2,719 | — | 10,195 | — | 2,719 | — | — | — | ||||||||||||||||||||||||
|
Currency
translation and other adjustments
|
159 | 313 | 820 | (2,329 | ) | 159 | 313 | 18 | (900 | ) | ||||||||||||||||||||||
|
At 31
December
|
20,925 | 13,297 | 37,979 | 27,654 | 20,925 | 13,297 | 7,743 | 8,194 | ||||||||||||||||||||||||
38
Analysis of cash and cash equivalents
|
Group
|
Company
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
At 1
January
|
||||||||||||||||||||||||
|
–
cash
|
28,378 | 25,476 | 23,723 | 11 | 30 | 60 | ||||||||||||||||||
|
– cash
equivalents
|
43,273 | 27,073 | 26,298 | 646 | 1,096 | 249 | ||||||||||||||||||
|
Acquisition of
subsidiaries
|
60,098 | — | — | — | — | — | ||||||||||||||||||
|
Net cash
inflow/(outflow)
|
17,206 | 19,102 | 2,528 | 916 | (469 | ) | 817 | |||||||||||||||||
|
At 31
December
|
148,955 | 71,651 | 52,549 | 1,573 | 657 | 1,126 | ||||||||||||||||||
|
Comprising:
|
||||||||||||||||||||||||
|
Cash and
balances at central banks
|
17,428 | 5,752 | 4,456 | — | — | — | ||||||||||||||||||
|
Treasury bills
and debt securities
|
6,818 | 1,596 | 998 | — | — | — | ||||||||||||||||||
|
Loans and
advances to banks
|
124,709 | 64,303 | 47,095 | 1,573 | 657 | 1,126 | ||||||||||||||||||
|
Cash and cash
equivalents
|
148,955 | 71,651 | 52,549 | 1,573 | 657 | 1,126 | ||||||||||||||||||
Certain subsidiary
undertakings are required to maintain balances with the Bank of England which,
at 31 December 2007, amounted to £439 million (2006 – £369 million). Certain
subsidiary undertakings are required by law to maintain reserve balances with
the Federal Reserve Bank in the US. Such reserve balances amounted to US$1
million at 31 December 2007 (2006 – US$13 million). ABN AMRO had mandatory
reserve deposits of €6 million at 31 December 2007.
Notes on the accounts
continued
39
Segmental analysis
(a)
Divisions
The
directors manage the Group primarily by class of business and present the
segmental analysis on that basis. The Group’s activities are organised as
follows:
|
·
|
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.
|
|
·
|
RFS Holdings
excluding minority interest comprises those activities of ABN AMRO that
are attributable to the Group including investment banking, international
cash payments and trade finance.
|
|
·
|
UK Corporate
Banking provides banking, finance and risk management services to UK
corporate customers. Through its network of relationship managers across
the country it distributes the full range of Corporate Markets’ products
and services to companies.
|
|
·
|
Retail
comprises both the Royal Bank and NatWest retail brands, and a number of
direct providers offering a full range of banking products and related
financial services to the personal, premium and small business markets
across several distribution channels. Retail also includes the Group’s
non-branch based retail business, such as Tesco Personal Finance, that
issues a comprehensive range of credit and charge cards to personal and
corporate customers and provides card processing services for retail
businesses.
|
|
·
|
Wealth
Management provides private banking and investment services to its global
clients through Coutts Group, Adam & Company, The Royal Bank of
Scotland International and NatWest
Offshore.
|
|
·
|
Ulster Bank
Group brings together the Ulster Bank and First Active businesses. Retail
Markets serves personal customers through both brands and Corporate
Markets caters for the banking needs of business and corporate
customers.
|
|
·
|
Citizens is
engaged in retail and corporate banking activities through its branch
network in 13 states in the United States and through non-branch offices
in other states. Citizens includes the two banks, RBS Citizens, NA and
Citizens Bank of Pennsylvania. Citizens also includes RBS Lynk, our
merchant acquiring business, and Kroger Personal Finance, the credit card
joint venture with the second largest US supermarket
group.
|
|
·
|
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 International Division, RBS Insurance sells general
insurance, mainly motor, in Spain, Germany and Italy. The Intermediary and
Broker Division sells general insurance products through independent
brokers.
|
|
·
|
Manufacturing
supports the customer-facing businesses and provides operational
technology, customer support in telephony, account management, lending and
money transmission, global purchasing, property and other
services.
|
|
·
|
RFS Holdings
minority interest comprises those activities of ABN AMRO that are
attributable to the other consortium banks including retail banking in the
Netherlands and Brazil.
|
Segments charge
market prices for services rendered to other parts of the Group with the
exception of Manufacturing and central items. The expenditure incurred by
Manufacturing relates to costs principally in respect of the Group’s banking and
insurance operations in the UK and Ireland. These costs reflect activities that
are shared between the various customer-facing divisions. These shared costs and
related assets and liabilities are not allocated to divisions in the day-to-day
management of the businesses but are allocated to customer-facing divisions for
financial reporting purposes on a basis the directors consider to be reasonable.
Funding charges between segments are determined by Group Treasury, having regard
to commercial demands. The results of each division before amortisation of
purchased intangible assets, integration costs and net gain on sale of strategic
investments and subsidiaries, and where appropriate, allocation of Manufacturing
costs (‘Contribution’) and after allocation of Manufacturing costs (‘Operating
profit before tax’) are shown below.
|
Group
|
||||||||||||||||||||||||||||||||||||
|
Net interest
income
|
Non-interest
income
|
Total
|
Operating
expenses and insurance claims
|
Depreciation
and amortisation
|
Impairment
losses
|
Contribution
|
Allocation of
Manufacturing costs
|
Operating
profit before tax
|
||||||||||||||||||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Global Banking
& Markets
|
1,049 | 5,531 | 6,580 | (2,254 | ) | (455 | ) | (39 | ) | 3,832 | (145 | ) | 3,687 | |||||||||||||||||||||||
|
RFS Holdings
excluding
|
||||||||||||||||||||||||||||||||||||
|
minority
interest
|
275 | 539 | 814 | (816 | ) | (48 | ) | (65 | ) | (115 | ) | — | (115 | ) | ||||||||||||||||||||||
|
UK Corporate
Banking
|
2,260 | 1,482 | 3,742 | (836 | ) | (328 | ) | (180 | ) | 2,398 | (437 | ) | 1,961 | |||||||||||||||||||||||
|
Retail
|
4,191 | 3,571 | 7,762 | (2,468 | ) | (25 | ) | (1,196 | ) | 4,073 | (1,603 | ) | 2,470 | |||||||||||||||||||||||
|
Wealth
Management
|
569 | 459 | 1,028 | (455 | ) | (11 | ) | (4 | ) | 558 | (145 | ) | 413 | |||||||||||||||||||||||
|
Ulster
Bank
|
923 | 374 | 1,297 | (437 | ) | (24 | ) | (104 | ) | 732 | (219 | ) | 513 | |||||||||||||||||||||||
|
Citizens
|
1,975 | 1,147 | 3,122 | (1,340 | ) | (118 | ) | (341 | ) | 1,323 | — | 1,323 | ||||||||||||||||||||||||
|
RBS
Insurance
|
611 | 5,045 | 5,656 | (4,708 | ) | (46 | ) | — | 902 | (219 | ) | 683 | ||||||||||||||||||||||||
|
Manufacturing
|
(175 | ) | 36 | (139 | ) | (2,223 | ) | (552 | ) | — | (2,914 | ) | 2,914 | — | ||||||||||||||||||||||
|
Central
items
|
(154 | ) | (174 | ) | (328 | ) | (436 | ) | 15 | (1 | ) | (750 | ) | (146 | ) | (896 | ) | |||||||||||||||||||
|
RFS Holdings
minority interest
|
1,144 | 437 | 1,581 | (1,056 | ) | (84 | ) | (198 | ) | 243 | — | 243 | ||||||||||||||||||||||||
| 12,668 | 18,447 | 31,115 | (17,029 | ) | (1,676 | ) | (2,128 | ) | 10,282 | — | 10,282 | |||||||||||||||||||||||||
|
Amortisation
of intangibles
|
— | — | — | (40 | ) | (234 | ) | — | (274 | ) | — | (274 | ) | |||||||||||||||||||||||
|
Integration
cost
|
— | — | — | (48 | ) | (60 | ) | — | (108 | ) | — | (108 | ) | |||||||||||||||||||||||
| 12,668 | 18,447 | 31,115 | (17,117 | ) | (1,970 | ) | (2,128 | ) | 9,900 | — | 9,900 | |||||||||||||||||||||||||
|
2006
|
||||||||||||||||||||||||||||||||||||
|
Global Banking
& Markets
|
1,113 | 5,718 | 6,831 | (2,351 | ) | (472 | ) | (85 | ) | 3,923 | (144 | ) | 3,779 | |||||||||||||||||||||||
|
UK Corporate
Banking
|
2,115 | 1,347 | 3,462 | (742 | ) | (338 | ) | (189 | ) | 2,193 | (431 | ) | 1,762 | |||||||||||||||||||||||
|
Retail
|
4,108 | 3,458 | 7,566 | (2,396 | ) | (30 | ) | (1,310 | ) | 3,830 | (1,580 | ) | 2,250 | |||||||||||||||||||||||
|
Wealth
Management
|
496 | 393 | 889 | (415 | ) | (11 | ) | (1 | ) | 462 | (144 | ) | 318 | |||||||||||||||||||||||
|
Ulster
Bank
|
812 | 313 | 1,125 | (364 | ) | (21 | ) | (104 | ) | 636 | (215 | ) | 421 | |||||||||||||||||||||||
|
Citizens
|
2,085 | 1,232 | 3,317 | (1,398 | ) | (156 | ) | (181 | ) | 1,582 | — | 1,582 | ||||||||||||||||||||||||
|
RBS
Insurance
|
511 | 5,168 | 5,679 | (4,671 | ) | (44 | ) | — | 964 | (215 | ) | 749 | ||||||||||||||||||||||||
|
Manufacturing
|
(174 | ) | 45 | (129 | ) | (2,223 | ) | (520 | ) | — | (2,872 | ) | 2,872 | — | ||||||||||||||||||||||
|
Central
items
|
(470 | ) | (268 | ) | (738 | ) | (582 | ) | 24 | (8 | ) | (1,304 | ) | (143 | ) | (1,447 | ) | |||||||||||||||||||
| 10,596 | 17,406 | 28,002 | (15,142 | ) | (1,568 | ) | (1,878 | ) | 9,414 | — | 9,414 | |||||||||||||||||||||||||
|
Amortisation
of intangibles
|
— | — | — | — | (94 | ) | — | (94 | ) | — | (94 | ) | ||||||||||||||||||||||||
|
Integration
costs
|
— | — | — | (118 | ) | (16 | ) | — | (134 | ) | — | (134 | ) | |||||||||||||||||||||||
| 10,596 | 17,406 | 28,002 | (15,260 | ) | (1,678 | ) | (1,878 | ) | 9,186 | — | 9,186 | |||||||||||||||||||||||||
|
2005
|
||||||||||||||||||||||||||||||||||||
|
Global Banking
& Markets
|
1,035 | 4,583 | 5,618 | (1,814 | ) | (473 | ) | (139 | ) | 3,192 | (139 | ) | 3,053 | |||||||||||||||||||||||
|
UK Corporate
Banking
|
1,906 | 1,266 | 3,172 | (646 | ) | (343 | ) | (196 | ) | 1,987 | (416 | ) | 1,571 | |||||||||||||||||||||||
|
Retail
|
3,965 | 3,333 | 7,298 | (2,393 | ) | (37 | ) | (1,135 | ) | 3,733 | (1,526 | ) | 2,207 | |||||||||||||||||||||||
|
Wealth
Management
|
439 | 345 | 784 | (369 | ) | (14 | ) | (13 | ) | 388 | (139 | ) | 249 | |||||||||||||||||||||||
|
Ulster
Bank
|
713 | 290 | 1,003 | (314 | ) | (25 | ) | (95 | ) | 569 | (208 | ) | 361 | |||||||||||||||||||||||
|
Citizens
|
2,122 | 1,142 | 3,264 | (1,407 | ) | (151 | ) | (131 | ) | 1,575 | — | 1,575 | ||||||||||||||||||||||||
|
RBS
Insurance
|
461 | 5,028 | 5,489 | (4,527 | ) | (27 | ) | — | 935 | (208 | ) | 727 | ||||||||||||||||||||||||
|
Manufacturing
|
(169 | ) | 50 | (119 | ) | (2,134 | ) | (523 | ) | — | (2,776 | ) | 2,776 | — | ||||||||||||||||||||||
|
Central
items
|
(554 | ) | (386 | ) | (940 | ) | (419 | ) | 5 | 2 | (1,352 | ) | (140 | ) | (1,492 | ) | ||||||||||||||||||||
| 9,918 | 15,651 | 25,569 | (14,023 | ) | (1,588 | ) | (1,707 | ) | 8,251 | — | 8,251 | |||||||||||||||||||||||||
|
Amortisation
of intangibles
|
— | — | — | — | (97 | ) | — | (97 | ) | — | (97 | ) | ||||||||||||||||||||||||
|
Integration
costs
|
— | — | — | (318 | ) | (140 | ) | — | (458 | ) | — | (458 | ) | |||||||||||||||||||||||
|
Net gain on
sale of strategic
|
||||||||||||||||||||||||||||||||||||
|
investments
and subsidiaries
|
— | 333 | 333 | (93 | ) | — | — | 240 | — | 240 | ||||||||||||||||||||||||||
| 9,918 | 15,984 | 25,902 | (14,434 | ) | (1,825 | ) | (1,707 | ) | 7,936 | — | 7,936 | |||||||||||||||||||||||||
Notes on the accounts
continued
39 Segmental analysis
(continued)
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
Inter
|
Inter
|
Inter
|
||||||||||||||||||||||||||||||||||
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
||||||||||||||||||||||||||||
|
Total
revenue
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Global Banking
& Markets
|
12,512 | 9,614 | 22,126 | 11,419 | 7,638 | 19,057 | 8,501 | 3,623 | 12,124 | |||||||||||||||||||||||||||
|
RFS Holdings
excluding
|
||||||||||||||||||||||||||||||||||||
|
minority
interest
|
2,845 | 399 | 3,244 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
UK Corporate
Banking
|
7,277 | 44 | 7,321 | 5,962 | 18 | 5,980 | 6,104 | 101 | 6,205 | |||||||||||||||||||||||||||
|
Retail
|
12,041 | 1,895 | 13,936 | 11,143 | 1,612 | 12,755 | 10,698 | 1,516 | 12,214 | |||||||||||||||||||||||||||
|
Wealth
Management
|
922 | 2,218 | 3,140 | 991 | 1,430 | 2,421 | 843 | 1,129 | 1,972 | |||||||||||||||||||||||||||
|
Ulster
Bank
|
2,841 | 197 | 3,038 | 2,361 | 196 | 2,557 | 1,820 | 150 | 1,970 | |||||||||||||||||||||||||||
|
Citizens
|
5,528 | — | 5,528 | 5,872 | 2 | 5,874 | 4,878 | 4 | 4,882 | |||||||||||||||||||||||||||
|
RBS
Insurance
|
6,333 | 89 | 6,422 | 6,365 | 82 | 6,447 | 6,194 | 67 | 6,261 | |||||||||||||||||||||||||||
|
Manufacturing
|
41 | 1 | 42 | 49 | 5 | 54 | 54 | 6 | 60 | |||||||||||||||||||||||||||
|
Central
items
|
1,013 | 9,717 | 10,730 | 124 | 7,985 | 8,109 | 28 | 5,161 | 5,189 | |||||||||||||||||||||||||||
|
RFS Holdings
minority interest
|
3,114 | (399 | ) | 2,715 | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Eliminations
|
— | (23,775 | ) | (23,775 | ) | — | (18,968 | ) | (18,968 | ) | — | (11,757 | ) | (11,757 | ) | |||||||||||||||||||||
| 54,467 | — | 54,467 | 44,286 | — | 44,286 | 39,120 | — | 39,120 | ||||||||||||||||||||||||||||
|
Net gain on
sale of strategic
|
||||||||||||||||||||||||||||||||||||
|
investments
|
— | — | — | — | — | — | 333 | — | 333 | |||||||||||||||||||||||||||
| 54,467 | — | 54,467 | 44,286 | — | 44,286 | 39,453 | — | 39,453 | ||||||||||||||||||||||||||||
Note:
(1)
Revenue represents total income included in the income statement grossed-up for
interest payable and fees and commissions payable.
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
Inter
|
Inter
|
Inter
|
||||||||||||||||||||||||||||||||||
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
||||||||||||||||||||||||||||
|
Total
income
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Global Banking
& Markets
|
8,578 | (1,998 | ) | 6,580 | 8,502 | (1,671 | ) | 6,831 | 6,338 | (720 | ) | 5,618 | ||||||||||||||||||||||||
|
RFS Holdings
excluding
|
||||||||||||||||||||||||||||||||||||
|
minority
interest
|
415 | 399 | 814 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
UK Corporate
Banking
|
5,980 | (2,238 | ) | 3,742 | 5,231 | (1,769 | ) | 3,462 | 4,699 | (1,527 | ) | 3,172 | ||||||||||||||||||||||||
|
Retail
|
8,175 | (413 | ) | 7,762 | 7,903 | (337 | ) | 7,566 | 7,556 | (258 | ) | 7,298 | ||||||||||||||||||||||||
|
Wealth
Management
|
(1,046 | ) | 2,074 | 1,028 | (507 | ) | 1,396 | 889 | (265 | ) | 1,049 | 784 | ||||||||||||||||||||||||
|
Ulster
Bank
|
1,774 | (477 | ) | 1,297 | 1,278 | (153 | ) | 1,125 | 1,090 | (87 | ) | 1,003 | ||||||||||||||||||||||||
|
Citizens
|
3,178 | (56 | ) | 3,122 | 3,399 | (82 | ) | 3,317 | 3,353 | (89 | ) | 3,264 | ||||||||||||||||||||||||
|
RBS
Insurance
|
5,649 | 7 | 5,656 | 5,662 | 17 | 5,679 | 5,501 | (12 | ) | 5,489 | ||||||||||||||||||||||||||
|
Manufacturing
|
(135 | ) | (4 | ) | (139 | ) | (108 | ) | (21 | ) | (129 | ) | (85 | ) | (34 | ) | (119 | ) | ||||||||||||||||||
|
Central
items
|
(3,433 | ) | 3,105 | (328 | ) | (3,358 | ) | 2,620 | (738 | ) | (2,618 | ) | 1,678 | (940 | ) | |||||||||||||||||||||
|
RFS Holdings
minority interest
|
1,980 | (399 | ) | 1,581 | — | — | — | — | — | — | ||||||||||||||||||||||||||
| 31,115 | — | 31,115 | 28,002 | — | 28,002 | 25,569 | — | 25,569 | ||||||||||||||||||||||||||||
|
Net gain on
sale of strategic
|
||||||||||||||||||||||||||||||||||||
|
investments
|
— | — | — | — | — | — | 333 | — | 333 | |||||||||||||||||||||||||||
| 31,115 | — | 31,115 | 28,002 | — | 28,002 | 25,902 | — | 25,902 | ||||||||||||||||||||||||||||
|
Note:
|
|
|
(1)
|
Segmental
results for 2006 and 2005 have been restated to reflect transfers of
businesses between segments in
2007.
|
|
Group
|
||||||||||||||||||||||||||||||||||||
|
Assets
–
before
allocation
of
Manufacturing
assets
|
Allocation
of
Manufacturing
assets
|
Assets
|
Liabilities
–
before
allocation
of
Manufacturing
liabilities
|
Allocation
of
Manufacturing
liabilities
|
Liabilities
|
Cost
to
acquire
fixed
assets
and
intangible
assets –
before
allocation
of
Manufacturing
assets
|
Allocation
of
Manufacturing
assets
|
Cost
to
acquire
fixed
assets
and intangible
assets
|
||||||||||||||||||||||||||||
|
2007
|
£m
|
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Global Banking
& Markets
|
724,905 | 267 | 725,172 | 658,786 | — | 658,786 | 2,208 | 91 | 2,299 | |||||||||||||||||||||||||||
|
RFS Holdings
excluding
|
||||||||||||||||||||||||||||||||||||
|
minority
interest
|
533,853 | — | 533,853 | 511,486 | — | 511,486 | — | — | — | |||||||||||||||||||||||||||
|
UK Corporate
Banking
|
102,728 | 460 | 103,188 | 88,214 | — | 88,214 | 1,320 | 131 | 1,451 | |||||||||||||||||||||||||||
|
Retail
|
116,755 | 2,968 | 119,723 | 102,145 | 1,076 | 103,221 | 26 | 480 | 506 | |||||||||||||||||||||||||||
|
Wealth
Management
|
14,014 | 199 | 14,213 | 34,950 | — | 34,950 | 33 | 59 | 92 | |||||||||||||||||||||||||||
|
Ulster
Bank
|
54,790 | 255 | 55,045 | 44,307 | — | 44,307 | 35 | 77 | 112 | |||||||||||||||||||||||||||
|
Citizens
|
80,390 | — | 80,390 | 67,901 | — | 67,901 | 171 | — | 171 | |||||||||||||||||||||||||||
|
RBS
Insurance
|
12,439 | 419 | 12,858 | 8,935 | — | 8,935 | 92 | 113 | 205 | |||||||||||||||||||||||||||
|
Manufacturing
|
5,375 | (5,375 | ) | — | 1,950 | (1,950 | ) | — | 1,001 | (1,001 | ) | — | ||||||||||||||||||||||||
|
Central
items
|
14,818 | 807 | 15,625 | 74,596 | 874 | 75,470 | — | 50 | 50 | |||||||||||||||||||||||||||
|
RFS Holdings
minority interest
|
240,452 | — | 240,452 | 215,823 | — | 215,823 | 675 | — | 675 | |||||||||||||||||||||||||||
|
Group
|
1,900,519 | — | 1,900,519 | 1,809,093 | — | 1,809,093 | 5,561 | — | 5,561 | |||||||||||||||||||||||||||
|
Group
|
||||||||||||||||||||||||||||||||||||
|
Assets
–
before
allocation
of
Manufacturing
assets
|
Allocation
of
Manufacturing
assets
|
Assets
|
Liabilities
–
before
allocation
of
Manufacturing
liabilities
|
Allocation
of
Manufacturing
liabilities
|
Liabilities
|
Cost
to
acquire
fixed
assets
and
intangible
assets –
before
allocation
of
Manufacturing
assets
|
Allocation
of
Manufacturing
assets
|
Cost
to
acquire
fixed
assets
and intangible
assets
|
||||||||||||||||||||||||||||
|
2006
|
£m
|
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Global Banking
& Markets
|
498,267 | 228 | 498,495 | 444,496 | — | 444,496 | 2,069 | 14 | 2,083 | |||||||||||||||||||||||||||
|
UK Corporate
Banking
|
88,694 | 417 | 89,111 | 80,254 | — | 80,254 | 1,284 | 46 | 1,330 | |||||||||||||||||||||||||||
|
Retail
|
113,383 | 3,546 | 116,929 | 92,981 | 1,014 | 93,995 | 13 | 186 | 199 | |||||||||||||||||||||||||||
|
Wealth
Management
|
10,987 | 196 | 11,183 | 29,375 | — | 29,375 | 79 | 19 | 98 | |||||||||||||||||||||||||||
|
Ulster
Bank
|
44,515 | 265 | 44,780 | 34,534 | — | 34,534 | 166 | 24 | 190 | |||||||||||||||||||||||||||
|
Citizens
|
82,531 | — | 82,531 | 69,770 | — | 69,770 | 203 | — | 203 | |||||||||||||||||||||||||||
|
RBS
Insurance
|
12,252 | 397 | 12,649 | 9,085 | — | 9,085 | 83 | 54 | 137 | |||||||||||||||||||||||||||
|
Manufacturing
|
5,709 | (5,709 | ) | — | 1,884 | (1,884 | ) | — | 361 | (361 | ) | — | ||||||||||||||||||||||||
|
Central
items
|
15,094 | 660 | 15,754 | 63,563 | 870 | 64,433 | 482 | 18 | 500 | |||||||||||||||||||||||||||
|
Group
|
871,432 | — | 871,432 | 825,942 | — | 825,942 | 4,740 | — | 4,740 | |||||||||||||||||||||||||||
|
2007
|
2006
|
|||||||
|
Owners’ equity
by division
|
£m
|
£m | ||||||
|
Global Banking
& Markets
|
11,584 | 10,745 | ||||||
|
RFS Holdings
excluding minority interests
|
18,162 | — | ||||||
|
UK Corporate
Banking
|
7,619 | 6,987 | ||||||
|
Retail
|
5,977 | 6,057 | ||||||
|
Wealth
Management
|
549 | 487 | ||||||
|
Ulster
Bank
|
2,829 | 2,960 | ||||||
|
Citizens
|
11,001 | 11,765 | ||||||
|
RBS
Insurance
|
2,646 | 2,461 | ||||||
|
Manufacturing
|
250 | 246 | ||||||
|
Central
items
|
(7,579 | ) | (1,481 | ) | ||||
|
Group
|
53,038 | 40,227 | ||||||
|
Note:
|
|
|
(1)
|
Segmental
results for 2006 have been restated to reflect transfers of businesses
between segments in 2007.
|
Segmental analysis
of goodwill is as follows:
|
Group
|
||||||||||||||||||||||||||||||||||||||||
|
Global Banking
& Markets
|
UK Corporate
Banking
|
Retail
|
Wealth
Management
|
Ulster
Bank
|
Citizens
|
RBS
Insurance
|
ABN
AMRO
|
Central
items
|
Total
|
|||||||||||||||||||||||||||||||
|
£m
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||
|
At 1 January
2006
|
31 | 55 | 263 | 137 | 414 | 7,444 | 1,064 | — | 9,415 | 18,823 | ||||||||||||||||||||||||||||||
|
Currency
translation and other adjustments
|
4 | — | (8 | ) | (7 | ) | (9 | ) | (904 | ) | — | — | — | (924 | ) | |||||||||||||||||||||||||
|
Disposals
|
— | — | — | (3 | ) | — | (7 | ) | — | — | — | (10 | ) | |||||||||||||||||||||||||||
|
At 1 January
2007
|
35 | 55 | 255 | 127 | 405 | 6,533 | 1,064 | — | 9,415 | 17,889 | ||||||||||||||||||||||||||||||
|
Currency
translation and other adjustments
|
2 | (7 | ) | 10 | 7 | 38 | (126 | ) | 1 | 1,274 | — | 1,199 | ||||||||||||||||||||||||||||
|
Acquisitions
|
— | — | — | — | — | 66 | — | 23,255 | — | 23,321 | ||||||||||||||||||||||||||||||
|
Transfer
between divisions
|
— | — | (54 | ) | — | 54 | — | — | — | — | — | |||||||||||||||||||||||||||||
|
Impairment of
goodwill
|
— | — | (40 | ) | — | — | — | — | — | — | (40 | ) | ||||||||||||||||||||||||||||
|
At 31 December
2007
|
37 | 48 | 171 | 134 | 497 | 6,473 | 1,065 | 24,529 | 9,415 | 42,369 | ||||||||||||||||||||||||||||||
Notes on the accounts
continued
39 Segmental analysis
(continued)
(b)
Geographical segments
The
geographical analyses in the tables below have been compiled on the basis of
location of office where the transactions are recorded.
|
Group
|
||||||
|
UK
|
USA
|
Europe
|
Rest of the
World
|
Total
|
||
|
2007
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Total
revenue
|
33,743
|
8,570
|
8,140
|
4,014
|
54,467
|
|
|
Net interest
income
|
8,350
|
2,054
|
1,510
|
754
|
12,668
|
|
|
Fees and
commissions (net)
|
3,933
|
1,176
|
560
|
485
|
6,154
|
|
|
Income from
trading activities
|
1,252
|
(486)
|
348
|
213
|
1,327
|
|
|
Other
operating income
|
3,844
|
260
|
587
|
166
|
4,857
|
|
|
Insurance
premium income (net of reinsurers’ share)
|
5,562
|
—
|
525
|
22
|
6,109
|
|
|
Total
income
|
22,941
|
3,004
|
3,530
|
1,640
|
31,115
|
|
|
Operating
profit before tax
|
7,761
|
719
|
1,136
|
284
|
9,900
|
|
|
Total
assets
|
998,088
|
340,170
|
421,724
|
140,537
|
1,900,519
|
|
|
Total
liabilities
|
962,364
|
326,499
|
392,028
|
128,202
|
1,809,093
|
|
|
Net assets
attributable to equity owners and minority interests
|
35,724
|
13,671
|
29,696
|
12,335
|
91,426
|
|
|
Contingent
liabilities and commitments
|
197,637
|
95,547
|
82,316
|
24,599
|
400,099
|
|
|
Cost to
acquire property, plant and equipment and intangible
assets
|
3,305
|
238
|
1,793
|
225
|
5,561
|
|
|
2006
|
||||||
|
Total
revenue
|
29,162
|
9,411
|
4,683
|
1,030
|
44,286
|
|
|
Net interest
income
|
7,541
|
2,278
|
709
|
68
|
10,596
|
|
|
Fees and
commissions (net)
|
3,443
|
1,245
|
412
|
94
|
5,194
|
|
|
Income from
trading activities
|
1,585
|
939
|
108
|
43
|
2,675
|
|
|
Other
operating income
|
2,766
|
295
|
491
|
12
|
3,564
|
|
|
Insurance
premium income (net of reinsurers’ share)
|
5,604
|
—
|
369
|
—
|
5,973
|
|
|
Total
income
|
20,939
|
4,757
|
2,089
|
217
|
28,002
|
|
|
Operating
profit before tax
|
6,038
|
2,334
|
785
|
29
|
9,186
|
|
|
Total
assets
|
589,962
|
201,134
|
60,759
|
19,577
|
871,432
|
|
|
Total
liabilities
|
568,492
|
187,143
|
56,662
|
13,645
|
825,942
|
|
|
Net assets
attributable to equity owners and minority interests
|
21,470
|
13,991
|
4,097
|
5,932
|
45,490
|
|
|
Contingent
liabilities and commitments
|
186,627
|
57,873
|
13,244
|
7,159
|
264,903
|
|
|
Cost to
acquire property, plant and equipment and intangible
assets
|
3,040
|
254
|
1,427
|
19
|
4,740
|
|
|
Group
|
|||||
|
UK
|
USA
|
Europe
|
Rest of the
World
|
Total
|
|
|
2005
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Total
revenue
|
27,461
|
7,562
|
3,650
|
780
|
39,453
|
|
Net interest
income
|
6,942
|
2,225
|
713
|
38
|
9,918
|
|
Fees and
commissions (net)
|
3,466
|
1,100
|
263
|
80
|
4,909
|
|
Income from
trading activities
|
1,263
|
959
|
56
|
65
|
2,343
|
|
Other
operating income
|
2,330
|
211
|
403
|
9
|
2,953
|
|
Insurance
premium income (net of reinsurers’ share)
|
5,462
|
—
|
317
|
—
|
5,779
|
|
Total
income
|
19,463
|
4,495
|
1,752
|
192
|
25,902
|
|
Operating
profit before tax
|
5,278
|
2,032
|
602
|
24
|
7,936
|
|
Total
assets
|
492,962
|
205,514
|
62,203
|
16,148
|
776,827
|
|
Total
liabilities
|
473,581
|
191,189
|
58,527
|
15,986
|
739,283
|
|
Net assets
attributable to equity owners and minority interests
|
19,381
|
14,325
|
3,676
|
162
|
37,544
|
|
Contingent
liabilities and commitments
|
168,887
|
51,392
|
10,714
|
1,164
|
232,157
|
|
Cost to
acquire property, plant and equipment and intangible
assets
|
3,353
|
337
|
1,581
|
17
|
5,288
|
40
Directors’ and key management remuneration
|
Group
|
||
|
2007
|
2006
|
|
|
Directors’
remuneration
|
£000
|
£000
|
|
Non-executive
directors – emoluments
|
1,081
|
998
|
|
Chairman and
executive directors – emoluments
|
16,461
|
19,448
|
|
– contributions and allowances in respect of defined
|
||
|
contribution
pension schemes
|
30
|
101
|
|
17,572
|
20,547
|
|
|
– amounts receivable under long-term incentive plans
|
1,839
|
3,997
|
|
– gains on exercise of share options
|
1,474
|
2
|
|
20,885
|
24,546
|
|
Retirement benefits
are accruing to five directors (2006 – five) under defined benefit schemes, one
(2006 – two) of whom also accrued benefits under defined contribution
schemes.
The
executive directors may also participate in the company’s executive share option
and sharesave schemes and details of their interests in the company’s shares
arising from their participation are given on page
85
. Details
of the remuneration received by each director during the year and each
director’s pension arrangements are given on pages 92 to
96.
Compensation
of key management
The
aggregate remuneration of directors and other members of key management during
the year was as follows:
|
Group
|
||
|
2007
|
2006
|
|
|
£000
|
£000
|
|
|
Short-term
benefits
|
37,763
|
41,003
|
|
Post-employment
benefits
|
10,051
|
11,264
|
|
Other
long-term
|
708
|
3,309
|
|
Share-based
payments
|
5,165
|
2,787
|
|
53,687
|
58,363
|
|
Notes on the accounts
continued
41
Transactions with directors, officers and others
|
(a)
|
At 31 December
2007, the amounts outstanding in relation to transactions, arrangements
and agreements entered into by authorised institutions in the Group, as
defined in UK legislation, were £527,021 in respect of loans to 15 persons
who were directors of the company (or persons connected with them) at any
time during the financial period.
|
|
(b)
|
For the
purposes of IAS 24 ‘Related Party Disclosures’, key management comprise
directors of the company and members of the Group Executive Management
Committee.
|
The
captions in the Group’s primary financial statements include the following
amounts attributable, in aggregate, to key management:
|
2007
|
2006
|
|
|
£000
|
£000
|
|
|
Loans and
advances to customers
|
2,023
|
2,188
|
|
Customer
accounts
|
13,309
|
18,575
|
Key
management have banking relationships with Group entities which are entered into
in the normal course of business and on substantially the same terms, including
interest rates and security, as for comparable transactions with other persons
of a similar standing or, where applicable, with other employees. These
transactions did not involve more than the normal risk of repayment or present
other unfavourable features.
Key
management had no reportable transactions or balances with the company except
for dividends.
42
Related parties
|
(a)
|
Group
companies provide development and other types of capital support to
businesses in their roles as providers of finance. These investments are
made in the normal course of business and on arm’s-length terms. In some
instances, the investment may extend to ownership or control over 20% or
more of the voting rights of the investee company. However, these
investments are not considered to give rise to transactions of a
materiality requiring disclosure under IAS
24.
|
|
(b)
|
The Group
recharges The Royal Bank of Scotland Group Pension Fund with the cost of
administration services incurred by it. The amounts involved are not
material to the Group.
|
|
(c)
|
In accordance
with IAS 24, transactions or balances between Group entities that have
been eliminated on consolidation are not
reported.
|
|
(d)
|
The captions
in the primary financial statements of the parent company include amounts
attributable to subsidiaries. These amounts have been disclosed in
aggregate in the relevant notes to the financial
statements.
|
43
Post balance sheet events
There have been no
significant events between the year end and the date of approval of these
accounts which would require a change to or disclosure in the
accounts.
Additional
information
|
196
|
Financial
summary
|
|
196
|
Amounts in
accordance
|
|
with
IFRS
|
|
|
205
|
Amounts in
accordance
|
|
with UK
GAAP
|
|
|
212
|
Exchange
rates
|
|
213
|
Economic and
monetary
|
|
environment
|
|
|
213
|
Supervision
and regulation
|
| 215 | Litigation |
| 216 | Investigations |
|
217
|
Description of
property
|
|
and
equipment
|
|
|
217
|
Major
shareholders
|
|
218
|
Material
contracts
|
|
218
|
FSA Listing
Rules disclosure
|
Additional
information
Financial
summary
The
Group’s financial statements are prepared in accordance with IFRS as issued by
the IASB. Selected data under IFRS for each of the four years ended 31 December
2007 are presented on page 196 to 204. Selected data under UK GAAP for each
of the two years ended 31 December 2004 are presented on pages 205 to 211.
The dollar financial information included below has been converted from sterling
at a rate of £1.00 to US$1.9843, being the Noon Buying Rate on 31 December
2007.
Amounts
in accordance with IFRS
|
2007
|
2007
|
2006
|
2005
|
2004
|
|
|
Summary
consolidated income statement – IFRS
|
$m
|
£m
|
£m
|
£m
|
£m
|
|
Net interest
income
|
25,137
|
12,668
|
10,596
|
9,918
|
9,071
|
|
Non-interest
income
(1)
|
36,604
|
18,447
|
17,406
|
15,984
|
14,320
|
|
Total
income
|
61,741
|
31,115
|
28,002
|
25,902
|
23,391
|
|
Operating
expenses
(2, 3,
4)
|
28,643
|
14,435
|
12,480
|
11,946
|
10,362
|
|
Profit before
other operating charges and impairment losses
|
33,098
|
16,680
|
15,522
|
13,956
|
13,029
|
|
Insurance net
claims
|
9,231
|
4,652
|
4,458
|
4,313
|
4,260
|
|
Impairment
losses
|
4,222
|
2,128
|
1,878
|
1,707
|
1,485
|
|
Operating
profit before tax
|
19,645
|
9,900
|
9,186
|
7,936
|
7,284
|
|
Tax
|
4,072
|
2,052
|
2,689
|
2,378
|
1,995
|
|
Profit from
continuing operations
|
15,573
|
7,848
|
6,497
|
5,558
|
5,289
|
|
Loss from
discontinued operations, net of tax
|
270
|
136
|
—
|
—
|
—
|
|
Profit for the
year
|
15,303
|
7,712
|
6,497
|
5,558
|
5,289
|
|
Profit
attributable to:
|
|||||
|
Minority
interests
|
324
|
163
|
104
|
57
|
177
|
|
Other
owners
|
488
|
246
|
191
|
109
|
256
|
|
Ordinary
shareholders
|
14,491
|
7,303
|
6,202
|
5,392
|
4,856
|
|
Notes:
|
|
|
(1)
|
Includes gain
on sale of strategic investment of £333 million in
2005.
|
|
(2)
|
Includes loss
on sale of subsidiaries of £93 million in 2005.
|
|
(3)
|
Includes
integration expenditure of £108 million in 2007 (2006 – £134 million; 2005
– £458 million; 2004 – £520 million).
|
|
(4)
|
Includes
purchased intangibles amortisation of £274 million in 2007 (2006 – £94
million; 2005 – £97 million; 2004 – £45
million).
|
|
2007
|
2007
|
2006
|
2005
|
2004
|
|
|
Summary
consolidated balance sheet – IFRS
|
$m
|
£m
|
£m
|
£m
|
£m
|
|
Loans and
advances
|
2,080,955
|
1,048,710
|
549,499
|
487,813
|
408,324
|
|
Debt
securities and equity shares
|
653,734
|
329,453
|
140,755
|
130,266
|
98,631
|
|
Derivatives
and settlement balances
|
702,440
|
353,999
|
124,106
|
101,668
|
23,482
|
|
Other
assets
|
334,071
|
168,357
|
57,072
|
57,080
|
57,685
|
|
Total
assets
|
3,771,200
|
1,900,519
|
871,432
|
776,827
|
588,122
|
|
Equity
owners
|
105,243
|
53,038
|
40,227
|
35,435
|
33,905
|
|
Minority
interests
|
76,173
|
38,388
|
5,263
|
2,109
|
3,492
|
|
Subordinated
liabilities
|
75,362
|
37,979
|
27,654
|
28,274
|
20,366
|
|
Deposits
|
1,974,375
|
994,998
|
516,365
|
453,274
|
383,198
|
|
Derivatives,
settlement balances and short positions
|
839,520
|
423,081
|
167,588
|
140,426
|
51,866
|
|
Other
liabilities
|
700,527
|
353,035
|
114,335
|
117,309
|
95,295
|
|
Total
liabilities and equity
|
3,771,200
|
1,900,519
|
871,432
|
776,827
|
588,122
|
The
per share data in the table below have been restated for the effect of the bonus
issue of ordinary shares in May 2007.
|
Other
financial data based upon IFRS
|
2007
|
2006
|
2005
|
2004
|
|
Earnings per
ordinary share – pence
|
76.4
|
64.9
|
56.5
|
52.5
|
|
Diluted
earnings per ordinary share – pence
(1)
|
75.7
|
64.4
|
56.1
|
52.0
|
|
Dividends per
ordinary share – pence
|
32.2
|
25.8
|
20.2
|
17.5
|
|
Dividend
payout ratio
(2)
|
45%
|
46%
|
43%
|
38%
|
|
Share price
per ordinary share at year end – £
|
4.44
|
6.64
|
5.85
|
5.84
|
|
Market
capitalisation at year end – £bn
|
44.4
|
62.8
|
56.1
|
55.6
|
|
Net asset
value per ordinary share – £
|
4.47
|
3.86
|
3.38
|
3.09
|
|
Return on
average total assets
(3)
|
0.63%
|
0.74%
|
0.73%
|
0.94%
|
|
Return on
average ordinary shareholders’ equity
(4)
|
18.8%
|
18.5%
|
17.5%
|
18.3%
|
|
Average
owners’ equity as a percentage of average total assets
|
3.7%
|
4.4%
|
4.5%
|
5.9%
|
|
Risk asset
ratio – Tier 1
|
7.3%
|
7.5%
|
7.6%
|
7.0%
|
|
Risk asset
ratio – Total
|
11.2%
|
11.7%
|
11.7%
|
11.7%
|
|
Ratio of
earnings to combined fixed charges and preference share dividends
(5)
|
||||
|
– including
interest on deposits
|
1.44
|
1.62
|
1.67
|
1.88
|
|
– excluding
interest on deposits
|
5.74
|
6.12
|
6.05
|
7.43
|
|
Ratio of
earnings to fixed charges only
(5)
|
||||
|
– including
interest on deposits
|
1.46
|
1.64
|
1.69
|
1.94
|
|
– excluding
interest on deposits
|
6.53
|
6.87
|
6.50
|
9.70
|
|
Notes:
|
|
|
(1)
|
All the
convertible preference shares have a dilutive effect in 2007, 2006 and
2005 and as such have been included in the computation of diluted earnings
per share. In 2004 their effect was
anti-dilutive.
|
|
(2)
|
Dividend
payout ratio represents the interim dividend paid and final dividend
proposed as a percentage of profit attributable to ordinary
shareholders.
|
|
(3)
|
Return on
average total assets represents profit attributable to ordinary
shareholders as a percentage of average total
assets.
|
|
(4)
|
Return on
average ordinary shareholders’ equity represents profit attributable to
ordinary shareholders expressed as a percentage of average ordinary
shareholders’ equity.
|
|
(5)
|
For this
purpose, earnings consist of income before tax and minority interests,
plus fixed charges less the unremitted income of associated undertakings
(share of profits less dividends received). Fixed charges consist of total
interest expense, including or excluding interest on deposits and debt
securities in issue, as appropriate, and the proportion of rental expense
deemed representative of the interest factor (one third of total rental
expenses).
|
Additional information
continued
Amounts in accordance with IFRS
(continued)
Analysis
of loans and advances to customers – IFRS
The
following table analyses loans and advances to customers before provisions by
remaining maturity, geographical area and type of customer. Overdrafts are
included in the ‘Within 1 year’ category.
|
Within
1
year
|
After
1
but
within
5
years
|
After
5
years
|
2007
Total
|
2006
|
2005
|
2004
|
||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
UK
|
||||||||||||||||||||||||
|
Central and
local government
|
2,790 | 29 | 316 | 3,135 | 6,732 | 3,340 | 1,866 | |||||||||||||||||
|
Manufacturing
|
7,836 | 3,584 | 2,032 | 13,452 | 11,051 | 11,615 | 6,292 | |||||||||||||||||
|
Construction
|
6,427 | 2,443 | 1,332 | 10,202 | 8,251 | 7,274 | 5,024 | |||||||||||||||||
|
Finance
|
64,624 | 4,283 | 1,783 | 70,690 | 25,017 | 27,091 | 24,638 | |||||||||||||||||
|
Service
industries and business activities
|
21,194 | 15,471 | 17,300 | 53,965 | 43,887 | 40,687 | 30,867 | |||||||||||||||||
|
Agriculture,
forestry and fishing
|
1,109 | 516 | 848 | 2,473 | 2,767 | 2,645 | 2,481 | |||||||||||||||||
|
Property
|
15,236 | 17,596 | 17,219 | 50,051 | 39,296 | 32,899 | 26,448 | |||||||||||||||||
|
Individuals
– home mortgages
|
19,394 | 1,183 | 53,339 | 73,916 | 70,884 | 65,286 | 57,535 | |||||||||||||||||
|
–
other
|
23,525 | 2,425 | 2,236 | 28,186 | 27,922 | 26,323 | 26,459 | |||||||||||||||||
|
Finance leases
and instalment credit
|
2,476 | 6,045 | 7,111 | 15,632 | 14,218 | 13,909 | 13,044 | |||||||||||||||||
|
Accrued
interest
|
2,124 | 79 | 141 | 2,344 | 1,497 | 1,250 | — | |||||||||||||||||
|
Total
domestic
|
166,735 | 53,654 | 103,657 | 324,046 | 251,522 | 232,319 | 194,654 | |||||||||||||||||
|
Overseas
residents
|
51,758 | 23,242 | 23,845 | 98,845 | 69,242 | 52,234 | 48,183 | |||||||||||||||||
|
Total UK
offices
|
218,493 | 76,896 | 127,502 | 422,891 | 320,764 | 284,553 | 242,837 | |||||||||||||||||
|
Overseas
|
||||||||||||||||||||||||
|
US
|
72,268 | 26,017 | 36,774 | 135,059 | 92,166 | 90,606 | 74,027 | |||||||||||||||||
|
Rest of the
World
|
112,130 | 52,621 | 112,987 | 277,738 | 57,896 | 45,951 | 34,555 | |||||||||||||||||
|
Total Overseas
offices
|
184,398 | 78,638 | 149,761 | 412,797 | 150,062 | 136,557 | 108,582 | |||||||||||||||||
|
Loans and
advances to customers – gross
|
402,891 | 155,534 | 277,263 | 835,688 | 470,826 | 421,110 | 351,419 | |||||||||||||||||
|
Loan
impairment provisions
|
(6,438 |
)
|
(3,933 | ) | (3,884 | ) | (4,168 | ) | ||||||||||||||||
|
Loans and
advances to customers – net
|
829,250 | 466,893 | 417,226 | 347,251 | ||||||||||||||||||||
|
Fixed
rate
|
149,685 | 62,985 | 139,227 | 351,897 | 115,240 | 100,748 | 101,227 | |||||||||||||||||
|
Variable
rate
|
253,206 | 92,549 | 138,036 | 483,791 | 355,586 | 320,362 | 250,192 | |||||||||||||||||
|
Loans and
advances to customers – gross
|
402,891 | 155,534 | 277,263 | 835,688 | 470,826 | 421,110 | 351,419 | |||||||||||||||||
Cross
border exposures
Cross border
exposures are defined as loans to banks and customers (including finance lease
and instalment credit receivables) and other monetary assets, including
non-local currency claims of overseas offices on local residents.
The
Group monitors the geographical breakdown of these exposures based on the
country of domicile of the borrower or guarantor of ultimate risk.
The
table below sets out the Group’s cross border outstandings in excess of 0.75% of
Group total assets (including acceptances), which totalled £1,900.5 billion at
31 December 2007 (2006 – £871.4 billion; 2005 – £776.8 billion). None of these
countries has experienced repayment difficulties that have required refinancing
of outstanding debt.
|
2007
|
2006
|
2005
|
|
|
£m
|
£m
|
£m
|
|
|
United
States
|
91,653
|
43,718
|
34,246
|
|
France
|
65,430
|
18,136
|
13,402
|
|
Germany
|
51,123
|
20,130
|
18,395
|
|
Japan
|
31,922
|
7,725
|
*
|
|
Spain
|
31,651
|
9,341
|
7,392
|
|
Netherlands
|
27,707
|
12,407
|
8,026
|
|
Italy
|
23,925
|
7,506
|
*
|
|
Republic of
Ireland
|
17,736
|
8,530
|
6,008
|
|
Cayman
Islands
|
17,099
|
9,063
|
11,813
|
|
Norway
|
*
|
7,768
|
*
|
|
Switzerland
|
*
|
7,262
|
7,061
|
|
China
|
*
|
6,574
|
*
|
*
Less than 0.75% of Group total assets.
Loan
impairment provisions
For
a discussion of the factors considered in determining the amount of the
provisions, see ‘Loan impairment’ on page 58 and ‘Critical accounting
polices – Loan impairment provisions’ on pages 113 and 114.
The
following table shows the elements of loan impairment provisions.
|
IFRS
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Provisions at
the beginning of the year
|
||||||||||||||||
|
Domestic
|
3,037 | 2,759 | 2,675 | 2,408 | ||||||||||||
|
Foreign
|
898 | 1,128 | 1,470 | 1,477 | ||||||||||||
| 3,935 | 3,887 | 4,145 | 3,885 | |||||||||||||
|
Currency
translation and other adjustments
|
||||||||||||||||
|
Domestic
|
5 | (17 | ) | (7 | ) | (8 | ) | |||||||||
|
Foreign
|
132 | (44 | ) | 58 | (90 | ) | ||||||||||
| 137 | (61 | ) | 51 | (98 | ) | |||||||||||
|
Acquisitions
of businesses
|
||||||||||||||||
|
Domestic
|
10 | — | — | 2 | ||||||||||||
|
Foreign
|
2,200 | — | — | 288 | ||||||||||||
| 2,210 | — | — | 290 | |||||||||||||
|
Amounts
written-off
|
||||||||||||||||
|
Domestic
|
(1,222 | ) | (1,360 | ) | (1,252 | ) | (901 | ) | ||||||||
|
Foreign
|
(949 | ) | (481 | ) | (788 | ) | (548 | ) | ||||||||
| (2,171 | ) | (1,841 | ) | (2,040 | ) | (1,449 | ) | |||||||||
|
Recoveries of
amounts written-off in previous years
|
||||||||||||||||
|
Domestic
|
158 | 119 | 97 | 85 | ||||||||||||
|
Foreign
|
232 | 96 | 75 | 59 | ||||||||||||
| 390 | 215 | 172 | 144 | |||||||||||||
|
Charged to
income statement
|
||||||||||||||||
|
Domestic
|
1,420 | 1,663 | 1,376 | 960 | ||||||||||||
|
Foreign
|
686 | 214 | 327 | 442 | ||||||||||||
| 2,106 | 1,877 | 1,703 | 1,402 | |||||||||||||
|
Unwind of
discount
|
||||||||||||||||
|
Domestic
|
(150 | ) | (127 | ) | (130 | ) | — | |||||||||
|
Foreign
|
(16 | ) | (15 | ) | (14 | ) | — | |||||||||
| (166 | ) | (142 | ) | (144 | ) | — | ||||||||||
|
Provisions at
the end of the year
(1)
|
||||||||||||||||
|
Domestic
|
3,258 | 3,037 | 2,759 | 2,546 | ||||||||||||
|
Foreign
|
3,183 | 898 | 1,128 | 1,628 | ||||||||||||
| 6,441 | 3,935 | 3,887 | 4,174 | |||||||||||||
|
Gross loans
and advances to customers
|
||||||||||||||||
|
Domestic
|
324,046 | 251,522 | 232,319 | 194,654 | ||||||||||||
|
Foreign
|
511,642 | 219,304 | 188,791 | 156,765 | ||||||||||||
| 835,688 | 470,826 | 421,110 | 351,419 | |||||||||||||
|
Closing
customer provisions as a % of gross loans and advances to customers
(2)
|
||||||||||||||||
|
Domestic
|
1.00 | % | 1.21 | % | 1.19 | % | 1.31 | % | ||||||||
|
Foreign
|
0.62 | % | 0.41 | % | 0.60 | % | 1.04 | % | ||||||||
|
Total
|
0.77 | % | 0.84 | % | 0.92 | % | 1.19 | % | ||||||||
|
Customer
charge to income statement as a % of gross loans and advances to
customers
|
||||||||||||||||
|
Domestic
|
0.44 | % | 0.66 | % | 0.59 | % | 0.49 | % | ||||||||
|
Foreign
|
0.13 | % | 0.10 | % | 0.17 | % | 0.28 | % | ||||||||
|
Total
|
0.25 | % | 0.40 | % | 0.40 | % | 0.40 | % | ||||||||
|
Notes:
|
|
|
(1)
|
Includes
closing provisions against loans and advances to banks of £3 million (2006
– £2 million; 2005 – £3 million; 2004 – £6
million).
|
|
(2)
|
Closing
customer provisions exclude closing provisions against loans and advances
to banks.
|
Additional information
continued
Amounts in accordance with IFRS
(continued)
Loan impairment provisions
(continued)
The
following table shows additional information in respect of the loan impairment
provisions.
|
IFRS
|
||||
|
2007
|
2006
|
2005
|
2004
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
Loans and
advances to customers (gross)
|
835,688
|
470,826
|
421,110
|
351,419
|
|
Loan
impairment provisions at end of year:
|
||||
|
–
customers
|
6,438
|
3,933
|
3,884
|
|
|
–
banks
|
3
|
2
|
3
|
|
|
Specific
provisions – customers
|
3,607
|
|||
|
Specific
provisions – banks
|
6
|
|||
|
General
provision
|
561
|
|||
|
6,441
|
3,935
|
3,887
|
4,174
|
|
|
Average loans
and advances to customers (gross)
|
567,900
|
445,766
|
402,473
|
299,430
|
|
As a % of
average loans and advances to customers during the year:
|
||||
|
Total customer
provisions charged to income statement
|
0.37%
|
0.42%
|
0.42%
|
0.47%
|
|
Amounts
written-off (net of recoveries) – customers
|
0.31%
|
0.36%
|
0.46%
|
0.44%
|
Analysis
of closing loan impairment provisions
The
following table analyses customer loan impairment provisions by geographical
area and type of domestic customer.
|
IFRS
|
|||||||||||
|
2007
|
2006
|
2005
|
2004
|
||||||||
|
Closing
provision
|
% of
loans
to
total
loans
|
Closing
provision
|
% of
loans
to
total
loans
|
Closing
provision
|
% of
loans
to
total
loans
|
Closing
provision
|
% of
loans
to
total
loans
|
||||
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
||||
|
Domestic
|
|||||||||||
|
Central and
local government
|
—
|
0.4
|
—
|
1.4
|
—
|
0.8
|
—
|
0.6
|
|||
|
Manufacturing
|
93
|
1.6
|
94
|
2.4
|
138
|
2.8
|
127
|
1.8
|
|||
|
Construction
|
75
|
1.2
|
63
|
1.8
|
74
|
1.7
|
71
|
1.4
|
|||
|
Finance
|
52
|
8.4
|
33
|
5.3
|
104
|
6.4
|
54
|
7.0
|
|||
|
Service
industries and business activities
|
562
|
6.5
|
647
|
9.3
|
647
|
9.7
|
516
|
8.8
|
|||
|
Agriculture,
forestry and fishing
|
21
|
0.3
|
25
|
0.6
|
26
|
0.6
|
23
|
0.7
|
|||
|
Property
|
85
|
6.0
|
70
|
8.3
|
63
|
7.8
|
64
|
7.5
|
|||
|
Individuals
– home mortgages
|
36
|
8.8
|
37
|
15.1
|
36
|
15.5
|
32
|
16.4
|
|||
|
–
other
|
2,043
|
3.4
|
1,826
|
5.9
|
1,513
|
6.3
|
1,277
|
7.5
|
|||
|
Finance leases
and instalment credit
|
132
|
1.9
|
103
|
3.0
|
88
|
3.3
|
122
|
3.7
|
|||
|
Accrued
interest
|
—
|
0.3
|
—
|
0.3
|
—
|
0.3
|
|||||
|
Total
domestic
|
3,099
|
38.8
|
2,898
|
53.4
|
2,689
|
55.2
|
2,286
|
55.4
|
|||
|
Foreign
|
2,289
|
61.2
|
442
|
46.6
|
652
|
44.8
|
1,321
|
44.6
|
|||
|
Impaired book
provisions
|
5,388
|
100.00
|
3,340
|
100.0
|
3,341
|
100.0
|
100.0
|
||||
|
Latent book
provisions
|
1,050
|
593
|
543
|
||||||||
|
Specific
provisions
|
3,607
|
||||||||||
|
General
provision
|
561
|
||||||||||
|
Total
provisions
|
6,438
|
3,933
|
3,884
|
4,168
|
|||||||
Analysis
of write-offs
The
following table analyses amounts written-off by geographical area and type of
domestic customer.
|
IFRS
|
||||
|
2007
|
2006
|
2005
|
2004
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
Domestic
|
||||
|
Manufacturing
|
29
|
41
|
40
|
55
|
|
Construction
|
21
|
29
|
17
|
12
|
|
Finance
|
47
|
17
|
21
|
19
|
|
Service
industries and business activities
|
190
|
212
|
176
|
163
|
|
Agriculture,
forestry and fishing
|
4
|
5
|
4
|
9
|
|
Property
|
9
|
6
|
25
|
33
|
|
Individuals
– home mortgages
|
—
|
5
|
4
|
4
|
|
–
others
|
909
|
1,021
|
948
|
516
|
|
Finance leases
and instalment credit
|
13
|
24
|
15
|
90
|
|
Total
domestic
|
1,222
|
1,360
|
1,250
|
901
|
|
Foreign
|
949
|
481
|
788
|
548
|
|
Total
write-offs
(1)
|
2,171
|
1,841
|
2,038
|
1,449
|
Note:
|
(1)
|
Excludes £2
million written-off in respect of loans and advances to banks in
2005.
|
Analysis
of recoveries
The
following table analyses recoveries of amounts written-off by geographical area
and type of domestic customer.
|
IFRS
|
||||
|
2007
|
2006
|
2005
|
2004
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
Domestic
|
||||
|
Manufacturing
|
—
|
—
|
1
|
1
|
|
Construction
|
—
|
—
|
1
|
—
|
|
Finance
|
—
|
—
|
—
|
2
|
|
Service
industries and business activities
|
7
|
5
|
2
|
1
|
|
Property
|
—
|
1
|
2
|
—
|
|
Individuals –
home mortgages
|
—
|
—
|
—
|
1
|
|
Individuals –
others
|
143
|
101
|
84
|
78
|
|
Finance leases
and instalment credit
|
8
|
12
|
7
|
2
|
|
Total
domestic
|
158
|
119
|
97
|
85
|
|
Foreign
|
232
|
96
|
75
|
59
|
|
Total
recoveries
|
390
|
215
|
172
|
144
|
Additional information
continued
Amounts in accordance with IFRS
(continued)
Risk
elements in lending and potential problem loans
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 SEC in the US. The following table shows the estimated
amount of loans that would be reported using the SEC’s classifications. The
figures are stated before deducting the value of security held or related
provisions.
IFRS require
interest to be recognised on a financial asset (or a group of financial assets)
after impairment at the rate of interest used to discount recoveries when
measuring the impairment loss. Thus, interest on impaired financial assets is
credited to profit or loss as the discount on expected recoveries unwinds.
Despite this, such assets are not considered performing. All loans that have an
impairment provision are classified as non-accrual. This is a change from
practice in 2004 and earlier years where certain loans with provisions were
classified as past due 90 days or potential problem loans (and interest accrued
on them).
|
IFRS
|
||||
|
2007
|
2006
|
2005
|
2004
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
Loans
accounted for on a non-accrual basis
(2)
:
|
||||
|
Domestic
|
5,599
|
5,420
|
4,977
|
3,658
|
|
Foreign
|
4,763
|
812
|
949
|
1,075
|
|
Total
|
10,362
|
6,232
|
5,926
|
4,733
|
|
Accruing loans
which are contractually overdue 90 days or more as to principal or
interest
(3)
:
|
||||
|
Domestic
|
217
|
81
|
2
|
634
|
|
Foreign
|
152
|
24
|
7
|
79
|
|
Total
|
369
|
105
|
9
|
713
|
|
Loans not
included above which are classified as ‘troubled debt restructurings’ by
the SEC:
|
||||
|
Domestic
|
—
|
—
|
2
|
14
|
|
Foreign
|
—
|
—
|
—
|
10
|
|
Total
|
—
|
—
|
2
|
24
|
|
Total risk
elements in lending
|
10,731
|
6,337
|
5,937
|
5,470
|
|
Potential
problem loans
(4)
|
||||
|
Domestic
|
63
|
47
|
14
|
173
|
|
Foreign
|
608
|
5
|
5
|
107
|
|
Total
potential problem loans
|
671
|
52
|
19
|
280
|
|
Closing
provisions for impairment as a % of total risk elements in
lending
|
60%
|
62%
|
65%
|
76%
|
|
Closing
provisions for impairment as a % of total risk elements in lending and
potential
problem loans
|
56%
|
62%
|
65%
|
72%
|
|
Risk elements
in lending as a % of gross lending to customers excluding reverse
repos
|
1.55%
|
1.55%
|
1.60%
|
1.83%
|
|
Notes:
|
|
|
(1)
|
For the
analysis above, ‘Domestic’ consists of the United Kingdom domestic
transactions of the Group. ‘Foreign’ comprises the Group’s transactions
conducted through offices outside the UK and through those offices in the
UK specifically organised to service international banking
transactions.
|
|
(2)
|
All loans
against which an impairment provision is held are reported in the
non-accrual category.
|
|
(3)
|
Loans where an
impairment event has taken place but no impairment recognised. This
category is used for fully collateralised non-revolving credit
facilities.
|
|
(4)
|
Loans for
which an impairment event has occurred but no impairment provision is
necessary. This category is used for fully collateralised advances and
revolving credit facilities where identification as 90 days overdue is not
feasible.
|
|
IFRS
|
||||
|
2007
|
2006
|
2005
|
2004
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
Gross income
not recognised but which would have been
|
||||
|
recognised
under the original terms of non-accrual and restructured
loans
|
||||
|
Domestic
|
390
|
370
|
334
|
235
|
|
Foreign
|
155
|
77
|
62
|
58
|
|
545
|
447
|
396
|
293
|
|
|
Interest on
non-accrual and restructured loans included in net interest
income
|
||||
|
Domestic
|
165
|
142
|
130
|
58
|
|
Foreign
|
16
|
15
|
14
|
7
|
|
181
|
157
|
144
|
65
|
|
Analysis
of deposits – product analysis
The
following table shows the distribution of the Group’s deposits by type and
geographical area:
|
IFRS
|
|||
|
2007
|
2006
|
2005
|
|
|
£m
|
£m
|
£m
|
|
|
UK
|
|||
|
Domestic:
|
|||
|
Demand
deposits – interest-free
|
43,721
|
39,149
|
28,833
|
|
–
interest-bearing
|
121,343
|
118,315
|
91,564
|
|
Time
deposits – savings
|
41,185
|
31,656
|
27,091
|
|
–
other
|
207,247
|
80,496
|
73,097
|
|
Overseas
residents:
|
|||
|
Demand
deposits – interest-free
|
563
|
573
|
396
|
|
–
interest-bearing
|
25,129
|
37,729
|
26,663
|
|
Time
deposits – savings
|
605
|
1,122
|
1,108
|
|
–
other
|
87,437
|
51,568
|
53,997
|
|
Total UK
offices
|
527,230
|
360,608
|
302,749
|
|
Overseas
|
|||
|
Demand
deposits – interest-free
|
27,959
|
12,173
|
13,248
|
|
–
interest-bearing
|
70,758
|
27,441
|
17,886
|
|
Time
deposits – savings
|
52,381
|
19,049
|
21,691
|
|
–
other
|
316,670
|
97,094
|
97,700
|
|
Total overseas
offices (see below)
|
467,768
|
155,757
|
150,525
|
|
Total
deposits
|
994,998
|
516,365
|
453,274
|
|
Held-for-trading
|
125,916
|
104,249
|
66,712
|
|
Designated as
at fair value through profit or loss
|
7,505
|
3,922
|
3,683
|
|
Amortised
cost
|
861,577
|
408,194
|
382,879
|
|
Total
deposits
|
994,998
|
516,365
|
453,274
|
|
Overseas
|
|||
|
US
|
152,324
|
115,121
|
120,405
|
|
Rest of the
World
|
315,444
|
40,636
|
30,120
|
|
Total
overseas
|
467,768
|
155,757
|
150,525
|
Additional information
continued
Amounts in accordance with IFRS
(continued)
Short
term borrowings
|
IFRS
|
|||
|
2007
|
2006
|
2005
|
|
|
£m
|
£m
|
£m
|
|
|
Commercial
paper
|
|||
|
Outstanding at
year end
|
78,612
|
12,675
|
14,110
|
|
Maximum
outstanding at any month end during the year
|
81,187
|
14,402
|
16,853
|
|
Approximate
average amount during the year
|
32,498
|
13,225
|
15,329
|
|
Approximate
weighted average interest rate during the year
|
4.8%
|
4.9%
|
3.7%
|
|
Approximate
weighted average interest rate at year end
|
5.5%
|
5.0%
|
4.2%
|
|
Other short
term borrowings
|
|||
|
Outstanding at
year end
|
280,526
|
122,576
|
105,483
|
|
Maximum
outstanding at any month end during the year
|
312,557
|
130,867
|
117,913
|
|
Approximate
average amount during the year
|
188,326
|
112,008
|
100,681
|
|
Approximate
weighted average interest rate during the year
|
4.6%
|
4.5%
|
3.4%
|
|
Approximate
weighted average interest rate at year end
|
4.1%
|
4.5%
|
3.5%
|
Average interest
rates during the year are computed by dividing total interest expense by the
average amount borrowed. Average interest rates at year end are average rates
for a single day and as such may reflect one-day market distortions which may
not be indicative of generally prevailing rates. Original maturities of
commercial paper are not in excess of one year. ‘Other short-term borrowings’
consist principally of borrowings in the money markets included within ‘Deposits
by banks’ and ‘Customer accounts’ in the accounts, and generally have original
maturities of one year or less.
Certificates
of deposit and other time deposits
The
following table shows details of the Group’s certificates of deposit and other
time deposits over $100,000 or equivalent by remaining maturity.
|
Within
3
months
|
Over 3
months
but
within
6
months
|
Over 6
months
but
within
12
months
|
Over
12
months
|
2007
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
UK based
companies and branches
|
|||||
|
Certificates
of deposit
|
18,747
|
4,832
|
1,897
|
1,064
|
26,540
|
|
Other time
deposits
|
98,943
|
6,467
|
3,734
|
12,085
|
121,229
|
|
Overseas based
companies and branches
|
|||||
|
Certificates
of deposit
|
39,039
|
6,797
|
2,213
|
27,683
|
75,732
|
|
Other time
deposits
|
131,701
|
12,745
|
5,077
|
13,227
|
162,750
|
|
Total
|
288,430
|
30,841
|
12,921
|
54,059
|
386,251
|
Amounts
in accordance with UK GAAP
|
2004
|
2003
|
|
|
Summary
consolidated profit and loss account – UK GAAP
|
£m
|
£m
|
|
Net interest
income
|
9,208
|
8,301
|
|
Non-interest
income
|
13,546
|
10,980
|
|
Total
income
|
22,754
|
19,281
|
|
Operating
expenses excluding goodwill amortisation
(1)
|
9,931
|
8,753
|
|
Goodwill
amortisation
|
915
|
763
|
|
General
insurance claims (net)
|
3,480
|
2,195
|
|
Profit before
provisions
|
8,428
|
7,570
|
|
Provisions for
bad and doubtful debts
|
1,428
|
1,461
|
|
Amounts
written off fixed asset investments
|
83
|
33
|
|
Profit on
ordinary activities before tax
|
6,917
|
6,076
|
|
Tax on profit
on ordinary activities
|
2,155
|
1,888
|
|
Profit on
ordinary activities after tax
|
4,762
|
4,188
|
|
Minority
interests (including non-equity)
|
250
|
210
|
|
Preference
dividends – non-equity
|
256
|
261
|
|
4,256
|
3,717
|
|
|
Additional
Value Shares dividend – non-equity
|
—
|
1,463
|
|
Profit
attributable to ordinary shareholders
|
4,256
|
2,254
|
Note:
|
(1)
|
Includes
integration expenditure of £269 million in 2004 (2003 – £229
million).
|
|
2004
|
2003
|
|
|
Summary
consolidated balance sheet – UK GAAP
|
£m
|
£m
|
|
Loans and
advances to banks (net of provisions)
|
58,260
|
51,891
|
|
Loans and
advances to customers (net of provisions)
|
345,469
|
252,531
|
|
Debt
securities and equity shares
|
94,171
|
82,249
|
|
Intangible
fixed assets
|
17,576
|
13,131
|
|
Other
assets
|
67,991
|
54,626
|
|
Total
assets
|
583,467
|
454,428
|
|
Called up
share capital
|
822
|
769
|
|
Share premium
account
|
12,964
|
8,175
|
|
Other
reserves
|
10,856
|
11,307
|
|
Profit and
loss account
|
7,223
|
5,847
|
|
Shareholders’
funds
|
31,865
|
26,098
|
|
Minority
interests
|
3,829
|
2,713
|
|
Subordinated
liabilities
|
20,366
|
16,998
|
|
Deposits by
banks
|
99,081
|
67,323
|
|
Customer
accounts
|
285,062
|
236,963
|
|
Debt
securities in issue
|
58,960
|
41,016
|
|
Other
liabilities
|
84,304
|
63,317
|
|
Total
liabilities
|
583,467
|
454,428
|
Additional information
continued
Amounts in accordance with UK GAAP
(continued)
The
per share data in the table below have been restated for the effect of the bonus
issue of ordinary shares in May 2007.
|
Other
financial data based upon UK GAAP
|
2004
|
2003
|
|
Earnings per
ordinary share – pence
|
46.0
|
25.6
|
|
Diluted
earnings per ordinary share – pence
(1)
|
45.6
|
25.4
|
|
Dividends per
ordinary share – pence
|
19.3
|
16.8
|
|
Dividend
payout ratio
(2)
|
43%
|
66%
|
|
Share price
per ordinary share at period end – £
|
5.84
|
5.49
|
|
Market
capitalisation at period end – £bn
|
55.6
|
48.8
|
|
Net asset
value per ordinary share – £
|
2.87
|
2.61
|
|
Return on
average total assets
(3)
|
0.82%
|
0.51%
|
|
Return on
average equity shareholders’ funds
(4)
|
16.0%
|
9.8%
|
|
Average
shareholders’ equity as a percentage
|
||
|
of average
total assets
|
5.7%
|
5.9%
|
|
Risk asset
ratio – Tier 1
|
7.0%
|
7.4%
|
|
–
Total
|
11.7%
|
11.8%
|
|
Ratio of
earnings to combined fixed charges and preference
|
||
|
share
dividends
(5)
|
||
|
– including
interest on deposits
|
1.84
|
1.95
|
|
– excluding
interest on deposits
|
7.09
|
7.08
|
|
Ratio of
earnings to fixed charges only
(5)
|
||
|
– including
interest on deposits
|
1.90
|
2.04
|
|
– excluding
interest on deposits
|
9.26
|
9.73
|
|
Notes:
|
|
|
(1)
|
Convertible
preference shares have not been included in the computation of diluted
earnings per share as their effect was
anti-dilutive.
|
|
(2)
|
Dividend
payout ratio represents the interim dividend paid and final dividend
proposed as a percentage of profit attributable to ordinary
shareholders.
|
|
(3)
|
Return on
average total assets represents profit attributable to ordinary
shareholders as a percentage of average total
assets.
|
|
(4)
|
Return on
average equity shareholders’ funds represents profit attributable to
ordinary shareholders expressed as a percentage of average equity
shareholders’ funds.
|
|
(5)
|
For this
purpose, earnings consist of income before tax and minority interests,
plus fixed charges less the unremitted income of associated undertakings
(share of profits less dividends received). Fixed charges consist of total
interest expense, including or excluding interest on deposits and debt
securities in issue, as appropriate, and the proportion of rental expense
deemed representative of the interest factor (one third of total rental
expenses).
|
Analysis
of loans and advances to customers
The
following table analyses loans and advances to customers before provisions by
geographical area and type of customer.
|
UK
GAAP
|
||
|
2004
|
2003
|
|
|
£m
|
£m
|
|
|
UK
|
||
|
Central and
local government
|
1,866
|
1,217
|
|
Manufacturing
|
6,292
|
6,384
|
|
Construction
|
5,024
|
3,960
|
|
Finance
|
25,157
|
18,948
|
|
Service
industries and business activities
|
30,850
|
29,290
|
|
Agriculture,
forestry and fishing
|
2,480
|
2,562
|
|
Property
|
26,445
|
19,670
|
|
Individuals –
home mortgages
|
57,529
|
48,117
|
|
–
other
|
27,863
|
25,526
|
|
Finance leases
and instalment credit
|
13,083
|
11,703
|
|
Total
domestic
|
196,589
|
167,377
|
|
Overseas
residents
|
44,053
|
27,168
|
|
Total UK
offices
|
240,642
|
194,545
|
|
Overseas
|
||
|
US
|
74,045
|
40,373
|
|
Rest of the
World
|
35,004
|
21,535
|
|
Total overseas
offices
|
109,049
|
61,908
|
|
Loans and
advances to customers – gross
|
349,691
|
256,453
|
|
Provisions for
bad and doubtful debts
|
(4,222)
|
(3,922)
|
|
Loans and
advances to customers – net
|
345,469
|
252,531
|
|
Fixed
rate
|
100,729
|
81,918
|
|
Variable
rate
|
248,962
|
174,535
|
|
Loans and
advances to customers – gross
|
349,691
|
256,453
|
Cross
border exposures
The
table below sets out the Group’s cross border outstandings in excess of 0.75% of
Group total assets (including acceptances), which totalled £583.8 billion at 31
December 2004 (2003 – £455.0 billion). None of these countries has experienced
repayment difficulties that have required refinancing of outstanding
debt.
|
UK
GAAP
|
||
|
2004
|
2003
|
|
|
£m
|
£m
|
|
|
United
States
|
28,795
|
14,618
|
|
Germany
|
14,050
|
15,073
|
|
France
|
9,604
|
7,524
|
|
Netherlands
|
8,871
|
6,830
|
|
Cayman
Islands
|
7,258
|
6,666
|
|
Spain
|
5,249
|
3,421
|
|
Japan
|
4,610
|
4,141
|
Additional information
continued
Amounts in accordance with UK GAAP
(continued)
Provisions
for bad and doubtful debts
The
following table shows the elements of provisions for bad and doubtful debts
under UK GAAP.
|
UK
GAAP
|
||
|
2004
|
2003
|
|
|
£m
|
£m
|
|
|
Provisions at
the beginning of the year
|
||
|
Domestic
|
2,452
|
2,581
|
|
Foreign
|
1,477
|
1,346
|
|
3,929
|
3,927
|
|
|
Currency
translation and other adjustments
|
||
|
Domestic
|
(8)
|
(2)
|
|
Foreign
|
(90)
|
(60)
|
|
(98)
|
(62)
|
|
|
Acquisitions
of businesses
|
||
|
Domestic
|
2
|
—
|
|
Foreign
|
288
|
50
|
|
290
|
50
|
|
|
Amounts
written-off
|
||
|
Domestic
|
(920)
|
(1,097)
|
|
Foreign
|
(548)
|
(422)
|
|
(1,468)
|
(1,519)
|
|
|
Recoveries of
amounts written-off in previous years
|
||
|
Domestic
|
88
|
38
|
|
Foreign
|
59
|
34
|
|
147
|
72
|
|
|
Charged to
profit and loss account
|
||
|
Domestic
|
986
|
932
|
|
Foreign
|
442
|
529
|
|
1,428
|
1,461
|
|
|
Provisions at
the end of the year
(1)
|
||
|
Domestic
|
2,600
|
2,452
|
|
Foreign
|
1,628
|
1,477
|
|
4,228
|
3,929
|
|
|
Gross loans
and advances to customers
|
||
|
Domestic
|
196,589
|
167,377
|
|
Foreign
|
153,102
|
89,076
|
|
349,691
|
256,453
|
|
|
Closing
customer provisions as a % of gross loans and advances to customers
(2)
|
||
|
Domestic
|
1.32%
|
1.46%
|
|
Foreign
|
1.06%
|
1.65%
|
|
Total
|
1.21%
|
1.53%
|
|
Customer
charge against profit as a % of gross loans and advances to
customers
|
||
|
Domestic
|
0.50%
|
0.56%
|
|
Foreign
|
0.29%
|
0.59%
|
|
Total
|
0.41%
|
0.57%
|
|
Notes:
|
|
|
(1)
|
Includes
closing provisions against loans and advances to banks of £6 million in
2004 (2003 – £7 million).
|
|
(2)
|
Closing
customer provisions exclude closing provisions against loans and advances
to banks.
|
The
following table shows additional information with respect to the provisions for
bad and doubtful debts under UK GAAP.
|
UK
GAAP
|
||
|
2004
|
2003
|
|
|
£m
|
£m
|
|
|
Loans and
advances to customers (gross)
|
349,691
|
256,453
|
|
Provisions at
end of year:
|
||
|
Specific
provisions – customers
|
3,648
|
3,356
|
|
–
banks
|
6
|
7
|
|
General
provision
|
574
|
566
|
|
4,228
|
3,929
|
|
|
Customer
provision at end of year as % of loans and
|
||
|
advances to
customers at end of year:
|
||
|
Specific
provisions
|
1.04%
|
1.31%
|
|
General
provision
|
0.17%
|
0.22%
|
|
1.21%
|
1.53%
|
|
|
Average loans
and advances to customers (gross)
|
298,150
|
245,798
|
|
As a % of
average loans and advances to customers during the year:
|
||
|
Total customer
provisions charged to profit and loss
|
0.48%
|
0.59%
|
|
Amounts
written-off (net of recoveries) – customers
|
0.44%
|
0.59%
|
Analysis of closing
provisions for bad and doubtful debts
The
following table analyses customer provisions for bad and doubtful debts by
geographical area and type of domestic customer.
|
UK
GAAP
|
|||||
|
2004
|
2003
|
||||
|
Closing
provision
|
% of
loans
to
total
loans
|
Closing
provision
|
% of
loans
to
total
loans
|
||
|
£m
|
%
|
£m
|
%
|
||
|
Domestic
|
|||||
|
Central and
local government
|
—
|
0.5
|
—
|
0.5
|
|
|
Manufacturing
|
127
|
1.8
|
156
|
2.5
|
|
|
Construction
|
71
|
1.4
|
56
|
1.5
|
|
|
Finance
|
54
|
7.2
|
34
|
7.4
|
|
|
Service
industries and business activities
|
516
|
8.8
|
599
|
11.4
|
|
|
Agriculture,
forestry and fishing
|
23
|
0.7
|
20
|
1.0
|
|
|
Property
|
64
|
7.6
|
58
|
7.7
|
|
|
Individuals –
home mortgages
|
32
|
16.5
|
35
|
18.8
|
|
|
–
other
|
1,318
|
8.0
|
1,003
|
9.9
|
|
|
Finance leases
and instalment credit
|
122
|
3.7
|
136
|
4.6
|
|
|
Total
domestic
|
2,327
|
56.2
|
2,097
|
65.3
|
|
|
Foreign
|
1,321
|
43.8
|
1,259
|
34.7
|
|
|
Specific
provisions
|
3,648
|
100.0
|
3,356
|
100.0
|
|
|
General
provision
|
574
|
566
|
|||
|
Total
provisions
|
4,222
|
3,922
|
|||
Additional information
continued
Amounts in accordance with UK GAAP
(continued)
Analysis
of write-offs
The
following table analyses amounts written-off by geographical area and type of
domestic customer.
|
UK
GAAP
|
||
|
2004
|
2003
|
|
|
£m
|
£m
|
|
|
Domestic
|
||
|
Manufacturing
|
55
|
99
|
|
Construction
|
12
|
22
|
|
Finance
|
19
|
54
|
|
Service
industries and business activities
|
163
|
393
|
|
Agriculture,
forestry and fishing
|
9
|
4
|
|
Property
|
33
|
6
|
|
Individuals –
home mortgages
|
4
|
2
|
|
–
others
|
535
|
357
|
|
Finance leases
and instalment credit
|
90
|
160
|
|
Total
domestic
|
920
|
1,097
|
|
Foreign
|
548
|
422
|
|
Total
write-offs
|
1,468
|
1,519
|
Analysis
of recoveries
The
following table analyses recoveries of amounts written-off by geographical area
and type of domestic customer.
|
UK
GAAP
|
||
|
2004
|
2003
|
|
|
£m
|
£m
|
|
|
Domestic
|
||
|
Manufacturing
|
1
|
—
|
|
Finance
|
2
|
—
|
|
Service
industries and business activities
|
1
|
3
|
|
Individuals –
home mortgages
|
1
|
—
|
|
–
others
|
81
|
26
|
|
Finance leases
and instalment credit
|
2
|
9
|
|
Total
domestic
|
88
|
38
|
|
Foreign
|
59
|
34
|
|
Total
recoveries
|
147
|
72
|
Risk
elements in lending and potential problem loans
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 SEC in the US. The following table shows the estimated
amount of loans that would be reported using the SEC’s classifications. The
figures incorporate estimates and are stated before deducting the value of
security held or related provisions.
|
UK
GAAP
|
||
|
2004
|
2003
|
|
|
£m
|
£m
|
|
|
Loans
accounted for on a non-accrual basis
(3)
:
|
||
|
Domestic
|
3,705
|
3,221
|
|
Foreign
|
1,075
|
1,211
|
|
Total
|
4,780
|
4,432
|
|
Accruing loans
which are contractually overdue 90 days or more as to principal or
interest
(4)
:
|
||
|
Domestic
|
646
|
561
|
|
Foreign
|
79
|
81
|
|
Total
|
725
|
642
|
|
Loans not
included above which are classified as ‘troubled debt restructurings’ by
the SEC:
|
||
|
Domestic
|
14
|
53
|
|
Foreign
|
10
|
30
|
|
Total
|
24
|
83
|
|
Total risk
elements in lending
|
5,529
|
5,157
|
|
Potential
problem loans
(5)
|
||
|
Domestic
|
173
|
492
|
|
Foreign
|
107
|
99
|
|
Total
potential problem loans
|
280
|
591
|
|
Closing
provisions for bad and doubtful debts as a % of
total risk
elements in lending
|
76%
|
76%
|
|
Closing
provisions for bad and doubtful debts as a % of
total risk
elements in lending and potential problem loans
|
73%
|
68%
|
|
Risk elements
in lending as a % of gross loans and advances to customers excluding
reverse repos
|
1.86%
|
2.22%
|
|
Notes:
|
|
|
(1)
|
For the
analysis above, ‘Domestic’ consists of the UK domestic transactions of the
Group. ‘Foreign’ comprises the Group’s transactions conducted through
offices outside the UK and through those offices in the UK specifically
organised to service international banking
transactions.
|
|
(2)
|
The
classification of a loan as non-accrual, past due 90 days or troubled debt
restructuring does not necessarily indicate that the principal of the loan
is uncollectable in whole or in part. Collection depends in each case on
the individual circumstances of the loan, including the adequacy of any
collateral securing the loan and therefore classification of a loan as
non-accrual, past due 90 days or troubled debt restructuring does not
always require that a provision be made against such a loan. In accordance
with the Group’s provisioning policy for bad and doubtful debts, it is
considered that adequate provisions for the above risk elements in lending
have been made.
|
|
(3)
|
The Group’s UK
banking subsidiary undertakings account for loans on a non-accrual basis
from the point in time at which the collectability of interest is in
significant doubt. Certain subsidiary undertakings of the Group,
principally Citizens, generally account for loans on a non-accrual basis
when interest or principal is past due 90
days.
|
|
(4)
|
Overdrafts
generally have no fixed repayment schedule and consequently are not
included in this category.
|
|
(5)
|
Loans that are
current as to the payment of principal and interest but in respect of
which management has serious doubts about the ability of the borrower to
comply with contractual repayment terms. Substantial security is held in
respect of these loans and appropriate provisions have already been made
in accordance with the Group’s provisioning policy for bad and doubtful
debts.
|
|
UK
GAAP
|
||
|
2004
|
2003
|
|
|
£m
|
£m
|
|
|
Gross income
not recognised but which would have been
|
||
|
recognised
under the original terms of non-accrual and restructured
loans
|
||
|
Domestic
|
237
|
237
|
|
Foreign
|
58
|
55
|
|
295
|
292
|
|
|
Interest on
non-accrual and restructured loans included in net interest
income
|
||
|
Domestic
|
58
|
60
|
|
Foreign
|
7
|
3
|
|
65
|
63
|
|
Additional information
continued
Exchange
rates
Except as stated,
the following tables show, for the dates or periods indicated, the Noon Buying
Rate in New York for cable transfers in sterling as certified for customs’
purposes by the Federal Reserve Bank of New York (the “Noon Buying
Rate”):
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Noon Buying
Rate
|
|||||
|
Period end
rate
|
1.9843
|
1.9586
|
1.7188
|
1.9160
|
1.7842
|
|
Average rate
for the period
(1)
|
2.0073
|
1.8582
|
1.8147
|
1.8356
|
1.6450
|
|
Consolidation
rate
(2)
|
|||||
|
Period end
rate
|
2.0043
|
1.9651
|
1.7214
|
1.9346
|
1.7857
|
|
Average rate
for the period
|
2.0015
|
1.8436
|
1.8198
|
1.8325
|
1.6354
|
| Notes: | |
|
(1)
|
The average of
the Noon Buying Rates on the last business day of each month during the
period.
|
|
(2)
|
The rates used
by the Group for translating US dollars into sterling in the preparation
of its financial statements.
|
|
(3)
|
On
12
May 2008, the Noon
Buying Rate was £1.00 = US$
1.9616
.
|
Economic
and monetary environment
The
Group’s earnings are affected by the economic and monetary environment in its
key markets (UK, US, Eurozone and Asia Pacific).
Global financial
markets entered a period of unprecedented strain in the second half of 2007,
with reference interbank lending rates spiking sharply and parts of the
short-term money market seizing up. This temporarily tightened monetary
conditions, affecting credit supply and denting investor risk appetite, at a
time when a slowdown in global economic activity had started. After a series of
individual efforts, central banks in Canada, the Eurozone, Switzerland, the UK
and the US intervened in concert to improve liquidity conditions in money
markets in December. This measure was successful in bringing interest rate
spreads in interbank markets back towards historic averages, but uncertainties
about the full impact on the real economy and the future evolution of debt
markets remain.
The
UK interest rate cycle peaked in 2007, with the Monetary Policy Committee (MPC)
first hiking the Bank Rate from 5% to 5.75% in three successive 25bps moves in
January, May and July, before cutting it back to 5.50% in December and most
recently to 5.25% in February. The rate increases were due to a combination of
above-trend growth at 3.1% and CPI-inflation exceeding the official target of 2%
for most of the year on the back of high commodity prices. Upside risks to
inflation over the medium-term prevailed, preventing the MPC from cutting more
aggressively in response to the liquidity squeeze in financial markets in
December. On balance, monetary conditions were probably in restrictive territory
in 2007, which is expected to lead to slower growth in 2008. Sterling’s 6%
depreciation on a trade-weighted basis only partly offset the dampening impact
from strains in money markets and high inflation-adjusted interest rates, which
only started to fall towards the end of the year.
US
monetary conditions were close to neutral at the start of 2007, with policy
rates on hold at 5.25% until the onset of the liquidity crisis in August. A
marked slowdown in the US housing market, deterioration in consumer and business
confidence and the liquidity squeeze in financial markets prompted the Federal
Open Market Committee (FOMC) to bring the federal funds rate down to 4.25% by
the end of the year. Despite a 10% decline in the value of the dollar on a
trade-weighted basis and the resulting stimulus for US exports, the overall
outlook for the US economy darkened materially in the first two months of 2008.
The FOMC continued to react aggressively in the face of more evidence of
downside risks to economic growth, and further reduced the policy rate by 125bps
at two meetings in January, bringing it to 3.00% at the end of February 2008.
Even though CPI-inflation ran above 4% by the end of 2007, US bond markets did
not seem overly concerned about rising inflationary pressure in the longer term,
as the long-end of the yield curve shifted downwards too.
Against the backdrop
of robust demand, and an upward trend in CPI-inflation, the European Central
Bank raised the official refinancing rate twice in the first half of 2007, from
3.5% to 4%, and staying on hold for the rest of the year. Rapid economic growth
in emerging market economies resulted in strong demand for Eurozone export
goods, despite a 5% trade-weighted appreciation of the euro. Overall, the
Eurozone appeared to be less affected by the liquidity squeeze than the UK or
the US, partly because domestic demand had been less reliant on
credit.
Asia Pacific was the
most dynamic region in 2007, with economic growth outpacing the rate of
expansion recorded in other regions. Exports remained the main driver of
economic growth, resulting in a large current account surplus, and corresponding
inflows of foreign exchange into the region. Some countries in the region
continued to manage their currencies, to prevent appreciation. This loosening of
monetary conditions boosted domestic investment. Inflationary pressures started
to emerge, possibly requiring a tighter stance of monetary policy further
out.
In
addition to influencing the level of effective demand countries face, exchange
rates affect earnings reported by the Group’s non-UK subsidiaries, and the value
of non-sterling denominated assets and liabilities. Sterling remained strong
against the dollar in 2007, gaining another 1%, but slipped by 8% against the
euro. These movements have mixed effects on the Group’s reported earnings,
assets and liabilities, boosting their sterling-value when denominated in euro
but depressing their sterling-value when denominated in dollars.
Supervision
and regulation
1.
United Kingdom
1.1 Authorised
firms in the Group
The
UK Financial Services Authority (FSA) is the consolidated supervisor of the
Group and the Royal Bank. As at 31 December 2007, 31 companies in the Group
(excluding subsidiaries of the ABN AMRO Group), spanning a range of financial
services sectors (banking, insurance and investment business), were authorised
to conduct financial activities regulated by the FSA.
The
UK authorised banks in the Group include the Royal Bank, NatWest, Coutts &
Co and Ulster Bank Ltd. Wholesale activities, other than Group Treasury
activities, are concentrated in the Group’s Corporate Markets division and are
undertaken under the names of the Royal Bank and NatWest. UK retail banking
activities are managed by the Retail Markets division. The exception is Ulster
Bank Ltd, which is run as a separate division within the Group. Ulster Bank Ltd
provides banking services in Northern Ireland while the banking service to the
Republic of Ireland is provided by Ulster Bank Ireland Ltd which is primarily
supervised by the Irish Financial Services Regulatory Authority.
Investment
management business is principally undertaken by companies in the Retail Markets
division, including Adam & Company Investment Management Limited, and in the
Corporate Markets division, RBS Asset Management Limited.
General insurance
business is principally undertaken by companies in the RBS Insurance division,
including Direct Line Insurance plc and Churchill Insurance Company Limited.
Life assurance business is undertaken by Royal Scottish Assurance plc and
National Westminster Life Assurance Limited (with the Group’s partner, the AVIVA
Group) and Direct Line Life Insurance Company Limited.
1.2 Regulatory
development and implementation.
Basel II is the most
significant change to regulation of the banking industry for many years and will
have a lasting effect on our relationships with customers, investors and other
key stakeholders. The FSA in the UK has endorsed the Group’s approach to
managing credit risk under Basel II. This puts us among the small number of UK
financial services organisations that are using Advanced Internal Ratings Based
approach for the calculation of credit risk capital requirements from 1 January
2008. From 2008, the Group will apply the Standardised Approach for operational
risk, migrating to the Advanced Measurement Approach (AMA) in line with the US
timescales. The Group has implemented Pillar 2 and Pillar 3 in line with
regulatory requirements.
In
addition, the Group successfully implemented the Markets in Financial
Instruments Directive (‘MiFID’) by the implementation date of 1 November 2007.
MiFID established a comprehensive legislative framework at the European level,
which is now implemented in the UK, for the establishment and conduct of
investment firms, multilateral trading facilities and regulated
markets.
The
FSA’s high level principles require all regulated firms to treat their customers
fairly and a specific industry wide project on Treating Customers Fairly (‘TCF’)
was launched in 2004. The FSA emphasised that TCF will be a key area of focus
for the regulator over the coming years. In the summer of 2007 it followed this
up by setting out specific targets that it would expect all firms to meet during
2008 in relation to management information required to evidence TCF
embeddedness. The Group already had several underlying principles built into the
existing customer proposition which clearly demonstrated the concept of fairness
in action. These fundamental business values include demonstrating fairness,
transparency and honesty throughout the whole relationship with our customers,
ensuring that any representations we make are clear, fair and not misleading,
and having mechanisms in place to avoid things going wrong and correct any
deficiencies.
UK
FSA authorised firms must also comply with rules designed to reduce the scope
for firms to be used for financial crime and in particular money laundering.
Revised Joint Money Laundering Steering Group Guidance Notes were issued on 13
November 2007 to take into account the new Money Laundering Regulations 2007.
These Regulations came into force on 15 December 2007 and implemented the EU’s
Third Money Laundering Directive. Amongst their other provisions, the
Regulations endorse a risk based approach to combating money laundering, while
also prescribing ‘enhanced due diligence’ for non face to face customers,
‘politically exposed persons’ (PEPs) and correspondent banking. Whilst for all
material purposes the Group is already compliant – these provisions having been
anticipated in industry guidance for some time – internal processes are
continually reviewed to ensure best practice standards are met. In particular,
the Group has issued new internal policy guidelines based on the regulations and
supporting industry guidance against which all divisions have undertaken a gap
analysis as a basis for further action plans where necessary.
1.3 Information
Commissioners Office
The
Information Commissioner’s Office (ICO) is the UK’s independent public body set
up to promote access to official information and to protect personal
information. The ICO enforces the Data Protection Act 1998, the Freedom of
Information Act 2000, the Privacy and Electronic Communications Regulations 2003
and the Environmental Information Regulations 2004, regulating the organisations
that come within their remits. They promote awareness of information rights and
obligations and ensure compliance. The Commissioner reports directly to
Parliament and has the power to order compliance, using enforcement and
prosecution. The Group takes data protection very seriously and follows the
guidance provided by the ICO. The Group continues to improve its processes in
line with changing guidelines and in order to meet customers increasing
expectations in relation to information security.
2.
International
2.1 ABN
AMRO
The
consolidated supervisor of ABN AMRO is the Dutch central bank, De Nederlandsche
Bank (DNB). It operates partly as the Dutch central bank and prudential
supervisor of banks and insurance companies; and also as part of the European
System of Central Banks. Following the acquisition of ABN AMRO the Group now
operates in over 50 countries.
2.2 United
States
The
Group is both a bank holding company and financial holding company within the
meaning of the US Bank Holding Company Act of 1956. As such, it is subject to
the regulation and supervision of the Board of Governors of
the Federal Reserve
System (the “Federal Reserve”). Among other things, the Group’s direct and
indirect activities and investments in the United States are limited to those
that are ‘financial in nature’ or ‘incidental’ or ‘complementary’ to a financial
activity, as determined by the Federal Reserve. The Group is also required to
obtain the prior approval of the Federal Reserve before acquiring, directly or
indirectly, the ownership or control of more than 5% of any class of the voting
shares of any US bank or bank holding company.
Under current
Federal Reserve policy, the Group is required to act as a source of financial
strength for its US bank subsidiaries. Among other things, this source of
strength obligation could require the Group to inject capital into any of its US
bank subsidiaries if any of them became undercapitalised.
The
Group’s US bank and non-bank subsidiaries and RBS’s US branches are also subject
to supervision and regulation by a variety of other U.S. regulatory agencies. As
of 1 September 2007, Citizens Financial Group’s bank subsidiaries (with the
exception of its state-chartered bank subsidiary in the State of Pennsylvania)
were merged and consolidated into a single nationally chartered bank, RBS
Citizens, NA. As a result, RBS Citizens, NA is now supervised by the Office of
the Comptroller of the Currency, a bureau of the US Department of the Treasury
charged with the regulation and supervision of nationally chartered banks.
Citizens Financial Group remains under the supervision of the Federal Reserve as
a bank holding company. Citizens Bank of Pennsylvania is subject to the
regulation and supervision of the Pennsylvania Department of Banking and the US
Federal Deposit Insurance Corporation. RBS’s New York branch is supervised by
the New York State Banking Department, and its Connecticut branch is supervised
by the Connecticut Department of Banking. Both branches are also subject to
supervisory oversight by the Federal Reserve, through the Federal Reserve Bank
of Boston.
The
Group’s US insurance agencies are regulated by state insurance authorities. The
Group’s US broker dealer, Greenwich Capital Markets, Inc., is subject to
regulation and supervision by the US Securities and Exchange Commission and the
Financial Industry National Regulatory Association (FINRA) with respect to its
securities activities. With respect to its futures activities, Greenwich Capital
Markets, Inc. is also subject to regulation and oversight by the US Commodity
Futures Trading Commission and the Chicago Board of Trade.
The
Group is subject to extensive regulations that impose obligations on financial
institutions to maintain appropriate policies, procedures and controls to
detect, prevent and report money laundering and terrorist financing and to
ensure compliance with US economic sanctions against designated foreign
countries, nationals and others. Anti-money laundering, anti-terrorism and
economic sanctions regulations have become a major focus of US government policy
relating to financial institutions and are rigorously enforced by US government
agencies.
2.3 Other
jurisdictions
The
Group and Bank of China have established an exclusive strategic partnership. The
Group and Bank of China have agreed to co-operate across a range of business
activities, building on Bank of China’s distribution strength and the Group’s
product skills in areas including credit cards, wealth management, corporate
banking and personal lines insurance. The Group also continues to grow its other
Asian activities, having recently set up new branches in the Middle East and Far
East. As in all jurisdictions in which the Group undertakes business, it
considers regulatory risk as a key component of is new products approval process
to ensure that it meets with local regulatory requirements.
Litigation
As a participant in
the financial services industry, the Group operates in a legal and regulatory
environment that exposes it to potentially significant litigation risks. As a
result, RBSG and other members of the Group are involved in various disputes and
legal proceedings in the United Kingdom, the United States and other
jurisdictions, including litigation. Such cases are subject to many
uncertainties, and their outcome is often difficult to predict, particularly in
the earlier stages of a case. Currently, the Group is involved in litigation
arising out of its operations.
Other than as set
out in this section, so far as the company is aware, neither the company nor any
member of the Group is or has been engaged in nor has pending or threatened any
governmental, legal or arbitration proceedings which may have or have had in the
recent past (covering the 12 months immediately preceding the date of this
document) a significant effect on the Group’s financial position or
profitability.
United
Kingdom
In
common with other banks in the United Kingdom, the Royal Bank and NatWest have
received claims and complaints from a large number of customers relating to the
legal status and enforceability of current and historic contractual terms in
personal current account agreements relating to unarranged overdraft and unpaid
item charges (‘‘Relevant Charges’’) and seeking repayment of Relevant Charges
that had been applied to their accounts in the past. The claims and complaints
are based primarily on the common law penalty doctrine and the Unfair Terms in
Consumer Contracts Regulations 1999 (the ‘‘Regulations’’). Because of the High
Court test case referred to below, most existing and new claims in the County
Courts are currently stayed and there is currently an FSA waiver of the
complaints handling process and a standstill of Financial Ombudsman Service
decisions.
On 27 July 2007,
following discussions between the OFT, the Financial Ombudsman Service, the
Financial Services Authority and major UK banks (including RBS), the OFT issued
proceedings in a test case against the banks which was intended to determine
certain preliminary issues concerning the legal status and enforceability of
contractual terms relating to Relevant Charges.
The judgement on
these preliminary issues was handed down on 24 April 2008. The judgement
primarily addressed the contractual terms relating to Relevant Charges in
personal current account (excluding basic bank account) agreements in force in
early 2008 (‘‘Current Terms’’) and not contractual terms in historic personal
current account agreements. The judgement held that the Current Terms used by
the Royal Bank and NatWest (i) are not unenforceable as penalties, but (ii) are
not exempt from assessment for fairness under the Regulations. The Group is
considering whether to appeal any of the rulings contained in the
judgement.
A High Court hearing
has been arranged for 22 May 2008 at which the OFT, RBS and the other test case
banks are expected to make submissions to the Court in relation to whether they
wish to appeal the judgement, the implications of the judgement in the test case
and arrangements for any remaining issues relevant to the customer claims and
complaints to be determined in the test case in due course.
The issues relating
to the legal status and enforceability of the Relevant Charges are complex. RBS
maintains that its Relevant Charges are fair and enforceable and believes that
it has a number of substantive and credible defences. The Group cannot, however,
at this stage predict with any certainty if, or for how long, the stays, waiver
and standstill referred to above will remain in place. Nor can it at this stage
predict with any certainty the timing or substance of the final outcome of the
customer claims and complaints, any appeals against the judgement handed down on
24 April 2008 and any further stages of the test case. It is unable reliably to
estimate the liability, if any, that may arise as a result of or in connection
with these matters or its effect on the Group’s consolidated net assets,
operating results or cash flows in any particular period. Consistent with the
Group’s obligations as a company admitted to the Official List, the Group will
give further details in relation to the OFT litigation when they become
available, including its potential impact on the Company.
United
States
Proceedings,
including consolidated class actions on behalf of former Enron securities
holders, have been brought in the United States against a large number of
defendants, including the Group, following the collapse of Enron. The claims
against the Group could be significant; the class plaintiff’s position is that
each defendant is responsible for an entire aggregate damage amount less
settlements—they have not quantified claimed damages against the Group in
particular. The Group considers that it has substantial and credible legal and
factual defences to these claims and will continue to defend them vigorously.
Recent decisions by the US Supreme Court and the US federal court for the Fifth
Circuit provide further support for the Group’s position. The Group is unable
reliably to estimate the liability, if any, that might arise or its effect on
the Group’s consolidated net assets, its operating results or cash flows in any
particular period.
Investigations
The Group’s
businesses and earnings can be affected by the fiscal or other policies and
other actions of various governmental and regulatory authorities in the United
Kingdom, the European Union, the United States and elsewhere. There is
continuing political and regulatory scrutiny of the operation of the retail
banking and consumer credit industries in the United Kingdom and elsewhere. The
nature and impact of future changes in policies and regulatory action are not
predictable and are beyond the Group’s control but could have an adverse impact
on the Group’s businesses and earnings.
European
Union
In the European
Union, these regulatory actions included an inquiry into retail banking in all
of the then 25 member states by the European Commission’s Directorate General
for Competition. The inquiry examined retail banking in Europe generally. On 31
January 2007, the European Commission announced that barriers to competition in
certain areas of retail banking, payment cards and payment systems in the
European Union had been identified. The European Commission indicated that it
will use its powers to address these barriers and will encourage national
competition authorities to enforce European and national competition laws where
appropriate.
In 2007 the European
Commission issued a judgement that MasterCard’s current multilateral interchange
fee (‘‘MIF’’) arrangement for cross border payment card transactions with
MasterCard and Maestro branded consumer credit and debit cards in the European
Union are in breach of competition law. MasterCard is required by the decision
to withdraw the relevant cross border MIFs by June 2008. The Group is waiting
for MasterCard to report to member banks with its proposals for removing the
cross border MIF for credit and debit card transactions. The Group also
understands that MasterCard is intending to appeal the decision. Visa’s MIFs
were temporarily allowed in 2002 by the European Commission up to 31 December
2007. On 27 March 2008, the European Commission opened a formal inquiry into
Visa’s current MIF arrangements for cross border payment card transactions with
Visa branded debit and consumer credit card charges in the European Union. There
is no deadline for the closure of the inquiry.
United
Kingdom
In the United
Kingdom, in September 2005, the Office of Fair Trading (‘‘OFT’’) received a
supercomplaint from the Citizens Advice Bureau relating to payment protection
insurance (‘‘PPI’’). As a result, the OFT commenced a market study on PPI in
April 2006. In October 2006, the OFT announced the outcome of the market study
and, on 7 February 2007, following a period of consultation, the OFT referred
the PPI market to the Competition Commission (‘‘CC’’) for an in-depth inquiry.
This inquiry could continue for up to two years. Also, in October 2006, the
Financial Services Authority published the outcome of its broad industry
thematic review of PPI sales practices in which it concluded that some
institutions fail to treat customers fairly.
In January 2006, the
OFT commenced a review of the undertakings given following the conclusion of the
CC inquiry in 2002 into the supply of banking services to small and medium
enterprises (‘‘SMEs’’). On 21 December 2007, the CC published its decision to
lift the temporary price controls imposed in 2003 on the United Kingdom’s four
largest banks servicing SMEs (including RBS) and to retain certain behavioural
undertakings.
The OFT has carried
out investigations into Visa and MasterCard credit card interchange rates. The
decision by the OFT in the MasterCard interchange case was set aside by the
Competition Appeals Tribunal in June 2006. The OFT’s investigations in the Visa
interchange case and a second MasterCard interchange case are ongoing. The
outcome is not known, but these investigations may have an impact on the
consumer credit industry in general and, therefore, on the Group’s business in
this sector. On 9 February 2007, the OFT announced that it was expanding its
investigation into interchange rates to include debit cards.
On 29 March 2007,
the OFT announced that, following an initial review into bank current account
charges, it had decided to conduct an in-depth study of UK retail bank pricing
and a formal investigation into the fairness of bank current account charges.
The findings of the OFT’s study and investigation are expected to be published
later this year. Given the stage of the investigation, the Company cannot
estimate the impact of any adverse outcome of the investigation upon it, if any.
However, the Company is cooperating fully with the OFT to achieve resolution of
the matters under investigation.
On 26 January 2007,
the FSA issued a Statement of Good Practice relating to Mortgage Exit
Administration Fees. On 1 March 2007, the Group adopted a policy of charging all
customers the fee applicable at the time the customers took out the mortgage or,
if later, varied their mortgage. The Company believes that it is currently in
compliance with the Statement of Good Practice and will continue to monitor its
performance against those standards.
On 26 April 2007,
the Office of Rail Regulation referred the leasing of rolling stock for
franchised passenger services and the supply of related maintenance services in
the United Kingdom to the CC for an inquiry lasting up to two years. The Group
owns the Angel Trains group, a rolling stock leasing business operating in this
market. Given the stage of the investigation, the Company cannot estimate the
impact of any adverse outcome of the investigation upon it, if any. The Company
is cooperating fully with the Office of Rail Regulation and the CC to resolve
the questions being considered.
On 15 May 2007, the
CC published its final report into the supply of personal current account
banking services in Northern Ireland. The Northern Ireland PCA Banking Market
Investigation Order 2008 implementing the remedies (including,
inter alia
, measures designed
to make switching current accounts between banks easier for depositors and
requiring the provision of aggregate fees and other information to customers)
set out in the report came into force on 22 February 2008. The Group owns Ulster
Bank, which is active in the Northern Ireland current account market. The
Company has responded to the remedies mandated by the Order and believes that it
is currently in compliance with its obligations. The Company will continue to
monitor its performance against those requirements.
Additional information
continued
United
States
In July 2004, ABN
AMRO signed a written agreement with the US regulatory authorities concerning
ABN AMRO’s dollar clearing activities in the New York branch. In addition, in
December 2005, ABN AMRO agreed to a Cease and Desist Order with the Dutch
Central Bank and various US federal and state regulators. This involved an
agreement to pay an aggregate civil penalty of US$75m and a voluntary endowment
of $5m in connection with deficiencies in the US dollar clearing operations at
ABN AMRO’s New York branch and OFAC compliance procedures regarding transactions
originating at its Dubai branch. ABN AMRO and members of ABN AMRO’s management
continue to provide information to law enforcement authorities in connection
with ongoing criminal investigations relating to ABN AMRO’s dollar clearing
activities, OFAC compliance procedures and other Bank Secrecy Act compliance
matters. The Cease and Desist Order with the Dutch Central Bank was lifted on 26
July 2007. Although no written agreement has yet been reached and negotiations
are ongoing,
ABN AMRO has
reached an agreement in principle with the US Department of Justice that
would resolve all presently known aspects of the ongoing investigation. Under
the terms of the agreement in principle, ABN AMRO and the United States would
enter into a deferred prosecution agreement in which ABN AMRO would waive
indictment and agree to the filing of information in the United States District
Court charging it with certain violations of federal law based on information
disclosed in an agreed factual statement. ABN AMRO would also agree to continue
cooperating in the United States’ ongoing investigation and to settle all known
civil and criminal claims currently held by the United States for the sum of
US$500m. The precise terms of the deferred prosecution agreement are still under
negotiation.
These compliance
issues and the related sanctions and investigations have had, and will continue
to have, an impact on ABN AMRO’s operations in the United States, including
limitations on expansion. ABN AMRO is actively exploring all possible options to
resolve these issues. The ultimate resolution of these compliance issues and
related investigations and the nature and severity of possible additional
sanctions cannot be predicted.
The New York State
Attorney General has issued subpoenas to a wide array of participants in the
sub-prime mortgage industry including mortgage originators, appraisers, due
diligence firms, investment banks and rating agencies, focusing on the
information underwriters obtained as part of the due diligence process from the
independent due diligence firms and whether that information is adequately
disclosed to investors. RBS Greenwich Capital has produced documents requested
by the New York State Attorney General principally related to sub-prime loans
that were pooled into one securitisation transaction.
In
addition to the above, certain of the Group’s subsidiaries have received
requests for information from various US governmental agencies and
self-regulatory organisations including in connection with sub-prime mortgages
and securitisations, collateralised debt obligations and synthetic products
related to sub-prime mortgages. In particular, during March 2008 the Group was
advised by the SEC that it had commenced a non-public, formal investigation
relating to the Group’s US sub-prime securities exposure and US residential
mortgage exposures. The company and its subsidiaries are co-operating with these
various requests for information and investigations.
Description
of property and equipment
The
Group operates from a number of locations worldwide, principally in the UK. At
31 December 2007, the Royal Bank and NatWest had 649 and 1,629 retail branches,
respectively, in the UK. Ulster Bank and First Active had a network of 282
branches in Northern Ireland and the Republic of Ireland. Citizens had 1,616
retail banking offices (including in-store branches) covering Connecticut,
Delaware, Illinois, Indiana, Massachusetts, Michigan, New Hampshire, New Jersey,
New York, Ohio, Pennsylvania, Rhode Island and Vermont. A substantial majority
of the UK branches are owned by the Royal Bank, NatWest and their subsidiaries
or are held under leases with unexpired terms of over 50 years. The Group’s
principal properties include its headquarters at Gogarburn, Edinburgh, its
principal offices in London at 135 and 280 Bishopsgate and the Drummond House
administration centre located at South Gyle, Edinburgh.
Total capital
expenditure on premises (excluding investment properties), computers and other
equipment in the year ended 31 December 2007 was £1,792 million (2006 – £1,140
million; 2005 – £1,275 million).
Major
shareholders
Details of major
shareholders of the company’s ordinary and preference shares are given on page
79.
As of 12
May, 2008, the holdings of major shareholders did not change, except for Legal
and General Group plc, which held 465,895,376 ordinary shares or
4.64%.
There have been no
significant changes in the percentage ownership of major shareholders of the
company’s ordinary and preference shares during the three years ended 27
February 2008. All shareholders within a class of the company’s shares have the
same voting rights. The company is not directly or indirectly owned or
controlled by another corporation or any foreign government and the company is
unaware of any arrangement which might result in a change of
control.
At
27 February 2008, the directors of the company had options to purchase a total
of 8,603,307 ordinary shares of the company.
At 12 May, 2008, the
directors of the company had options to purchase a total of 12,346,237 ordinary
shares of the company.
As
at 31 December 2007, almost all of the company’s US$ denominated preference
shares and ADSs representing ordinary shares were held by shareholders
registered in the US. All other shares were predominantly held by shareholders
registered outside the US.
Material
contracts
The
company and its subsidiaries are party to various contracts in the ordinary
course of business. During the year ended 31 December 2007, the company entered
into a Consortium and Shareholders’ Agreement dated 28 May 2007, among the
company, Banco Santander Central Hispano, S.A. Fortis N.V., Fortis SA/NV and RFS
Holdings B.V., which governs the relationships amongst these parties in relation
to the offers by RFS Holdings B.V. to the holders of ABN AMRO ordinary shares
and American Depositary Shares, as more fully described in the section entitled
‘Summary of the Consortium and Shareholders’ Agreement’ included in the
company’s Form F-4, as amended (Reg. No. 333-144752). Other than the
aforementioned agreement, there have been no material contracts entered into
outside the ordinary course of business.
Rights
issue underwriting agreement
Pursuant to an
underwriting agreement dated 22 April 2008 among the company, certain
underwriters and the Royal Bank, the underwriters have agreed severally to
procure subscribers for, or failing which themselves to subscribe for, new
Ordinary Shares not taken up under the rights issue, in each case at the issue
price of 200 pence per share. On 24 April 2008, pursuant to the terms of the
underwriting agreement, the company appointed certain additional institutions as
underwriters, who thereby became parties to the underwriting
agreement.
In consideration of
their services under the underwriting agreement, and subject to their
obligations under the underwriting agreement having become unconditional and the
underwriting agreement not having been terminated, the underwriters will be paid
(i) a base fee of 1.50 per cent. of the issue price multiplied by the aggregate
number of new Ordinary Shares and (ii) in the company’s sole discretion (as to
payment and allocation) a discretionary fee equal to 0.25 per cent. of the issue
price multiplied by the aggregate number of new Ordinary Shares, in each case,
whether or not they are called upon to acquire or procure acquirers for any of
the new Ordinary Shares under the underwriting agreement. Subject to the
underwriters’ obligations under the underwriting agreement having become
unconditional and the underwriting agreement not having been terminated, the
company will pay the Royal Bank an aggregate bookrunning fee of 0.05 per cent.
of the issue price multiplied by the aggregate number of new Ordinary Shares.
Out of such fees (to the extent received by the underwriters) the underwriters
will pay any sub-underwriting commissions (to the extent that sub-underwriters
are or have been procured). The underwriters may arrange sub-underwriting for
some, all or none of the new Ordinary Shares.
The company shall
pay (whether or not the underwriters’ obligations under this underwriting
agreement become unconditional) all costs and expenses of, or in connection
with, the rights issue, the general meeting, the allotment and issue of the new
ordinary shares and the underwriting agreement including (but not limited to)
the UK Listing Authority and the London Stock Exchange and Euronext Amsterdam
listing and trading fees, other regulatory fees and expenses, printing and
advertising costs, postage, the registrar’s charges, its own and the
Underwriters’ properly incurred legal and other out of pocket expenses, all
accountancy and other professional fees, properly incurred public relations fees
and expenses and all stamp duty and stamp duty reserve tax (if any) and other
duties and taxes (other than corporation tax incurred by any of the underwriters
on the commissions payable to them).
The obligations of
the underwriters under the underwriting agreement are subject to certain
conditions including, amongst others:
|
·
|
shareholder
approval which was granted at the general meeting held on 14 May
2008 (the “general meeting”);
|
|
·
|
the
underwriting agreement for the rights issue become unconditional in all
respects save for the condition relating to admission of the new Ordinary
Shares, nil paid, to the Official List of the UKLA and to trading on the
London Stock Exchange; and
|
|
·
|
such admission
becoming effective by not later than 8.00 a.m. on 19 May 2008 (or such
later time and date as the parties to the underwriting agreement may
agree).
|
The
lead underwriters may terminate the Underwriting Agreement in certain
circumstances but only prior to admission of the new Ordinary shares, fully
paid, to the Official List of the UKLA and to trading on the London Stock
Exchange. The company has given certain representations and warranties and
indemnities to the Underwriters under which the liabilities of the company are
unlimited as to time and amount.
FSA
Listing Rules disclosure
With effect from 17
October 2007, the Group transferred to Santander (a related party for the
purposes of the FSA Listing Rules) its rights and obligations under the
Consortium and Shareholders’ Agreement in respect of the ABN AMRO Global Clients
business in Brazil for €750 million.
Shareholder
information
|
220
|
Financial
calendar
|
|
220
|
Shareholder
enquiries
|
|
221
|
Capital gains
tax
|
|
222
|
Analyses of
ordinary
shareholders
|
|
223
|
Trading
market
|
|
226
|
Dividend
history
|
|
227
|
Taxation for
US Holders
|
|
231
|
Exchange
controls
|
|
231
|
Memorandum and
Articles
of
Association
|
|
236
|
Incorporation
and registration
|
|
236
|
Code of
ethics
|
| 236 | Documents on display |
|
237
|
Important
addresses
|
|
237
|
Principal
offices
|
Shareholder
information
|
Financial
calendar
|
|
|
Annual
General Meeting
|
23 April 2008
at 2.00 pm
|
|
Edinburgh
International Conference Centre,
|
|
|
The Exchange,
Morrison Street, Edinburgh
|
|
|
Interim
results
|
8 August
2008
|
|
Dividends
|
|
|
Payment
dates:
|
|
|
Ordinary
shares (2007 Final)
|
6 June
2008
|
|
Ordinary
shares (2008 Interim)
|
October
2008
|
|
Cumulative
preference shares
|
30 May and 31
December 2008
|
|
Non-cumulative
preference shares
|
31 March, 30
June, 30 September and 31 December 2008
|
|
Ex-dividend
dates:
|
|
|
Ordinary
shares (2007 Final)
|
5 March
2008
|
|
Cumulative
preference shares
|
30 April
2008
|
|
Record
dates:
|
|
|
Ordinary
shares (2007 Final)
|
7 March
2008
|
|
Cumulative
preference shares
|
2 May
2008
|
Shareholder
enquiries
Shareholdings in the
company may be checked by visiting our website (www.rbs.com/shareholder). You
will need the shareholder reference number printed on your share certificate or
tax voucher to gain access to this information.
Dividend
payments
The
company pays its dividends in pounds sterling although shareholders may choose
to receive payment in US dollars or euros.
Shareholders wishing
to receive payment in either US dollars or euros should request an instruction
form from the company’s registrar:
Computershare
Investor Services PLC
PO
Box 82
The
Pavilions
Bridgwater
Road
Bristol BS99
6ZZ
Telephone: 0870 702
0135
Fax: 0870 703
6009
Email:
web.queries@computershare.co.uk
Shareholders may
also download an instruction form via our website
(www.rbs.com/shareholder).
Completed
instruction forms must be returned to the registrar no later than 15 working
days before the relevant dividend payment date.
Braille
and audio Annual Review and Summary Financial Statement
Shareholders
requiring a Braille or audio version of the Annual Review and Summary Financial
Statement should contact the Registrar on 0870 702 0135.
ShareGift
The
company is aware that shareholders who hold a small number of shares may be
retaining these shares because dealing costs make it uneconomical to dispose of
them. ShareGift, the charity share donation scheme is a free service operated by
The Orr Mackintosh Foundation (registered charity 1052686) to enable
shareholders to donate shares to charity.
Should you wish to
donate your shares to charity in this way you should contact ShareGift for
further information:
ShareGift, The Orr
Mackintosh Foundation, 17 Carlton House Terrace, London SW1Y 5AH Tel: 020 7930
3737 www.ShareGift.org
Donating your shares
in this way will not give rise to either a gain or a loss for UK capital gains
tax purposes and you may be able to reclaim UK income tax on gifted shares.
Further information can be obtained from HM Revenue & Customs.
Capital
gains tax
For
shareholders who held RBS ordinary shares at 31 March 1982, the market value of
one ordinary share held was 103p. After adjusting for the 1 March 1985 rights
issue, the 1 September 1989 capitalisation issue, the bonus issue of Additional
Value Shares on 12 July 2000 and the bonus issue of ordinary shares on 8 May
2007, the adjusted 31 March 1982 base value of one ordinary share held currently
is 15.4p.
For
shareholders who held NatWest ordinary shares at 31 March 1982, the market value
of one ordinary share held was 28.39p for shareholders who accepted the basic
terms of the RBS offer. This takes account of the August 1984 and June 1986
rights issues and the June 1989 bonus issue of NatWest ordinary shares as well
as the subsequent issue of Additional Value Shares and the bonus issue of
ordinary shares on 8 May 2007.
When disposing of
shares, shareholders are also entitled to indexation allowance (to April 1998
only in the case of individuals and non-corporate holders), which is calculated
on the 31 March 1982 value, on the cost of subsequent purchases from the date of
purchase and on the subscription for rights from the date of that payment.
Further adjustments must be made where a shareholder has chosen to receive
shares instead of cash for dividends. Individuals and non-corporate shareholders
may also be entitled to some taper relief to reduce the amount of any chargeable
gain on disposal of shares.
It
was announced in the Pre-Budget Report on 9 October 2007 that the capital gains
tax treatment for individuals will change for disposals made on or after 6 April
2008. There will be a single rate of capital gains tax set at 18%. Indexation
allowance and taper relief will no longer be available and for assets held on 31
March 1982, the market value of the asset on that date will automatically be
used for the purpose of calculating the gain or loss arising on a
disposal.
The
information set out above is intended as a general guide only and is based on
current United Kingdom legislation and HM Revenue & Customs practice as at
this date. This information deals only with the position of individual
shareholders who are resident in the United Kingdom for tax purposes, who are
the beneficial owners of their shares and who hold their shares as an
investment. It does not deal with the position of shareholders other than
individual shareholders, shareholders who are resident outside the United
Kingdom for tax purposes or certain types of shareholders, such as dealers in
securities.
Shareholder information
continued
Analyses
of ordinary shareholders at 31 December 2007
|
Shareholdings
|
Number
of
shares
–
millions
|
%
|
|||
|
Individuals
|
174,438
|
693.7
|
6.9
|
||
|
Banks and
nominee companies
|
25,434
|
8,898.1
|
88.9
|
||
|
Investment
trusts
|
172
|
4.3
|
0.1
|
||
|
Insurance
companies
|
329
|
5.1
|
0.1
|
||
|
Other
companies
|
2,148
|
321.6
|
3.2
|
||
|
Pension
trusts
|
45
|
32.7
|
0.3
|
||
|
Other
corporate bodies
|
94
|
50.7
|
0.5
|
||
|
202,660
|
10,006.2
|
100.00
|
|||
|
Range of
shareholdings:
|
|||||
|
1 –
1,000
|
84,387
|
34.5
|
0.3
|
||
|
1,001 –
10,000
|
99,951
|
336.1
|
3.4
|
||
|
10,001 –
100,000
|
16,400
|
351.8
|
3.5
|
||
|
100,001 –
1,000,000
|
1,202
|
420.8
|
4.2
|
||
|
1,000,001 –
10,000,000
|
569
|
1,853.4
|
18.5
|
||
|
10,000,001 and
over
|
151
|
7,009.6
|
70.1
|
||
|
202,660
|
10,006.2
|
100.00
|
Trading
market
Non-cumulative
dollar preference shares
On
26 March 1997, 8 February 1999, 30 September 2004, 26 August 2004, 19 May 2005,
9 November 2005,
25 May 2006, 27
December 2006, 28 June 2007, 27 September 2007 and 4 October 2007 the company
issued the following American Depositary Shares (“ADSs”) representing
non-cumulative dollar preference shares of the company, in the United States,
which were outstanding at 31 December 2007:
8,000,000 Series F
(“Series F ADSs”) representing 8,000,000 non-cumulative dollar preference
shares, Series F;
12,000,000 Series H
(“Series H ADSs”) representing 12,000,000 non-cumulative dollar preference
shares, Series H;
34,000,000 Series L
(“Series L ADSs”) representing 34,000,000 non-cumulative dollar preference
shares, Series L;
37,000,000 Series M
(“Series M ADSs”) representing 37,000,000 non-cumulative dollar preference
shares, Series M;
40,000,000 Series N
(“Series N ADSs”) representing 40,000,000 non-cumulative dollar preference
shares, Series N;
22,000,000 Series P
(“Series P ADSs”) representing 22,000,000 non-cumulative dollar preference
shares, Series P;
27,000,000 Series Q
(“Series Q ADSs”) representing 27,000,000 non-cumulative dollar preference
shares, Series Q;
26,000,000 Series R
(“Series R ADSs”) representing 26,000,000 non-cumulative dollar preference
shares, Series R;
38,000,000 Series S
(“Series S ADSs”) representing 38,000,000 non-cumulative dollar preference
shares, Series S;
64,000,000 Series T
(“Series T ADSs”) representing 64,000,000 non-cumulative dollar preference
shares, Series T; and
15,000 Series U
(“Series U ADSs”) representing 15,000 non-cumulative dollar preference shares,
Series U.
Each of the
respective ADSs set out above represents the right to receive one corresponding
preference share, and is evidenced by an American Depositary Receipt (“ADR”) and
is listed on the New York Stock Exchange, a subsidiary of NYSE Euronext
(“NYSE”).
The
ADRs evidencing the ADSs above were issued pursuant to Deposit Agreements, among
the company, The Bank of New York, as depository, and all holders from
time-to-time of ADRs issued thereunder. Currently, there is no non-United States
trading market for any of the non-cumulative dollar preference shares. All of
the non-cumulative dollar preference shares are held by the depository, as
custodian, in bearer form.
In
January 2007, the company redeemed the 8 million Series E non-cumulative
preference shares of US$0.01 each, the 10 million Series G non-cumulative
preference shares of US$0.01 each and the 16 million Series K non-cumulative
preference shares of US$0.01 each.
At
31 December 2007, there were 100 registered shareholders of Series F ADSs, 63
registered shareholders of Series H ADSs, 25 registered shareholders of Series L
ADSs, 1 registered shareholder of Series M ADSs, 47 registered shareholders of
Series N ADSs, 55 registered shareholders of Series P ADSs, 17 registered
shareholders of Series Q ADSs, 1 registered shareholder of Series R ADSs, 1
registered shareholder of Series S ADSs, 23 registered shareholders of Series T
ADSs and 1 registered shareholder of Series U ADSs.
PROs
On
20 August 2001, the company issued US$1.2 billion of perpetual regulatory tier
one securities (‘PROs’) in connection with a public offering in the United
States. The PROs are listed on the NYSE.
ADSs
representing ordinary shares
On
17 October 2007, the company listed ADSs, each representing one ordinary share,
nominal value 25p each (or a right to receive one ordinary share), and evidenced
by an ADR or uncertificated securities, on the NYSE. On the same day, trading
commenced on a ‘when issued’ basis and on 18 October 2007, regular trading
commenced. As of 31 December 2007, 62.9 million ADSs were outstanding. The ADSs
were issued in connection with the company’s bid for the outstanding share
capital of ABN AMRO Holding N.V.
The
ADSs described in the above paragraph were issued pursuant to a Deposit
Agreement, among the company, The Bank of New York Mellon, as depositary, and
all owners and holders from time to time of ADSs issued thereunder. The ordinary
shares of the company are listed and traded on the London Stock Exchange. All
ordinary shares are deposited with the principal London office of The Bank of
New York Mellon, as custodian for the depositary.
Shareholder information
continued
The
following table shows, for the periods indicated, the high and low sales prices
for each of the outstanding ADSs representing non-cumulative dollar preference
shares and PROs, as reported on the NYSE composite tape:
|
Figures in
US$
|
Series
F
ADSs
|
Series
H
ADSs
|
Series
L
ADSs
|
Series
M
ADSs
|
Series
N
ADSs
|
Series
P
ADSs
|
Series
Q
ADSs
|
Series
R
ADSs
|
Series
S
ADSs
|
Series
T
ADSs
|
Series
U
ADSs
|
PROs
(1)
|
||||||||||||
|
By
month
|
||||||||||||||||||||||||
|
April 2008
|
High
|
25.65 | 24.92 | 20.22 | 22.64 | 22.52 | 21.99 | 23.74 | 21.49 | 22.74 | 24.70 |
94.13
|
93.76
|
|||||||||||
|
Low
|
25.13 | 24.20 | 19.41 | 21.45 | 21.50 | 20.90 | 22.95 | 20.55 | 21.78 | 23.79 |
85.25
|
91.00
|
||||||||||||
|
March 2008
|
High
|
25.59 | 25.30 | 20.88 | 23.70 | 23.38 | 23.00 | 24.84 | 22.74 | 23.67 | 25.20 |
100.36
|
102.99
|
|||||||||||
|
Low
|
24.53 | 24.00 | 18.05 | 20.60 | 19.78 | 20.05 | 22.75 | 19.79 | 20.77 | 23.95 |
86
.13
|
9
3.76
|
||||||||||||
|
February
2008
|
High
|
25.53
|
25.30
|
22.27
|
24.10
|
24.01
|
23.83
|
24.95
|
23.21
|
24.45
|
25.66
|
102
.68
|
104.90
|
|||||||||||
|
Low
|
25.22
|
24.90
|
21.19
|
22.89
|
22.60
|
22.45
|
23.72
|
22.37
|
23.26
|
25.00
|
97.54
|
100.73
|
||||||||||||
|
January
2008
|
High
|
25.55
|
25.15
|
22.20
|
24.12
|
24.00
|
23.85
|
24.83
|
23.52
|
24.66
|
25.50
|
105.61
|
107.55
|
|||||||||||
|
Low
|
24.50
|
24.21
|
18.80
|
20.88
|
20.54
|
20.10
|
21.80
|
19.90
|
21.39
|
24.00
|
101.72
|
104.13
|
||||||||||||
|
December
2007
|
High
|
25.54
|
25.10
|
20.66
|
22.44
|
22.12
|
21.99
|
23.69
|
21.50
|
22.75
|
25.22
|
102.81
|
106.64
|
|||||||||||
|
Low
|
23.60
|
22.70
|
17.90
|
19.68
|
19.50
|
19.25
|
20.71
|
18.96
|
20.26
|
22.61
|
98.34
|
100.49
|
||||||||||||
|
November
2007
|
High
|
25.75
|
25.25
|
20.89
|
23.01
|
22.81
|
22.60
|
24.52
|
21.93
|
23.30
|
25.25
|
104.94
|
109.95
|
|||||||||||
|
Low
|
25.25
|
22.77
|
18.44
|
20.19
|
20.14
|
19.94
|
21.30
|
19.44
|
20.73
|
23.35
|
101.16
|
103.08
|
||||||||||||
|
By
quarter
|
||||||||||||||||||||||||
|
2008: First
quarter
|
High
|
25.59 | 25.30 | 22.27 | 24.12 | 24.01 | 23.85 | 24.95 | 23.52 | 24.66 | 25.66 | 105.61 | 107.55 | |||||||||||
|
Low
|
24.50 | 24.00 | 18.05 | 20.60 | 19.78 | 20.05 | 21.80 | 19.79 | 20.77 | 23.95 | 86 .13 | 93.76 | ||||||||||||
|
2007: Fourth
quarter
|
High
|
25.85
|
25.50
|
21.34
|
23.23
|
23.10
|
22.89
|
24.80
|
22.54
|
24.11
|
25.48
|
107.98
|
109.95
|
|||||||||||
|
Low
|
23.60
|
22.70
|
17.90
|
19.68
|
19.50
|
19.25
|
20.71
|
18.96
|
20.26
|
22.61
|
98.34
|
100.49
|
||||||||||||
|
2007: Third
quarter
|
High
|
26.23
|
25.60
|
22.23
|
24.60
|
24.30
|
24.14
|
25.88
|
23.55
|
25.20
|
25.10
|
—
|
112.88
|
|||||||||||
|
Low
|
25.25
|
24.95
|
20.30
|
22.22
|
21.98
|
21.76
|
23.49
|
21.20
|
22.77
|
24.95
|
—
|
104.94
|
||||||||||||
|
2007: Second
quarter
|
High
|
26.50
|
25.78
|
24.36
|
25.88
|
25.67
|
25.78
|
26.40
|
25.35
|
25.00
|
—
|
—
|
118.15
|
|||||||||||
|
Low
|
25.39
|
25.10
|
21.80
|
24.10
|
23.81
|
23.51
|
24.95
|
23.30
|
24.75
|
—
|
—
|
110.17
|
||||||||||||
|
2007: First
quarter
|
High
|
25.76
|
25.85
|
24.75
|
25.99
|
25.75
|
25.83
|
26.91
|
25.50
|
—
|
—
|
—
|
122.07
|
|||||||||||
|
Low
|
25.26
|
25.21
|
24.02
|
25.50
|
25.35
|
25.25
|
26.08
|
24.79
|
—
|
—
|
—
|
115.81
|
||||||||||||
|
2006: Fourth
quarter
|
High
|
26.73
|
25.95
|
24.62
|
26.08
|
25.96
|
26.07
|
26.76
|
—
|
—
|
—
|
—
|
121.54
|
|||||||||||
|
Low
|
25.29
|
25.17
|
23.80
|
25.23
|
25.21
|
24.91
|
25.97
|
—
|
—
|
—
|
—
|
114.47
|
||||||||||||
|
2006: Third
quarter
|
High
|
26.91
|
25.75
|
24.08
|
25.44
|
25.30
|
25.33
|
26.24
|
—
|
—
|
—
|
—
|
117.81
|
|||||||||||
|
Low
|
25.58
|
25.16
|
21.71
|
24.05
|
23.69
|
23.64
|
25.08
|
—
|
—
|
—
|
—
|
106.96
|
||||||||||||
|
2006: Second
quarter
|
High
|
26.07
|
25.49
|
23.39
|
25.03
|
25.04
|
24.70
|
25.55
|
—
|
—
|
—
|
—
|
114.90
|
|||||||||||
|
Low
|
25.45
|
25.01
|
21.15
|
23.58
|
23.32
|
22.76
|
24.67
|
—
|
—
|
—
|
—
|
106.06
|
||||||||||||
|
2006: First
quarter
|
High
|
27.25
|
25.78
|
24.50
|
25.62
|
25.60
|
25.35
|
—
|
—
|
—
|
—
|
—
|
122.23
|
|||||||||||
|
Low
|
25.72
|
25.25
|
23.09
|
25.08
|
25.10
|
24.72
|
—
|
—
|
—
|
—
|
—
|
114.75
|
||||||||||||
|
By
year
|
||||||||||||||||||||||||
|
2007
|
High
|
26.50
|
25.85
|
24.75
|
25.99
|
25.75
|
25.83
|
26.91
|
25.50
|
25.20
|
25.48
|
107.98
|
122.07
|
|||||||||||
|
Low
|
23.60
|
22.70
|
17.90
|
19.68
|
19.50
|
19.25
|
20.71
|
18.96
|
20.26
|
22.61
|
98.34
|
100.49
|
||||||||||||
|
2006
|
High
|
27.25
|
25.95
|
24.62
|
26.08
|
25.96
|
26.07
|
26.76
|
—
|
—
|
—
|
—
|
122.23
|
|||||||||||
|
Low
|
25.29
|
25.01
|
21.15
|
23.58
|
23.32
|
22.76
|
24.67
|
—
|
—
|
—
|
—
|
106.06
|
||||||||||||
|
2005
|
High
|
28.00
|
26.19
|
24.99
|
26.75
|
26.23
|
25.50
|
—
|
—
|
—
|
—
|
—
|
129.57
|
|||||||||||
|
Low
|
26.02
|
25.20
|
22.67
|
24.77
|
24.70
|
24.60
|
—
|
—
|
—
|
—
|
—
|
116.70
|
||||||||||||
|
2004
|
High
|
28.45
|
25.87
|
24.68
|
26.16
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
125.14
|
|||||||||||
|
Low
|
25.65
|
24.45
|
23.51
|
25.13
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
110.58
|
||||||||||||
|
2003
|
High
|
29.05
|
26.40
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
130.78
|
|||||||||||
|
Low
|
27.03
|
25.10
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
111.06
|
Note:
|
(1)
|
Price quoted
as a % of US$1,000 nominal.
|
Ordinary
shares
The
following table shows, for the periods indicated, the high and low sales prices
for the company’s ordinary shares on the London Stock Exchange, as derived from
the Daily Office List of the UK Listing Authority:
|
Figures in
£
|
Ordinary
shares
|
Figures in
£
|
Ordinary
shares
|
Figures in
£
|
Ordinary
shares
|
|||||
|
By
month
|
By
quarter
|
By
year
|
||||||||
|
April 2008
|
High
|
3.8400 |
2008: First
quarter
|
High
|
4.4250 |
2007
|
High
|
7.1900
|
||
|
Low
|
3.4075 |
Low
|
3.0500 |
Low
|
3.9725
|
|||||
|
March
2008
|
High
|
3.6925 |
2007: Fourth
quarter
|
High
|
5.6950
|
2006
|
High
|
6.6600
|
||
|
Low
|
3.0500 |
Low
|
3.9725
|
Low
|
5.5600
|
|||||
|
February
2008
|
High
|
4.1350
|
2007: Third
quarter
|
High
|
6.4250
|
2005
|
High
|
6.1000
|
||
|
Low
|
3.5075
|
Low
|
5.0850
|
Low
|
5.0700
|
|||||
|
January
2008
|
High
|
4.4250
|
2007: Second
quarter
|
High
|
6.9000
|
2004
|
High
|
5.8700
|
||
|
Low
|
3.4275
|
Low
|
6.2300
|
Low
|
4.8800
|
|||||
|
December
2007
|
High
|
4.9000
|
2007: First
quarter
|
High
|
7.1900
|
2003
|
High
|
5.9300
|
||
|
Low
|
4.2425
|
Low
|
6.5100
|
Low
|
4.1200
|
|||||
|
November
2007
|
High
|
4.9875
|
2006: Fourth
quarter
|
High
|
6.6600
|
|
|
|
||
|
|
|
Low
|
6.0800
|
|
|
|||||
|
|
|
|
2006: Third
quarter
|
High
|
6.1200
|
|
|
|
||
|
|
|
Low
|
5.5600
|
|
|
|||||
|
|
|
|
2006: Second
quarter
|
High
|
6.2500
|
|||||
|
|
|
Low
|
5.5900
|
|||||||
|
2006: First
quarter
|
High
|
6.4400
|
||||||||
|
Low
|
5.6700
|
On
12 May 2008, the closing price of shares on the London Stock Exchange was
£3.4475, equivalent to $6.7626 per share translated at the Noon Buying Rate of
$1.9616 per £1.00 on 12 May 2008.
ADSs
The
following table shows, for the periods indicated, the high and low sales prices
for the company’s ordinary ADSs, as reported on the NYSE composite
tape:
|
Figures in
US$
|
ADSs
|
Figures in
US$
|
ADSs
|
Figures in
US$
|
ADSs
|
|||||
|
By
month
|
By
quarter
|
By
year
|
||||||||
| April 2008 | High | 7.76 |
2008: First
quarter
|
High
|
8.90 | 2007 |
High
|
11.30
|
||
|
Low
|
6.85 |
Low
|
6.28 | Low |
8.43
|
|||||
| March 2008 | High | 7.50 |
2007: Fourth
quarter
|
High
|
11.30
|
|
||||
|
Low
|
6.28 |
Low
|
8.43
|
|||||||
| February 2008 | High | 8.34 |
|
|
|
|||||
| Low | 7.06 |
|
|
|||||||
|
January
2008
|
High
|
8.90
|
|
|
|
|
|
|
||
|
Low
|
7.50
|
|
|
|
|
|||||
|
December
2007
|
High
|
10.26
|
||||||||
|
Low
|
8.64
|
|||||||||
|
November
2007
|
High
|
10.58
|
||||||||
|
Low
|
8.43
|
On
12
May
2008, the closing
price of ordinary ADSs on the New York Stock Exchange was $6.94.
Shareholder information
continued
Dividend
history
Preference
and other non-equity dividends
|
IFRS
2007
|
IFRS
2006
|
IFRS
2005
|
||||||||
|
Subordinated
liabilities
|
Equity
|
Subordinated
liabilities
|
Equity
|
Subordinated
liabilities
|
Equity
|
|||||
|
Amount per
share
|
$
|
£
|
$
|
£
|
£
|
£
|
£
|
£
|
||
|
Non-cumulative
preference shares of US$0.01
|
||||||||||
|
– Series D
(redeemed March 2006)
|
—
|
—
|
0.21
|
1.13
|
||||||
|
– Series E
(redeemed January 2007)
|
0.08
|
0.04
|
1.10
|
1.12
|
||||||
|
– Series
F
|
1.91
|
0.96
|
1.03
|
1.06
|
||||||
|
– Series G
(redeemed January 2007)
|
0.08
|
0.04
|
1.00
|
1.02
|
||||||
|
– Series
H
|
1.81
|
0.91
|
0.98
|
1.00
|
||||||
|
– Series I
(redeemed March 2006)
|
—
|
—
|
0.20
|
1.10
|
||||||
|
– Series J
(redeemed November 2005)
|
—
|
—
|
—
|
1.06
|
||||||
|
– Series K
(redeemed January 2007)
|
0.08
|
0.04
|
1.06
|
1.09
|
||||||
|
– Series
L
|
1.44
|
0.72
|
0.78
|
0.79
|
||||||
|
– Series
M
|
1.60
|
0.80
|
0.87
|
0.88
|
||||||
|
– Series
N
|
1.59
|
0.79
|
0.86
|
0.55
|
||||||
|
– Series
P
|
1.56
|
0.78
|
0.85
|
0.13
|
||||||
|
– Series
Q
|
1.69
|
0.84
|
0.53
|
—
|
||||||
|
– Series
R
|
1.54
|
0.77
|
—
|
—
|
||||||
|
– Series S
(issued June 2007)
|
0.83
|
0.41
|
—
|
—
|
||||||
|
– Series T
(issued September 2007)
|
0.47
|
0.23
|
—
|
—
|
||||||
|
Non-cumulative
convertible preference shares
|
||||||||||
|
of
US$0.01
|
||||||||||
|
– Series
1
|
91.18
|
45.58
|
50.26
|
50.33
|
||||||
|
– Series 2
(redeemed March 2005)
|
—
|
—
|
—
|
11.60
|
||||||
|
– Series 3
(redeemed December 2005)
|
—
|
—
|
—
|
43.03
|
||||||
|
Non-cumulative
convertible preference shares
|
||||||||||
|
of
€0.01
|
||||||||||
|
– Series 1
(redeemed March 2005)
|
—
|
—
|
—
|
11.54
|
||||||
|
Non-cumulative
preference shares of €0.01
|
||||||||||
|
– Series
1
|
79.43
|
39.63
|
37.18
|
41.14
|
||||||
|
– Series
2
|
71.19
|
35.52
|
36.22
|
—
|
||||||
|
Non-cumulative
convertible preference shares
|
||||||||||
|
of
£0.01
|
||||||||||
|
– Series
1
|
148.06
|
73.87
|
73.87
|
73.87
|
||||||
|
UK
GAAP
2004
|
UK
GAAP
2003
|
||
|
Amount per
share
|
£
|
£
|
|
|
Non-cumulative
preference shares of US$0.01
|
|||
|
– Series B
(redeemed January 2003)
|
—
|
0.13
|
|
|
– Series C
(redeemed January 2003)
|
—
|
0.11
|
|
|
– Series D
(redeemed March 2006)
|
1.11
|
1.23
|
|
|
– Series E
(redeemed January 2007)
|
1.10
|
1.21
|
|
|
– Series
F
|
1.04
|
1.15
|
|
|
– Series G
(redeemed January 2007)
|
1.00
|
1.11
|
|
|
– Series
H
|
0.98
|
1.09
|
|
|
– Series I
(redeemed March 2006)
|
1.08
|
1.20
|
|
|
– Series J
(redeemed November 2005)
|
1.15
|
1.27
|
|
|
– Series K
(redeemed January 2007)
|
1.07
|
1.18
|
|
|
– Series
L
|
0.19
|
—
|
|
|
– Series
M
|
0.30
|
—
|
|
|
Non-cumulative
convertible preference shares
|
|||
|
of
US$0.01
|
|||
|
– Series
1
|
49.05
|
54.89
|
|
|
– Series 2
(redeemed March 2005)
|
47.43
|
53.08
|
|
|
– Series 3
(redeemed December 2005)
|
41.74
|
45.57
|
|
|
Non-cumulative
convertible preference shares
|
|||
|
of
€0.01
|
|||
|
– Series 1
(redeemed March 2005)
|
44.19
|
49.58
|
|
|
Non-cumulative
preference shares of €0.01
|
|||
|
– Series
1
|
3.45
|
—
|
|
|
Non-cumulative
convertible preference shares
|
|||
|
of
£0.01
|
|||
|
– Series
1
|
73.87
|
73.87
|
|
|
Additional
Value Shares of £1
|
—
|
0.55
|
Ordinary
dividends
For a discussion of
the Group’s current dividend policy, please read “Business review – Recent
developments – Dividends and dividend policy”.
Ordinary dividends
per share for prior years in the table below have been restated for the effect
of the bonus issue of ordinary shares in May 2007.
|
IFRS
2007
|
IFRS
2006
|
IFRS
2005
|
||
|
Amount per
share and American Depository Shares
(1)
|
cents
|
pence
|
pence
|
pence
|
|
Interim
|
20.1
|
10.1
|
8.1
|
6.5
|
|
Final
(2)
|
45.8
|
23.1
|
22.1
|
17.7
|
|
Total
dividends on equity shares
|
65.9
|
33.2
|
30.2
|
24.2
|
|
UK
GAAP
2004
|
UK
GAAP
2003
|
|
|
Amount per
share
|
pence
|
pence
|
|
Interim
|
5.6
|
4.9
|
|
Final
(2)
|
13.7
|
11.9
|
|
Total
dividends on equity shares
|
19.3
|
16.8
|
|
Notes:
|
|
|
(1)
|
Each American
Depositary Share represents one ordinary share. The historical amounts
listed in the table apply to the ordinary shares, as the American
Depositary Shares were not issued until October 2007 as described above
under Trading Market.
|
|
(2)
|
2007 final
dividends are proposed.
|
For
further information, see Notes 6 and 7 on the accounts.
Taxation
for US Holders
The
following discussion summarises certain US federal and UK tax consequences of
the acquisition, ownership and disposition of ordinary shares, non-cumulative
dollar preference shares, ADSs representing ordinary shares (“ordinary ADSs”),
ADSs representing non-cumulative dollar preference shares (“preference ADSs”) or
PROs by a beneficial owner that is
, for US federal tax
purposes, (i)
a citizen or
individual resident of the United States; (ii) a corporation, or other entity
taxable as a corporation, created or organized in or under the laws of the
United States or any political subdivision the
reof; or (iii) an estate or trust the
income of which is subject to U.S. federal income taxation regardless of its
source
(a “US Holder”). This summary assumes that a US Holder is
holding ordinary shares, non-cumulative dollar preference shares, ordinary ADSs,
preference ADSs or PROs, as applicable, as capital assets. This summary does not
address the tax consequences to a US Holder (i) that is resident (or, in the
case of an individual, ordinarily resident) in the UK for UK tax purposes or
(ii) generally, that is a corporation which alone or together with one or more
associated companies, controls, directly or indirectly, 10% or more of the
voting stock of the company.
The
statements and practices set forth below regarding US and UK tax laws, including
the US/UK double taxation convention relating to income and capital gains which
entered into force on 31 March 2003 (the “Treaty”), and the US/UK double
taxation convention relating to estate and gift taxes (the “Estate Tax Treaty”),
are based on those laws and practices as in force and as applied in practice on
the date of this Report. This summary is not exhaustive of all possible tax
considerations and holders are advised to satisfy themselves as to the overall
tax consequences, including specifically the consequences under US federal,
state, local and other laws, and possible changes in taxation law, of the
acquisition, ownership and disposition of ordinary shares, non-cumulative dollar
preference shares, ordinary ADSs, preference ADSs or PROs by consulting their
own tax advisers.
The
following discussion assumes that the Company is not, and will not become, a
passive foreign investment company (“PFIC”) – see “Passive Foreign Investment
Company Considerations” on page 230.
Ordinary
shares, preference shares, ordinary ADSs and preference ADSs
Taxation
of dividends
For
the purposes of the Treaty, the Estate Tax Treaty and the US Internal Revenue
Code of 1986, as amended (the “Code”), US Holders of ordinary ADSs and
preference ADSs should be treated as owners of the ordinary shares and the
non-cumulative dollar preference shares underlying such ADSs.
The
US Treasury has expressed concerns that parties to whom ADSs are pre-released or
intermediaries in the chain of ownership between US Holders and the issuer of
the security underlying the ADSs may be taking actions that are inconsistent
with the claiming of foreign tax credits for US Holders of ADSs. Such actions
would also be inconsistent with the claiming of the reduced rate of tax
applicable to dividends received by certain non-corporate US Holders.
Accordingly, availability of the reduced tax rate for dividends received by
certain non-corporate US Holders of ordinary ADSs could be affected by actions
taken by such parties or intermediaries.
The
company is not required to withhold UK tax at source from dividend payments it
makes or from any amount (including any amounts in respect of accrued dividends)
distributed by the company. US Holders who are not resident or ordinarily
resident in the UK and who do not carry on a trade, profession or vocation in
the UK through a branch, agency or permanent establishment in connection with
which their ordinary shares, non-cumulative preference shares, ordinary ADSs or
preference ADSs are held used or acquired will not be subject to UK tax in
respect of any dividends received on the relevant shares or ADSs.
Distributions by the
company will constitute foreign source dividend income for US federal income tax
purposes to the extent paid out of the current or accumulated earnings and
profits of the company, as determined for US federal income tax purposes.
Because the company does not maintain calculations of its earnings and profits
under US federal income tax principles, it is expected that distributions will
be reported to US Holders as dividends. Payments will not be eligible for the
dividends-received deduction allowed to corporate US Holders.
Subject to
applicable limitations that may vary depending upon a holder’s individual
circumstances, dividends paid to certain non-corporate US Holders in taxable
years beginning before 1 January 2011 will be taxable at a maximum tax rate of
15%. Non-corporate US Holders should consult their own tax advisers to determine
whether they are subject to any special rules that limit their ability to be
taxed at this favourable rate.
Dividends will be
included in a US Holder’s income on the date of the US Holder’s (or in the case
of ADSs, the Depositary’s) 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.
Shareholder information
continued
Taxation
of capital gains
A
US Holder that is not resident (or, in the case of an individual, ordinarily
resident) in the UK will not normally be liable for UK tax on capital gains
realised on the disposition of an ordinary share, a non-cumulative dollar
preference share, an ordinary ADS or a preference ADS unless at the time of the
disposal, in the case of a corporate US Holder, such US Holder carries on a
trade in the UK through a permanent establishment or, in the case of any other
US Holder, such US Holder carries on a trade, profession or vocation in the UK
through a UK branch or agency and such ordinary share, non-cumulative dollar
preference share, ordinary ADS or preference ADS is or has been used, held or
acquired by or for the purposes of such trade (or profession or vocation),
permanent establishment, branch or agency. Special rules apply to individuals
who are temporarily not resident or ordinarily resident in the UK.
A
US Holder will, upon the sale or other disposition of an ordinary share, a
non-cumulative dollar preference share, an ordinary ADS or a preference ADS, or
upon the redemption of a non-cumulative dollar preference share or preference
ADS, generally recognise capital gain or loss for US federal income tax purposes
(assuming that in the case of a redemption of a non-cumulative dollar preference
share or a preference ADS, such US Holder does not own, and is not deemed to
own, any ordinary shares or ordinary ADSs of the company) in an amount equal to
the difference between the amount realised (excluding in the case of a
redemption any amount treated as a dividend for US federal income tax purposes,
which will be taxed accordingly) and the US Holder’s tax basis in such share or
ADS. This capital gain or loss will be long-term capital gain or loss if the US
Holder held the share or ADS so sold, disposed or redeemed for more than one
year.
A
US Holder who is liable for both UK and US tax on a gain recognised on the
disposal of an ordinary share, a non-cumulative 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.
If
a corporate US Holder is subject to UK corporation tax by reason of carrying on
a trade in the UK through a permanent establishment and its non-cumulative
dollar preference share or preference ADS is, or has been, used, held or
acquired for the purposes of that permanent establishment, certain provisions
introduced by the Finance (No. 2) Act 2005 will apply if the US Holder holds its
non-cumulative dollar preference share or preference ADS for a “tax avoidance
purpose”. If these provisions apply, dividends on the non-cumulative dollar
preference share, or preference ADS, as well as certain fair value credits and
debits arising in respect of such share or ADS, will be brought within the
charge to UK corporation tax on income and the UK tax position outlined in the
preceding paragraphs will not apply in relation to such US Holder.
Estate
and gift tax
Subject to the
discussion of the Estate Tax Treaty in the next paragraph, ordinary shares,
non-cumulative dollar preference shares, ordinary ADSs or preference ADSs
beneficially owned by an individual may be subject to UK inheritance tax
(subject to exemptions and reliefs) on the death of the individual or in certain
circumstances, if such shares or ADSs are the subject of a gift (including a
transfer at less than market value) by such individual. (Inheritance tax is not
generally chargeable on gifts to individuals made more than seven years before
the death of the donor). Ordinary shares, non-cumulative dollar preference
shares, ordinary ADSs or preference ADSs held by the trustees of a settlement
will also be subject to UK inheritance tax. Special rules apply to such
settlements.
An
ordinary share, a non-cumulative dollar preference share, an ordinary ADS or a
preference ADS beneficially owned by an individual, whose domicile is determined
to be the United States for purposes of the Estate Tax Treaty and who is not a
national of the UK, will not be subject to UK inheritance tax on the
individual’s death or on a lifetime transfer of such share or ADS, except in
certain cases where the share or ADS (i) is comprised in a settlement (unless,
at the time of the settlement, the settlor was domiciled in the United States
and was not a national of the UK); (ii) is part of the business property of a UK
permanent establishment of an enterprise; or (iii) pertains to a UK fixed base
of an individual used for the performance of independent personal services. The
Estate Tax Treaty generally provides a credit against US federal estate or gift
tax liability for the amount of any tax paid in the UK in a case where the
ordinary share, non-cumulative dollar preference share, ordinary ADS or
preference ADS is subject to both UK inheritance tax and US federal estate or
gift tax.
UK
stamp duty and stamp duty reserve tax (“SDRT”)
The
following is a summary of the UK stamp duty and SDRT consequences of
transferring an ADS or ADR in registered form (otherwise than to the custodian
on cancellation of the ADS) or of transferring an ordinary share or a
non-cumulative dollar preference share. A transfer of a registered ADS or ADR
executed and retained in the United States will not give rise to stamp duty and
an agreement to transfer a registered ADS or ADR will not give rise to SDRT.
Stamp duty or SDRT will normally be payable on or in respect of transfers of
ordinary shares or non-cumulative dollar preference shares and accordingly any
holder who acquires or intends to acquire ordinary shares or non-cumulative
dollar preference shares is advised to consult its own tax advisers in relation
to stamp duty and SDRT.
PROs
United
States
Payments of interest
on a PRO (including any UK withholding tax, as to which see below) will
constitute foreign source dividend income for US federal income tax purposes to
the extent paid out of the current or accumulated earnings and profits of the
company, as determined for US federal income tax purposes. Payments will not be
eligible for the dividends-received deduction allowed to corporate US Holders. A
US Holder who is entitled under the Treaty to a refund of UK tax, if any,
withheld on a payment will not be entitled to claim a foreign tax credit with
respect to such tax.
Subject to
applicable limitations that may vary depending upon a holder’s individual
circumstances, dividends paid to certain non-corporate US Holders in taxable
years beginning before 1 January 2011 will be taxable at a maximum tax rate of
15%. Non-corporate US Holders should consult their own tax advisers to determine
whether they are subject to any special rules that limit their ability to be
taxed at this favourable rate.
In
addition, bills have been introduced in both the US House and the US Senate
which would, if enacted, deny the favourable tax rates described in the
preceding paragraph for dividends paid in respect of certain securities,
including securities such as PROs, where the issuer of the securities is allowed
a deduction under the tax laws of a foreign country with respect to such
dividend. The proposed legislation would apply to dividends received after the
date of its enactment. It is not possible to predict whether the proposed
legislation will be enacted, either in its present form or any other form.
Non-corporate US Holders should consult their tax advisers with respect to the
potential enactment of currently proposed legislation and its application in
their particular circumstances.
A
US Holder will, upon the sale, exchange or redemption of a PRO, generally
recognise capital gain or loss for US federal income tax purposes (assuming that
in the case of a redemption, such US Holder does not own, and is not deemed to
own, any ordinary shares or ordinary ADSs of the company) 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 federal income tax liability in respect of such
gain.
United
Kingdom
Taxation
of payments on the PROs
Payments on the PROs
will constitute interest rather than dividends for UK withholding tax purposes.
However, the PROs will constitute ‘quoted eurobonds’ within the meaning of
section 987 of the Income Tax Act 2007 and therefore payments of interest will
not be subject to withholding or deduction for or on account of UK taxation as
long as the PROs remain at all times listed on a ‘recognised stock exchange’
within the meaning of section 1005 of the Income Tax Act 2007. In all other
cases, an amount must be withheld on account of UK income tax at the savings
rate (currently 20%) subject to any direction to the contrary by HM Revenue
& Customs under the Treaty and except that the withholding obligation is
disapplied in respect of payments to persons who the company reasonably believes
are within the charge to corporation tax or fall within various categories
enjoying a special tax status (including charities and pension funds), or are
partnerships consisting of such persons (unless HM Revenue & Customs directs
otherwise). Where interest has been paid under deduction of UK withholding tax,
US Holders may be able to recover the tax deducted under the
Treaty.
Any
paying agent or other person by or through whom interest is paid to, or by whom
interest is received on behalf of, an individual, may be required to provide
information in relation to the payment and the individual concerned to HM
Revenue & Customs. HM Revenue & Customs may communicate this information
to the tax authorities of other jurisdictions.
HM
Revenue & Customs confirmed at around the time of the issue of the PROs that
interest payments would not be treated as distributions for UK tax purposes by
reason of (i) the fact that interest may be deferred under the terms of issue;
or (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 ‘funded company’. A company will be associated with the
company if, broadly speaking, it is part of the same group as the company. A
company will be a ‘funded company’ for these purposes if there are arrangements
involving that company being put in funds (directly or indirectly) by the
company, or an entity associated with the company. In this respect, HM Revenue
& Customs has confirmed that a company holding an interest in the PROs which
incidentally has banking facilities with any company associated with the company
will not be a ‘funded company’ by virtue of such facilities. Interest on the
PROs constitutes UK source income for UK tax purposes and, as such, may be
subject to income tax by direct assessment even where paid without withholding.
However, interest with a UK source received without deduction or withholding on
account of UK tax will not be chargeable to UK tax in the hands of a US Holder
unless, in the case of a corporate US Holder, such US Holder carries on a trade
in the UK through a UK permanent establishment or in the case of other US
Holders, such persons carry on a trade, profession or vocation in the UK through
a UK branch or agency in connection with which the interest is received or to
which the PROs are attributable. There are exemptions for interest received by
certain categories of agents (such as some brokers and investment
managers).
Shareholder information
continued
EU
Directive on taxation of savings income
The
European Union has adopted a directive regarding the taxation of savings income.
The Directive requires member states of the European Union to provide to the tax
authorities of other member states details of payments of interest and other
similar income paid by a person to an individual or certain other persons
resident in another member state, except that Belgium, Luxembourg and Austria
may instead impose a withholding system for a transitional period unless during
such period they elect otherwise.
Disposal
(including redemption)
A
disposal (including redemption) of PROs by a non-corporate US Holder will not
give rise to any liability to UK taxation on capital gains unless the US Holder
carries on a trade (which for this purpose includes a profession or a vocation)
in the UK through a branch or agency and the PROs are, or have been, held or
acquired for the purposes of that trade, branch or agency.
A
transfer of PROs by a US Holder will not give rise to a charge to UK tax on
accrued but unpaid interest payments, unless the US Holder is an individual or
other non-corporate taxpayer and at any time in the relevant year of assessment
or accounting period carries on a trade in the UK through a branch or agency to
which the PROs are attributable.
Annual
tax charges
Corporate US Holders
of PROs may be subject to annual UK tax charges (or relief) by reference to
fluctuations in exchange rates and in respect of profits, gains and losses
arising from the PROs, but only if such corporate US Holders carry on a trade,
profession or vocation in the UK through a UK permanent establishment to which
the PROs are attributable.
Inheritance
tax
In
relation to PROs held through DTC (or any other clearing system), the UK
inheritance tax position is not free from doubt in respect of a lifetime
transfer, or death of, a US Holder who is not domiciled nor deemed to be
domiciled in the UK for inheritance tax purposes; HM Revenue & Customs is
known to consider that the situs of securities held in this manner is not
necessarily determined by the place where the securities are registered. In
appropriate circumstances, there may be a charge to UK inheritance tax as a
result of a lifetime transfer at less than market value by, or on the death of,
such US Holder. Inheritance tax is not generally chargeable on gifts to
individuals made more than seven years before the death of the donor. However,
exemption from, or a reduction of, any such UK tax liability may be available
under the Estate Tax Treaty (see below). US Holders should consult their
professional advisers in relation to such potential liability. PROs beneficially
owned by an individual, whose domicile is determined to be the United States for
the purposes of the Estate Tax Treaty and who is not a national of the UK, will
not be subject to UK inheritance tax on the individual’s death or on a lifetime
transfer of the PRO, except in certain cases where the PRO (i) is comprised in a
settlement (unless, at the time of the settlement, the settlor was domiciled in
the United States and was not a national of the UK); (ii) is part of the
business property of a UK permanent establishment of an enterprise; or (iii)
pertains to a UK fixed base of an individual used for the performance of
independent personal services. The Estate Tax Treaty generally provides a credit
against US federal estate or gift tax liability for the amount of any tax paid
in the UK in a case where the PRO is subject to both UK inheritance tax and US
federal estate or gift tax.
Stamp
duty and SDRT
No
stamp duty, SDRT or similar tax is imposed in the UK on the issue, transfer or
redemption of the PROs.
Passive
Foreign Investment Company considerations
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 “look-through rules,” either (i) at least 75% of its
gross income is “passive income” or (ii) at least 50% of the average value of
its assets is attributable to assets which produce passive income or are held
for the production of passive income. The company does not believe that it was a
PFIC for its 2007 taxable year. Although interest income is generally passive
income, a special rule allows banks to treat their banking business income as
non-passive. To qualify for this rule, a bank must satisfy certain requirements
regarding its licensing and activities. The company believes that it currently
meets these requirements. The company’s possible status as a PFIC must be
determined annually, however, and may be subject to change if the company fails
to qualify under this special rule for any year in which a US Holder holds
ordinary shares, non-cumulative dollar preference shares, ordinary ADSs,
preference ADSs or PROs. If the company were to be treated as a PFIC in any year
during which a US Holder holds ordinary shares, non-cumulative dollar preference
shares, ordinary ADSs, preference ADSs or PROs, the US Holder would generally be
subject to adverse US federal income tax consequences. Holders should consult
their own tax advisers as to the potential application of the PFIC rules to the
ownership and disposition of the company’s ordinary shares, non-cumulative
dollar preference shares, ordinary ADSs, preference ADSs or PROs.
Exchange
controls
The
company has been advised that there are currently no UK laws, decrees or
regulations which would prevent the import or export of capital, including the
availability of cash or cash equivalents for use by the Group, or the remittance
of dividends, interest or other payments to non-UK resident holders of the
company’s securities.
There are no
restrictions under the Articles of Association of the company or under UK law,
as currently in effect, which limit the right of non-UK resident owners to hold
or, when entitled to vote, freely to vote the company’s securities.
Memorandum
and Articles of Association
The following
information is a summary of certain terms of the company’s Memorandum of
Association (the “Memorandum”) and Articles of Association (the “Articles”) as
in effect at the date of this Annual Report and certain relevant provisions of
the Companies Act 1985, as amended (the “ 1985 Act”) and the Companies Act 2006
(the “2006 Act”) where appropriate and as relevant to the holders of any class
of share. The Articles were last amended on 23 April 2008. The amendments to the
Articles were designed to update the Articles primarily to take account of
changes in company law introduced by the 2006 Act. The following summary
description is qualified in its entirety by reference to the terms and
provisions of the Memorandum and Articles. The Memorandum and Articles are
registered with the Registrar of Companies of Scotland. Holders of any class of
share are encouraged to read the full Memorandum and Articles, which have been
filed as an exhibit to this annual report on Form 20-F.
Incorporation
and registration
The company was
incorporated and registered in Scotland under the Companies Act 1948 as a
limited company on 25 March 1968 under the name National and Commercial Banking
Group Limited. On 10 March 1982, it changed its name to its present name and was
registered under the Companies Acts 1948 to 1980 as a public company with
limited liability. The company is registered under Company No. SC
45551.
Purpose
and objects
The Memorandum
provides, amongst other things, that its objects are to carry on the business of
banking in all or any of its aspects and to carry on the business of a holding
company. The company’s objects are set out in full in clause 4 of the
Memorandum.
Directors
At each annual
general meeting of the company, any Director appointed since the last annual
general meeting and any Directors who were not appointed at one of the
preceeding two annual general meetings shall retire from office and may offer
themselves for re-election by the members. Directors who have attained
the age of 16 may be appointed to or remain on the Board if that
appointment is or was made or approved by the company in a general
meeting.
Directors may be
appointed by the company by ordinary resolution or by the Board. A director
appointed by the Board holds office only until the next annual general meeting,
whereupon he will be eligible for re-election. Unless and until otherwise
determined by ordinary resolution, the directors (other than alternate
directors) shall be not more than twenty five. There is no stipulation in the
Articles regarding a minimum number of directors; under the 2006 Act, and in the
absence of express provision, the minimum number is two.
Directors’
interests
A director shall not
vote at a meeting of the Board or a committee of the Board on any resolution of
the Board concerning a matter in which he has an interest (otherwise than by
virtue of his interest in shares, debentures or other securities of, or
otherwise in or through, the company) which (together with any interest of any
person connected with him) is, to his knowledge, material unless his interests
arises only because the resolution relates to one or more of the following
matters:
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i.
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the giving of
any security or indemnity to him pursuant to the Articles or in respect of
money lent, or obligations incurred, by him at the request of, or for the
benefit of, the company or any of its subsidiary
undertakings;
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ii.
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the giving of
any security or indemnity to a third party in respect of a debt or
obligation of the company or any of its subsidiary undertakings for which
he has assumed responsibility (in whole or in part) under a guarantee or
indemnity or by the giving of security;
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iii.
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a proposal
concerning an offer of shares, debentures or other securities of the
company, or any of its subsidiary undertakings, for subscription or
purchase, in which offer he is, or may be, entitled to participate as a
holder of securities or in the underwriting or sub-underwriting of which
he is to participate;
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iv.
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any proposal
concerning any other body corporate in which he is interested, directly or
indirectly, whether as an officer or shareholder or otherwise, provided
that he is not the holder of shares representing one per cent or more of
any class of the equity share capital of such body
corporate;
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v.
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any proposal
concerning the adoption, modification or operation of a pension fund or
retirement, death or disability benefits scheme or employees’ share scheme
which relates both to directors and employees of the company or a
subsidiary of the company and does not provide any privilege or advantage
in respect of any director which it does not accord to the employees to
which the fund or scheme relates;
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vi.
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a contract or
arrangement for the benefit of the employees of the company or any of its
subsidiary undertakings which does not accord him any privilege or
advantage not generally accorded to the employees to whom the contract or
arrangement relates; and
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vii.
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a proposal
concerning any insurance which the company proposes to purchase and/or
maintain for the benefit of any directors or for persons who include
directors of the company.
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Under the 2006 Act,
from 1 October 2008 a director must avoid a situation where he has, or can have,
a direct or indirect interest that conflicts, or possibly may conflict, with the
company’s interests. The 2006 Act allows directors of public companies, where
appropriate, to authorise conflicts and potential conflicts where the articles
of association contain a provision to this effect. The 2006 Act also allows the
articles of association to contain other provisions for dealing with directors’
conflicts of interest to avoid a breach of duty.
Clause 100 of the
Articles, to take effect from 1 October 2008, gives the directors authority to
authorise any matter which would or might otherwise constitute or give rise to a
breach of the duty of a director under the 2006 Act to avoid a situation in
which he has, or can have, a direct or indirect interest that conflicts, or
possibly may conflict with the company.
Authorisation of any
matter pursuant to Clause 100 must be approved in accordance with normal board
procedures by directors who have no interest in the matter being
considered. In taking the decision, the directors must act in a way
they consider, in good faith, will be most likely to promote the company’s
success. Any authorisation of a matter may be given on or subject to such
conditions or limitations as the directors determine, whether at the time of
authorisation or subsequently, including providing for the exclusion of the
interested directors from the receipt of information or participation in
discussion relating to the matter authorised by the directors and providing that
interested directors in receipt of confidential information from a third party
are not obliged to disclose such information to the company or use the
information in relation to the company’s affairs. Any authorization may be
terminated by the directors at any time.
A director is not,
except as otherwise agreed by him, accountable to the company for any benefit
which he, or a person connected with him, derives from any matter authorised by
the directors and any contract, transaction or arrangement relating to such
matter is not liable to be avoided on the grounds of such benefit.
Borrowing
powers
The directors may
exercise all the powers of the company to borrow money and to mortgage or charge
its undertaking, property and uncalled capital and to issue debentures and other
securities, whether outright or as collateral security for any debt, guarantee,
liability or obligation of the company, or of any third party.
Qualifying
shareholding
Directors are not
required to hold any shares of the company by way of qualification.
Classes
of shares
The company has
issued and outstanding the following 3 general classes of shares, namely
ordinary shares, preference shares and non-voting deferred shares to which the
provisions set forth below apply. In addition, the company has authorized as
part of its share capital Additional Value Shares (“AVSs”). All of the issued
AVSs were converted into non-voting deferred shares in December 2003. The terms
of those AVSs are set out in Schedule 4 to the Articles.
Dividends
General
Subject to the
provisions of the 1985 Act and clause 133 of the Articles, the company may, by
ordinary resolution, declare dividends on ordinary shares save that no dividend
shall be payable except out of profits available for distribution, or in excess
of the amount recommended by the Board or in contravention of the special rights
attaching to any share.
Any dividend which
has remained unclaimed for 12 years from the date of declaration shall be
forfeited and shall revert to the company. The company may cease sending
dividend warrants and cheques by post or otherwise to a member if such
instruments have been returned undelivered to, or left uncashed by, that member
on at least two consecutive occasions, or, following one such occasion,
reasonable enquiries have failed to establish any new address or account of the
registered holder. The company may resume sending warrants and cheques if the
holder requests such recommencement in writing.
Preference
shares
Each cumulative
preference share confers the right to a fixed cumulative preferential dividend
payable half-yearly. Each non-cumulative preference share confers the right to a
preferential dividend (not exceeding a specified amount) payable in the currency
of the relevant share. The rate of such dividend and the date of payment
thereof, together with the terms and conditions of the dividend, are as may be
determined by the directors prior to allotment. Cumulative preference share
dividends are paid in priority to any dividend on any other class of
share.
The non-cumulative
preference shares rank for dividend after the cumulative preference shares but
rank pari passu with each other and any shares expressed to rank, in terms of
participation in the profits of the company, in some or all respects pari passu
therewith and otherwise in priority to dividends payable on the ordinary shares
and any other share capital in the company.
The directors may
resolve prior to the issue and allotment of any series of non-cumulative
preference shares that full dividends in respect of a particular dividend
payment date will not be declared and paid if, (i) in its sole and absolute
discretion, the directors resolve prior to the relevant dividend payment date
that such dividend (or part thereof) shall not be paid and/or (ii) in the
opinion of the directors, payment of a dividend would cause a breach of the UK
Financial Services Authority’s capital adequacy requirements applicable to the
company or its subsidiaries, or subject to the next following paragraph,
insufficient distributable profits of the company are available to cover the
payment in full of all dividends after having paid any dividends payable on any
of the cumulative preference shares.
If dividends will be
paid but, in the opinion of the directors, insufficient distributable profits of
the company are available to cover the payment in full of dividends after having
paid any dividends payable on any of the cumulative preference shares, dividends
will be declared by the directors, pro rata on the non-cumulative preference
shares to the extent of the available distributable profits.
The non-cumulative
preference shares will carry no further rights to participate in the profits of
the company and if, and to the extent, any dividend or part of any dividend is
on any occasion not paid for any of the reasons described above, holders of
non-cumulative preference shares will have no claim in respect of such
non-payment.
If any dividend is
not payable for the reasons described in clause (ii) of this subsection, the
directors may pay a special dividend not exceeding US$0.01, £0.01 or €0.01
(depending on the currency of the relevant preference share) per
share.
If the dividend
payable on any series of non-cumulative preference shares on the most recent
payment date is not paid in full, or if a sum is not set aside to provide for
such payment in full, in either case for the reasons set forth in clause (ii) of
this subsection, no dividends may be declared on any other share capital of the
company and no sum may be set aside for the payment of a dividend on any other
share capital (in each case other than the cumulative preference shares),
unless, on the date of declaration, an amount equal to the dividend payable in
respect of the then current dividend period for such series of non-cumulative
preference shares is set aside for payment in full on the next dividend payment
date.
If any dividend
payable on the non-cumulative preference shares is not paid in full or if a sum
is not set aside to provide for such payment in full (in either case for the
reasons set forth in clause (ii) of this subsection), the company may not redeem
or purchase or otherwise acquire any other share capital of the company and may
not set aside any sum nor establish any sinking fund for its redemption,
purchase or other such acquisition, until such time as dividends have been
declared and paid in full in respect of successive dividend periods together
aggregating not less than twelve months.
The non-payment of
any dividend (in full or in part) by reason of the exercise of the directors’
discretion referred to in clause (i) of this subsection, shall not prevent or
restrict (a) the declaration and payment of dividends on any other series of
non-cumulative preference shares or on any non-cumulative preference shares
expressed to rank pari passu with the non-cumulative preference shares, (b) the
setting aside of sums for the payment of such dividends, (c) except as set forth
in the following paragraph, the redemption, purchase or other acquisition of
shares in the company by the company, or (d) except as set forth in the
following paragraph, the setting aside of sums, or the establishment of sinking
funds, for any such redemption, purchase or other acquisition by the
company.
If dividends are not
declared and paid in full on any series of non-cumulative preference shares as a
result of the directors’ discretion referred to in clause (i) of this
subsection, then the company may not redeem, purchase or otherwise acquire for
any consideration any share capital ranking after such preference shares, and
may not set aside any sum nor establish any sinking fund for the redemption,
purchase or other acquisition thereof, until such time as the company has
declared and paid in full dividends on such series of non-cumulative preference
shares in respect of successive dividend periods together aggregating no less
than twelve months. In addition, no dividend may be declared or paid on any of
the company’s share capital ranking after such preference shares until the
dividend in respect of a particular dividend payment date payable on the
preference shares to which the directors’ discretion in clause (i) of this
subsection applies has been declared and paid in full.
Non-voting
deferred shares
The holders of
non-voting deferred shares are not entitled to the payment of any dividend or
other distribution.
Distribution
of assets on liquidation
Cumulative
preference shares
In the event of a
return of capital on a winding-up or otherwise, the holders of cumulative
preference shares are entitled to receive out of the surplus assets of the
company available for distribution amongst the members (i) in priority to the
holders of the non-cumulative preference shares and any other shares ranking
pari passu therewith, the arrears of any fixed dividends including the amount of
any dividend due for a payment after the date of commencement of any winding-up
or liquidation but which is payable in respect of a half-year period ending on
or before such date and (ii) pari passu with the holders of the non-cumulative
preference shares and any other shares ranking pari passu therewith, the amount
paid up or credited as paid up on such shares together with any
premium.
Non-cumulative
preference shares
Each non-cumulative
preference share will confer on a winding up or liquidation (except (unless
otherwise provided by the terms of issue) a redemption or purchase by the
company of any shares in the capital of the company), the right to receive out
of surplus assets of the company available for distribution amongst the members
after payment of the arrears (if any) of the cumulative dividend on the
cumulative preference shares and in priority to the holders of the ordinary
shares, repayment of the amount paid up or credited as paid up on the
non-cumulative preference shares together with any premium paid on issue pari
passu with the holders of the cumulative preference shares and together with an
amount equal to accrued and unpaid dividends.
Non-voting
deferred shares
On a winding-up or
other return of capital of the company, holders of non-voting deferred shares
are entitled only to payment of the amounts paid up on the non-voting deferred
shares, after repayment to the holders of ordinary shares of the nominal amount
paid up on the ordinary shares held by them and payment of £100,000 on each
ordinary share.
General
On a winding-up of
the company, the liquidator may, with the authority of any extraordinary
resolution and any other sanction required by the Insolvency Act 1986 and
subject to the rights attaching to any class of shares after payment of all
liabilities, including the payment to holders of preference shares, divide
amongst the members in specie or kind the whole or any part of the assets of the
company or vest the whole or any part of the assets in trustees upon such trusts
for the benefit of the members and may determine the scope and terms of those
trusts. No member shall be compelled to accept any assets on which there is a
liability.
Voting
Rights
General
Subject to any
rights or restrictions as to voting attaching to any shares or class of shares,
on a show of hands every member who is present in person or by proxy at a
general meeting shall have one vote and on a poll every member present in person
or by proxy shall have one vote for each 25 pence in nominal amount of shares
held by him. No member shall, unless the directors otherwise determine, be
entitled to vote at a general meeting or at a separate meeting of the holders of
shares in the capital of the company, either in person or by proxy, in respect
of any share held by him unless all monies presently payable by him in respect
of that share have been paid.
The quorum required
for a meeting of members is not less than five members present in person and
entitled to vote. If a meeting is adjourned because of the lack of a quorum, the
members present in person or by proxy and entitled to vote will constitute a
quorum at the adjourned meeting.
Meetings are
convened upon written notice of not less than 21 days in respect of annual
general meetings of members and not less than 14 days in respect of other
meetings of members.
Cumulative
preference shares
At a general meeting
of the company, every holder of a cumulative preference share who is present in
person or by proxy shall be entitled to one vote on a show of hands and, on a
poll, every person who is present in person or by proxy shall have one vote for
each 25 pence in nominal amount of shares held. No member shall be entitled to
vote any share in person or by proxy unless all moneys owed in respect of that
share have been paid.
Non-cumulative
preference shares
Holders of
non-cumulative preference shares are not entitled to attend or vote at any
general meeting unless the business of the meeting includes the consideration of
a resolution for the winding-up of the company or any resolution directly
varying or abrogating the rights attached to any such shares and then in such
case only to speak to and vote upon any such resolution.
However, holders
have the right to vote in respect of any matter when the dividend payable on
their shares has not been declared in full for such number of dividend periods
as the directors shall determine prior to the allotment thereof.
Whenever a holder is
entitled to vote at a general meeting, on a show of hands every shareholder who
is present in person has one vote and, on a poll, every such holder who is
present in person or by proxy shall have such number of votes as may be
determined by the directors prior to allotment.
Non-voting
deferred shares
The holders of
non-voting deferred shares are not entitled to receive notice of or to attend or
vote at any general meeting of the company or otherwise receive any shareholder
communication.
Redemption
Unless the directors
determine, prior to allotment of any particular series of non-cumulative
preference shares, that such series shall be non-redeemable, the preference
shares will be redeemable at the option of the company on any date (a
“Redemption Date”) which (subject to certain exceptions described in the terms
of such shares) falls no earlier than such date (if any) as may be fixed by the
directors, prior to allotment of such shares. On redemption, there shall be paid
on each non-cumulative preference share the aggregate of its nominal amount
together with any premium paid on issue, where applicable a redemption premium
and accruals of dividend.
Purchase
General
Subject to the 1985
Act, the company may, by special resolution, reduce its share capital, any
capital redemption reserve and any share premium account or other
undistributable reserve and may also, subject to the 1985 Act, the requirements
of the London Stock Exchange and the rights attached to any class of shares,
purchase its own shares (including redeemable shares).
Non-cumulative
preference shares and convertible preference shares
Subject to the 1985
Act, the company may purchase any non-cumulative preference shares and
convertible preference shares upon such terms as the directors shall determine
provided that, where the shares being purchased are listed on the London Stock
Exchange, the purchase price payable, exclusive of expenses and accrued
dividends, shall not exceed (a) in the case of a purchase in the open market, or
by tender, the average of the closing middle market quotations of such shares
for the 10 dealing days preceding the date of the purchase of (if higher), in
the case of a purchase in the open market only, the market price on the date of
purchase provided that such market price is not more than 105 per cent of such
average and (b) in the case of a purchase by private treaty, 120 per cent of the
closing middle market quotation of such shares for the last dealing day
preceding the date of purchase; but so that this proviso shall not apply to any
purchase of such shares made in the ordinary course of a business of dealing in
securities. Upon the purchase of any such shares, the nominal amount of such
shares shall thereafter be divided into, and reclassified as, ordinary
shares.
Conversion
rights
Convertible
preference shares carry the right to convert into ordinary shares if they have
not been the subject of a notice of redemption from the company, on or before a
specified date determined by the directors. The right to convert will be
exercisable by service of a conversion notice on the company within a specified
period. The company will use reasonable endeavours to arrange the sale, on
behalf of convertible preference shareholders who have submitted a conversion
notice, of the ordinary shares which result from such conversion and to pay to
them the proceeds of such sale so that they receive net proceeds equal to the
nominal value of the convertible preference shares which were the subject of the
conversion notice and any premium at which such shares were issued, provided
that ordinary shares will not be sold at below a benchmark price (as determined
prior to the issue of the relevant convertible preference shares by the
directors).
In December 2003,
following the payment of aggregate dividends of £1 in respect of each AVS, all
issued and outstanding AVSs were de-listed from the Official List and from
trading on the London Stock Exchange’s market for listed securities and
converted into non-voting deferred shares of £0.01 each.
Changes
in share capital and variation of rights
Subject to the
provisions of the 1985 Act and without prejudice to any rights attached to any
existing shares or class of shares, any share may be issued with such rights or
restrictions as the company may by ordinary resolution determine or, subject to
and in default of such determination, as the Board shall determine. Subject to
the provisions of the 1985 Act, the company may issue shares which are, or at
the option of the company or the holder are liable, to be redeemed. Subject to
the provisions of the 1985 Act and the Articles, unissued shares are at the
disposal of the Board.
The company may by
ordinary resolution: increase its share capital; consolidate and divide all or
any of its share capital into shares of larger amount than its existing shares;
subject to the provisions of the 1985 Act, subdivide its shares, or any of them,
into shares of smaller amount than is fixed by the Memorandum; or cancel any
shares which have not been taken or agreed to be taken by any person and
diminish the amount of its share capital by the amount of the shares so
cancelled.
Subject to the
provisions of the 1985 Act, if at any time the capital of the company is divided
into different classes of shares, the rights attached to any class of shares may
(unless further conditions are provided by the terms of issue of the shares of
that class) be varied or abrogated, whether or not the company is being wound
up, either with the consent in writing of the holders of three-quarters
in-nominal value of the issued shares of the class or with the sanction of an
extraordinary resolution passed at a separate general meeting of holders of the
shares of the class (but not otherwise).
To any such separate
general meeting the provision of the Articles relating to general meetings will
apply, save that:
|
(i)
|
if at any
adjourned meeting of such holders a quorum as defined above is not
present, two people who hold shares of the class, or their proxies. are a
quorum; and
|
|
|
(ii)
|
any such
holder present in person or by proxy may demand a poll.
|
|
The rights attaching
to any class of shares having preferential rights are not, unless otherwise
expressly provided by the terms of issue thereof, deemed to be varied by the
creation or issue of further shares ranking, as regards participation in the
profits or assets of the company, pari passu therewith, but in no respect in
priority thereto.
Disclosure
of interests in shares
The 2006 Act gives
the company the power to require persons who it believes to be, or have been
within the previous three years, interested in its shares, to disclose
prescribed particulars of those interests. Failure to supply the information or
supplying a statement which is materially false may lead to the Board imposing
restrictions upon the relevant shares. The restrictions available are the
suspension of voting or other rights conferred by membership in relation to
meetings of the company in respect of the relevant shares and, additionally, in
the case of a shareholding representing at least 0.25 per cent of the class of
shares concerned, the withholding of payment of dividends on, and the
restriction of transfers of, the relevant shares.
Limitations
on rights to own share
There are no
limitations imposed by UK law or the Memorandum and Articles on the right of
non-residents or foreign persons to hold or vote the company's shares other than
the limitations that would generally apply to all of the company's
shareholders.
Members
resident abroad
Members with
registered addresses outside the United Kingdom are not entitled to receive
notices from the company unless they have given the company an address within
the United Kingdom at which such notices may be served.
Incorporation
and registration
The
company was incorporated and registered in Scotland under the Companies Act 1948
as a limited company on 25 March 1968 under the name National and Commercial
Banking Group Limited. On 10 March 1982, it changed its name to its present name
and was registered under the Companies Acts 1948 to 1980 as a public company
with limited liability. The company is registered under Company No. SC
45551.
Code
of ethics
As
discussed on page 76, the Group has adopted a code of ethics that is applicable
to all of the Group’s employees, which will be provided to any person without
charge, upon request, by contacting Group Secretariat at the telephone number
listed on page 237.
Documents
on display
Documents concerning
the company may be inspected at 36 St Andrew Square, Edinburgh, EH2
2YB.
Executive directors’
service contracts and copies of directors’ indemnities granted by the company in
terms of section 309C of the Companies Act 1985 may be inspected at the
company’s office at Gogarburn, Edinburgh, EH12 1HQ (telephone 0131 626
4114).
In
addition, we file reports and other information with the SEC. You can read and
copy these reports and other information at the SEC’s Public Reference Room at
100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can call the SEC at
1-800-SEC-0330 for further information on the Public Reference Room or contact
the offices of The New York Stock Exchange, on which certain of our securities
are listed, at 20 Broad Street, New York, New York 10005. The SEC also maintains
a website at www.sec.gov which contains in electronic form each of the reports
and other information that we have filed electronically with the
SEC.
Shareholder information
continued
|
Important
addresses
|
Principal
offices
|
|
Shareholder
enquiries
|
The
company
|
|
Registrar
|
PO Box 1000
Gogarburn Edinburgh EH12 1HQ
|
|
Computershare
Investor Services PLC
|
Telephone:
0131 626 0000
|
|
The
Pavilions
|
|
|
Bridgwater
Road
|
The
Royal Bank of Scotland plc
|
|
Bristol BS99
6ZZ
|
PO Box 1000
Gogarburn Edinburgh EH12 1HQ
|
|
Telephone:
0870 702 0135
|
280
Bishopsgate London EC2M 4RB
|
|
Facsimile:
0870 703 6009
|
|
|
Email:
web.queries@computershare.co.uk
|
National
Westminster Bank Plc
|
|
135
Bishopsgate London EC2M 3UR
|
|
|
ADR
Depositary Bank
|
|
|
The Bank of
New York Mellon
|
Citizens
|
|
Investor
Services
|
Citizens
Financial Group, Inc.
|
|
PO Box
11258
|
One Citizens
Plaza Providence Rhode Island 02903 USA
|
|
Church Street
Station
|
|
|
New York NY
10286-1258
|
Ulster
Bank
|
|
Telephone: 1
888 269 2377 (US callers)
|
11-16 Donegall
Square East Belfast BT1 5UB
|
|
Telephone: 212
815 3700 (International)
|
George’s Quay
Dublin 2
|
|
Email:
shareowners@bankofny.com
|
|
|
RBS
Insurance
|
|
|
Group
Secretariat
|
Direct Line
House 3 Edridge Road Croydon Surrey CR9 1AG
|
|
The Royal Bank
of Scotland Group plc
|
Churchill
Court Westmoreland Road Bromley BR1 1DP
|
|
PO Box
1000
|
|
|
Business House
F
|
RBS
Greenwich Capital
|
|
Gogarburn
|
600 Steamboat
Road
|
|
Edinburgh EH12
1HQ
|
Greenwich
Connecticut 06830 USA
|
|
Telephone:
0131 556 8555
|
|
|
Facsimile:
0131 626 3081
|
Coutts
Group
|
|
440 Strand
London WC2R 0QS
|
|
|
Investor
Relations
|
|
|
280
Bishopsgate
|
The
Royal Bank of Scotland International Limited
|
|
London EC2M
4RB
|
Royal Bank
House 71 Bath Street
|
|
Telephone:
0207 672 1758
|
St Helier
Jersey Channel Islands JE4 8PJ
|
|
Email:
investor.relations@rbs.com
|
|
|
NatWest
Offshore
|
|
|
Registered
office
|
23/25 Broad
Street
|
|
36 St Andrew
Square
|
St Helier
Jersey Channel Islands JE4 8QJ
|
|
Edinburgh EH2
2YB
|
|
|
Telephone:
0131 556 8555
|
ABN
AMRO Holding N.V.
|
|
Registered in
Scotland No. 45551
|
Gustav
Mahlerlaan 10
|
|
1082 PP
Amsterdam The Netherlands
|
|
|
Website
|
|
|
www.rbs.com
|
Exhibit
index
|
Exhibit
Number
|
Description | |
|
1.1
|
Memorandum and
Articles of Association of The Royal Bank of Scotland Group
plc
|
|
|
2.1
|
Form of
Deposit Agreement among The Royal Bank of Scotland Group plc, The Bank of
New York as Depositary, and all Owners and Holders from time to
time of American Depositary Receipts issued thereunder, incorporated by
reference to Exhibit 1 to the Registration Statement on Form F-6
(Registration No. 333-144756) (filed on 20 July 2007)
|
|
|
2.2
|
Form of
American Depositary Receipt for ordinary shares of the par value of £0.25
each incorporated by reference to Exhibit A of Exhibit 1 to the
Registration Statement on Form F-6 (Registration No. 333-144756) (filed on
20 July 2007)
|
|
| 2.3 | Letter dated May 12, 2008 from The Bank of New York Mellon as Depository to The Royal Bank of Scotland Group plc relating to the Pre-release of American Depository Receipts | |
|
4.1*
|
Contract of
employment for Sir Frederick A. Goodwin
|
|
|
4.2**
|
Service
contract for Gordon Pell
|
|
|
4.3
|
Service
contract for Lawrence Fish
|
|
|
4.4**
|
Service
contract for Guy Whittaker
|
|
|
4.5**
|
Service
contract for Johnny Cameron
|
|
|
4.6***
|
Service
Agreement for Mark Fisher
|
|
|
4.7***
|
Deed of
Indemnity in favor of Sir Frederick A. Goodwin
|
|
|
4.8***
|
Form of Deed
of Indemnity for Directors
|
|
|
4.9
|
Consortium and
Shareholders' Agreement, dated 28 May 2007, among The Royal
Bank of Scotland Group plc, Banco Santander Central
Hispano, S.A., Fortis N.V., Fortis SA/NV and
RFS Holdings B.V. incorporated by reference to Exhibit 10.1 to
the Registration Statement on Form F-4 (Registration No. 333-144752)
(filed on July 20, 2007)
|
|
|
4.10
|
Supplemental
Consortium and Shareholders' Agreement dated 17 September 2007,
supplementing the Consortium and Shareholders' Agreement dated 28 May
2007, among The Royal Bank of Scotland Group plc, Banco
Santander, S.A., Fortis N.V., Fortis SA/NV and RFS Holdings B.V.
incorporated by reference to Exhibit 99.(A)(5)(XXVI) to Amendment No. 9 to
the Tender Offer Statement on Schedule TO filed on 18 September
2007
|
|
|
7.1
|
Explanation of
ratio calculations
|
|
|
8.1
|
Principal
subsidiaries of The Royal Bank of Scotland Group plc
|
|
|
12.1
|
CEO
certification required by Rule 13a-14(a)
|
|
|
12.2
|
CFO
certification required by Rule 13a-14(a)
|
|
|
13.1
|
Certification
required by Rule 13a-14(b)
|
|
|
15.1
|
Consent of
independent registered public accounting firm
|
|
|
15.2
|
Summary of the
Consortium and Shareholders’ Agreement excerpted from Amendment No. 7 to
the Registration Statement on Form F-4 (Registration No. 333-144752)
(filed on October 1, 2007)
|
*Previously filed and incorporated by reference to Exhibit 4.1 to the Group’s Annual Report on Form 20-F for the fiscal year ended 31 December 2004 (File No. 1-10306).
**Previously filed
and incorporated by reference to Exhibits 4.4, 4.6 and 4.8, respectively, to the
Group’s Annual Report on Form 20-F for the fiscal year ended 31 December 2005
(File No. 1-10306).
***Previously filed
and incorporated by reference to Exhibits 4.9, 4.10 and
4.11, respectively, to the Group’s Annual Report on Form 20-F for the
fiscal year ended 31 December 2006 (File No. 1-10306).
With respect to
Exhibit 4.11, the sentence "PROVIDED THAT this Indemnity is given subject to the
provisions of Section 309A Companies Act 1985" has been replaced with "PROVIDED
THAT this Indemnity is given subject to the provisions of Section 234 Companies
Act 2006."
SIGNATURE
The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
The Royal Bank of
Scotland Group plc
Registrant
/s/
Guy Robert Whittaker
Guy
Robert Whittaker
Group Finance
Director
14
May 2008
239
