Interim Results

Royal Bank of Scotland Group PLC 07 August 2002 THE ROYAL BANK OF SCOTLAND GROUP plc SIX MONTHS ENDED 30 JUNE 2002 - FINANCIAL HIGHLIGHTS First half First half Full year 2002 2001 2001 (restated) Â£m Â£m Increase Â£m Total income 8,182 6,822 20% 14,558 -------- -------- -------- Operating expenses 3,740 3,284 14% 6,841 -------- -------- -------- Profit before tax, goodwill amortisation and integration costs 3,151 2,751 15% 5,778 -------- -------- -------- Profit before tax 2,325 2,072 12% 4,252 -------- -------- -------- Cost:income ratio 45.7% 48.1% - 47.0% -------- -------- -------- Adjusted earnings per ordinary share 69.8p 62.6p 12% 127.9p -------- -------- -------- Dividends per ordinary share 12.7p 11.0p 15% 38.0p -------- -------- -------- Sir George Mathewson, Chairman of The Royal Bank of Scotland Group plc, said:- 'Strong income growth and improved efficiency are key factors in these results. Our focus on satisfying customers continues to reap rewards with increased customer numbers across the Group and in particular in Citizens, Direct Line, Retail Banking and Retail Direct. Provisions remain at a level consistent with the second half of 2001, influenced both by growth in our book and particular corporate situations. Overall credit quality remains strong. The strength, diversity and flexibility of our Group has enabled us to grow our profit before tax, goodwill amortisation and integration costs by 15% and the Board is pleased to increase the interim dividend also by 15%.' THE ROYAL BANK OF SCOTLAND GROUP plc FIRST HALF 2002 HIGHLIGHTS â€¢ Profit up 15% to Â£3,151 million*. â€¢ Income up 20% to Â£8,182 million, expenses up 14% to Â£3,740 million. â€¢ Excluding acquisitions, income up 15%, expenses up 8%. â€¢ Customer growth in all divisions. â€¢ Net interest margin stable at 3.1%. â€¢ Further efficiency gains - cost:income ratio 45.7%, improved from 48.1%. â€¢ Profit and loss charge for provisions Â£652 million, against Â£622 million in the second half of 2001 and Â£369 million in the first half of 2001. â€¢ Credit quality remains strong. â€¢ Balance sheet provision coverage of risk elements in lending maintained at 80%. â€¢ Increased targets for NatWest integration being met. â€¢ Accelerated delivery of Mellon Regional Franchise integration benefits. â€¢ Adjusted earnings per share up 12%, basic earnings per share up 13%. â€¢ Interim dividend 12.7p per share, up 15%. * before tax, goodwill amortisation and integration costs THE ROYAL BANK OF SCOTLAND GROUP plc CONTENTS Page Review of results 4 Restatements and recent developments 7 Summary consolidated profit and loss account 8 Divisional performance 9 Corporate Banking and Financial Markets 10 Retail Banking 11 Retail Direct 12 Manufacturing 13 Wealth Management 14 Direct Line Group 15 Ulster Bank 16 Citizens 17 Central items 18 Average balance sheet 19 Average interest rates, yields, spreads and margins 20 Integration information 21 Statutory consolidated profit and loss account 23 Consolidated balance sheet 25 Overview of consolidated balance sheet 26 Statement of consolidated total recognised gains and losses 28 Reconciliation of movements in consolidated shareholders' funds 28 Consolidated cash flow statement 29 Notes 30 Asset quality 37 Analysis of loans and advances to customers 37 Cross border outstandings 38 Selected country exposures 38 Risk elements in lending 39 Provisions for bad and doubtful debts 40 Market risk 42 Regulatory ratios and other information 43 Additional financial data for US investors 44 Forward-looking statements 46 Independent review report by the auditors 47 Contacts 48 THE ROYAL BANK OF SCOTLAND GROUP plc REVIEW OF RESULTS The Royal Bank of Scotland Group ('RBS') continued to make substantial progress in the first half of 2002. Key features of these interim results include strong growth in income and further improvements in efficiency and margins. The charge for bad debt provisions is similar to the second half of 2001. The increased targets for NatWest integration benefits are being met and excellent progress is being made by Citizens on the integration of the Mellon Regional Franchise. Profit RBS increased its first half profit before tax, goodwill amortisation and integration costs by 15%, or Â£400 million, from Â£2,751 million to Â£3,151 million. All divisions contributed to this increase. After goodwill amortisation and integration costs, profit before tax was up by 12%, from Â£2,072 million to Â£2,325 million. Integration costs relating to NatWest and the Mellon Regional Franchise were Â£461 million in the first half of 2002, against Â£361 million in the first half of 2001. Total income RBS continued to achieve strong growth in income. Total income was up by 20%, or Â£1,360 million, to Â£8,182 million. Excluding acquisitions, total income was up by 15%. Of the Â£1,360 million growth in total income, Â£620 million was net interest income and Â£740 million non-interest income. Citizens increased its income by 69% (17% underlying growth, excluding the Mellon Regional Franchise), Direct Line Group by 46% and Retail Direct by 19%. Corporate Banking and Financial Markets income was up by 15% over the first half of 2001 and maintained the level achieved in the second half of 2001, when Financial Markets benefited from market volatility and falling interest rates. Retail Banking grew its income by 8% and Ulster Bank by 11%. The small fall in Wealth Management income reflected lower stock market values. Net interest income Net interest income increased by 19%, or Â£620 million, to Â£3,873 million. Net interest income accounted for 47% of first half total income. Average interest-earning assets of the banking business increased by 15%. Net interest margin The Group net interest margin increased slightly, from 3.0% to 3.1%. Improved lending margins offset the downward pressure on deposit margins arising from lower interest rates. Non-interest income Non-interest income increased by 21%, or Â£740 million, to Â£4,309 million. Non-interest income accounted for 53% of first half total income. Fees and commissions receivable were up 18%, or Â£400 million. General insurance premium income, after reinsurance, rose by 47%, or Â£284 million reflecting Direct Line Group's organic growth and acquisitions in Continental Europe. Continued strong growth in fee paying current accounts also contributed to the increase in fees and commissions. Operating expenses Operating expenses, excluding goodwill amortisation and integration costs, rose by 14%, or Â£456 million, to Â£3,740 million. Excluding acquisitions, operating expenses were up by 8%, Â£263 million in support of strong growth in business volumes. THE ROYAL BANK OF SCOTLAND GROUP plc REVIEW OF RESULTS (continued) Cost:income ratio As a result of the relative movements in total income and operating expenses, the Group achieved a further improvement in its cost:income ratio, to 45.7% from 48.1%. Net insurance claims General insurance claims, after reinsurance, increased by 53%, or Â£221 million, to Â£639 million. This reflects significant increases in customer numbers. Provisions The profit and loss charge for provisions was Â£652 million in the first half of 2002, against Â£622 million in the second half of 2001 and Â£369 million in the first half of 2001. The charge for bad debt provisions amounted to Â£611 million in the first half of 2002, compared with Â£617 million in the second half of 2001 and Â£367 million in the first half of 2001. The charge for bad debts reflects overall growth in lending and is particularly influenced by provisions required against a number of specific corporate situations. Amounts written off fixed asset investments were Â£41 million in the first half of 2002, against Â£5 million in the second half of 2001 and Â£2 million in the first half of 2001. Total balance sheet provisions amounted to Â£3,856 million at 30 June 2002, up from Â£3,653 million at 31 December 2001 and Â£3,236 million at 30 June 2001. Credit quality Overall credit quality remains strong, with no material change to the distribution by grade of the Group's total risk assets compared with the position at the previous year end. Risk elements in lending amounted to Â£4,791 million at 30 June 2002, against Â£4,493 million at 31 December 2001 and Â£4,045 million at 30 June 2001. Total provision coverage (the ratio of total balance sheet provisions to risk elements in lending) was 80% at 30 June 2002, against 81% at 31 December 2001 and 80% at 30 June 2001. Integration The integration of NatWest continues on track and the increased targets for integration benefits, announced in February 2002, are being met. In the first half of 2002, the contribution to profit before tax of revenue benefits amounted to Â£222 million, against the revised target of Â£460 million for the full year, and the effect of cost savings amounted to Â£618 million, against the revised target of Â£1,280 million for the full year. By June 2002, the cumulative total of integration costs was Â£1,767 million - up from Â£1,394 million at December 2001. It is still expected that the full amount of integration costs will be Â£2.3 billion, as indicated in February 2002. Excellent progress is being made by Citizens on the integration of the Mellon Regional Franchise and the transaction benefits are being delivered more quickly than was envisaged. RBS is on track to achieve the full amount of the expected transaction benefits. THE ROYAL BANK OF SCOTLAND GROUP plc REVIEW OF RESULTS (continued) Earnings and dividends Earnings per share, adjusted for goodwill amortisation and integration costs, increased by 12%, from 62.6p to 69.8p. Basic earnings per share increased by 13%, from 41.1p to 46.6p. An interim dividend of 12.7p per ordinary share has been declared, an increase of 15%. The interim dividend is covered 5.4 times by earnings before goodwill amortisation and integration costs. Balance sheet Total assets were Â£397 billion at 30 June 2002, 8% higher than total assets of Â£369 billion at 31 December 2001 and 16% higher than total assets of Â£341 billion at 30 June 2001. Within the 30 June 2002 total, Â£294 billion (74%) related to banking business and Â£103 billion (26%) to trading business. Loans and advances to customers amounted to Â£210 billion at 30 June 2002, up 10% from Â£190 billion at 31 December 2001. Compared with 30 June 2001, loans and advances to customers were up 17%, Â£30 billion. Customer deposits increased by 3%, from Â£199 billion at 31 December 2001 to Â£205 billion at 30 June 2002 and were up 13% from Â£181 billion at 30 June 2001. Capital ratios at 30 June 2002 were 7.4% (tier 1) and 11.8% (total), against 7.1% (tier 1) and 11.5% (total) at 31 December 2001 and 7.2% (tier 1) and 11.4% (total) at 30 June 2001. Acquisitions In May 2002, Lombard completed the acquisition of Dixon Motors PLC for a consideration of Â£118 million. In June 2002, Citizens announced the acquisition of the Massachusetts savings bank, Medford Bancorp, Inc, for a cash consideration of US$273 million. It is expected that this acquisition will be completed in the final quarter of 2002. Outlook As ever, the outlook for the economies in which we operate is difficult to predict with any certainty. However, as our interim results have demonstrated, the strength, diversity and flexibility of our Group enables us to adopt a cautious stance relative to market conditions, whilst still being able to deliver superior business performance through the provision to our customers of the support, products and services which they want and need. We anticipate continuing with a cautious stance in the short term, however we remain confident in our ability to continue to deliver superior performance for our shareholders. THE ROYAL BANK OF SCOTLAND GROUP plc RESTATEMENTS AND RECENT DEVELOPMENTS Restatements The Group has implemented Financial Reporting Standard 19 'Deferred Tax' ('FRS 19') which requires recognition of deferred tax assets and liabilities on all timing differences, with specified exceptions. Previously, provision was made for deferred tax only to the extent that timing differences were expected to reverse and the deferred tax liability crystallise in the foreseeable future. Prior periods have been restated resulting in a decrease in profit and loss account reserves of Â£117 million at 30 June 2001 and 31 December 2001; an increase in the deferred tax liability of Â£182 million at 30 June 2001 and Â£194 million at 31 December 2001; and an increase in the deferred tax asset of Â£65 million at 30 June 2001 and Â£77 million at 31 December 2001. The tax charge for 2001 is unchanged. Following the issuance of Urgent Issues Task Force Abstract 33 'Obligations in capital instruments' ('UITF 33') in February 2002, the Group has reclassified its perpetual regulatory tier one securities, issued in August 2001, from non-equity shareholders' funds to subordinated liabilities and the interest on these securities is now included in interest payable rather than non-equity dividends. Comparative figures have been restated resulting in an increase in interest payable of Â£23 million in the second half of 2001, a reduction in non-equity shareholders' funds of Â£835 million, an increase in undated loan capital of Â£820 million and an increase in accruals and deferred income of Â£15 million as at 31 December 2001. Following the transfer of certain businesses from Ulster Bank to Corporate Banking and Financial Markets with effect from 1 January 2002, prior period information for these divisions has been restated. The Group results are not affected. Recent developments The Competition Commission published its report on the supply of banking services by clearing banks to small and medium-sized enterprises (SME's) in March 2002. The report recommended a number of pricing and behavioural remedies. The Group has, along with three other major clearing banks, given undertakings to implement the pricing remedies with effect from 1 January 2003. These undertakings require the Group to offer its SME customers either interest on current accounts at a prescribed rate or free core money transmission services or a choice between the two. The Group is also actively discussing with the Office of Fair Trading the proposed behavioural remedies with a view to reaching agreement on these expeditiously. THE ROYAL BANK OF SCOTLAND GROUP plc SUMMARY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 JUNE 2002 (unaudited) The profit and loss account set out below shows goodwill amortisation and integration costs separately. In the statutory profit and loss account on page 23, these items are included in the captions prescribed by the Companies Act. First half First half Full year 2002 2001 2001 (restated) (restated) Â£m Â£m Â£m Net interest income 3,873 3,253 6,846 -------- -------- -------- Dividend income 29 24 54 Fees and commissions receivable 2,609 2,209 4,735 Fees and commissions payable (481) (459) (930) Dealing profits 724 689 1,426 Other operating income 543 505 1,052 -------- -------- -------- 3,424 2,968 6,337 General insurance premium income 885 601 1,375 -------- -------- -------- Non-interest income 4,309 3,569 7,712 -------- -------- --------- Total income 8,182 6,822 14,558 -------- -------- --------- Staff costs 1,930 1,659 3,461 Other operating expenses 1,810 1,625 3,380 -------- -------- -------- Operating expenses 3,740 3,284 6,841 -------- -------- -------- Profit before other operating charges 4,442 3,538 7,717 General insurance claims 639 418 948 -------- -------- -------- Operating profit before provisions 3,803 3,120 6,769 Provisions for bad and doubtful debts 611 367 984 Amounts written off fixed asset investments 41 2 7 -------- -------- -------- Profit before goodwill amortisation and integration costs 3,151 2,751 5,778 Goodwill amortisation 365 318 651 Integration costs 461 361 875 -------- -------- -------- Profit before tax 2,325 2,072 4,252 Tax 781 746 1,537 -------- -------- -------- Profit after tax 1,544 1,326 2,715 Minority interests (including non-equity) 49 44 90 Preference dividends 159 178 358 -------- -------- -------- 1,336 1,104 2,267 Additional Value Shares dividend - - 399 -------- -------- -------- Profit attributable to ordinary shareholders 1,336 1,104 1,868 Ordinary dividends 368 313 1,085 -------- -------- -------- Retained profit 968 791 783 -------- -------- -------- Basic earnings per ordinary share (Note 4) 46.6p 41.1p 67.6p -------- -------- --------- Adjusted earnings per ordinary share (Note 4) 69.8p 62.6p 127.9p -------- -------- --------- THE ROYAL BANK OF SCOTLAND GROUP plc DIVISIONAL PERFORMANCE The contribution of each division before goodwill amortisation and integration costs and, where appropriate, Manufacturing costs is detailed below. First half First half Full year 2002 2001 Increase 2001 Â£m Â£m % Â£m Corporate Banking and Financial Markets* 1,554 1,509 3 3,024 Retail Banking 1,488 1,377 8 2,807 Retail Direct 330 241 37 551 Manufacturing (850) (778) (9) (1,568) Wealth Management 235 234 - 459 Direct Line Group 153 112 37 261 Ulster Bank* 125 115 9 229 Citizens 384 233 65 501 Central items (268) (292) 8 (486) ** -------- -------- -------- Group operating profit before goodwill amortisation and integration costs 3,151 2,751 15 5,778 -------- -------- -------- * Prior periods have been restated to reflect the transfer of certain businesses from Ulster Bank to Corporate Banking and Financial Markets. ** Restated following the implementation of UITF 33. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE BANKING AND FINANCIAL MARKETS First half First half Full year 2002 2001 2001 (restated) (restated) Â£m Â£m Â£m Net interest income 1,179 1,011 2,138 Non-interest income 1,755 1,531 3,319 -------- -------- -------- Total income 2,934 2,542 5,457 Direct expenses - staff costs 622 552 1,131 - other 185 154 366 - operating lease depreciation 217 193 434 -------- -------- -------- Contribution before provisions 1,910 1,643 3,526 Provisions 356 134 502 -------- -------- -------- Contribution 1,554 1,509 3,024 -------- -------- -------- Direct cost:income ratio (%) 34.9 35.4 35.4 Total assets - Corporate Banking (Â£bn) 100.6 91.3 96.1 - Financial Markets (Â£bn) 135.7 115.6 120.4 Loans and advances to customers - gross (Â£bn) 110.8 93.5 95.1 Customer deposits excluding repos (Â£bn) 58.0 54.6 56.4 Weighted risk assets (Â£bn) 130.0 110.8 118.3 Corporate Banking and Financial Markets ('CBFM') is the largest provider of banking services to medium and large businesses in the UK and the leader in the UK in asset finance. It provides an integrated range of products and services to mid-sized and large corporate and institutional customers in the UK and overseas, including corporate and commercial banking, treasury and capital markets products, structured and leveraged finance, trade finance, leasing and factoring. In May 2002, Lombard, the leasing arm of CBFM, completed the acquisition of Dixon Motors PLC. Lombard and Ulster was transferred to CBFM from Ulster Bank on 1 January 2002; prior periods have been restated to reflect this. Contribution increased over the first half of 2001 by 3% or Â£45 million to Â£1,554 million. Contribution before provisions was up by 16%, Â£267 million to Â£1,910 million. Total income was up by 15% or Â£392 million to Â£2,934 million. Excluding acquisitions, which added Â£22 million, total income was still up by 15%. Net interest income rose by 17% or Â£168 million to Â£1,179 million, reflecting lending growth in Corporate Banking and continued good performance by Financial Markets. Average loans and advances to customers of the banking business increased by 15% or Â£10.8 billion to Â£85.1 billion. Non-interest income rose by 15% or Â£224 million to Â£1,755 million, mainly as a result of fees earned on higher customer advances and on increased payments and electronic banking activities. There were also significant increases in operating lease income and in rental income from investment properties. Direct expenses increased by 14% or Â£125 million to Â£1,024 million. Excluding acquisitions, which added Â£20 million, expenses were up by Â£105 million or 12%. Of this increase of Â£105 million, Â£24 million was higher operating lease depreciation, and the balance reflects support for higher business volumes and expansion of offices in Continental Europe. The direct cost:income ratio improved from 35.4% to 34.9%. Provisions amounted to Â£356 million in the first half of 2002 compared with Â£368 million in the second half of 2001 and Â£134 million in the first half of 2001. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL BANKING First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Net interest income 1,376 1,280 2,622 Non-interest income 661 609 1,277 -------- -------- -------- Total income 2,037 1,889 3,899 Direct expenses - staff costs 349 339 702 - other 98 89 226 -------- -------- -------- Contribution before provisions 1,590 1,461 2,971 Provisions 102 84 164 -------- -------- -------- Contribution 1,488 1,377 2,807 -------- -------- -------- Direct cost:income ratio (%) 21.9 22.7 23.8 Total assets (Â£bn) 62.7 59.2 61.1 Loans and advances to customers - gross - mortgages (Â£bn) 30.0 26.8 28.5 - other (Â£bn) 21.4 19.2 20.5 Customer deposits (Â£bn) 59.3 55.0 56.8 Weighted risk assets (Â£bn) 36.5 33.2 35.2 Retail Banking provides a wide range of banking, insurance and related financial services to individuals and small businesses. These services are delivered from a network of Royal Bank of Scotland and NatWest branches throughout Great Britain and through the telephone, ATMs and the internet. Contribution increased over the first half of 2001 by 8% or Â£111 million to Â£1,488 million. Total income was up by 8% or Â£148 million to Â£2,037 million. This increase in income was supported by continued growth in customer numbers. The number of personal current accounts increased by 130,000 to 10.43 million over the first half of the year. Similarly, the number of small business customers increased by 13,000 to 1.09 million. Net interest income rose by 8% or Â£96 million to Â£1,376 million, reflecting strong growth in customer loans and deposits. Average loans to customers, excluding mortgages, grew by 10% or Â£2.0 billion to Â£20.8 billion. Average mortgage lending grew by 11% or Â£2.9 billion to Â£29.0 billion. Average customer deposits increased by 6% or Â£3.4 billion to Â£56.8 billion. Non-interest income rose by 9% or Â£52 million to Â£661 million, reflecting the growth in packaged current accounts, increased volumes of general insurance products sold to NatWest and Royal Bank customers and a strong sales performance in Bancassurance with new business up 36% year on year. The fall in equity markets reduced Bancassurance income by Â£7 million. Direct expenses increased by 4% or Â£19 million to Â£447 million. The direct cost:income ratio improved from 22.7% to 21.9%. Provisions increased by Â£18 million to Â£102 million, reflecting growth in lending over recent years. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL DIRECT First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Net interest income 370 319 674 Non-interest income 386 317 696 ----- ----- ------- Total income 756 636 1,370 Direct expenses - staff costs 88 79 164 - other 198 192 400 ----- ----- ----- Contribution before provisions 470 365 806 Provisions 140 124 255 ----- ----- ----- Contribution 330 241 551 ----- ----- ----- Direct cost:income ratio (%) 37.8 42.6 41.2 Total assets (Â£bn) 17.9 15.7 17.2 Loans and advances to customers - gross - mortgages (Â£bn) 6.6 5.2 5.9 - other (Â£bn) 11.4 10.3 11.2 Customer deposits (Â£bn) 4.2 3.3 4.3 Weighted risk assets (Â£bn) 13.1 11.5 12.5 Retail Direct issues a comprehensive range of credit, charge and debit cards to personal and corporate customers and engages in merchant acquisition and processing facilities for retail businesses. It also includes: Tesco Personal Finance ('TPF'), Virgin Direct Personal Finance ('VDPF'), Direct Line Financial Services ('DLFS'), Lombard Direct, the Group's internet banking platform and Comfort Card European businesses, all of them offering products to customers through direct channels. Contribution increased over the first half of 2001 by 37% or Â£89 million to Â£330 million. Total income was up by 19% or Â£120 million to Â£756 million, reflecting continued strong growth in the Cards Business and in TPF. The number of active credit card accounts increased since December 2001 by 350,000 to 9.51 million at June 2002. The number of customers of TPF increased since December 2001 by 400,000 to 3.0 million at June 2002. Net interest income was up by 16% or Â£51 million to Â£370 million. Average credit card and store card balances were up by 8% to Â£8.0 billion. In TPF, average personal loans rose by 24% to Â£1.1 billion and average customer deposits by 32% to Â£1.8 billion. In addition, average mortgage lending was 41% higher in VDPF at Â£3.9 billion and 13% higher in DLFS at Â£2.3 billion, while average personal lending in DLFS and Lombard Direct increased by 14% to Â£1.9 billion. Non-interest income was up by 22% or Â£69 million to Â£386 million mainly as a result of higher fee income reflecting growth in volumes, particularly in TPF, where the total number of insurance policies increased to 950,000 from 700,000 at December 2001. Direct expenses increased by 6% or Â£15 million to Â£286 million, to support business expansion. The direct cost:income ratio improved from 42.6% to 37.8%. Provisions increased by Â£16 million to Â£140 million, reflecting the growth in lending volumes. THE ROYAL BANK OF SCOTLAND GROUP plc MANUFACTURING First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Staff costs 235 194 428 Other costs 615 584 1,140 ----- ----- ------- Total manufacturing costs 850 778 1,568 ----- ----- ------- Analysis: Group Technology 327 299 632 Group Purchasing and Property Operations 279 255 467 Customer Support and other operations 244 224 469 ----- ----- ------- Total manufacturing costs 850 778 1,568 ----- ----- ------- Manufacturing supports the customer facing businesses, mainly Corporate Banking and Financial Markets, Retail Banking and Retail Direct, and provides operational technology, account management, money transmission, property and other services. Total manufacturing costs amounted to Â£850 million in the first half of 2002, 9% or Â£72 million higher than the first half of 2001. The increase in costs reflects support for growth in business volumes arising from new customer accounts opened, mortgage applications, new personal loans and ATM transactions, and for initiatives to enhance customer service, particularly in NatWest telephony. THE ROYAL BANK OF SCOTLAND GROUP plc WEALTH MANAGEMENT First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Net interest income 228 231 464 Non-interest income 236 241 469 ----- ----- ----- Total income 464 472 933 Expenses - staff costs 155 150 298 - other 82 92 181 ----- ----- ----- Contribution before provisions 227 230 454 Net release of provisions 8 4 5 ----- ----- ----- Contribution 235 234 459 ----- ----- ----- Cost:income ratio (%) 51.1 51.3 51.3 Total assets (Â£bn) 13.8 12.1 12.5 Investment management assets - excluding deposits (Â£bn) 21.3 22.6 21.4 Customer deposits (Â£bn) 28.9 28.3 29.1 Weighted risk assets (Â£bn) 8.9 7.0 7.8 Wealth Management comprises Coutts Group, Adam & Company and the offshore banking businesses, The Royal Bank of Scotland International and NatWest Offshore. The Coutts Group focuses on private banking through the Coutts, The Royal Bank of Scotland and NatWest Private Banking brands. Adam & Company is a private bank operating primarily in Scotland. The offshore businesses provide retail banking services to local and expatriate customers, and corporate banking and treasury services to corporate, intermediary and institutional clients. Contribution was Â£235 million, Â£1 million higher than the first half of 2001. Total income was down by 2% or Â£8 million to Â£464 million. Net interest income declined by 1% or Â£3 million to Â£228 million, as a result of a small reduction in deposit margins associated with lower interest rates. Non-interest income declined by 2% or Â£5 million to Â£236 million, reflecting the impact of lower equity markets on fees and commissions. However, despite lower equity markets, new business inflow ensured that the amount of investment management assets was maintained at a level similar to December 2001. Expenses were down by 2% or Â£5 million to Â£237 million with certain processes now performed by the Manufacturing division. The cost:income ratio improved slightly from 51.3% to 51.1%. There was a net release of provisions of Â£8 million in the first half of 2002, against a net release of Â£4 million in the first half of 2001. THE ROYAL BANK OF SCOTLAND GROUP plc DIRECT LINE GROUP First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Earned premiums 1,111 817 1,804 Reinsurers' share (226) (216) (429) ------- ------- ------- Insurance premium income 885 601 1,375 Other income 104 78 168 ------ ------- ------- Total income 989 679 1,543 Expenses - staff costs 90 68 152 - other 107 81 182 Gross claims 787 585 1,263 Reinsurers' share (148) (167) (315) ------- ------ ------ Contribution 153 112 261 ------- ------ ------ In-force policies (000) - motor: UK 4,376 3,617 4,017 - motor: International 782 335 601 - home: UK 1,552 1,143 1,360 Combined operating ratio - UK (%) 89.1 87.0 88.0 Insurance reserves - UK (Â£m) 1,787 1,336 1,541 Direct Line Group sells and underwrites retail and wholesale insurance on the telephone and the internet. The Direct Division sells general insurance and motor breakdown services direct to the customer and Green Flag is a leading wholesale provider of insurance and motoring related services. Through its International Division, Direct Line sells insurance in Spain, Germany, Italy and Japan. The acquisition of Royal & Sun Alliance's direct motor insurance operation in Italy is expected to be completed by the end of 2002. This will make Direct Line the second largest direct insurer in Italy with over 300,000 customers. Contribution increased over the first half of 2001 by 37% or Â£41 million to Â£153 million. Total income was up by 46% or Â£310 million to Â£989 million. Excluding acquisitions, which added Â£28 million, total income was up by 42% or Â£282 million. After reinsurance, insurance premium income was up by 47% or Â£284 million to Â£885 million, reflecting strong growth in customer numbers. The number of UK in-force motor insurance policies increased since December 2001 by 360,000 to 4.38 million at June 2002, while the number of UK in-force home insurance policies increased since December 2001 by 190,000 to 1.55 million at June 2002. Expenses increased by 32% or Â£48 million to Â£197 million. Excluding acquisitions, which added Â£20 million, expenses were up by 19% or Â£28 million. Net claims, after reinsurance, increased by 53% or Â£221 million to Â£639 million, mainly as a result of higher business volumes. THE ROYAL BANK OF SCOTLAND GROUP plc ULSTER BANK First half First half Full year 2002 2001 2001 (restated) (restated) Â£m Â£m Â£m Net interest income 165 149 313 Non-interest income 92 83 170 ----- ----- ----- Total income 257 232 483 Expenses - staff costs 69 65 135 - other 52 46 104 ----- ----- ----- Contribution before provisions 136 121 244 Provisions 11 6 15 ----- ----- ----- Contribution 125 115 229 ----- ----- ----- Cost:income ratio (%) 47.1 47.8 49.5 Total assets (Â£bn) 11.6 11.1 10.8 Loans and advances to customers - gross (Â£bn) 8.3 7.1 7.6 Customer deposits (Â£bn) 8.1 7.2 7.7 Weighted risk assets (Â£bn) 8.4 7.4 7.7 Average exchange rate - â‚¬/Â£ 1.609 1.605 1.609 Spot exchange rate - â‚¬/Â£ 1.543 1.660 1.637 Ulster Bank provides a comprehensive range of retail and wholesale financial services in Northern Ireland and the Republic of Ireland. Retail Banking has a network of branches throughout Ireland and operates in the personal, commercial and wealth management sectors. Corporate Banking and Financial Markets provides a wide range of services in the corporate and institutional markets. Lombard & Ulster was transferred from Ulster Bank to CBFM on 1 January 2002; prior periods have been restated to reflect this. Contribution increased over the first half of 2001 by 9%, or Â£10 million to Â£125 million. Total income increased by 11%, Â£25 million to Â£257 million. Net interest income rose by 11% or Â£16 million to Â£165 million, reflecting good growth in both loans and deposits. Average customer loans and advances and deposits of the banking business increased by 15%, Â£1.0 billion, to Â£7.7 billion, and by 8%, Â£0.6 billion, to Â£7.6 billion respectively. The net interest margin was unchanged. The number of customers increased since December 2001 by 20,000 to 762,000 at June 2002. Non-interest income rose by 11% or Â£9 million to Â£92 million. Net fees and commissions increased by Â£5 million, while other operating income was Â£4 million higher. Expenses increased by 9% or Â£10 million to Â£121 million, to support higher business volumes. The cost:income ratio improved from 47.8% to 47.1%. Provisions were up by Â£5 million to Â£11 million. The increase reflected a small number of specific situations. THE ROYAL BANK OF SCOTLAND GROUP plc CITIZENS First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Net interest income 640 370 814 Non-interest income 236 147 306 ----- ----- -------- Total income 876 517 1,120 Expenses - staff costs 243 146 305 - other 198 110 245 ----- ----- ----- Contribution before provisions 435 261 570 Provisions 51 28 69 ----- ----- ----- Contribution 384 233 501 ----- ----- ----- Cost:income ratio (%) 50.3 49.5 49.1 Total assets ($bn) 54.3 31.7 52.4 Loans and advances to customers - gross ($bn) 27.1 18.9 26.3 Customer deposits ($bn) 44.4 26.0 42.8 Weighted risk assets ($bn) 36.5 24.4 35.8 Average exchange rate - US$/Â£ 1.445 1.440 1.440 Spot exchange rate - US$/Â£ 1.528 1.405 1.450 Citizens is engaged in retail and corporate banking activities through its branch network in the states of Rhode Island, Connecticut, Massachusetts and New Hampshire and is the second largest bank in New England. The acquisition of the Mellon Regional Franchise in December 2001 extended Citizens presence to the states of Pennsylvania, Delaware and New Jersey. In June 2002, Citizens announced the acquisition of the Massachusetts savings bank, Medford Bancorp, Inc, subject to approval by Medford shareholders and US regulators. Contribution increased over the first half of 2001 by 65% or Â£151 million to Â£384 million. Excluding the Mellon Regional Franchise, which contributed Â£114 million, and the Â£1 million adverse impact of exchange rate fluctuations, contribution increased by 16% or Â£38 million. Total income was up by 69% or Â£359 million to Â£876 million. Excluding the Mellon Regional Franchise and exchange rate fluctuations, total income increased by 17% or Â£89 million. Net interest income rose by 73% or Â£270 million to Â£640 million. Excluding the Mellon Regional Franchise, which added Â£205 million, and exchange rate fluctuations, net interest income was up by 18% or Â£66 million, as a result of strong growth in personal loans and deposits. Non-interest income rose by 61% or Â£89 million to Â£236 million. Excluding the Mellon Regional Franchise, which added Â£67 million, and exchange rate fluctuations, non-interest income was up by 16% or Â£23 million, as a result of growth in deposit service charges and mortgage banking. Expenses increased by 72% or Â£185 million to Â£441 million. Excluding the Mellon Regional Franchise, which added Â£153 million, and exchange rate fluctuations, expenses increased by 13% or Â£33 million, to support higher business volumes and expansion of Citizens' supermarket banking. The cost:income ratio increased from 49.5% to 50.3%. However, excluding the Mellon Regional Franchise the cost:income ratio improved from 49.5% to 47.7%. Provisions were up from Â£28 million to Â£51 million. Excluding the Mellon Regional Franchise, which added Â£5 million, provisions of Â£46 million were consistent with provisions in the second half of 2001 and the growth in lending volumes. THE ROYAL BANK OF SCOTLAND GROUP plc CENTRAL ITEMS First half First half Full year 2002 2001 2001 (restated) Â£m Â£m Â£m Funding costs 113 102 211 Central department costs - staff costs 51 48 99 - other 48 37 93 Other corporate items - net 56 105 83 ------ ------ ------ Total Central items 268 292 486 ------ ------ ------ The Centre comprises group and corporate functions which provide services to the operating divisions. Total Central items decreased by Â£24 million to Â£268 million, compared with the first half of 2001. Funding costs at Â£113 million, including Â£31 million interest payable on perpetual regulatory tier one securities, were 11%, Â£11 million higher. Departmental and other costs reduced to Â£155 million compared with Â£190 million reflecting certain one off items in both years. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE BALANCE SHEET First half 2002 First half 2001 Average Interest Rate Average Interest Rate balance balance (restated) Assets Â£m Â£m % Â£m Â£m % Treasury and other eligible bills UK 935 9 1.9 174 5 5.7 Overseas 271 2 1.5 84 2 4.8 Loans and advances to banks UK 13,733 254 3.7 17,542 452 5.2 Overseas 10,767 171 3.2 9,314 282 6.1 Loans and advances to customers UK 134,530 3,879 5.8 117,689 4,259 7.2 Overseas 33,444 917 5.5 26,060 945 7.3 Instalment credit and finance lease receivables UK 15,498 628 8.1 14,311 596 8.3 Overseas 1,253 41 6.5 1,510 52 6.9 Debt securities UK 16,919 335 4.0 16,165 476 5.9 Overseas 18,750 472 5.0 10,892 331 6.1 ----------- -------- ----------- -------- Interest-earning assets - banking business 246,100 6,708 5.5 213,741 7,400 6.9 - trading business 75,941 -------- 68,661 -------- ----------- ----------- Total interest-earning assets 322,041 282,402 Non-interest-earning assets 65,188 59,345 ----------- ----------- Total assets 387,229 341,747 ----------- ----------- Percentage of assets applicable to overseas operations 31.7% 26.5% ---------- ---------- Liabilities Deposits by banks UK 19,112 253 2.6 17,191 388 4.5 Overseas 10,496 129 2.5 7,828 205 5.2 Customer accounts UK 118,123 1,499 2.5 112,250 2,318 4.1 Overseas 34,940 413 2.4 25,325 521 4.1 Debt securities in issue UK 24,096 470 3.9 19,887 528 5.3 Overseas 9,032 129 2.9 8,257 228 5.5 Loan capital UK 12,847 322 5.0 10,186 357 7.0 Overseas 173 9 10.4 342 14 8.2 Internal funding of trading business (22,075) (389) 3.5 (17,903) (412) 4.6 ----------- -------- ----------- -------- Interest-bearing liabilities - banking business 206,744 2,835 2.8 183,363 4,147 4.5 - trading business 72,095 -------- 65,508 -------- ----------- ----------- Total interest-bearing liabilities 278,839 248,871 Non-interest-bearing liabilities - demand deposits 28,309 24,363 - other liabilities 53,207 44,743 Shareholders' funds 26,874 23,770 ----------- ----------- Total liabilities and shareholders' funds 387,229 341,747 ----------- ----------- Percentage of liabilities applicable to overseas operations 30.2% 25.4% ----------- --------- The analysis between UK and Overseas has been compiled on the basis of location of office. Interest receivable and interest payable on trading assets and liabilities are included in dealing profits. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS First half 2002 First half 2001 Average Average rate Rate % % The Group's base rate 4.0 5.6 London inter-bank offered rate: three month sterling 4.1 5.5 three month eurodollar 1.9 4.8 three month euro 3.4 4.7 Yields, spreads and margins of the banking business: Gross yield (1) Group 5.5 6.9 UK 5.6 7.0 Overseas 5.0 6.7 Interest spread (2) Group 2.7 2.4 UK 2.8 2.5 Overseas 2.5 2.1 Net interest margin (3) Group 3.1 3.0 UK 3.2 3.1 Overseas 2.9 2.9 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. THE ROYAL BANK OF SCOTLAND GROUP plc INTEGRATION INFORMATION 1. NATWEST INTEGRATION In the Offer Document for NatWest issued on 16 December 1999, the Group made various estimates in respect of revenue benefits, cost savings and staff reductions. Those estimates were based on the latest available published information at that time, namely NatWest interim accounts for the half year to 30 June 1999 and the Group's accounts for the year to 30 September 1999. On 19 April 2000, the Group revised its estimates upwards as a consequence of the experience gained by having detailed access to NatWest following the acquisition on 6 March 2000. These revised estimates are shown in the tables below as 'plan'. Subsequently, the Group further revised the integration targets upwards in February 2002 for the remainder of the programme based on actual achievements. These targets are shown in the tables below as 'revised plan'. Period ending REVENUE BENEFITS December December June December March 2000 2001 2002 2002 2003 â€¢ Cumulative gross revenue initiatives implemented at the end of each period (Â£m) plan 120 350 550 595 revised plan 800 890 actual 147 605 707 December 2003 â€¢ Impact on profit before tax (Â£m) plan 50 120 240 390 revised plan 460 590 actual 52 312 222 The gross revenue initiatives generated income of Â£337 million in the six months to 30 June 2002 which, net of costs, claims and provisions, added Â£222 million to profit before tax. Period ending COST SAVINGS December December June December March 2000 2001 2002 2002 2003 â€¢ Cumulative cost savings implemented at the end of each period (Â£m) plan 550 900 1,200 1,340 revised plan 1,340 1,440 actual 653 1,205 1,280 December 2003 â€¢ Impact on profit before tax (Â£m) plan 290 700 1,050 1,300 revised plan 1,280 1,400 actual 448 1,008 618 Period ending STAFF REDUCTIONS December December June December March 2000 2001 2002 2002 2003 â€¢ Cumulative total plan 9,000 14,000 16,000 18,000 revised plan 18,000 18,000 actual 13,000 17,000 17,250 THE ROYAL BANK OF SCOTLAND GROUP plc INTEGRATION INFORMATION (continued) Period ending INTEGRATION COSTS December December June December March 2000 2001 2002 2002 2003 â€¢ Cumulative charge (Â£m) plan 650 1,150 1,350 1,400 revised plan 2,200 2,300 actual 547 1,394 1,767 1. MELLON REGIONAL FRANCHISE INTEGRATION In the Group announcement relating to the acquisition of the Mellon Regional Franchise issued on 17 July 2001, the Group made various estimates in respect of cost savings and revenue benefits. Those estimates were based on the unaudited management accounts of the Mellon Regional Franchise for the four months ended 20 April 2001 and Citizen's financial statements for the year ended 31 December 2000. These estimates were confirmed as part of the Group's year end reporting on 28 February 2002. Period ending REVENUE BENEFITS June December December December 2002 2002 2003 2004 â€¢ Cumulative gross revenue initiatives implemented at the end of each period (US$m) plan 57 136 242 actual 40 â€¢ Impact on profit before tax (US$m) plan 2 34 104 actual 6 The gross revenue initiatives generated income of US$15 million in the six months to 30 June 2002 which, net of costs, claims and provisions, added US$6 million to profit before tax. Period ending COST SAVINGS June December December December 2002 2002 2003 2004 â€¢ Cumulative cost savings implemented at the end of each period (US$m) plan 71 95 101 actual 54 â€¢ Impact on profit before tax (US$m) plan 46 83 98 actual 26 Period ending INTEGRATION COSTS December June December December December 2001 2002 2002 2003 2004 â€¢ Cumulative charge (US$m) plan 101 241 260 267 actual 41 167 The above discussion of the NatWest and Mellon Regional Franchise integrations should be read in the light of the 'forward-looking statements' discussed on page 46. THE ROYAL BANK OF SCOTLAND GROUP plc STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 JUNE 2002 (unaudited) In the consolidated profit and loss account set out below, goodwill amortisation and integration costs are included in the captions prescribed by the Companies Act. Audited First half First half Full year 2002 2001 2001 (restated) Â£m Â£m Â£m Interest receivable 6,708 7,400 14,421 Interest payable 2,835 4,147 7,575 -------- -------- -------- Net interest income 3,873 3,253 6,846 -------- -------- -------- Dividend income 29 24 54 Fees and commissions receivable 2,609 2,209 4,735 Fees and commissions payable (481) (459) (930) Dealing profits 724 689 1,426 Other operating income 543 505 1,052 -------- -------- -------- 3,424 2,968 6,337 General insurance - earned premiums 1,111 817 1,804 - reinsurance (226) (216) (429) -------- -------- -------- Non-interest income 4,309 3,569 7,712 -------- -------- --------- Total income 8,182 6,822 14,558 -------- -------- --------- Administrative expenses - staff costs* 2,192 1,882 4,059 - premises and equipment* 485 419 873 - other* 1,096 915 1,903 Depreciation and amortisation - tangible fixed assets* 428 429 881 - goodwill 365 318 651 -------- -------- -------- Operating expenses 4,566 3,963 8,367 -------- -------- -------- Profit before other operating charges 3,616 2,859 6,191 General insurance - gross claims 787 585 1,263 - reinsurance (148) (167) (315) -------- -------- -------- Operating profit before provisions 2,977 2,441 5,243 Provisions for bad and doubtful debts 611 367 984 Amounts written off fixed asset investments 41 2 7 -------- -------- -------- Profit on ordinary activities before tax 2,325 2,072 4,252 -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 JUNE 2002 (unaudited) (continued) Audited First half First half Full year 2002 2001 2001 (restated) Â£m Â£m Â£m Profit on ordinary activities before tax 2,325 2,072 4,252 Tax on profit on ordinary activities 781 746 1,537 -------- -------- -------- Profit on ordinary activities after tax 1,544 1,326 2,715 Minority interests (including non-equity) 49 44 90 -------- -------- -------- Profit after minority interests 1,495 1,282 2,625 Preference dividends 159 178 358 -------- -------- -------- 1,336 1,104 2,267 Additional Value Shares dividend - - 399 -------- -------- -------- Profit attributable to ordinary shareholders 1,336 1,104 1,868 Ordinary dividends 368 313 1,085 -------- -------- -------- Retained profit 968 791 783 -------- -------- -------- Basic earnings per ordinary share (Note 4) 46.6p 41.1p 67.6p -------- -------- -------- Adjusted earnings per ordinary share (Note 4) 69.8p 62.6p 127.9p -------- -------- -------- Diluted earnings per ordinary share (Note 4) 46.0p 40.4p 66.3p -------- -------- -------- * Operating expenses include the following integration costs: First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Staff costs 262 223 598 Premises and equipment 52 15 64 Other administrative expenses 146 103 188 Depreciation 1 20 25 -------- -------- -------- 461 361 875 -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2002 (unaudited) Audited 30 June 31 December 30 June 2002 2001 2001 (restated) (restated) Â£m Â£m Â£m Assets Cash and balances at central banks 3,037 3,093 2,639 Items in the course of collection from other banks 3,925 3,288 3,799 Treasury bills and other eligible bills 8,184 10,136 3,882 Loans and advances to banks 39,172 38,513 39,748 Loans and advances to customers 209,884 190,492 179,389 Debt securities 68,829 64,040 53,721 Equity shares 1,794 1,557 1,609 Interests in associated undertakings 110 108 115 Intangible fixed assets 12,981 13,325 11,821 Tangible fixed assets 9,136 8,813 6,934 Other assets 26,070 21,550 22,520 Prepayments and accrued income 4,487 3,696 4,422 ----------- ----------- ----------- 387,609 358,611 330,599 Long-term assurance assets attributable to policyholders 9,530 10,248 10,344 ----------- ----------- ----------- Total assets 397,139 368,859 340,943 ----------- ----------- ----------- Liabilities Deposits by banks 47,015 40,038 35,627 Items in the course of transmission to other banks 1,942 2,109 1,851 Customer accounts 204,800 198,995 180,964 Debt securities in issue 32,451 30,669 29,847 Other liabilities 48,990 37,357 37,234 Accruals and deferred income 8,156 7,669 7,448 Provisions for liabilities and charges - deferred taxation 1,672 1,650 1,480 - other provisions 306 341 316 Subordinated liabilities - dated loan capital 7,247 6,681 6,404 - undated loan capital including convertible debt 6,215 5,849 4,255 Minority interests - equity 32 5 (15) - non-equity 1,383 580 618 Shareholders' funds - equity 23,743 22,287 20,098 - non-equity 3,657 4,381 4,472 ----------- ----------- ----------- 387,609 358,611 330,599 Long-term assurance liabilities to policyholders 9,530 10,248 10,344 ----------- ----------- ----------- Total liabilities 397,139 368,859 340,943 ----------- ----------- ----------- Memorandum items Contingent liabilities and commitments 146,249 138,844 115,343 ----------- ----------- ----------- THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONSOLIDATED BALANCE SHEET This overview compares the balance sheets at 30 June 2002 and 31 December 2001. Total assets of Â£397.1 billion at 30 June 2002 were up Â£28.3 billion, 8%, compared with 31 December 2001, reflecting business growth. Treasury bills and other eligible bills decreased by Â£2.0 billion, 19%, to Â£8.2 billion reflecting liquidity management. Loans and advances to banks rose Â£0.7 billion, 2%, to Â£39.2 billion. Growth in bank placings, up Â£2.2 billion, 11% to Â£23.0 billion, was partially offset by decreased reverse repurchase agreements and stock borrowing ('reverse repos'), down Â£1.5 billion, 9%, to Â£16.2 billion, reflecting a switch to customer reverse repos. Loans and advances to customers were up Â£19.4 billion, 10%, to Â£209.9 billion. Within this, reverse repos increased by 69%, Â£8.0 billion to Â£19.6 billion. Excluding reverse repos, lending increased by Â£11.4 billion, 6% (7% at constant US$ exchange rate for Citizens) to Â£190.3 billion. Growth was reflected across all divisions except for Citizens, which was adversely affected by the depreciation of the US$. In US$ terms, customer lending in Citizens was up 3%. Debt securities increased by Â£4.8 billion, 7%, to Â£68.8 billion, principally due to increased positions in Financial Markets, due to a switch from bank placings, together with growth in Wealth Management's investment portfolio of investment grade asset-backed securities. Intangible fixed assets declined by Â£0.3 billion, 3% to Â£13.0 billion, reflecting amortisation in the period. Tangible fixed assets were up Â£0.3 billion, 4% to Â£9.1 billion, primarily due to growth in operating lease assets. Other assets rose by Â£4.5 billion, 21% to Â£26.1 billion, mainly due to higher settlement balances, up Â£3.8 billion and growth in the mark-to-market value of trading derivatives, up Â£0.5 billion, both as a result of increased trading activity. Long term assurance assets declined Â£0.7 billion, 7% to Â£9.5 billion reflecting the fall in equity markets partially offset by increased investments. Deposits by banks increased by Â£7.0 billion, 17% to Â£47.0 billion to fund business growth, with repurchase agreements and stock lending ('repos') up Â£4.3 billion, 41%, to Â£14.7 billion and inter-bank deposits up Â£2.7 billion, 9% to Â£32.3 billion. Customer accounts were up Â£5.8 billion, 3% at Â£204.8 billion. Within this, repos were up by Â£1.9 billion, 11% to Â£19.4 billion. Excluding repos, deposits rose Â£3.9 billion, 2% (3% at constant US$ exchange rate for Citizens) to Â£185.4 billion with growth in Corporate Banking and Financial Markets, Retail Banking and Ulster Bank, partly offset by small declines in Retail Direct, Wealth Management and Citizens, although in US$ terms, Citizens grew by 4%. Debt securities in issue were up Â£1.8 billion, 6%, at Â£32.5 billion primarily to meet the Group's funding requirements. Other liabilities increased by Â£11.6 billion, 31% to Â£49.0 billion mainly due to higher settlement balances, up Â£4.7 billion, short positions, up Â£5.7 billion, and mark-to-market value of trading derivatives, up Â£1.3 billion. THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONSOLIDATED BALANCE SHEET (continued) Subordinated liabilities were up Â£0.9 billion, 7% to Â£13.5 billion. The issue of Â£0.1 billion (â‚¬130 million) euro denominated and Â£0.6 billion (US$ 850 million) US$ denominated, dated loan capital and Â£0.5 billion sterling denominated undated loan capital was partially offset by the effect of exchange rate movements of Â£0.2 billion and a Â£40 million redemption of loan capital. Minority interests increased by Â£0.8 billion to Â£1.4 billion reflecting the issue of Â£0.8 billion (â‚¬1.25 billion) trust preferred securities by a subsidiary of the Group. Shareholders' funds were up Â£0.7 billion, 3% to Â£27.4 billion principally due to retentions of Â£1.0 billion and the issue of Â£0.5 billion of equity shares, mainly in respect of the scrip dividend, partly offset by the redemption of Â£0.6 billion non-equity shares in January 2002 and the effect of exchange rate movements on the share premium account, Â£0.1 billion. THE ROYAL BANK OF SCOTLAND GROUP plc STATEMENT OF CONSOLIDATED TOTAL RECOGNISED GAINS AND LOSSES FOR THE SIX MONTHS ENDED 30 JUNE 2002 (unaudited) Audited First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Profit attributable to ordinary shareholders 1,336 1,104 1,868 Currency translation adjustments and other movements 13 (13) (3) Revaluation of premises - - 72 ------- ------- ------- Total recognised gains and losses in the period 1,349 1,091 1,937 ------- ------- Prior year adjustment on the implementation of FRS 19 (117) -------- Total recognised gains and losses since 31 December 2001 1,232 -------- RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS FOR THE SIX MONTHS ENDED 30 JUNE 2002 (unaudited) Audited First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Profit attributable to ordinary shareholders 1,336 1,104 1,868 Ordinary dividends (368) (313) (1,085) -------- -------- -------- Retained profit for the period 968 791 783 Issue of ordinary and preference shares 481 643 2,759 Perpetual regulatory tier one securities - - 835 Redemption of preference shares (600) - - Other recognised gains and losses 13 (13) 69 Currency translation adjustment on share premium account (130) 150 58 -------- -------- -------- Net increase in shareholders' funds as previously reported 732 1,571 4,504 Perpetual regulatory tier one securities - - (835) -------- -------- -------- Net increase in shareholders' funds as restated 732 1,571 3,669 -------- -------- -------- Opening shareholders' funds as previously reported 27,620 23,116 23,116 Prior year adjustments: - FRS 19 (117) (117) (117) - UITF 33 (835) - - --------- --------- --------- Opening shareholders' funds as restated 26,668 22,999 22,999 --------- --------- --------- Closing shareholders' funds 27,400 24,570 26,668 --------- --------- --------- THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED CASH FLOW STATEMENT FOR SIX MONTHS ENDED 30 JUNE 2002 (unaudited) Audited First half First half Full year 2002 2001 2001 (restated) Â£m Â£m Â£m Net cash inflow from operating activities 4,597 6,183 7,287 ------- ------- ------- Dividends received from associated undertakings - 1 1 ------- ------- ------- Returns on investments and servicing of finance Preference dividends paid (175) (185) (353) Additional Value Shares dividend paid - - (399) Dividends paid to minority shareholders in subsidiary undertakings (22) (21) (43) Interest paid on subordinated liabilities (313) (341) (652) ------- ------- --------- Net cash outflow from returns on investments and servicing of finance (510) (547) (1,447) ------- ------- --------- Taxation UK tax paid (349) (181) (790) Overseas tax paid (142) (188) (419) ------- ------- --------- Net cash outflow from taxation (491) (369) (1,209) ------- ------- --------- Capital expenditure and financial investment Purchase of investment securities (13,957) (11,941) (27,537) Sale and maturity of investment securities 11,957 12,496 20,578 Purchase of tangible fixed assets (1,344) (1,582) (4,245) Sale of tangible fixed assets 615 364 867 ---------- ---------- ---------- Net cash outflow from capital expenditure and financial investment (2,729) (663) (10,337) ---------- ---------- ---------- Acquisitions and disposals Purchases of businesses and subsidiary undertakings (net of cash acquired) (173) - (1,614) Investment in associated undertakings (2) (45) (47) Sale of subsidiary and associated undertakings (net of cash sold) - 8 8 ------- -------- -------- Net cash outflow from acquisitions and disposals (175) (37) (1,653) ------- -------- -------- Ordinary equity dividends paid (381) (353) (653) -------- -------- --------- Net cash inflow/(outflow) before financing 311 4,215 (8,011) -------- -------- --------- Financing Proceeds from issue of ordinary share capital 22 22 2,131 Proceeds from issue of trust preferred securities 802 - - Proceeds from issue of preference share capital - 281 281 Issue of subordinated liabilities 1,167 689 2,705 Redemption of preference shares (600) - - Repayment of subordinated liabilities (40) (693) (693) Increase/(decrease) in minority interests 21 14 (13) -------- -------- -------- Net cash inflow from financing 1,372 313 4,411 -------- -------- -------- Increase/(decrease) in cash 1,683 4,528 (3,600) -------- -------- --------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES 1. Accounting policies There have been no changes to the Group's principal accounting policies as set out on pages 49 to 51 of the 2001 Report and Accounts, except as noted under 'Restatements' on page 7 in respect of FRS 19 ' Deferred Tax'. As discussed on page 7, publication of UITF 33 has resulted in the reclassification of the Group's perpetual regulatory tier one securities. 2. Provisions for bad and doubtful debts Operating profit is stated after charging provisions for bad and doubtful debts of Â£611 million (30 June 2001 - Â£367 million). The balance sheet provisions for bad and doubtful debts increased in the six months to 30 June 2002 from Â£3,653 million to Â£3,856 million, and the movements thereon were: 2002 2001 Specific General Total Total Â£m Â£m Â£m Â£m At 1 January 3,039 614 3,653 3,153 Currency translation and other adjustments (16) (2) (18) 34 Amounts written off (424) - (424) (354) Recoveries of amounts previously written off 34 - 34 36 Charge to profit and loss account 609 2 611 367 -------- -------- -------- -------- At 30 June 3,242 614 3,856 3,236 -------- -------- -------- -------- 3. Taxation The charge for taxation is based on a UK corporation tax rate of 30% and comprises: First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Tax on profit before goodwill amortisation and integration costs 942 847 1,798 Tax relief on goodwill amortisation and integration costs (161) (101) (261) ------- ------- ------- 781 746 1,537 ------- ------- ------- The tax charge of Â£781 million, equivalent to 34% of pre-tax profit, is higher than the standard UK tax rate of 30% mainly due to goodwill amortisation, which is not allowable for UK tax. First half First half Full year 2002 2001 2001 (restated) (restated) Â£m Â£m Â£m Expected tax charge 698 622 1,276 Goodwill amortisation 92 89 188 Contributions to employee share ownership trust (3) (3) (48) Non-deductible items 5 39 166 Non-taxable items (3) (8) (51) Taxable foreign exchange - - 16 movements Foreign profits taxed at other (7) 12 (13) rates Losses brought forward utilised (1) (9) (10) Prior year items - 4 13 -------- -------- -------- 781 746 1,537 -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 4. Earnings per share The earnings per share have been calculated based on the following: First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Earnings Profit attributable to ordinary shareholders 1,336 1,104 1,868 ------- ------- -------- Number of shares - millions Weighted average number of ordinary shares In issue during the period 2,866 2,687 2,762 Effect of dilutive share options and convertible non-equity shares 39 48 55 -------- -------- -------- In issue during the period - diluted 2,905 2,735 2,817 -------- -------- -------- Basic earnings per share 46.6p 41.1p 67.6p AVS dividend - - 14.5p -------- -------- -------- 46.6p 41.1p 82.1p Goodwill amortisation 12.1p 11.6p 23.2p Integration costs 11.1p 9.9p 22.6p -------- -------- --------- Adjusted earnings per share 69.8p 62.6p 127.9p -------- -------- -------- Diluted earnings per share 46.0p 40.4p 66.3p -------- -------- --------- Adjusted earnings are calculated by excluding from the profit attributable to ordinary shareholders the after tax effect of goodwill amortisation and integration costs, and the AVS dividend. 5. Interim dividend The directors have declared an interim dividend of 12.7p per share on the ordinary shares. The interim dividend will be paid on 11 October 2002 to shareholders registered on 16 August 2002. As an alternative to cash, a scrip dividend election is to be offered and shareholders will receive details of this by letter. 6. Analysis of repurchase agreements 30 June 31 December 30 June 2002 2001 2001 Â£m Â£m Â£m Reverse repurchase agreements and stock borrowing Loans and advances to banks 16,166 17,721 15,285 Loans and advances to customers 19,582 11,588 14,593 Repurchase agreements and stock lending Deposits by banks 14,748 10,446 10,596 Customer accounts 19,401 17,455 15,665 THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 7. Contingent liabilities and commitments 30 June 31 December 30 June 2002 2001 2001 Â£m Â£m Â£m Contingent liabilities Acceptances and endorsements 2,246 2,814 2,275 Guarantees and assets pledged as collateral security 4,970 4,653 4,240 Other contingent liabilities 5,829 6,106 6,247 ---------- ---------- ---------- 13,045 13,573 12,762 ---------- ---------- ---------- Commitments Documentary credits and other short- term trade related transactions 2,098 2,107 1,600 Undrawn formal standby facilities, credit lines and other commitments to lend 130,761 122,826 100,597 Other commitments 345 338 384 ----------- ----------- ----------- 133,204 125,271 102,581 ----------- ----------- ----------- Total contingent liabilities and commitments 146,249 138,844 115,343 ----------- ---------- ---------- 8. Derivatives Replacement cost of over-the-counter contracts (trading and non-trading) The following table shows the gross replacement cost, which is the sum of the fair values, of all over-the-counter contracts with third parties (trading and non-trading) with positive value. This measure makes no allowance for netting arrangements. 30 June 31 December 30 June 2002 2001 2001 Â£m Â£m Â£m Exchange rate contracts 21,134 12,638 15,598 Interest rate contracts 37,732 36,853 24,560 Equity and commodity contracts 228 188 143 ---------- ---------- ---------- 59,094 49,679 40,301 ---------- ---------- ---------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 8. Derivatives (continued) Derivatives held for trading purposes The table below shows the notional principal amounts of trading instruments entered into with third parties. 30 June 31 December 30 June 2002 2001 2001 Â£bn Â£bn Â£bn Exchange rate contracts 883.4 788.6 891.2 Interest rate contracts 3,817.4 3,658.7 3,449.0 Equity and commodity contracts 16.2 18.6 4.0 The table below shows the fair values (which, after netting, are the balance sheet values) of trading instruments entered into with third parties. 30 June 2002 31 December 2001 30 June 2001 Fair value Fair value Fair value Assets Liabilities Assets Liabilities Assets Liabilities Â£m Â£m Â£m Â£m Â£m Â£m Exchange rate contracts 21,110 21,799 12,586 12,595 15,583 15,679 Interest rate contracts 37,366 37,715 36,638 36,851 24,416 25,405 Equity and commodity contracts 259 268 472 475 134 130 ---------- ---------- ---------- ---------- ---------- ---------- 58,735 59,782 49,696 49,921 40,133 41,214 Netting (47,417) (47,417) (38,846) (38,846) (30,000) (30,000) ---------- ---------- ---------- ---------- ---------- ---------- 11,318 12,365 10,850 11,075 10,133 11,214 ---------- ---------- ---------- ---------- ---------- ---------- Derivatives held for purposes other than trading The Group uses derivatives to manage specific interest rate positions relating to assets and liabilities and to hedge foreign currency exposures. The Group establishes non-trading derivative positions with third parties and through intra-company and intra-Group transactions with the Group's independent trading operations. The table below shows the notional principal amounts of the Group's non-trading derivatives (third party and internal). 30 June 31 December 30 June 2002 2001 2001 Â£bn Â£bn Â£bn Exchange rate contracts 13.8 13.9 9.0 Interest rate contracts 115.2 108.7 104.5 Equity and commodity contracts 0.9 0.8 1.5 THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 9. Analysis of consolidated shareholders' funds First half First half Full year 2002 2001 2001 (restated) (restated) Called-up share capital Â£m Â£m Â£m At beginning of period 893 848 848 Shares issued during the period 7 7 45 Preference shares redeemed during the period (150) - - -------- -------- -------- At end of period 750 855 893 -------- -------- -------- Share premium account At beginning of period 7,465 6,530 6,530 Currency translation adjustments (130) 150 58 Shares issued during the period 485 647 870 Preference shares redeemed during the period (268) - - Other movements 6 6 7 -------- -------- -------- At end of period 7,558 7,333 7,465 -------- -------- -------- Merger reserve At beginning of period 12,029 12,604 12,604 Shares issued to finance the Mellon Regional Franchise acquisition - - 2,007 Transfer to profit and loss account (287) (285) (2,582) --------- --------- ---------- At end of period 11,742 12,319 12,029 --------- --------- ---------- Reserves At beginning of period 212 191 191 Redemption of preference shares 150 - - Transfer of increase in value of long-term assurance business 3 8 17 Other movements - - 4 --------- --------- ------ At end of period 365 199 212 --------- --------- ------ Revaluation reserve At beginning of period 113 40 40 Revaluation of premises - - 72 Transfer (to)/from profit and loss account - (1) 1 -------- -------- -------- At end of period 113 39 113 -------- -------- -------- Profit and loss account As previously reported 6,073 2,903 2,903 Prior year adjustment (117) (117) (117) -------- -------- -------- At beginning of period, as restated 5,956 2,786 2,786 Currency translation adjustments and other movements 7 (19) (14) Retention for the period 968 791 783 Employee share option payments (11) (11) (163) Redemption of preference shares (332) - - Transfer from merger reserve 287 285 2,582 Transfer of increase in value of long-term assurance business (3) (8) (17) Transfer from/(to) revaluation reserve - 1 (1) -------- -------- -------- At end of period 6,872 3,825 5,956 -------- -------- -------- Closing shareholders' funds 27,400 24,570 26,668 ---------- ---------- ---------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 10. Reconciliation of operating profit to net cash inflow from operating activities First half First half Full year 2002 2001 2001 (restated) Â£m Â£m Â£m Operating profit 2,325 2,072 4,252 (Increase)/decrease in prepayments and accrued income (791) (240) 486 Interest on subordinated liabilities 333 371 674 Increase in accruals and deferred income 473 246 490 Amortisation of and provisions against investment securities 59 8 39 Provisions for bad and doubtful debts 611 367 984 Loans and advances written off net of recoveries (390) (318) (755) Profit on sale of tangible fixed assets (11) (9) (55) Loss from associated undertakings - 2 6 Profit on sale of investment securities (36) (87) (48) Provisions for liabilities and charges 2 19 67 Provisions utilised (35) (10) (37) Depreciation and amortisation of tangible and intangible fixed assets 793 747 1,532 Increase in value of long-term assurance business (5) (25) (55) ---------- ---------- ---------- Net cash inflow from trading activities 3,328 3,143 7,580 Increase in items in the course of collection (637) (838) (327) Decrease/(increase) in treasury and other eligible bills 1,952 (566) (6,796) Decrease/(increase) in loans and advances to banks 1,082 (2,745) (4,785) Increase in loans and advances to customers (19,596) (11,400) (18,038) (Increase)/decrease in securities (3,864) 4,248 760 Increase in other assets (4,398) (4,396) (3,327) (Decrease)/increase in items in the course of transmission (167) 144 402 Increase in deposits by banks 6,918 497 4,604 Increase in customer accounts 5,805 3,662 11,584 Increase in debt securities in issue 1,782 10,440 11,262 Increase in other liabilities 11,693 4,298 4,271 Effects of other accruals/deferrals and other non-cash movements 699 (304) 97 ---------- ---------- ---------- Net cash inflow from operating activities 4,597 6,183 7,287 ---------- ---------- ---------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 11. Litigation Members of the Group are engaged in litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of business. The directors of the company, after reviewing the claims pending and threatened against Group undertakings and taking into account the advice of the relevant legal advisers, are satisfied that the outcome of these claims will not have a material adverse effect on the net assets of the Group. 12. Statutory accounts Financial information contained in this document does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985 ('the Act'). The statutory accounts for the year ended 31 December 2001 have been filed with the Registrar of Companies and have been reported on by the auditors under Section 235 of the Act. The report of the auditors was unqualified and did not contain a statement under 237(2) or (3) of the Act. 13. Auditors' review The interim results have been reviewed by the Group's auditors, Deloitte & Touche, and their review report is set out on page 47. 14. Form 6-K This interim report will be filed with the Securities and Exchange Commission in the US on Form 6-K. 15. Final results The Group's results for the year ended 31 December 2002 will be announced on Thursday 27 February 2003. THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY Analysis of loans and advances to customers The following table analyses loans and advances to customers (including reverse repurchase agreements and stock borrowing, instalment credit and finance lease receivables) by geographical area and type of customer. 30 June 31 December 30 June 2002 2001 2001 Â£m Â£m Â£m UK Central and local government 1,300 706 1,543 Manufacturing 6,730 7,401 6,655 Construction 3,235 3,018 2,931 Finance 15,208 8,517 10,801 Service industries 20,770 19,169 16,742 Agriculture, forestry and fishing 2,511 2,391 2,362 Property 13,558 12,274 10,516 Business and other services 6,407 5,864 4,094 Individuals - home mortgage 39,501 36,976 34,362 - other 21,366 20,076 19,438 Instalment credit and other loans 5,457 5,347 5,174 Finance leases 6,167 5,911 5,966 ----------- ----------- ----------- 142,210 127,650 120,584 Overseas residents 24,737 24,164 24,111 ----------- ----------- ----------- Total UK offices 166,947 151,814 144,695 ----------- ----------- ----------- Overseas USA 31,646 29,230 25,881 Rest of the World 15,141 13,093 12,039 ----------- ----------- ----------- Total overseas offices 46,787 42,323 37,920 ----------- ----------- ----------- Loans and advances to customers - gross 213,734 194,137 182,615 Provisions for bad and doubtful debts (3,850) (3,645) (3,226) ----------- ----------- ----------- Total loans and advances to customers 209,884 190,492 179,389 ----------- ----------- ----------- THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY (continued) Cross border outstandings The table below sets out the Group's cross border outstandings in excess of 0.75% of Group total assets (including acceptances) of Â£399.4 billion (31 December 2001 - Â£371.6 billion; 30 June 2001 - Â£343.3 billion). None of these countries have experienced repayment difficulties which have required refinancing of outstanding debt. 30 June 31 December 30 June 2002 2001 2001 Â£m Â£m Â£m Germany 9,424 7,969 8,336 USA 7,986 8,901 6,364 Cayman Islands 6,333 5,501 4,555 Netherlands 4,996 4,596 4,520 France 4,563 4,930 4,706 Spain 3,476 * * Switzerland * 3,646 3,422 * less than 0.75% of Group total assets (including acceptances). Selected country exposures The Group devotes particular attention to exposures to countries that have been adversely affected by global economic pressure. The table below details exposures to countries that are sometimes considered as having a higher credit and foreign exchange risk. 30 June 2002 31 December 2001 30 June 2001 Bank Non-bank Total Bank Non-bank Total Bank Non-bank Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Argentina 35 16 51 39 12 51 61 52 113 Brazil 42 22 64 158 22 180 202 56 258 Mexico 76 70 146 108 62 170 193 85 278 Turkey 29 103 132 38 102 140 145 77 222 Uruguay - - - 3 - 3 4 - 4 Venezuela - 111 111 - 99 99 - 105 105 THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY (continued) Risk elements in lending 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 Securities and Exchange Commission ('SEC') in the US. The following table shows the estimated amount of loans which 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. 30 June 31 December 30 June 2002 2001 2001 Â£m Â£m Â£m Loans accounted for on a non-accrual basis (2): Domestic 3,085 2,829 2,555 Foreign 897 737 400 -------- -------- -------- 3,982 3,566 2,955 -------- -------- -------- Accruing loans which are contractually overdue 90 days or more as to principal or interest (3): Domestic 494 643 770 Foreign 145 142 143 -------- -------- -------- 639 785 913 -------- -------- -------- Loans not included above which are 'troubled debt restructurings' as defined by the SEC: Domestic 78 26 37 Foreign 92 116 140 -------- -------- -------- 170 142 177 -------- -------- -------- Total risk elements in lending 4,791 4,493 4,045 -------- -------- -------- Closing provisions for bad and doubtful debts as a % of total risk elements in lending 80% 81% 80% -------- -------- -------- Risk elements in lending as a % of gross loans and advances to customers 2.24% 2.31% 2.22% -------- -------- -------- Potential problem loans (4) Domestic 897 801 832 Foreign 333 279 48 -------- -------- -------- 1,230 1,080 880 -------- -------- -------- 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. 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 generally account for loans on a non-accrual basis when interest or principal is past due 90 days. 3. Overdrafts generally have no fixed repayment schedule and consequently are not included in this category. 4. Loans that are current as to 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. THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY (continued) Provisions for bad and doubtful debts First half 2002 Full year 2001 First half 2001 Specific General Specific General Specific General Â£m Â£m Â£m Â£m Â£m Â£m Provisions at beginning of period Domestic 2,123 344 2,034 336 2,034 336 Foreign 916 270 551 232 551 232 -------- -------- -------- -------- -------- -------- 3,039 614 2,585 568 2,585 568 -------- -------- -------- -------- -------- -------- Currency translation and other adjustments Domestic 7 3 4 - 1 - Foreign (23) (5) 10 3 26 7 -------- -------- -------- -------- -------- -------- (16) (2) 14 3 27 7 -------- -------- -------- -------- -------- -------- Acquisitions of businesses Domestic - - 83 - - - Foreign - - 138 33 - - -------- -------- -------- --------- -------- -------- - - 221 33 - - -------- -------- -------- -------- -------- -------- Amounts written-off Domestic (313) - (645) - (267) - Foreign (111) - (190) - (87) - -------- -------- -------- -------- -------- -------- (424) - (835) - (354) - -------- -------- -------- -------- -------- -------- Recoveries of amounts written-off in previous periods Domestic 20 - 54 - 22 - Foreign 14 - 26 - 14 - -------- -------- -------- -------- -------- -------- 34 - 80 - 36 - -------- -------- -------- -------- -------- -------- Charged to profit and loss account Domestic 474 1 593 8 274 5 Foreign 135 1 381 2 86 2 -------- -------- -------- -------- -------- -------- 609 2 974 10 360 7 -------- -------- -------- -------- -------- -------- Provisions at end of period (2) Domestic 2,311 348 2,123 344 2,064 341 Foreign 931 266 916 270 590 241 -------- -------- -------- -------- -------- -------- 3,242 614 3,039 614 2,654 582 -------- -------- -------- -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY (continued) Provisions for bad and doubtful debts (continued) 30 June 31 December 30 June 2002 2001 2001 Â£m Â£m Â£m Gross loans and advances to customers Domestic 142,210 127,650 120,584 Foreign 71,524 66,487 62,031 ----------- ---------- ----------- 213,734 194,137 182,615 ----------- ---------- ----------- Closing customer provisions as a % of gross loans and advances to customers (3) Domestic 1.87% 1.93% 1.99% Foreign 1.67% 1.77% 1.32% Total 1.80% 1.88% 1.77% Customer charge against profit (annualised) as a % of gross loans and advances to customers Domestic 0.67% 0.47% 0.46% Foreign 0.38% 0.58% 0.28% Total 0.57% 0.51% 0.40% 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. Includes closing provisions against loans and advances to banks of Â£6 million (31 December 2001 - Â£8 million; 30 June 2001 - Â£10 million). 3. Closing customer provisions exclude closing provisions against loans and advances to banks. THE ROYAL BANK OF SCOTLAND GROUP plc MARKET RISK The Group manages the market risk in its trading and treasury portfolios through value-at-risk (VaR) limits as well as stress testing, position and sensitivity limits. 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 a given confidence level. The table below sets out the VaR for the Group, which assumes a 95% confidence level and a one-day time horizon. Six months to 30 June At 30 June Maximum Minimum Average Â£m Â£m Â£m Â£m Trading 2002 9.7 11.3 7.0 8.9 2001 12.1 15.2 8.8 11.3 Treasury 2002 4.1 4.8 3.6 4.1 2001 5.3 5.3 4.0 4.4 The Group's VaR should be interpreted in the light of the assumptions underlying the methodologies adopted and their limitations as discussed in the 2001 Report and Accounts and Annual Report on Form 20-F. Historical data used in computing VaR may not be indicative of future market conditions. THE ROYAL BANK OF SCOTLAND GROUP plc REGULATORY RATIOS AND OTHER INFORMATION 30 June 31 December 30 June 2002 2001 2001 Capital base (Â£m) Tier 1 capital 16,804 15,052 13,715 Tier 2 capital 12,644 11,734 10,632 Tier 3 capital 164 172 178 ---------- ---------- ---------- 29,612 26,958 24,525 Less: investments in insurance companies, associated undertakings and other supervisory deductions (2,980) (2,698) (2,707) ------------ ---------- ----------- 26,632 24,260 21,818 ------------ ----------- ----------- Weighted risk assets (Â£m) Banking book - on-balance sheet 185,300 176,000 159,600 - off-balance sheet 29,700 22,000 17,700 Trading book 10,800 12,500 13,600 ----------- ----------- ----------- 225,800 210,500 190,900 ----------- ----------- ----------- Risk asset ratio - tier 1 7.4% 7.1% 7.2% - total 11.8% 11.5% 11.4% Share price Â£18.60 Â£16.72 Â£15.67 Number of shares in issue 2,888m 2,860m 2,705m Market capitalisation Â£53.7bn Â£47.8bn Â£42.4bn Net asset value per ordinary share Â£8.22 Â£7.79* Â£7.43* Employee numbers Corporate Banking and Financial Markets** 18,500 14,400 13,400 Retail Banking 29,500 30,500 29,300 Retail Direct 6,500 6,200 6,000 Manufacturing 20,700 20,700 19,300 Wealth Management 6,900 7,100 6,800 Direct Line Group 10,300 9,200 7,500 Ulster Bank** 4,700 4,500 4,400 Citizens 12,700 11,500 7,300 Centre 1,700 1,600 1,600 ------------ ---------- ---------- Group total 111,500 105,700 95,600 Effect of acquisitions - Corporate Banking and Financial Markets 4,100 300 - - Direct Line Group 600 700 - - Citizens 4,800 3,800 - ------------ ------------ ------------ Underlying employee numbers 102,000 100,900 95,600 ------------ ------------ ------------ * Restated to reflect the implementation of FRS 19. ** Prior periods have been restated to reflect the transfer of certain businesses from Ulster Bank to Corporate Banking and Financial Markets. THE ROYAL BANK OF SCOTLAND GROUP plc ADDITIONAL FINANCIAL DATA FOR US INVESTORS Reconciliation between UK and US GAAP The following tables summarise the significant adjustments to consolidated net income available for ordinary shareholders and shareholders' equity which would result from the application of US generally accepted accounting principles ('US GAAP') instead of UK GAAP. First half First half Full year 2002 2001 2001 Consolidated statement of income Â£m Â£m Â£m Profit attributable to ordinary shareholders - UK GAAP 1,336 1,104 1,868 Adjustments in respect of: Acquisition accounting - 29 (113) Amortisation of goodwill 339 (23) (48) Property depreciation (5) 2 (13) Property disposals - - 1 Loan fees and costs (47) (44) (95) Pension costs (42) 114 242 Long-term assurance business (17) (7) (25) Leasing (33) (24) (68) Derivatives 104 36 (125) Software development costs 163 203 442 Taxation (84) (79) (4) ---------- ---------- ---------- Net income available for ordinary shareholders - US GAAP 1,714 1,311 2,062 ---------- ---------- ---------- Dividend per ordinary share - paid during the period 27.0p 23.5p 34.5p ---------- ---------- ---------- As a result of implementing FRS 19, accounting for deferred tax under UK GAAP is now consistent with US GAAP. The Group has fully implemented Statement of Financial Accounting Standards 142 'Goodwill and Other Intangible Assets' ('SFAS 142'), with effect from 1 January 2002. Under this standard, goodwill and intangible assets deemed to have indefinite lives are not amortised and are subject to annual impairment tests. Other intangible assets continue to be amortised over their useful lives. The Group has completed the impairment tests required under SFAS 142 and no impairment has been recognised as a result. The table below sets out reported net income for comparative periods reconciled to net income adjusted to comply with SFAS 142. First half First half Full year 2002 2001 2001 Â£m Â£m Â£m Net income as above 1,714 1,311 2,062 Goodwill amortisation - 322 657 -------- -------- -------- Adjusted net income 1,714 1,633 2,719 -------- -------- -------- Basic earnings per share 59.8p 48.8p 74.7p Goodwill amortisation - 12.0p 23.7p -------- -------- --------- Adjusted basic earnings per share 59.8p 60.8p 98.4p -------- -------- --------- Diluted earnings per share 59.0p 47.9p 73.2p Goodwill amortisation - 11.8p 23.3p -------- -------- -------- Adjusted diluted earnings per share 59.0p 59.7p 96.5p -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc ADDITIONAL FINANCIAL DATA FOR US INVESTORS (continued) 30 June 31 December 30 June 2002 2001 2001 (restated) (restated) Consolidated shareholders' equity Â£m Â£m Â£m Shareholders' funds - UK GAAP 27,400 26,668 24,570 Adjustments in respect of: Acquisition accounting 418 418 560 Goodwill 1,199 860 885 Elimination of revaluation surplus on properties less depreciation (297) (292) (184) Proposed dividend 368 772 313 Loan fees and costs (216) (169) (118) Pension costs 358 400 272 Long-term assurance business (101) (84) (66) Leasing (127) (94) (50) Net unrealised gains on available-for-sale securities 326 272 426 Derivatives (5) (112) 25 Perpetual regulatory tier one securities 793 835 - Software development costs 840 677 438 Taxation (328) (228) (343) ---------- ---------- ---------- Shareholders' equity - US GAAP 30,628 29,923 26,728 ---------- ---------- ---------- As explained on page 7, following the issuance of UITF 33, the Group's perpetual regulatory tier one securities are classified as subordinated liabilities rather than shareholders' funds under UK GAAP. This change does not affect their classification as shareholders' equity under US GAAP. Total assets Total assets under US GAAP, adjusted to reflect the inclusion of acceptances and the grossing-up of certain repurchase balances offset under UK GAAP, together with the affect of adjustments made to net income and shareholders' funds were Â£416,693 million (31 December 2001 - Â£386,696 million; 30 June 2001 - Â£346,157 million). Exchange rates The following table shows rates for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York (the 'Noon Buying Rate') and the rates used by the Group in the preparation of its consolidated financial statements. 30 June 2002 31 December 2001 30 June US$ per Â£1 2001 Noon Buying Rate Period end rate 1.525 1.454 1.408 Average rate for the period (1) 1.449 1.440 1.440 High 1.529 1.505 1.505 Low 1.407 1.373 1.373 Consolidation rate (2) Period end rate 1.528 1.450 1.405 Average rate for the period 1.445 1.440 1.440 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 dollars into sterling in the preparation of its consolidated financial statements. 3. On 5 August 2002, the Noon Buying Rate was Â£1.00 = $1.566. THE ROYAL BANK OF SCOTLAND GROUP plc 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', 'should', 'intend', 'plan', 'probability', 'risk', 'Value-at-Risk ('VaR')', 'target', 'goal', 'objective', 'will', 'endeavour' and similar expressions or variations on such expressions and sections such as 'Chairman's comments', 'Review of results - Integration', 'Restatements and recent developments - Recent developments' and 'Integration information'. In particular, this document includes forward-looking statements relating, but not limited, to the Group's potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. Such statements are subject to risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G-7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing. 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. THE ROYAL BANK OF SCOTLAND GROUP plc INDEPENDENT REVIEW REPORT TO THE ROYAL BANK OF SCOTLAND GROUP plc Introduction We have been instructed by the company to review the financial information for the six months ended 30 June 2002 which comprises the statutory consolidated profit and loss account, the consolidated balance sheet, the statement of consolidated total recognised gains and losses, the reconciliation of movements in consolidated shareholders' funds, the consolidated cash flow statement, the divisional performance disclosures and related notes 1 to 15. We have read the other information contained in this interim results announcement and, solely on that basis, have considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim results announcement, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim results announcement in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom auditing standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2002. Deloitte & Touche Chartered Accountants Edinburgh 6 August 2002 THE ROYAL BANK OF SCOTLAND GROUP plc CONTACTS Fred Goodwin Group Chief Executive 020 7427 8145 0131 523 2033 Fred Watt Group Finance Director 020 7427 8412 0131 523 2028 Jonathan Atack Head of Investor Relations 020 7427 9574 7 August 2002 END This information is provided by RNS The company news service from the London Stock Exchange EFMSESEIA

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