Interim Results

Royal Bank of Scotland Group PLC 05 August 2003 THE ROYAL BANK OF SCOTLAND GROUP plc CONTENTS Page Results summary 2 First half 2003 Highlights 3 Group Chief Executive's review 4 Financial review 6 Summary consolidated profit and loss account 9 Divisional performance 10 Corporate Banking and Financial Markets 11 Retail Banking 13 Retail Direct 14 Manufacturing 16 Wealth Management 17 Direct Line Group 18 Ulster Bank 19 Citizens 20 Central items 22 Average balance sheet 23 Average interest rates, yields, spreads and margins 24 Statutory consolidated profit and loss account 25 Consolidated balance sheet 27 Overview of consolidated balance sheet 28 Statement of consolidated total recognised gains and losses 30 Reconciliation of movements in consolidated shareholders' funds 30 Consolidated cash flow statement 31 Notes 32 Asset quality Analysis of loans and advances to customers 38 Cross border outstandings 39 Selected country exposures 39 Risk elements in lending 40 Provisions for bad and doubtful debts 41 Market risk 43 Regulatory ratios and other information 44 Additional financial data for US investors 45 Forward-looking statements 46 Independent review report by the auditors 47 Contacts 48 THE ROYAL BANK OF SCOTLAND GROUP plc RESULTS SUMMARY First half First half Full year 2003 2002 2002 Â£m Â£m Increase Â£m Total income 9,080 8,182 11% 16,815 -------- -------- -------- Operating expenses* 4,051 3,740 8% 7,669 -------- -------- -------- Operating profit before provisions* 4,193 3,803 10% 7,796 -------- -------- -------- Profit before tax, goodwill amortisation and integration costs 3,451 3,151 10% 6,451 -------- -------- -------- Profit before tax 2,896 2,325 25% 4,763 -------- -------- -------- Cost:income ratio** 43.0% 44.2% - 44.0% -------- -------- -------- Basic earnings per ordinary share 60.0p 46.6p 29% 68.4p -------- -------- -------- Adjusted earnings per ordinary share 76.5p 69.8p 10% 144.1p -------- -------- --------- Dividends per ordinary share 14.6p 12.7p 15% 43.7p -------- -------- -------- * excludes goodwill amortisation and integration costs. ** the cost:income ratio is based on operating expenses excluding goodwill amortisation and integration costs, and after netting operating lease depreciation against rental income. Sir George Mathewson, Chairman of The Royal Bank of Scotland Group plc, said: 'These are strong results, the more so for having been delivered against a backdrop of a lower growth environment in the markets in which we operate'. THE ROYAL BANK OF SCOTLAND GROUP plc FIRST HALF 2003 HIGHLIGHTS â€¢ Profit before tax, goodwill amortisation and integration costs up 10% to Â£3,451 million. â€¢ Profit before tax up 25% to Â£2,896 million. â€¢ Income up 11% to Â£9,080 million. â€¢ Operating expenses up 8% to Â£4,051 million. â€¢ Excluding acquisitions, income up 10%, expenses up 7%. â€¢ Customer growth in all divisions. â€¢ Net interest margin in line with guidance at 3.0%. â€¢ Further efficiency gains - cost:income ratio 43.0%, improved from 44.2%. â€¢ Profit and loss charge for provisions Â£742 million, in line with growth in lending. â€¢ Credit quality remains strong and problem loan metrics continue to improve. â€¢ Basic earnings per share up 29%. â€¢ Adjusted earnings per share up 10%. â€¢ Interim dividend 14.6p per share, up 15%. THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW The Group continued to make good progress during the first half of 2003. We achieved strong growth in income, a further improvement in efficiency and maintained credit quality. As a result, we increased both our Group profit before tax, goodwill amortisation and integration costs, and our adjusted earnings per share, by 10%. During the first half of 2003, we grew income across the Group as a whole by Â£898 million, with Direct Line, Retail Direct and Corporate Banking and Financial Markets achieving particularly strong year-on-year growth. We continue to see good growth in loans and deposits in both the UK and the US while maintaining our cautious stance towards corporate lending in particular. In addition, our credit card and general insurance businesses continue to perform strongly. All divisions of the Group increased their customer numbers. Net interest margin at 3.0% (2002 - 3.1%) was in line with guidance given in February 2003, with the lower interest rate environment reducing both the benefit of interest-free funds and treasury income; and net interest income in the UK was reduced by the outcome of the Competition Commission inquiry into SME banking. A key strength of the Group however is the diversity of its revenue streams and, although interest margin was lower than the same period last year, non-interest income, including fees, commissions and income from financial markets, was strong. In addition to growing its income, the Group improved its efficiency further in the first half of 2003. Whilst expenses increased to support higher business volumes, the Group cost:income ratio improved to 43.0% (2002 - 44.2%). Provisions for bad debts amounted to Â£746 million in the first half of 2003, a level consistent with provisions reported in 2002 and the growth in the loan book. Credit quality remains strong, with no material change to the distribution by grade of our risk assets. Credit metrics have continued to improve, with risk elements in lending representing 2.01% of loans and advances to customers compared with 2.14% at 31 December 2002 and 2.24% at 30 June 2002. Potential problem loans saw a reduction of 18% from the position reported at 31 December 2002. REVIEW OF DIVISIONS Corporate Banking and Financial Markets increased its income by 12% and contribution before Manufacturing costs by 10% to Â£1,739 million (2002 - Â£1,581 million). Corporate Banking and Financial Markets maintained leading positions in the UK in corporate lending, leasing, deposits, payments, derivatives and foreign exchange and across a wide range of specialised corporate banking activities. It achieved good growth in customer numbers; in particular, UK mid-corporate customers increased by over 4,000 in the six months to June 2003. While good growth in loans and deposits was again achieved, net interest income was impacted by the outcome of the Competition Commission inquiry into SME banking and by the effect on deposit and treasury income of lower interest rates. Volumes in Financial Markets were up strongly in both the UK and the US as a result of growth in customer-driven activity in interest rate protection, mortgage securitisation and foreign exchange. Outside the UK, the division achieved good growth in Continental Europe through its offices in Paris, Frankfurt, Milan and Madrid. Retail Banking achieved good volume growth across all areas of personal current accounts and mortgages, personal loans and deposits, and small business loans and current accounts. Total customers in the first six months of the year increased by 113,000. Average non-mortgage lending increased by 11%, mortgages increased by 12% and deposit balances increased by 5%. Both income and contribution were reduced in this period by the outcome of the Competition Commission inquiry into SME banking and by the impact of lower interest rates. Despite these significant negative factors, the division increased its income by 5% and contribution before Manufacturing costs by 3% to Â£1,535 million (2002 - Â£1,488 million). THE ROYAL BANK OF SCOTLAND GROUP plc GROUP CHIEF EXECUTIVE'S REVIEW (continued) Retail Direct increased its income by 15% and contribution before Manufacturing costs by 23% to Â£407 million (2002 - Â£330 million). Retail Direct increased its customer accounts by 500,000 while expanding balances and fee income associated with these accounts. In July 2003, RBS bought the credit card and personal loan portfolios of Santander Direkt Bank which will add 480,000 customers in Germany. Manufacturing costs increased by 2% to Â£900 million (2002 - Â£886 million). Technology costs were down 6% to Â£291 million (2002 - Â£309 million), while other costs were up by 6% to Â£609 million (2002 - Â£577 million), reflecting increased volume of customer transactions. Wealth Management's income declined by 8% and contribution by 10% to Â£219 million (2002 - Â£244 million), reflecting continued difficult stock market conditions, although customer numbers and funds under management saw positive movements. In July 2003, RBS sold the Miami-based operations of Coutts to Santander Central Hispano. Direct Line Group increased its income by 30% and contribution by 32% to Â£202 million (2002 - Â£153 million). Direct Line Group increased its UK motor insurance policies by 193,000 and its UK home insurance policies by 60,000. In Continental Europe, Direct Line businesses in Spain, Italy and Germany increased their total policy numbers by 143,000. In June 2003, RBS announced the acquisition of Churchill Insurance Group PLC, which has subsequently received Office of Fair Trading clearance, but is still subject to approval from the Financial Services Authority. Ulster Bank increased its income by 9% and its contribution by 5% to Â£131 million (2002 - Â£125 million). Ulster Bank achieved strong growth in loans and deposits but recorded lower income from treasury and stockbroking activities. Customers in total increased by 7,000 in the first six months. Citizens increased its US dollar income by 16% and contribution by 23% to $685 million (2002 - $555 million). In sterling terms, Citizens income growth was 4% and its contribution growth 11% to Â£425 million (2002 - Â£384 million). Citizens increased its personal customer base by 237,000 and its business customers by 18,000 as a result of organic growth, through both traditional branches and supermarket branches, and through the acquisition of Commonwealth Bancorp, Inc., Pennsylvania, which was completed in January 2003. In July 2003, Citizens announced the acquisition of Community Bancorp, Inc., Massachusetts and completed the acquisition of Port Financial Corp., Massachusetts. OUTLOOK These results provide further evidence of the core strengths of our Group: the ability to grow income strongly while improving efficiency and maintaining credit quality. Coupled with our strong cash generation these attributes present us with a wide range of strategic options. Consequently, whilst an inherently and fundamentally optimistic outlook is tempered to a degree by elements of uncertainty in the markets in which we operate, we remain confident of our ability to continue to deliver superior value for our shareholders, customers and staff. Fred Goodwin Group Chief Executive THE ROYAL BANK OF SCOTLAND GROUP plc FINANCIAL REVIEW Profit The Group increased its profit before tax, goodwill amortisation and integration costs by 10% or Â£300 million, from Â£3,151 million to Â£3,451 million. Profit before tax was up 25%, from Â£2,325 million to Â£2,896 million. Total income The Group continued to achieve strong growth in income. Total income at Â£9,080 million was up 11% or Â£898 million. Excluding acquisitions, total income rose by 10%. Net interest income increased by 4% to Â£4,025 million. The Group has maintained the good volume growth seen in the second half of last year. Average loans and advances to customers are up 12% over the comparable period last year, and average customer deposits have grown by 8%. While volume growth has been strong, income growth in this period has been affected by foreign exchange translation and the outcome of the Competition Commission inquiry into SME banking. In addition, lower interest rates have reduced the benefit of interest-free funds. Non-interest income increased by 17% to Â£5,055 million. Growth in general insurance premium income was a major contributor to this as a result of strong growth across both motor and home products. In addition, volumes in financial markets were up strongly in both the UK and the US as a result of growth in customer-driven activity in interest rate protection, mortgage securitisation and foreign exchange. Operating lease income was also up strongly due to expansion of the operating lease portfolio in Corporate Banking and Financial Markets. Net interest margin The Group's net interest margin at 3.0% was, as anticipated, down from 3.1% due to a reduced benefit from interest-free funds arising from lower interest rates and the outcome of the Competition Commission inquiry into SME banking. Operating expenses Operating expenses, excluding goodwill amortisation and integration costs, rose by 8% to Â£4,051 million. Excluding acquisitions, operating expenses were up 7% or Â£251 million in support of strong growth in business volumes. Cost:income ratio Strong income growth coupled with tight cost management resulted in a further improvement in the Group's ratio of operating expenses (excluding goodwill amortisation and integration costs and after netting operating lease depreciation against rental income) to total income, to 43.0% from 44.2%. Excluding the effect of acquisitions, the cost:income ratio improved to 42.7%. Net insurance claims Consistent with volume growth and reflecting stability in claims experience, general insurance claims, after reinsurance, increased by 31% to Â£836 million. THE ROYAL BANK OF SCOTLAND GROUP plc Financial Review (continued) Provisions The profit and loss charge for bad debts and amounts written off fixed asset investments was Â£742 million compared with Â£652 million in the first half of 2002 and Â£693 million in the second half of 2002. The profit and loss charge is in line with the growth in loans and advances. Credit quality Overall credit quality remains strong with no material change in the distribution by grade of the Group's total risk assets compared with the position at 31 December 2002. The ratio of risk elements in lending to gross loans and advances to customers at 2.01% at 30 June 2003 showed an improving trend (31 December 2002 - 2.14%; 30 June 2002 - 2.24%). Risk elements in lending and potential problem loans represented 2.40% of total loans and advances to customers compared with 2.66% at 31 December 2002 and 2.82% at 30 June 2002. Integration By February 2003 all integration initiatives in relation to NatWest had been implemented. The programme annualised benefits, comprising Â£890 million revenue benefits and Â£1,440 million cost savings, were fully implemented less than three years after the acquisition of NatWest. Total costs for the integration programme were Â£2.3 billion, in line with the revised plan. Integration costs for the six months ended 30 June 2003 were Â£182 million. Of this amount, Â£143 million related to the final elements of the NatWest integration, which has now been completed. Earnings and dividends Basic earnings per ordinary share increased by 29%, from 46.6p to 60.0p, reflecting lower integration costs in the first half of 2003. Earnings per ordinary share, adjusted for goodwill amortisation and integration costs, increased by 10%, from 69.8p to 76.5p. An interim dividend of 14.6p per ordinary share, an increase of 15%, will be paid on 10 October 2003 to shareholders registered on 15 August 2003. The interim dividend is covered 5.2 times by earnings before goodwill amortisation and integration costs. Balance sheet Total assets were Â£449 billion at 30 June 2003, 9% higher than total assets of Â£412 billion at 31 December 2002. In the first half of 2003, lending to customers, excluding repurchase agreements and stock borrowing ('reverse repos'), increased by 8% or Â£17 billion to Â£218 billion. Customer deposits, excluding repurchase agreements and stock lending ('repos'), grew by 6% or Â£12 billion to Â£206 billion. Capital ratios at 30 June 2003 were 7.6% (tier 1) and 12.3% (total), against 7.3% (tier 1) and 11.7% (total) at 31 December 2002. These ratios are slightly higher than our target ratios ahead of the acquisition of Churchill Insurance. Profitability The adjusted after-tax return on ordinary equity was 18.2% compared with 17.4% for the first half of 2002. This is based on profit attributable to ordinary shareholders before goodwill amortisation and integration costs, and average ordinary equity. THE ROYAL BANK OF SCOTLAND GROUP plc Financial Review (continued) Acquisitions In January 2003, Citizens completed the acquisition of Pennsylvania-based commercial bank, Commonwealth Bancorp, Inc. for a cash consideration of US$450 million. In April 2003, Citizens announced the acquisition of Port Financial Corp., the holding company of the Massachusetts savings bank, CambridgePort Bank for a cash consideration of US$285 million. This transaction was completed on 31 July 2003. In May 2003, RBS announced the acquisition of Nordisk Renting AB, a Swedish leasing company, for a cash consideration of â‚¬104 million. This transaction was completed on 2 June 2003. In May 2003, RBS announced the purchase of the credit card and personal loans portfolios of Frankfurt-based Santander Direkt Bank for a consideration of â‚¬486 million. This transaction was completed on 31 July 2003. In June 2003, RBS announced the acquisition of Churchill Insurance Group PLC for a consideration of Â£1.1 billion. OFT clearance has been received and the transaction, which is still subject to approval of the FSA, is expected to be completed by the fourth quarter of 2003. In July 2003, Citizens announced the acquisition of Community Bancorp, Inc., the holding company for Community National Bank, for a cash consideration of US$116 million. This transaction is subject to Community Bancorp, Inc. shareholder and US regulatory approvals and is expected to be completed by the end of 2003. Disposals In May 2003, RBS announced the sale of the Miami-based Latin American private banking operations of Coutts Group to Santander Central Hispano for a premium of approximately US$75 million. This transaction was completed on 31 July 2003. THE ROYAL BANK OF SCOTLAND GROUP plc SUMMARY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited) In the profit and loss account set out below goodwill amortisation and integration costs are shown separately. In the statutory profit and loss account on page 25, these items are included in the captions prescribed by the Companies Act 1985. First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Net interest income 4,025 3,873 7,849 -------- -------- -------- Dividend income 30 29 58 Fees and commissions receivable 2,719 2,609 5,308 Fees and commissions payable (554) (481) (965) Dealing profits (before associated direct costs) 985 724 1,462 Other operating income 726 543 1,209 -------- -------- -------- 3,906 3,424 7,072 General insurance premium income 1,149 885 1,894 -------- -------- -------- Non-interest income 5,055 4,309 8,966 -------- -------- --------- Total income 9,080 8,182 16,815 -------- -------- --------- Staff costs 2,126 1,930 3,942 Other operating expenses 1,925 1,810 3,727 -------- -------- -------- Operating expenses 4,051 3,740 7,669 -------- -------- -------- Profit before other operating charges 5,029 4,442 9,146 General insurance claims 836 639 1,350 -------- -------- -------- Operating profit before provisions 4,193 3,803 7,796 Provisions for bad and doubtful debts 746 611 1,286 Amounts written off fixed asset investments (4) 41 59 -------- -------- -------- Profit before tax, goodwill amortisation and integration costs 3,451 3,151 6,451 Goodwill amortisation 373 365 731 Integration costs 182 461 957 -------- -------- -------- Profit before tax 2,896 2,325 4,763 Tax 927 781 1,556 -------- -------- -------- Profit after tax 1,969 1,544 3,207 Minority interests (including non-equity) 87 49 133 Preference dividends 137 159 305 -------- -------- -------- 1,745 1,336 2,769 Additional Value Shares dividend - - 798 -------- -------- -------- Profit attributable to ordinary shareholders 1,745 1,336 1,971 Ordinary dividends 431 368 1,267 -------- -------- -------- Retained profit 1,314 968 704 -------- -------- -------- Basic earnings per ordinary share (Note 4) 60.0p 46.6p 68.4p -------- -------- -------- Adjusted earnings per ordinary share (Note 4) 76.5p 69.8p 144.1p -------- -------- -------- 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 Increase/ Full year 2003 2002 (decrease) in 2002 contribution Â£m Â£m % Â£m Corporate Banking and Financial Markets* 1,739 1,581 10 3,261 Retail Banking 1,535 1,488 3 3,019 Retail Direct 407 330 23 701 Manufacturing* (900) (886) (2) (1,762) Wealth Management* 219 244 (10) 454 Direct Line Group 202 153 32 355 Ulster Bank 131 125 5 244 Citizens 425 384 11 766 Central items (307) (268) (15) (587) -------- -------- -------- Profit before goodwill amortisation and integration costs 3,451 3,151 10 6,451 -------- -------- -------- * prior periods have been restated to reflect the transfer in the first half of 2003 of certain activities from Corporate Banking and Financial Markets and Wealth Management to Manufacturing. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE BANKING AND FINANCIAL MARKETS First half First half Full year 2003 2002 2002 (restated*) (restated*) Â£m Â£m Â£m Net interest income excluding funding cost of operating lease assets 1,246 1,264 2,529 Operating lease funding cost (100) (85) (180) -------- -------- -------- Net interest income 1,146 1,179 2,349 -------- -------- -------- Fees and commissions receivable 704 680 1,394 Fees and commissions payable (101) (74) (157) Dealing profits (before associated direct costs) 913 656 1,338 Operating lease rentals 446 356 791 Other operating income 186 137 337 -------- -------- -------- Non-interest income 2,148 1,755 3,703 -------- -------- -------- Total income 3,294 2,934 6,052 -------- -------- -------- Direct expenses - staff costs 710 602 1,230 - other 189 178 375 - operating lease depreciation 252 217 461 -------- -------- -------- 1,151 997 2,066 -------- -------- -------- Contribution before provisions 2,143 1,937 3,986 Provisions 404 356 725 -------- -------- -------- Contribution 1,739 1,581 3,261 -------- -------- -------- * prior periods have been restated following the transfer of certain activities to Manufacturing. Â£bn Â£bn Â£bn Total assets** 234.4 201.0 203.4 Loans and advances to customers** - gross - banking book 98.1 88.0 92.1 - trading book 5.9 3.5 3.6 Operating lease assets 5.9 4.1 5.3 Customer deposits** 67.6 58.0 62.2 Weighted risk assets - banking 139.9 119.3 125.2 - trading 13.2 10.7 11.3 ** excluding repos and reverse repos 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. Treasury and capital markets products are provided through Financial Markets which is a leading provider of debt, foreign exchange and derivatives products. THE ROYAL BANK OF SCOTLAND GROUP plc CORPORATE BANKING AND FINANCIAL MARKETS (continued) Contribution increased over the first half of 2002 by 10% or Â£158 million to Â£1,739 million. Total income was up 12% or Â£360 million to Â£3,294 million. Excluding the effect of the acquisition of Dixon Motors in May 2002, which added Â£36 million, total income was up 11%. Net interest income, excluding the cost of funding operating lease assets, was Â£18 million lower at Â£1,246 million, reflecting the reduced benefit of interest-free funds due to lower interest rates and the outcome of the Competition Commission inquiry into SME banking. In addition, income from treasury was lower as a result of less favourable market conditions. Balance sheet growth however was good; average loans and advances to customers of the banking business increased by 9% or Â£7.9 billion to Â£93.0 billion and average customer deposits increased by 8% or Â£4.4 billion to Â£59.7 billion. Non-interest income rose by 22% or Â£393 million to Â£2,148 million. Dealing profits before associated direct costs were up Â£257 million, reflecting increased volumes in the UK and the US as a result of growth in customer activity in interest rate protection, mortgage securitisation and foreign exchange. There was also a significant increase in operating lease rentals, up 25% or Â£90 million to Â£446 million, reflecting growth in the asset finance business. Direct expenses increased by 15% or Â£154 million to Â£1,151 million. Excluding Dixon Motors, which added Â£31 million and after netting operating lease asset depreciation against rental income, expenses rose by 11%, in line with income growth. The charge for provisions for bad debts and amounts written off fixed asset investments amounted to Â£404 million compared with Â£369 million in the second half of 2002 and Â£356 million in the first half of 2002. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL BANKING First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Net interest income 1,433 1,376 2,840 Non-interest income 703 661 1,353 -------- -------- -------- Total income 2,136 2,037 4,193 -------- -------- -------- Direct expenses - staff costs 373 349 707 - other 93 98 254 -------- -------- -------- 466 447 961 -------- -------- -------- Contribution before provisions 1,670 1,590 3,232 Provisions 135 102 213 -------- -------- -------- Contribution 1,535 1,488 3,019 -------- -------- -------- Â£bn Â£bn Â£bn Total assets 63.4 62.9 66.5 Loans and advances to customers - gross - mortgages 33.6 30.2 32.1 - other 24.2 21.4 23.5 Customer deposits 64.0 59.3 61.7 Weighted risk assets 41.2 36.6 38.8 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. Credit card services provided to retail customers are included within the Retail Direct division. The division achieved good volume growth across all areas of personal current accounts and mortgages, personal loans and deposits, and small business loans and current accounts. Total customers in the first six months of the year increased by 113,000. Both income and contribution were reduced in this period by the outcome of the Competition Commission inquiry into SME banking and by the impact of lower interest rates. Despite these significant negative factors, the division increased its income by 5% or Â£99 million to Â£2,136 million, and contribution before Manufacturing costs by 3% or Â£47 million to Â£1,535 million. Net interest income rose by 4% or Â£57 million to Â£1,433 million, reflecting strong growth in customer advances and deposits which was partially offset in this particular period by the outcome of the Competition Commission inquiry into SME banking and the impact of a lower interest rate environment. Average loans to customers, excluding mortgages, grew by 11% or Â£2.2 billion to Â£23.2 billion. Average mortgage lending grew by 12% or Â£3.6 billion to Â£32.6 billion. Average customer deposits increased by 5% or Â£2.8 billion to Â£59.6 billion. Non-interest income rose by 6% or Â£42 million to Â£703 million. This was due to continued growth in customer numbers, increased volumes in the general insurance business and higher embedded value profit. Direct expenses increased by 4% or Â£19 million to Â£466 million. The charge for provisions for bad debts increased by Â£33 million to Â£135 million, reflecting growth in lending over recent years. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL DIRECT First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Net interest income 400 370 749 Non-interest income 468 386 841 ------ ------ ------- Total income 868 756 1,590 ------ ------ ------- Direct expenses - staff costs 101 88 190 - other 213 198 418 ------ ------ ------ 314 286 608 ------ ------ ------ Contribution before provisions 554 470 982 Provisions 147 140 281 ------ ------ ------ Contribution 407 330 701 ------ ------ ------ Â£bn Â£bn Â£bn Total assets 20.3 17.7 19.4 Loans and advances to customers - gross - mortgages 7.6 6.3 7.0 - other 12.9 11.4 12.4 Customer deposits 4.5 4.2 4.4 Weighted risk assets 15.3 13.0 14.4 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'), The One account, Direct Line Financial Services ('DLFS'), Lombard Direct, WorldPay Limited, the Group's internet banking platform, the Primeline brand, and in Europe, the Comfort Card businesses, all of them offering products to customers through direct channels. In July 2003, Retail Direct completed the purchase of the credit card and personal loans portfolios of Frankfurt-based Santander Direkt Bank. Contribution increased over the first half of 2002 by 23% or Â£77 million to Â£407 million. Total income was up 15% or Â£112 million to Â£868 million, reflecting continued strong growth in the Cards Business and in TPF. WorldPay, which was acquired in the second half of 2002, added Â£6 million. Net interest income was up 8% or Â£30 million to Â£400 million. Average credit card balances were up 5% to Â£8.4 billion. In TPF, average personal loans rose by 21% and average customer deposits by 20%. Average mortgage lending was 24% higher in The One account and 10% higher in DLFS, while average personal lending in DLFS and Lombard Direct increased by 22%. Non-interest income was up 21% or Â£82 million to Â£468 million. There was good growth in credit card fees, insurance and ATM income resulting from increased volumes, particularly in TPF and the Cards Business. THE ROYAL BANK OF SCOTLAND GROUP plc RETAIL DIRECT (continued) In the six months to 30 June 2003, the total number of customer accounts increased by 500,000. Direct expenses increased by 10% or Â£28 million to Â£314 million to support business expansion and includes Â£9 million relating to WorldPay. The charge for provisions for bad debts increased by Â£7 million to Â£147 million, reflecting growth in lending volumes offset by higher recoveries. THE ROYAL BANK OF SCOTLAND GROUP plc MANUFACTURING First half First half Full year 2003 2002 2002 (restated*) (restated*) Â£m Â£m Â£m Staff costs 287 261 536 Other costs 613 625 1,226 ----- ----- ------- Total manufacturing costs 900 886 1,762 ----- ----- ------- Analysis: Group Technology** 291 309 613 Group Purchasing and Property Operations** 319 299 585 Customer Support and other operations 290 278 564 ----- ----- ------- Total manufacturing costs 900 886 1,762 ----- ----- ------- * prior periods have been restated following the transfer of certain activities from Corporate Banking and Financial Markets and Wealth Management. ** prior periods have also been restated to reflect the transfer of certain business units within Manufacturing. Manufacturing supports the customer facing businesses, mainly Corporate Banking and Financial Markets, Retail Banking, Retail Direct and Wealth Management, and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services. The expenditure incurred by Manufacturing relates to shared costs in respect of the Group's UK banking operations. These costs reflect, inter alia, operational technology, account processing and management, and money transmission activities which are shared between the various customer-facing divisions. Consequently, these joint costs cannot be directly attributed to individual divisions. Instead, the Group monitors and controls each of its customer facing divisions on revenue generation and direct costs whilst in Manufacturing such control is exercised through appropriate efficiency measures and targets. Manufacturing drives optimum efficiencies in high volume processing activities, leverages the Group's purchasing power and has become the centre of excellence for managing large scale and complex change. Manufacturing's costs increased by 2% or Â£14 million, to Â£900 million. Lower costs in Group Technology reflect the benefits of the successful migration of NatWest onto the RBS technology platform during 2002. Group Purchasing and Property Operations costs increased principally as a result of investment in the Group's property infrastructure, notably in London and Birmingham, and in modernisation of the branch network. Customer Support and other operations continued with its programme of customer service enhancements. A significant element of this has been the rollout of the new telephony proposition that has enabled NatWest customers to call their branch direct, a major enhancement to customer service. THE ROYAL BANK OF SCOTLAND GROUP plc WEALTH MANAGEMENT First half First half Full year 2003 2002 2002 (restated*) (restated*) Â£m Â£m Â£m Net interest income 225 228 460 Non-interest income 204 236 447 ----- ----- ----- Total income 429 464 907 ----- ----- ----- Expenses - staff costs 139 149 301 - other 74 79 163 ----- ----- ----- 213 228 464 ----- ----- ----- Contribution before provisions 216 236 443 Net release of provisions 3 8 11 ----- ----- ----- Contribution 219 244 454 ----- ----- ----- Â£bn Â£bn Â£bn Total assets 14.0 13.8 13.4 Investment management assets - excluding deposits 21.6 21.3 20.5 Customer deposits 29.7 28.9 29.1 Weighted risk assets 8.7 8.9 8.4 * prior periods have been restated following the transfer of certain activities to Manufacturing. Wealth Management comprises Coutts Group, Adam & Company, The Royal Bank of Scotland International, The Royal Bank of Scotland Private Banking, NatWest Offshore and NatWest Private Banking. Following the sale in September 2002 of a 50% interest, NatWest Stockbrokers now operates as a 50:50 joint venture with TD Waterhouse. The Miami-based private banking operations of Coutts Group were sold to Santander Central Hispano in July 2003. Contribution was Â£219 million, Â£25 million or 10% lower than the first half of 2002, in part due to the sale of NatWest Stockbrokers in September 2002 which had contributed Â£15 million of income and Â£12 million of costs in the first half of 2002. Total income was down by 8% or Â£35 million to Â£429 million reflecting the effect of low interest rates and difficult stock market conditions. Net interest income declined by 1% or Â£3 million to Â£225 million. Growth in banking volumes was negated by the effect of lower interest rates. Non-interest income declined by 14% or Â£32 million to Â£204 million. The reduction reflects the continuing impact of lower equity markets on fees and commissions. Investment management assets increased to Â£21.6 billion. Expenses were down by 7% or Â£15 million to Â£213 million reflecting tight cost control. There was a net release of provisions of Â£3 million in the first half of 2003, against a net release of Â£8 million in the first half of 2002, reflecting recoveries in both periods. THE ROYAL BANK OF SCOTLAND GROUP plc DIRECT LINE GROUP First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Earned premiums 1,359 1,111 2,383 Reinsurers' share (210) (226) (489) -------- ------- -------- Insurance premium income 1,149 885 1,894 Other income 132 104 245 -------- ------- -------- Total income 1,281 989 2,139 -------- ------- -------- Expenses - staff costs 96 90 178 - other 147 107 256 ------- ------- ------- 243 197 434 ------- ------- ------- Gross claims 1,002 787 1,693 Reinsurers' share (166) (148) (343) ------- ------- -------- Net claims 836 639 1,350 ------- ------- ------- Contribution 202 153 355 ------- ------- ------- In-force policies (000) - motor: UK 4,861 4,376 4,668 - motor: International 1,395 782 1,224 - home: UK 1,647 1,552 1,587 Combined operating ratio - UK (%) 89.5 89.1 89.4 Insurance reserves - UK (Â£m) 2,120 1,787 1,946 Direct Line Group sells and underwrites retail and wholesale insurance on the telephone and the internet. The Retail Division sells general insurance and motor breakdown services direct to the customer and UKI Partnerships 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. In June 2003, RBS Group announced the acquisition of Churchill Insurance Group PLC. The transaction, which has received clearance from the OFT but is still subject to FSA approval, is expected to be completed by the fourth quarter of 2003. Contribution increased over the first half of 2002 by 32% or Â£49 million to Â£202 million. Total income was up 30% or Â£292 million to Â£1,281 million. After reinsurance, insurance premium income was up 30% or Â£264 million to Â£1,149 million, reflecting strong growth in the customer base. In the six months to 30 June 2003, the number of UK in-force motor insurance policies increased by 193,000, while the number of UK in-force home insurance policies increased by 60,000. The number of international in-force motor policies increased by 171,000 since December 2002. Other income increased by 27% or Â£28 million to Â£132 million with growth in customer volumes partially offset by the effect of lower interest rates. Expenses increased by 23% or Â£46 million to Â£243 million to support the growth in business. Net claims, after reinsurance, increased by 31% or Â£197 million to Â£836 million, mainly as a result of higher business volumes. THE ROYAL BANK OF SCOTLAND GROUP plc ULSTER BANK First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Net interest income 190 165 339 Non-interest income 91 92 181 ------ ------ ------ Total income 281 257 520 ------ ------ ------ Expenses - staff costs 79 69 145 - other 53 52 109 ------ ------ ------ 132 121 254 ------ ------ ------ Contribution before provisions 149 136 266 Provisions 18 11 22 ------ ------ ------ Contribution 131 125 244 ------ ------ ------ Â£bn Â£bn Â£bn Total assets 14.2 11.6 12.7 Loans and advances to customers - gross 10.4 8.3 9.1 Customer deposits 9.0 8.1 8.8 Weighted risk assets 10.3 8.4 9.0 Average exchange rate - â‚¬/Â£ 1.460 1.609 1.591 Spot exchange rate - â‚¬/Â£ 1.437 1.543 1.536 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. Contribution increased over the first half of 2002 by 5% or Â£6 million to Â£131 million with exchange rate movements offsetting less favourable market conditions in treasury and stockbroking. Total income increased by 9% or Â£24 million to Â£281 million reflecting volume growth and the positive effect of exchange rate movements which more than offset reduced benefit of interest-free funds due to lower interest rates. Net interest income rose by 15% or Â£25 million to Â£190 million, reflecting strong growth in both average customer lending and deposits of the banking business. These increased by 23% or Â£1.8 billion, to Â£9.5 billion, and by 14% or Â£1.1 billion, to Â£8.7 billion respectively. The net interest margin fell slightly following reductions in both the UK base rate and the European Central Bank rate. The number of customers increased since December 2002 by 7,000. Non-interest income fell by Â£1 million to Â£91 million. Good growth in banking and card fee income was masked by lower levels of activity in treasury reflecting difficult trading conditions. Depressed equity markets adversely affected brokerage fees. Expenses increased by 9% or Â£11 million to Â£132 million, reflecting the annual pay award, and were adversely affected by exchange rate movements. The charge for provisions for bad debts was up Â£7 million to Â£18 million reflecting growth in lending and a slight deterioration in asset quality. THE ROYAL BANK OF SCOTLAND GROUP plc CITIZENS First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Net interest income 638 640 1,248 Non-interest income 271 236 468 ------- ------- ------- Total income 909 876 1,716 ------- ------- ------- Expenses - staff costs 254 243 485 - other 186 198 370 ------- ------- ------- 440 441 855 ------- ------- ------- Contribution before provisions 469 435 861 Provisions 44 51 95 ------- ------- ------- Contribution 425 384 766 ------- ------- ------- $bn $bn $bn Total assets 68.2 54.3 61.1 Loans and advances to customers - gross 37.5 27.1 31.4 Customer deposits 57.5 44.4 51.1 Weighted risk assets 44.1 36.5 38.8 Average exchange rate - US$/Â£ 1.611 1.445 1.503 Spot exchange rate - US$/Â£ 1.650 1.528 1.613 Citizens is engaged in retail and corporate banking activities through its branch network in the states of Rhode Island, Connecticut, Massachusetts, New Hampshire, Pennsylvania, Delaware and New Jersey. Citizens is the fifteenth largest commercial bank in the US based on deposits. In January 2003, Citizens completed the acquisition of Commonwealth Bancorp, Inc. of Pennsylvania, and in July 2003, completed the acquisition of Port Financial Corp., the holding company for CambridgePort Bank, a Massachusetts savings bank. Also in July 2003, Citizens announced the acquisition of Community Bancorp, Inc., Massachusetts, the holding company for Community National Bank. The transaction is subject to Community Bancorp, Inc. shareholder and US regulatory approvals and is expected to be completed by the end of 2003. Contribution increased over the first half of 2002 by 11% or Â£41 million to Â£425 million; in US dollars, contribution increased by 23% or $130 million to $685 million. Total income was up 16% or $200 million to $1,465 million. Net interest income increased by 11% or $104 million to $1,029 million. Excluding the acquisitions, net interest income was up 7% or $62 million (Â£38 million), reflecting strong organic growth in personal loans and deposits. Excluding the acquisitions, average loans were up 25% or $6.7 billion and average deposits were up 22% or $9.4 billion. The benefit of this growth was partially offset by a narrowing interest margin due to reductions in US interest rates. THE ROYAL BANK OF SCOTLAND GROUP plc CITIZENS (continued) Non-interest income rose by 28% or $96 million to $436 million. Excluding the acquisitions, non-interest income was up 25% or $85 million (Â£52 million), as a result of growth in banking service charges and securities gains. Expenses increased by 11% or $72 million to $709 million. Excluding the acquisitions, expenses increased by 7% or $45 million (Â£29 million), to support higher business volumes and expansion of Citizens' supermarket banking programme. Provisions were down $2 million from $73 million to $71 million. Excluding the acquisitions, provisions were $4 million (Â£3 million), or 5%, lower than the first half of 2002. In the six months ended 30 June 2003, Citizens increased its personal customer base by 237,000 accounts and its business customers by 18,000 due to growth through both traditional and supermarket branches, and the acquisition of Commonwealth Bancorp. THE ROYAL BANK OF SCOTLAND GROUP plc CENTRAL ITEMS First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Funding costs 85 113 215 Central department costs - staff costs 56 51 108 - other 69 48 102 Other corporate items - net 97 56 162 ------ ------ ------ Total Central items 307 268 587 ------ ------ ------ The Centre comprises group and corporate functions, such as human resources and finance, which provide services to the operating divisions. Total Central items increased by Â£39 million to Â£307 million, compared with the first half of 2002. Funding costs at Â£85 million, were 25% or Â£28 million lower partly due to the benefit of capital raising undertaken in the first half of the year. Departmental and other costs at Â£222 million were broadly in line with the second half of 2002. THE ROYAL BANK OF SCOTLAND GROUP plc AVERAGE BALANCE SHEET First half 2003 First half 2002 Average Average balance Interest Rate balance Interest Rate Assets Â£m Â£m % Â£m Â£m % Treasury and other eligible bills UK 1,656 27 3.3 935 9 1.9 Overseas - - - 271 2 1.5 Loans and advances to banks UK 13,212 230 3.5 13,733 254 3.7 Overseas 9,406 107 2.3 10,767 171 3.2 Loans and advances to customers UK 166,743 4,671 5.6 150,028 4,507 6.0 Overseas 40,023 1,020 5.1 34,697 958 5.5 Debt securities UK 22,683 382 3.4 16,919 335 4.0 Overseas 18,160 413 4.5 18,750 472 5.0 ---------- -------- --------- -------- Interest-earning assets - banking business UK 204,294 5,310 5.2 181,615 5,105 5.6 Overseas 67,589 1,540 4.6 64,485 1,603 5.0 ----------- -------- ---------- ------- 271,883 6,850 5.0 246,100 6,708 5.5 -------- ------- - trading business 91,946 75,941 ----------- ---------- Total interest-earning assets 363,829 322,041 Non-interest-earning assets 67,300 65,188 ----------- ----------- Total assets 431,129 387,229 ----------- ----------- Percentage of assets applicable to Overseas operations 32.0% 31.7% ----------- ----------- Liabilities Deposits by banks UK 26,515 338 2.5 19,112 253 2.6 Overseas 9,819 110 2.2 10,496 129 2.5 Customer accounts UK 130,902 1,513 2.3 118,123 1,499 2.5 Overseas 40,953 366 1.8 34,940 413 2.4 Debt securities in issue UK 29,034 495 3.4 24,096 470 3.9 Overseas 9,674 64 1.3 9,032 129 2.9 Loan capital UK 14,435 228 3.2 12,847 322 5.0 Overseas 156 8 10.3 173 9 10.4 Internal funding of trading business (22,218) (297) 2.7 (22,075) (389) 3.5 ----------- ------- ---------- ------- Interest-bearing liabilities - banking business UK 180,767 2,292 2.5 153,317 2,168 2.8 Overseas 58,503 533 1.9 53,427 667 2.5 ----------- ------- ---------- ------- 239,270 2,825 2.3 206,744 2,835 2.8 -------- ------- - trading business 88,778 72,095 ----------- ----------- Total interest-bearing liabilities 328,048 278,839 Non-interest-bearing liabilities - demand deposits 24,130 28,309 - other liabilities 51,326 53,207 Shareholders' funds 27,625 26,874 ----------- ----------- Total liabilities and shareholders' funds 431,129 387,229 ----------- ----------- Percentage of liabilities applicable to Overseas operations 31.1% 30.2% ----------- ----------- 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 First half 2003 2002 Average Average rate rate % % The Group's base rate 3.8 4.0 London inter-bank three month offered rates: Sterling 3.7 4.1 Eurodollar 1.3 1.9 Euro 2.5 3.4 Yields, spreads and margins of the banking business: Gross yield Group 5.0 5.5 UK 5.2 5.6 Overseas 4.6 5.0 Interest spread Group 2.7 2.7 UK 2.7 2.8 Overseas 2.7 2.5 Net interest margin Group 3.0 3.1 UK 3.0 3.2 Overseas 3.0 2.9 First half First half Full year 2003 2002 2002 % % % Gross yield on interest-earning assets of banking business 5.0 5.5 5.4 Cost of interest-bearing liabilities of banking business (2.3) (2.8) (2.7) ----- ----- ----- Interest spread of banking business 2.7 2.7 2.7 Benefit from interest-free funds 0.3 0.4 0.4 ----- ----- ----- Net interest margin of banking business 3.0 3.1 3.1 ----- ----- ----- Group Interest spread for the Group as a whole was unchanged at 2.7%. Interest-free balances fell by over Â£6 billion partly due to the outcome of the Competition Commission inquiry into SME banking and this together with the lower interest rate environment contributed to the reduction in the benefit of interest-free funds from 0.4% to 0.3% giving a decline in net interest margin from 3.1% to 3.0%. UK While individual product margins remained stable, a slightly greater proportion of relatively lower margin mortgage business has resulted in a reduction in spread versus the first half of 2002, although a spread of 2.7% is consistent with the second half of 2002. The reduced benefit of interest-free funds reflects the rate and volume impact on interest-free funds described above. Overseas Although asset spreads have tightened in US, overall mix and volume improvements elsewhere have resulted in an increased overseas spread from 2.5% to 2.7%. Lower interest rates led to a reduction in the benefit from interest-free funds. THE ROYAL BANK OF SCOTLAND GROUP plc STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 JUNE 2003 (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 1985. Full year First half First half 2002 2003 2002 (Audited) Â£m Â£m Â£m Interest receivable 6,850 6,708 13,561 Interest payable 2,825 2,835 5,712 -------- -------- -------- Net interest income 4,025 3,873 7,849 -------- -------- -------- Dividend income 30 29 58 Fees and commissions receivable 2,719 2,609 5,308 Fees and commissions payable (554) (481) (965) Dealing profits 985 724 1,462 Other operating income 726 543 1,209 -------- -------- -------- 3,906 3,424 7,072 General insurance - earned premiums 1,359 1,111 2,383 - reinsurance (210) (226) (489) -------- -------- -------- Non-interest income 5,055 4,309 8,966 -------- -------- --------- Total income 9,080 8,182 16,815 -------- -------- --------- Administrative expenses - staff costs* 2,238 2,192 4,472 - premises and equipment* 520 485 1,006 - other* 1,026 1,096 2,253 Depreciation and amortisation - tangible fixed assets* 449 428 895 - goodwill 373 365 731 ------- ------- -------- Operating expenses 4,606 4,566 9,357 ------- ------- -------- Profit before other operating charges 4,474 3,616 7,458 General insurance - gross claims 1,002 787 1,693 - reinsurance (166) (148) (343) ------- ------- -------- Operating profit before provisions 3,638 2,977 6,108 Provisions for bad and doubtful debts 746 611 1,286 Amounts written off fixed asset investments (4) 41 59 -------- -------- -------- Profit on ordinary activities before tax 2,896 2,325 4,763 -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited) (continued) Full year First half First half 2002 2003 2002 (Audited) Â£m Â£m Â£m Profit on ordinary activities before tax 2,896 2,325 4,763 Tax on profit on ordinary activities 927 781 1,556 -------- -------- -------- Profit on ordinary activities after tax 1,969 1,544 3,207 Minority interests (including non-equity) 87 49 133 -------- -------- -------- Profit after minority interests 1,882 1,495 3,074 Preference dividends 137 159 305 -------- -------- -------- 1,745 1,336 2,769 Additional Value Shares dividend - - 798 -------- -------- -------- Profit attributable to ordinary shareholders 1,745 1,336 1,971 Ordinary dividends 431 368 1,267 -------- -------- -------- Retained profit 1,314 968 704 -------- -------- -------- Basic earnings per ordinary share (Note 4) 60.0p 46.6p 68.4p -------- -------- -------- Adjusted earnings per ordinary share (Note 4) 76.5p 69.8p 144.1p -------- -------- -------- Diluted earnings per ordinary share (Note 4) 59.5p 46.0p 67.4p -------- -------- -------- * Integration costs included in operating expenses comprise: First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Staff costs 112 262 530 Premises and equipment 31 52 127 Other administrative expenses 38 146 298 Depreciation 1 1 2 ----- ----- ----- 182 461 957 ----- ----- ----- THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2003 (unaudited) 31 December 30 June 2002 30 June 2003 (Audited) 2002 Â£m Â£m Â£m Assets Cash and balances at central banks 3,268 3,481 3,037 Items in the course of collection from other banks 3,729 2,741 3,925 Treasury bills and other eligible bills 7,047 11,459 8,184 Loans and advances to banks 44,923 44,296 39,172 Loans and advances to customers 248,726 223,324 209,884 Debt securities 73,328 67,042 68,829 Equity shares 2,150 1,886 1,794 Interests in associated undertakings 91 94 110 Intangible fixed assets 12,514 12,697 12,981 Tangible fixed assets 11,638 10,485 9,136 Settlement balances 15,169 4,102 9,635 Other assets 19,026 16,929 16,435 Prepayments and accrued income 4,074 4,353 4,487 ----------- ----------- ----------- 445,683 402,889 387,609 Long-term assurance assets attributable to policyholders 3,462 9,111 9,530 ----------- ----------- ----------- Total assets 449,145 412,000 397,139 ----------- ----------- ----------- Liabilities Deposits by banks 62,039 54,720 47,015 Items in the course of transmission to other banks 1,367 1,258 1,942 Customer accounts 225,697 219,161 204,800 Debt securities in issue 40,156 33,938 32,451 Settlement balances and short positions 36,749 19,412 31,004 Other liabilities 22,343 20,754 17,986 Accruals and deferred income 8,399 8,626 8,156 Provisions for liabilities and charges - deferred taxation 1,909 1,834 1,672 - other provisions 293 330 306 Subordinated liabilities - dated loan capital 8,151 7,602 7,247 - undated loan capital including convertible debt 7,545 6,363 6,215 Minority interests - equity (23) (11) 32 - non-equity 2,444 1,850 1,383 Shareholders' funds - equity 25,496 23,545 23,743 - non-equity 3,118 3,507 3,657 ----------- ----------- ----------- 445,683 402,889 387,609 Long-term assurance liabilities attributable to policyholders 3,462 9,111 9,530 ----------- ----------- ----------- Total liabilities 449,145 412,000 397,139 ----------- ----------- ----------- Memorandum items Contingent liabilities and commitments 138,933 144,180 146,249 ----------- ----------- ----------- THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONSOLIDATED BALANCE SHEET This overview compares the balance sheets at 30 June 2003 and 31 December 2002. Total assets of Â£449.1 billion at 30 June 2003 were up Â£37.1 billion, 9%, compared with 31 December 2002, reflecting business growth. Treasury bills and other eligible bills decreased by Â£4.4 billion, 39%, to Â£7.0 billion reflecting liquidity management. Loans and advances to banks rose Â£0.6 billion, 1%, to Â£44.9 billion. Growth in bank placings, up Â£6.0 billion, 26% to Â£29.8 billion, was partially offset by decreased reverse repurchase agreements and stock borrowing ('reverse repos'), down Â£5.4 billion, 26%, to Â£15.1 billion, reflecting a switch to customer reverse repos. Loans and advances to customers were up Â£25.4 billion, 11%, to Â£248.7 billion. Within this, reverse repos increased by 39%, Â£8.5 billion to Â£30.4 billion. Excluding reverse repos, lending increased by Â£16.9 billion, 8% to Â£218.3 billion with growth reflected across all divisions. Debt securities increased by Â£6.3 billion, 9%, to Â£73.3 billion, principally relating to growth in Financial Markets. Intangible fixed assets declined by Â£0.2 billion, 1% to Â£12.5 billion, reflecting amortisation in the period and the effect of exchange rate movements, partially offset by goodwill arising on the acquisition of Commonwealth Bancorp, Inc. and Nordisk Renting AB. Tangible fixed assets were up Â£1.2 billion, 11% to Â£11.6 billion, primarily due to growth in operating lease assets. Settlement balances increased by Â£11.1 billion to Â£15.2 billion as a result of increased trading activity. Other assets rose by Â£2.1 billion, 12% to Â£19.0 billion, mainly due to growth in the mark-to-market value of trading derivatives. Long-term assurance assets and liabilities declined Â£5.6 billion, 62% to Â£3.5 billion, resulting from the transfer of the pension managed fund business of NatWest Life to another third party life company. Deposits by banks increased by Â£7.3 billion, 13% to Â£62.0 billion to fund business growth, with repurchase agreements and stock lending ('repos') up Â£0.5 billion, 3%, to Â£20.6 billion and inter-bank deposits up Â£6.8 billion, 20% to Â£41.4 billion. Customer accounts were up Â£6.5 billion, 3% at Â£225.7 billion. Within this, repos were down Â£5.5 billion, 22% to Â£19.6 billion. Excluding repos, deposits rose by Â£12.0 billion, 6%, to Â£206.1 billion with growth across all divisions. Debt securities in issue were up Â£6.2 billion, 18%, at Â£40.2 billion primarily to meet the Group's funding requirements. THE ROYAL BANK OF SCOTLAND GROUP plc OVERVIEW OF CONSOLIDATED BALANCE SHEET (continued) Short positions were up Â£7.2 billion, 44% to Â£23.6 billion to fund the growth in the Group's trading activities. Settlement balances rose by Â£10.1 billion to Â£13.1 billion as a result of increased trading activity. Other liabilities increased by Â£1.6 billion, 8% to Â£22.3 billion mainly due to growth in the mark-to-market value of trading derivatives. Subordinated liabilities were up Â£1.7 billion, 12% to Â£15.7 billion. This reflected the issue of Â£0.5 billion (â‚¬750 million) euro denominated dated loan capital, and Â£0.7 billion sterling denominated and Â£0.5 billion (US$850 million) US$ denominated, undated loan capital. Minority interests increased by Â£0.6 billion, 32%, to Â£2.4 billion, mainly reflecting the issue in May 2003 by a subsidiary of the Group of US$850 million (Â£0.5 billion) Series C non-cumulative trust preferred securities. Shareholders' funds were up Â£1.6 billion, 6% to Â£28.6 billion principally due to retentions of Â£1.3 billion and the issue of Â£0.6 billion of equity shares, mainly in respect of the scrip dividend, partly offset by the redemption of Â£0.4 billion non-equity shares in January 2003. THE ROYAL BANK OF SCOTLAND GROUP plc STATEMENT OF CONSOLIDATED TOTAL RECOGNISED GAINS AND LOSSES FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited) Full year First half First half 2002 2003 2002 (Audited) Â£m Â£m Â£m Profit attributable to ordinary shareholders 1,745 1,336 1,971 Currency translation adjustments and other movements 47 13 36 Revaluation of premises - - (33) ------- ------- ------- Total recognised gains in the period 1,792 1,349 1,974 Prior year adjustment arising from the implementation of Financial Reporting Standard 19 'Deferred Tax' - (117) (117) ------- ------- ------- Total recognised gains 1,792 1,232 1,857 ------- ------- ------- RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited) Full year First half First half 2002 2003 2002 (Audited) Â£m Â£m Â£m Profit attributable to ordinary shareholders 1,745 1,336 1,971 Ordinary dividends (431) (368) (1,267) -------- -------- -------- Retained profit for the period 1,314 968 704 Issue of ordinary shares 555 481 560 Redemption of preference shares (364) (600) (600) Goodwill previously written off to reserves 40 - - Other recognised gains 47 13 3 Currency translation adjustment on share premium account (30) (130) (283) -------- -------- -------- Net increase in shareholders' funds 1,562 732 384 Opening shareholders' funds 27,052 26,668 26,668 --------- --------- --------- Closing shareholders' funds 28,614 27,400 27,052 --------- --------- --------- THE ROYAL BANK OF SCOTLAND GROUP plc CONSOLIDATED CASH FLOW STATEMENT FOR SIX MONTHS ENDED 30 JUNE 2003 (unaudited) Full year First half First half 2002 2003 2002 (Audited) Â£m Â£m Â£m Net cash inflow from operating activities (note 10) 14,428 4,597 13,737 --------- ------- --------- Dividends received from associated undertakings 1 - 1 ------- ------- ------- Returns on investments and servicing of finance Preference dividends paid (140) (175) (317) Additional Value Shares dividend paid - - (798) Dividends paid to minority shareholders in subsidiary undertakings (60) (22) (112) Interest paid on subordinated liabilities (322) (313) (674) ------- ------- --------- Net cash outflow from returns on investments and servicing of finance (522) (510) (1,901) ------- ------- --------- Taxation UK tax paid (359) (349) (833) Overseas tax paid (233) (142) (274) ------- ------- --------- Net cash outflow from taxation (592) (491) (1,107) ------- ------- --------- Capital expenditure and financial investment Purchase of investment securities (24,343) (13,957) (32,701) Sale and maturity of investment securities 20,775 11,957 26,072 Purchase of tangible fixed assets (1,533) (1,344) (3,367) Sale of tangible fixed assets 395 615 811 ---------- ---------- ---------- Net cash outflow from capital expenditure and financial investment (4,706) (2,729) (9,185) ---------- ---------- ---------- Acquisitions and disposals Purchases of businesses and subsidiary undertakings (net of cash acquired) (318) (173) (308) Investment in associated undertakings (3) (2) (2) Sale of subsidiary and associated undertakings (net of cash sold) 105 - 29 ------- -------- -------- Net cash outflow from acquisitions and disposals (216) (175) (281) ------- -------- -------- Ordinary equity dividends paid (396) (381) (729) -------- -------- --------- Net cash inflow before financing 7,997 311 535 -------- -------- --------- Financing Proceeds from issue of ordinary share capital 9 22 85 Proceeds from issue of trust preferred securities 512 802 1,242 Redemption of preference share capital (364) (600) (600) Issue of subordinated liabilities 1,731 1,167 2,157 Repayment of subordinated liabilities (40) (40) (202) Increase in minority interests 19 21 29 -------- -------- -------- Net cash inflow from financing 1,867 1,372 2,711 -------- -------- -------- Increase in cash 9,864 1,683 3,246 -------- -------- --------- 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 93 to 95 of the 2002 Report and Accounts. 2. Provisions for bad and doubtful debts Operating profit is stated after charging provisions for bad and doubtful debts of Â£746 million (30 June 2002 - Â£611 million). The balance sheet provisions for bad and doubtful debts increased in the six months to 30 June 2003 from Â£3,927 million to Â£3,971 million, and the movements thereon were: 2003 2002 Specific General Total Total Â£m Â£m Â£m Â£m At 1 January 3,330 597 3,927 3,653 Currency translation and other adjustments (8) 2 (6) (18) Acquisitions 10 - 10 - Amounts written off (740) - (740) (424) Recoveries of amounts previously written off 34 - 34 34 Charge to profit and loss account 741 5 746 611 -------- -------- -------- -------- At 30 June 3,367 604 3,971 3,856 -------- -------- -------- -------- 3. Taxation The charge for taxation is based on a UK corporation tax rate of 30% and comprises: First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Tax on profit before goodwill amortisation and integration costs 1,001 942 1,863 Tax relief on goodwill amortisation and integration costs (74) (161) (307) ------- ------- ------- 927 781 1,556 ------- ------- ------- The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation tax rate of 30% as follows: First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Expected tax charge 869 698 1,429 Goodwill amortisation 95 92 190 Contributions to employee share schemes (4) (3) (40) Non-deductible items 3 5 111 Non-taxable items (34) (3) (70) Taxable foreign exchange movements (2) - 4 Foreign profits taxed at other rates 6 (7) 3 Unutilised losses brought forward and carried forward (1) (1) - Adjustments in respect of prior periods (5) - (71) -------- -------- -------- Actual tax charge 927 781 1,556 -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 4. Earnings per share Earnings per share have been calculated based on the following: First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Earnings Profit attributable to ordinary shareholders 1,745 1,336 1,971 ------- ------- ------- Number of shares - millions Weighted average number of ordinary shares In issue during the period 2,908 2,866 2,881 Effect of dilutive share options and convertible non-equity shares 26 39 43 -------- -------- -------- Diluted weighted average number of ordinary shares during the period 2,934 2,905 2,924 -------- -------- -------- Basic earnings per share 60.0p 46.6p 68.4p AVS dividend - - 27.7p -------- -------- -------- 60.0p 46.6p 96.1p Goodwill amortisation 12.2p 12.1p 24.2p Integration costs 4.3p 11.1p 23.8p -------- -------- --------- Adjusted earnings per share 76.5p 69.8p 144.1p -------- -------- --------- Diluted earnings per share 59.5p 46.0p 67.4p -------- -------- -------- 5. Interim dividend The directors have declared an interim dividend of 14.6p per share on the ordinary shares. The interim dividend will be paid on 10 October 2003 to shareholders registered on 15 August 2003. 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 2003 2002 2002 Â£m Â£m Â£m Reverse repurchase agreements and stock borrowing Loans and advances to banks 15,140 20,578 16,166 Loans and advances to customers 30,443 21,941 19,582 Repurchase agreements and stock lending Deposits by banks 20,644 20,097 14,748 Customer accounts 19,595 25,060 19,401 THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 7. Contingent liabilities and commitments 30 June 31 December 30 June 2003 2002 2002 Â£m Â£m Â£m Contingent liabilities Acceptances and endorsements 2,268 2,407 2,246 Guarantees and assets pledged as collateral security 5,683 5,200 4,970 Other contingent liabilities 8,232 7,981 5,829 ---------- ---------- ---------- 16,183 15,588 13,045 ---------- ---------- ---------- Commitments Documentary credits and other short-term trade related transactions 244 655 2,098 Undrawn formal standby facilities, credit lines and other commitments to lend 121,515 127,429 130,761 Other commitments 991 508 345 ----------- ----------- ----------- 122,750 128,592 133,204 ----------- ----------- ----------- Total contingent liabilities and commitments 138,933 144,180 146,249 ----------- ----------- ----------- 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 2003 2002 2002 Â£m Â£m Â£m Exchange rate contracts 20,941 17,262 21,134 Interest rate contracts 76,883 64,460 37,732 Equity and commodity contracts 924 810 228 --------- --------- --------- 98,748 82,532 59,094 --------- --------- --------- 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 2003 2002 2002 Â£bn Â£bn Â£bn Exchange rate contracts 1,241.8 899.0 883.4 Interest rate contracts 5,072.2 3,922.4 3,817.4 Equity and commodity contracts 28.3 23.5 16.2 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 2003 31 December 2002 30 June 2002 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 20,905 22,392 17,217 18,625 21,110 21,799 Interest rate contracts 76,364 76,556 64,072 64,420 37,366 37,715 Equity and commodity contracts 867 599 733 496 259 268 ---------- ---------- ---------- ---------- --------- ---------- 98,136 99,547 82,022 83,541 58,735 59,782 Netting (83,374) (83,374) (68,812) (68,812) (47,417) (47,417) ---------- ---------- ---------- ---------- --------- ---------- 14,762 16,173 13,210 14,729 11,318 12,365 ---------- ---------- ---------- ---------- --------- ---------- 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 2003 2002 2002 Â£bn Â£bn Â£bn Exchange rate contracts 16.3 14.1 13.8 Interest rate contracts 127.6 113.7 115.2 Equity and commodity contracts 1.7 2.2 0.9 THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 9. Analysis of consolidated shareholders' funds First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Called-up share capital At beginning of period 754 893 893 Shares issued during the period 10 7 11 Preference shares redeemed during the period - (150) (150) -------- -------- -------- At end of period 764 750 754 -------- -------- -------- Share premium account At beginning of period 7,608 7,465 7,465 Currency translation adjustments (30) (130) (283) Shares issued during the period 557 485 685 Preference shares redeemed during the period - (268) (268) Other movements 6 6 9 -------- -------- -------- At end of period 8,141 7,558 7,608 -------- -------- -------- Merger reserve At beginning of period 11,455 12,029 12,029 Transfer to profit and loss account (287) (287) (574) --------- --------- --------- At end of period 11,168 11,742 11,455 --------- --------- --------- Revaluation reserve At beginning of period 80 113 113 Revaluation of premises - - (33) -------- -------- -------- At end of period 80 113 80 -------- -------- -------- Other reserves At beginning of period 387 212 212 Redemption of preference shares - 150 150 Transfer of increase in value of long-term assurance business 10 3 25 --------- --------- ------ At end of period 397 365 387 --------- --------- ------ Profit and loss account At beginning of period 6,768 5,956 5,956 Currency translation adjustments and other movements 41 7 27 Retention for the period 1,314 968 704 Employee share option payments (12) (11) (136) Redemption of preference shares (364) (332) (332) Goodwill previously written off 40 - - Transfer from merger reserve 287 287 574 Transfer of increase in value of long-term assurance business (10) (3) (25) -------- -------- -------- At end of period 8,064 6,872 6,768 -------- -------- -------- Closing shareholders' funds 28,614 27,400 27,052 ---------- ---------- ---------- THE ROYAL BANK OF SCOTLAND GROUP plc NOTES (continued) 10. Analysis of net cash inflow from operating activities First half First half Full year 2003 2002 2002 Â£m Â£m Â£m Net cash inflow from trading activities 3,920 3,328 7,459 Increase in loans and advances to banks and (14,452) (18,514) (35,426) customers Increase in deposits by banks and customers 11,677 12,723 33,895 (Increase)/decrease in securities (2,901) (3,864) 1,799 Increase in debt securities in issue 6,218 1,782 3,269 Settlement balances and short positions 6,270 6,541 482 Increase in other assets and liabilities 3,696 2,601 2,259 --------- --------- --------- Net cash inflow from operating activities 14,428 4,597 13,737 --------- --------- --------- 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, after reviewing the actual, threatened and known potential claims 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 2002 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 section 237(2) or (3) of the Act. 13. Auditors' review The interim results have been reviewed by the Group's auditors, Deloitte & Touche LLP, and their review report is set out on page 47. 14. Form 6-K A report on Form 6-K will be filed with the Securities and Exchange Commission in the United States. The profit and loss account presented in the Form 6-K will be the statutory profit and loss account as set out on page 25 of this announcement, which includes goodwill amortisation and integration costs in the captions prescribed by the Companies Act 1985. The Financial Review included in the Form 6-K will be based on the statutory profit and loss account. 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) by geographical area and type of customer. 30 June 31 December 30 June 2003 2002 2002 Â£m Â£m Â£m UK Central and local government 627 1,521 1,300 Manufacturing 7,167 7,386 6,730 Construction 4,055 3,468 3,235 Finance 13,508 12,396 15,208 Service industries and business activities 28,717 26,022 27,177 Agriculture, forestry and fishing 2,756 2,463 2,511 Property 18,906 15,939 13,558 Individuals - home mortgages 44,240 42,101 39,501 - other 23,793 22,255 21,366 Finance leases and instalment credit 11,577 11,723 11,624 ---------- ----------- ----------- 155,346 145,274 142,210 Overseas residents 27,539 23,657 24,737 ---------- ---------- ----------- Total UK offices 182,885 168,931 166,947 ---------- ----------- ----------- Overseas US 49,766 41,008 31,646 Rest of the World 20,039 17,305 15,141 ----------- ---------- ----------- Total overseas offices 69,805 58,313 46,787 ----------- ---------- ----------- Loans and advances to customers - gross 252,690 227,244 213,734 Provisions for bad and doubtful debts (3,964) (3,920) (3,850) ----------- ---------- ----------- Total loans and advances to customers 248,726 223,324 209,884 ----------- ----------- ----------- Reverse repurchase agreements included in the analysis above: 30 June 31 December 30 June 2003 2002 2002 Â£m Â£m Â£m Central and local government 358 1,000 1,150 Finance 8,436 5,186 8,650 --------- --------- --------- 8,794 6,186 9,800 Overseas residents 3,310 1,287 1,505 --------- --------- --------- Total UK offices 12,104 7,473 11,305 Overseas US 18,038 14,184 8,093 Rest of the World 301 284 184 --------- --------- --------- Total 30,443 21,941 19,582 --------- ---------- --------- Loans and advances to customers excluding reverse repurchase agreements - net 218,283 201,383 190,302 ----------- ----------- ----------- 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£451.4 billion (31 December 2002 - Â£414.4 billion; 30 June 2002 - Â£399.4 billion). None of these countries have experienced repayment difficulties which have required refinancing of outstanding debt. 30 June 31 December 30 June 2003 2002 2002 Â£m Â£m Â£m US 14,504 11,658 7,986 Germany 10,648 10,464 9,424 France 7,242 5,971 4,563 Netherlands 7,090 6,318 4,996 Cayman Islands 6,611 6,897 6,333 Japan 5,250 3,156 * Spain 3,997 * 3,476 Italy 3,978 3,867 * Canada 3,426 * * * less than 0.75% of Group total assets (including acceptances). Selected country exposures The table below details exposures to countries that are sometimes considered as having a higher credit and foreign exchange risk. 30 June 2003 31 December 2002 30 June 2002 Non-bank Non-bank Non-bank Bank Total Bank Total Bank Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Argentina 29 11 40 30 15 45 35 16 51 Brazil - 10 10 - 14 14 42 22 64 Turkey 7 83 90 25 65 90 29 103 132 Venezuela - 108 108 - 115 115 - 111 111 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 2003 2002 2002 Â£m Â£m Â£m Loans accounted for on a non-accrual basis (2): Domestic 3,404 3,077 3,085 Foreign 1,177 1,098 897 -------- -------- -------- 4,581 4,175 3,982 -------- -------- -------- Accruing loans which are contractually overdue 90 days or more as to principal or interest (3): Domestic 306 363 494 Foreign 61 129 145 -------- -------- -------- 367 492 639 -------- -------- -------- Loans not included above which are 'troubled debt restructurings' as defined by the SEC: Domestic 96 144 78 Foreign 39 60 92 -------- -------- -------- 135 204 170 -------- -------- -------- Total risk elements in lending 5,083 4,871 4,791 -------- -------- -------- Potential problem loans (4) Domestic 871 639 897 Foreign 104 544 333 -------- -------- -------- 975 1,183 1,230 -------- -------- -------- Closing provisions for bad and doubtful debts as a % of total risk elements in lending 78% 81% 80% -------- -------- -------- Closing provisions for bad and doubtful debts as a % of gross loans and advances to customers 1.57% 1.73% 1.80% -------- -------- -------- Risk elements in lending as a % of gross loans and advances to customers 2.01% 2.14% 2.24% --------- --------- --------- 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 2003 Full year 2002 First half 2002 Specific General Specific General Specific General Â£m Â£m Â£m Â£m Â£m Â£m Provisions at beginning of period Domestic 2,232 349 2,123 344 2,123 344 Foreign 1,098 248 916 270 916 270 -------- ------- -------- -------- -------- -------- 3,330 597 3,039 614 3,039 614 -------- ------- -------- -------- -------- -------- Currency translation and other adjustments Domestic 4 - 11 (15) 7 3 Foreign (12) 2 (56) (2) (23) (5) ------- ------- ------- -------- -------- -------- (8) 2 (45) (17) (16) (2) ------- ------- ------- -------- -------- -------- Acquisitions Domestic - - 11 - - - Foreign 10 - 12 - - - ------- -------- ------- --------- -------- -------- 10 - 23 - - - ------- ------- ------- -------- -------- -------- Amounts written-off Domestic (506) - (743) - (313) - Foreign (234) - (293) - (111) - ------- ------- ------- -------- -------- -------- (740) - (1,036) - (424) - ------- ------- ------- -------- -------- -------- Recoveries of amounts written-off in previous periods Domestic 15 - 37 - 20 - Foreign 19 - 26 - 14 - ------- ------- ------- -------- -------- -------- 34 - 63 - 34 - ------- ------- ------- -------- -------- -------- Charged to profit and loss account Domestic 482 14 793 20 474 1 Foreign 259 (9) 493 (20) 135 1 ------- ------- ------- -------- -------- -------- 741 5 1,286 - 609 2 ------- ------- ------- -------- -------- -------- Provisions at end of period (2) Domestic 2,227 363 2,232 349 2,311 348 Foreign 1,140 241 1,098 248 931 266 -------- ------- -------- -------- -------- -------- 3,367 604 3,330 597 3,242 614 -------- ------- -------- -------- -------- -------- THE ROYAL BANK OF SCOTLAND GROUP plc ASSET QUALITY (continued) Provisions for bad and doubtful debts (continued) 30 June 31 December 30 June 2003 2002 2002 Â£m Â£m Â£m Gross loans and advances to customers Domestic 155,346 145,274 142,210 Foreign 97,344 81,970 71,524 ----------- ----------- ----------- 252,690 227,244 213,734 ----------- ----------- ----------- Closing customer provisions as a % of gross loans and advances to customers (3) Domestic 1.67% 1.78% 1.87% Foreign 1.41% 1.63% 1.67% Total 1.57% 1.73% 1.80% Customer charge against profit (annualised) as a % of gross loans and advances to customers Domestic 0.64% 0.56% 0.67% Foreign 0.51% 0.58% 0.38% Total 0.59% 0.57% 0.57% 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£7 million (31 December 2002 - Â£7 million; 30 June 2002 - Â£6 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 trading and treasury 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 2003 11.5 12.8 8.0 10.8 2002 9.7 11.3 7.0 8.9 Treasury 2003 10.0 10.0 5.6 7.3 2002 4.1 4.8 3.6 4.1 The Group's VaR should be interpreted in light of the limitations of the methodologies used. These limitations include: â€¢ Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements which have not occurred in the historical window used in the calculations. â€¢ VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day. â€¢ VaR using a 95% confidence level does not reflect the extent of potential losses beyond that percentile. â€¢ The Group largely computes the VaR of the trading portfolios at the close of business and positions may change substantially during the course of the trading day. Controls are in place to limit the Group's intra-day exposure; such as the calculation of VaR for selected portfolios. These limitations and the nature of the VaR measure mean that the Group cannot guarantee that losses will not exceed the VaR amounts indicated nor that losses in excess of the VaR amounts will not occur more frequently than once in 20 business days. THE ROYAL BANK OF SCOTLAND GROUP plc REGULATORY RATIOS AND OTHER INFORMATION 30 June 31 December 30 June 2003 2002 2002 Capital base (Â£m) Ordinary shareholders' funds and minority interests 13,321 11,169 10,889 Preference shares and tax deductible securities 6,137 5,986 5,915 --------- ---------- ---------- Tier 1 capital 19,458 17,155 16,804 Tier 2 capital 14,941 13,271 12,644 Tier 3 capital - - 164 --------- ---------- ---------- 34,399 30,426 29,612 Less: investments in insurance companies, associated undertakings and other supervisory deductions (2,707) (3,146) (2,980) ---------- ---------- ---------- 31,692 27,280 26,632 ---------- ---------- ---------- Weighted risk assets (Â£m) Banking book - on-balance sheet 209,500 193,800 185,300 - off-balance sheet 34,200 28,700 29,700 Trading book 13,400 11,500 10,800 ----------- ----------- ----------- 257,100 234,000 225,800 ----------- ----------- ----------- Risk asset ratio - tier 1 7.6% 7.3% 7.4% - total 12.3% 11.7% 11.8% Share price Â£17.00 Â£14.88 Â£18.60 Number of shares in issue 2,942m 2,901m 2,888m Market capitalisation Â£50.0bn Â£43.2bn Â£53.7bn Net asset value per ordinary share Â£8.67 Â£8.12 Â£8.22 Employee numbers Corporate Banking and Financial Markets* 16,100 16,900 17,000 Retail Banking 30,000 30,100 29,500 Retail Direct 7,000 7,000 6,500 Manufacturing* 21,200 21,900 22,700 Wealth Management* 5,500 6,000 6,400 Direct Line Group 11,000 10,500 10,300 Ulster Bank 4,500 4,400 4,700 Citizens 13,800 13,300 12,700 Centre 1,700 1,700 1,700 ----------- ----------- ----------- Group total 110,800 111,800 111,500 ----------- ----------- Acquisitions in the six months ended 30 June 2003 (500) ----------- Underlying 110,300 ----------- * prior periods have been restated to reflect the transfer in the first half of 2003 of certain activities from Corporate Banking and Financial Markets and Wealth Management to Manufacturing. 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 which would result from the application of US generally accepted accounting principles ('US GAAP') instead of UK GAAP. First half First half Full year 2003 2002 2002 Consolidated statement of income Â£m Â£m Â£m Profit attributable to ordinary shareholders - UK GAAP 1,745 1,336 1,971 Adjustments in respect of: Acquisition accounting 22 - - Amortisation of goodwill 366 339 681 Property depreciation (12) (5) (18) Loan fees and costs (20) (47) (72) Pension costs (168) (42) (58) Long-term assurance business (13) (17) (37) Leasing (33) (33) (71) Derivatives and hedging (243) 104 770 Software development costs (123) 163 283 Tax effect on the above adjustments 160 (38) (261) Deferred taxation - (46) (80) ---------- ---------- ---------- Net income available for ordinary shareholders 1,681 1,714 3,108 - US GAAP ---------- ---------- ---------- Dividend per ordinary share - paid during the period 31.0p 27.0p 39.7p ---------- ---------- ---------- 30 June 31 December 30 June 2003 2002 2002 Consolidated shareholders' equity Â£m Â£m Â£m Shareholders' funds - UK GAAP 28,614 27,052 27,400 Adjustments in respect of: Acquisition accounting 440 418 418 Goodwill 1,867 1,541 1,199 Property revaluation and depreciation (289) (277) (297) Proposed dividend 431 899 368 Loan fees and costs (261) (241) (216) Pension costs 174 342 358 Recognition of pension scheme minimum liability (3,393) (3,568) - Long-term assurance business (134) (121) (101) Leasing (198) (165) (127) Available-for-sale securities 147 284 326 Derivatives and hedging 643 535 (5) Perpetual regulatory tier one securities 733 751 793 Software development costs 837 960 840 Tax effect on cumulative UK/US GAAP adjustments (301) (461) (238) Tax effect on other comprehensive income 900 1,013 7 Deferred taxation (34) (34) (97) ---------- ---------- --------- Shareholders' equity - US GAAP 30,176 28,928 30,628 ---------- ---------- --------- Total assets Total assets under US GAAP, which include 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' equity were Â£472 billion (31 December 2002 - Â£431 billion; 30 June 2002 - Â£417 billion). 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', 'outlook', 'optimistic', 'prospects' and similar expressions or variations on such expressions and sections such as 'Chairman's statement', 'Group Chief Executive's review' and 'Financial review'. 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 2003 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 14. 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. This report is made solely to the company in accordance with Bulletin 1999/4 issued by the Auditing Practices Board ('the Bulletin'). Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed. 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 the Bulletin 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 2003. Deloitte & Touche LLP Chartered Accountants Edinburgh 4 August 2003 THE ROYAL BANK OF SCOTLAND GROUP plc CONTACTS Fred Goodwin Group Chief Executive 020 7672 0008 0131 523 2033 Fred Watt Group Finance Director 020 7672 0008 0131 523 2028 Richard O'Connor Head of Investor Relations 020 7672 1758 5 August 2003 END This information is provided by RNS The company news service from the London Stock Exchange

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