RBS 2004 Annual Report Download - page 70

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Operating and financial review
Operating and financial review continued
2004 compared with 2003
Profit
Profit before tax, goodwill amortisation and integration costs
increased by 15% or £1,033 million, from £7,068 million to
£8,101 million. At constant exchange rates the increase was
18% or £1,278 million.
Profit before tax was up 14%, from £6,076 million to £6,917
million.
The Group made a number of acquisitions during 2004 which
had a bearing on the year's results. These included:
In January 2004, Ulster Bank completed the acquisition of First
Active plc, for a cash consideration of 887 million.
In March 2004, RBS completed the purchase of the credit card
business of People's Bank in the US.
In August 2004, Citizens completed the acquisition of Charter
One Financial, Inc. for a cash consideration of US$10.1 billion.
The Group has adopted Financial Reporting Standard 17
‘Retirement Benefits’ (“FRS 17”) – the standard that replaces
SSAP24 ‘Pension Costs’. The effect on prior years of adopting
FRS 17 is shown on page 139.
Total income
The Group achieved strong growth in income during 2004.
Total income was up 18% or £3,473 million to £22,754 million.
Excluding acquisitions and at constant exchange rates, total
income was up by 11%, £2,004 million.
Net interest income increased by 11% to £9,208 million and
represents 40% of total income (2003 – 43%). Excluding
acquisitions and at constant exchange rates, net interest
income was up 8%. Average loans and advances to customers
and average customer deposits grew by 19% and 10%
respectively.
Non-interest income increased by 23% to £13,546 million and
represents 60% of total income (2003 – 57%). Excluding
acquisitions and at constant exchange rates, non-interest
income was up 13%. There was good growth in transmission
income and other fees, up 17% while general insurance
premium income increased by 58%, reflecting organic growth
and the acquisition of Churchill in September 2003. Gross
income from rental assets grew by 18%, reflecting strong
growth in operating lease assets.
Net interest margin
The Group's net interest margin at 2.92% was in line with
expectations. Excluding the acquisition of First Active, the
Group's net interest margin was down 0.03% from 2.97% in
2003, principally as a result of strong organic growth in
mortgage lending and the increased funding cost of rental
assets, the income from which is included in other income.
Operating expenses
Operating expenses, excluding goodwill amortisation and
integration costs, rose by 13% to £9,662 million to support the
strong growth in business volumes. Excluding acquisitions and
at constant exchange rates, operating expenses were up by
9%, £739 million.
Cost:income ratio
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
improved further to 40.8% from 42.6%. Excluding Charter One,
the Group's cost:income ratio was 40.6%.
Net insurance claims
General insurance claims, after reinsurance, increased by 59%
to £3,480 million. Excluding Churchill, the increase was 20%,
consistent with volume growth and business mix.
Provisions
The profit and loss charge for bad and doubtful debts and
amounts written off fixed asset investments was £1,511 million
compared with £1,494 million in 2003. The charge for
provisions in 2004 represented 0.51% of gross loans and
advances to customers (excluding reverse repurchase
agreements), compared with 0.64% in 2003.
Credit quality
Credit quality remains strong with no material change during
2004 in the distribution by grade of the Group's total risk assets.
The ratio of risk elements in lending to gross loans and
advances to customers improved to 1.58% (2003 – 2.01%).
Risk elements in lending and potential problem loans
represented 1.66% of gross loans and advances to customers
(2003 – 2.24%).
Provision coverage of risk elements in lending and potential
problem loans improved to 73% (2003 – 68%).
Integration
Integration costs in 2004 were £269 million principally relating
to the integration of Churchill and the acquisitions by Citizens.
Earnings and dividends
Basic earnings per ordinary share increased by 79%, from
76.9p to 138.0p. The final dividend on the Additional Value
Shares (“AVS”) paid in December 2003 reduced earnings per
ordinary share for that year by 49.9p. Adjusting for this and for
goodwill amortisation and integration costs, earnings per
ordinary share increased by 10%, from 157.2p to 172.5p.
A final dividend of 41.2p per ordinary share is recommended,
making a total for the year of 58.0p per share, an increase of
15%. If approved, the final dividend will be paid on 3 June
2005 to shareholders registered on 11 March 2005. The total
dividend is covered 2.9 times by earnings before goodwill
amortisation and integration costs.