RBS 2004 Annual Report Download - page 71

section
01
Operating and
financial review
69
Annual Report and Accounts 2004
Operating and financial review
Balance sheet
Total assets were £583 billion at 31 December 2004, 28%
higher than total assets of £454 billion at 31 December 2003.
Lending to customers, excluding repurchase agreements and
stock borrowing (“reverse repos”), increased in 2004 by 28%
or £64.8 billion to £293.3 billion. Excluding acquisitions and
reverse repos, lending increased by 18%. Customer deposits,
excluding repurchase agreements and stock lending (“repos”),
grew in 2004 by 16% or £33.0 billion to £242.9 billion.
Excluding acquisitions and repos, deposits increased by 7%.
Although the adoption of FRS 17 has reduced shareholders'
funds by £3,220 million (2003 – £2,001 million), this has no
effect on the Group's regulatory capital at 31 December 2004.
Capital ratios at 31 December 2004 were 7.0% (tier 1) and
11.7% (total), against 7.4% (tier 1) and 11.8% (total) at 31
December 2003.
Profitability
The adjusted after-tax return on ordinary equity was stable at
20.1%. This is based on profit attributable to ordinary
shareholders before goodwill amortisation, integration costs
and in 2003 the AVS dividend, and average ordinary equity.
2003 compared with 2002
Profit
Profit before tax, goodwill amortisation and integration costs
increased by 8% or £528 million, from £6,540 million to £7,068
million.
Profit before tax was up 25%, from £4,852 million to £6,076 million.
Total income
The Group achieved strong growth in income during 2003.
Total income was up 13% or £2,265 million to £19,281 million.
Non-interest income accounted for 57% of total income.
Excluding acquisitions, total income rose by 10%.
Net interest income increased by 6% to £8,301 million and
represented 43% of total income (2002 – 46%). Average loans
and advances to customers and average customer deposits
grew by 12% and 8% respectively. The benefit of this growth
more than offset the impact on net interest income of the
Competition Commission inquiry into SME banking in the UK and
the lower interest rate environment in the UK and the US which
reduced income earned from deposits and investments.
Non-interest income increased by 20% to £10,980 million and
represented 57% of total income (2002 – 54%). Fees
receivable were up 8% with good growth in lending,
transmission and card related fees reflecting higher volumes.
General insurance premium income grew strongly, reflecting
volume growth in both motor and home insurance products,
and the acquisition of Churchill. In addition, volumes in
financial markets were up strongly in both the UK and the US
reflecting growth in customer-driven activity in interest rate
protection, mortgage securitisation and foreign exchange.
Income from rental assets grew by 17% to £1,088 million,
reflecting the growth in operating leases and investment
properties.
Net interest margin
The Group’s net interest margin at 2.97% was, in line with the
first half, down from 3.13% in 2002 due to a reduced benefit
from interest-free funds arising from the lower interest rate
environment, and the outcome of the Competition Commission
inquiry into SME banking.
Operating expenses
Operating expenses, excluding goodwill amortisation and
integration costs, rose by 10% to £8,524 million. Excluding
acquisitions, operating expenses were up 7% in support of
higher business volumes and 10% income growth.
Cost:income ratio
The strong growth in income together 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 42.6% from 44.2%.
Excluding the effect of acquisitions, the cost:income ratio
improved to 43.9%.
Net insurance claims
General insurance claims, after reinsurance, increased by 63%
to £2,195 million. Excluding Churchill, the increase was 29%,
consistent with volume growth in the component parts of the
insurance division.
Provisions
The profit and loss charge for bad debts and amounts written
off fixed asset investments was £1,494 million compared with
£1,345 million in 2002. The profit and loss charge is in line with
the growth in loans and advances.
Credit quality
There was no material change during the year 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 at 2.01% at 31 December 2003
showed an improving trend (31 December 2002 – 2.14%).
Risk elements in lending and potential problem loans represented
2.24% of gross loans and advances to customers compared
with 2.66% at 31 December 2002.
Integration
Integration costs in the year were £229 million, of which, £143
million related to the final elements of the NatWest integration
and £86 million related to other acquisitions, including Citizens’
acquisitions and Churchill.
All integration initiatives in relation to NatWest have been
implemented. The programme benefits, comprising £890
million annual revenue benefits and £1,440 million annual cost
savings, were fully implemented less than three years after the