RBS 2004 Annual Report Download - page 82

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Operating and financial review
Operating and financial review continued
Corporate Banking and Financial Markets
2004 2003 2002
£m £m £m
Net interest income excluding funding cost of rental assets 2,959 2,653 2,631
Funding cost of rental assets (414) (329) (282)
Net interest income 2,545 2,324 2,349
Fees and commissions receivable 1,723 1,537 1,394
Fees and commissions payable (277) (220) (157)
Dealing profits (before associated direct costs) 1,855 1,661 1,338
Income on rental assets 1,282 1,088 931
Other operating income 381 307 197
Non-interest income 4,964 4,373 3,703
Total income 7,509 6,697 6,052
Direct expenses
– staff costs 1,642 1,410 1,230
– other 412 394 375
– operating lease depreciation 610 518 461
2,664 2,322 2,066
Contribution before provisions 4,845 4,375 3,986
Provisions 580 755 725
Contribution 4,265 3,620 3,261
£bn £bn £bn
Total assets* 265.3 219.0 203.4
Loans and advances to customers – gross*
– banking book 114.9 99.3 92.1
– trading book 10.0 5.0 3.6
Rental assets 11.2 10.1 7.0
Customer deposits* 74.9 68.6 62.2
Weighted risk assets – banking 160.9 140.0 125.2
Weighted risk assets – trading 16.9 12.6 11.3
* excluding repos and reverse repos
2004 compared with 2003
Contribution increased by 18%, £645 million to £4,265 million
reflecting growth in all business areas.
Total income was up 12% or £812 million to £7,509 million.
Strong growth in all locations was partially masked by the
effect of stronger sterling on the translation of income from
Europe and North American businesses. At constant exchange
rates, income grew by 14% and contribution was up 20%.
Net interest income, excluding the cost of funding rental assets,
increased 12% or £306 million to £2,959 million. Average loans
and advances to customers of the banking business increased
by 10% or £9.5 billion to £103.8 billion. The second half of 2004
saw a modest recovery in large corporate lending. Average
customer deposits within the banking business increased by
8% or £5.0 billion to £66.0 billion. An improvement in margins
was achieved through strong growth in our UK mid-corporate
relationships.
Fees receivable rose by £186 million, 12% to £1,723 million
with growth driven by lending, structured finance and capital
markets activities. Fees payable, including brokerage, were up
£57 million to £277 million due to the greater volumes of
trading and structuring business.
Dealing profits, which is income (before associated direct
costs) arising from our role in providing customers with debt
and risk management products in interest rate, currency and
credit asset classes, rose by 12% to £1,855 million. Growth
was achieved across all our customer segments and product
classes with further diversification of dealing revenues in the
US to compensate for lower residential mortgage refinancing
volume than in 2003. The Group's trading value-at-risk (VaR)
remains modest and the average VaR was £10.8 million (2003
– £9.4 million).
The asset rental business, comprising operating lease assets
and investment properties continued to grow strongly. Rental
assets increased to £11.2 billion and income after deducting
funding costs and operating lease depreciation increased by
7%, £17 million to £258 million.
Other operating income also grew strongly, up £74 million or
24% to £381 million.
Direct expenses increased by 15% or £342 million to £2,664
million. Excluding operating lease depreciation, operating
expenses were up 14%, £250 million. This was mainly due to
the mix effect of faster growth in businesses with inherently
higher cost:income ratios, such as Capital Markets and our
overseas businesses, together with the investment in new
revenue initiatives in the US.
The charge for provisions for bad debts and amounts written
off fixed asset investments amounted to £580 million, a decrease
of 23%, £175 million. The reduction reflects an improvement in
corporate credit quality and the economic environment in 2004.