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Make it happenrbs.com
Annual Report and Accounts 2006
Total
income up
10%
Profit before
tax up
16%
Dividend up
25%
Adjusted
earnings per
share up
14%

Table of contents

  • Page 1
    Annual Report and Accounts 2006 Profit before tax up Total income up 16% 10% Dividend up 25% Adjusted earnings per share up 14% rbs.com Make it happen

  • Page 2
    ... Corporate Responsibility 38 40 41 Corporate Responsibility Key Achievements Community Investment â- Report and accounts 43 Operating and financial review 101 Governance 127 Financial statements 225 Additional information 251 Shareholder information RBS Group • Annual Report and Accounts 2006...

  • Page 3
    ...and net gain on sale of strategic investments and subsidiaries, and after netting operating lease depreciation against rental income. Group operating profit increased by 14% to £9,414 million in 2006. Profit before tax (£m) Adjusted earnings per share (pence) Dividend per ordinary share (pence...

  • Page 4
    ...-section of leading UK companies. The total shareholder return for the company and the FTSE 100 have been rebased to 100 for 2001. Index 80 60 40 RBS 20 FTSE 100 Source: Datastream 2002 2003 2004 2005 2006 0 2001 Market capitalisation (£bn) Share price performance 2005 2006 % change 06 05...

  • Page 5
    ... price of £18.09 over the course of 2006 and have moved higher since. This is significantly above the average share price of companies trading on the London Stock Exchange and we believe that many shareholders prefer to deal Sir Tom McKillop Chairman 4 RBS Group • Annual Report and Accounts...

  • Page 6
    RBS Group • Annual Report and Accounts 2006 5

  • Page 7
    Group Chief Executive's review Group Chief Executive's review 6 RBS Group • Annual Report and Accounts 2006

  • Page 8
    ...in our average daily value at risk. Our customers The Group continues to hold the highest market share in UK corporate banking and we are now the joint leader in the personal current account market. RBS has once again secured top position and NatWest is joint second among major High Street banks for...

  • Page 9
    Group profile United Kingdom US Corporate Markets Retail Markets Ulster Bank RBS Insurance Manufacturing Corporate Markets Citizens 2006 2006 Income (£bn) Operating profit (£bn) Loans to customers (£bn) Deposits by customers (£bn) Employees 20.4 5.5 318 280 100,400 Income (£bn) ...

  • Page 10
    ... Ulster Bank RBS Insurance Manufacturing Corporate Markets Retail Markets Manufacturing 2006 2006 Income (£bn) Operating profit (£bn) Loans to customers (£bn) Deposits by customers (£bn) Employees 2.5 1.4 47 10 7,900 Income (£bn) Operating profit (£bn) Loans to customers (£bn) Deposits...

  • Page 11
    ...to major corporations and financial and governmental institutions around the world, providing an extensive range of debt, risk and investment services; and UK Corporate Banking is the largest provider of banking, finance and risk management services to UK corporate and commercial customers. 2006 key...

  • Page 12
    ...of commercial banking services. 2006 key highlights - No 7 in US personal loans - No 8 in US deposits - No 9 in US assets - No 9 in US credit cards Contribution ($m) 06 2,917 2,867 Location in this report: page 26 05 RBS Insurance RBS Insurance is the second-largest general insurer in the UK and...

  • Page 13
    ... for our Global Banking teams to work together. For Shanghai Time Shipping, one of the largest shippers in China, we successfully completed a $60 million financing facility for the purchase of three vessels. Divisional review Corporate Markets 12 RBS Group • Annual Report and Accounts 2006

  • Page 14
    ... banking, finance and risk management services to UK corporate customers. Through its network of relationship managers across the country it distributes the full range of Corporate Markets' products and services to companies. GBM's employees serve the diverse needs of major corporates and financial...

  • Page 15
    .... We enabled the company to secure the ships offshore at attractive prices, and charter them in a strong international market. We also obtained Chinese government approvals to import, flag and register the vessels. This was the first joint ship financing by RBS working with Bank of China as its...

  • Page 16
    Renewable energy Last year RBS was the largest provider of funding for renewable energy projects and is the market leader internationally for wind farm financing, with over £1 billion of funding for projects globally. RBS Group • Annual Report and Accounts 2006 15

  • Page 17
    ... investment in additional international trade services and specialists to help our UK customers to trade in international markets. 2006 has seen strong growth in both lending and deposits across UKCB, reflecting the successful growth of our customers' businesses. Commercial Banking serves customers...

  • Page 18
    ... and services would help them move their business forward. RBS financial products included international trade finance, invoice finance and foreign exchange hedging, allowing the company to concentrate on product design, development and distribution. Selected awards â- RBS Corporate Banking in...

  • Page 19
    ...review Savings products 2006 saw strong growth in our savings and investment products with a 56% increase in bancassurance sales. We increased the number of financial planning managers in our branch network by 25%. Divisional review Retail Markets 18 RBS Group • Annual Report and Accounts 2006

  • Page 20
    ... Banking, Business Banking and Cards & Direct Finance operate in the UK; and Wealth Management serves customers in the UK, continental Europe and the Asia Pacific region. The Royal Bank of Scotland and NatWest maintained our commitment to development of the branch network, opening new branches...

  • Page 21
    ... finance options. The Royal Bank of Scotland provided facilities for farmers to accept their support payments in euros. Mentor, our business advice service for employment law, health & safety, and tax, assisted more than 22,000 customers last year. â- â- â- â- â- Cards & Direct Finance...

  • Page 22
    ... in the past three years have seen a 30% increase in the number of customers who earn over £100,000. Private Banking has been re-launched to meet the needs of this customer group with dedicated relationship managers, and 24 hour telephone support. RBS Group • Annual Report and Accounts 2006 21

  • Page 23
    ... its range of products, and in 2006 introduced the Bonus Credit Card, which gives customers back one month's interest every year - a first in the UK. Tesco Personal Finance has also entered the business market with the new Tesco Business Credit Card. â- â- â- â- Retail Markets Free Access...

  • Page 24
    ... service with access to international and same-day UK payments. Adam & Company have five offices in the UK and one in Guernsey, and achieved a 14% growth in income, its twelth successive year of double-digit income growth. â- â- â- â- â- RBS Group • Annual Report and Accounts 2006...

  • Page 25
    ...this year. The response from fans around the globe was overwhelming and the limited edition of one million notes sold out in ten days. Barbara McNarry, his sister, is pictured with one of the notes in the family home. Divisional review Ulster Bank 24 RBS Group • Annual Report and Accounts 2006

  • Page 26
    ... profit up 20% â- Ulster Bank, including First Active, provides an extensive range of retail and wholesale financial services for personal and corporate customers across the island of Ireland, through branches, business centres, the telephone and the internet. Total customer numbers increased...

  • Page 27
    ..., led by local entrepreneurs Brian Tierney and Bruce Toll, looked to Citizens Financial Group and RBS for a funding package to give them the edge in their bid to keep the paper in local hands, despite stiff competition. Divisional review Citizens 26 RBS Group • Annual Report and Accounts 2006

  • Page 28
    ... year of record profits, and in 2006 profit increased by 2% to US$2,917 million. Citizens has been building its customer franchise in commercial banking and in card issuing and acquiring. Business and home equity lending also showed good growth. Retail Banking in the Charter One footprint has opened...

  • Page 29
    ... 2005, with average commercial loans up 15% excluding financed leases. In foreign exchange, interest rate derivatives and cash management we benefited from the product strength of RBS Corporate Markets. By the end of 2006, Citizens had opened 390 new company cash management relationships with RBS...

  • Page 30
    ... Economic Development Association Standard of Excellence award for community website Web Marketing Association Governor's Outstanding Volunteer Award Citizens Bank, Delaware Governor's Commission on Volunteerism and Service â- â- â- â- RBS Group • Annual Report and Accounts 2006 29

  • Page 31
    ... Additional drivers named on a Direct Line car insurance policy now build up their own no claims discount, one of the most successful new product features highlighted in the "Good Deal Better" marketing campaign in 2006. Divisional review RBS Insurance 30 RBS Group • Annual Report and Accounts...

  • Page 32
    ... a range of channels, with customers offered the choice of direct brands (Direct Line, Churchill, Privilege) and access through the bank branches (Royal Bank of Scotland and NatWest), as well as through a range of partners. â- â- â- â- â- â- RBS Group • Annual Report and Accounts 2006...

  • Page 33
    ... new customers. RBS Insurance's partnership business, UKI Partnerships, introduced a seven-day free car insurance offer scheme for new car purchases across all its motor manufacturer partners. It also introduced a car insurance policy for Tesco Personal Finance, consistent with the Tesco Value range...

  • Page 34
    ... Insight The Financial Services Forum Awards for Marketing Effectiveness 2006 RBS Insurance IT Application Development - Business Achievement in Financial, Insurance and Professional Services 2006 British Computer Society Awards â- â- â- â- RBS Group • Annual Report and Accounts 2006 33

  • Page 35
    ... the introduction of real-time monitoring of spending by our customers on their debit cards. Any uncharacteristic spending behaviour is immediately checked with customers and 3,000 frauds have already been stopped. Divisional review Manufacturing 34 RBS Group • Annual Report and Accounts 2006

  • Page 36
    ... as more than 7,500 ATMs and 475,350 merchant terminals. In 2006 over 100 key technology systems supporting customer transactions and employee systems were available an average 99.9% of the time, even though we make many upgrades and changes to systems daily. We have been able to reduce the delivery...

  • Page 37
    .... Corporate Service Centres opened 123,000 new accounts in 2006, a 13.8% rise over 2005. Lombard Operations supported 17% growth in UK new business deals for Lombard Asset Finance. â- â- â- â- â- â- Manufacturing â- â- â- â- Divisional review 36 RBS Group • Annual Report...

  • Page 38
    ... London (UCL) World-class Management System for Hub and Spoke Operations - Manufacturing Operations University of Warwick Best Banking Provider - Direct Banking Your Money Direct Awards Learning Organisation Award - The One account Unisys Service Excellence Awards Corporate Occupier of the Year...

  • Page 39
    ... funding for a small-scale hydro project in the Ards Peninsula. Generating 56kW at peak output it can generate 88,000 units of renewable electricity every year. Ian McMurray is the Conservation Officer at the project. Corporate Responsibility 38 RBS Group • Annual Report and Accounts 2006

  • Page 40
    ...banks are set up and run by pupils for pupils and aim to establish a savings habit. In May 2006 we launched our Managing Your Money websites providing consumers with free access to skills, tools and advice to help them understand and manage their money. â- â- â- â- â- RBS Group • Annual...

  • Page 41
    ... Banking & Market's Madrid office joined in one of Madrid's best supported charity fun runs. Asociación Española Contra el Cancer's annual run has become one of the most popular fund raising events in the city. Financial Crime â- The Group's global fraud losses fell by 24% in 2006. In the UK...

  • Page 42
    ... the UK, nominated by RBS employees, benefiting from a playground improvement project. Citizens Financial Group contributed $27 million to 4,500 non-profit organisations in 13 states in the US, as well as providing more than 70,000 volunteer hours, at a value of $1.2 million. Charter One is making...

  • Page 43
    Operating and financial review 42 RBS Group • Annual Report and Accounts 2006

  • Page 44
    ... business 48 Risk factors 49 Financial highlights 50 Summary consolidated income statement 52 Analysis of results 60 Divisional performance 75 Consolidated balance sheet 77 Cash flow 78 IFRS compared with US GAAP 78 Capital resources 79 Risk management RBS Group • Annual Report and Accounts 2006...

  • Page 45
    ..., the term 'company' means The Royal Bank of Scotland Group plc, 'RBS' or the 'Group' means the company and its subsidiary undertakings, 'the Royal Bank' means The Royal Bank of Scotland plc and 'NatWest' means National Westminster Bank Plc. The company publishes its financial statements in pounds...

  • Page 46
    ...statement' and 'Group Chief Executive's 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...

  • Page 47
    ... both the Royal Bank and NatWest retail brands, and a number of direct providers offering a full range of banking products and related financial services to the personal, premium and small business markets across several distribution channels. 46 RBS Group • Annual Report and Accounts 2006

  • Page 48
    ...lending, consumer lending, commercial and consumer deposit products, merchant credit card services, trust services and retail investment services. Citizens includes RBS National Bank, our US credit card business, RBS Lynk, our merchant acquiring business, and Kroger Personal Finance, our credit card...

  • Page 49
    ...affect earnings reported by the Group's nonUK subsidiaries, mainly Citizens, RBS Greenwich Capital and Ulster Bank, and may affect income from foreign exchange dealing. The performance of financial markets may cause changes in the value of the Group's investment and trading portfolios. The Group has...

  • Page 50
    ...profit attributable to ordinary shareholders adjusted for purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries, and average ordinary equity shareholders' funds. RBS Group • Annual Report and Accounts 2006 49 Operating and financial...

  • Page 51
    ... Profit before tax Tax Profit for the year Minority interests Preference dividends Profit attributable to ordinary shareholders Basic earnings per ordinary share Intangibles amortisation Integration costs Net gain on sale of strategic investments and subsidiaries Adjusted earnings per ordinary share...

  • Page 52
    ...to ordinary shareholders before purchased intangibles amortisation, integration costs and net gain on sale of strategic investments and subsidiaries, and average ordinary equity, was 19.0% compared with 18.2% in 2005. RBS Group • Annual Report and Accounts 2006 51 Operating and financial review

  • Page 53
    ...banking business Benefit from interest-free funds Net interest margin of the banking business Yields, spreads and margins of the banking business Gross yield (3) Group UK Overseas Interest spread (4) Group UK Overseas Net interest margin (5) Group UK Overseas The Royal Bank of Scotland plc base rate...

  • Page 54
    ... fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted. (4) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. RBS Group • Annual Report and Accounts 2006...

  • Page 55
    ... accounts: savings deposits UK Overseas Customer accounts: other time deposits UK Overseas Debt securities in issue UK Overseas Subordinated liabilities UK Overseas Internal funding of trading business UK Overseas Total interest payable of the banking business UK Overseas Operating and financial...

  • Page 56
    ...and principal investments in Corporate Markets. General insurance premium income, after reinsurance, rose by 3%, or £194 million to £5,973 million with good growth in motor policies in the UK and Continental Europe. RBS Group • Annual Report and Accounts 2006 55 Operating and financial review

  • Page 57
    ... of operating expenses (excluding purchased intangibles amortisation and integration costs and after netting operating lease depreciation against rental income) to total income was 42.1% compared with 42.4% in 2005. Operating and financial review 56 RBS Group • Annual Report and Accounts 2006

  • Page 58
    ... £m Charge to income statement £m Utilised during the year £m At 31 December 2006 £m Staff costs Premises and equipment Other 32 14 26 72 (1) (1) (1) (3) 76 10 48 134 (84) (23) (65) (172) 23 - 8 31 RBS Group • Annual Report and Accounts 2006 57 Operating and financial review

  • Page 59
    ... for impairment to total risk elements in lending and potential problem loans also decreased to 62% compared with 65% in 2005. This reflects amounts written-off and the changing mix from unsecured to secured exposure. Operating and financial review 58 RBS Group • Annual Report and Accounts 2006

  • Page 60
    ...exchange movements Foreign profits taxed at other rates Unutilised losses - brought forward and carried forward Adjustments in respect of prior periods Actual tax charge 2,756 58 230 (251) 5 63 14 (186) 2,689 2,381 79 230 (166) (10) 77 (5) (208) 2,378 RBS Group • Annual Report and Accounts 2006...

  • Page 61
    ... division is detailed below, and is described as 'operating profit' in the divisional analyses that follow. 2006 £m 2005 £m Corporate Markets Global Banking & Markets UK Corporate Banking Total Corporate Markets Retail Markets Retail Wealth Management Total Retail Markets Ulster Bank Citizens RBS...

  • Page 62
    ... our activities into two businesses, Global Banking & Markets and UK Corporate Banking, in order to enhance our focus on the distinct needs of these two customer segments. 2006 £m 2005 £m Net interest income from banking activities Non-interest income Total income Direct expenses - staff costs...

  • Page 63
    ... financial review continued Corporate Markets - Global Banking & Markets 2006 £m 2005 £m Net interest income from banking activities Net fees and commissions receivable Trading activities Net income from rental assets (net of related funding costs) Other operating income (net of related funding...

  • Page 64
    ... position in arranging, structuring and distributing large scale private and public financings. We have increased our customer penetration, and in 2006 were the third most active underwriter of bonds for European, including UK, corporates. Income from trading activities continued to grow steadily...

  • Page 65
    ....3 76.7 66.4 82.6 UK Corporate Banking had a successful year across all its businesses, strengthening its market leading positions in corporate and commercial banking and building good momentum in the provision of a broadening range of financing and risk management services to its customer base. As...

  • Page 66
    ... of combining Retail Banking and Direct Channels into a unified business. Customer recruitment has been centred on our branch channels, where we have achieved good growth in savings accounts and are joint market leader for personal current accounts. Our commitment to customer service, through the...

  • Page 67
    ... income Direct expenses - staff costs - other Insurance net claims Contribution before impairment losses Impairment losses Contribution Allocation of Manufacturing costs Operating profit Total banking assets Loans and advances to customers - gross - mortgages - personal - cards - business Customer...

  • Page 68
    ..., and helped support a new business margin which improved significantly over the period. The product proposition was strengthened across all lines. Latest market share data shows an increase from 6.6% to 9.0%. On a UK GAAP embedded value basis for life assurance, investment contracts and open ended...

  • Page 69
    ... was successfully increased by 7%, reflecting our continued investment in the UK and further expansion in Asia. Impairment losses returned to historic levels, following a number of specific items in prior years. Operating and financial review 68 RBS Group • Annual Report and Accounts 2006

  • Page 70
    ... by 6% to £215 million. Ulster Bank achieved good growth in fees from credit cards and ATMs as well as in sales of investment products, which was only partially offset by the introduction of Ulster Bank's new range of current accounts, which are free of transaction fees. Total expenses increased...

  • Page 71
    ... and advances, the same level as in 2005. Our consumer lending is to prime customers with average FICO scores on our portfolios, including home equity lines of credit, in excess of 700, and 95% of lending is secured. Operating and financial review 70 RBS Group • Annual Report and Accounts 2006

  • Page 72
    ... in risk management. The UK combined operating ratio for 2006, including Manufacturing costs, was 94.6%, compared with 93.4% in 2005, reflecting a higher loss ratio and the discontinuation of some partnerships. RBS Group • Annual Report and Accounts 2006 71 Operating and financial review

  • Page 73
    ... centres continued to record market-leading customer satisfaction scores. Our investment in 'lean manufacturing' approaches across our operational centres is expected to deliver further improvements in efficiency. Operating and financial review 72 RBS Group • Annual Report and Accounts 2006

  • Page 74
    ... in economic hedges that do not meet the criteria in IFRS for hedge accounting is transferred to the Group's central treasury function. Departmental and corporate costs at £588 million were similar to 2005. RBS Group • Annual Report and Accounts 2006 73 Operating and financial review

  • Page 75
    Operating and financial review continued Employee numbers at 31 December (full time equivalents rounded to the nearest hundred) 2006 2005 Global Banking & Markets UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Centre Group total 8,700 8,800 39,800 4,...

  • Page 76
    ...,432 2,109 826 34,609 37,544 776,827 54,152 62,908 117,060 41,804 48,887 90,691 Repurchase agreements and stock lending Deposits by banks Customer accounts 76,376 63,984 140,360 47,905 48,754 96,659 Operating and financial review RBS Group • Annual Report and Accounts 2006 75

  • Page 77
    ...-for-sale reserves, mainly reflecting the Group's share in the investment in Bank of China and a £1.3 billion net decrease after tax in the Group's pension liability, were partly offset by the payment of the 2005 final ordinary dividend and the 2006 interim dividend, £2.5 billion and preference...

  • Page 78
    ... debt were more than offset by dividend payments of £2,007 million and the repayment of £1,553 million of subordinated liabilities, resulting in a net cash outflow from financing activities of £703 million. RBS Group • Annual Report and Accounts 2006 77 Operating and financial review

  • Page 79
    ... £454 million from eliminating IFRS hedge accounting adjustments partially offset by an increase of £196 million relating to financial instruments, principally net foreign exchange losses on available-for-sale securities. • reduction of US GAAP shareholders' equity at £40,077 million is £150...

  • Page 80
    ...Management Committee Group Credit Committee • Group Audit Committee ("GAC") is a committee comprising independent non-executive directors that supports the Board in carrying out its responsibilities for financial reporting including accounting policies and in respect of internal control and risk...

  • Page 81
    ... The annual business planning and performance management process and associated activities ensure the expression of risk appetite remains appropriate. GRC and GALCO support this work. Risk organisation Divisional Chief Executive Officers (CEOs) are specifically responsible for the management of risk...

  • Page 82
    ... credit committee. • Financial Markets counterparties are subject to similar modelling techniques but are approved by a dedicated credit function which specialises in traded market product risk. Consumer lending and personal businesses employ best practice credit scoring techniques to process...

  • Page 83
    ..., and qualitative inputs, such as company management performance or sector outlook. Every customer credit grade across all grading scales in the Group can be mapped to a Group level credit grade (see page 83). Operating and financial review 82 RBS Group • Annual Report and Accounts 2006

  • Page 84
    ... credit, finance lease receivables, debt securities and other traded instruments across all customer types. Credit risk assets Corporate Markets - Global Banking & Markets - UK Corporate Banking Retail Markets - Retail - Wealth Management Ulster Bank Citizens RBS Insurance Credit risk assets...

  • Page 85
    ... diversified across a range of sectors. Banks and financial sevices account for 20% of credit risk assets (2005 - 22%) and public sector and quasi government credit risk assets make up the remaining 16% (2005 - 13%). Operating and financial review 84 RBS Group • Annual Report and Accounts 2006

  • Page 86
    ...% RBS Group • Annual Report and Accounts 2006 85 Operating and financial review The Group also monitors its credit portfolio by customer type and product type. The largest category is lending to corporate customers, which represented 35% of credit risk assets as at 31 December 2006 (2005 - 31...

  • Page 87
    ... 1.57% of customer loans and advances at 31 December 2006 (2005 - 1.60%). REIL by division The table below shows REIL by division. REIL Corporate Markets - Global Banking & Markets - UK Corporate Banking Retail Markets - Retail - Wealth Management Ulster Bank Citizens Other Total REIL 2006 £m 2005...

  • Page 88
    ... 0.46% Provisions for loan impairment charged to the income statement in 2006 were £1,877 million, up £174 million (10%) from 2005. As a percentage of customer lending, the impairment charge remained flat at 0.46%. Operating and financial review RBS Group • Annual Report and Accounts 2006 87

  • Page 89
    ...(144) 3,887 An impairment provision calculated using the effective interest rate method leaves a discounted asset; the discount unwinds at a constant effective rate until the outstanding asset is completely realised. Operating and financial review 88 RBS Group • Annual Report and Accounts 2006

  • Page 90
    ... in respect of internal policy and the regulatory requirements of the Financial Services Authority. Detailed liquidity position reports are compiled each day by Group Treasury and reviewed daily and weekly with Global Banking & Markets, who manage day-to-day and intra-day market execution within the...

  • Page 91
    ... market funding to support loan growth. Net customer activity Loans and advances to customers (gross, excluding reverse repos) Customer accounts (excluding repos) Customer lending less customer accounts Loans and advances to customers as a % of customer accounts (excluding repos) 2006 £m 2005...

  • Page 92
    ... are applied in each case, dependent on various parameters, to determine the Group's ability to realise cash at short notice via the sale or repo of such marketable assets if required to meet unexpected outflows. RBS Group • Annual Report and Accounts 2006 91 Operating and financial review

  • Page 93
    ...published to date, the Group continues to develop its liquidity risk reporting, management and stress testing capabilities. Market risk Market risk is defined as the risk of loss as a result of adverse changes in risk factors including interest rates, foreign currency and equity prices together with...

  • Page 94
    ... and investments held by its general insurance business are the principal sources of non-trading equity price risk. The Group's portfolios of nontrading financial instruments mainly comprise loans (including finance leases), debt securities, equity shares, deposits, certificates of deposit and...

  • Page 95
    ... exceptions at legal entity level during 2006. The Group's trading activities are carried out principally by Global Banking & Markets. The chart below depicts the number of days on which Global Banking & Markets' trading income fell within stated ranges. 40 Number of trading days 35 30 25 20...

  • Page 96
    ... committees, GALCO and the Board. Non-trading interest rate VaR Non-trading interest rate VaR for the Group's treasury and retail and commercial banking activities was £40.2 million at 31 December 2006 (2005 - £81.5 million) with the major exposure being to changes in longer term US dollar...

  • Page 97
    ... action may involve execution of derivatives, product development and tactical pricing changes. Note 35 on the accounts includes, on pages 191 and 192, tables that summarise the Group's interest rate sensitivity gap for its non-trading book at 31 December 2006 and 31 December 2005. The tables show...

  • Page 98
    ... Pricing policies which are set by senior management through pricing committees; • Centralised control of changes. policy wordings and any subsequent RBS Group • Annual Report and Accounts 2006 97 Operating and financial review • Underwriting and pricing risk, • Claims management risk...

  • Page 99
    ... satisfy the Credit Risk Approval process that uses information derived internally and from security ratings agencies. Acceptable reinsurers are rated at A- or better unless specifically authorised by the RBS Insurance Group Board. Reserving risk Reserving risk relates to both premiums and claims...

  • Page 100
    .... Life business The three regulated life companies of the Group, National Westminster Life Assurance Limited, Royal Scottish Assurance plc and Direct Line Life Insurance Company Limited, are required to meet minimum capital requirements at all times under the Financial Service Authority's Prudential...

  • Page 101
    ... systems and cards. The outcome of these reviews is outside the Group's control and it is not possible to predict the effect, if any, on the Group's operations of future changes in regulatory actions and policies. Operating and financial review 100 RBS Group • Annual Report and Accounts 2006

  • Page 102
    Governance 102 Board of directors and secretary 104 Report of the directors 108 Corporate governance 114 Directors' remuneration report 125 Directors' interests in shares 126 Statement of directors' responsibilities RBS Group • Annual Report and Accounts 2006 101 Governance

  • Page 103
    ... in Scotland. Group Finance Director 3. Guy Whittaker (age 50) C Appointed to the Board in February 2006, Guy Whittaker was formerly group treasurer at Citigroup Inc., based in New York, having previously held a number of management positions within the financial markets business at Citigroup...

  • Page 104
    ... Commissioner responsible for competition policy. He is chairman of BP p.l.c. and Goldman Sachs International. He was formerly chairman of Allied Irish Bank and director general of GATT and its successor, the World Trade Organisation. RBS Group • Annual Report and Accounts 2006 103 Governance

  • Page 105
    ... to members on the register at the close of business on 9 March 2007. Business review Activities The company is a holding company owning the entire issued ordinary share capital of The Royal Bank of Scotland, the principal direct operating subsidiary undertaking of the company. The "Group" comprises...

  • Page 106
    ... that the Group meets changing customer, shareholder, investor, employee and supplier expectations. The Group believes that meeting high standards of environmental, social and ethical responsibility is key to the way it does business. For the financial services sector, consumer banking issues are...

  • Page 107
    ... in Note 30 on the accounts. Authority to repurchase shares At the Annual General Meeting in 2006, shareholders renewed the authority for the company to make market purchases of up to 319,778,520 ordinary shares. As at 28 February 2007 (the latest practical date prior to printing of this report) the...

  • Page 108
    ... & Touche LLP as the company's auditor will be proposed at the forthcoming Annual General Meeting. By order of the Board. Miller McLean Secretary 28 February 2007 The Royal Bank of Scotland Group plc is registered in Scotland No. 45551. RBS Group • Annual Report and Accounts 2006 107 Governance

  • Page 109
    ... the Act concerns internal control over financial reporting and the Group is required to comply with it for the first time for the financial year ended 31 December 2006. The company complies with section 404 and all other applicable sections of the Act. Board of directors The Board is the principal...

  • Page 110
    ... balance of its activities and was content that it was allocating appropriate time to such key matters as monitoring business performance, risk appetite and strategy. Taking into account their review and deliberations the directors have concluded that the Board is effective in meeting its objectives...

  • Page 111
    ..., the Group's performance against the sector, and key broker comments. In addition, information on major investor relations activities and changes to external ratings is provided. The senior independent director would be available to shareholders if concerns could not be addressed through the normal...

  • Page 112
    ... Financial Reporting Council in October 2005. The effectiveness of the Group's internal control system is reviewed regularly by the Board and the Audit Committee. Executive management committees or boards of directors in each of the Group's businesses receive quarterly reports on significant risks...

  • Page 113
    ...and annual financial statements to the Group Board. This core agenda is supplemented by additional meetings as required, three being added in 2006. Audit Committee meetings are attended by relevant executive directors, the internal and external auditors and finance and risk management executives. At...

  • Page 114
    ... in its initial year, the revised structure has bedded down well. The Audit Committee has an appropriately close relationship with each of the business audit committees. Archie Hunter Chairman of the Audit Committee 28 February 2007 RBS Group • Annual Report and Accounts 2006 113 Governance

  • Page 115
    ... and responsibilities of the individual director. Benefits UK-based executive directors, with the exception of Guy Whittaker, are members of The Royal Bank of Scotland Group Pension Fund ("the RBS Fund"). Any new executive directors will not be eligible to participate in the RBS Fund unless...

  • Page 116
    ... efficiency and change objectives. In respect of 2006, the Remuneration Committee reviewed the annual incentive payments for all executive directors taking into account performance against the various targets set at the beginning of the year and covering overall Group financial metrics, divisional...

  • Page 117
    ... annual salary for executive directors. Target shareholding levels are determined by reference to ordinary shares held, together with any vested awards under the Group's Medium-term Performance Plan. Executive directors have a period of five years in which to build up their shareholdings to meet...

  • Page 118
    ... Royal Bank of Scotland plc 20 February 2006 The Royal Bank of Scotland plc 19 December 2005 The Royal Bank of Scotland plc 12 months 12 months 12 months 12 months 12 months 12 months 6 months 6 months 12 months 12 months 6 months 12 months Governance RBS Group • Annual Report and Accounts 2006...

  • Page 119
    ... Committee concluded that a change to the terms of the RBS Fund in respect of early retirement at the company's request would not be a cost effective route to take at this time. The RBS Fund is closed to employees, including any executive directors, joining the Group after 30 September 2006...

  • Page 120
    ... of the Remuneration Committee. No director received any expense allowances chargeable to UK income tax or compensation for loss of office/termination payment. The non-executive directors did not receive any bonus payments or benefits. RBS Group • Annual Report and Accounts 2006 119 Governance

  • Page 121
    ... ordinary shares of 25p each in the company granted to, and exercised by, directors during the year to 31 December 2006 are included in the table below: Options exercised in 2006 Options held at 1 January 2006 Options granted in 2006 Market price at date of exercise Number £ Option price £ Options...

  • Page 122
    ...In the ten year period to 31 December 2006, awards made that could require new issue shares under the company's share plans represented 4.8% of the company's issued ordinary share capital, leaving an available dilution headroom of 5.2%. RBS Group • Annual Report and Accounts 2006 121 Governance

  • Page 123
    ... their right over the underlying share equivalents at any time up to ten years from the date of grant. No variation was made to any of the terms of the plan during the year. The performance measures are detailed on pages 115 and 116. Governance 122 RBS Group • Annual Report and Accounts 2006

  • Page 124
    ... 31.12.07 01.01.06 - 31.12.08 01.01.06 - 31.12.08 Note: (1) A new cash LTIP was approved by shareholders at the company's Annual General Meeting in April 2005. Details are given on page 116. This replaced the previous LTIP which provided for a target payment of 60% of average salary over the three...

  • Page 125
    ... in The Royal Bank of Scotland Group Pension Fund ("the RBS Fund"). The RBS Fund is a defined benefit fund registered with HM Revenue & Customs under the Finance Act 2004. The legislation governing the taxation of pensions in the UK changed with effect from April 2006. No changes have been...

  • Page 126
    ...which is open to inspection, contains full details of directors' shareholdings and options to subscribe. No director held a non-beneficial interest in the shares of the company at 31 December 2006, at 1 January 2006 or date of appointment if later. RBS Group • Annual Report and Accounts 2006 125...

  • Page 127
    ... and explained in the accounts. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act 1985. They are...

  • Page 128
    ... statements 128 Independent auditors' report 130 Accounting policies 139 Consolidated income statement 140 Balance sheets 141 Statements of recognised income and expense 142 Cash flow statements 143 Notes on the accounts RBS Group • Annual Report and Accounts 2006 127 Financial statements

  • Page 129
    ...audited the financial statements of The Royal Bank of Scotland Group plc ("the company") and its subsidiaries (together "the Group") for the year ended 31 December 2006 which comprise the accounting policies, the balance sheets as at 31 December 2006 and 2005, the consolidated income statements, the...

  • Page 130
    ... dated 28 February 2007 which will be included in the Annual Report on Form 20-F for the year ended 31 December 2006 to be filed with the Securities and Exchange Commission expressed an unqualified opinion on management's assessment of the effectiveness of the Group's internal control over financial...

  • Page 131
    ... issued by the IASB. The date of transition to IFRS for the Group and the company (The Royal Bank of Scotland Group plc) and the date of their opening IFRS balance sheets was 1 January 2004. The company is incorporated in the UK and registered in Scotland. The accounts are prepared on the historical...

  • Page 132
    ... sheet caption 'Intangible fixed assets' and that on associates within their carrying amounts. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill. RBS Group • Annual Report and Accounts 2006 131 Financial statements

  • Page 133
    ... payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Finance lease income is allocated to accounting periods so as to give a constant periodic rate of return before tax on the net investment. Unguaranteed residual values are subject to regular review...

  • Page 134
    ..., financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract. RBS Group • Annual Report and Accounts 2006 133 Financial statements

  • Page 135
    ... are recognised on trade date. Fair value for a net open position in a financial asset that is quoted in an active market is the current bid price times the number of units of the instrument held. Fair values for financial assets not quoted in an active market are determined using appropriate...

  • Page 136
    ... (see accounting policy 3 above). Fair value for a net open position in a financial liability that is quoted in an active market is the current offer price times the number of units of the instrument held or issued. Fair values for financial liabilities not quoted in an active market are determined...

  • Page 137
    ... is recognised directly in equity. Any ineffective portion is recognised in profit or loss. 18. Share-based payments The Group grants options over shares in The Royal Bank of Scotland Group plc to its employees under various share option schemes. The Group has applied IFRS 2 'Share-based Payment' to...

  • Page 138
    ... directly from quoted prices. Details of financial instruments carried at fair value are given in Note 35 on the accounts. General insurance claims The Group makes provision for the full cost of settling outstanding claims arising from its general insurance business at the balance sheet date...

  • Page 139
    ... or company. The IFRIC issued interpretation IFRIC 11 'Group and Treasury Share Transactions' in November 2006. Entities which buy their own shares, or whose shareholders buy shares in the reporting entity, in order to provide incentives to employees shall account for those incentives on an equity...

  • Page 140
    ... and impairment losses Insurance claims Reinsurers' share Impairment losses Operating profit before tax Tax Profit for the year Profit attributable to: Minority interests Preference shareholders Ordinary shareholders for the year ended 31 December 2006 2006 £m 2005 £m 2004 £m Note 1 2 16...

  • Page 141
    ...,712 17,538 30,742 The accounts were approved by the Board of directors on 28 February 2007 and signed on its behalf by: Sir Tom McKillop Chairman Sir Fred Goodwin Group Chief Executive Guy Whittaker Group Finance Director Financial statements 140 RBS Group • Annual Report and Accounts 2006

  • Page 142
    Statements of recognised income and expense for the year ended 31 December 2006 Group 2006 £m 2005 £m 2004 £m 2006 £m Company 2005 £m 2004 £m Available-for-sale investments Net valuation gains taken direct to equity Net profit taken to income on sales Cash flow hedges Net (losses)/gains taken...

  • Page 143
    ...statements for the year ended 31 December 2006 Group Note 2006 £m 2005* £m 2004* £m 2006 £m Company 2005* £m 2004 £m Operating activities Operating profit before tax Adjustments for: Depreciation and amortisation Interest on subordinated liabilities Charge for defined benefit pension schemes...

  • Page 144
    ...100 143,500 106,900 27,100 7,000 900 141,900 RBS Group • Annual Report and Accounts 2006 143 Financial statements Global Banking & Markets UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Centre Total 7,800 8,800 43,800 4,600 4,800 24,600 18,500...

  • Page 145
    ... year of service prior to retirement. Employees do not make contributions for basic pensions but may make voluntary contributions to secure additional benefits on a money-purchase basis. Since October 2006 The Royal Bank of Scotland Group Pension Fund ('Main scheme') has been closed to new entrants...

  • Page 146
    Main scheme Present value of defined benefit obligations £m All schemes Present value of defined benefit obligations £m Changes in value of net pension liability At 1 January 2005 Currency translation and other adjustments Income statement: Expected return Interest cost Current service cost Past...

  • Page 147
    ... forward and carried forward Adjustments in respect of prior periods Actual tax charge for the year 2,756 58 230 (251) 5 63 14 (186) 2,689 2,381 79 230 (166) (10) 77 (5) (208) 2,378 2,185 - 110 (128) (10) 49 6 (217) 1,995 Financial statements 146 RBS Group • Annual Report and Accounts 2006

  • Page 148
    ... equity preference shareholders for payment on 30 March 2007. 7 Ordinary dividends 2006 p per share 2005 p per share Group 2004 p per share 2006 £m 2005 £m 2004 £m Final dividend for previous year declared during the current year Interim dividend Total dividends paid on ordinary equity shares...

  • Page 149
    ... to customers Group 2006 £m 2005 £m Company 2006 £m 2005 £m Held-for-trading Designated as at fair value through profit or loss Loans and receivables Finance leases 72,462 1,327 381,583 11,521 466,893 53,963 616 350,960 11,687 417,226 - - 286 - 286 - - 567 - 567 Financial statements...

  • Page 150
    .... Customer assets are transferred into an SPE which issues notes in the commercial paper market. The Group supplies certain services and contingent liquidity support to these vehicles on an arm's length basis as well as programme credit enhancement. RBS Group • Annual Report and Accounts 2006...

  • Page 151
    ... these securitisations. Net pre-tax gains are based on the difference between the sales prices and previous carrying values of assets prior to date of sale, are net of transaction costs, and exclude any results attributable to hedging activities, interest income, funding costs, and changes in asset...

  • Page 152
    .... RBS Group • Annual Report and Accounts 2006 151 Financial statements Mortgage-backed securities The Group sells originated mortgage loans to US government sponsored enterprises in return for securities backed by these loans and guaranteed by the Agency whilst retaining the rights to service...

  • Page 153
    ... 2006 UK government £m Other government £m Bank and building society £m Mortgagebacked securities(1) £m Corporate £m Other £m Total £m Held-for-trading Designated as at fair value through profit or loss Available-for-sale Loans and receivables At 31 December 2006 Available-for-sale...

  • Page 154
    ...for-sale debt securities are temporary, principally because they reflect changes in benchmark interest rates. 14 Equity shares Listed £m Unlisted £m Group 2006 Total £m Listed £m Unlisted £m 2005 Total £m Held-for-trading Designated as at fair value through profit or loss Available-for-sale...

  • Page 155
    ... Nature of business The Royal Bank of Scotland plc National Westminster Bank Plc (1) Citizens Financial Group, Inc. Coutts & Co (2) Greenwich Capital Markets, Inc. RBS Insurance Group Limited Ulster Bank Limited (3) Notes: (1) The company does not hold any of the NatWest preference shares in issue...

  • Page 156
    ... Net book value £m Impaired financial assets Loans and receivables and finance leases Available-for-sale 6,232 185 6,417 3,342 88 3,430 2,890 97 2,987 5,926 316 6,242 3,344 132 3,476 Group 2,582 184 2,766 2006 £m 2005 £m 2004 £m Impairment losses charged to the income statement Loans...

  • Page 157
    ... of core deposit intangibles and other purchased intangibles for each of the next five years is currently estimated to be: 6 6 £m Core deposit intangibles Other purchased intangibles 2007 2008 2009 2010 2011 95 95 71 17 15 Financial statements 156 RBS Group • Annual Report and Accounts 2006

  • Page 158
    ...information were applied to each CGU. The multiples used for both 2006 and 2005 were in the range 7.0 - 13.0 times earnings after charging manufacturing costs. The goodwill allocated to Global Banking & Markets, UK Corporate Banking, Retail and Wealth Management arose from the acquisition of NatWest...

  • Page 159
    ...lease assets £m 2005 Total £m Cost or valuation: At 1 January 2005 Currency translation and other adjustments Reclassifications Additions Expenditure on investment properties Change in fair value of investment...5,237 18,053 Financial statements 158 RBS Group • Annual Report and Accounts 2006

  • Page 160
    ... properties are valued to reflect fair value, that is, the market value of the Group's interest at the reporting date excluding any special terms or circumstances relating to the use or financing of the property and transaction costs that would be incurred in making a sale. Observed market data such...

  • Page 161
    ... from the interest rate swap over the life to date of the hedging relationship. For fair value hedge relationships of interest rate risk the hedged items are typically large corporate fixed-rate loans, fixed-rate finance leases, fixed-rate medium-term notes or preference shares classified as debt...

  • Page 162
    ... - gain of £4 million (2005 - gain of £12 million). The company held derivative liabilities with a fair value of £42 million (2005 - £55 million derivative assets) and notional amount of £1 billion (2005 - £1 billion). RBS Group • Annual Report and Accounts 2006 161 Financial statements

  • Page 163
    ... changes are immaterial measured as the change in fair value from movements in the period in the credit risk premium payable by the Group. The carrying amount is £383 million (2005 - £365 million) lower than the principal amount. Financial statements 162 RBS Group • Annual Report and Accounts...

  • Page 164
    ...Charge to income statement Releases to income statement Provisions utilised At 31 December 2006 Notes: (1) Comprises property provisions and other provisions arising in the normal course of business. 162 (1) 101 (20) (42) 200 RBS Group • Annual Report and Accounts 2006 163 Financial statements

  • Page 165
    ...accrued income and other assets, Note 20) Net deferred tax Group 2006 £m Company 2006 £m 2005 £m 2005 £m 3,264 (156) 3,108 Group 1,695 (156) 1,539 - (3) (3) - (3) (3) Accelerated capital Pension allowances £m £m Provisions £m Deferred gains £m Fair value of IAS financial transition...

  • Page 166
    ...January 2005 Release in the year At 1 January 2006 Increase in the year Release in the year At 31 December 2006 Gross £m Reinsurance £m Net £m 2,895 (12) 2,883 - (33) 2,850 (98) 71 (27) (16) - (43) 2,797 59 2,856 (16) (33) 2,807 RBS Group • Annual Report and Accounts 2006 165 Financial...

  • Page 167
    ...146 1,514 2,255 8 52 1,640 2,189 There are no options and guarantees relating to life assurance contracts that could in aggregate have a material effect on the amount, timing and uncertainty of the Group's future cash flows. Financial statements 166 RBS Group • Annual Report and Accounts 2006

  • Page 168
    ...,297 7,822 11,867 7,671 914 28,274 Group RBS Group • Annual Report and Accounts 2006 167 Financial statements 2005 - call date Sterling US$ Euro Other Total Currently £m 2006 £m 2007 £m 2008 - 2010 £m 2011- 2015 £m Thereafter £m Perpetual £m Total £m 139 2,386 - - 2,525 331...

  • Page 169
    ...2006 £m 2007 £m 2008 - 2010 £m 2011- 2015 £m Thereafter £m Perpetual £m Total £m - 1,079 - 1,079 - 428 - 428 - 159 - 159 197 1,297 - 1,494 - 1,572 - 1,572 - 3,315 1,194 4,509 1 - - 1 198 7,850 1,194 9,242 Financial statements 168 RBS Group • Annual Report and Accounts 2006

  • Page 170
    ... in respect of the Group's dated loan capital are subordinated to the claims of other creditors. None of the Group's dated loan capital is secured. (5) Interest on all floating rate subordinated notes is calculated by reference to market rates. RBS Group • Annual Report and Accounts 2006 169

  • Page 171
    ... them, on selling these shares, to settle the interest payment. Financial statements (3) Guaranteed by the company. (4) Exchangeable at the option of the issuer into 200 million 8.392% (gross) non-cumulative preference shares of £1 each of National Westminster Bank Plc at any time. (5) Except as...

  • Page 172
    ...interest payment date thereafter. They may also be redeemed in whole, but not in part, upon the occurrence of certain tax and regulatory events. These securities are included in the company balance sheet as dated loan capital. RBS Group • Annual Report and Accounts 2006 171 Financial statements

  • Page 173
    ...interest payment date thereafter. They may also be redeemed in whole, but not in part, upon the occurrence of certain tax and regulatory events. These securities are included in the company balance sheet as dated loan capital. Financial statements 172 RBS Group • Annual Report and Accounts 2006

  • Page 174
    ...in ordinary shares in issue during the year Number of shares - thousands At 1 January 2006 Shares issued during the year Shares repurchased and cancelled during the year At 31 December 2006 3,196,544 9,999 (53,699) 3,152,844 RBS Group • Annual Report and Accounts 2006 173 Financial statements

  • Page 175
    ...and discounts allowed on preference shares issued during the year were £20 million. Under IFRS certain of the Group's preference shares are classified as debt and are included in subordinated liabilities on the balance sheet. Financial statements 174 RBS Group • Annual Report and Accounts 2006

  • Page 176
    ... of the ordinary shares, and in these circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears. RBS Group • Annual Report and Accounts 2006 175 Financial...

  • Page 177
    Notes on the accounts continued 31 Shareholders' equity 2006 £m Group 2005 £m 2004 £m 2006 £m Company 2005 £m 2004 £m Called-up share capital At 1 January Implementation of IAS 32 on 1 January 2005 Shares issued during the year Shares repurchased during the year At 31 December Share premium ...

  • Page 178
    ... required by the relevant regulator. At 31 December 2006, 6,497,502 (2005 - 772,917) ordinary shares of 25p each of the company were held by Employee Share Trusts in respect of share awards and options granted to employees. RBS Group • Annual Report and Accounts 2006 177 Financial statements

  • Page 179
    ... Accumulated allowance for uncollectable minimum lease receivables Note: (1) In the year ended 31 December 2004 contingent rental income amounted to £51 million and minimum operating lease payments amounted to £319 million. 5,211 67 5,947 72 178 RBS Group • Annual Report and Accounts 2006

  • Page 180
    ... 2.5 billion) charged as security against Federal Home Loan Bank deposits of £10.5 billion (2005 - £11.1 billion). RBS Group • Annual Report and Accounts 2006 179 Financial statements Liabilities secured by charges on assets Deposits by banks Customer accounts Debt securities in issue Other...

  • Page 181
    ... of a credit committee. In exercising credit authority, the individuals act independently. • Where credit authority is exercised personally, the individual Financial statements has no responsibility or accountability for related business revenue origination. 180 RBS Group • Annual Report and...

  • Page 182
    ... exchange rates. Credit risk assets Credit risk assets are an internal risk measure of the Group's exposure to customers. These consist of loans and advances (including overdraft facilities), instalment credit, finance lease receivables, debt securities and other traded instruments. Credit risk...

  • Page 183
    ...and non-UK branches which have material local treasury activities in external markets, to ensure those activities do not compromise daily maintenance of the Group's overall liquidity risk position within the Group's policy parameters. The level of large deposits taken from banks, corporate customers...

  • Page 184
    ... and investments held by its general insurance business are the principal sources of non-trading equity price risk. The Group's portfolios of non-trading financial instruments mainly comprise loans (including finance leases), debt securities, equity shares, deposits, certificates of deposit and...

  • Page 185
    ... a mix of quoted and unquoted investments, or its portfolio of strategic investments. These investments are carried at fair value with changes in fair value recorded in profit or loss, or equity. Insurance risk The Group is exposed to insurance risk, either directly through its businesses or through...

  • Page 186
    ... (3,021) 1,080 4,215 - - - - - 19,707 (343) (183) (43) (62) 1 4,215 19,077 (1,925) (14,303) 2,290 4,774 79 103 4,956 Liability in respect of prior years Claims handling costs Net general insurance claims liability RBS Group • Annual Report and Accounts 2006 185 Financial statements

  • Page 187
    ...risks and sources of uncertainty Most general insurance contracts written by the Group are issued on an annual basis, which means that the Group's liability extends for a 12 month period, after which the Group is entitled to decline or renew or can impose renewal terms by amending the premium, terms...

  • Page 188
    Life business The Group's three regulated life companies, National Westminster Life Assurance Limited, Royal Scottish Assurance plc ("RSA") and Direct Line Life Insurance Company Limited, are required to meet minimum capital requirements at all times under the Financial Service Authority's ...

  • Page 189
    ... not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that assets and liabilities are actively managed and may vary at the time that any actual market movement occurs. Financial statements 188 RBS Group • Annual Report and Accounts 2006

  • Page 190
    ... Over 5 years £m Equity shares £m Total £m Assets Cash and balances at central banks Treasury and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Equity shares Settlement balances Derivatives Liabilities Deposits by banks Customer accounts Debt...

  • Page 191
    ...the accounts continued 35 Financial instruments (continued) Remaining maturity 2006 Company 1 month or less £m 1-3 months £m 3-12 months £m 1-5 years £m Over 5 years £m Total £m Assets Loans and advances to banks Loans and advances to customers Liabilities Deposits by banks Debt securities in...

  • Page 192
    ... 871,432 Liabilities and equity Deposits by banks 52,301 26 2,502 Customer accounts 262,010 7,512 6,188 Debt securities in issue 63,245 2,516 2,133 Subordinated liabilities 7,298 1,127 273 Other liabilities - - - Shareholders' equity - - - Internal funding of trading business (43,864) (5,443) (92...

  • Page 193
    ... profit or loss £m 2005 Over 5 years £m Yield % Banking book total £m Trading book total £m Total £m Assets Loans and advances to banks Loans and advances to customers Debt securities and treasury bills Other assets Total assets Liabilities and equity Deposits by banks Customer accounts...

  • Page 194
    ... point increase (487) (40) 180 (1,631) 1,146 (832) Financial statements Financial assets and liabilities designated as at fair value through profit or loss 2006 £m 2005 £m Net gain in year recognised in other operating income 573 364 RBS Group • Annual Report and Accounts 2006 193

  • Page 195
    ... at fair value through profit or loss 1,327 1,327 616 616 Loans and receivables 381,583 382,671 350,960 354,670 Finance leases 11,521 11,504 11,687 11,687 466,893 467,964 417,226 420,936 Debt securities Held-for-trading Designated as at fair value through profit or loss Available-for-sale Loans and...

  • Page 196
    ... Designated as at fair value through profit or loss Amortised cost 118,112 118,112 124 27,530 27,654 124 28,606 28,730 150 28,124 28,274 150 29,598 29,748 - 8,194 8,194 - 8,369 8,369 - 9,242 9,242 - 9,639 9,639 RBS Group • Annual Report and Accounts 2006 195 Financial statements

  • Page 197
    ... Group Loans and advances to banks and customers £m Treasury bills, debt securities and equity shares £m Netting and offset (2) £m 2006 Derivatives £m Other (1) £m Total £m UK Central and local government Manufacturing Construction Finance Service industries and business activities...

  • Page 198
    Group Loans and advances to banks and customers £m Treasury bills, debt securities and equity shares £m Netting and offset £m 2006 Derivatives £m Other (1) £m Total £m (2) Total Central and local government Manufacturing Construction Finance Service industries and business activities ...

  • Page 199
    ... Group Loans and advances to banks and customers £m Treasury bills, debt securities and equity shares £m Netting and offset (2) £m 2005 Derivatives £m Other (1) £m Total £m UK Central and local government Manufacturing Construction Finance Service industries and business activities...

  • Page 200
    Group Loans and advances to banks and customers £m Treasury bills, debt securities and equity shares £m Netting and offset (2) £m 2005 Derivatives £m Other (1) £m Total £m Total Central and local government Manufacturing Construction Finance Service industries and business activities ...

  • Page 201
    ... of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties and indemnities. Commitments Commitments to lend - under a loan commitment the Group agrees to make funds available...

  • Page 202
    ... to defined benefit pension schemes Other provisions utilised Depreciation and amortisation Elimination of foreign exchange differences Other non-cash items Net cash inflow from trading activities (Increase)/decrease in loans and advances to banks and customers Increase in securities Decrease...

  • Page 203
    ... million). Certain subsidiary undertakings are required by law to maintain reserve balances with the Federal Reserve Bank in the US. Such reserve balances amounted to US$13 million at 31 December 2006 (2005 - US$156 million). Financial statements 202 RBS Group • Annual Report and Accounts 2006

  • Page 204
    ... in the income statement grossed-up for interest payable and fees and commissions payable. RBS Group • Annual Report and Accounts 2006 203 Financial statements Global Banking & Markets UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Central...

  • Page 205
    ...Banking & Markets UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Central items Eliminations Net gain on sale of strategic investments Financial statements... 2,944 6,076 57 2,088 (8,498) 33,377 - 33,377 204 RBS Group • Annual Report and Accounts 2006

  • Page 206
    ... 2005 Inter segment £m Total £m External £m 2004 Inter segment £m Total £m Total income Global Banking & Markets UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Central items Net gain on sale of strategic investments Operating profit before tax...

  • Page 207
    ... Group Global Banking & Markets £m UK Corporate Banking £m Wealth Retail Management £m £m Ulster Bank £m RBS Insurance £m Central items £m Citizens £m Total £m At 1 January 2005 Currency translation and other adjustments Arising on acquisitions during the year Disposals At 1 January 2006...

  • Page 208
    ... aggregate remuneration of directors and other members of key management during the year was as follows: Group 2006 £000 2005 £000 RBS Group • Annual Report and Accounts 2006 207 Financial statements Short-term benefits Post-employment benefits Other long-term Share-based payments 41,003 11...

  • Page 209
    ...: 2006 £000 2005 £000 Loans and advances to customers Customer accounts 2,188 18,575 3,090 12,604 Key management have banking relationships with Group entities which are entered into in the normal course of business. Key management had no reportable transactions or balances with the company...

  • Page 210
    ...of premiums or discounts. Other debt securities and equity shares are carried at fair value. IFRS Under IAS 39, financial assets are classified into held-tomaturity; available-for-sale; held-for-trading; designated as at fair value through profit or loss; and loans and receivables. Financial assets...

  • Page 211
    ... an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment. 210 RBS Group • Annual Report and Accounts 2006

  • Page 212
    ... and related funding are presented separately. A financial liability is removed from the balance sheet when, and only when, it is extinguished i.e. when the obligation specified in the contract is discharged or cancelled or expires. RBS Group • Annual Report and Accounts 2006 211 Financial...

  • Page 213
    ...bills Loans and advances to banks Loans and advances to customers Debt securities Equity shares Intangible assets Property, plant and equipment Settlement balances Derivatives at fair value Prepayments, accrued income and other assets Total assets Liabilities Deposits by banks Customer accounts Debt...

  • Page 214
    ... 2005 Financial assets - designated as at fair value through profit or loss - available-for-sale 2,579 40,161 2,728 39,718 - - - - Financial liabilities - designated as at fair value through profit or loss 9,976 10,071 - - RBS Group • Annual Report and Accounts 2006 213 Financial...

  • Page 215
    ...income as the accumulated benefit obligation (the current value of accrued benefits without the allowance for future salary increases) exceeded the fair value of plan assets and a prepayment was recorded. Financial statements (f) Pension costs - acquisition accounting On the acquisition of NatWest...

  • Page 216
    ...Trading securities and derivatives are carried at fair value. Designation on initial recognition is not allowed. Securities held by the Group's private equity business are considered to be held by investment companies and carried at fair value with changes in fair value being reflected in net income...

  • Page 217
    ...Exchange differences are included with other unrealised gains and losses on available-for-sale securities and reported in a separate component of equity. Only financial liabilities that are derivatives and short positions are carried at fair value with changes in fair value recognised in net income...

  • Page 218
    ... of the Group's 2004 consolidated income statements and balance sheets, all IFRS have been applied except those relating to financial instruments and insurance contracts where UK GAAP principles then current have been applied. IFRS or relevant UK GAAP (a) Acquisition accounting All integration...

  • Page 219
    ... benefit obligation. Movements in the additional minimum liability are recognised in a separate component of equity. (f) Long-term assurance business The shareholders' interest in the long-term assurance fund is valued as the discounted value of the cash flows expected to be generated from in-force...

  • Page 220
    ... US GAAP Investment securities held by the Group's private equity business are considered to be held by investment companies and carried at fair value, with changes in fair value being reflected in net income. The Group's other investment debt securities and marketable investment equity shares are...

  • Page 221
    ... of a plan as of the year-end date. It also specifies additional disclosures. It is effective for the Group's 2006 US GAAP reporting. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 ('SAB No. 108') 'Financial Statements - Considering the Effects of...

  • Page 222
    ... Loan origination Pension costs Sale and leaseback transactions Long-term assurance business Extinguishment of liabilities Financial instruments Derivatives and hedging Liabilities and equity Implementation timing difference - intangibles Other Taxation Net income available for ordinary shareholders...

  • Page 223
    ...prices of the options are greater than the average market price of the ordinary shares during the relevant period. At 31 December 2006, there were 5.1 million such options outstanding (2005 - 17.3 million; 2004 - 8.7 million). Financial statements 222 RBS Group • Annual Report and Accounts 2006

  • Page 224
    ... 2005 % 5.4 4.0 2.7 6.7 2004 % Weighted average allocations of market value of plan assets at 31 December: Equity shares Debt securities Other % % 60.5 33.8 5.7 62.9 27.6 6.7 60.7 33.3 6.0 61.3 34.5 4.2 56.7 31.1 12.2 RBS Group • Annual Report and Accounts 2006 223 Financial statements

  • Page 225
    ... statements (28) 2,499 4,531 (146) 2,381 4,413 49 Post balance sheet events There have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts. 224 RBS Group • Annual Report and Accounts 2006

  • Page 226
    ... Amounts in accordance with UK GAAP 243 Exchange rates 244 Off-balance sheet arrangements 246 Economic and monetary environment 246 Supervision and regulation 250 Description of property and equipment 250 Major shareholders RBS Group • Annual Report and Accounts 2006 225 Additional information

  • Page 227
    ... (1) Total income Operating expenses (2,3,4) Insurance net claims Operating profit before impairment losses Impairment losses Operating profit before tax Tax Profit for the year Minority interests Preference dividends Profit attributable to ordinary shareholders Notes: (1) Includes gain on sale of...

  • Page 228
    ... ordinary share - pence Dividends per ordinary share - pence Dividend payout ratio (2) Share price per ordinary share at year end - £ Market capitalisation at year end - £bn Net asset value per ordinary share - £ Return on average total assets (3) Return on average ordinary shareholders' equity...

  • Page 229
    ... Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages Individuals - other Finance leases and instalment credit Accrued interest Total domestic Overseas residents Total UK offices Overseas US Rest of the World Total Overseas offices Loans...

  • Page 230
    ... to income statement as a % of gross loans and advances to customers Domestic Foreign Total Notes: (1) Includes closing provisions against loans and advances to banks of £2 million (2005 - £3 million; 2004 - £6 million). (2) Closing customer provisions exclude closing provisions against loans and...

  • Page 231
    ... customer. IFRS 2006 2005 2004 % of loans % of loans % of loans Closing to total Closing to total Closing to total provision loans provision loans provision loans £m % £m % £m % Domestic Central and local government Manufacturing Construction Finance Service industries and business activities...

  • Page 232
    ... and business activities Property Individuals - home mortgages Individuals - others Finance leases and instalment credit Total domestic Foreign Total recoveries - - - 5 1 - 101 12 119 96 215 1 1 - 2 2 - 84 7 97 75 172 1 - 2 1 - 1 78 2 85 59 144 RBS Group • Annual Report and Accounts 2006 231...

  • Page 233
    ... and revolving credit facilities where identification as 90 days overdue is not feasible. IFRS 2006 £m 2005 £m 2004 £m Gross income not recognised but which would have been recognised under the original terms of non-accrual and restructured loans Domestic Foreign Additional information 370 77...

  • Page 234
    ...-free Demand deposits - interest-bearing Time deposits - savings Time deposits - other Total overseas offices (see below) Total deposits Held-for-trading Designated as at fair value through profit or loss Amortised cost Banking business Trading business Total deposits Overseas US Rest of the World...

  • Page 235
    ... and branches Certificates of deposit Other time deposits Total 7,654 67,175 1,556 3,637 1,674 3,049 201 5,701 11,085 79,562 8,647 22,783 106,259 853 2,799 8,845 122 2,909 7,754 - 6,847 12,749 9,622 35,338 135,607 Additional information 234 RBS Group • Annual Report and Accounts 2006

  • Page 236
    ... expense, including or excluding interest on deposits and debt securities in issue, as appropriate, and the proportion of rental expense deemed representative of the interest factor (one third of total rental expenses). RBS Group • Annual Report and Accounts 2006 235 Additional information

  • Page 237
    ... - UK GAAP Loans and advances to banks (net of provisions) Loans and advances to customers (net of provisions) Debt securities and equity shares Intangible fixed assets Other assets Total assets Called up share capital Share premium account Other reserves Profit and loss account Shareholders' funds...

  • Page 238
    ...earnings per ordinary share - pence Dividends per ordinary share - pence Dividend payout ratio Share price per ordinary share at period end - £ Market capitalisation at period end - £bn Net asset value per ordinary share - £ Return on average total assets (2) Return on average equity shareholders...

  • Page 239
    ... Finance Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages Individuals - other Finance leases and instalment credit Total domestic Overseas residents Total UK offices Overseas US Rest of the World Total overseas offices Loans...

  • Page 240
    ... against loans and advances to banks. 196,589 153,102 349,691 1.32% 1.06% 1.21% 167,377 89,076 256,453 1.46% 1.65% 1.53% 145,274 81,970 227,244 1.78% 1.63% 1.72% 0.50% 0.29% 0.41% 0.56% 0.59% 0.57% 0.56% 0.58% 0.57% RBS Group • Annual Report and Accounts 2006 239 Additional information

  • Page 241
    ... customer. UK GAAP 2004 2003 2002 % of loans % of loans % of loans Closing to total Closing to total Closing to total provision loans provision loans provision loans £m % £m % £m % Domestic Central and local government Manufacturing Construction Finance Service industries and business activities...

  • Page 242
    ... and business activities Property Individuals - home mortgages Individuals - others Finance leases and instalment credit Total domestic Foreign Total recoveries 1 2 1 - 1 81 2 88 59 147 - - 3 - - 26 9 38 34 72 1 - 1 1 - 27 7 37 26 63 RBS Group • Annual Report and Accounts 2006 241 Additional...

  • Page 243
    Additional information continued Amounts in accordance with UK GAAP (continued) Risk elements in lending and potential problem loans 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, ...

  • Page 244
    ... 1.7857 1.6354 1.6128 1.5032 (2) The rates used by the Group for translating US dollars into sterling in the preparation of its financial statements. (3) On 27 February 2007, the Noon Buying Rate was £1.00 = US$1.9661. RBS Group • Annual Report and Accounts 2006 243 Additional information

  • Page 245
    ... liabilities include those arising from standby letters of credit that support customer debt issues and those relating to customers' trading activities such as performance and customs bonds, warranties and indemnities. Additional information 244 RBS Group • Annual Report and Accounts 2006

  • Page 246
    ... obligations to purchase goods or services Total The tables above do not include undated loan capital. 602 310 659 1,571 1,065 591 458 2,114 2,971 512 148 3,631 8,363 1,700 20 10,083 13,001 3,113 1,285 17,399 RBS Group • Annual Report and Accounts 2006 245 Additional information

  • Page 247
    ... activities regulated by the FSA. These companies are referred to as 'authorised firms'. The FSA supervises the banking business of the UK based banks in the Group, including The Royal Bank of Scotland, NatWest, Coutts & Co, Ulster Bank Limited and Tesco Personal Finance Limited. General insurance...

  • Page 248
    ... firms. The Financial Services Compensation Scheme (financed by levies on authorised firms) is available to provide compensation up to certain limits if a firm collapses owing money to investors, depositors or policyholders. RBS Group • Annual Report and Accounts 2006 247 Additional information

  • Page 249
    ... Deposit Insurance Corporation, and The Royal Bank of Scotland's New York branch is supervised by the New York State Banking Department. The company's US insurance agencies are regulated by state insurance authorities. The company's US securities affiliates, including Greenwich Capital Markets...

  • Page 250
    ... introduces two new elements - a formal supervisory review process (Pillar 2) and more extensive market disclosures (Pillar 3). The Group is making good progress in both areas, in advance of formal implementation in 2008. 5 RBS Group • Annual Report and Accounts 2006 249 Additional information

  • Page 251
    ... company. As at 31 December 2006, almost all of the company's US$ denominated preference shares were held by shareholders registered in the US. All other shares were predominantly held by shareholders registered outside the US. Additional information 250 RBS Group • Annual Report and Accounts...

  • Page 252
    ... gains tax 253 Analyses of ordinary shareholders 254 Trading market 256 Dividend history 257 Taxation for US holders 259 Exchange controls 259 Memorandum and articles of association 259 Documents on display 260 Important addresses 260 Principal offices RBS Group • Annual Report and Accounts 2006...

  • Page 253
    ... Annual General Meeting 25 April 2007 at 2.00 pm Edinburgh International Conference Centre, The Exchange, Morrison Street, Edinburgh 3 August 2007 Interim results Dividends Payment dates: Ordinary shares (2006 Final) Ordinary shares (2007 Interim) Cumulative preference shares Non-cumulative dollar...

  • Page 254
    ...ordinary shareholders at 31 December 2006 shareholdings Number of shares - millions % of total Individuals Banks and nominee companies Investment trusts Insurance companies Other companies Pension trusts Other corporate... RBS Group • Annual Report and Accounts 2006 253 Shareholder information

  • Page 255
    ... Deposit Agreements, among the company, The Bank of New York, as depository, and all holders from time-to-time of ADRs issued thereunder. Currently, there is no non-United States trading market for any of the non-cumulative dollar preference shares. All of the non-cumulative dollar preference shares...

  • Page 256
    ....60 - - - - - - 26.76 24.67 122.23 106.06 129.57 116.70 125.14 110.58 130.78 111.06 116.36 100.07 Notes: (1) Redeemed in January 2007. (2) Price quoted as a % of US$1,000 nominal. RBS Group • Annual Report and Accounts 2006 255 Shareholder information

  • Page 257
    Shareholder information continued Dividend history Preference and other non-equity dividends 2006 Subordinated liabilities $ £ Equity $ £ 2005 Subordinated liabilities £ Equity £ 2004 £ 2003 £ 2002 £ Amount per share Non-cumulative preference shares of US$0.01 - Series B (redeemed January ...

  • Page 258
    ...more than seven years before the death of the donor). Non-cumulative dollar preference shares or ADSs held by the trustees of a settlement will also be subject to UK inheritance tax. Special rules apply to such settlements. RBS Group • Annual Report and Accounts 2006 257 Shareholder information

  • Page 259
    ... a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the non-cumulative dollar preference share or ADS is...

  • Page 260
    ... time in the relevant year of assessment or accounting period carries on a trade in the UK through a branch or agency to which the PROs are attributable. Annual tax charges Corporate US Holders of PROs may be subject to annual UK tax charges (or relief) by reference to fluctuations in exchange rates...

  • Page 261
    ... Strand London WC2R 0QS The Royal Bank of Scotland International Limited Royal Bank House 71 Bath Street St Helier Jersey Channel Islands JE4 8PJ NatWest Offshore 23/25 Broad Street St Helier Jersey Channel Islands JE4 8QJ Shareholder information 260 RBS Group • Annual Report and Accounts 2006

  • Page 262
    The Royal Bank of Scotland Group plc Group Headquarters PO Box 1000 Gogarburn Edinburgh EH12 1HQ