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Make it happenrbs.com
Annual Report and Accounts 2007
Adjusted
earnings per
share up
18%
Profit before
tax up
8%
Dividend up
10%
Return
on equity
19.9%

Table of contents

  • Page 1
    Annual Report and Accounts 2007 Profit before tax up 8% Adjusted earnings per share up Return on equity 18% Dividend up 19.9% 10% rbs.com Make it happen

  • Page 2

  • Page 3
    ... Building financial capability Promoting financial inclusion Customer service Citizens in the community Our employees RBS and the environment Report and accounts 27 91 Business review Governance 117 Financial statements 213 Additional information 235 Shareholder information RBS Group • Annual...

  • Page 4
    ... issue of ordinary shares in May 2007. FTSE Banks Source: Datastream Group operating profit * Corporate Markets Global Banking & Markets UK Corporate Banking Total Corporate Markets Retail Markets Retail Wealth Management Total Retail Markets Ulster Bank Citizens RBS Insurance Measuring our success...

  • Page 5
    ...57.7m 36% 40m invested in our communities. reduction in the Group's carbon footprint. customers served in six continents 1m 24% No.1 new savings accounts opened in the UK reduction in global fraud losses in the UK for reduction in internet fraud RBS Group • Annual Report and Accounts 2007 03

  • Page 6
    Group profile RBS was named Global Bank of the Year 2007 by The Banker magazine Great Britain Corporate Markets Retail Markets Ulster Bank RBS Insurance Manufacturing ABN AMRO Americas Corporate Markets Citizens ABN AMRO The Royal Bank of Scotland has operated in Great Britain since 1727. The ...

  • Page 7
    ... the number five corporate bank in Asia-Pacific, excluding Japan, as measured by number of corporate relationships. With the ABN AMRO acquisition, we have access to 3.7 million new retail customers. RBS Coutts grew income by 51% in US dollar terms. RBS Group • Annual Report and Accounts 2007 05

  • Page 8
    ... 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 - 2007 key global rankings ifr magazine named us Sterling Bond House...

  • Page 9
    ... trade finance. GBM and ABN AMRO's capabilities will make us a global top five bank in products including Global Securitisation, International Bonds and International Cash Management. Contribution (£m) - from date of 07 128 acquisition 17 October 2007. RBS Group • Annual Report and Accounts 2007...

  • Page 10
    ...in RBS being named as one of the 100 most sustainable companies globally at the Davos World Economic Forum in 2008. Our commitment to the environment is also good for our business and in 2007 we remained one of the world's leading financiers of renewable energy projects. 2008 We have a great deal to...

  • Page 11
    RBS Group • Annual Report and Accounts 2007 09

  • Page 12
    Group Chief Executive's review Group Chief Executive's review 10 RBS Group • Annual Report and Accounts 2007

  • Page 13
    For The Royal Bank of Scotland Group, 2007 was defined by another strong operating performance and by the acquisition of ABN AMRO. The diversity and quality of our business platform enabled us to deliver good financial results, with operating profit for the enlarged RBS Group rising by 9% to £10,...

  • Page 14
    ... two divisions, Global Banking & Markets ('GBM') and Global Transaction Services ('GTS'). The first corresponds largely to the existing GBM, enhanced by the product capabilities and customer franchises of ABN AMRO. GTS will combine ABN AMRO's world class capability in international payments with...

  • Page 15
    ... to meet clients' needs around the globe. Integration of ABN AMRO's wholesale businesses within GBM brings considerable strengths in equities, corporate finance and advisory services, emerging markets and transaction services, including cash management and trade finance. GBM's Tokyo office was...

  • Page 16
    ... carbon offset scheme, while our services to businesses that trade internationally were enhanced by Supplier Finance - a new global supply chain finance product - and Tradeflow - an automated online trade finance service. We maintained our rigorous focus on credit quality and risk management. As...

  • Page 17
    ... new savings accounts. In Business Banking we maintained our leading share of the SME market and invested in people, technology and service quality to secure future growth, including returning 500 managers to branches where they can work more closely with customers. Tesco Personal Finance celebrated...

  • Page 18
    ...our new joint private banking initiative opened for business in Beijing and Shanghai in March. Coutts & Co launched its first financial education programme for children of clients in July 2007. The 21/2 day Assets & Responsibilities Course was designed to engage young people in wealth management and...

  • Page 19
    .... Ulster Bank Group continued to expand its footprint across the island of Ireland. In 2007, we opened seven new joint branch and business centres for Ulster Bank and three new First Active stores. This is the new branch and business centre at Blackpool in County Cork. RBS Group • Annual Report...

  • Page 20
    ... economic conditions affected our personal lending, mortgage and auto loans businesses. However, Citizens continued to make progress in developing its corporate and commercial franchise. In doing so it drew on the strengths of the wider Group, enabling us to make private placements, public bond...

  • Page 21
    ...up by 7%. In the last two weeks of June, the flood claims team at RBS Insurance dealt with more calls in one day than they usually receive in a typical summer month. Direct Line introduced its new 'Open For Business' insurance products in September. RBS Group • Annual Report and Accounts 2007 19

  • Page 22
    ...&T Williams Formula 1 Team made the UK's first public transaction in East London. We launched a new customer service commitment, where we aim to refund customers who have been innocent victims of fraud within 24 hours of contact. Divisional review 20 RBS Group • Annual Report and Accounts 2007

  • Page 23
    ... AMRO, RBS is now the leading corporate bank in Europe in terms of relationships with large corporates and financial institutions. This is the Paris office of ABN AMRO. India is already an important market for ABN AMRO. It has a network of 28 branches. RBS Group • Annual Report and Accounts 2007...

  • Page 24
    ... business. We have taken a range of actions to protect our customers. Working with others, our contribution to industry initiatives in 2007 was equivalent to 14,000 days of police officers' time. RBS was among the first banks to load data onto the new Fraud Intelligence Sharing System. Our internal...

  • Page 25
    ..., postsecondary education or business ownership. This anti-poverty strategy combines learning about financial management with incentives to save for long-term assets that improve the economic security and lifetime earning power of participants. RBS Group • Annual Report and Accounts 2007 23

  • Page 26
    ... charity, Tommy's. Ulster Bank's musical outreach programme is designed to nurture young primary school talent across the island of Ireland. Children from St Paul's Junior National School in Dublin enjoy their workshop. Corporate Responsibility 24 RBS Group • Annual Report and Accounts 2007

  • Page 27
    ... creative activities and was the first to benefit when the programme was extended to the Midwest. in them. It also helps us to develop the products and services to meet our customers' needs, and to sustain and enhance the value we return to our shareholders. Last year we convened the new Strategic...

  • Page 28
    ... across the UK. Here she is helping pupils at Ramsey School Essex. Sharon Johnson who has worked for RBS since leaving school 17 years ago, took a two month sabbatical to work at the Sepilok Orangutan Sanctuary in Borneo. Corporate Responsibility 26 RBS Group • Annual Report and Accounts 2007

  • Page 29
    ... of business 32 Risk factors 34 Financial highlights 35 Summary consolidated income statement 38 Analysis of results 48 Divisional performance 66 Consolidated balance sheet 68 Cash flow 69 Capital resources 70 Risk and capital management RBS Group • Annual Report and Accounts 2007 27 Business...

  • Page 30
    ..., 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 31
    ...-looking statements contained in this document include, but are not limited to: general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of...

  • Page 32
    ... range of credit and charge cards to personal and corporate customers and provides card processing services for retail businesses. Retail is the leading merchant acquirer in Europe and ranks third globally. It also includes Tesco Personal Finance, The One account, MINT , First Active UK, Direct Line...

  • Page 33
    ... Division sells general insurance products through independent brokers. Manufacturing supports the customer-facing businesses and provides operational, technology and customer support in telephony, account management, lending and money transmission, global purchasing, property and other services...

  • Page 34
    ...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 implemented risk management methods to mitigate and control...

  • Page 35
    ...control. Such changes would affect the profitability of current and future insurance products and services. The Group re-insures some of the risks it has assumed. Operational risks are inherent in the Group's business The Group's businesses are dependent on the ability to process a very large number...

  • Page 36
    ... investments and subsidiaries, and average ordinary equity shareholders' funds. Overview of results As discussed on page 28, the results of ABN AMRO are fully consolidated in the Group's financial statements. Consequently, the statutory results of the RBS for the year ended 31 December 2007...

  • Page 37
    ... 14,271 4,413 (100) 9,958 1,707 8,251 97 458 240 7,936 2,378 5,558 - 5,558 57 109 5,392 56.5p 0.6p 3.3p (1.8p) 58.6p * Prior year per share data have been restated to reflect the bonus issue of ordinary shares in May 2007. RBS Group • Annual Report and Accounts 2007 35 Business review

  • Page 38
    ... final dividend will be paid on 6 June 2008 to shareholders registered on 7 March 2008. The total dividend is covered 2.4 times by earnings before purchased intangibles amortisation and integration costs. Balance sheet Total assets were £1,900.5 billion at 31 December 2007. The acquisition of ABN...

  • Page 39
    ... profit attributable 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 2007 37 Business...

  • Page 40
    ... interest rate paid on average interest-bearing liabilities of the banking business. (5) Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business. Business review 38 RBS Group • Annual Report and Accounts 2007

  • Page 41
    ... 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 2007...

  • Page 42
    ... 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. 40 RBS Group • Annual Report and Accounts 2007

  • Page 43
    ...: 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 Movement in net interest income UK...

  • Page 44
    ...' share 2007 compared with 2006 Non-interest income increased by 6%, £1,041 million to £18,447 million, including £960 million from the acquisition of ABN AMRO. Good organic growth was offset by write-downs in Global Banking & Markets in respect of US mortgage-related and leveraged finance...

  • Page 45
    ... 2007. Positions are valued by considering recent syndication prices in the same or similar assets, prices in the secondary loan market, and with reference to relevant indices for credit products such as the LevX, LCDX and ITraxx and CDX credit default swap indices. Group (including ABN AMRO...

  • Page 46
    ...The Group's ratio 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. Business review 44 RBS Group • Annual Report and Accounts 2007

  • Page 47
    ... relation to integration costs are set out below. At 31 December 2006 £m Charge to income statement £m Utilised At during 31 December the year 2007 £m £m Staff costs Premises and equipment Other 23 - 8 31 18 4 86 108 (37) (2) (93) (132) 4 2 1 7 RBS Group • Annual Report and Accounts 2007...

  • Page 48
    ... provisions 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. Business review 46 RBS Group • Annual Report and Accounts 2007

  • Page 49
    ...UK corporation tax of 30% principally due to certain non-taxable capital gains, changes to deferred tax balances following the change in rate of corporation tax and release of tax provisions following the finalisation of prior year issues. RBS Group • Annual Report and Accounts 2007 47 Business...

  • Page 50
    ... division. 2007 £m 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 Insurance Manufacturing Central items Operating profit (excluding ABN AMRO) ABN AMRO...

  • Page 51
    ...14% of loans and advances to customers. Average risk-weighted assets rose by 12%, with disciplined capital allocation and increasing returns. The ratio of operating profit to average risk-weighted assets improved from 2.3% to 2.5%. RBS Group • Annual Report and Accounts 2007 49 Business review

  • Page 52
    ....9 44.7 120.0 2007 compared with 2006 Global Banking & Markets (GBM) achieved strong performances in many of its businesses in 2007, with particularly strong growth in interest rate and currency trading activities, but financial results were held back by challenging credit market conditions in the...

  • Page 53
    ...2006 we arranged over $450 billion of financing for our corporate and institutional customers, up 17% from 2005. We ranked first among managers of global asset-backed and mortgage-backed securitisations and fourth among managers of global syndicated loans, while among managers of international bonds...

  • Page 54
    ...of service provided to our expanding customer base, as well as further investment in our electronic banking proposition. Impairment losses were 4% lower than in 2005 at £189 million. Portfolio risk remained stable and the credit environment benign. 52 RBS Group • Annual Report and Accounts 2007

  • Page 55
    ...-leading customer satisfaction ratings. Average risk-weighted assets fell by 3%, reflecting a change in business mix toward mortgage lending as well as careful balance sheet management, including increased use of securitisations. RBS Group • Annual Report and Accounts 2007 53 Business review

  • Page 56
    ... 975,000 new personal current accounts in 2007 and maintaining the Group's joint number one position in the current account market. RBS and NatWest continue to lead the other major high street banks in Great Britain for customer satisfaction. We continue to focus on sales through the branch channel...

  • Page 57
    ... individual pensions growth, boosted by A-Day, helped underpin the outturn. Sales of guaranteed bonds were also particularly strong, and helped support a new business margin which improved significantly over the period. The product proposition was strengthened across all lines. Latest market share...

  • Page 58
    ... gross Investment management assets - excluding deposits Customer deposits Risk-weighted assets 10.5 35.1 33.9 7.5 8.8 28.2 28.4 6.4 7.8 25.4 25.4 6.0 2007 compared with 2006 Wealth Management's offering of private banking and investment services continued to deliver very strong growth in income...

  • Page 59
    ... our branch and business centre footprint and recruited additional customer-facing staff, particularly in Corporate Markets. Despite tighter housing market conditions, arrears trends saw no deterioration in 2007 and impairment losses remained stable at £104 million. RBS Group • Annual Report and...

  • Page 60
    ...both corporate lending, where average loans and advances increased by 32%, and deposits, with Ulster Bank winning a share of new business current accounts well in excess of its historic market share, particularly in the Republic of Ireland. Average mortgage balances grew by 26%, although the rate of...

  • Page 61
    ... portfolios, including home equity lines of credit, remain in excess of 700, with 97% of lending secured. Average loan-to-value ratios at the end of 2007 were 58% on our residential mortgage book and 74% on our home equity book. RBS Group • Annual Report and Accounts 2007 59 Business review

  • Page 62
    ... 0.32% of loans 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. Business review 60 RBS Group • Annual Report and Accounts 2007

  • Page 63
    ... profitability in 2007. Home insurance grew across all of our own brands in the second half, and we achieved particular success in the distribution of home policies through our bank branches, with sales up 40%. In our partnerships and broker business, providing underwriting and processing services...

  • Page 64
    ... and improvements 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. Business review 62 RBS Group • Annual Report and Accounts 2007

  • Page 65
    ... investment in software development. Group Property costs rose by 3% to £962 million, reflecting refurbishment and expansion of the Ulster Bank network and continuing investment to support the strong growth of our business in Europe and Asia, including the opening of a new Corporate Markets office...

  • Page 66
    ... in IFRS for hedge accounting is transferred to the Group's central treasury function. Departmental and other costs were 10% higher at £442 million largely attributable to additional pension costs and higher securitisation costs. Business review 64 RBS Group • Annual Report and Accounts 2007

  • Page 67
    ... at 31 December (full time equivalents rounded to the nearest hundred) 2007 2006 2005 Global Banking & Markets UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Centre RFS Holdings Group total 10,300 9,500 37,500 5,000 6,400 22,500 17,300 25,200 2,900...

  • Page 68
    ... 2007 2007 £m 2006 £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 Intangible assets Property, plant and equipment Prepayments, accrued income...

  • Page 69
    ... 2006 final ordinary dividend and the 2007 interim dividend, £3.0 billion and preference dividends of £0.3 billion, £0.5 billion reduction in available-for-sale reserves, and a £0.4 billion decrease in cash flow hedging reserve. RBS Group • Annual Report and Accounts 2007 67 Business review

  • Page 70
    ... million subordinated 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. Business review 68 RBS Group • Annual Report and Accounts 2007

  • Page 71
    ...business. In carrying out this policy, the Group has regard to the supervisory requirements of the Financial Services Authority ("FSA"). The FSA uses Risk Asset Ratio ("RAR") as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its risk-weighted assets...

  • Page 72
    ... the Group balance sheet risks. These risks are managed by setting limits and controls for capital adequacy, funding and liquidity, intra-group exposures, and nontrading interest rate, equity and foreign currency risk. - - Business review 70 RBS Group • Annual Report and Accounts 2007

  • Page 73
    ... policies. • Independence underpins the approach to risk management, which is reinforced throughout the Group by appropriate reporting lines. Developments in 2007 Following its acquisition by RFS Holdings, ABN AMRO is subject to the Group's high level controls and oversight by RBS' control...

  • Page 74
    ... management of Business review portfolio concentrations as measured by risk reporting and stress testing, where credit risk may be mitigated through promoting asset sales, buying credit protection or curtailing risk appetite for new transactions. 72 RBS Group • Annual Report and Accounts 2007

  • Page 75
    ... 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 ABN AMRO excluding minority interest ABN AMRO minority interest 2007 £bn 2006 £bn 2005 £bn 330...

  • Page 76
    ...AQ2 AQ3 AQ4 2007 including ABN AMRO 2007 including ABN AMRO net of minority interest 2007 excluding ABN AMRO AQ5 2006 0% 10% 20% 30% 40% 50% Note: Graph data are shown net of provisions and reverse repurchase agreements. Business review 74 RBS Group • Annual Report and Accounts 2007

  • Page 77
    ... which are well diversified across a range of sectors. Banks and financial services account for 24% of credit risk assets (2006 - 20%) and public sector and quasi government credit risk assets make up the remaining 15% (2006 - 16%). RBS Group • Annual Report and Accounts 2007 75 Business review

  • Page 78
    ...ABN AMRO net of minority interest, the largest category is lending to banks, corporates, sovereigns and quasi governments which represented 48% of credit risk assets as at 31 December 2007 (2006 - 41%). Lending to individuals accounted for 20% (2006 - 26%). Business review 76 RBS Group • Annual...

  • Page 79
    ...49% of customer loans and advances at 31 December 2007 (2006 - 1.57%). 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 ABN AMRO excluding minority...

  • Page 80
    ... income statement in 2007 were £2,106 million. Excluding ABN AMRO minority interest, the charge was £1,938 million, up £61 million (3%) from 2006 and as a percentage of customer lending, the impairment charge was 0.34% (2006 - 0.46%). Business review 78 RBS Group • Annual Report and Accounts...

  • Page 81
    ... 2007 £m Loan impairment provisions (1) Latent loss provisions Collectively assessed provisions Individually assessed provisions Total provisions Total provision as a % of customer loans and advances - gross (2) Notes: Including ABN AMRO 2007 £m Excluding ABN AMRO 2007 £m 2006 £m 2005...

  • Page 82
    ... Total customer accounts, long term funds and collateralised borrowing 1,054,293 Debt securities in issue up to one year remaining maturity 155,742 Deposits by banks (excluding repos) 149,595 Short positions 73,501 Total 1,433,131 Including ABN AMRO 2007 £m % Excluding ABN AMRO 2007 £m % 2006...

  • Page 83
    ... positions in various securities are held primarily by RBS Greenwich Capital in the US, RBS Global Banking & Markets and by ABN AMRO Global Markets. Excluding ABN AMRO, the level of funding from short term unsecured debt issuance, bank deposits (excluding repos) and short positions has increased...

  • Page 84
    ... Excluding ABN AMRO 2007 £m 2006 £m 2005 £m Net short-term wholesale market activity Debt securities, listed held-for-trading equity shares, treasury and other eligible bills Reverse repo agreements with banks and customers Less: repos with banks and customers Short positions Insurance companies...

  • Page 85
    ... approach to the management of liquidity risk within integrated banking groups such as the Group. Market risk Market risk is defined as the risk of loss resulting from adverse changes in risk factors such as interest rates, foreign currency and equity prices, together with related factors such as...

  • Page 86
    ...market risk exposure, including idiosyncratic risk, is presented in the table below. 2007 2006 Maximum £m Minimum £m Average £m Period end £m Maximum £m Minimum £m Average £m Period end £m Excluding ABN AMRO Interest rate Credit spread Currency Equity Commodity Diversification Total trading...

  • Page 87
    ... changes in market rates and prices on the fair value of the Group's trading portfolios. GEMC approves the high-level market risk stress test limit for the Group. The Group calculates a range of market risk stress tests each day. The objective of stress testing is to identify the loss that the Group...

  • Page 88
    ... Non-trading interest rate VaR Non-trading interest rate VaR for the Group's treasury and retail and commercial banking activities, including ABN AMRO on a fully consolidates basis, was £42.9 million at 31 December 2007 (2006 - £40.2 million) with the major exposure being to changes in longer term...

  • Page 89
    ... 11,975 5,409 47 662 3,755 2,120 23,968 2006 The exposure in Chinese RMB arises from the Group's strategic investment in Bank of China. RBS Group • Annual Report and Accounts 2007 87 Business review US dollar Euro Swiss franc Chinese RMB Other non-sterling 15,036 3,059 462 3,013 132 21,702...

  • Page 90
    ..., linked equity fund investments, private equity and venture capital investments, preference shares classified as equity and capital stock in the Federal Home Loans Bank and the Federal Reserve Bank. Insurance risk The Group is exposed to insurance risk, either directly through its businesses or...

  • Page 91
    ... the policy is written. 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...

  • Page 92
    ... in certain areas of retail banking, payment systems and cards. As previously disclosed by ABN AMRO, the United States Department of Justice has been conducting a criminal investigation into ABN AMRO's dollar clearing activities, Office of Foreign Assets Control compliance procedures and other...

  • Page 93
    Governance 92 Board of directors and secretary 94 Report of the directors 99 Corporate governance 105 Directors' remuneration report 115 Directors' interests in shares 116 Statement of directors' responsibilities RBS Group • Annual Report and Accounts 2007 91 Governance

  • Page 94
    ... of Corporate Banking & Financial Markets (CBFM) with responsibility for the integration of the NatWest and RBS Corporate Banking businesses. In October 2001 he was appointed Chief Executive CBFM, subsequently renamed Corporate Markets in January 2006. Chairman, Managing Board, ABN AMRO 6. Mark...

  • Page 95
    ... Insurers. He is currently chairman of Yell Group plc and a non-executive director of Swiss Reinsurance Company and Jardine Lloyd Thompson Group plc. He is also a trustee of the Crimestoppers Trust, an adviser to Duke Street Capital Private Equity and a board member of Pension Insurance Corporation...

  • Page 96
    ... at the Annual General Meeting, a final dividend of 23.1p per ordinary share totalling £2.3 billion (2006 - £2.1 billion) be paid on 6 June 2008 to members on the register at the close of business on 7 March 2008. Business review Activities The company is a holding company owning the entire...

  • Page 97
    ... everyone right across the Group, and during 2007 this approach was extended to a number of non-UK employees. Employees also participate in bonus incentive plans specific to their business and share in the Group's ongoing success through the Profit Share, Buy As You Earn and Sharesave schemes, which...

  • Page 98
    ... issues, employee practices, direct environmental impact, community investment, global lending and project finance, financial inclusion and capability and support for small businesses. The Group takes all these responsibilities seriously, continually monitoring and managing them through policies and...

  • Page 99
    ... period from 1 January 2007 to 27 February 2008. Directors' indemnities In terms of section 236 of the Companies Act 2006, the directors of the company, members of the Group Executive Management Committee and Approved Persons of the Group (under the Financial Services and Markets Act 2000) have been...

  • Page 100
    ... & Touche LLP as the company's auditor will be proposed at the forthcoming Annual General Meeting. By order of the Board. Miller McLean Secretary 27 February 2008 The Royal Bank of Scotland Group plc is registered in Scotland No. 45551. Governance 98 RBS Group • Annual Report and Accounts 2007

  • Page 101
    ... principal business activities. Members of executive management attend and make regular presentations at meetings of the Board. In addition to scheduled meetings, 20 ad hoc Board meetings and Chairman's Committee meetings were held during 2007 to consider the acquisition of ABN AMRO. These meetings...

  • Page 102
    ...risk management and capital planning and the format of the Board meetings. The Board also considered the range and 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...

  • Page 103
    ...' reports and a monthly report from the Group's investor relations department which includes an analysis of share price movements, 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...

  • Page 104
    ... or losses. The Board has established a process for the identification, evaluation and management of the significant risks faced by the Group, which operated throughout the year ended 31 December 2007 and to 27 February 2008, the date the directors approved the Report and Accounts. This process is...

  • Page 105
    ... and finance and risk management executives. At least twice per annum the Audit Committee meets privately with the external auditors. Since 2000, the Audit Committee has undertaken an annual programme of visits to the Group's business divisions and control functions. The object of the programme is...

  • Page 106
    ... committees have been responsible for reviewing each division's business. These committees report to the Audit Committee which has concluded that they operate effectively. Archie Hunter Chairman of the Audit Committee 27 February 2008 Governance 104 RBS Group • Annual Report and Accounts 2007

  • Page 107
    ... top 20 companies and major UK, European and US banks. Total potential rewards will be earned through achievement of demanding performance targets based on measures consistent with shareholder interests over the short, medium and longer term. • RBS Group • Annual Report and Accounts 2007 105...

  • Page 108
    ... taking account of the remuneration environment and the performance and responsibilities of the individual director. Benefits The Group operates The Royal Bank of Scotland Group Pension Fund ("the RBS Fund"), a non-contributory defined benefit fund for employees (including executive directors...

  • Page 109
    ... TSB Group plc and Standard Chartered PLC. Following the acquisition of ABN AMRO by the Consortium Banks in October 2007, the Remuneration Committee agreed that Fortis N.V. would replace ABN AMRO in the comparator group for awards made in 2006 and 2007, and also for awards to be made in 2008. The...

  • Page 110
    ...have been rebased to 100 for 2002. RBS 40 FTSE 100 20 0 2002 FTSE banks Source: Datastream 2003 2004 2005 2006 2007 Service contracts The company's policy in relation to the duration of contracts with directors is that executive directors' contracts generally continue until termination by either...

  • Page 111
    ...of The Royal Bank of Scotland Group Pension Fund ('the RBS Fund') and are contractually entitled to receive all pension benefits in accordance with its terms. The RBS Fund rules allow all members who retire early at the request of their employer to receive a pension based on accrued service with no...

  • Page 112
    ... 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. Governance 110 RBS Group • Annual Report and Accounts 2007

  • Page 113
    ...790 153,648 4.40 Mr Whittaker Note: (1) Options held under the sharesave schemes, which are not subject to performance conditions. The performance conditions for options granted in 2007 are detailed on page 107. RBS Group • Annual Report and Accounts 2007 111 Governance - 8,889 81,918 460...

  • Page 114
    ... their right over the underlying share equivalents at any time up to ten years from the date of grant. Governance No variation was made to any of the terms of the plan during the year. The performance measures are detailed on pages 106 and 107. 112 RBS Group • Annual Report and Accounts 2007

  • Page 115
    ...in April 2005. Performance is measured on a combination of growth in Profit before tax and Relative Return on Equity based on a comparison of Citizens with comparator US banks. No variation was made to any of the terms of the plan during the year. RBS Group • Annual Report and Accounts 2007 113...

  • Page 116
    ...' remuneration report continued Directors' pension arrangements During the year, Johnny Cameron, Sir Fred Goodwin and Gordon Pell accrued pensionable service 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...

  • Page 117
    ... December 2007 (2006 - 20,000). No other director had an interest in the preference shares during the year. No director held a non-beneficial interest in the shares of the company at 31 December 2007, at 1 January 2007 or date of appointment if later. RBS Group • Annual Report and Accounts 2007...

  • Page 118
    ... for safeguarding the assets of the company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. By order of the Board. Miller McLean Secretary 27 February 2008 Governance 116 RBS Group • Annual Report and Accounts 2007

  • Page 119
    ... statements 118 Independent auditors' report 120 Consolidated income statement 121 Balance sheets 122 Statements of recognised income and expense 123 Cash flow statements 124 Accounting policies 140 Notes on the accounts RBS Group • Annual Report and Accounts 2007 117 Financial statements

  • Page 120
    ...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 2007 which comprise the accounting policies, the balance sheets as at 31 December 2007 and 2006, the consolidated income statements, the...

  • Page 121
    ...equity, 7.7% of the Group's total income and 0.2% of the Group's profit after tax as of and for the year ended 31 December 2007. Our report dated 27 February 2008 which will be included in the Annual Report on Form 20-F for the year ended 31 December 2007 to be filed with the Securities and Exchange...

  • Page 122
    ...707 7,936 2,378 5,558 - 5,558 6 163 246 7,303 7,712 104 191 6,202 6,497 57 109 5,392 5,558 Per 25p ordinary share: Basic earnings Diluted earnings Dividends 9 9 7 76.4p 75.7p 32.2p 64.9p 64.4p 25.8p 56.5p 56.1p 20.2p Financial statements 120 RBS Group • Annual Report and Accounts 2007

  • Page 123
    ... income and other assets Assets of disposal groups Total assets Liabilities Deposits by banks Customer accounts Debt securities in issue Settlement balances and short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred taxation Insurance...

  • Page 124
    Statements of recognised income and expense 2007 £m for the year ended 31 December 2007 Group 2006 £m 2005 £m 2007 £m Company 2006 £m 2005 £m Available-for-sale investments Net valuation (losses)/gains taken direct to equity Net profit taken to income on sales Cash flow hedges Net (losses)/...

  • Page 125
    ... statements for the year ended 31 December 2007 Group Note 2007 £m 2006 £m 2005 £m 2007 £m Company 2006 £m 2005 £m Operating activities Operating profit before tax Adjustments for: Depreciation and amortisation Interest on subordinated liabilities Charge for defined benefit pension schemes...

  • Page 126
    ... income is earned when the payment or transaction occurs. Charges for payment services are usually debited to the customer's account, monthly or quarterly in arrears. Accruals are raised for services provided but not charged at period end. Financial statements 124 RBS Group • Annual Report and...

  • Page 127
    ... or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified as investment property. RBS Group • Annual Report and Accounts 2007 125 Financial statements

  • Page 128
    ...at foreign exchange rates ruling at the dates the values were determined. Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale non-monetary financial assets, for example equity shares, which...

  • Page 129
    ... at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses on held-for-trading financial assets are recognised in profit or loss as they arise. RBS Group • Annual Report and Accounts 2007 127 Financial statements

  • Page 130
    ... way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way purchases 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...

  • Page 131
    ... cost. All other financial liabilities are measured at amortised cost using the effective interest method (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...

  • Page 132
    ..., in the same periods during which the asset or liability affects profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is recognised in profit or loss immediately. Financial statements 130 RBS Group • Annual Report and Accounts 2007

  • Page 133
    ... take into account the option's exercise price, its term, the risk-free interest rate and the expected volatility of the market price of The Royal Bank of Scotland Group plc's shares. Vesting conditions are not taken into account when measuring fair value, but are reflected by adjusting the number...

  • Page 134
    ... interests in securitisations. Equity securities (held-for-trading, designated as at fair value though profit or loss and available-for-sale) - comprise equity shares of companies or corporations both listed and unlisted. Financial statements 132 RBS Group • Annual Report and Accounts 2007

  • Page 135
    ... value though profit or loss) - measured at fair value and principally comprise medium term notes. Short positions (held-for-trading) - arise in dealing and market making activities where treasury and other eligible bills, debt securities and equity shares are sold which the Group does not currently...

  • Page 136
    ... information other than observable market data(3) £bn Financial instruments measured at fair value Assets Fair value though profit or loss Loans and advances to banks Loans and advances to customers Treasury and other eligible bills and debt securities Equity shares Derivatives Available-for-sale...

  • Page 137
    ... and for major indices on such shares. Commodity prices - many commodities are actively traded in spot, forward and futures on exchanges in London, New York and other commercial centres. • • • • The Group refines and modifies its valuation techniques as markets and products develop and...

  • Page 138
    ... property type and geographic location, loan interest rate, loan to value ratios, debt service coverage ratios, prepayment rates, cumulative loan loss information, yields, investor demand, market volatility since the last securitisation, and credit enhancement. Where observable market prices...

  • Page 139
    ... to the financial asset or liability in question, such as credit spreads, derivative inputs and equity correlations, would reduce the fair value by up to £119 million or increase the fair value by up to £117 million. RBS Group • Annual Report and Accounts 2007 137 Financial statements

  • Page 140
    ... reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of cash-generating units; and the valuation of the separable assets of each business whose goodwill is being reviewed. Financial statements 138 RBS Group • Annual Report and Accounts 2007

  • Page 141
    ... on or after 1 July 2008 and is not expected to have a material effect on the Group or company. The IFRIC issued interpretation IFRIC 14 'IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction' in July 2007. The net pension asset that may be recognised by...

  • Page 142
    ... as follows: Group 2007 2006 2005 Financial statements Global Banking & Markets RFS Holdings excluding minority interest UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Centre RFS Holdings minority interest Total UK US Europe Rest of the World Total...

  • Page 143
    ... of 40 years. 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. Principal actuarial...

  • Page 144
    ... income and expense, of which £1,579 million (2006 - £521 million losses; 2005 - £2,150 million losses) relate to the Main scheme. Main scheme All schemes 2005 £m 2004 £m 2007 £m 2006 £m 2005 £m 2004 £m Financial statements History of defined benefit schemes Fair value of plan assets...

  • Page 145
    ... year was 20.7% (2006 - 29.3%; 2005 - 30.0%). The tax rate benefited from a reduction of £189 million in the Group's deferred tax liability following the change in the rate of UK Corporation Tax from 30% to 28% from 1 April 2008. Financial statements RBS Group • Annual Report and Accounts 2007...

  • Page 146
    ... by members in a general meeting. At the Annual General Meeting on 23 April 2008, a final dividend will be proposed in respect of 2007 of 23.1 pence per share (2006 - 22.1 pence per share) amounting to a total of £2.3 billion (2006 - £2.1 billion). The financial statements for the year ended 31...

  • Page 147
    ... 91,426 1,900,519 RBS Group • Annual Report and Accounts 2007 145 Financial statements Liabilities Deposits by banks (4) Customer accounts (5, 6) Debt securities in issue (7, 8) Settlement balances and short positions Derivatives Accruals, deferred income and other liabilities Retirement...

  • Page 148
    ...the credit risk premium payable by the Group. The carrying amount is £317 million (2006 - £383 million) lower than the principal amount. Amounts included in the consolidated income statement: 2007 £m Group 2006 £m 2005 £m Financial statements Gains on financial assets/liabilities designated...

  • Page 149
    ... 7,252 286 21,784 3 29,325 738 2,139 42 15 8,194 11,128 18,197 29,325 Equity Notes: (1) Includes amounts due from subsidiaries of £7,130 million (2006 - £7,252 million). (2) Due from subsidiaries. (3) Due to subsidiaries. RBS Group • Annual Report and Accounts 2007 147 Financial statements

  • Page 150
    ... value £m 2007 Carrying value £m Company 2007 Fair value £m 2006 Carrying value £m 2006 Fair value £m Financial assets Cash and balances at central banks Loans and advances to banks Loans and receivables Loans and advances to customers Loans and receivables Finance leases Debt securities Loans...

  • Page 151
    ... 12 months £m 2006 More than 12 months £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...

  • Page 152
    ... quality of financial assets by the Group's internal credit ratings. Group AQ1 £m AQ2 £m AQ3 £m AQ4 £m AQ5 £m Accruing past due £m Nonaccrual £m Impairment provision £m Total £m 2007 Cash and balance at central banks Treasury and other eligible bills Loans and advances to banks* Loans and...

  • Page 153
    ... following table analyses financial assets by location of office and by industry type. Group Loans and Treasury bills, advances to banks debt securities and customers and equity shares £m £m Netting and offset(2) £m 2007 Derivatives £m Other(1) £m Total £m UK Central and local government...

  • Page 154
    .... Group Loans and Treasury bills, advances to banks debt securities and customers and equity shares £m £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 155
    Group Loans and Treasury bills, advances to banks debt securities and customers and equity shares £m £m Netting and offset(2) £m 2006 Derivatives £m Other(1) £m Total £m Europe Central and local government Manufacturing Construction Finance Service industries and business activities ...

  • Page 156
    ... million relating to loans and advances to banks (2006 - £2 million; 2005 - £3 million). (3) There is no provision for impairment losses in the company. Group Impairment losses charged to the income statement Loans and advances to customers Debt securities Equity shares 2007 £m 2006 £m 2005...

  • Page 157
    ...and other events unrelated to credit quality. Loans that have been renegotiated in the past 12 months that would otherwise have been past due or impaired amounted to £930 million as at 31 December 2007 (2006 - £744 million). RBS Group • Annual Report and Accounts 2007 155 Financial statements

  • Page 158
    Notes on the accounts continued 13 Derivatives Companies in the Group transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk. The Group enters into fair value hedges, cash flow hedges and hedges of net investments in ...

  • Page 159
    ... (12) Company Notional amounts £bn 2007 Assets £m Liabilities £m Notional amounts £bn 2006 Assets £m Liabilities £m Exchange contracts Interest rate contracts 13 1 154 19 173 178 1 179 1 - - - - 42 - 42 RBS Group • Annual Report and Accounts 2007 157 Financial statements Included...

  • Page 160
    ...US government sponsored entity £m 2007 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 9,163...

  • Page 161
    ... of £12 million (2006 - £19 million) were realised on the sale of available-for-sale securities. Interest receivable includes £2,197 million (2006 - £1,559 million; 2005 - £1,624 million) in respect of debt securities. RBS Group • Annual Report and Accounts 2007 159 Financial statements

  • Page 162
    Notes on the accounts continued 15 Equity shares Group 2007 Listed £m Unlisted £m Total £m Listed £m 2006 Unlisted £m Total £m Held-for-trading Designated as at fair value through profit or loss Available-for-sale 33,696 1,856 5,622 41,174 3,850 6,010 1,992 11,852 37,546 7,866 7,614 53,026...

  • Page 163
    ...principal area of operation Group interest 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) ABN AMRO Bank N.V. (4) Notes: (1) The company does not hold...

  • Page 164
    Notes on the accounts continued 17 Intangible assets Group Core deposit intangibles £m Other purchased intangibles £m Internally generated software £m 2007 Goodwill £m Total £m Cost: At 1 January 2007 Currency translation and other adjustments Acquisition of subsidiaries Additions ...

  • Page 165
    ... based on: 2007 £m 2006 £m Global Banking & Markets UK Corporate Banking Retail Wealth Management RBS Insurance Citizens - Retail Banking Citizens - Commercial Banking Citizens - Consumer Financial Services Citizens - Midstates Fair value less Fair value less Fair value less Fair value less Fair...

  • Page 166
    ... lease assets £m 2007 Total £m Cost or valuation: At 1 January 2007 Currency translation and other adjustments Acquisition of subsidiaries Reclassifications Additions Transfers to disposal groups Expenditure on investment properties Change in fair value of investment properties Disposals...

  • Page 167
    ... as security Investment 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...

  • Page 168
    ... to income statement Releases to income statement Provisions utilised At 31 December 2007 Note: (1) Comprises property provisions and other provisions arising in the normal course of business. 200 (5) 39 184 (39) (211) 168 Financial statements 166 RBS Group • Annual Report and Accounts 2007

  • Page 169
    ... Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. RBS Group • Annual Report and Accounts 2007 167 Financial statements

  • Page 170
    ... 2006 Increase in the year Release in the year At 1 January 2007 Release in the year At 31 December 2007 Gross £m Reinsurance £m Net £m 2,883 - (33) 2,850 (98) 2,752 (27) (16) - (43) 2 (41) 2,856 (16) (33) 2,807 (96) 2,711 Financial statements 168 RBS Group • Annual Report and Accounts...

  • Page 171
    ... New business contribution (1) Operating assumption changes Investment return variances Economic assumption changes Other Closing net assets Note: (1) New business contribution represents the present value of future profits on new insurance contract business written during the year. 2007 £m 2006...

  • Page 172
    Notes on the accounts continued 24 Subordinated liabilities Group 2007 £m 2006 £m Company 2007 £m 2006 £m Dated loan capital Undated loan capital Preference shares Trust preferred securities ...475 10,382 7,930 1,867 27,654 Financial statements 170 RBS Group • Annual Report and Accounts 2007

  • Page 173
    ...£m 2007 £m 2008 £m 2009-2011 £m 2012-2016 £m Thereafter £m Perpetual £m Total £m - 762 - 762 - 203 41 244 - 380 - 380 198 1,287 - 1,485 - 2,643 1,169 3,812 399 1,111 - 1,510 1 - - 1 598 6,386 1,210 8,194 RBS Group • Annual Report and Accounts 2007 171 Financial statements

  • Page 174
    ...(callable April 2013) Other minority interest subordinated issues ABN AMRO and subsidiaries â,¬113 million 7.50% subordinated notes 2008 â,¬182 million 6.00% subordinated notes 2009 â,¬182 million 6.13% subordinated notes 2009 Financial statements 172 RBS Group • Annual Report and Accounts 2007

  • Page 175
    ... 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. (2) Unconditionally guaranteed by the company. RBS Group • Annual Report and Accounts 2007 173 Financial statements

  • Page 176
    ... 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. Financial statements (5) Except as stated above, claims in respect of the Group's undated loan capital are...

  • Page 177
    ... payment date thereafter. They may also be redeemed in whole, but not in part, upon the occurrence of certain tax and regulatory events. The company classifies its obligations to these subsidiaries as dated loan capital. RBS Group • Annual Report and Accounts 2007 175 Financial statements

  • Page 178
    ... payment date thereafter. They may also be redeemed in whole, but not in part, upon the occurrence of certain tax and regulatory events. The company classifies its obligations to these subsidiaries as dated loan capital. Financial statements 176 RBS Group • Annual Report and Accounts 2007

  • Page 179
    ...2007 Bonus issue in May 2007 Shares issued in respect of the acquisition of ABN AMRO Other shares issued during the year Shares cancelled during the year At 31 December 2007 3,152,844 6,304,299 530,621 19,146 (695) 10,006,215 RBS Group • Annual Report and Accounts 2007 177 Financial statements

  • Page 180
    .... These securities entitle the holders to interest which may be deferred at the sole discretion of the company. Repayment of the securities is at the sole discretion of the company on giving between 30 and 60 days notice. Financial statements 178 RBS Group • Annual Report and Accounts 2007

  • Page 181
    ... ordinary shares as regards participation in the surplus assets of the company. Except as described above, the holders of the non-cumulative preference shares have no right to participate in the surplus assets of the company. RBS Group • Annual Report and Accounts 2007 179 Financial statements...

  • Page 182
    ... 13 170 157 - 157 170 - 170 157 13 170 157 - 157 (1) Of the amount transferred to earnings, £138 million (2006 - £140 million; 2005 - £85 million) was recorded in net interest income and nil (2006 and 2005 - nil) in other operating income. 180 RBS Group • Annual Report and Accounts 2007

  • Page 183
    ... notes attract coupons of 6.99% and 6.666% respectively until October 2017 when they increase to 2.67% above the London interbank offered rate for 3-month US dollar deposits and 2.76% above the Canadian dollar offered rate respectively. RBS Group • Annual Report and Accounts 2007 181 Financial...

  • Page 184
    ... not provided for at the year end Operating leases Finance lease receivables Unearned finance income Accumulated allowance for uncollectable minimum lease receivables (23) 322 (37) 366 545 1,437 Financial statements 5,343 63 5,211 67 182 RBS Group • Annual Report and Accounts 2007

  • Page 185
    ...remaining balances mainly relate to assets charged as security against deposits from central and federal banks and other public sector bodies. RBS Group • Annual Report and Accounts 2007 183 Financial statements Liabilities secured by charges on Group assets Deposits by banks Customer accounts...

  • Page 186
    ... transfers where substantially all the risks and rewards of the assets have been retained by the Group. 2007 Asset type 2006 Liabilities £m Assets £m Liabilities £m Assets £m Residential mortgages Credit card receivables Other loans Commercial paper conduits Finance lease receivables 23,652...

  • Page 187
    ... Board's strategy. Risk and capital It is the Group's policy to optimise return to shareholders while maintaining a strong capital base and credit rating to support business growth and meet regulatory capital requirements at all times. Risk appetite is measured as the maximum level of retained risk...

  • Page 188
    ... facility limit. • Portfolio management: active management of portfolio concentrations as measured by risk reporting and stress testing, where credit risk may be mitigated through promoting asset sales, buying credit protection or curtailing risk appetite for new transactions. • Loss given...

  • Page 189
    ... units are used for different customer types to ensure that the appropriate risk mitigation is taken in a timely manner. Portfolio provisions are reassessed regularly as part of the Group's ongoing monitoring process. RBS Group • Annual Report and Accounts 2007 187 Financial statements

  • Page 190
    ...long term funds Repo agreements with customers Repo agreements with banks Total customer accounts, long term funds and collateralised borrowing Debt securities in issue up to one year remaining maturity Deposits by banks (excluding repos) Short positions Total Financial statements 2007 £m % 2006...

  • Page 191
    ...regimes, subject to review by Group Treasury. As integration of ABN AMRO's businesses within the Group proceeds, the liquidity risk policies, parameters and metrics used will be progressively aligned within a single framework. RBS Group • Annual Report and Accounts 2007 189 Financial statements

  • Page 192
    Notes on the accounts continued 31 Risk management (continued) Net short-term wholesale market activity Debt securities, listed held-for-trading equity shares, treasury and other eligible bills Reverse repo agreements with banks and customers Less: repos with banks and customers Short positions ...

  • Page 193
    ... financial assets backing these contracts (2007 - £4,398 million; 2006 - £1,713 million). Group 0-3 months £m 3-12 months £m 1-3 years £m 3-5 years £m 5-10 years £m 10-20 years £m 2006 644 1,688 1,997 885 517 68 RBS Group • Annual Report and Accounts 2007 191 Financial statements...

  • Page 194
    .... Market risk Market risk is defined as the risk of loss resulting from adverse changes in risk factors such as interest rates, foreign currency and equity prices together with related factors such as market volatilities. The Group is exposed to market risk because of positions held in its trading...

  • Page 195
    ... order to take advantage of anticipated market conditions. The principal risk factors are interest rates, credit spreads, equity prices and foreign exchange. Financial instruments held in the Group's trading portfolios include, but are not limited to, debt securities, loans, deposits, equity shares...

  • Page 196
    ... unlisted equity shares, equity warrants and options, linked equity fund investments, private equity and venture capital investments, preference shares classified as equity and capital stock in the Federal Home Loans Bank and Federal Reserve Bank. 194 RBS Group • Annual Report and Accounts 2007

  • Page 197
    ... Group manages underwriting and pricing risk through the use of underwriting guidelines which detail the class, nature and type of business that may be accepted; pricing policies by product line and by brand; and centralised control of policy wordings and any subsequent changes. Claims management...

  • Page 198
    ... risk, reserving risk, premium rates not matching claims inflation rates, the weather, the social, economic and legislative environment and reinsurance failure risk. Financial statements The major source of uncertainty in the Group's property accounts is the volatility of weather. Weather in the UK...

  • Page 199
    Life business The Group's three UK 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 200
    ... 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 198 RBS Group • Annual Report and Accounts 2007

  • Page 201
    ... requirements throughout the year. A number of subsidiaries and sub-groups within the Group, principally banking and insurance entities, are subject to various individual regulatory capital requirements in the UK and overseas. RBS Group • Annual Report and Accounts 2007 199 Financial statements

  • Page 202
    ... named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, and other short-term trade related transactions. Financial statements 200 RBS Group • Annual Report and Accounts 2007

  • Page 203
    ..., companies, pension schemes and others. The assets and their income are not included in the Group's financial statements. The Group earned fee income of £695 million (2006 - £472 million; 2005 - £366 million) from these activities. Litigation Proceedings, including consolidated class actions...

  • Page 204
    ... income Provisions for impairment losses Loans and advances written-off net of recoveries Unwind of discount on impairment losses Profit on sale of property, plant and equipment (Profit)/loss on sale of subsidiaries and associates Profit on sale of securities Charge for defined benefit pension...

  • Page 205
    ... closing price on the trading day immediately prior to the date of exchange. (5) ABN AMRO made a loss for the period since its acquisition of £123 million, of which £136 million was attributable to discontinued operations. RBS Group • Annual Report and Accounts 2007 203 Financial statements

  • Page 206
    ... paid Group 2007 £m 2006 £m 2005 £m 2007 £m Company 2006 £m 2005 £m Interest received Interest paid 32,720 (18,976) 13,744 24,381 (14,656) 9,725 21,608 (11,878) 9,730 457 (746) (289) 594 (632) (38) 488 (704) (216) Financial statements 204 RBS Group • Annual Report and Accounts 2007

  • Page 207
    ... reserve balances with the Federal Reserve Bank in the US. Such reserve balances amounted to US$1 million at 31 December 2007 (2006 - US$13 million). ABN AMRO had mandatory reserve deposits of 6 million at 31 December 2007. RBS Group • Annual Report and Accounts 2007 205 Financial statements

  • Page 208
    ... range of credit and charge cards to personal and corporate customers and provides card processing services for retail businesses. Wealth Management provides private banking and investment services to its global clients through Coutts Group, Adam & Company, The Royal Bank of Scotland International...

  • Page 209
    ...2005 Global Banking & Markets UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Central items Amortisation of intangibles Integration costs Net gain on sale of strategic investments...RBS Group • Annual Report and Accounts 2007 207 Financial statements

  • Page 210
    ... payable. 2007 External £m Inter segment £m Total £m External £m 2006 Inter segment £m Total £m External £m 2005 Inter segment £m Total £m Total income Global Banking & Markets RFS Holdings excluding minority interest UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS...

  • Page 211
    ... Global Banking & Markets RFS Holdings excluding minority interests UK Corporate Banking Retail Wealth Management Ulster Bank Citizens RBS Insurance Manufacturing Central items Group Note: (1) Segmental results for 2006 have been restated to reflect transfers of businesses between segments in 2007...

  • Page 212
    .... Group UK £m USA £m Europe £m Rest of the World £m Total £m 2007 Total revenue Net interest income Fees and commissions (net) Income from trading activities Other operating income Insurance premium income (net of reinsurers' share) Total income Operating profit before tax Total assets Total...

  • Page 213
    ...The aggregate remuneration of directors and other members of key management during the year was as follows: Group 2007 £000 2006 £000 RBS Group • Annual Report and Accounts 2007 211 Financial statements Short-term benefits Post-employment benefits Other long-term Share-based payments 37,763...

  • Page 214
    ... to the financial statements. 43 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. Financial statements 212 RBS Group • Annual Report and Accounts 2007

  • Page 215
    ... with UK GAAP 230 Exchange rates 231 Economic and monetary environment 231 Supervision and regulation 234 Description of property and equipment 234 Major shareholders 234 Material contracts 234 FSA Listing Rules disclosure RBS Group • Annual Report and Accounts 2007 213 Additional information

  • Page 216
    ... Debt securities and equity shares Derivatives and settlement balances Other assets Total assets Equity owners Minority interests Subordinated liabilities Deposits Derivatives, settlement balances and short positions Other liabilities Total liabilities and equity 2007 $m 2007 £m 2006 £m 2005...

  • Page 217
    ... in May 2007. Other financial data based upon IFRS Earnings per ordinary share - pence Diluted earnings per ordinary share - pence (1) Adjusted earnings per ordinary share - pence Dividends per ordinary share - pence Dividend payout ratio (2) Share price per ordinary share at year end - £ Market...

  • Page 218
    ...years £m After 5 years £m 2007 Total £m 2006 £m 2005 £m 2004 £m UK Central and local government Manufacturing Construction Finance Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages - other Finance leases and instalment credit...

  • Page 219
    ...information (1) Includes closing provisions against loans and advances to banks of £3 million (2006 - £2 million; 2005 - £3 million; 2004 - £6 million). (2) Closing customer provisions exclude closing provisions against loans and advances to banks. RBS Group • Annual Report and Accounts 2007...

  • Page 220
    ... loans % 2004 Closing provision £m % of loans to total loans % Domestic Central and local government Manufacturing Construction Finance Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages - other Finance leases and instalment credit...

  • Page 221
    ...Property Individuals - home mortgages Individuals - others Finance leases and instalment credit Total domestic Foreign Total recoveries - - - 7 - - 143 8 158 232 390 - - - 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 2007...

  • Page 222
    ... value of security held or related provisions. IFRS require interest to be recognised on a financial asset (or a group of financial assets) after impairment at the rate of interest used to discount recoveries when measuring the impairment loss. Thus, interest on impaired financial assets is credited...

  • Page 223
    ...- other Total UK offices Overseas Demand deposits - interest-free - interest-bearing Time deposits - savings - other Total overseas offices (see below) Total deposits Held-for-trading Designated as at fair value through profit or loss Amortised cost Total deposits Overseas US Rest of the World Total...

  • Page 224
    ...,483 117,913 100,681 3.4% 3.5% rates. Original maturities of commercial paper are not in excess of one year. 'Other short-term borrowings' consist principally of borrowings in the money markets included within 'Deposits by banks' and 'Customer accounts' in the accounts, and generally have original...

  • Page 225
    ... - 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 226
    ... of ordinary shares in May 2007. Other financial data based upon UK GAAP Earnings per ordinary share - pence Diluted earnings per ordinary share - pence (1) Adjusted earnings per ordinary share - pence Dividends per ordinary share - pence Dividend payout ratio (2) Share price per ordinary share at...

  • Page 227
    ... Construction Finance Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages - other Finance leases and instalment credit Total domestic Overseas residents Total UK offices Overseas US Rest of the World Total overseas offices Loans and...

  • Page 228
    ...). (2) Closing customer provisions exclude closing provisions 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% 0.50% 0.29% 0.41% 0.56% 0.59% 0.57% Additional information 226 RBS Group • Annual Report and Accounts 2007

  • Page 229
    ... loans % 2003 Closing provision £m % of loans to total loans % Domestic Central and local government Manufacturing Construction Finance Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages - other Finance leases and instalment credit...

  • Page 230
    ... Finance Service industries and business activities Individuals - home mortgages - 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 Additional information 228 RBS Group • Annual Report and Accounts 2007

  • Page 231
    ... under the original terms of non-accrual and restructured loans Domestic Foreign 237 58 295 237 55 292 Interest on non-accrual and restructured loans included in net interest income Domestic Foreign 58 7 65 60 3 63 Additional information RBS Group • Annual Report and Accounts 2007 229

  • Page 232
    ... 1.9346 1.8325 1.7857 1.6354 (2) The rates used by the Group for translating US dollars into sterling in the preparation of its financial statements. (3) On 26 February 2008, the Noon Buying Rate was £1.00 = US$1.9747. Additional information 230 RBS Group • Annual Report and Accounts 2007

  • Page 233
    ...of the Group and the Royal Bank. As at 31 December 2007, 31 companies in the Group (excluding subsidiaries of the ABN AMRO Group), spanning a range of financial services sectors (banking, insurance and investment business), were authorised to conduct financial activities regulated by the FSA. The UK...

  • Page 234
    ... Adam & Company Investment Management Limited, and in the Corporate Markets division, RBS Asset Management Limited. General insurance business is principally undertaken by companies in the RBS Insurance division, including Direct Line Insurance plc and Churchill Insurance Company Limited. Life...

  • Page 235
    ...a range of business activities, building on Bank of China's distribution strength and the Group's product skills in areas including credit cards, wealth management, corporate banking and personal lines insurance. The Group also continues to grow its other Asian activities, having recently set up new...

  • Page 236
    ... Santander (a related party for the purposes of the FSA Listing Rules) its rights and obligations under the Consortium and Shareholders' Agreement in respect of the ABN AMRO Global Clients business in Brazil for 750 million. Additional information 234 RBS Group • Annual Report and Accounts 2007

  • Page 237
    ... 239 Trading market 242 Dividend history 243 Taxation for US Holders 247 Exchange controls 247 Memorandum and Articles of Association 247 Incorporation and registration 247 Code of ethics 248 Important addresses 248 Principal offices RBS Group • Annual Report and Accounts 2007 235 Shareholder...

  • Page 238
    Shareholder information Financial calendar Annual General Meeting 23 April 2008 at 2.00 pm Edinburgh International Conference Centre, The Exchange, Morrison Street, Edinburgh 8 August 2008 Interim results Dividends Payment dates: Ordinary shares (2007 Final) Ordinary shares (2008 Interim) ...

  • Page 239
    ... terms of the RBS offer. This takes account of the August 1984 and June 1986 rights issues and the June 1989 bonus issue of NatWest ordinary shares as well as the subsequent issue of Additional Value Shares and the bonus issue of ordinary shares on 8 May 2007. When disposing of shares, shareholders...

  • Page 240
    Shareholder information continued Analyses of ordinary shareholders at 31 December 2007 Shareholdings Number of shares - millions % Individuals Banks and nominee companies Investment trusts Insurance companies Other companies Pension trusts Other corporate bodies 174,438 25,434 172 329 2,148 45 94...

  • Page 241
    .... The ordinary shares of the company are listed and traded on the London Stock Exchange. All ordinary shares are deposited with the principal London office of The Bank of New York Mellon, as custodian for the depositary. RBS Group • Annual Report and Accounts 2007 239 Shareholder information

  • Page 242
    ....98 122.07 22.61 98.34 100.49 - - 122.23 - - 106.06 - - 129.57 - - 116.70 - - 125.14 - - 110.58 - - 130.78 - - 111.06 Note: (1) Price quoted as a % of US$1,000 nominal. Shareholder information 240 RBS Group • Annual Report and Accounts 2007

  • Page 243
    ... in US$ By quarter 2007: Fourth quarter ADSs High Low 11.30 8.43 Figures in US$ By year 2007 ADSs High Low 11.30 8.43 On 26 February 2008, the closing price of ordinary ADSs on the New York Stock Exchange was $8.34. RBS Group • Annual Report and Accounts 2007 241 Shareholder information

  • Page 244
    ... ordinary shares, as the American Depositary Shares were not issued until October 2007 as described above under Trading Market. Shareholder information (2) 2007 final dividends are proposed. For further information, see Notes 6 and 7 on the accounts. 242 RBS Group • Annual Report and Accounts...

  • Page 245
    ... to recognise foreign currency gain or loss in respect of the dividend income. If the amount of such dividend is not converted into US dollars on the date of receipt, the US Holder may have foreign currency gain or loss. RBS Group • Annual Report and Accounts 2007 243 Shareholder information

  • Page 246
    ... preference shares and accordingly any holder who acquires or intends to acquire ordinary shares or non-cumulative dollar preference shares is advised to consult its own tax advisers in relation to stamp duty and SDRT. Shareholder information 244 RBS Group • Annual Report and Accounts 2007

  • Page 247
    ... at all times listed on a 'recognised stock exchange' within the meaning of section 1005 of the Income Tax Act 2007. In all other cases, an amount must be withheld on account of UK income tax at the savings rate (currently 20%) subject to any direction to the contrary by HM Revenue & Customs under...

  • Page 248
    ... their own tax advisers as to the potential application of the PFIC rules to the ownership and disposition of the company's ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs. Shareholder information 246 RBS Group • Annual Report and Accounts 2007

  • Page 249
    ...the company's Annual Report on Form 20-F for the fiscal year ended 31 December 2004. Incorporation and registration The company was incorporated and registered in Scotland under the Companies Act 1948 as a limited company on 25 March 1968 under the name National and Commercial Banking Group Limited...

  • Page 250
    ... 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 ABN AMRO Holding N.V. Gustav Mahlerlaan 10 1082 PP Amsterdam The Netherlands Shareholder information 248 RBS Group • Annual Report and Accounts 2007

  • Page 251
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