RBS 2007 Annual Report Download - page 39

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RBS Group • Annual Report and Accounts 2007
Business review
2006 compared with 2005
Profit
Profit before tax, purchased intangibles amortisation,
integration costs and net gain on sale of strategic investments
and subsidiaries increased by 14% or £1,163 million, from
£8,251 million to £9,414 million.
Profit before tax was up 16%, from £7,936 million to £9,186
million, reflecting strong organic income growth in all divisions.
Total income
The Group achieved strong growth in income during 2006.
Total income was up 10% or £2,433 million to £28,002 million.
Net interest income increased by 7% to £10,596 million and
represents 38% of total income (2005 – 39%). Average loans
and advances to customers and average customer deposits
grew by 14% and 11% respectively.
Non-interest income increased by 11% to £17,406 million and
represents 62% of total income (2005 – 61%).
Net interest margin
The Group’s net interest margin at 2.47% was down from
2.55% in 2005, due mainly to the business mix effect of growth
in corporate and mortgage lending and the impact of the
flatter US dollar yield curve.
Operating expenses
Operating expenses, excluding purchased intangibles
amortisation and integration costs, rose by 8% to £12,252 million.
Cost:income ratio
The Group’s cost:income ratio was 42.1% compared with
42.4% in 2005.
Net insurance claims
Bancassurance and general insurance claims, after
reinsurance, increased by 3% to £4,458 million reflecting
volume growth.
Impairment losses
Impairment losses were £1,878 million compared with £1,707
million in 2005, an increase of 10%.
Risk elements in lending and potential problem loans
represented 1.57% of gross loans and advances to customers
excluding reverse repos at 31 December 2006 (2005 – 1.60%).
Provision coverage of risk elements in lending and potential
problem loans was 62% compared with 65% at 31 December
2005. This reflects amounts written-off and the changing mix
from unsecured to secured exposures.
Integration
Integration costs were £134 million compared with £458 million
in 2005. Included are costs relating to the integration of First
Active and Charter One, as well as the amortisation of software
costs relating to the integration of Churchill. Integration costs in
2005 included software costs relating to the acquisition of
NatWest which were previously written-off as incurred under
UK GAAP but under IFRS were capitalised and amortised. All
such software was fully amortised by the end of 2005.
Earnings and dividends*
Basic earnings per ordinary share increased by 15%, from
56.5p to 64.9p. Earnings per ordinary share adjusted for
purchased intangibles amortisation, integration costs and net
gain on sale of strategic investments and subsidiaries
increased by 14%, from 58.6p to 66.7p.
A final dividend of 22.1p per ordinary share was paid, giving a
total dividend for the year of 30.2p, an increase of 25%. The
total dividend was covered 2.2 times by earnings before
purchased intangibles amortisation and integration costs.
*restated for the effect of the bonus issue of ordinary shares in
May 2007.
Balance sheet
Total assets were £871.4 billion at 31 December 2006, 12%
higher than total assets of £776.8 billion at 31 December 2005.
Lending to customers, excluding repurchase agreements and
stock borrowing (“reverse repos”), increased in 2006 by 10%
or £35.7 billion to £404.0 billion. Customer deposits, excluding
repurchase agreements and stock lending (“repos”), grew by
9% or £26.1 billion to £320.2 billion.
Capital ratios at 31 December 2006 were 7.5% (Tier 1) and
11.7% (Total).
Profitability
The adjusted after-tax return on ordinary equity, which is based
on 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.