RBS 2007 Annual Report Download - page 53

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RBS Group • Annual Report and Accounts 2007
Business review
2006 compared with 2005
Global Banking & Markets performed strongly in 2006,
delivering excellent growth in income while continuing to build
our strong international franchise. Total income rose by 22% to
£6,831 million, contribution by 23% to £3,923 million and
operating profit by 24% to £3,779 million.
GBM is a leading provider of debt financing and risk
management solutions covering the origination, structuring and
distribution of a wide range of assets. In 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 we moved from thirteenth place to eighth. These league
table positions demonstrate our success in broadening and
deepening our franchise.
In 2006 we have further invested in extending our product
capabilities and our worldwide reach. Income in North America
rose by 18% in local currency, despite flat revenues in our US
residential mortgage-backed securities business, as the
investments we have made in our debt capital markets, loan
markets, rates and credit trading businesses have borne fruit.
In Europe, income increased by 26% in local currency as a
result of good performances in Germany, France, Spain, Italy
and the Nordic region. We participated in many of the largest
cross-border financings in 2006. Asia-Pacific, too, showed
marked progress, with income increasing by 35% in US dollar
terms. We have established a promising presence in the
region, building our product capability and client relationships.
Net interest income from banking activities rose by 10% to
£1,632 million, representing 24% of total GBM income.
Average loans and advances to customers increased by 20%
as we further expanded our customer base outside the UK.
Net fee income rose by 26% to £1,032 million, reflecting our
top tier 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, rising
by 13% to £2,211 million as a result of good volumes of debt
and risk management products provided to our customers. A
strong performance in credit products was supplemented by
growth in our broadening product range, including equity
derivatives and structured credit, partially offset by the impact
of a slower US mortgage-backed securities market. Average
trading book value at risk remained modest at £14.2 million.
Our rental and other asset-based activities have achieved
continuing success in originating, structuring, financing and
managing physical assets such as aircraft, trains, ships and
real estate for our customers. This success has driven good
growth in net income from rental assets, which increased (net
of related funding costs and operating lease depreciation) to
£271 million from £224 million.
These businesses also generate value through the ownership
of a portfolio of assets which we manage actively. Good
results from these activities, as well as from principal
investments where we work with our corporate customers and
with financial sponsors, leveraging our financial capability to
structure and participate in a wide variety of investment
opportunities, were reflected in other operating income, which
increased to £1,279 million (net of related funding costs) from
£744 million in 2005.
We have maintained good cost discipline while continuing to
invest in extending our geographical footprint, our infrastructure
and our product range. Net of operating lease depreciation our
cost:income ratio was 39.9%. Total expenses grew by 22% to
£2,967 million. Variable performance-related compensation
increased and now accounts for 41% of total costs.
Portfolio risk remained stable and the corporate credit environment
remained benign. Impairment losses fell to £85 million, with the
distribution of impairments over the course of the year reflecting
recoveries in the first half.
Average risk-weighted assets grew by 11% and the ratio of
operating profit to average risk-weighted assets improved from
2.6% to 2.9%.
credit markets, write-downs reflecting the weakening of the
US housing market led to a sharp fall in income.
Rental and other asset-based activities achieved continuing
success in originating, structuring, financing and managing
physical assets such as aircraft, trains, ships and real estate
for our customers. Income from rental assets, net of related
funding costs and operating lease depreciation, increased by
16% to £314 million.
Other operating income increased to £1,899 million, net of
related funding costs, including the successful sale of
Southern Water concluded during the second half. The majority
of our remaining private equity portfolio has been sold into a
fund, managed by RBS, thereby improving capital efficiency
while offering more predictable and stable returns.
Costs were reduced by 4% to £2,854 million, in line with
income. We continued to invest in expanding our geographical
footprint, our infrastructure and our product range.
Portfolio credit risk remained stable and impairment losses
declined to £39 million in 2007, with no deterioration in overall
corporate credit quality. The liquidity and profitability of our
corporate customers remains generally strong.
Total assets increased to £579.4 billion, primarily reflecting an
increase of £128.8 billion in derivative assets (mostly rates and
currencies) accompanied by a corresponding increase in
derivative liabilities. The increase was a result of the strong
growth in client-driven interest rate and currency trading
activities in a more volatile market environment. Careful risk
and capital management held our risk-weighted assets to
£152.6 billion, an increase of 10% over the prior year.