RBS 2007 Annual Report Download - page 61

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RBS Group • Annual Report and Accounts 2007
Business review
Citizens
2007 2006 2005
£m £m £m
Net interest income 1,975 2,085 2,122
Non-interest income 1,147 1,232 1,142
Total income 3,122 3,317 3,264
Direct expenses
– staff costs 741 803 819
– other 717 751 739
1,458 1,554 1,558
Contribution before impairment losses 1,664 1,763 1,706
Impairment losses 341 181 131
Operating profit 1,323 1,582 1,575
US$bn US$bn US$bn
Total assets 161.1 162.2 158.8
Loans and advances to customers – gross
– mortgages 19.1 18.6 18.8
– home equity 35.9 34.5 31.8
– other consumer 21.7 23.2 24.8
– corporate and commercial 37.6 32.7 29.2
Customer deposits 115.0 106.8 106.3
Customer deposits (excluding wholesale funding) 105.0 101.8 105.2
Risk-weighted assets 114.4 113.1 106.4
Average exchange rate – US$/£ 2.001 1.844 1.820
Spot exchange rate – US$/£ 2.004 1.965 1.721
2007 compared with 2006
Against the background of weaker housing and credit market
conditions, Citizens’ franchise demonstrated resilience in 2007,
with a particularly good performance in corporate and
commercial banking. Modest growth in net interest margins
and strong fee growth in several products lifted income by 2%
to $6,249 million which, coupled with tight cost control,
resulted in contribution before impairment losses growing by
2% to $3,329 million. However, impairment losses increased
from 0.31% of loans and advances to 0.60%, resulting in a
decrease in operating profit of 9% to $2,647 million. In sterling
terms, total income decreased by 6% to £3,122 million and
operating profit fell by 16% to £1,323 million.
Net interest income rose by 3% to $3,954 million. Average
loans and advances to customers increased by 4%, with
strong growth in corporate and commercial lending, up 13%,
with close attention being paid to our risk appetite in light of
prevailing market conditions. Average customer deposits
increased by 1% but deposit margins narrowed as a result of
deposit pricing competition and continued migration from low-
cost checking accounts and liquid savings to higher-cost
products. Notwithstanding this migration, Citizens’ net interest
margin increased slightly to 2.80% in 2007, compared with
2.72% in 2006, thanks in part to improved lending spreads in
the latter part of the year.
Non-interest income rose by 1% to $2,295 million. Business
and corporate fees rose strongly, with good results especially
in foreign exchange, interest rate derivatives and cash
management, driven by increasing cooperation with RBS
Corporate Markets. Good progress was also made in credit
card issuing, where we increased our customer base by 20%,
and in merchant acquiring, where RBS Lynk achieved
significant growth, processing 30% more transactions than in
2006 and expanding its merchant base by 5%.
In response to more difficult market conditions Citizens
intensified cost discipline, with a reduction in headcount
helping to limit total expense growth to 2%, despite
enhancements to infrastructure and processes as well as
continued investment in growth opportunities including mid-
corporate banking, contactless debit cards and merchant
acquiring.
Rising losses and increased provisions lifted impairment costs
from $333 million in 2006 to $682 million in 2007. Against a
background of weaker economic activity the Citizens portfolio
is performing well, although we have experienced a reversion
from the very low levels of impairment seen in recent years,
reflecting both the planned expansion of our commercial loan
book and the impact of a softer housing market. There has
also been an increase in reserving. The average FICO scores
on our consumer 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.