NWG

Business Context and Reporting Period

This filing is an Annual Report on Form 20-F for The Royal Bank of Scotland Group plc (RBS) for the fiscal year ended 31 December 2004. RBS is a major UK-based banking and financial services group operating in the UK, US, and internationally through subsidiaries including the Royal Bank, NatWest, Citizens Financial Group (US), and RBS Insurance. The Group reported a market capitalization of £55.6 billion at year-end.

Key Financial Metrics

Note: 2003 figures have been restated following the implementation of FRS 17 (Retirement Benefits).

Material Changes vs. Prior Period

• Acquisitions: Significant growth was driven by major acquisitions, most notably Charter One Financial, Inc. (US$10.1 billion) in August 2004, which expanded the US footprint. Other acquisitions included First Active plc (Ireland) and the credit card business of People's Bank (US).
• Income Growth: Total income rose 18% to £22.8 billion. Excluding acquisitions and at constant exchange rates, organic growth was 11%. Non-interest income grew 23% to £13.5 billion, driven by fees, commissions, and insurance premiums.
• Profitability: Profit before tax increased 14%. The surge in profit attributable to ordinary shareholders (89%) was significantly aided by the absence of the £1.46 billion Additional Value Shares (AVS) dividend paid in 2003.
• Provisions: The charge for bad and doubtful debts decreased slightly to £1.428 billion (0.41% of gross loans), reflecting improved credit quality and economic conditions, despite higher lending volumes.
• Accounting Policy Change: The Group adopted FRS 17, which recognized a pension deficit of £1.9 billion on the balance sheet, reducing shareholders' funds by £3.2 billion compared to prior year reporting standards.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued growth in demand for borrowing may exceed deposit growth in the medium term, increasing reliance on wholesale funding. The Group is actively preparing for the implementation of Basel II capital requirements and International Financial Reporting Standards (IFRS) effective 1 January 2005.
• Dividends: A final dividend of 41.2p per share is recommended, bringing the total 2004 dividend to 58.0p (a 15% increase), covered 2.3 times by earnings.
• Key Risks:
  • Credit Risk: Exposure to borrower credit quality and economic conditions in the UK, US, and Europe. Risk elements in lending were 1.58% of gross loans.
  • Market Risk: Sensitivity to interest rate, foreign exchange, and equity price movements. Trading Value-at-Risk (VaR) averaged £10.8 million.
  • Insurance Risk: Exposure to claims experience, particularly regarding catastrophic weather and mortality trends.
  • Operational Risk: Risks arising from fraud, system failures, and regulatory compliance.

Important Facts for Investor Verification

• US GAAP Reconciliation: Net income available to ordinary shareholders under US GAAP was £3.948 billion, £308 million lower than UK GAAP, primarily due to differences in pension accounting, derivative hedging treatment, and software capitalization.
• Pension Deficit: Verify the impact of the £1.9 billion pension deficit recognized under FRS 17 and the subsequent £750 million cash contribution made to the main UK scheme in December 2004.
• Acquisition Integration: Monitor the integration costs (£269 million in 2004) and the realization of synergies from the Charter One and First Active acquisitions.
• Capital Adequacy: Confirm that Tier 1 and Total capital ratios remain above regulatory minimums (4% and 8% respectively) despite the dilution from acquisitions and the pension deficit.
• IFRS Transition: Assess the potential impact of transitioning to IFRS in 2005, particularly regarding the treatment of goodwill (no amortization) and financial instruments.