NWG

Business Context and Reporting Period

This Form 20-F is the Annual Report for The Royal Bank of Scotland Group plc (RBS) for the fiscal year ended 31 December 2002. The Group is a major UK clearing bank and financial services group, operating through principal subsidiaries including The Royal Bank of Scotland plc and National Westminster Bank Plc (NatWest). The reporting period covers the successful completion of the NatWest IT integration project and the integration of the Mellon Regional Franchise in the US.

Key Financial Metrics

Material Changes vs. Prior Period

• Income Growth: Total income rose 16% to £16.8 billion, driven by a 15% increase in net interest income (£7.8 billion) and a 16% increase in non-interest income (£9.0 billion). Strong growth was observed in Citizens (US), Direct Line Group, and Retail Direct.
• Profitability: Profit before tax increased 12% to £4.8 billion. Adjusted earnings per share rose 13% to 144.1p, reflecting strong underlying performance despite higher integration costs.
• Cost Efficiency: The cost:income ratio improved to 45.6% (45.0% excluding acquisitions) due to tight cost control and integration benefits, despite a 12% rise in operating expenses.
• Provisions: Provisions for bad and doubtful debts increased to £1.29 billion (up 31%) reflecting loan portfolio growth and specific corporate situations, though provision coverage remained at 81% of risk elements.
• Dividends: The Board recommended a final dividend of 31.0p, bringing the total for the year to 43.7p (up 15%). A second dividend of 30.0p was paid on Additional Value Shares (AVS).

Guidance, Outlook, and Risks

• Outlook: Management expects moderate improvement in UK economic growth in 2003. The US economy is expected to continue gradual improvement. The Group remains focused on building strategic options and growing income while managing volatility.
• Integration Benefits: The NatWest IT integration was completed ahead of schedule in October 2002. By February 2003, all integration initiatives were complete, delivering annualised revenue benefits of £890 million and cost savings of £1.44 billion.
• Key Risks:
  • Credit Risk: Deterioration in economic conditions could impact loan recoverability.
  • Market Risk: Exposure to interest rate, foreign exchange, and equity price fluctuations.
  • Regulatory Risk: Changes in UK and international regulations (e.g., Basel II, FSA rules) could impact capital requirements and business conduct.
  • Operational Risk: Risks related to fraud, system failures, and the complexity of large-scale integration.
• Accounting Changes: The Group implemented FRS 19 (Deferred Tax) and UITF 33 (Obligations in capital instruments), resulting in restatements of prior periods and reclassification of perpetual regulatory tier one securities from equity to liabilities.

Important Facts for Investor Verification

• Integration Completion: Verify the realization of the £2.33 billion in annualised integration benefits (revenue and cost savings) from the NatWest and Mellon acquisitions.
• Provision Coverage: Confirm the adequacy of the £3.9 billion total balance sheet provisions for bad debts against the £4.9 billion in risk elements in lending (81% coverage).
• US GAAP Reconciliation: Note that US GAAP net income available to ordinary shareholders was £3.1 billion, significantly higher than UK GAAP (£1.97 billion) due to differences in goodwill amortisation, derivative accounting, and pension costs.
• Capital Adequacy: Verify the Tier 1 capital ratio of 7.3% and Total capital ratio of 11.7% against regulatory requirements.
• Additional Value Shares (AVS): Monitor the final AVS dividend payment of 55.0p scheduled for December 2003, which impacts the final return to shareholders from the NatWest acquisition.