The Royal Bank of Scotland Group plc

FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

6 August 2003

Commission File Number: 001-10306

The Royal Bank of Scotland Group plc

42 St Andrew Square
Edinburgh EH2 2YE
Scotland

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F   X   Form 40-F      

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):______

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):______

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes        No   X  

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-________






The following information was issued as Company announcements, in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6 K:





 


Interim Results 2003

 

     Interim results
for the half year ended
30 June 2003






THE ROYAL BANK OF SCOTLAND GROUP plc    
     
CONTENTS Page  
Results summary 2  
First half 2003 Highlights 3  
Group Chief Executive’s review 4  
Financial review 6  
Summary consolidated profit and loss account 9  
Divisional performance 10  
   Corporate Banking and Financial Markets 11  
   Retail Banking 13  
   Retail Direct 14  
   Manufacturing 16  
   Wealth Management 17  
   Direct Line Group 18  
   Ulster Bank 19  
   Citizens 20  
   Central items 22  
Average balance sheet 23  
Average interest rates, yields, spreads and margins 24  
Statutory consolidated profit and loss account 25  
Consolidated balance sheet 27  
Overview of consolidated balance sheet 28  
Statement of consolidated total recognised gains and losses 30  
Reconciliation of movements in consolidated shareholders' funds 30  
Consolidated cash flow statement 31  
Notes 32  
Asset quality    
   Analysis of loans and advances to customers 38  
   Cross border outstandings 39  
   Selected country exposures 39  
   Risk elements in lending 40  
   Provisions for bad and doubtful debts 41  
Market risk 43  
Regulatory ratios and other information 44  
Additional financial data for US investors 45  
Forward-looking statements 46  
Independent review report by the auditors 47  
Contacts 48  

1






THE ROYAL BANK OF SCOTLAND GROUP plc

RESULTS SUMMARY

  First half   First half       Full year  
  2003   2002       2002  
  £m   £m   Increase   £m  
                 
Total income 9,080   8,182   11 % 16,815  
 
 
     
 
Operating expenses* 4,051   3,740   8 % 7,669  
 
 
     
 
Operating profit before provisions* 4,193   3,803   10 % 7,796  
 
 
     
 
Profit before tax, goodwill amortisation                
   and integration costs 3,451   3,151   10 % 6,451  
 
 
     
 
Profit before tax 2,896   2,325   25 % 4,763  
 
 
     
 
Cost:income ratio** 43.0 % 44.2 % -   44.0 %
 
 
     
 
Basic earnings per ordinary share 60.0 p 46.6 p 29 % 68.4 p
 
 
     
 
Adjusted earnings per ordinary share 76.5 p 69.8 p 10 % 144.1 p
 
 
     
 
Dividends per ordinary share 14.6 p 12.7 p 15 % 43.7 p
 
 
     
 
*
  
excludes goodwill amortisation and integration costs.
**
  
the cost:income ratio is based on operating expenses excluding goodwill amortisation and integration costs, and after netting operating lease depreciation against rental income.

 

Sir George Mathewson, Chairman of The Royal Bank of Scotland Group plc, said:

"These are strong results, the more so for having been delivered against a backdrop of a lower growth environment in the markets in which we operate".

2






THE ROYAL BANK OF SCOTLAND GROUP plc

FIRST HALF 2003 HIGHLIGHTS

3






THE ROYAL BANK OF SCOTLAND GROUP plc

GROUP CHIEF EXECUTIVE’S REVIEW

The Group continued to make good progress during the first half of 2003. We achieved strong growth in income, a further improvement in efficiency and maintained credit quality. As a result, we increased both our Group profit before tax, goodwill amortisation and integration costs, and our adjusted earnings per share, by 10%.

During the first half of 2003, we grew income across the Group as a whole by £898 million, with Direct Line, Retail Direct and Corporate Banking and Financial Markets achieving particularly strong year-on-year growth. We continue to see good growth in loans and deposits in both the UK and the US while maintaining our cautious stance towards corporate lending in particular. In addition, our credit card and general insurance businesses continue to perform strongly. All divisions of the Group increased their customer numbers.

Net interest margin at 3.0% (2002 – 3.1%) was in line with guidance given in February 2003, with the lower interest rate environment reducing both the benefit of interest-free funds and treasury income; and net interest income in the UK was reduced by the outcome of the Competition Commission inquiry into SME banking. A key strength of the Group however is the diversity of its revenue streams and, although interest margin was lower than the same period last year, non-interest income, including fees, commissions and income from financial markets, was strong.

In addition to growing its income, the Group improved its efficiency further in the first half of 2003. Whilst expenses increased to support higher business volumes, the Group cost:income ratio improved to 43.0% (2002 – 44.2%).

Provisions for bad debts amounted to £746 million in the first half of 2003, a level consistent with provisions reported in 2002 and the growth in the loan book. Credit quality remains strong, with no material change to the distribution by grade of our risk assets. Credit metrics have continued to improve, with risk elements in lending representing 2.01% of loans and advances to customers compared with 2.14% at 31 December 2002 and 2.24% at 30 June 2002. Potential problem loans saw a reduction of 18% from the position reported at 31 December 2002.

REVIEW OF DIVISIONS

Corporate Banking and Financial Markets increased its income by 12% and contribution before Manufacturing costs by 10% to £1,739 million (2002 – £1,581 million). Corporate Banking and Financial Markets maintained leading positions in the UK in corporate lending, leasing, deposits, payments, derivatives and foreign exchange and across a wide range of specialised corporate banking activities. It achieved good growth in customer numbers; in particular, UK mid-corporate customers increased by over 4,000 in the six months to June 2003. While good growth in loans and deposits was again achieved, net interest income was impacted by the outcome of the Competition Commission inquiry into SME banking and by the effect on deposit and treasury income of lower interest rates. Volumes in Financial Markets were up strongly in both the UK and the US as a result of growth in customer-driven activity in interest rate protection, mortgage securitisation and foreign exchange. Outside the UK, the division achieved good growth in Continental Europe through its offices in Paris, Frankfurt, Milan and Madrid.

Retail Banking achieved good volume growth across all areas of personal current accounts and mortgages, personal loans and deposits, and small business loans and current accounts. Total customers in the first six months of the year increased by 113,000. Average non-mortgage lending increased by 11%, mortgages increased by 12% and deposit balances increased by 5%. Both income and contribution were reduced in this period by the outcome of the Competition Commission inquiry into SME banking and by the impact of lower interest rates. Despite these significant negative factors, the division increased its income by 5% and contribution before Manufacturing costs by 3% to £1,535 million (2002 - £1,488 million).

4






THE ROYAL BANK OF SCOTLAND GROUP plc

GROUP CHIEF EXECUTIVE’S REVIEW (continued)

Retail Direct increased its income by 15% and contribution before Manufacturing costs by 23% to £407 million (2002 – £330 million). Retail Direct increased its customer accounts by 500,000 while expanding balances and fee income associated with these accounts. In July 2003, RBS bought the credit card and personal loan portfolios of Santander Direkt Bank which will add 480,000 customers in Germany.

Manufacturing costs increased by 2% to £900 million (2002 – £886 million). Technology costs were down 6% to £291 million (2002 – £309 million), while other costs were up by 6% to £609 million (2002 – £577 million), reflecting increased volume of customer transactions.

Wealth Management's income declined by 8% and contribution by 10% to £219 million (2002 –£244 million), reflecting continued difficult stock market conditions, although customer numbers and funds under management saw positive movements. In July 2003, RBS sold the Miami-based operations of Coutts to Santander Central Hispano.

Direct Line Group increased its income by 30% and contribution by 32% to £202 million (2002 –£153 million). Direct Line Group increased its UK motor insurance policies by 193,000 and its UK home insurance policies by 60,000. In Continental Europe, Direct Line businesses in Spain, Italy and Germany increased their total policy numbers by 143,000. In June 2003, RBS announced the acquisition of Churchill Insurance Group PLC, which has subsequently received Office of Fair Trading clearance, but is still subject to approval from the Financial Services Authority.

Ulster Bank increased its income by 9% and its contribution by 5% to £131 million (2002 – £125 million). Ulster Bank achieved strong growth in loans and deposits but recorded lower income from treasury and stockbroking activities. Customers in total increased by 7,000 in the first six months.

Citizens increased its US dollar income by 16% and contribution by 23% to $685 million (2002 –$555 million). In sterling terms, Citizens income growth was 4% and its contribution growth 11% to £425 million (2002 - £384 million). Citizens increased its personal customer base by 237,000 and its business customers by 18,000 as a result of organic growth, through both traditional branches and supermarket branches, and through the acquisition of Commonwealth Bancorp, Inc., Pennsylvania, which was completed in January 2003. In July 2003, Citizens announced the acquisition of Community Bancorp, Inc., Massachusetts and completed the acquisition of Port Financial Corp., Massachusetts.

OUTLOOK
These results provide further evidence of the core strengths of our Group: the ability to grow income strongly while improving efficiency and maintaining credit quality. Coupled with our strong cash generation these attributes present us with a wide range of strategic options.

Consequently, whilst an inherently and fundamentally optimistic outlook is tempered to a degree by elements of uncertainty in the markets in which we operate, we remain confident of our ability to continue to deliver superior value for our shareholders, customers and staff.



Fred Goodwin
Group Chief Executive

5






THE ROYAL BANK OF SCOTLAND GROUP plc

FINANCIAL REVIEW

Profit
The Group increased its profit before tax, goodwill amortisation and integration costs by 10% or £300 million, from £3,151 million to £3,451 million.

Profit before tax was up 25%, from £2,325 million to £2,896 million.

Total income
The Group continued to achieve strong growth in income. Total income at £9,080 million was up 11% or £898 million. Excluding acquisitions, total income rose by 10%.

Net interest income increased by 4% to £4,025 million. The Group has maintained the good volume growth seen in the second half of last year. Average loans and advances to customers are up 12% over the comparable period last year, and average customer deposits have grown by 8%. While volume growth has been strong, income growth in this period has been affected by foreign exchange translation and the outcome of the Competition Commission inquiry into SME banking. In addition, lower interest rates have reduced the benefit of interest-free funds.

Non-interest income increased by 17% to £5,055 million. Growth in general insurance premium income was a major contributor to this as a result of strong growth across both motor and home products.

In addition, volumes in financial markets were up strongly in both the UK and the US as a result of growth in customer-driven activity in interest rate protection, mortgage securitisation and foreign exchange.

Operating lease income was also up strongly due to expansion of the operating lease portfolio in Corporate Banking and Financial Markets.

Net interest margin
The Group's net interest margin at 3.0% was, as anticipated, down from 3.1% due to a reduced benefit from interest-free funds arising from lower interest rates and the outcome of the Competition Commission inquiry into SME banking.

Operating expenses
Operating expenses, excluding goodwill amortisation and integration costs, rose by 8% to £4,051 million. Excluding acquisitions, operating expenses were up 7% or £251 million in support of strong growth in business volumes.

Cost:income ratio
Strong income growth coupled with tight cost management resulted in a further improvement in the Group's ratio of operating expenses (excluding goodwill amortisation and integration costs and after netting operating lease depreciation against rental income) to total income, to 43.0% from 44.2%. Excluding the effect of acquisitions, the cost:income ratio improved to 42.7%.

Net insurance claims
Consistent with volume growth and reflecting stability in claims experience, general insurance claims, after reinsurance, increased by 31% to £836 million.

6






THE ROYAL BANK OF SCOTLAND GROUP plc

FINANCIAL REVIEW (continued)

Provisions
The profit and loss charge for bad debts and amounts written off fixed asset investments was £742 million compared with £652 million in the first half of 2002 and £693 million in the second half of 2002. The profit and loss charge is in line with the growth in loans and advances.

Credit quality
Overall credit quality remains strong with no material change in the distribution by grade of the Group's total risk assets compared with the position at 31 December 2002.

The ratio of risk elements in lending to gross loans and advances to customers at 2.01% at 30 June 2003 showed an improving trend (31 December 2002 - 2.14%; 30 June 2002 - 2.24%).

Risk elements in lending and potential problem loans represented 2.40% of total loans and advances to customers compared with 2.66% at 31 December 2002 and 2.82% at 30 June 2002.

Integration
By February 2003 all integration initiatives in relation to NatWest had been implemented. The programme annualised benefits, comprising £890 million revenue benefits and £1,440 million cost savings, were fully implemented less than three years after the acquisition of NatWest. Total costs for the integration programme were £2.3 billion, in line with the revised plan.

Integration costs for the six months ended 30 June 2003 were £182 million. Of this amount, £143 million related to the final elements of the NatWest integration, which has now been completed.

Earnings and dividends
Basic earnings per ordinary share increased by 29%, from 46.6p to 60.0p, reflecting lower integration costs in the first half of 2003. Earnings per ordinary share, adjusted for goodwill amortisation and integration costs, increased by 10%, from 69.8p to 76.5p.

An interim dividend of 14.6p per ordinary share, an increase of 15%, will be paid on 10 October 2003 to shareholders registered on 15 August 2003. The interim dividend is covered 5.2 times by earnings before goodwill amortisation and integration costs.

Balance sheet
Total assets were £449 billion at 30 June 2003, 9% higher than total assets of £412 billion at 31 December 2002.

In the first half of 2003, lending to customers, excluding repurchase agreements and stock borrowing (“reverse repos”), increased by 8% or £17 billion to £218 billion. Customer deposits, excluding repurchase agreements and stock lending (“repos”), grew by 6% or £12 billion to £206 billion.

Capital ratios at 30 June 2003 were 7.6% (tier 1) and 12.3% (total), against 7.3% (tier 1) and 11.7% (total) at 31 December 2002. These ratios are slightly higher than our target ratios ahead of the acquisition of Churchill Insurance.

Profitability
The adjusted after-tax return on ordinary equity was 18.2% compared with 17.4% for the first half of 2002. This is based on profit attributable to ordinary shareholders before goodwill amortisation and integration costs, and average ordinary equity.

7






THE ROYAL BANK OF SCOTLAND GROUP plc

FINANCIAL REVIEW (continued)

Acquisitions
In January 2003, Citizens completed the acquisition of Pennsylvania-based commercial bank, Commonwealth Bancorp, Inc. for a cash consideration of US$450 million.

In April 2003, Citizens announced the acquisition of Port Financial Corp., the holding company of the Massachusetts savings bank, CambridgePort Bank for a cash consideration of US$285 million. This transaction was completed on 31 July 2003.

In May 2003, RBS announced the acquisition of Nordisk Renting AB, a Swedish leasing company, for a cash consideration of €104 million. This transaction was completed on 2 June 2003.

In May 2003, RBS announced the purchase of the credit card and personal loans portfolios of Frankfurt-based Santander Direkt Bank for a consideration of €486 million. This transaction was completed on 31 July 2003.

In June 2003, RBS announced the acquisition of Churchill Insurance Group PLC for a consideration of £1.1 billion. OFT clearance has been received and the transaction, which is still subject to approval of the FSA, is expected to be completed by the fourth quarter of 2003.

In July 2003, Citizens announced the acquisition of Community Bancorp, Inc., the holding company for Community National Bank, for a cash consideration of US$116 million. This transaction is subject to Community Bancorp, Inc. shareholder and US regulatory approvals and is expected to be completed by the end of 2003.

Disposals
In May 2003, RBS announced the sale of the Miami-based Latin American private banking operations of Coutts Group to Santander Central Hispano for a premium of approximately US$75 million. This transaction was completed on 31 July 2003.

8






THE ROYAL BANK OF SCOTLAND GROUP plc

SUMMARY CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited)

In the profit and loss account set out below goodwill amortisation and integration costs are shown separately. In the statutory profit and loss account on page 25, these items are included in the captions prescribed by the Companies Act 1985.

  First half   First half   Full year  
  2003   2002   2002  
  £m   £m   £m  
             
Net interest income 4,025   3,873   7,849  
 
 
 
 
Dividend income 30   29   58  
Fees and commissions receivable 2,719   2,609   5,308  
Fees and commissions payable (554 ) (481 ) (965 )
Dealing profits (before associated direct costs) 985   724   1,462  
Other operating income 726   543   1,209  
 
 
 
 
  3,906   3,424   7,072  
General insurance premium income 1,149   885   1,894  
 
 
 
 
Non-interest income 5,055   4,309   8,966  
 
 
 
 
Total income 9,080   8,182   16,815  
 
 
 
 
Staff costs 2,126   1,930   3,942  
Other operating expenses 1,925   1,810   3,727  
 
 
 
 
Operating expenses 4,051   3,740   7,669  
 
 
 
 
Profit before other operating charges 5,029   4,442   9,146  
General insurance claims 836   639   1,350  
 
 
 
 
Operating profit before provisions 4,193   3,803   7,796  
Provisions for bad and doubtful debts 746   611   1,286  
Amounts written off fixed asset investments (4 ) 41   59  
 
 
 
 
Profit before tax, goodwill amortisation and            
   integration costs 3,451   3,151   6,451  
Goodwill amortisation 373   365   731  
Integration costs 182   461   957  
 
 
 
 
Profit before tax 2,896   2,325   4,763  
Tax 927   781   1,556  
 
 
 
 
Profit after tax 1,969   1,544   3,207  
Minority interests (including non-equity) 87   49   133  
Preference dividends 137   159   305  
 
 
 
 
  1,745   1,336   2,769  
Additional Value Shares dividend -   -   798  
 
 
 
 
Profit attributable to ordinary shareholders 1,745   1,336   1,971  
Ordinary dividends 431   368   1,267  
 
 
 
 
Retained profit 1,314   968   704  
 
 
 
 
             
Basic earnings per ordinary share (Note 4) 60.0 p 46.6 p 68.4 p
 
 
 
 
Adjusted earnings per ordinary share (Note 4) 76.5 p 69.8 p 144.1 p
 
 
 
 

9






THE ROYAL BANK OF SCOTLAND GROUP plc

DIVISIONAL PERFORMANCE

The contribution of each division before goodwill amortisation and integration costs and, where appropriate, Manufacturing costs is detailed below.

  First half   First half   Increase/   Full year  
  2003   2002   (decrease) in   2002  
          contribution      
  £m   £m   %   £m  
                 
Corporate Banking and Financial Markets* 1,739   1,581   10   3,261  
Retail Banking 1,535   1,488   3   3,019  
Retail Direct 407   330   23   701  
Manufacturing* (900 ) (886 ) (2 ) (1,762 )
Wealth Management* 219   244   (10 ) 454  
Direct Line Group 202   153   32   355  
Ulster Bank 131   125   5   244  
Citizens 425   384   11   766  
Central items (307 ) (268 ) (15 ) (587 )
 
 
     
 
Profit before goodwill amortisation                
   and integration costs 3,451   3,151   10   6,451  
 
 
     
 

* prior periods have been restated to reflect the transfer in the first half of 2003 of certain activities from Corporate Banking and Financial Markets and Wealth Management to Manufacturing.

10






THE ROYAL BANK OF SCOTLAND GROUP plc

CORPORATE BANKING AND FINANCIAL MARKETS

  First half   First half   Full year  
  2003   2002   2002  
      (restated*)   (restated*)  
  £m   £m   £m  
             
Net interest income excluding funding cost            
      of operating lease assets 1,246   1,264   2,529  
Operating lease funding cost (100 ) (85 ) (180 )
 
 
 
 
Net interest income 1,146   1,179   2,349  
 
 
 
 
Fees and commissions receivable 704   680   1,394  
Fees and commissions payable (101 ) (74 ) (157 )
Dealing profits (before associated direct costs) 913   656   1,338  
Operating lease rentals 446   356   791  
Other operating income 186   137   337  
 
 
 
 
Non-interest income 2,148   1,755   3,703  
 
 
 
 
Total income 3,294   2,934   6,052  
 
 
 
 
Direct expenses            
   - staff costs 710   602   1,230  
   - other 189   178   375  
   - operating lease depreciation 252   217   461  
 
 
 
 
  1,151   997   2,066  
 
 
 
 
Contribution before provisions 2,143   1,937   3,986  
Provisions 404   356   725  
 
 
 
 
Contribution 1,739   1,581   3,261  
 
 
 
 
* prior periods have been restated following the transfer of certain activities to Manufacturing.  
             
  £bn   £bn   £bn  
Total assets** 234.4   201.0   203.4  
Loans and advances to customers** – gross            
   - banking book 98.1   88.0   92.1  
   - trading book 5.9   3.5   3.6  
Operating lease assets 5.9   4.1   5.3  
Customer deposits** 67.6   58.0   62.2  
Weighted risk assets – banking 139.9   119.3   125.2  
         – trading 13.2   10.7   11.3  
             
** excluding repos and reverse repos            

Corporate Banking and Financial Markets (“CBFM”) is the largest provider of banking services to medium and large businesses in the UK and the leader in the UK in asset finance. It provides an integrated range of products and services to mid-sized and large corporate and institutional customers in the UK and overseas, including corporate and commercial banking, treasury and capital markets products, structured and leveraged finance, trade finance, leasing and factoring. Treasury and capital markets products are provided through Financial Markets which is a leading provider of debt, foreign exchange and derivatives products.

11






THE ROYAL BANK OF SCOTLAND GROUP plc

CORPORATE BANKING AND FINANCIAL MARKETS (continued)

Contribution increased over the first half of 2002 by 10% or £158 million to £1,739 million.

Total income was up 12% or £360 million to £3,294 million. Excluding the effect of the acquisition of Dixon Motors in May 2002, which added £36 million, total income was up 11%.

Net interest income, excluding the cost of funding operating lease assets, was £18 million lower at £1,246 million, reflecting the reduced benefit of interest-free funds due to lower interest rates and the outcome of the Competition Commission inquiry into SME banking. In addition, income from treasury was lower as a result of less favourable market conditions. Balance sheet growth however was good; average loans and advances to customers of the banking business increased by 9% or £7.9 billion to £93.0 billion and average customer deposits increased by 8% or £4.4 billion to £59.7 billion.

Non-interest income rose by 22% or £393 million to £2,148 million. Dealing profits before associated direct costs were up £257 million, reflecting increased volumes in the UK and the US as a result of growth in customer activity in interest rate protection, mortgage securitisation and foreign exchange. There was also a significant increase in operating lease rentals, up 25% or £90 million to £446 million, reflecting growth in the asset finance business.

Direct expenses increased by 15% or £154 million to £1,151 million. Excluding Dixon Motors, which added £31 million and after netting operating lease asset depreciation against rental income, expenses rose by 11%, in line with income growth.

The charge for provisions for bad debts and amounts written off fixed asset investments amounted to £404 million compared with £369 million in the second half of 2002 and £356 million in the first half of 2002.

12






THE ROYAL BANK OF SCOTLAND GROUP plc

RETAIL BANKING            
  First half   First half   Full year  
  2003   2002   2002  
  £m   £m   £m  
Net interest income 1,433   1,376   2,840  
Non-interest income 703   661   1,353  
 
 
 
 
Total income 2,136   2,037   4,193  
 
 
 
 
Direct expenses            
   - staff costs 373   349   707  
   - other 93   98   254  
 
 
 
 
  466   447   961  
 
 
 
 
Contribution before provisions 1,670   1,590   3,232  
Provisions 135   102   213  
 
 
 
 
Contribution 1,535   1,488   3,019  
 
 
 
 
  £bn   £bn   £bn  
Total assets 63.4   62.9   66.5  
Loans and advances to customers - gross            
      - mortgages 33.6   30.2   32.1  
      - other 24.2   21.4   23.5  
Customer deposits 64.0   59.3   61.7  
Weighted risk assets 41.2   36.6   38.8  

Retail Banking provides a wide range of banking, insurance and related financial services to individuals and small businesses. These services are delivered from a network of Royal Bank of Scotland and NatWest branches throughout Great Britain and through the telephone, ATMs and the internet. Credit card services provided to retail customers are included within the Retail Direct division.

The division achieved good volume growth across all areas of personal current accounts and mortgages, personal loans and deposits, and small business loans and current accounts. Total customers in the first six months of the year increased by 113,000. Both income and contribution were reduced in this period by the outcome of the Competition Commission inquiry into SME banking and by the impact of lower interest rates. Despite these significant negative factors, the division increased its income by 5% or £99 million to £2,136 million, and contribution before Manufacturing costs by 3% or £47 million to £1,535 million.

Net interest income rose by 4% or £57 million to £1,433 million, reflecting strong growth in customer advances and deposits which was partially offset in this particular period by the outcome of the Competition Commission inquiry into SME banking and the impact of a lower interest rate environment. Average loans to customers, excluding mortgages, grew by 11% or £2.2 billion to £23.2 billion. Average mortgage lending grew by 12% or £3.6 billion to £32.6 billion. Average customer deposits increased by 5% or £2.8 billion to £59.6 billion.

Non-interest income rose by 6% or £42 million to £703 million. This was due to continued growth in customer numbers, increased volumes in the general insurance business and higher embedded value profit.

Direct expenses increased by 4% or £19 million to £466 million.

The charge for provisions for bad debts increased by £33 million to £135 million, reflecting growth in lending over recent years.

13






THE ROYAL BANK OF SCOTLAND GROUP plc

RETAIL DIRECT            
             
  First half   First half   Full year  
  2003   2002   2002  
  £m   £m   £m  
             
Net interest income 400   370   749  
Non-interest income 468   386   841  
 
 
 
 
Total income 868   756   1,590  
 
 
 
 
Direct expenses            
   - staff costs 101   88   190  
   - other 213   198   418  
 
 
 
 
  314   286   608  
 
 
 
 
Contribution before provisions 554   470   982  
Provisions 147   140   281  
 
 
 
 
Contribution 407   330   701  
 
 
 
 
  £bn   £bn   £bn  
Total assets 20.3   17.7   19.4  
Loans and advances to customers - gross            
      - mortgages 7.6   6.3   7.0  
      - other 12.9   11.4   12.4  
Customer deposits 4.5   4.2   4.4  
Weighted risk assets 15.3   13.0   14.4  

Retail Direct issues a comprehensive range of credit, charge and debit cards to personal and corporate customers and engages in merchant acquisition and processing facilities for retail businesses. It also includes: Tesco Personal Finance (“TPF”), The One account, Direct Line Financial Services (“DLFS”), Lombard Direct, WorldPay Limited, the Group’s internet banking platform, the Primeline brand, and in Europe, the Comfort Card businesses, all of them offering products to customers through direct channels. In July 2003, Retail Direct completed the purchase of the credit card and personal loans portfolios of Frankfurt-based Santander Direkt Bank.

Contribution increased over the first half of 2002 by 23% or £77 million to £407 million.

Total income was up 15% or £112 million to £868 million, reflecting continued strong growth in the Cards Business and in TPF. WorldPay, which was acquired in the second half of 2002, added £6 million.

Net interest income was up 8% or £30 million to £400 million. Average credit card balances were up 5% to £8.4 billion. In TPF, average personal loans rose by 21% and average customer deposits by 20%. Average mortgage lending was 24% higher in The One account and 10% higher in DLFS, while average personal lending in DLFS and Lombard Direct increased by 22%.

Non-interest income was up 21% or £82 million to £468 million. There was good growth in credit card fees, insurance and ATM income resulting from increased volumes, particularly in TPF and the Cards Business.

14






THE ROYAL BANK OF SCOTLAND GROUP plc

RETAIL DIRECT (continued)

In the six months to 30 June 2003, the total number of customer accounts increased by 500,000.

Direct expenses increased by 10% or £28 million to £314 million to support business expansion and includes £9 million relating to WorldPay.

The charge for provisions for bad debts increased by £7 million to £147 million, reflecting growth in lending volumes offset by higher recoveries.

15






THE ROYAL BANK OF SCOTLAND GROUP plc

MANUFACTURING

  First half   First half   Full year  
  2003   2002   2002  
      (restated*)   (restated*)  
  £m   £m   £m  
             
Staff costs 287   261   536  
Other costs 613   625   1,226  
 
 
 
 
Total manufacturing costs 900   886   1,762  
 
 
 
 
Analysis:            
Group Technology** 291   309   613  
Group Purchasing and Property Operations** 319   299   585  
Customer Support and other operations 290   278   564  
 
 
 
 
Total manufacturing costs 900   886   1,762  
 
 
 
 

* prior periods have been restated following the transfer of certain activities from Corporate Banking and Financial Markets and Wealth Management.

** prior periods have also been restated to reflect the transfer of certain business units within Manufacturing.

Manufacturing supports the customer facing businesses, mainly Corporate Banking and Financial Markets, Retail Banking, Retail Direct and Wealth Management, and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services.

The expenditure incurred by Manufacturing relates to shared costs in respect of the Group's UK banking operations. These costs reflect, inter alia, operational technology, account processing and management, and money transmission activities which are shared between the various customer-facing divisions. Consequently, these joint costs cannot be directly attributed to individual divisions. Instead, the Group monitors and controls each of its customer facing divisions on revenue generation and direct costs whilst in Manufacturing such control is exercised through appropriate efficiency measures and targets.

Manufacturing drives optimum efficiencies in high volume processing activities, leverages the Group's purchasing power and has become the centre of excellence for managing large scale and complex change.

Manufacturing's costs increased by 2% or £14 million, to £900 million.

Lower costs in Group Technology reflect the benefits of the successful migration of NatWest onto the RBS technology platform during 2002.

Group Purchasing and Property Operations costs increased principally as a result of investment in the Group’s property infrastructure, notably in London and Birmingham, and in modernisation of the branch network.

Customer Support and other operations continued with its programme of customer service enhancements. A significant element of this has been the rollout of the new telephony proposition that has enabled NatWest customers to call their branch direct, a major enhancement to customer service.

16






THE ROYAL BANK OF SCOTLAND GROUP plc

WEALTH MANAGEMENT

           
  First half   First half   Full year  
  2003   2002   2002  
      (restated*)   (restated*)  
  £m   £m   £m  
Net interest income 225   228   460  
Non-interest income 204   236   447  
 
 
 
 
Total income 429   464   907  
 
 
 
 
Expenses            
   - staff costs 139   149   301  
   - other 74   79   163  
 
 
 
 
  213   228   464  
 
 
 
 
Contribution before provisions 216   236   443  
Net release of provisions 3   8   11  
 
 
 
 
Contribution 219   244   454  
 
 
 
 
  £bn   £bn   £bn  
Total assets 14.0   13.8   13.4  
Investment management assets - excluding            
      deposits 21.6   21.3   20.5  
Customer deposits 29.7   28.9   29.1  
Weighted risk assets 8.7   8.9   8.4  

* prior periods have been restated following the transfer of certain activities to Manufacturing.

Wealth Management comprises Coutts Group, Adam & Company, The Royal Bank of Scotland International, The Royal Bank of Scotland Private Banking, NatWest Offshore and NatWest Private Banking. Following the sale in September 2002 of a 50% interest, NatWest Stockbrokers now operates as a 50:50 joint venture with TD Waterhouse. The Miami-based private banking operations of Coutts Group were sold to Santander Central Hispano in July 2003.

Contribution was £219 million, £25 million or 10% lower than the first half of 2002, in part due to the sale of NatWest Stockbrokers in September 2002 which had contributed £15 million of income and £12 million of costs in the first half of 2002.

Total income was down by 8% or £35 million to £429 million reflecting the effect of low interest rates and difficult stock market conditions.

Net interest income declined by 1% or £3 million to £225 million. Growth in banking volumes was negated by the effect of lower interest rates.

Non-interest income declined by 14% or £32 million to £204 million. The reduction reflects the continuing impact of lower equity markets on fees and commissions. Investment management assets increased to £21.6 billion.

Expenses were down by 7% or £15 million to £213 million reflecting tight cost control.

There was a net release of provisions of £3 million in the first half of 2003, against a net release of £8 million in the first half of 2002, reflecting recoveries in both periods.

17






THE ROYAL BANK OF SCOTLAND GROUP plc

DIRECT LINE GROUP

  First half   First half   Full year  
  2003   2002   2002  
  £m   £m   £m  
             
Earned premiums 1,359   1,111   2,383  
Reinsurers' share (210 ) (226 ) (489 )
 
 
 
 
Insurance premium income 1,149   885   1,894  
Other income 132   104   245  
 
 
 
 
Total income 1,281   989   2,139  
 
 
 
 
Expenses            
   - staff costs 96   90   178  
   - other 147   107   256  
 
 
 
 
  243   197   434  
 
 
 
 
Gross claims 1,002   787   1,693  
Reinsurers' share (166 ) (148 ) (343 )
 
 
 
 
Net claims 836   639   1,350  
 
 
 
 
Contribution 202   153   355  
 
 
 
 
In-force policies (000)            
   - motor: UK 4,861   4,376   4,668  
   - motor: International 1,395   782   1,224  
   - home: UK 1,647   1,552   1,587  
Combined operating ratio - UK (%) 89.5   89.1   89.4  
Insurance reserves - UK (£m) 2,120   1,787   1,946  

Direct Line Group sells and underwrites retail and wholesale insurance on the telephone and the internet. The Retail Division sells general insurance and motor breakdown services direct to the customer and UKI Partnerships is a leading wholesale provider of insurance and motoring related services. Through its International Division, Direct Line sells insurance in Spain, Germany, Italy and Japan. In June 2003, RBS Group announced the acquisition of Churchill Insurance Group PLC. The transaction, which has received clearance from the OFT but is still subject to FSA approval, is expected to be completed by the fourth quarter of 2003.

Contribution increased over the first half of 2002 by 32% or £49 million to £202 million.

Total income was up 30% or £292 million to £1,281 million.

After reinsurance, insurance premium income was up 30% or £264 million to £1,149 million, reflecting strong growth in the customer base. In the six months to 30 June 2003, the number of UK in-force motor insurance policies increased by 193,000, while the number of UK in-force home insurance policies increased by 60,000. The number of international in-force motor policies increased by 171,000 since December 2002.

Other income increased by 27% or £28 million to £132 million with growth in customer volumes partially offset by the effect of lower interest rates.

Expenses increased by 23% or £46 million to £243 million to support the growth in business.

Net claims, after reinsurance, increased by 31% or £197 million to £836 million, mainly as a result of higher business volumes.

18






THE ROYAL BANK OF SCOTLAND GROUP plc

ULSTER BANK

  First half   First half   Full year  
  2003   2002   2002  
  £m   £m   £m  
Net interest income 190   165   339  
Non-interest income 91   92   181  
 
 
 
 
Total income 281   257   520  
 
 
 
 
Expenses            
   - staff costs 79   69   145  
   - other 53   52   109  
 
 
 
 
  132   121   254  
 
 
 
 
Contribution before provisions 149   136   266  
Provisions 18   11   22  
 
 
 
 
Contribution 131   125   244  
 
 
 
 
  £bn   £bn   £bn  
Total assets 14.2   11.6   12.7  
Loans and advances to customers - gross 10.4   8.3   9.1  
Customer deposits 9.0   8.1   8.8  
Weighted risk assets 10.3   8.4   9.0  
Average exchange rate - €/£ 1.460   1.609   1.591  
Spot exchange rate - €/£ 1.437   1.543   1.536  

Ulster Bank provides a comprehensive range of retail and wholesale financial services in Northern Ireland and the Republic of Ireland. Retail Banking has a network of branches throughout Ireland and operates in the personal, commercial and wealth management sectors. Corporate Banking and Financial Markets provides a wide range of services in the corporate and institutional markets.

Contribution increased over the first half of 2002 by 5% or £6 million to £131 million with exchange rate movements offsetting less favourable market conditions in treasury and stockbroking.

Total income increased by 9% or £24 million to £281 million reflecting volume growth and the positive effect of exchange rate movements which more than offset reduced benefit of interest-free funds due to lower interest rates.

Net interest income rose by 15% or £25 million to £190 million, reflecting strong growth in both average customer lending and deposits of the banking business. These increased by 23% or £1.8 billion, to £9.5 billion, and by 14% or £1.1 billion, to £8.7 billion respectively. The net interest margin fell slightly following reductions in both the UK base rate and the European Central Bank rate. The number of customers increased since December 2002 by 7,000.

Non-interest income fell by £1 million to £91 million. Good growth in banking and card fee income was masked by lower levels of activity in treasury reflecting difficult trading conditions. Depressed equity markets adversely affected brokerage fees.

Expenses increased by 9% or £11 million to £132 million, reflecting the annual pay award, and were adversely affected by exchange rate movements.

The charge for provisions for bad debts was up £7 million to £18 million reflecting growth in lending and a slight deterioration in asset quality.

19






THE ROYAL BANK OF SCOTLAND GROUP plc

CITIZENS

  First half   First half   Full year  
  2003   2002   2002  
  £m   £m   £m  
             
Net interest income 638   640   1,248  
Non-interest income 271   236   468  
 
 
 
 
Total income 909   876   1,716  
 
 
 
 
Expenses            
   - staff costs 254   243   485  
   - other 186   198   370  
 
 
 
 
  440   441   855  
 
 
 
 
Contribution before provisions 469   435   861  
Provisions 44   51   95  
 
 
 
 
Contribution 425   384   766  
 
 
 
 
  $bn   $bn   $bn  
Total assets 68.2   54.3   61.1  
Loans and advances to customers - gross 37.5   27.1   31.4  
Customer deposits 57.5   44.4   51.1  
Weighted risk assets 44.1   36.5   38.8  
             
Average exchange rate - US$/£ 1.611   1.445   1.503  
Spot exchange rate - US$/£ 1.650   1.528   1.613  

Citizens is engaged in retail and corporate banking activities through its branch network in the states of Rhode Island, Connecticut, Massachusetts, New Hampshire, Pennsylvania, Delaware and New Jersey. Citizens is the fifteenth largest commercial bank in the US based on deposits. In January 2003, Citizens completed the acquisition of Commonwealth Bancorp, Inc. of Pennsylvania, and in July 2003, completed the acquisition of Port Financial Corp., the holding company for CambridgePort Bank, a Massachusetts savings bank. Also in July 2003, Citizens announced the acquisition of Community Bancorp, Inc., Massachusetts, the holding company for Community National Bank. The transaction is subject to Community Bancorp, Inc. shareholder and US regulatory approvals and is expected to be completed by the end of 2003.

Contribution increased over the first half of 2002 by 11% or £41 million to £425 million; in US dollars, contribution increased by 23% or $130 million to $685 million.

Total income was up 16% or $200 million to $1,465 million.

Net interest income increased by 11% or $104 million to $1,029 million. Excluding the acquisitions, net interest income was up 7% or $62 million (£38 million), reflecting strong organic growth in personal loans and deposits. Excluding the acquisitions, average loans were up 25% or $6.7 billion and average deposits were up 22% or $9.4 billion. The benefit of this growth was partially offset by a narrowing interest margin due to reductions in US interest rates.

20






THE ROYAL BANK OF SCOTLAND GROUP plc

CITIZENS (continued)

Non-interest income rose by 28% or $96 million to $436 million. Excluding the acquisitions, non-interest income was up 25% or $85 million (£52 million), as a result of growth in banking service charges and securities gains.

Expenses increased by 11% or $72 million to $709 million. Excluding the acquisitions, expenses increased by 7% or $45 million (£29 million), to support higher business volumes and expansion of Citizens' supermarket banking programme.

Provisions were down $2 million from $73 million to $71 million. Excluding the acquisitions, provisions were $4 million (£3 million), or 5%, lower than the first half of 2002.

In the six months ended 30 June 2003, Citizens increased its personal customer base by 237,000 accounts and its business customers by 18,000 due to growth through both traditional and supermarket branches, and the acquisition of Commonwealth Bancorp.

21






THE ROYAL BANK OF SCOTLAND GROUP plc

CENTRAL ITEMS

  First half   First half   Full year  
  2003   2002   2002  
  £m   £m   £m  
             
Funding costs 85   113   215  
Central department costs            
   - staff costs 56   51   108  
   - other 69   48   102  
Other corporate items – net 97   56   162  
 
 
 
 
Total Central items 307   268   587  
 
 
 
 

The Centre comprises group and corporate functions, such as human resources and finance, which provide services to the operating divisions.

Total Central items increased by £39 million to £307 million, compared with the first half of 2002.

Funding costs at £85 million, were 25% or £28 million lower partly due to the benefit of capital raising undertaken in the first half of the year.

Departmental and other costs at £222 million were broadly in line with the second half of 2002.

22






THE ROYAL BANK OF SCOTLAND GROUP plc

AVERAGE BALANCE SHEET

    First half 2003       First half 2002      
    Average           Average          
    balance   Interest   Rate   balance   Interest   Rate  
Assets   £m   £m   %   £m   £m   %  
Treasury and other eligible bills                          
      UK   1,656   27   3.3   935   9   1.9  
      Overseas   -   -   -   271   2   1.5  
Loans and advances to banks                          
      UK   13,212   230   3.5   13,733   254   3.7  
      Overseas   9,406   107   2.3   10,767   171   3.2  
Loans and advances to customers                        
      UK   166,743   4,671   5.6   150,028   4,507   6.0  
      Overseas   40,023   1,020   5.1   34,697   958   5.5  
Debt securities                          
      UK   22,683   382   3.4   16,919   335   4.0  
      Overseas   18,160   413   4.5   18,750   472   5.0  
   
 
     
 
     
Interest-earning assets - banking business                        
  UK 204,294   5,310   5.2   181,615   5,105   5.6  
  Overseas 67,589   1,540   4.6   64,485   1,603   5.0  
   
 
     
 
     
    271,883   6,850   5.0   246,100   6,708   5.5  
       
         
     
  - trading business 91,946           75,941          
   
         
         
Total interest-earning assets   363,829           322,041          
Non-interest-earning assets   67,300           65,188          
   
         
         
Total assets   431,129           387,229          
   
         
         
Percentage of assets applicable to Overseas operations 32.0 %         31.7 %        
   
         
         
Liabilities                          
Deposits by banks                          
      UK   26,515   338   2.5   19,112   253   2.6  
      Overseas   9,819   110   2.2   10,496   129   2.5  
Customer accounts                          
      UK   130,902   1,513   2.3   118,123   1,499   2.5  
      Overseas   40,953   366   1.8   34,940   413   2.4  
Debt securities in issue                          
      UK   29,034   495   3.4   24,096   470   3.9  
      Overseas   9,674   64   1.3   9,032   129   2.9  
Loan capital                          
      UK   14,435   228   3.2   12,847   322   5.0  
      Overseas   156   8   10.3   173   9   10.4  
Internal funding of trading business (22,218 ) (297 ) 2.7   (22,075 ) (389 ) 3.5  
   
 
     
 
     
Interest-bearing liabilities - banking business                        
  UK 180,767   2,292   2.5   153,317   2,168   2.8  
  Overseas 58,503   533   1.9   53,427   667   2.5  
   
 
     
 
     
    239,270   2,825   2.3   206,744   2,835   2.8  
       
         
     
  - trading business 88,778           72,095          
   
         
         
Total interest-bearing liabilities   328,048           278,839          
Non-interest-bearing liabilities                          
   - demand deposits   24,130           28,309          
   - other liabilities   51,326           53,207          
Shareholders' funds   27,625           26,874          
   
         
         
Total liabilities and shareholders' funds 431,129           387,229          
   
         
         
Percentage of liabilities applicable to Overseas                        
      operations   31.1 %         30.2 %        
   
         
         

The analysis between UK and Overseas has been compiled on the basis of location of office. Interest receivable and interest payable on trading assets and liabilities are included in dealing profits.

23






THE ROYAL BANK OF SCOTLAND GROUP plc

AVERAGE INTEREST RATES, YIELDS, SPREADS AND MARGINS

      First half   First half  
      2003   2002  
    Average   Average  
      rate   rate  
      %   %  
             
The Group's base rate     3.8   4.0  
             
London inter-bank three month offered rates:            
   Sterling     3.7   4.1  
   Eurodollar     1.3   1.9  
   Euro     2.5   3.4  
Yields, spreads and margins of the banking business:            
   Gross yield            
      Group     5.0   5.5  
      UK     5.2   5.6  
      Overseas     4.6   5.0  
   Interest spread            
      Group     2.7   2.7  
      UK     2.7   2.8  
      Overseas     2.7   2.5  
   Net interest margin            
      Group     3.0   3.1  
      UK     3.0   3.2  
      Overseas     3.0   2.9  
             
  First half   First half   Full year  
  2003   2002   2002  
  %   %   %  
Gross yield on interest-earning assets of banking business 5.0   5.5   5.4  
Cost of interest-bearing liabilities of banking business (2.3 ) (2.8 ) (2.7 )
 
 
 
 
Interest spread of banking business 2.7   2.7   2.7  
Benefit from interest-free funds 0.3   0.4   0.4  
 
 
 
 
Net interest margin of banking business 3.0   3.1   3.1  
 
 
 
 

Interest spread for the Group as a whole was unchanged at 2.7%.

Interest-free balances fell by over £6 billion partly due to the outcome of the Competition Commission inquiry into SME banking and this together with the lower interest rate environment contributed to the reduction in the benefit of interest-free funds from 0.4% to 0.3% giving a decline in net interest margin from 3.1% to 3.0%.

UK

While individual product margins remained stable, a slightly greater proportion of relatively lower margin mortgage business has resulted in a reduction in spread versus the first half of 2002, although a spread of 2.7% is consistent with the second half of 2002. The reduced benefit of interest-free funds reflects the rate and volume impact on interest-free funds described above.

Overseas

Although asset spreads have tightened in US, overall mix and volume improvements elsewhere have resulted in an increased overseas spread from 2.5% to 2.7%. Lower interest rates led to a reduction in the benefit from interest-free funds.

24






THE ROYAL BANK OF SCOTLAND GROUP plc

STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited)

In the consolidated profit and loss account set out below, goodwill amortisation and integration costs are included in the captions prescribed by the Companies Act 1985.

          Full year  
  First half   First half   2002  
  2003   2002   (Audited)  
  £m   £m   £m  
             
Interest receivable 6,850   6,708   13,561  
Interest payable 2,825   2,835   5,712  
 
 
 
 
Net interest income 4,025   3,873   7,849  
 
 
 
 
Dividend income 30   29   58  
Fees and commissions receivable 2,719   2,609   5,308  
Fees and commissions payable (554 ) (481 ) (965 )
Dealing profits 985   724   1,462  
Other operating income 726   543   1,209  
 
 
 
 
  3,906   3,424   7,072  
General insurance            
- earned premiums 1,359   1,111   2,383  
- reinsurance (210 ) (226 ) (489 )
 
 
 
 
Non-interest income 5,055   4,309   8,966  
 
 
 
 
Total income 9,080   8,182   16,815  
 
 
 
 
Administrative expenses            
   - staff costs* 2,238   2,192   4,472  
   - premises and equipment* 520   485   1,006  
   - other* 1,026   1,096   2,253  
Depreciation and amortisation            
   - tangible fixed assets* 449   428   895  
   - goodwill 373   365   731  
 
 
 
 
Operating expenses 4,606   4,566   9,357  
 
 
 
 
Profit before other operating charges 4,474   3,616   7,458  
General insurance            
   - gross claims 1,002   787   1,693  
   - reinsurance (166 ) (148 ) (343 )
 
 
 
 
Operating profit before provisions 3,638   2,977   6,108  
Provisions for bad and doubtful debts 746   611   1,286  
Amounts written off fixed asset investments (4 ) 41   59  
 
 
 
 
Profit on ordinary activities before tax 2,896   2,325   4,763  
 
 
 
 

25






THE ROYAL BANK OF SCOTLAND GROUP plc

STATUTORY CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited) (continued)

  First half
2003
£m
  First half
2002
£m
  Full year
2002

(Audited)

£m
 
             
Profit on ordinary activities before tax 2,896   2,325   4,763  
Tax on profit on ordinary activities 927   781   1,556  
 
 
 
 
Profit on ordinary activities after tax 1,969   1,544   3,207  
Minority interests (including non-equity) 87   49   133  
 
 
 
 
Profit after minority interests 1,882   1,495   3,074  
Preference dividends 137   159   305  
 
 
 
 
  1,745   1,336   2,769  
Additional Value Shares dividend -   -   798  
 
 
 
 
Profit attributable to ordinary shareholders 1,745   1,336   1,971  
Ordinary dividends 431   368   1,267  
 
 
 
 
Retained profit 1,314   968   704  
 
 
 
 
             
Basic earnings per ordinary share (Note 4) 60.0 p 46.6 p 68.4 p
 
 
 
 
Adjusted earnings per ordinary share (Note 4) 76.5 p 69.8 p 144.1 p
 
 
 
 
Diluted earnings per ordinary share (Note 4) 59.5 p 46.0 p 67.4 p
 
 
 
 

* Integration costs included in operating expenses comprise:

  First half First half Full year  
  2003 2002 2002  
  £m £m £m  
         
Staff costs 112 262 530  
Premises and equipment 31 52 127  
Other administrative expenses 38 146 298  
Depreciation 1 1 2  
 


 
  182 461 957  
 


 

26






THE ROYAL BANK OF SCOTLAND GROUP plc

CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2003 (unaudited)

      31 December      
  30 June   2002   30 June  
  2003   (Audited)   2002  
  £m   £m   £m  
Assets            
Cash and balances at central banks 3,268   3,481   3,037  
Items in the course of collection from other banks 3,729   2,741   3,925  
Treasury bills and other eligible bills 7,047   11,459   8,184  
Loans and advances to banks 44,923   44,296   39,172  
Loans and advances to customers 248,726   223,324   209,884  
Debt securities 73,328   67,042   68,829  
Equity shares 2,150   1,886   1,794  
Interests in associated undertakings 91   94   110  
Intangible fixed assets 12,514   12,697   12,981  
Tangible fixed assets 11,638   10,485   9,136  
Settlement balances 15,169   4,102   9,635  
Other assets 19,026   16,929   16,435  
Prepayments and accrued income 4,074   4,353   4,487  
 
 
 
 
  445,683   402,889   387,609  
Long-term assurance assets attributable to            
      policyholders 3,462   9,111   9,530  
 
 
 
 
Total assets 449,145   412,000   397,139  
 
 
 
 
Liabilities            
Deposits by banks 62,039   54,720   47,015  
Items in the course of transmission to other banks 1,367   1,258   1,942  
Customer accounts 225,697   219,161   204,800  
Debt securities in issue 40,156   33,938   32,451  
Settlement balances and short positions 36,749   19,412   31,004  
Other liabilities 22,343   20,754   17,986  
Accruals and deferred income 8,399   8,626   8,156  
Provisions for liabilities and charges            
   - deferred taxation 1,909   1,834   1,672  
   - other provisions 293   330   306  
Subordinated liabilities            
   - dated loan capital 8,151   7,602   7,247  
   - undated loan capital including convertible debt 7,545   6,363   6,215  
Minority interests            
   - equity (23 ) (11 ) 32  
   - non-equity 2,444   1,850   1,383  
Shareholders' funds            
   - equity 25,496   23,545   23,743  
   - non-equity 3,118   3,507   3,657  
 
 
 
 
  445,683   402,889   387,609  
Long-term assurance liabilities attributable to            
      policyholders 3,462   9,111   9,530  
 
 
 
 
Total liabilities 449,145   412,000   397,139  
 
 
 
 
Memorandum items            
Contingent liabilities and commitments 138,933   144,180   146,249  
 
 
 
 

27






THE ROYAL BANK OF SCOTLAND GROUP plc

OVERVIEW OF CONSOLIDATED BALANCE SHEET

This overview compares the balance sheets at 30 June 2003 and 31 December 2002.

Total assets of £449.1 billion at 30 June 2003 were up £37.1 billion, 9%, compared with 31 December 2002, reflecting business growth.

Treasury bills and other eligible bills decreased by £4.4 billion, 39%, to £7.0 billion reflecting liquidity management.

Loans and advances to banks rose £0.6 billion, 1%, to £44.9 billion. Growth in bank placings, up £6.0 billion, 26% to £29.8 billion, was partially offset by decreased reverse repurchase agreements and stock borrowing ("reverse repos"), down £5.4 billion, 26%, to £15.1 billion, reflecting a switch to customer reverse repos.

Loans and advances to customers were up £25.4 billion, 11%, to £248.7 billion. Within this, reverse repos increased by 39%, £8.5 billion to £30.4 billion. Excluding reverse repos, lending increased by £16.9 billion, 8% to £218.3 billion with growth reflected across all divisions.

Debt securities increased by £6.3 billion, 9%, to £73.3 billion, principally relating to growth in Financial Markets.

Intangible fixed assets declined by £0.2 billion, 1% to £12.5 billion, reflecting amortisation in the period and the effect of exchange rate movements, partially offset by goodwill arising on the acquisition of Commonwealth Bancorp, Inc. and Nordisk Renting AB.

Tangible fixed assets were up £1.2 billion, 11% to £11.6 billion, primarily due to growth in operating lease assets.

Settlement balances increased by £11.1 billion to £15.2 billion as a result of increased trading activity.

Other assets rose by £2.1 billion, 12% to £19.0 billion, mainly due to growth in the mark-to-market value of trading derivatives.

Long-term assurance assets and liabilities declined £5.6 billion, 62% to £3.5 billion, resulting from the transfer of the pension managed fund business of NatWest Life to another third party life company.

Deposits by banks increased by £7.3 billion, 13% to £62.0 billion to fund business growth, with repurchase agreements and stock lending ("repos") up £0.5 billion, 3%, to £20.6 billion and inter-bank deposits up £6.8 billion, 20% to £41.4 billion.

Customer accounts were up £6.5 billion, 3% at £225.7 billion. Within this, repos were down £5.5 billion, 22% to £19.6 billion. Excluding repos, deposits rose by £12.0 billion, 6%, to £206.1 billion with growth across all divisions.

Debt securities in issue were up £6.2 billion, 18%, at £40.2 billion primarily to meet the Group's funding requirements.

28






THE ROYAL BANK OF SCOTLAND GROUP plc

OVERVIEW OF CONSOLIDATED BALANCE SHEET (continued)

Short positions were up £7.2 billion, 44% to £23.6 billion to fund the growth in the Group's trading activities. Settlement balances rose by £10.1 billion to £13.1 billion as a result of increased trading activity.

Other liabilities increased by £1.6 billion, 8% to £22.3 billion mainly due to growth in the mark-to-market value of trading derivatives.

Subordinated liabilities were up £1.7 billion, 12% to £15.7 billion. This reflected the issue of £0.5 billion (€750 million) euro denominated dated loan capital, and £0.7 billion sterling denominated and £0.5 billion (US$850 million) US$ denominated, undated loan capital.

Minority interests increased by £0.6 billion, 32%, to £2.4 billion, mainly reflecting the issue in May 2003 by a subsidiary of the Group of US$850 million (£0.5 billion) Series C non-cumulative trust preferred securities.

Shareholders’ funds were up £1.6 billion, 6% to £28.6 billion principally due to retentions of £1.3 billion and the issue of £0.6 billion of equity shares, mainly in respect of the scrip dividend, partly offset by the redemption of £0.4 billion non-equity shares in January 2003.

29






THE ROYAL BANK OF SCOTLAND GROUP plc

STATEMENT OF CONSOLIDATED TOTAL RECOGNISED GAINS AND LOSSES FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited)

  First half
2003
£m
  First half
2002
£m
  Full year
2002
(Audited)
£m
 
             
Profit attributable to ordinary shareholders 1,745   1,336   1,971  
Currency translation adjustments and other movements 47   13   36  
Revaluation of premises -   -   (33 )
 
 
 
 
Total recognised gains in the period 1,792   1,349   1,974  
Prior year adjustment arising from the implementation            
   of Financial Reporting Standard 19 ‘Deferred Tax’ -   (117 ) (117 )
 
 
 
 
Total recognised gains 1,792   1,232   1,857  
 
 
 
 

RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS’ FUNDS FOR THE SIX MONTHS ENDED 30 JUNE 2003 (unaudited)

  First half
2003
£m
  First half
2002
£m
  Full year
2002
(Audited)
£m
 
             
Profit attributable to ordinary shareholders 1,745   1,336   1,971  
Ordinary dividends (431 ) (368 ) (1,267 )
 
 
 
 
Retained profit for the period 1,314   968   704  
Issue of ordinary shares 555   481   560  
Redemption of preference shares (364 ) (600 ) (600 )
Goodwill previously written off to reserves 40   -   -  
Other recognised gains 47   13   3  
Currency translation adjustment on            
   share premium account (30 ) (130 ) (283 )
 
 
 
 
Net increase in shareholders’ funds 1,562   732   384  
Opening shareholders’ funds 27,052   26,668   26,668  
 
 
 
 
Closing shareholders’ funds 28,614   27,400   27,052  
 
 
 
 

30






THE ROYAL BANK OF SCOTLAND GROUP plc

CONSOLIDATED CASH FLOW STATEMENT
FOR SIX MONTHS ENDED 30 JUNE 2003 (unaudited)

  First half
2003
£m
  First half
2002
£m
  Full year
2002
(Audited)
£m
 
             
Net cash inflow from operating activities (note 10) 14,428   4,597   13,737  
 
 
 
 
Dividends received from associated undertakings 1   -   1  
 
 
 
 
Returns on investments and servicing of finance            
Preference dividends paid (140 ) (175 ) (317 )
Additional Value Shares dividend paid -   -   (798 )
Dividends paid to minority shareholders in            
   subsidiary undertakings (60 ) (22 ) (112 )
Interest paid on subordinated liabilities (322 ) (313 ) (674 )
 
 
 
 
Net cash outflow from returns on investments and            
   servicing of finance (522 ) (510 ) (1,901 )
 
 
 
 
Taxation            
UK tax paid (359 ) (349 ) (833 )
Overseas tax paid (233 ) (142 ) (274 )
 
 
 
 
Net cash outflow from taxation (592 ) (491 ) (1,107 )
 
 
 
 
Capital expenditure and financial investment            
Purchase of investment securities (24,343 ) (13,957 ) (32,701 )
Sale and maturity of investment securities 20,775   11,957   26,072  
Purchase of tangible fixed assets (1,533 ) (1,344 ) (3,367 )
Sale of tangible fixed assets 395   615   811  
 
 
 
 
Net cash outflow from capital expenditure and            
   financial investment (4,706 ) (2,729 ) (9,185 )
 
 
 
 
Acquisitions and disposals            
Purchases of businesses and subsidiary            
   undertakings (net of cash acquired) (318 ) (173 ) (308 )
Investment in associated undertakings (3 ) (2 ) (2 )
Sale of subsidiary and associated            
   undertakings (net of cash sold) 105   -   29  
 
 
 
 
Net cash outflow from acquisitions and disposals (216 ) (175 ) (281 )
 
 
 
 
Ordinary equity dividends paid (396 ) (381 ) (729 )
 
 
 
 
Net cash inflow before financing 7,997   311   535  
 
 
 
 
Financing            
Proceeds from issue of ordinary share capital 9   22   85  
Proceeds from issue of trust preferred securities 512   802   1,242  
Redemption of preference share capital (364 ) (600 ) (600 )
Issue of subordinated liabilities 1,731   1,167   2,157  
Repayment of subordinated liabilities (40 ) (40 ) (202 )
Increase in minority interests 19   21   29  
 
 
 
 
Net cash inflow from financing 1,867   1,372   2,711  
 
 
 
 
Increase in cash 9,864   1,683   3,246  
 
 
 
 

31






THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES

1.
  
Accounting policies
There have been no changes to the Group’s principal accounting policies as set out on pages 93 to 95 of the 2002 Report and Accounts.
2.
  
Provisions for bad and doubtful debts
Operating profit is stated after charging provisions for bad and doubtful debts of £746 million (30 June 2002 - £611 million). The balance sheet provisions for bad and doubtful debts increased in the six months to 30 June 2003 from £3,927 million to £3,971 million, and the movements thereon were:

            2003   2002  
    Specific   General   Total   Total  
    £m   £m   £m   £m  
                   
  At 1 January 3,330   597   3,927   3,653  
  Currency translation and other adjustments (8 ) 2   (6 ) (18 )
  Acquisitions 10   -   10   -  
  Amounts written off (740 ) -   (740 ) (424 )
  Recoveries of amounts previously written off 34   -   34   34  
  Charge to profit and loss account 741   5   746   611  
   
 
 
 
 
  At 30 June 3,367   604   3,971   3,856  
   
 
 
 
 

3.
  

Taxation

The charge for taxation is based on a UK corporation tax rate of 30% and comprises:


                   
                 
                   
        First half   First half   Full year  
        2003   2002   2002  
        £m   £m   £m  
  Tax on profit before goodwill amortisation                
  and integration costs     1,001   942   1,863  
  Tax relief on goodwill amortisation and                
  integration costs     (74 ) (161 ) (307 )
       
 
 
 
        927   781   1,556  
       
 
 
 

  The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation tax rate of 30% as follows:

         First half   First half   Full year  
        2003   2002   2002  
        £m   £m   £m  
                   
  Expected tax charge     869   698   1,429  
  Goodwill amortisation     95   92   190  
  Contributions to employee share schemes     (4 ) (3 ) (40 )
  Non-deductible items     3   5   111  
  Non-taxable items     (34 ) (3 ) (70 )
  Taxable foreign exchange movements     (2 ) -   4  
  Foreign profits taxed at other rates     6   (7 ) 3  
  Unutilised losses brought forward                
     and carried forward     (1 ) (1 ) -  
  Adjustments in respect of prior periods     (5 ) -   (71 )
       
 
 
 
  Actual tax charge     927   781   1,556  
       
 
 
 

32






THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES (continued)

4.

Earnings per share

Earnings per share have been calculated based on the following:

    First half   First half   Full year  
    2003   2002   2002  
    £m   £m   £m  
  Earnings            
  Profit attributable to ordinary shareholders 1,745   1,336   1,971  
   
 
 
 
    Number of shares - millions  
  Weighted average number of            
     ordinary shares            
  In issue during the period 2,908   2,866   2,881  
  Effect of dilutive share options and            
     convertible non-equity shares 26   39   43  
   
 
 
 
  Diluted weighted average number of            
     ordinary shares during the period 2,934   2,905   2,924  
   
 
 
 
  Basic earnings per share 60.0 p 46.6 p 68.4 p
  AVS dividend -   -   27.7 p
   
 
 
 
    60.0 p 46.6 p 96.1 p
  Goodwill amortisation 12.2 p 12.1 p 24.2 p
  Integration costs 4.3 p 11.1 p 23.8 p
   
 
 
 
  Adjusted earnings per share 76.5 p 69.8 p 144.1 p
   
 
 
 
  Diluted earnings per share 59.5 p 46.0 p 67.4 p
   
 
 
 

5.

Interim dividend

The directors have declared an interim dividend of 14.6p per share on the ordinary shares. The interim dividend will be paid on 10 October 2003 to shareholders registered on 15 August 2003. As an alternative to cash, a scrip dividend election is to be offered and shareholders will receive details of this by letter.

6. 

Analysis of repurchase agreements

    30 June   31 December   30 June  
    2003   2002   2002  
    £m   £m   £m  
  Reverse repurchase agreements and            
     stock borrowing            
  Loans and advances to banks 15,140   20,578   16,166  
  Loans and advances to customers 30,443   21,941   19,582  
               
  Repurchase agreements and stock lending            
  Deposits by banks 20,644   20,097   14,748  
  Customer accounts 19,595   25,060   19,401  

33






THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES (continued)

7. 

Contingent liabilities and commitments

    30 June   31 December   30 June  
    2003   2002   2002  
    £m   £m   £m  
  Contingent liabilities            
  Acceptances and endorsements 2,268   2,407   2,246  
  Guarantees and assets pledged as            
     collateral security 5,683   5,200   4,970  
  Other contingent liabilities 8,232   7,981   5,829  
   
 
 
 
    16,183   15,588   13,045  
   
 
 
 
  Commitments            
  Documentary credits and other short-term            
     trade related transactions 244   655   2,098  
  Undrawn formal standby facilities, credit            
     lines and other commitments to lend 121,515   127,429   130,761  
  Other commitments 991   508   345  
   
 
 
 
    122,750   128,592   133,204  
   
 
 
 
               
  Total contingent liabilities and commitments 138,933   144,180   146,249  
   
 
 
 

8. 

Derivatives

Replacement cost of over-the-counter contracts (trading and non-trading)
The following table shows the gross replacement cost, which is the sum of the fair values, of all over-the-counter contracts with third parties (trading and non-trading) with positive value. This measure makes no allowance for netting arrangements.

    30 June   31 December   30 June  
    2003   2002   2002  
    £m   £m   £m  
               
  Exchange rate contracts 20,941   17,262   21,134  
  Interest rate contracts 76,883   64,460   37,732  
  Equity and commodity contracts 924   810   228  
   
 
 
 
    98,748   82,532   59,094  
   
 
 
 

34






THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES (continued)

8. 

Derivatives (continued)

Derivatives held for trading purposes
The table below shows the notional principal amounts of trading instruments entered into with third parties.

    30 June   31 December   30 June  
    2003   2002   2002  
    £bn   £bn   £bn  
               
  Exchange rate contracts 1,241.8   899.0   883.4  
  Interest rate contracts 5,072.2   3,922.4   3,817.4  
  Equity and commodity contracts 28.3   23.5   16.2  

 

The table below shows the fair values (which, after netting, are the balance sheet values) of trading instruments entered into with third parties.


    30 June 2003   31 December 2002   30 June 2002  
    Fair value   Fair value   Fair value  
    Assets   Liabilities   Assets   Liabilities   Assets   Liabilities  
    £m   £m   £m   £m   £m   £m  
                           
     Exchange rate contracts 20,905   22,392   17,217   18,625   21,110   21,799  
     Interest rate contracts 76,364   76,556   64,072   64,420   37,366   37,715  
     Equity and commodity                        
        contracts 867   599   733   496   259   268  
   
 
 
 
 
 
 
    98,136   99,547   82,022   83,541   58,735   59,782  
  Netting (83,374 ) (83,374 ) (68,812 ) (68,812 ) (47,417 ) (47,417 )
   
 
 
 
 
 
 
    14,762   16,173   13,210   14,729   11,318   12,365  
   
 
 
 
 
 
 

 

 

Derivatives held for purposes other than trading

The Group uses derivatives to manage specific interest rate positions relating to assets and liabilities and to hedge foreign currency exposures. The Group establishes non-trading derivative positions with third parties and through intra-company and intra-Group transactions with the Group’s independent trading operations. The table below shows the notional principal amounts of the Group’s non-trading derivatives (third party and internal).

 

    30 June   31 December   30 June  
    2003   2002   2002  
    £bn   £bn   £bn  
               
  Exchange rate contracts 16.3   14.1   13.8  
  Interest rate contracts 127.6   113.7   115.2  
  Equity and commodity contracts 1.7   2.2   0.9  

35






THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES (continued)

 

9.  Analysis of consolidated shareholders’ funds
    First half   First half   Full year  
    2003   2002   2002  
    £m   £m   £m  
  Called-up share capital            
  At beginning of period 754   893   893  
  Shares issued during the period 10   7   11  
  Preference shares redeemed during the period -   (150 ) (150 )
   
 
 
 
  At end of period 764   750   754  
   
 
 
 
  Share premium account            
  At beginning of period 7,608   7,465   7,465  
  Currency translation adjustments (30 ) (130 ) (283 )
  Shares issued during the period 557   485   685  
  Preference shares redeemed during the period -   (268 ) (268 )
  Other movements 6   6   9  
   
 
 
 
  At end of period 8,141   7,558   7,608  
   
 
 
 
  Merger reserve            
  At beginning of period 11,455   12,029   12,029  
  Transfer to profit and loss account (287 ) (287 ) (574 )
   
 
 
 
  At end of period 11,168   11,742   11,455  
   
 
 
 
  Revaluation reserve            
  At beginning of period 80   113   113  
  Revaluation of premises -   -   (33 )
   
 
 
 
  At end of period 80   113   80  
   
 
 
 
  Other reserves            
  At beginning of period 387   212   212  
  Redemption of preference shares -   150   150  
  Transfer of increase in value of            
     long-term assurance business 10   3   25  
   
 
 
 
  At end of period 397   365   387  
   
 
 
 
  Profit and loss account            
  At beginning of period 6,768   5,956   5,956  
  Currency translation adjustments and other            
     movements 41   7   27  
  Retention for the period 1,314   968   704  
  Employee share option payments (12 ) (11 ) (136 )
  Redemption of preference shares (364 ) (332 ) (332 )
  Goodwill previously written off 40   -   -  
  Transfer from merger reserve 287   287   574  
  Transfer of increase in value of            
     long-term assurance business (10 ) (3 ) (25 )
   
 
 
 
  At end of period 8,064   6,872   6,768  
   
 
 
 
  Closing shareholders’ funds 28,614   27,400   27,052  
   
 
 
 

36






THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES (continued)

10.  Analysis of net cash inflow from operating activities
    First half   First half   Full year  
    2003   2002   2002  
    £m   £m   £m  
               
  Net cash inflow from trading activities 3,920   3,328   7,459  
  Increase in loans and advances to banks and            
     customers (14,452 ) (18,514 ) (35,426 )
  Increase in deposits by banks and customers 11,677   12,723   33,895  
  (Increase)/decrease in securities (2,901 ) (3,864 ) 1,799  
  Increase in debt securities in issue 6,218   1,782   3,269  
  Settlement balances and short positions 6,270   6,541   482  
  Increase in other assets and liabilities 3,696   2,601   2,259  
   
 
 
 
  Net cash inflow from operating activities 14,428   4,597   13,737  
   
 
 
 
11.
  
Litigation
Members of the Group are engaged in litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of business. The directors, after reviewing the actual, threatened and known potential claims against Group undertakings and taking into account the advice of the relevant legal advisers, are satisfied that the outcome of these claims will not have a material adverse effect on the net assets of the Group.
12.
  
Statutory accounts
Financial information contained in this document does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985 ("the Act"). The statutory accounts for the year ended 31 December 2002 have been filed with the Registrar of Companies and have been reported on by the auditors under section 235 of the Act. The report of the auditors was unqualified and did not contain a statement under section 237(2) or (3) of the Act.
13.
  
Auditors’ review
The interim results have been reviewed by the Group’s auditors, Deloitte & Touche LLP, and their review report is set out on page 47.
14.
  
Form 6-K
A report on Form 6-K will be filed with the Securities and Exchange Commission in the United States.
   
  The profit and loss account presented in the Form 6-K will be the statutory profit and loss account as set out on page 25 of this announcement, which includes goodwill amortisation and integration costs in the captions prescribed by the Companies Act 1985. The Financial Review included in the Form 6-K will be based on the statutory profit and loss account.

 

37






THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY

Analysis of loans and advances to customers

The following table analyses loans and advances to customers (including reverse repurchase agreements and stock borrowing) by geographical area and type of customer.

    30 June   31 December   30 June  
    2003   2002   2002  
    £m   £m   £m  
UK              
Central and local government   627   1,521   1,300  
Manufacturing   7,167   7,386   6,730  
Construction   4,055   3,468   3,235  
Finance   13,508   12,396   15,208  
Service industries and business activities   28,717   26,022   27,177  
Agriculture, forestry and fishing   2,756   2,463   2,511  
Property   18,906   15,939   13,558  
Individuals - home mortgages 44,240   42,101   39,501  
  - other 23,793   22,255   21,366  
Finance leases and instalment credit   11,577   11,723   11,624  
   
 
 
 
    155,346   145,274   142,210  
Overseas residents   27,539   23,657   24,737  
   
 
 
 
Total UK offices   182,885   168,931   166,947  
   
 
 
 
Overseas              
US   49,766   41,008   31,646  
Rest of the World   20,039   17,305   15,141  
   
 
 
 
Total overseas offices   69,805   58,313   46,787  
   
 
 
 
Loans and advances to customers – gross 252,690   227,244   213,734  
Provisions for bad and doubtful debts (3,964 ) (3,920 ) (3,850 )
   
 
 
 
Total loans and advances to customers 248,726   223,324   209,884  
   
 
 
 

Reverse repurchase agreements included in the analysis above:

  30 June   31 December   30 June  
  2003   2002   2002  
  £m   £m   £m  
             
Central and local government 358   1,000   1,150  
Finance 8,436   5,186   8,650  
 
 
 
 
  8,794   6,186   9,800  
Overseas residents 3,310   1,287   1,505  
 
 
 
 
Total UK offices 12,104   7,473   11,305  
Overseas            
US 18,038   14,184   8,093  
Rest of the World 301   284   184  
 
 
 
 
Total 30,443   21,941   19,582  
 
 
 
 
Loans and advances to customers excluding            
   reverse repurchase agreements - net 218,283   201,383   190,302  
 
 
 
 

38






THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY (continued)

Cross border outstandings

The table below sets out the Group’s cross border outstandings in excess of 0.75% of Group total assets (including acceptances) of £451.4 billion (31 December 2002 - £414.4 billion; 30 June 2002 - £399.4 billion). None of these countries have experienced repayment difficulties which have required refinancing of outstanding debt.

  30 June   31 December   30 June  
  2003   2002   2002  
  £m   £m   £m  
             
US 14,504   11,658   7,986  
Germany 10,648   10,464   9,424  
France 7,242   5,971   4,563  
Netherlands 7,090   6,318   4,996  
Cayman Islands 6,611   6,897   6,333  
Japan 5,250   3,156   *  
Spain 3,997   *   3,476  
Italy 3,978   3,867   *  
Canada 3,426   *   *  

* less than 0.75% of Group total assets (including acceptances).

Selected country exposures

The table below details exposures to countries that are sometimes considered as having a higher credit and foreign exchange risk.

  30 June 2003   31 December 2002   30 June 2002  
      Non-           Non-           Non-      
  Bank   bank   Total   Bank   bank   Total   Bank   bank   Total  
  £m   £m   £m   £m   £m   £m   £m   £m   £m  
                                     
Argentina 29   11   40   30   15   45   35   16   51  
Brazil -   10   10   -   14   14   42   22   64  
Turkey 7   83   90   25   65   90   29   103   132  
Venezuela -   108   108   -   115   115   -   111   111  

39






THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY (continued) Risk elements in lending

The Group’s loan control and review procedures do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the Securities and Exchange Commission (‘SEC’) in the US. The following table shows the estimated amount of loans which would be reported using the SEC’s classifications. The figures incorporate estimates and are stated before deducting the value of security held or related provisions.

  30 June   31 December   30 June  
  2003   2002   2002  
  £m   £m   £m  
Loans accounted for on a non-accrual basis (2):            
      Domestic 3,404   3,077   3,085  
      Foreign 1,177   1,098   897  
 
 
 
 
  4,581   4,175   3,982  
 
 
 
 
Accruing loans which are contractually overdue            
   90 days or more as to principal or interest (3):            
      Domestic 306   363   494  
      Foreign 61   129   145  
 
 
 
 
  367   492   639  
 
 
 
 
Loans not included above which are ‘troubled            
   debt restructurings’ as defined by the SEC:            
      Domestic 96   144   78  
      Foreign 39   60   92  
 
 
 
 
  135   204   170  
 
 
 
 
Total risk elements in lending 5,083   4,871   4,791  
 
 
 
 
Potential problem loans (4)            
      Domestic 871   639   897  
      Foreign 104   544   333  
 
 
 
 
  975   1,183   1,230  
 
 
 
 
Closing provisions for bad and doubtful debts            
   as a % of total risk elements in lending 78 % 81 % 80 %
 
 
 
 
Closing provisions for bad and doubtful debts            
   as a % of gross loans and advances to customers 1.57 % 1.73 % 1.80 %
 
 
 
 
Risk elements in lending as a % of gross loans            
   and advances to customers 2.01 % 2.14 % 2.24 %
 
 
 
 
             

Notes:  
1)  For the analysis above, 'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group’s transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions.
2)  The Group’s UK banking subsidiary undertakings account for loans on a non-accrual basis from the point in time at which the collectability of interest is in significant doubt. Certain subsidiary undertakings of the Group generally account for loans on a non-accrual basis when interest or principal is past due 90 days.
3)  Overdrafts generally have no fixed repayment schedule and consequently are not included in this category.
4)  Loans that are current as to payment of principal and interest but in respect of which management has serious doubts about the ability of the borrower to comply with contractual repayment terms. Substantial security is held in respect of these loans and appropriate provisions have already been made in accordance with the Group’s provisioning policy for bad and doubtful debts.

40







THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY (continued)

Provisions for bad and doubtful debts

  First half 2003   Full year 2002   First half 2002  
  Specific   General   Specific   General   Specific   General  
  £m   £m   £m   £m   £m   £m  
                         
Provisions at beginning of period                        
      Domestic 2,232   349   2,123   344   2,123   344  
      Foreign 1,098   248   916   270   916   270  
 
 
 
 
 
 
 
  3,330   597   3,039   614   3,039   614  
 
 
 
 
 
 
 
Currency translation and other                        
   adjustments                        
      Domestic 4   -   11   (15 ) 7   3  
      Foreign (12 ) 2   (56 ) (2 ) (23 ) (5 )
 
 
 
 
 
 
 
  (8 ) 2   (45 ) (17 ) (16 ) (2 )
 
 
 
 
 
 
 
Acquisitions                        
      Domestic -   -   11   -   -   -  
      Foreign 10   -   12   -   -   -  
 
 
 
 
 
 
 
  10   -   23   -   -   -  
 
 
 
 
 
 
 
Amounts written-off                        
      Domestic (506 ) -   (743 ) -   (313 ) -  
      Foreign (234 ) -   (293 ) -   (111 ) -  
 
 
 
 
 
 
 
  (740 ) -   (1,036 ) -   (424 ) -  
 
 
 
 
 
 
 
Recoveries of amounts written-off                        
   in previous periods                        
      Domestic 15   -   37   -   20   -  
      Foreign 19   -   26   -   14   -  
 
 
 
 
 
 
 
  34   -   63   -   34   -  
 
 
 
 
 
 
 
Charged to profit and loss account                        
      Domestic 482   14   793   20   474   1  
      Foreign 259   (9 ) 493   (20 ) 135   1  
 
 
 
 
 
 
 
  741   5   1,286   -   609   2  
 
 
 
 
 
 
 
Provisions at end of period (2)                        
      Domestic 2,227   363   2,232   349   2,311   348  
      Foreign 1,140   241   1,098   248   931   266  
 
 
 
 
 
 
 
  3,367   604   3,330   597   3,242   614  
 
 
 
 
 
 
 

41






THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY (continued)

Provisions for bad and doubtful debts (continued)

  30 June   31 December   30 June  
  2003   2002   2002  
  £m   £m   £m  
             
Gross loans and advances to customers            
      Domestic 155,346   145,274   142,210  
      Foreign 97,344   81,970   71,524  
 
 
 
 
  252,690   227,244   213,734  
 
 
 
 
Closing customer provisions as a % of gross            
   loans and advances to customers (3)            
      Domestic 1.67 % 1.78 % 1.87 %
      Foreign 1.41 % 1.63 % 1.67 %
      Total 1.57 % 1.73 % 1.80 %
             
Customer charge against profit (annualised) as            
   a % of gross loans and advances to customers            
      Domestic 0.64 % 0.56 % 0.67 %
      Foreign 0.51 % 0.58 % 0.38 %
      Total 0.59 % 0.57 % 0.57 %
             
Notes:  
1)  For the analysis above, 'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group’s transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions.
   
2)  Includes closing provisions against loans and advances to banks of £7 million (31 December 2002 - £7 million; 30 June 2002 - £6 million).
   
3)  Closing customer provisions exclude closing provisions against loans and advances to banks.

42






THE ROYAL BANK OF SCOTLAND GROUP plc

MARKET RISK

The Group manages the market risk in its trading and treasury portfolios through value-at-risk (VaR) limits as well as stress testing, position and sensitivity limits. VaR is a technique that produces estimates of the potential negative change in the market value of a portfolio over a specified time horizon at a given confidence level. The table below sets out the trading and treasury VaR for the Group, which assumes a 95% confidence level and a one-day time horizon.

        Six months to 30 June  
    At 30 June   Maximum   Minimum   Average  
    £m   £m   £m   £m  
Trading                  
2003   11.5   12.8   8.0   10.8  
2002   9.7   11.3   7.0   8.9  
                   
Treasury                  
2003   10.0   10.0   5.6   7.3  
2002   4.1   4.8   3.6   4.1  

The Group's VaR should be interpreted in light of the limitations of the methodologies used. These limitations include:

These limitations and the nature of the VaR measure mean that the Group cannot guarantee that losses will not exceed the VaR amounts indicated nor that losses in excess of the VaR amounts will not occur more frequently than once in 20 business days.

43






THE ROYAL BANK OF SCOTLAND GROUP plc

REGULATORY RATIOS AND OTHER INFORMATION

    30 June     31 December     30 June  
    2003     2002     2002  
                   
Capital base (£m)                  
Ordinary shareholders’ funds and minority interests   13,321     11,169     10,889  
Preference shares and tax deductible securities   6,137     5,986     5,915  
   
   
   
 
Tier 1 capital   19,458     17,155     16,804  
Tier 2 capital   14,941     13,271     12,644  
Tier 3 capital   -     -     164  
   
   
   
 
    34,399     30,426     29,612  
Less: investments in insurance companies, associated                  
   undertakings and other supervisory deductions   (2,707 )   (3,146 )   (2,980 )
   
   
   
 
    31,692     27,280     26,632  
   
   
   
 
Weighted risk assets (£m)                  
Banking book                  
   - on-balance sheet   209,500     193,800     185,300  
   - off-balance sheet   34,200     28,700     29,700  
Trading book   13,400     11,500     10,800  
   
   
   
 
    257,100     234,000     225,800  
   
   
   
 
Risk asset ratio                  
   - tier 1   7.6 %   7.3 %   7.4 %
   - total   12.3 %   11.7 %   11.8 %
                   
Share price £17.00     £14.88     £18.60  
                   
Number of shares in issue   2,942 m   2,901 m   2,888 m
                   
Market capitalisation £50.0 bn   £43.2 bn   £53.7 bn
                   
Net asset value per ordinary share £8.67     £8.12     £8.22  
                   
Employee numbers                  
Corporate Banking and Financial Markets*   16,100     16,900     17,000  
Retail Banking   30,000     30,100     29,500  
Retail Direct   7,000     7,000     6,500  
Manufacturing*   21,200     21,900     22,700  
Wealth Management*   5,500     6,000     6,400  
Direct Line Group   11,000     10,500     10,300  
Ulster Bank   4,500     4,400     4,700  
Citizens   13,800     13,300     12,700  
Centre   1,700     1,700     1,700  
   
   
   
 
Group total   110,800     111,800     111,500  
         
   
 
Acquisitions in the six months ended 30 June 2003   (500 )            
   
             
Underlying   110,300              
   
             

* prior periods have been restated to reflect the transfer in the first half of 2003 of certain activities from Corporate Banking and Financial Markets and Wealth Management to Manufacturing.

44






THE ROYAL BANK OF SCOTLAND GROUP plc

ADDITIONAL FINANCIAL DATA FOR US INVESTORS

Reconciliation between UK and US GAAP

The following tables summarise the significant adjustments which would result from the application of US generally accepted accounting principles (‘US GAAP’) instead of UK GAAP.

  First half   First half   Full year  
  2003   2002   2002  
Consolidated statement of income £m   £m   £m  
Profit attributable to ordinary shareholders – UK GAAP 1,745   1,336   1,971  
Adjustments in respect of:            
   Acquisition accounting 22   -   -  
   Amortisation of goodwill 366   339   681  
   Property depreciation (12 ) (5 ) (18 )
   Loan fees and costs (20 ) (47 ) (72 )
   Pension costs (168 ) (42 ) (58 )
   Long-term assurance business (13 ) (17 ) (37 )
   Leasing (33 ) (33 ) (71 )
   Derivatives and hedging (243 ) 104   770  
   Software development costs (123 ) 163   283  
   Tax effect on the above adjustments 160   (38 ) (261 )
   Deferred taxation -   (46 ) (80 )
 
 
 
 
Net income available for ordinary shareholders            
- US GAAP 1,681   1,714   3,108  
 
 
 
 
Dividend per ordinary share - paid during the period 31.0 p 27.0 p 39.7 p
 
 
 
 
  30 June   31 December   30 June  
  2003   2002   2002  
Consolidated shareholders' equity £m   £m   £m  
Shareholders' funds - UK GAAP 28,614   27,052   27,400  
Adjustments in respect of:            
   Acquisition accounting 440   418   418  
   Goodwill 1,867   1,541   1,199  
   Property revaluation and depreciation (289 ) (277 ) (297 )
   Proposed dividend 431   899   368  
   Loan fees and costs (261 ) (241 ) (216 )
   Pension costs 174   342   358  
   Recognition of pension scheme minimum liability (3,393 ) (3,568 ) -  
   Long-term assurance business (134 ) (121 ) (101 )
   Leasing (198 ) (165 ) (127 )
   Available-for-sale securities 147   284   326  
   Derivatives and hedging 643   535   (5 )
   Perpetual regulatory tier one securities 733   751   793  
   Software development costs 837   960   840  
   Tax effect on cumulative UK/US GAAP adjustments (301 ) (461 ) (238 )
   Tax effect on other comprehensive income 900   1,013   7  
   Deferred taxation (34 ) (34 ) (97 )
 
 
 
 
Shareholders’ equity – US GAAP 30,176   28,928   30,628  
 
 
 
 

Total assets
Total assets under US GAAP, which include acceptances and the grossing-up of certain repurchase balances offset under UK GAAP, together with the affect of adjustments made to net income and shareholders’ equity were £472 billion (31 December 2002 - £431 billion; 30 June 2002 - £417 billion).

45






THE ROYAL BANK OF SCOTLAND GROUP plc

FORWARD-LOOKING STATEMENTS

Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘should’, ‘intend’, ‘plan’, ‘probability’, ‘risk’, ‘Value-at-Risk (“VaR”)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, 'optimistic', 'prospects' and similar expressions or variations on such expressions and sections such as ‘Chairman’s statement’, ‘Group Chief Executive’s review’ and ‘Financial review'.

In particular, this document includes forward-looking statements relating, but not limited, to the Group’s potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. Such statements are subject to risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G-7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing.

The forward-looking statements contained in this document speak only as of the date of this report, and the Group does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

46






THE ROYAL BANK OF SCOTLAND GROUP plc

INDEPENDENT REVIEW REPORT TO THE ROYAL BANK OF SCOTLAND GROUP plc

Introduction

We have been instructed by the company to review the financial information for the six months ended 30 June 2003 which comprises the statutory consolidated profit and loss account, the consolidated balance sheet, the statement of consolidated total recognised gains and losses, the reconciliation of movements in consolidated shareholders’ funds, the consolidated cash flow statement, the divisional performance disclosures and related notes 1 to 14. We have read the other information contained in this interim results announcement and, solely on that basis, have considered whether it contains any apparent misstatements or material inconsistencies with the financial information.

This report is made solely to the company in accordance with Bulletin 1999/4 issued by the Auditing Practices Board ("the Bulletin"). Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors’ responsibilities

The interim results announcement, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim results announcement in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed.

Review work performed

We conducted our review in accordance with the guidance contained in the Bulletin for use in the United Kingdom. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom auditing standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information.

Review conclusion

On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2003.

Deloitte & Touche LLP
Chartered Accountants
Edinburgh
4 August 2003

47






THE ROYAL BANK OF SCOTLAND GROUP plc
     
CONTACTS    
     
Fred Goodwin Group Chief Executive 020 7672 0008
    0131 523 2033
     
Fred Watt Group Finance Director 020 7672 0008
    0131 523 2028
     
Richard O’Connor Head of Investor Relations 020 7672 1758
     
     
5 August 2003    
     
     
     
END    

48






Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: 6 August 2003

THE ROYAL BANK OF SCOTLAND GROUP plc
(Registrant)
   
By:
   
Name: H Campbell
Title: Head of Group Secretariat