NatWest Group Annual Report and Accounts 1999

Transcription

1 NatWest Group Annual Report and Accounts 1999 On 29 November 1999, The Royal Bank of Scotland Group plc announced the terms of an offer to acquire all of the issued ordinary share capital of the Bank. The offer, which was revised on 31 January 2000, was declared unconditional as to acceptances on 14 February 2000 and is due to be declared wholly unconditional by 6 March In view of this, no final dividend will be paid to holders of ordinary shares. Contents 2 Presentation of information 2 Reporting currency 2 Exchange rates 3 Financial highlights 4 Description of business 7 Operating and financial review 9 Results by nature of income and expense 15 Business segments 29 Summary balance sheet 31 Average balance sheet and interest rates 35 Return from shareholders perspective 36 Risk management 41 Cash flow Description of assets and liabilities 42 Loan portfolio 42 Provisions for bad and doubtful debts 45 Risk elements 45 Potential problem loans 46 Selected country exposure 46 Investment debt and equity securities 46 Deposits of banking business 49 Capital management 51 Board of directors 54 Executive officers 56 Report of the directors 64 Directors responsibility for financial reporting 65 Report of the auditors to the members of National Westminster Bank Plc Audited accounts 66 Consolidated profit and loss account 67 Statement of consolidated total recognised gains and losses 67 Note of consolidated historical cost profits and losses 67 Reconciliation of movements in consolidated shareholders funds 68 Consolidated balance sheet of the NatWest Group 69 Balance sheet of National Westminster Bank Plc 70 Consolidated cash flow statement 71 Notes to the accounts Additional selected information 122 Loans and advances to customers 124 Provisions for bad and doubtful debts 125 Distribution of outstandings and foreign country related assets 126 Cross-border outstandings 127 Short-term borrowings 127 Supervision and regulation 129 Effect of exchange rate fluctuations 129 Monetary policy 129 Forward-looking information 130 Five year summary Shareholder information 132 Holders of ordinary shares 132 Nature of trading market 133 Exchange controls and other limitations affecting security holders 134 Dividends 134 Taxation 137 Group structure 138 SEC Form 20-F cross reference guide 1 NatWest Group Annual Report and Accounts 1999

2 Presentation of information This document comprises National Westminster Bank Plc s 1999 Annual Report and Accounts and its 1999 Annual Report on Form 20-F to the Securities and Exchange Commission ( SEC ) in the United States of America ( US ). In this report, the term Bank means National Westminster Bank Plc and Group or NatWest Group means the Bank and its subsidiary undertakings. Continuing operations means, in any period, the operations of the Group excluding the results of Bancorp, the Group s former US retail and commercial banking operation, and Banco NatWest España SA ( BNWE ). These businesses were disposed of in Certain information relating to the Group s activities is presented separately for domestic and international operations. For this purpose, domestic operations consist of the United Kingdom ( UK ) domestic transactions of the Bank and its UK subsidiary undertakings (but exclude the Republic of Ireland transactions of Ulster Bank Limited and its subsidiaries). International operations consist of the Group s international transactions through those offices in the UK specifically organised to service international banking transactions (International offices UK) and through offices outside the UK, including the Republic of Ireland transactions of Ulster Bank Limited and its subsidiaries. US-based business recorded in the Bahamas is included in International offices US. Changes in presentation On 1 January 1999, Lombard s commercial businesses, Lombard Asset Finance Group ( LAFG ), and its personal finance business, Lombard Direct, were transferred to NatWest UK. In addition, NatWest Life and Investment Services was transferred from NatWest Wealth Management to NatWest UK. Ongoing business refers to results excluding businesses exited or sold. In 1999, these were Gleacher NatWest, Hawkpoint Partners, the Group s operations in Greece and interests in HDFC Bank and four Lombard joint venture companies. Businesses exited or sold in 1998 were Global Equities and Greenwich NatWest s operations in Australia and Canada, Coutts Bahamas and Coutts Institutional Trust and Custody business, Lex Vehicle Leasing, Lombard NatWest Bank in Cyprus and three Lombard point of sale businesses. Disposals in 1997 were principally County NatWest Investment Management Australia Limited and McLean, Budden Limited of Canada. The charge for goodwill amortisation is now reported separately. In prior periods, it was treated as a business/segment expense. The figures for 1998 and 1997 have been restated to reflect these changes as appropriate. Reporting currency The Bank publishes its accounts in pounds sterling ( or sterling ). References to dollars or $ are to US dollars. The abbreviations and bn represent millions and thousands of millions of pounds sterling, and the abbreviations $m and $bn represent millions and thousands of millions of dollars respectively. Amounts in dollars, unless otherwise stated, for any financial (fiscal) year have been translated from sterling at the rate prevailing on 31 December used by the Bank, as shown below under Exchange Rates. This rate should not be construed as a representation that the sterling amounts actually denote such dollar amounts or have been, could have been, or could be converted into dollars at the rate indicated. Exchange rates Except as stated, the following table sets forth, for the dates or periods indicated, the Noon Buying Rate in New York for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate ) (dollars per 1) 31 December Average High Low December rate used by the Bank Average rate used by the Bank The average of the Noon Buying Rates on the last day of each month during the financial year. 2 The rates used by the Bank in the preparation of its consolidated accounts. On 24 February 2000, the Noon Buying Rate was $ = 1. 2 NatWest Group Annual Report and Accounts 1999

3 Financial highlights Consolidated profit and loss account Continuing operations Operating income 7,237 7,367 6,974 6,885 6,157 Operating expenses (4,812) (5,055) (5,274) (4,724) (4,304) Trading surplus 2,425 2,312 1,700 2,161 1,853 Provisions for bad and doubtful debts (237) (499) (562) (549) (571) Profit before finance lease adjustment and termination and disposal of businesses 1 2,181 1,848 1,246 1,468 1,348 (Loss)/profit on termination/disposal of businesses (28) 265 (244) 224 Profit before tax 2,153 2, ,692 1,348 Group including discontinued operations Profit on ordinary activities before tax 2,263 2, ,337 1,696 Profit attributable to ordinary shareholders 1,629 1, ,120 Retention for the year 1, bn bn bn bn bn Consolidated balance sheet 2 Shareholders funds Total assets Weighted risk assets Loans and advances to customers and operating lease assets Customer accounts pence pence pence pence pence Per ordinary share 2 Dividends net Earnings basic Earnings diluted Earnings headline Net asset value % % % % % Ratios 2 Post-tax return on average equity Headline post-tax return on average equity Tier 1 capital Total capital For finance leases with tax variation clauses, the net benefit of the changes in UK Corporation Tax enacted in the Finance Act 1998 (including the reduction in the rate from 31% to 30%) is passed to the lessee in the form of reduced future rentals. The effect of this reduction, amounting to 55m, was recognised in It is matched by a corresponding release of deferred tax credited to the tax charge for the period, leaving profit after tax and earnings per share unaffected. A similar adjustment of 106m resulting from the reduction in the rate of UK Corporation Tax from 33% to 31% was recognised in Continuing and discontinued operations. 3 The offer by The Royal Bank of Scotland Group plc to acquire all of the issued ordinary share capital of the Bank was declared unconditional as to acceptances on 14 February 2000 and is due to be declared wholly unconditional by 6 March In view of this no final dividend for 1999 will be paid to holders of ordinary shares. 4 Headline earnings per ordinary share are defined on page NatWest Group Annual Report and Accounts 1999

4 Description of business Introduction The Bank was incorporated in England in 1968 and was formed from the merger of National Provincial Bank Limited and Westminster Bank Limited. These two banking groups had themselves grown through a series of mergers involving banks whose origins in some cases dated back to the seventeenth century. The Group is engaged in a wide range of banking, financial and related activities in the UK and 22 other countries. Operations are conducted directly through the Bank, which is one of the major London clearing banks, and banking and non-banking subsidiary undertakings. Outside the UK, only the United States of America accounted for more than 10% of Group total assets as at 31 December At that date, the Group employed approximately 61,900 full-time equivalent staff worldwide. The Group comprises five main business segments, NatWest UK, Ulster Bank Group ( Ulster Bank ), NatWest Wealth Management ( NWWM ), Global Financial Markets ( GFM ) and Greenwich NatWest ( GNW ). The remaining businesses are grouped under Other Businesses; group functions are contained in the Group Head Office. NatWest UK NatWest UK comprises Retail Banking, Corporate Banking ( CBS ) and Card Services. Retail Banking covers the personal and small business markets and is responsible for the branch network. It offers mortgages to personal customers for the purchase of residential properties and further secured advances for the purchase of major consumer items. It also provides insurance services and offers independent advice on life and pensions products to customers. Overdraft and loan facilities, generally at variable interest rates, are offered to borrowers in all segments of British industry and commerce (generally where turnover is under 1m per annum) and to personal customers. Fixed rate loans are also provided to small businesses and to personal customers for the purchase of property and consumer goods. Retail sterling deposits, comprising current accounts, demand, savings and time deposits are gathered through the branch network from both personal and corporate customers. Mortgage products are sold primarily through a qualified salesforce. NatWest Life and Investment Services was transferred from NWWM with effect from 1 January It provides advice on life and investment products to retail and corporate customers by a salesforce of around 600 financial planning managers. Through the single Marketing Group established in 1996, the salesforce has access to the unit trust, Individual Savings Account ( ISA ) and other investment products of Gartmore. Card Services issues a comprehensive range of credit, charge, and debit cards to personal and corporate customers, and engages in acquisition and processing facilities for retail businesses. It also provides consumer finance through Lombard Direct. The Bank is a member of both the VISA and MasterCard payment systems, and the Switch electronic debit card scheme. The NatWest Servicecard acts as a Switch card and as a UK cheque guarantee card. It also enables customers to obtain cash through automated teller machines ( ATMs ) throughout the UK and abroad. Corporate Banking deals with mid-sized and large corporate customers including the provision of international trade finance services. It currently has approximately 46,000 corporate relationships (generally with companies which have revenues in excess of 1m per annum) served by more than 600 dedicated relationship managers. CBS is a market leading provider of business asset finance through the Lombard brand. Ulster Bank Group Ulster Bank provides a comprehensive range of retail and wholesale financial services in Ireland. Ulster Bank Retail, which has branch networks in both Northern Ireland and the Republic of Ireland, operates in the personal and commercial sectors where it undertakes lending (including residential mortgages, leasing, instalment credit and invoice discounting business) and deposit taking. It is also active in credit and debit card operations and in insurance services. Ulster Bank Markets provides a wide range of investment banking products and services to the corporate and institutional markets, which include foreign exchange, money market services, lending, stockbroking and fund management and administrative and custodial operations. 4 NatWest Group Annual Report and Accounts 1999

5 Description of business continued NatWest Wealth Management NWWM brings together the Group s businesses that focus on the longer term savings, investments and private banking markets. Through working closely together, they deliver the full range of skills required to meet the wealth management needs of the Group s customers. Coutts NatWest is an international private bank serving high net worth clients with investment management, financial planning, trust and fiduciary products and banking services via an integrated international business. It includes NatWest Investments is a major provider of wealth management services investment, tax, trust and estate planning for UK-based affluent customers. NatWest Stockbrokers is one of the largest retail stockbrokers in the UK, providing stockbroking on an execution-only basis, as well as on a portfolio advisory basis. NatWest Offshore carries out retail and commercial banking activities in Jersey, Guernsey, Isle of Man and Gibraltar, serving domestic and cross-border business, including the growing expatriate market. Gartmore is one of the UK s leading managers of equity and fixed income assets, providing a full range of services for retail, corporate and institutional clients. Investment management is predominantly carried out in the UK, but the company is represented in Japan, the USA, Germany and Jersey. Gartmore is the focal point of asset management across the Group under both the NatWest and Gartmore brands. NatWest Equity Partners provides private equity finance. Global Financial Markets GFM provides specialist services in global foreign exchange, currency and structured derivatives, money markets and a range of interest rate management products to an international corporate and institutional client base. It also engages in similar activities for its own account and provides treasury support to the Group itself and its constituent businesses. GFM maintains a presence in the financial centres of London, New York, Hong Kong, Singapore and Tokyo and distributes research and dealing capability via Greenwich NatWest GNW comprises trading and capital markets businesses based primarily in London, Greenwich (Connecticut) and Tokyo. Its main activities are global interest rate derivatives trading, securitisation origination and trading, securities/credit trading, futures brokerage and project and structured trade finance origination. Other Businesses Other Businesses comprise the Group s remaining operations in countries from which it has exited and the commercial banking operations in Germany. Group Head Office Group Head Office comprises Group wide functions including audit, compliance, corporate affairs, finance, human resources, information technology and operations, legal and risk. It also provides operational support to the business segments, such as property services, security, payroll, and learning and development. Group Risk Group Risk is responsible for overseeing the implementation of the risk policy set by the board of directors and for the management of credit, market and operational risk issues for the Group. Group Risk is independent of the Businesses and is headed by the Director of Group Risk who, in turn, reports to the Group Chief Financial Officer. Group Audit & Group Compliance Group Audit & Group Compliance are independent of each of the business units and report directly to the Audit & Compliance Committee of the Board. Their directors report to the Group Chief Financial Officer and to the General Counsel respectively, which is independent of business segment management, with each having a right of direct access to the Group Chief Executive. The audit function, which is independent of business segment management, has overall responsibility for advising local and Group executive management and the Audit & Compliance Committee on the quality and effectiveness of internal controls and the identification of any significant operating control deficiencies within the Group. The role of Group Compliance is to ensure that regulated business is conducted in accordance with local laws and regulations or with the Group s minimum standards, whichever are more strict. Each business unit has its own independent compliance function which is responsible for day-to-day compliance. Discontinued operations Results from discontinued operations reflect the losses in 1996 on the sale of the three main operating entities of Bancorp ( Bancorp ) and the sale of 80% of the Group s investment in BNWE, its retail and commercial bank in Spain. The remaining interest in BNWE was sold in The Bancorp sale agreement provided for contingent consideration of up to $560m which will be included in the Group profit if and when received. A total of 273m ($450m) has been received and recognised by the end of 1999, 110m ($180m) in 1999, 84m ($142m) in 1998 and 79m ($128m) in NatWest Group Annual Report and Accounts 1999

6 Description of business continued Economic and Monetary Union (EMU) The Group has successfully provided euro products to customers and traded in euro markets, since the launch of the euro in January This confirmed the success of the Group s extensive preparations. CBS supported its position as the leading UK corporate bank by meeting customer needs with a range of euro based products and services to complement the Group s international payment capabilities. GFM already has a leading market position in euro/sterling trading activities, and is investing in the development of a new electronic platform for the provision of high value-added services for increasing numbers of European and global clients, allowing it to maximise the many opportunities that EMU will bring. The UK Government has announced that it would in principle like the UK to enter EMU in the next Parliament, subject to five economic tests and a referendum. The Group continues to respond to the Government s National Changeover Plan, working with the Bank of England and other banks to ensure that the Plan takes full account of the needs of banks, financial markets and our customers. Entry into the single currency would require domestic banking and payment systems to be sufficiently ready to meet expected demand for euro products and services, and the leadtimes for such investment need to be fully taken into account by the Government in planning UK entry. The Group has continued to develop plans for possible entry, but its timing will need to be more certain before we commit the investment needed for full scale preparation in our retail banking operations. Year 2000 The Group carried out extensive preparations to ensure that Millennium or Year 2000 problems, resulting from the use of only two digits to identify a year in computer systems and other equipment using embedded chips, did not cause any disruption to normal business operations and transaction processing. Most concern related to the date change on 1 January 2000 and, as a result of the successful preparation and testing programme carried out, all the Group s systems were fully operational and services to customers uninterrupted over the changeover date and subsequently. A possibility remains that problems may still be identified, either in the Group s systems or in those of its counterparties, suppliers or customers, but we remain confident that the Group s preparations and contingency plans will prevent any significant business disruption. Competition In the UK, the Bank competes with other clearing and international banks in both personal and corporate sectors. In the personal sector, banks and building societies (which are similar to savings and loan associations in the US) compete in the home mortgage market. Together with National Savings (savings schemes promoted and guaranteed by the UK government), they also participate in the market for retail deposits. The Bank is also a leading participant in the increasingly competitive credit and debit card markets. Competition in the personal sector has grown considerably with a number of non-traditional participants in the market who aggressively provide lending, investment products and deposit taking services. The private banking market is characterised by rapid growth and attractive economics, both of which continue to draw new entrants. It is highly competitive, but remains fragmented with competition from a wide range of different financial services providers such as traditional private banks, major international banks, investment managers and security houses, high street and merchant banks. Many of these providers are shifting towards direct services, offering the accessibility demanded by clients whether it be via the internet or over the telephone. GNW and GFM compete in corporate and institutional markets with UK and international commercial and investment banks across a wide range of wholesale market products. In the US, competitors include money centre, investment and international banks as well as super-regional banks and non-bank financial institutions. Factors which influence pricing by the Group include the Basle Committee s capital adequacy standards, risk, the economic environment and competitor activity. Accounting developments The Group s principal accounting policies are set out in note 1 to the Group s consolidated accounts on pages 71 and 72. Implementation by the Group of FRS 12 Provisions, Contingent Liabilities and Contingent Assets had no material effect on reported profits. Additional disclosures required by FRS 13 Derivatives and other Financial Instruments: Disclosures are included in notes 44 and 45 on pages 103 to 109. During 1999 the Accounting Standards Board also published FRS 15 Tangible Fixed Assets and FRS 16 Current Tax which will be effective for the Group s 2000 accounts. For a discussion of developments in US generally accepted accounting principles see Note 51 on page NatWest Group Annual Report and Accounts 1999

7 Operating and financial review Year ended 31 December Continuing operations Interest receivable 7,942 9,547 9,028 Interest payable (4,227) (5,681) (5,258) Adjustment for finance leases 1 (55) (106) Net interest income 3,715 3,811 3,664 Non-interest income 3,522 3,556 3,310 Operating income 7,237 7,367 6,974 Operating expenses (4,812) (5,055) (5,274) Trading surplus 2,425 2,312 1,700 Provisions for bad and doubtful debts (237) (499) (562) Provisions for contingent liabilities and commitments (5) Amounts written off fixed asset investments (23) (28) (31) Operating profit 2,165 1,785 1,102 Income from associated undertakings Disposal of tangible fixed assets (21) 25 Profit before termination and disposal of businesses 2,181 1,793 1,140 Losses on termination of Equities operations (14) (287) (Loss)/profit on disposal of businesses (14) Profit on continuing operations before tax 2,153 2, Discontinued operations Additional consideration on sale of Bancorp Profit on ordinary activities before tax 2,263 2, Tax on profit on ordinary activities (after release of deferred tax provision in 1998 of 59m following change in rate of corporation tax; m) 1 (584) (501) (309) Profit on ordinary activities after tax 1,679 1, % % % Continuing and discontinued operations Post-tax return on average equity Post-tax return on average total assets pence pence pence Per ordinary share Dividends Earnings basic Earnings diluted Earnings headline Net asset value For finance leases with tax variation clauses, the net benefit of the changes in UK Corporation Tax enacted in the Finance Act 1998 (including the reduction in the rate from 31% to 30%) is passed to the lessee in the form of reduced future rentals. The effect of this reduction, amounting to 55m, was recognised in It is matched by a corresponding release of deferred tax credited to the tax charge for the period, leaving profit after tax and earnings per share unaffected. A similar adjustment of 106m resulting from the reduction in the rate of UK Corporation Tax from 33% to 31% was recognised in The offer by The Royal Bank of Scotland Group plc to acquire all of the issued ordinary share capital of the Bank was declared unconditional as to acceptances on 14 February 2000 and is due to be declared wholly unconditional by 6 March In view of this no final dividend for 1999 will be paid to holders of ordinary shares. 3 Headline earnings per ordinary share are defined on page NatWest Group Annual Report and Accounts 1999

8 Operating and financial review continued Overview of results The Group s profit before tax was 2,263m, up 121m, 6%, compared with Excluding the loss/profit on disposals and termination of businesses, the adjustment of 55m for finance leases in 1998, pensions mis-selling provision of 40m ( m) and costs of 45m related to the bids by Bank of Scotland and The Royal Bank of Scotland Group plc, profit before tax from ongoing business was 346m, 18%, higher at 2,270m. Operating income at 7,237m was 130m, 2%, lower. For the ongoing business, operating income before the adjustment for finance leases rose by 353m, 5%, to 7,189m. Net interest income for ongoing businesses, before the adjustment for finance leases increased 204m, 6%, to 3,699m. The rise was largely due to growth in CBS, GFM and Card Services. Non-interest income for ongoing business was up 149m, 4%, at 3,490m reflecting higher dealing profits at GNW and improved fee income in CBS, Coutts NatWest, Card Services and Ulster Bank. These improvements were partially offset by lower dealing profits at GFM which had benefited from unique opportunities in the run up to the introduction of the euro in the second half of Lower investment realisation profits at NatWest Equity Partners led to a decline in other operating income. Operating expenses fell by 243m, 5%, to 4,812m. Tight cost control was exercised and the Group met its cost commitments for For the ongoing business, operating expenses were up 164m, 4%, to 4,753m. Within this, revenue investment expenditure increased by 62m, 13%, to 532m; and restructuring costs were up 19m, 16%, to 139m. Core expenses for the ongoing business were up 38m, 1%, to 4,037m entirely due to higher performance related remuneration in GNW. Costs relating to the bids by Bank of Scotland and The Royal Bank of Scotland Group plc amount to 65m of which 45m had been incurred by the end of Provisions for bad and doubtful debts were down 262m, 53%, at 237m. Excluding businesses exited or sold, provisions were 145m, 38%, lower at 237m. Provisions declined in Other Businesses which, in 1998, included a large single charge relating to UK Acquisition Finance and provisions in GNW have declined, reflecting specific provisions raised in 1998 in respect of Russian and South East Asian counterparties. During 1999, the Group exited or disposed of several businesses. The net loss on disposal and termination of these businesses amounted to 28m ( m profit). The Group received the third tranche of the additional consideration from the sale of Bancorp of 110m ( m). Of the contingent consideration of up to $560m, $450m has now been received. The tax charge was 584m, equivalent to 25.8% of pre-tax profit. Excluding the taxation credit relating to businesses exited or sold, the underlying tax rate was 31.4% ( %). The tier 1 capital ratio was 9.2%, up from 8.3% at 31 December Share repurchases amounting to 596m were completed in the first half of Profit before tax on continuing operations in 1998 increased 1,162m to 2,058m. Profit before tax for both years was affected by a number of substantial items, mainly the profit on disposal/termination of businesses of 265m (1997 loss 244m) and an adjustment for finance leases of 55m ( m). Profit from ongoing business, before the finance lease adjustments and disposals, rose 450m, 33%, to 1,824m. Operating income rose by 393m, 6%, to 7,367m. Excluding the finance lease adjustments the rise was 342m, 5%, to 7,422m. On the same basis, net interest income was up 96m, 3%, to 3,866m. Non-interest income increased 246m, 7%, to 3,556m. Operating expenses decreased by 219m, 4%, to 5,055m. Excluding businesses exited or sold operating expenses rose by 217m, 5%, to 4,589m mainly due to the additional 100m pensions mis-selling provision and increased revenue investment expenditure. Developments during the year On 6 September 1999, the Bank announced that it had reached agreement on the terms of a recommended offer for Legal & General Group Plc. The Bank raised 2,368m of subordinated debt in connection with this offer. On 24 September 1999, Bank of Scotland announced the terms of an offer to acquire all of the issued ordinary share capital of the Bank. Following this offer, the offer by the Bank for Legal & General Group Plc lapsed on 11 October On 29 November 1999, The Royal Bank of Scotland Group plc announced the terms of an offer to acquire all of the issued share capital of the Bank. The offer, which was revised on 31 January 2000, was declared unconditional as to acceptances on 14 February The offer is due to be declared wholly unconditional by 6 March In the Bank s response to the two offers, the Directors published on 24 January 2000 an estimate of 1999 profit before taxation of the Group of 2,305m, excluding costs relating to the offers from Bank of Scotland and The Royal Bank of Scotland Group plc. The audited pre-tax profit for the Group for 1999 was 2,308m, before charging bid defence costs of 45m. 8 NatWest Group Annual Report and Accounts 1999

9 Operating and financial review Results by nature of income and expense Net interest income Year ended 31 December Interest receivable 7,942 9,547 9,028 Interest payable (4,227) (5,681) (5,258) Ongoing business 3,699 3,495 3,284 Businesses exited or sold Net interest income before adjustment for finance leases 3,715 3,866 3,770 Adjustment for finance leases (55) (106) Net interest income 3,715 3,811 3,664 bn bn bn Average balances of banking business Loans and advances to customers Loans and advances to banks Debt securities Treasury and other eligible bills Total interest-earning assets of banking business Customer accounts Deposits by banks Other interest-bearing liabilities Internal funding of trading business (10.8) (13.6) (18.1) Total interest-bearing liabilities of banking business Net interest-free funds of banking business % % % Gross yield on interest-earning assets of banking business Cost of interest-bearing liabilities of banking business (4.40) (5.63) (5.31) Interest spread of banking business Benefit from interest-free funds Net interest margin of banking business Includes operating lease assets of 1.4bn ( bn; bn). 2 Excludes finance lease adjustment. Net interest income was down 96m, 3%, to 3,715m. Net interest income of the ongoing business, excluding the finance lease adjustment in 1998, increased by 204m, 6%, to 3,699m. Total average interest-earning assets of the banking business declined by 3.0bn, 3%, to 114.7bn. Within this, average loans and advances to customers were 3.9bn, 5%, lower at 75.8bn as reductions due to disposal of businesses exceeded growth in lending. The interest spread increased 4 basis points to 2.52%. The sale of low margin assets and unwinding of structured transactions by GNW, and wider margins in Card Services, Mortgages and GFM were partially offset by the impact of the sale and run down of some of the relatively high margin Lombard businesses and lower interest spread on deposits. Net interest-free funds increased by 1.7bn, 10%, to 18.6bn but their value overall declined due to lower interest rates. This led to a decrease in net interest margin of 4 basis points. Total average interest-earning assets in the ongoing business increased by 3.0bn, 3%, to 114.3bn and net interest margin increased by 10 basis points to 3.24%. In 1998, excluding the adjustment for finance leases, net interest income rose by 96m, 3%, to 3,866m. Interest spread of the banking business declined 1 basis point to 2.48% and net interest-free funds of banking business grew by 0.2bn, 1%, to 16.9bn, offsetting the decline in spread and leading to an increase in the net interest margin of 2 basis points to 3.28%. 9 NatWest Group Annual Report and Accounts 1999

10 Operating and financial review Results by nature of income and expense continued Average lending Year ended 31 December bn bn bn Average loans and advances to customers of banking business NatWest UK Ulster Bank NatWest Wealth Management Wholesale businesses Other Businesses Ongoing Businesses Businesses exited or sold Total Group banking business Comprising GNW and GFM. 2 Includes operating lease assets of 1.4bn ( bn; bn). Average lending to customers of the ongoing business rose by 1.4bn, 2%, to 75.6bn. NatWest UK average lending to customers rose 6.5bn, 11%, to 63.3bn, including 3.2bn transferred from GNW and 0.3bn from Other Businesses. Excluding this, growth was predominantly in corporate, mortgage and card lending. The rise of 0.8bn, 15%, to 6.0bn in average loans in Ulster Bank primarily reflected continued strong growth in the Republic of Ireland. There was also increased lending in NWWM, up 0.3bn, 9%, to 3.6bn reflecting growth in Coutts NatWest. The decline in lending in the Wholesale Businesses, down 5.9bn, 70%, to 2.5bn, resulted mainly from the transfers to NatWest UK and the continued disposal of low margin assets. In 1998, average lending to customers in NatWest UK rose by 6.4bn, 13%, to 56.8bn including 2.3bn transferred from GNW. Excluding this, growth in NatWest UK was predominantly in corporate, mortgage and card lending. Average loans at Ulster Bank were up 0.7bn, 16%, to 5.2bn with particularly strong growth in the Republic of Ireland. In the Wholesale Businesses, lending declined by 4.0bn, 32%, to 8.4bn largely reflecting the transfers to NatWest UK and reductions in structured finance transactions. Non-interest income Year ended 31 December _ Ongoing Ongoing Ongoing Total business Total business Total business _ Dividend income Fees and commissions Receivable 2,809 2,784 2,745 2,532 2,883 2,356 Payable (575) (571) (563) (505) (576) (436) Net fees and commissions 2,234 2,213 2,182 2,027 2,307 1,920 Dealing profits Foreign exchange Debt securities Equity securities 15 6 (19) 6 (87) 7 Interest rate derivatives Mispricing of interest rate options and swaptions (85) (85) Total dealing profits Other operating income _ Non-interest income 3,522 3,490 3,556 3,341 3,310 2,920 _ Non-interest income fell 34m, 1%, to 3,522m. Excluding businesses exited or sold, non-interest income was up 149m, 4%, to 3,490m. Growth in net fees and commissions was partly offset by lower investment realisation profits at NatWest Equity Partners and a slight decline in dealing profits. In 1998, non-interest income rose 246m, 7%, to 3,556m. Excluding the charge for options mispricing in GNW in 1997, non-interest income increased by 161m, 5%. This increase largely reflected improvements in the Wholesale businesses and NWWM which more than offset the decrease in contribution from businesses exited or sold, down 175m, 45%, on NatWest Group Annual Report and Accounts 1999

11 Operating and financial review Results by nature of income and expense continued Non-interest income continued Ongoing business Net fees and commissions were up 186m, 9%, to 2,213m. Card fees (net) rose by 48m, 15%, to 373m resulting from continued growth in debit and credit card usage in the UK and mainland Europe. Lending fees increased by 32m, 8%, to 433m, largely due to higher lending volumes in NatWest UK. Transmission fees declined by 6m, 1%, to 478m as customers took advantage of cheaper, more efficient electronic delivery mechanisms. Other fees (net) rose by 112m, 14%, to 929m, mainly resulting from higher fund management fees and increased sales of investment products at Coutts NatWest, growth in project and structured finance origination fees at GNW and higher insurance brokerage income at NatWest UK. Dealing profits fell 17m, 2%, to 849m. Foreign exchange was down 136m, 38%, to 224m, due to lack of volatility in the currency options market and reduced volumes in spot and forward exchange with fewer currencies traded following the introduction of the euro. Profit from debt securities rose 251m, 98%, to 507m with strong performance in the government bond and asset backed securities business. Income from interest rate derivatives fell 132m, 54%, to 112m. In 1998, favourable interest rate positioning opportunities arose from falling and converging interest rates in the run up to the introduction of the euro; these opportunities did not arise in Other operating income was down 19m, 4%, to 412m principally due to a decline in investment realisation profits at NatWest Equity Partners from 121m to 53m along with a reduction in LAFG within CBS. These were partially offset by profits arising on the sale of leasing receivables and other non-trading assets at GNW and an increase in life assurance embedded value profits. Operating expenses Year ended 31 December Ongoing Ongoing Ongoing Total business Total business Total business _ Staff costs 2,740 2,715 2,738 2,519 2,894 2,453 Other administrative expenses 1,017 1,006 1, , Depreciation and amortisation Tangible fixed assets Goodwill Other operating charges _ Operating expenses 4,812 4,753 5,055 4,589 5,274 4,372 _ Included within operating expenses Restructuring costs Revenue investment expenditure Costs relating to the offers from Bank of Scotland and The Royal Bank of Scotland Group plc Core operating expenses 4,096 4,037 4,449 3,999 4,729 3,857 _ Operating expenses 4,812 4,753 5,055 4,589 5,274 4,372 _ Operating expenses decreased by 243m, 5%, to 4,812m. Excluding businesses exited or sold, operating expenses rose 164m, 4%, to 4,753m including an increase in revenue investment expenditure of 62m, 13%, to 532m, 45m relating to the offers by Bank of Scotland and The Royal Bank of Scotland Group plc and higher restructuring costs up 19m, 16%, to 139m. Core operating expenses of the ongoing business increased 38m, 1%, to 4,037m due to higher performance related remuneration in GNW. In 1998 total operating expenses decreased by 219m, 4%, to 5,055m. Excluding businesses exited or sold, operating expenses rose 217m, 5%, to 4,589m including an additional provision of 100m for pension mis-selling. Revenue investment expenditure increased by 99m, 27%, to 470m largely due to making information systems Year 2000 compliant and ready for the introduction of the euro. Ongoing business Staff costs increased 196m, 8%, to 2,715m largely due to a 95m rise in performance related remuneration in GNW, higher restructuring costs in NatWest UK and Group Head Office and change programmes in Coutts NatWest. Other administrative expenses rose 59m, 6%, to 1,006m principally due to legal and professional fees and other costs in respect of the offers from Bank of Scotland and The Royal Bank of Scotland Group plc of 45m and the lapsed offer for Legal & General Group Plc. Depreciation of tangible fixed assets decreased 19m, 7%, to 255m. 11 NatWest Group Annual Report and Accounts 1999

12 Operating and financial review Results by nature of income and expense continued Operating expenses continued Ongoing business continued Other operating charges were 72m, 9%, lower at 738m. Excluding the pensions mis-selling provision of 40m ( m) and the 21m provision taken in 1998 to rationalise office accommodation in central London, other operating charges increased 9m, 1%. The increase was largely due to provisions of 23m against onerous property contracts, and a rise in software and development costs to support investment programmes in NatWest UK, partially offset by a reduction in overhead costs in GNW. Restructuring costs increased 19m, 16%, to 139m, reflecting higher levels of voluntary severances at NatWest UK and Group Head Office. Revenue investment expenditure increased 62m, 13%, to 532m. In NatWest UK revenue investment expenditure was up 46m, 13%, to 406m. This included 109m in respect of the Retail Transformation Programme ( RTP ) and 90m associated with the launch of NatWest.com and other e-commerce developments. The remaining 207m was incurred on a large number of initiatives to enhance the quality and effectiveness of processing and the development of information systems. At Coutts NatWest, revenue investment expenditure, primarily in the reorganisation of its operations and customer delivery systems, increased 16m, 57%, to 44m. Group-wide, a further 33m was spent in making systems Year 2000 compliant. Total expenditure since 1996 on Year 2000 compliance amounted to 166m (revenue investment expenditure 153m, capital expenditure 13m) including 7m of expenditure in January 2000 relating to the rollover. The cost:income ratio of the ongoing business improved to 65.5% from 67.1% excluding the bid-related costs of 45m and the finance lease adjustment in Staff numbers At 31 December Permanent staff NatWest UK 46,100 47,500 47,500 Ulster Bank 4,500 4,400 4,300 NatWest Wealth Management 6,000 6,200 5,800 Global Financial Markets 1,200 1, Greenwich NatWest 1,600 2,000 2,800 Other Businesses Group Central Services and Group Head Office 2,400 2,600 3,300 Ongoing business 61,900 64,000 65,000 Businesses exited or sold 400 5,000 Total permanent staff (full-time equivalent) 61,900 64,400 70,000 Temporary staff NatWest UK 3,700 5,700 6,500 Ulster Bank NatWest Wealth Management Global Financial Markets Greenwich NatWest Group Central Services and Group Head Office Ongoing business 5,300 7,300 8,200 Businesses exited or sold 500 Total temporary staff (full-time equivalent) 5,300 7,300 8,700 Permanent staff numbers were down 2,500, 4%, to 61,900. The number of permanent staff in ongoing business was 2,100, 3% lower. Temporary staff fell 2,000, 27%, to 5,300. In NatWest UK, total staff numbers declined 3,400, 6%, to 49,800. This reflects a reduction in Retail Banking s total staff numbers of 3,400, 8%, to 38,200 due to the migration of back office functions to new operating centres and a lessening of the extent of duplication during the transitional stage of RTP. An increase in staff numbers in Card Services to support business growth has been offset by lower staff numbers in CBS. GNW s total staff were down 500, 23%, to 1,700 principally due to transfers to other parts of the Group. In Group Central Services and Group Head Office, total staff numbers fell by 300. In 1998, total permanent staff numbers fell by 5,600, 8%, to 64,400. Excluding the exited businesses, permanent staff numbers fell by 1,000, 2%. In GNW, permanent staff numbers were down 800 due to closures of overseas offices, benefits of restructuring and transfers to GFM and NatWest UK. In Group Central Services and Group Head Office, permanent staff numbers fell by 700, 21%, to 2,600. In NWWM permanent staff numbers increased by 400, 7%, to 6,200 to support business growth. Total temporary staff fell by 1,400, 16%, to 7, NatWest Group Annual Report and Accounts 1999

13 Operating and financial review Results by nature of income and expense continued Provisions for bad and doubtful debts Year ended 31 December Lending Lending Lending Lending Lending Lending to to to to to to customers banks Total customers banks Total customers banks Total Specific provisions NatWest UK 239 (5) Ulster Bank NatWest Wealth Management (2) (1) (3) 10 (1) Global Financial Markets Greenwich NatWest (5) (4) (9) Other Businesses Ongoing business 256 (6) (4) 347 Business exited or sold Total specific provisions 256 (6) (4) 465 General provision NatWest UK Ulster Bank Wealth Management Other Businesses Head Office and central items (20) (20) Total general provision (13) (13) Total provisions for bad and doubtful debts 243 (6) (4) 562 Provisions for bad and doubtful debts fell 262m, 53%, to 237m. Specific provisions declined 238m, 49%, to 250m; the general provision was reduced by 13m compared with an increase in 1998 of 11m. Specific provisions against lending to customers in the ongoing business were down 77m, 23%, to 256m. Provisions in Other Businesses declined 64m from 67m in 1998 which included a single provision of 40m in UK Acquisition Finance and higher provisions in residual businesses. Provisions in GNW fell 42m to 5m, reflecting specific provisions raised in 1998 in respect of Indonesian and Thai counterparties. NatWest UK was up 49m, 26%, to 239m with higher provisions in Card Services, up 26m, 34%, to 102m, reflecting growth in advances and a higher level of recoveries in 1998 and in CBS, up 36m, 60%, to 96m. These increases were partially offset by lower provisions in Retail Banking, down 13m, 24%, to 41m. Provision recovery of 6m (1998 charge of 38m) against lending to banks reflects recoveries and reduced exposures to Russian and South East Asian counterparties. The general provision was reduced by 13m compared with an increase of 11m in Of the general provision held centrally in respect of sub-investment grade countries, 20m has been released, reflecting a reduction in exposures and the improved outlook in many of these countries. This was partially offset by an increase of 6m in Ulster Bank arising from growth in lending. In 1998, the total charge against profit for bad and doubtful debts declined 63m, 11%, to 499m. The 1997 charge included a general provision of 80m relating to South East Asian and South Korean exposures. Higher specific provisions in GNW and Other Businesses were partially offset by substantial reductions in NatWest UK and Coutts Natwest. Taxation Year ended 31 December Profit Tax Profit Tax Profit Tax % % % Profit and tax on profit on ordinary activities 2, , Effect of change in Corporation Tax rate from 31% to 30% Finance leases Other 4 8 Profit on disposal/termination of businesses (82) 101 (349) (14) Underlying 2, , , NatWest Group Annual Report and Accounts 1999

14 Operating and financial review Results by nature of income and expense continued Taxation continued The tax charge for the year was 584m, equivalent to 25.8% of pre-tax profit. Excluding the taxation credit relating to the disposal/termination of businesses, the underlying tax rate was 31.4% ( %). This was higher than the 1999 effective UK tax rate of 30.25% mainly due to items, including goodwill amortisation, which are not allowable for tax purposes, partially offset by overseas profits taxed at lower rates. In 1998, the tax charge was equivalent to 23.4% of pre-tax profit on ordinary activities, reflecting a release of deferred tax of 55m due to the reduction in the rate of UK Corporation Tax and a low tax charge on the profit on disposal of businesses. The underlying tax rate of 29.5% reflects non-taxable income and overseas profits taxed at lower rates, partially offset by overseas losses for which no relief is currently available and other items, mainly goodwill amortisation, which are not allowable for tax purposes. Profit /(loss) by business segments Year ended 31 December _ Pre-tax Post-tax _ NatWest UK 1 1,364 1,191 1, Ulster Bank NatWest Wealth Management Global Financial Markets Greenwich NatWest (3) (101) (49) Other Businesses 2 (67) (34) (2) (60) (35) Head Office costs and central items (140) (101) (149) (146) (99) (132) Goodwill amortisation (39) (39) (39) (39) (39) (39) Adjustment for finance leases (55) (106) _ Ongoing business 2,185 1,769 1,268 1,495 1, Trading (loss)/profit of businesses exited or sold 3 (4) 24 (128) 1 (97) (Loss)/profit on disposal/termination of businesses (28) 265 (244) (225) Bancorp sold in _ Group profit 2,263 2, ,679 1, _ 1 Excludes finance lease adjustment of 10m in 1998 ( m). 2 Excludes finance lease adjustment of 45m in 1998 ( m). 3 Includes goodwill amortisation of 12m in 1999 ( m; m). 14 NatWest Group Annual Report and Accounts 1999