Form 20-F
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(Mark one) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
------ OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
------
OR X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
------ THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 31 December 2002
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------
OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
------ THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 1 - 9266
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NATIONAL WESTMINSTER BANK Plc
ENGLAND
135 Bishopsgate, London, EC2M 3UR, England
- --------------------------------------------------------------------------------
Securities registered or to be registered pursuant to Section 12 (b) of the
Act.
Name of each exchange
Title of each class on which registered
- ------------------- --------------------
- - Non-Cumulative Dollar Preference Shares of
$25 each, Series B New York Stock Exchange
- - American Depositary Shares, each representing
one Non-Cumulative Dollar Preference Share
of $25 each, Series B New York Stock Exchange
- - Non-Cumulative Dollar Preference Shares of $25
each, Series C New York Stock Exchange
- - American Depositary Shares, each representing
one Non-Cumulative Dollar Preference Shares
of $25 each, Series C New York Stock Exchange
- - Exchangeable Capital Securities, Series A New York Stock Exchange
- -------------------------------------------------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
- --------------------------------------------------------------------------------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
Guarantees relating to 9 3/8% Guaranteed Capital Notes due 15 November
2003 of National Westminster Finance BV, payment of principal and interest
guaranteed by National Westminster Bank Plc on a subordinated basis
(suspended)
- --------------------------------------------------------------------------------
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
- (pound)1 Ordinary shares 1,678,176,558
- Non-Cumulative Dollar Preference Shares of
$25 each, Series B 10,000,000
- Non-Cumulative Dollar Preference Shares of
$25 each, Series C 12,000,000
- 9% Non-Cumulative Preference Shares of
(pound)1 each, Series A 140,000,000
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [_] NO
Indicate by check mark which financial statement item the registrant has elected
to follow. [_] Item 17 [X] Item 18
NATIONAL WESTMINSTER BANK Plc
ANNUAL REPORT ON FORM 20-F
FOR THE YEAR ENDED 31 DECEMBER 2002
CONTENTS
Item Item Caption Page
- ---- ------------ ----
Presentation of Information.................................... 4
PART I
1 Identity of Directors, Senior Management and Advisers.......... *
2 Offer Statistics and Expected Timetable........................ *
3 Key Information................................................ 6
Selected financial data .................................. 6
Capitalisation and indebtedness........................... *
Reasons for the offer and use of proceeds................. *
Risk factors.............................................. 11
4 Information on the Bank........................................ 12
History and development of the Bank....................... 12
Business overview......................................... 12
Organisational structure.................................. 18
Property, plant and equipment............................. 18
5 Operating and Financial Review and Prospects................... 19
Operating results......................................... 19
Liquidity and capital resources........................... 52
Research and development, patents, licences etc........... *
Trend information......................................... 52
6 Directors, Senior Management and Employees..................... 53
Directors and senior management........................... 53
Compensation.............................................. 55
Board practices........................................... 55
Employees................................................. 57
Share ownership........................................... 59
7 Major Shareholders and Related Party Transactions.............. 60
Major shareholders........................................ 60
Related party transactions................................ 62
Interests of experts and counsel.......................... *
8 Financial Information.......................................... 61
Consolidated statements and other financial information... 61
Significant changes....................................... 61
* Not required because this Form 20-F is filed as an Annual Report, not
applicable to National Westminster Bank Plc or otherwise not included herein.
2
9 The Offer and Listing.......................................... 62
Offer and listing details................................. 62
Plan of distribution...................................... *
Markets................................................... 63
Selling shareholders...................................... *
Dilution.................................................. *
Expenses of the issue..................................... *
10 Additional Information......................................... 64
Share capital............................................. *
Memorandum and articles of association.................... 64
Material contracts........................................ 69
Exchange controls......................................... 69
Taxation.................................................. 69
Dividends and paying agents............................... *
Statement of experts...................................... *
Documents on display...................................... 73
Subsidiary information.................................... *
11 Quantitative and Qualitative Disclosure about Market Risk...... 74
12 Description of Securities other than Equity Securities......... *
PART II
13 Defaults, Dividend Arrearages and Delinquencies................ *
14 Material Modifications to the Rights of Security Holders and
Use of Proceeds................................................ *
15 Controls and Procedures........................................ 85
16 Reserved....................................................... *
PART III
17 Financial Statements........................................... *
18 Financial Statements........................................... 86
19 Exhibits....................................................... 138
Signature...................................................... 139
Certifications................................................. 140
* Not required because this Form 20-F is filed as an Annual Report, not
applicable to National Westminster Bank Plc or otherwise not included herein.
3
PRESENTATION OF INFORMATION
In this report, the term 'Bank' means National Westminster Bank Plc and
'NatWest Group' means the Bank and its subsidiary and associated undertakings.
National Westminster Bank Plc was a wholly-owned direct subsidiary of The Royal
Bank of Scotland Group plc until January 2003, when ownership of the entire
issued ordinary share capital was transferred to The Royal Bank of Scotland
plc. For the purpose of this report, the term 'RBS Group' means The Royal Bank
of Scotland Group plc and its subsidiary and associated undertakings and the
term the 'Royal Bank' refers to The Royal Bank of Scotland plc.
The Bank publishes its financial statements in pounds sterling ("(pound)" or
"sterling"). The abbreviations '(pound)m' and '(pound)bn' represent millions
and thousands of millions of pounds sterling, respectively, and references to
'pence' represent pence in the United Kingdom ("UK"). Reference to 'dollars' or
'$' are to United States of America ("US") dollars. The abbreviations '$m' and
'$bn' represent millions and thousands of millions of dollars, respectively,
and references to 'cents' represent cents in the US. The abbreviation '(euro)'
represents the 'euro', the European single currency and the abbreviations
'(euro)m' and '(euro)bn' represent millions and thousands of millions of euros,
respectively.
Certain information in this report is presented separately for domestic and
foreign activities. Domestic activities primarily consist of UK domestic
transactions of NatWest Group. Foreign activities comprise NatWest Group's
transactions conducted through those offices in the UK specifically organised
to service international banking transactions and transactions conducted
through offices outside the UK.
The geographic analysis in the average balance sheet and interest rates,
changes in net interest income and average interest rates, yields, spreads and
margins in this report have been compiled on the basis of location of office -
UK and Overseas. Management believe that presentation on this basis provides
more useful information on the yields, spreads and margins of NatWest Group's
activities than would be provided by presentation on the basis of the domestic
and foreign activities analysis used elsewhere in this report as it more
closely reflects the basis on which NatWest Group is managed. 'UK' in this
context includes domestic transactions and transactions conducted through the
offices in the UK which service international banking transactions.
NatWest Group distinguishes its trading from non-trading activities by
determining whether a business unit's principal activity is trading or
non-trading and then attributing all of that unit's activities to one portfolio
or the other. Although this method may result in some non-trading activity
being classified as trading, and vice versa, NatWest Group believes that any
resulting misclassification is not material.
In this report, the terms 'UK GAAP' and 'US GAAP' refer to generally accepted
accounting principles ("GAAP") in the UK and the US respectively.
4
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' and similar expressions or variations on such expressions.
In particular, this document includes forward-looking statements relating, but
not limited, to NatWest 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 NatWest 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 NatWest Group in
managing the risks involved in the foregoing.
The forward-looking statements contained in this report speak only as of the
date of this report, and NatWest 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.
For a further discussion on certain risks faced by the NatWest Group, see Risk
Factors on page 11.
5
ITEM 3. KEY INFORMATION
-----------------------
SELECTED FINANCIAL DATA
The financial information set out below for the year ended 31 December 2002 and
each of the four years ended 31 December 2001, has been selected from the
audited Consolidated Financial Statements of NatWest Group for those years or,
where certain items are not shown in those audited Consolidated Financial
Statements, has been prepared for the purpose of this report. The information
should be read in conjunction with, and is qualified by reference to, the
Consolidated Financial Statements and Notes thereto for the three years ended
31 December 2002 audited by independent chartered accountants, Deloitte &
Touche and for the two years ended 31 December 1999 audited by independent
chartered accountants, KPMG Audit Plc. The dollar financial information has
been translated for convenience at the rate of (pound)1.00 to $1.6095, the Noon
Buying Rate on 31 December 2002.
NatWest Group's Consolidated Financial Statements are prepared in accordance
with UK GAAP, which differs in certain material respects from US GAAP. For a
discussion of such differences and a reconciliation of net income and
consolidated shareholders' funds between UK GAAP and US GAAP, see Note 52 to
the Consolidated Financial Statements.
--------------------------------------------------------------------
Summary consolidated profit and loss account 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
$m (pound)m (pound)m (pound)m (pound)m (pound)m
Amounts in accordance with UK GAAP (1):
Continuing operations
Net interest income 6,653 4,134 3,921 3,675 3,620 3,686
Non-interest income 5,730 3,560 3,703 3,818 3,895 4,118
--------------------------------------------------------------------
Total income 12,383 7,694 7,624 7,493 7,515 7,804
Operating expenses (7,394) (4,594) (4,525) (5,259) (5,074) (5,429)
--------------------------------------------------------------------
Profit before provisions 4,989 3,100 3,099 2,234 2,441 2,375
Provisions for bad and doubtful debts (817) (508) (510) (359) (237) (499)
Amounts written off fixed asset investments (13) (8) (6) (14) (23) (28)
Write-down of finance leases - - - - - (55)
--------------------------------------------------------------------
Operating profit 4,159 2,584 2,583 1,861 2,181 1,793
Losses on termination of Equities operations - - - - (14) -
Profit/(loss) on disposal of businesses - - - 967 (14) 265
--------------------------------------------------------------------
Profit before tax - continuing operations 4,159 2,584 2,583 2,828 2,153 2,058
Discontinued operations
Profit on the disposal of interests in discontinued
operations - - - 74 110 84
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Profit on ordinary activities before tax 4,159 2,584 2,583 2,902 2,263 2,142
Tax on profit on ordinary activities (1,148) (713) (733) (692) (583) (475)
Minority interests - equity (8) (5) (5) (9) (11) (24)
--------------------------------------------------------------------
Profit for the financial year 3,003 1,866 1,845 2,201 1,669 1,643
Preference dividends - non-equity (66) (41) (43) (41) (39) (51)
--------------------------------------------------------------------
Profit attributable to ordinary shareholders 2,937 1,825 1,802 2,160 1,630 1,592
--------------------------------------------------------------------
Amounts in accordance with US GAAP:
Net income available for ordinary shareholders 3,626 2,253 2,142 2,743 1,637 1,627
--------------------------------------------------------------------
Note:
(1) All prior years have been restated following the implementation of FRS 19
'Deferred Tax' in 2002.
6
Preference dividends
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2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
$m (pound)m (pound)m (pound)m (pound)m (pound)m
Non-cumulative preference shares of(pound)1, Series A 21 13 13 13 13 12
Non-cumulative preference shares of US$25, Series A - - - - - 10
Non-cumulative preference shares of US$25, Series B 22 13 14 13 12 11
Non-cumulative preference shares of US$25, Series C 26 15 16 15 14 13
Premium on redemption - - - - - 5
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69 41 43 41 39 51
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Ordinary dividends
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2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
$m (pound)m (pound)m (pound)m (pound)m (pound)m
Interim 314 195 399 3,973 219 201
Second interim 805 500 - - - -
Final - - 400 600 - 412
-----------------------------------------------------------------------
Total 1,119 695 799 4,573 219 613
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7
Summary consolidated balance sheet
---------------------------------------------------------------------------
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Amounts in accordance with UK GAAP (1): $m (pound)m (pound)m (pound)m (pound)m (pound)m
Loans and advances to banks (net of provisions) 38,087 23,664 31,269 34,995 28,793 32,369
Loans and advances to customers (net of provisions) 180,460 112,122 100,618 98,824 88,998 78,962
Debt securities and equity shares 28,831 17,913 21,208 34,239 39,844 37,896
Intangible fixed assets 533 331 284 186 540 639
Other assets 28,741 17,857 19,348 18,020 27,585 36,170
---------------------------------------------------------------------------
Total assets 276,652 171,887 172,727 186,264 185,760 186,036
---------------------------------------------------------------------------
Called up share capital 3,475 2,159 2,197 2,187 2,150 2,177
Share premium account 2,070 1,286 1,286 1,286 1,237 1,181
Other reserves 643 400 420 347 331 282
Profit and loss account 8,624 5,358 4,203 3,236 5,640 4,874
---------------------------------------------------------------------------
Shareholders' funds 14,812 9,203 8,106 7,056 9,358 8,514
Minority interests 76 47 110 103 96 147
Subordinated liabilities 9,549 5,933 6,396 6,904 7,541 5,162
---------------------------------------------------------------------------
Total capital resources 24,437 15,183 14,612 14,063 16,995 13,823
Deposits by banks 28,517 17,718 25,246 30,143 27,451 26,562
Customer accounts 179,422 111,477 99,951 109,722 98,117 96,294
Debt securities in issue 335 208 5,222 9,172 11,556 15,555
Other liabilities 43,941 27,301 27,696 23,164 31,641 33,802
---------------------------------------------------------------------------
Total liabilities 276,652 171,887 172,727 186,264 185,760 186,036
---------------------------------------------------------------------------
Amounts in accordance with US GAAP:
Shareholders' equity 14,751 9,165 8,042 6,487 8,063 7,767
Total assets 292,174 181,531 181,536 186,044 184,870 185,858
Note:
(1) All prior years have been restated following the implementation of FRS 19
in 2002.
8
Other financial data
-------------------------------------------------------------
Other financial data in accordance with 2002 2001 2000 1999 1998
UK GAAP (1): ---- ---- ---- ---- ----
Return on average total assets (2) 1.02% 0.95% 1.10% 0.86% 0.81%
Return on average ordinary shareholders' equity (3) 21.9% 24.3% 26.6% 19.4% 20.4%
Average shareholders' equity as a percentage of average
total assets 4.9% 4.2% 4.3% 4.7% 4.3%
Risk asset ratio
Tier 1 8.9% 7.9% 7.1% 9.2% 8.3%
Total 13.0% 12.3% 12.2% 16.2% 13.2%
Ratio of earnings to combined fixed charges and
preference share dividends (4)
Including interest on deposits 2.04 1.58 1.52 1.45 1.28
Excluding interest on deposits 3.82 4.30 4.88 3.82 2.16
Ratio of earnings to fixed charges only (4)
Including interest on deposits 2.07 1.60 1.53 1.47 1.29
Excluding interest on deposits 4.00 4.56 5.16 4.05 2.24
Other financial data in accordance with US GAAP:
Return on average total assets (2) 1.18% 1.11% 1.40% 0.86% 0.83%
Return on average ordinary shareholders' equity (3) 27.5% 30.5% 39.5% 22.6% 24.7%
Average shareholders' equity as a percentage of average
total assets 4.6% 3.9% 3.8% 4.1% 3.7%
Ratio of earnings to combined fixed charges and preference
share dividends (4)
Including interest on deposits 2.28 1.73 1.67 1.46 1.29
Excluding interest on deposits 4.48 5.12 5.97 3.86 2.18
Ratio of earnings to fixed charges only (4)
Including interest on deposits 2.32 1.75 1.68 1.46 1.29
Excluding interest on deposits 4.69 5.42 6.32 4.03 2.24
Notes:
(1) All prior years have been restated following the implementation of FRS 19
in 2002.
(2) Return on average total assets represents profit attributable to ordinary
shareholders as a percentage of average total assets.
(3) Return on average ordinary shareholders' equity represents profit
attributable to ordinary shareholders expressed as a percentage of average
ordinary shareholders' equity.
(4) For this purpose, earnings consist of income before taxes and minority
interests, plus fixed charges less the unremitted income of associated
undertakings (share of profits less dividends received). Fixed charges
consist of total interest expense, including or excluding interest on
deposits and debt securities in issue, as appropriate, and the proportion
of rental expense deemed representative of the interest factor (one third
of total rental expenses).
9
Exchange rates
Except as stated, the following table show, 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'):
US dollars per(pound)1 May April March February January December
- ---------------------- 2003 2003 2003 2003 2003 2002
---- ---- ---- ---- ---- ----
Noon buying rate
High 1.6484 1.5971 1.6129 1.6480 1.6482 1.6095
Low 1.5930 1.5500 1.5624 1.5727 1.5975 1.5555
US dollars per(pound)1 31 December
- ---------------------- ------------------------------------------------------------------------
2002 2001 2000 1999 1998
Noon buying rate
- ----------------
Year end rate 1.6095 1.4543 1.4955 1.6150 1.6628
Average rate for the year (1) 1.5043 1.4396 1.5204 1.6144 1.6602
Consolidation rate (2)
- ----------------------
Year end rate 1.6128 1.4498 1.4925 1.6165 1.6585
Average rate for the year 1.5032 1.4401 1.5160 1.6178 1.6576
Notes:
(1) The average of the Noon Buying Rates on the last business day of each
month during the year.
(2) The rates used by NatWest Group for translating dollars into sterling in
the preparation of its consolidated financial statements.
(3) On 11 June 2003, the Noon Buying Rate was(pound)1.00 = $1.6675.
10
RISK FACTORS
Set out below are certain risk factors, which could affect NatWest Group's
future results and cause them to be materially different from expected results.
NatWest Group's results could also be affected by competition and other
factors. The factors discussed in this report should not be regarded as a
complete and comprehensive statement of all potential risks and uncertainties.
The financial performance of NatWest Group is affected by borrower credit
quality and general economic conditions, in particular in the UK. Risks arising
from changes in credit quality and the recoverability of loans and amounts due
from counterparties are inherent in a wide range of NatWest Group's businesses.
Adverse changes in the credit quality of the NatWest Group's borrowers and
counterparties or a general deterioration in UK or global economic conditions,
or arising from systemic risks in the financial systems, could affect the
recoverability and value of NatWest Group's assets and require an increase in
the provision for bad and doubtful debts and other provisions.
Changes in interest rates, foreign exchange rates, equity prices and other
market factors affect NatWest Group's business. The most significant market
risks NatWest Group faces are interest rate, foreign exchange and bond and
equity price risks. Changes in interest rate levels, yield curves and spreads
may affect the interest rate margin realised between lending and borrowing
costs. Changes in currency rates, particularly in the sterling-dollar and
sterling-euro exchange rates, affect the value of assets and liabilities
denominated in foreign currencies and affect earnings reported by NatWest
Group's non-UK subsidiaries and may affect income from foreign exchange
dealing. The performance of financial markets may cause changes in the value of
NatWest Group's investment and trading portfolios. NatWest Group has
implemented risk management methods to mitigate and control these and other
market risks to which NatWest Group is exposed. However, it is difficult to
predict with accuracy changes in economic or market conditions and to
anticipate the effects that such changes could have on NatWest Group's
financial performance and business operations.
Operational risks are inherent in the Group's business. NatWest Group's
businesses are dependent on the ability to process a very large number of
transactions efficiently and accurately. Operational risk and losses can result
from fraud, errors by employees, failure to document transactions properly or
to obtain proper internal authorisation, failure to comply with regulatory
requirements and Conduct of Business rules, equipment failures, natural
disasters or the failure of external systems, for example, NatWest Group's
suppliers or counterparties. Although NatWest Group has implemented risk
controls and loss mitigation actions, and substantial resources are devoted to
developing efficient procedures and to staff training, it is only possible to
be reasonably, but not absolutely, certain that such procedures will be
effective in controlling each of the operational risks faced by NatWest Group.
Each of NatWest Group's businesses is subject to substantial regulation and
regulatory oversight. Any significant regulatory developments could have an
effect on how NatWest Group conducts its business and on NatWest Group's
results of operations. NatWest Group is subject to financial services laws,
regulations, administrative actions and policies in each location in which
NatWest Group operates. This supervision and regulation, in particular in the
UK, if changed could materially affect NatWest Group's business, the products
and services offered or the value of assets.
NatWest Group's future growth in earnings and shareholder value depends on
strategic decisions regarding organic growth and potential acquisitions.
NatWest Group devotes substantial management and planning resources to the
development of strategic plans for organic growth and identification of
possible acquisitions, supported by substantial expenditure to generate growth
in customer business. If these strategic plans do not meet with success,
NatWest Group's earnings could grow more slowly or decline.
11
ITEM 4. INFORMATION ON THE BANK
-------------------------------
HISTORY AND DEVELOPMENT OF THE BANK
National Westminster Bank Plc is a public limited company registered in England
and Wales No. 929027. The registered office and principal office of the Bank is
135 Bishopsgate, London, EC2M 3UR (telephone 020-7375-5000). The Bank's website
address is www.natwest.com.
NatWest Group is a diversified financial services group engaged in a wide range
of banking, financial and finance-related activities in the UK and
internationally. NatWest Group's operations are principally centred in the UK.
The Bank is a major UK clearing bank. The Bank was incorporated in England in
1968 and was formed from the merger of National Provincial Bank Limited and
Westminster Bank Limited, which had themselves been formed through a series of
mergers involving banks with origins dating back to the 17th century.
National Westminster Bank Plc was a wholly owned direct subsidiary of The Royal
Bank of Scotland Group plc until 31 January 2003 when ownership of the entire
issued ordinary share capital was transferred to the Royal Bank. At the same
date the Bank transferred ownership of its wholly owned subsidiary, Lombard
North Central PLC to the Royal Bank.
BUSINESS OVERVIEW
National Westminster Bank Plc was acquired by The Royal Bank of Scotland Group
plc on 6 March 2000 and since then it has operated and been managed as a member
of the overall RBS Group. As part of the integration of NatWest Group in the
RBS Group a number of businesses and assets have been transferred between
NatWest Group and the Royal Bank to bring together similar operations and
functions. In the RBS Group, all new large corporate relationships are
domiciled in the Royal Bank. In retail banking in the UK, RBS Group has
retained and promotes both the NatWest and the Royal Bank brands, which compete
with each other.
A central Manufacturing function provides services to entities in the RBS
Group. Allocations of manufacturing costs are made on appropriate basis to
individual legal entities, including NatWest.
At 31 December 2002, NatWest Group had total assets of (pound)171.9 billion and
shareholders' funds of (pound)9.2 billion.
The RBS Group operates on an integrated basis through a divisional structure.
The divisions relevant to the NatWest Group are Corporate Banking and Financial
Markets, Retail Banking, Retail Direct, Manufacturing, Wealth Management,
Ulster Bank and the Centre. A description of each of these business activities
is given below.
Corporate Banking and Financial Markets
Corporate Banking and Financial Markets ("CBFM") 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 and leasing.
Financial Markets provides corporate and institutional customers with treasury
services, including global interest rate derivatives trading, bond origination
and trading, sovereign debt trading, futures brokerage, foreign exchange, money
market, currency derivative and rate risk management services. It also engages
in similar activities for its own account, and provides treasury services
support to NatWest Group. RBS Greenwich Capital, with headquarters in
Connecticut, delivers debt market solutions tailored to meet the needs of
companies and institutions around the world.
On 1 January 2002, Ulster Bank's leasing business was transferred to CBFM and
in May 2002, Lombard, the leasing arm of CBFM, completed the acquisition of
Dixon Motors PLC, one of the UK's largest car dealerships.
Retail Banking
Retail Banking provides a wide range of banking, insurance and related
financial services to individuals and small businesses. These services are
delivered from branches throughout Great Britain and through the telephone,
ATMs and the internet.
In the personal banking market, Retail Banking offers money transmission,
savings and loan facilities. In the small business banking market, Retail
Banking provides a range of services which includes money transmission and cash
management, short, medium and long-term finance and retail and wholesale
deposit-taking products.
As at 31 December 2002, the Bank had 1,642 branches in the UK.
12
Retail Direct
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 Lombard Direct
and the Comfort Card businesses in Europe, both of which offer products to
customers through direct channels.
Manufacturing
Manufacturing supports the customer facing businesses of both the Bank and the
Royal Bank, mainly CBFM, Retail Banking and Retail Direct, and provides
operational technology, customer support in telephony, account management and
money transmission, global purchasing, property and other services. Appropriate
charges are made to both the Bank and the Royal Bank.
Wealth Management
Wealth Management comprises the Coutts Group, which focuses on private banking.
In September 2002, Wealth Management sold a 50% interest in NatWest
Stockbrokers Limited to TD Waterhouse, part of Toronto Dominion Bank of Canada.
Ulster Bank
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. On 1
January 2002, Ulster Bank's leasing business was transferred to CBFM.
The Centre
The Centre comprises group and corporate functions, which provide services to
the operating divisions.
Competition
The Bank and its subsidiaries are subject to intense competition in all aspects
of their business. In the UK, the Bank's principal competitors are other
clearing banks, building societies (which are similar to savings and loans
associations in the US) and the other major international banks.
Competition to serve corporate and institutional customers in the UK remains
strong. In addition to the UK clearing bank groups, large US and European
financial institutions are also active and offer combined investment and
commercial banking capabilities. The capital markets continue to innovate and
provide a broad range of financing and risk management solutions for corporate
customers. In asset finance, Lombard competes with both banks and specialised
asset finance providers.
In the small business banking market, NatWest Group competes with other UK
clearing bank groups, with specialised finance providers and building
societies. During 2002, competition within small business banking remained
strong as former building societies continued to develop their offerings.
In the personal banking market, competition remains intense. In addition to UK
banks and building societies, major retailers, life assurance companies and
internet-only players are active in the market.
The UK credit card market is highly competitive. Major retailers, utilities and
specialist card issuers, including the major US operators, are active in the
market in addition to UK banks and building societies. Competition is across a
range of dimensions, including aggressive pricing, loyalty and reward schemes
and packaged benefits. In addition to physical distribution channels, providers
compete through direct marketing activity and increasingly, the internet.
Coutts Group competes as a private bank with UK clearing and private banks and
with international private bankers. Difficult market conditions have seen some
retrenchment of competitive activity, particularly in the 'mass-affluent'
segment.
In Northern Ireland and the Republic of Ireland, Ulster Bank competes in retail
and commercial banking with the major Irish banks and building societies, and
with other UK and international banks and building societies active in the
market. Competition is intensifying as both UK and Irish institutions seek to
expand their businesses.
In the United States, NatWest Group competes through RBS Greenwich Capital and
NatWest branches, in large corporate lending and specialised finance markets,
and in fixed-income trading and sales. Competition is principally with the
large US commercial and investment banks and international banks active in the
US.
13
Monetary policy
NatWest Group's earnings are affected by domestic and global economic
conditions. The policies of the UK government, and of governments in other
countries in which NatWest Group operates, also have an impact.
The UK government sets an inflation target, which the Chancellor of the
Exchequer confirmed in his April 2003 Budget would remain at 2.5%, measured by
retail price inflation excluding mortgage interest payments (RPIX). From
November 2003, however, the UK inflation target will be measured against the
harmonised index of consumer prices (HICP), in line with other European
countries, as announced in the Chancellor's euro statement on 9 June 2003. The
level of the new HICP inflation target has not yet been set, but for the
members of European Monetary Union is currently set at 2%.
The Bank of England has operational independence in setting the repo rate to
achieve the inflation target. The Bank was given independence by the Chancellor
in 1997, with the aim of making monetary policy free from political influence,
and therefore more stable and credible. The Bank's Monetary Policy Committee
("MPC") meets each month to agree any change to interest rates, and the minutes
of these meetings are published two weeks later. One-off meetings can also be
held in exceptional circumstances - for example, when UK interest rates were
cut by a quarter point following the terrorist attacks on 11 September 2001. In
response to the downturn in the global economy and the terrorist attacks, the
Bank of England, along with other major central banks around the world, cut
rates sharply in 2001. Rates remained at exceptionally low levels throughout
2002, and were reduced again in February 2003, reflecting the uncertain nature
of the global and domestic economic circumstances.
The value of sterling is also important for UK monetary conditions. The
monetary authorities do not have an exchange rate target, but concerns over the
strength of sterling have played a role in the MPC's monthly debates in the
past. A feature of recent months has been the sharp depreciation of the US
dollar against the euro. In this context, sterling has also weakened against
the euro, falling to its lowest level since the single currency was first
introduced in 1999.
European Economic and Monetary Union ("EMU")
The new European single currency, the euro, came into being on 1 January 1999.
The third stage of EMU started on schedule on 1 January 1999. During the course
of 1998, it was determined that eleven countries (Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain) would participate. The UK, along with Denmark, exercised its right to
opt out at that stage, and Sweden also determined not to be part of this first
wave.
On 31 December 1998, the European Currency Unit (the "ECU") was replaced by the
euro on the international currency markets, on a one-for-one basis. The rates
for the euro against other international currencies were based upon the
official closing rates for the ECU. The bilateral rates for the legacy
currencies of the participating states were derived from their rates within the
Exchange Rate Mechanism and the closing value of the ECU. These rates, between
the legacy currencies and between these currencies and the euro, were fixed as
of 1 January 1999. The euro became the formal currency for all eleven
then-participating states.
Euro notes and coins were introduced into circulation on 1 January 2002 in
accordance with the Maastricht Treaty, which required that legacy currency
notes and coins be withdrawn by 30 June 2002. Also on 1 January 1999, the
European Central Bank ("ECB") assumed responsibility for the operation of
monetary policy throughout the euro zone. The ECB sets one short-term interest
rate to cover all twelve countries.
The UK government continues to support EMU entry in principle, but has decided
the UK will not adopt the single currency until it is in the UK's economic
interests, with a positive referendum vote. The Chancellor of the Exchequer has
laid down five key economic conditions for UK participation. An assessment of
these five tests took place in June 2003, resulting in the publication of the
Treasury's assessment, the 18 supporting EMU studies, and a 3rd outline
National Changeover Plan. While indicating that these five economic tests have
yet to be fully met, the government has set out a programme of economic reforms
and structural assessments necessary to achieve readiness for entry. The
Chancellor will make a progress statement in Budget 2004, at which point he
will decide whether to undertake a further assessment of the entry tests.
RBS Group continues to co-operate with the UK government, and to work within
the financial sector, to develop thinking and plans regarding a range of
practical issues that would arise if the UK were to decide to enter EMU.
Uncertainty continues on the likelihood and timing of the euro being introduced
in the UK. It is not possible to estimate with any degree of certainty the
ultimate cost of making systems and operations fully compliant. Expenditure in
the year ended 31 December 2002 in preparation for the possible introduction of
the euro in the UK was minimal.
14
Supervision and regulation
1 United Kingdom
1.1 The regulatory regime applying to the UK financial services industry
The Financial Services and Markets Act 2000 ("FSMA 2000"), containing a new
integrated legislative framework for the regulation of most of the UK financial
services industry, was implemented at the end of 2001 and the Financial
Services Authority (the "FSA") was established by the Government as the single
statutory regulator responsible for the regulation of deposit taking, insurance
and investment business in the UK.
Under the FSMA 2000, businesses require the FSA's permission to undertake
specified types of activities including carrying out contracts of insurance;
managing, dealing in or advising on, investments; accepting deposits; and
issuing electronic money. Detailed regulatory requirements are contained in a
Handbook published by the FSA.
The FSA's statutory objectives are to maintain confidence in, and to promote
public understanding of, the UK financial system; to secure an appropriate
degree of consumer protection; and to reduce the scope for financial crime. In
achieving these, the FSA must take account of certain "principles of good
regulation" which include recognising the responsibilities of regulated firms'
own management, facilitating innovation and competition and acting
proportionately in imposing burdens on the industry.
1.2 Authorised firms in the NatWest Group
A number of companies in NatWest Group undertake banking and investment
business, and are authorised and regulated to conduct business in the UK by the
FSA.
As at 31 December 2002, the FSA supervised the banking business of eight banks
in NatWest Group, including National Westminster Bank Plc, Coutts & Co, Lombard
North Central PLC and Ulster Bank Limited.
Investment management business is principally undertaken by companies in the
Wealth Management Division, including Coutts & Co Investment Management
Limited.
1.3 The FSA's regulatory approach and supervisory standards
The regulatory regime focuses on the risks to the FSA attaining its statutory
objectives and uses the full range of regulatory tools (including the
authorisation of firms, rule-making, supervision, investigation and
enforcement) available to the FSA. It is founded on a risk based, integrated
approach to regulation.
The FSA can request information from, and give directions to, authorised firms.
It may also require authorised firms to provide independent reports prepared by
professionals, relating to issues such as the accuracy of accounting records
and the adequacy of internal controls.
The FSA can exercise indirect control over the holding companies of authorised
firms via its statutory powers to object to persons who are, or who intend to
become, "controllers" of these firms.
Given the number of authorised firms in NatWest Group and the range and
complexity of business undertaken by these firms, they have been subject to a
comprehensive risk assessment by the FSA. Generally, authorised firms in
NatWest Group are subject to direct and on-going supervision by the FSA.
Setting standards for firms
The FSA carries out the prudential supervision and conduct of business
regulation of all authorised firms (although currently the application of its
conduct of business rules to banking business and general insurance business is
limited).
Prudential supervision includes monitoring the adequacy of a firm's management,
its financial resources and internal systems and controls. Firms are required
to submit regular returns to the FSA which provide material for supervisory
assessment. Currently, different prudential requirements apply to different
sectors of the financial services industry. These requirements are set out in
separate Prudential Sourcebooks issued by the FSA for each part of the
industry. These requirements are being reviewed by the FSA and an Integrated
Prudential Sourcebook (aimed at applying a more harmonised and consistent
approach to prudential regulation across the industry) is expected to be
implemented in stages, from mid 2004 until the end of 2006.
15
Many of the standards relating to the capital which firms must hold to absorb
losses arising from risks to its business are determined by EC legislation or
are negotiated internationally. The current capital adequacy regime requires
firms to maintain certain levels of capital, of certain specified types (or
tiers), against particular business risks. The 1988 Basel Capital Accord is
currently being reviewed by the Basel Committee on Banking Supervision and a
new set of capital adequacy proposals have been issued by the Bank for
International Settlements which have become known as "Basel II". These are
currently scheduled for implementation in the UK in January 2006. These new
proposals are based around the three principles or "Pillars" of Minimum Capital
Requirements (Pillar 1), Supervisory Review (Pillar 2) and Market Discipline
(Pillar 3). The proposed new framework represents a fundamental change to the
current capital adequacy regime and will have wide ranging consequences for the
Group and the banking industry as a whole. These changes will affect all
"internationally active banks". In addition, the Conglomerates Directive, to be
implemented in the UK in 2004, will affect the way in which financial groups
falling within the description of "financial conglomerates" assess solvency and
capital adequacy on a consolidated basis.
In its supervisory role, the FSA sets requirements relating to matters such as
consolidated supervision, capital adequacy, liquidity, large exposures, and the
adequacy of accounting procedures and controls.
Banks are required to set out their policy on "large exposures" and to inform
the FSA of this. The policy must be reviewed annually and any significant
departures must be discussed with the FSA. Large exposures must be monitored
and controlled.
Firms must also meet standards relating to their senior management arrangements
and internal systems and controls and must comply with rules designed to reduce
the scope for firms to be used for money laundering. During 2002, the FSA
concentrated on its objective to reduce financial crime and, given the
international focus, this emphasis will continue for the foreseeable future.
Additionally, the UK Government has implemented further legislation relating to
the prevention of money laundering, over the course of the past 12 months.
In regulating the conduct of authorised firms, the FSA has set out 11
Principles for Businesses. These reflect the FSA's regulatory objectives and
are a general statement of the fundamental obligations of authorised firms
under the regulatory system. In addition, the FSA has prescribed detailed
Conduct of Business Rules essentially governing key aspects of firms'
relationships with customers, such as the provision of clear and adequate
information, managing conflicts of interest and recommending products suitable
to the needs of customers. The marketing of financial products (particularly
investment products) is subject to detailed requirements.
The FSA's Conduct of Business Rules currently require certain authorised
regulated firms in the Group to determine whether to market the "packaged
products" (i.e. personal pensions, life assurance, collective investment
schemes and investment trust savings schemes) of only one company or group, or
to become an independent intermediary, providing customers with advice across a
broader range of products (this is called the "polarisation regime" and was
introduced as a consumer protection mechanism). A group of persons allied
together for purposes of marketing packaged products is referred to as a
"marketing group".
For marketing purposes, currently, NatWest Group companies are members of the
NatWest and Gartmore Marketing Group. The Bank and its subsidiary, Ulster Bank
Limited market the packaged products of the NatWest and Gartmore Marketing
Group through their branches and, under the Rules, neither the Bank nor its
subsidiary Ulster Bank Limited are permitted to advise on packaged products
more generally. Independent advice is available to customers through the Royal
Bank of Scotland Group Independent Financial Services Limited.
Recognising both the substantial anti-competitive effects of the polarisation
regime and the fact that it actually generates little consumer benefits, the
FSA has conducted a review and expects to introduce substantial changes to the
regime in 2003/2004.
16
Focus on customers
An important element of securing an appropriate degree of consumer protection
is ensuring that suitable arrangements are made for dealing with customer
complaints. Firms are required to establish appropriate internal complaint
handling procedures and to report complaints statistics to the FSA. Where
agreement cannot be reached between the firm and the customer, the issue can be
referred for independent assessment to a complaints scheme run by the Financial
Ombudsman Service.
The Financial Services Compensation Scheme (financed by levies on regulated
firms) is available to provide compensation up to certain limits if a firm
collapses owing money to investors, depositors or policyholders.
1.4 Enforcement
Where appropriate, the FSA may discipline and/or prosecute for breaches of the
legislative or regulatory requirements. It works closely with the criminal
authorities and uses both civil and criminal powers. It can withdraw a firm's
authorisation, discipline firms and individuals, prosecute for various offences
and require funds to be returned to customers.
The FSA also has powers under certain consumer legislation to take action
against regulated firms to address unfair terms in financial services consumer
contracts.
1.5 Extension of the FSA's responsibilities
From the end of October 2004, the scope of the FSA's responsibilities will be
widened to cover the regulation and supervision of mortgage lending and
administration, the selling of mortgages and the provision of mortgage advice
and from January 2005, the regulation of insurance mediation services (i.e.
selling and administration of insurance products). The regulatory regimes for
these are being devised and are to be finalised in 2003. All of these types of
activities are undertaken by companies in NatWest Group and this extension of
the scope of statutory regulation will significantly impact on how the relevant
businesses operate in the future.
1.6 Other relevant UK agencies and Government departments
Consumer credit issues are covered by the Department of Trade and Industry
("DTI") and the Office of Fair Trading ("OFT") and competition issues are dealt
with by the OFT. The business of granting consumer credit is heavily regulated.
The DTI also has responsibility for company law matters. The consumer credit
legislation and aspects of company law are currently being reviewed, both at
national and at EU levels and changes are expected.
2. United States
The Bank maintains a branch in the United States and consequently its
operations are subject to regulation under the US Bank Holding Company Act of
1956, as amended (the "BHCA"), by the Board of Governors of the Federal Reserve
System (the "Board"). The BHCA generally prohibits the Bank from acquiring,
directly or indirectly, the ownership or control of more than 5% of the voting
shares of any company engaged in non-banking activities in the United States
unless the Board has determined, by order or regulation, that such activities
are so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In addition, the BHCA requires the Bank to obtain the
prior approval of the Board before acquiring, directly or indirectly, the
ownership or control of more than 5% of the voting shares of any US bank or
bank holding company. Although the US Gramm-Leach-Bliley Act of 1999 permits
bank holding companies that have met certain eligibility criteria and elected
to become 'financial holding companies' to engage in a significantly broader
range of non-banking activities than those described above, the Bank has not
elected to become a financial holding company.
The Bank's US subsidiaries, and the Bank's US offices, are subject to direct
supervision and regulation by various other federal and state authorities. The
Bank's New York branch is supervised by the New York Banking Department. The
Bank's US securities affiliates are subject to regulation and supervision by
the Securities and Exchange Commission.
17
ORGANISATIONAL STRUCTURE
Until January 2003, the Bank was a wholly-owned direct subsidiary of The Royal
Bank of Scotland Group plc ("the holding company"), which is incorporated in
Great Britain and has its registered office at 36 St Andrew Square, Edinburgh
EH2 2YB. The principal subsidiary undertakings of NatWest Group and their
activities are detailed in note 19.
On 31 January 2003, ownership of the Bank's entire issued ordinary share
capital was transferred to the Royal Bank, which is also a wholly owned
subsidiary of the holding company.
DESCRIPTION OF PROPERTY AND EQUIPMENT
The NatWest Group's properties include its principal office in London at 135
Bishopsgate.
Freehold and long leasehold properties are revalued on a rolling basis, each
property being valued at least once every five years. Interim valuations
outwith the five year cycle are carried out on properties where there is an
indication that its value has changed significantly, given market conditions.
Any increase or deficit on revaluation is reflected in the carrying value of
premises at that time. Any impairment in the value of premises where there is a
clear consumption of economic benefits is charged in full to the profit and
loss account. Other impairments of premises are charged to the profit and loss
account after eliminating any previous revaluation surplus on the premises. Any
profit from the sale of revalued premises is calculated by deducting the
revalued amount from the net proceeds. The revaluation of premises at 31
December 2002 resulted in a (pound)22 million decrease in property revaluation
reserves.
Total capital expenditure on premises, computers and other equipment for the
year ended 31 December 2002 was (pound)123 million (2001 - (pound)135 million;
2000 - (pound)234 million).
COMPETITION COMMISSION
The UK Government has accepted the recommendations of the Competition
Commission ("CC") in respect of its inquiry into the UK market for small
business banking.
The CC published its report on the supply of banking services by clearing banks
to small and medium sized enterprises ("SMEs") in March 2002. The report
recommended a number of pricing and behavioural remedies. RBS Group has
implemented the pricing remedies with effect from 1 January 2003. In line with
undertakings given by RBS Group and three other major clearing banks to the
OFT, NatWest Group's SME customers have been offered the choice of either
receiving interest on current accounts at a prescribed rate or free core money
transmission services. RBS Group, along with seven other clearing banks, has
also given undertakings to implement the behavioural remedies. These
behavioural remedies include measures to achieve speedy and error free
switching of accounts between banks, unbundling of services and improving
market information and transparency.
18
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
----------------------------------------------------
OPERATING RESULTS
Critical accounting policies
The reported results of NatWest Group are sensitive to the accounting policies,
assumptions and estimates that underlie the preparation of its financial
statements. NatWest Group's principal accounting policies are set out on pages
93 to 95. UK company law and accounting standards require the directors, in
preparing the NatWest Group's financial statements, to select suitable
accounting policies, apply them consistently and make judgements and estimates
that are reasonable and prudent. Where UK GAAP allows a choice of policy,
Financial Reporting Standard ("FRS") 18 'Accounting Policies' requires an
entity to adopt those policies judged to be most appropriate to its particular
circumstances for the purpose of giving a true and fair view.
The judgements and assumptions involved in NatWest Group's accounting policies
that are most important to the portrayal of its financial condition are
discussed below. The use of estimates, assumptions or models that differ from
those adopted by the NatWest Group would affect its reported results.
Loans and advances - provisions for bad and doubtful debts
NatWest Group provides for losses existing in its lending book so as to state
its loan portfolio at its expected ultimate net realisable value. Specific
provisions are established against individual exposures and the general
provision covers advances impaired at the balance sheet date but which have not
been identified as such. For exposures that are individually assessed, the
specific provision is determined from a review of the financial condition of
the counterparty and any guarantor and takes into account the value of any
security. For certain portfolios of homogeneous loans, specific provisions are
established on a portfolio basis, based on historical loss experience and the
level of arrears. The general provision is assessed in the light of general
economic conditions, the size and diversity of NatWest Group's portfolio, a
review of internal credit risk classifications and the scope of specific
provisioning procedures.
The determination of NatWest Group's specific and general bad debt provisions
involves numerous estimates and judgements. These include the identification of
deteriorating loans, the amounts and timing of loan cash flows and the
realisable value of collateral.
Loans and advances - recognition of interest income
Interest is accrued on loans and advances unless its receipt is in significant
doubt. Doubtful interest is not credited to the profit and loss account but to
an interest in suspense account. Interest is not accrued on loans that have
been written off.
Fair value
Securities and derivatives held for trading purposes are carried at fair value
with changes in this value reflected in the profit and loss account. Fair
values are based on quoted market prices where available. If quoted prices are
not available for an instrument, fair value is determined from market prices
for its components using appropriate pricing models. Where NatWest Group's
position is of such a size that the price obtainable would be materially
different from the quoted price, the quoted price is adjusted based on
management's estimate of the price that NatWest Group would realise from the
holding in current market conditions. Where instruments such as
over-the-counter derivatives are valued using pricing models, the value of the
instrument and changes in that value are affected by the model and its
underlying assumptions.
Goodwill
NatWest Group capitalises acquired goodwill and amortises it over its useful
economic life. Under UK GAAP, there is a rebuttable presumption that the useful
economic life of purchased goodwill is limited and does not exceed 20 years
from the date of acquisition.
Accounting developments
UK GAAP
The Group has implemented FRS 19 'Deferred Tax' which requires recognition of
deferred tax assets and liabilities on all timing differences, with specified
exceptions. Previously, provision was made for deferred tax only to the extent
that timing differences were expected to reverse and the deferred tax liability
crystallise in the foreseeable future. The effect of adopting the new policy
for the year ended 31 December 2002 is to increase goodwill amortisation by
(pound)6 million, reduce profit before tax by (pound)6 million, increase the
tax charge by (pound)58 million and, at 31 December 2002, reduce profit and
loss account reserves by (pound)34 million and increase intangible fixed assets
by (pound)110 million. Prior periods have been restated resulting, at 31
December 2001, in an increase goodwill amortisation of (pound)6 million (2000 -
nil), a decrease in profit before tax of (pound)6 million (2000 - nil), a
decrease in the tax charge of (pound)20 million (2000 - decrease (pound)2
million) and, at 31 December 2001, an increase in profit and loss account
reserves of (pound)30 million (2000 - increase (pound)16 million) and an
increase in intangible fixed assets of (pound)116 million (2000 - nil).
19
International Financial Reporting Standards ("IFRS")
In June 2002, the European Parliament and Council of the European Union issued
a Regulation that will require all EU listed companies to prepare their
consolidated accounts in accordance with IFRS rather than existing national
GAAP. The Regulation takes effect from 2005, consequently the accounting
framework under which the RBS Group reports will change. The RBS Group will
produce its consolidated accounts in accordance with IFRS for the year ended 31
December 2005.
US GAAP
The following developments in US GAAP have no material affect on the NatWest
Group's US GAAP reporting.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 145 'Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections'. SFAS 145 rescinds existing requirements for accounting for
extinguishments of debt, removes an inconsistency in the existing requirements
for accounting by lessees for certain lease amendments, and makes other
technical corrections to existing statements.
In October 2002, the FASB issued SFAS 147 'Acquisitions of Certain Financial
Institutions'. SFAS 147 requires certain acquisitions that fell within the
scope of SFAS 72 'Accounting for Certain Acquisitions of Banking or Thrift
Institutions' to be accounted for in accordance with SFAS 141 'Business
Combinations', and includes transitional provisions to deal with unidentified
intangible assets recognised under SFAS 72. SFAS 147 is effective from 1
October 2002.
NatWest Group is currently considering the effect, if any, of the following
developments on its US GAAP reporting.
In July 2002, the FASB issued SFAS 146 'Accounting for Costs Associated with
Exit or Disposal Activities'. SFAS 146 addresses the recognition and
measurement of employee termination costs, contract termination costs and other
costs associated with exit or disposal activities, and related disclosures.
SFAS 146 is applicable to exit and disposal activities initiated after 31
December 2002.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45
'Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34'.
FIN 45 requires guarantees entered into or modified after 31 December 2002 to
be recognised and measured initially at their fair value. NatWest Group is
reviewing the initial recognition and measurement requirements of this
Statement to assess their effect on its US GAAP reporting.
In December 2002, the FASB issued SFAS 148 'Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123'. SFAS 148 addresses the treatment of a voluntary change in accounting for
stock-based employee compensation from the intrinsic value method under APB
Opinion No. 25, 'Accounting for Stock Issued to Employees', to the fair value
based method under SFAS 123. NatWest Group is currently not contemplating
moving to accounting for stock-based compensation using the fair value based
method of SFAS.
In January 2003, the FASB issued FASB Interpretation No. 46 'Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51'. FIN 46 addresses
accounting for variable interest entities, which are entities where the equity
investment at risk is not sufficient to permit the entity to finance its
activities without subordinated support from other parties to absorb losses, or
where the equity investors lack certain essential characteristics of a
controlling financial interest. FIN 46 requires the primary beneficiary of a
variable interest entity to consolidate that entity. An enterprise is the
primary beneficiary of a variable interest entity if it holds an interest that
will absorb the majority of its expected losses or receive a majority of its
expected residual returns. FIN 46 requires the holder of a significant variable
interest in a variable interest entity to make certain disclosures. The
requirements of FIN 46 apply to new variable interest entities created after 31
January 2003, or where the reporting entity acquires an interest after that
date, and to other variable interest entities in the first fiscal year or
interim period beginning after 15 June 2003.
However, FIN 46 requires disclosures in financial statements issued after 31
January 2003 about variable interest entities that, when FIN 46 becomes
effective, it is reasonably possible that the reporting enterprise will
consolidate or about which the enterprise will disclose information in
accordance with FIN 46. NatWest Group has undertaken a review to identify
variable interest entities in which it is the primary beneficiary or in which
it has a significant variable interest. NatWest Group has concluded that it is
reasonably possible that it is the primary beneficiary of, or has a significant
interest in a number of commercial paper conduits and other asset
securitisation vehicles that meet FIN 46's definition of a variable interest
entity. These entities acquire financial assets from third parties or from
NatWest Group funded by the issue of commercial paper or other debt
instruments. NatWest Group supplies certain administrative services and
provides credit enhancement, liquidity facilities and derivative transactions
to some or all of the entities on an arm's length basis. In the case of the
commercial paper conduits, NatWest Group provides programme wide credit
enhancement by letters of credit or loan facilities across all tranches of
assets funded by conduits. NatWest Group provides funding in the form of
reverse repurchase agreements on bonds owned by one variable interest entity.
20
At 31 December 2002, NatWest Group held loan notes issued by these entities
with a principal amount of (pound)3.0 million, had outstanding undrawn
liquidity lines amounting to (pound)1.6 billion, and total rate of return swaps
with a notional amount of (pound)0.7 billion. NatWest Group's maximum exposure
to loss, in the event of non-performance of the entire portfolio of assets in
these entities and if all counterclaims proved valueless, is represented by the
contractual amount of these instruments.
As experience with FIN 46 develops, NatWest Group is continuing to review its
existing interests to identify other variable interest entities in which
NatWest Group may have a significant variable interest or of which NatWest
Group may be the primary beneficiary.
The following developments in US GAAP have occurred since the consolidated
financial statements of the NatWest Group were approved.
On 30 April 2003, the FASB issued SFAS 149 'Amendment of Statement 133 on
Derivative Instruments as Hedging Activities.' SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in contracts, and for hedging activities under SFAS 133. SFAS 149 is
effective for contracts entered into or modified after 30 June 2003 and for
hedging relationships designated after 30 June 2003. The NatWest Group is
reviewing this statement to determine the effect on its US GAAP reporting.
On 15 May 2003, the FASB issued SFAS 150 'Accounting For Certain Financial
Instruments with Characteristics of both Liabilities And Equity'. SFAS 150
addresses classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. It requires financial
instruments falling within its scope to be classified as a liability; many of
those instruments were previously classified as equity. NatWest Group is
reviewing this statement to determine the effect on its US GAAP reporting.
21
Overview of results
The following table summarises NatWest Group's results for the three years
ended 31 December 2002:
Consolidated profit and loss account 2002 2001* 2000*
---- ---- ----
(pound)m (pound)m (pound)m
Net interest income 4,134 3,921 3,675
----------------- ------------------ -----------------
Dividend income 13 17 14
Fees and commissions receivable 2,908 3,036 2,957
Fees and commissions payable (715) (711) (637)
Dealing profits 735 719 684
Other operating income 619 642 800
----------------- ------------------ -----------------
Non-interest income 3,560 3,703 3,818
----------------- ------------------ -----------------
Total income 7,694 7,624 7,493
----------------- ------------------ -----------------
Administrative expenses
staff costs** (1,755) (2,097) (2,572)
premises and equipment** (285) (368) (609)
other** (2,084) (1,495) (1,492)
Depreciation and amortisation
tangible fixed assets** (444) (541) (559)
goodwill** (26) (24) (27)
----------------- ------------------ -----------------
Operating expenses (4,594) (4,525) (5,259)
----------------- ------------------ -----------------
Profit before provisions for bad and doubtful debts 3,100 3,099 2,234
Provisions for bad and doubtful debts (508) (510) (359)
Amounts written off fixed asset investments (8) (6) (14)
----------------- ------------------ -----------------
Operating profit 2,584 2,583 1,861
Profit on disposal of businesses - - 967
Additional consideration on sale of Bancorp - - 74
----------------- ------------------ -----------------
Profit on ordinary activities before tax 2,584 2,583 2,902
Tax (713) (733) (692)
----------------- ------------------ -----------------
Profit after tax 1,871 1,850 2,210
----------------- ------------------ -----------------
* restated (see page 19)
** includes restructuring costs (see page 28)
2002 compared with 2001
- -----------------------
Profit before tax at (pound)2,584 million was similar to the prior year at
(pound)2,583 million despite the transfer and disposal of businesses during
2001.
Net interest income increased by 5%, (pound)213 million to (pound)4,134
million. Average interest-earning assets of the banking business decreased by
5%, (pound)5.3 billion to (pound)112.7. Average loans and advances to customers
increased by (pound)4.9 billion, average loans and advances to banks decreased
by (pound)5.9 billion and debt securities decreased by (pound)4.2 billion.
Interest spread rose by 0.4% with growth in higher-yielding customer lending
offsetting the effect of the lower interest rate environment. Net interest
margin of the banking business improved to 3.6% from 3.3%.
Non-interest income decreased 4%, (pound)143 million to (pound)3,560 million
mainly due to the disposal of businesses in the previous year. Fees and
commissions receivable decreased by 4%, (pound)128 million to (pound)2,908
million. Dealing profits increased by (pound)16 million, 2% to (pound)735
million. Other operating income fell by 4%, (pound)23 million to (pound)619
million.
Operating expenses were up 2%, (pound)69 million to (pound)4,594 million.
Including in operating expenses are restructuring costs, up 4%, (pound)25
million to (pound)663 million. The conversion of NatWest IT systems onto the
Royal Bank technology platform was completed in October 2002. Staff costs were
16%, (pound)342 million lower at (pound)1,755 million reflecting lower staff
numbers, which fell by 10,400 to 22,600 predominately as a result of staff
transferring to the Royal Bank. Other operating expenses increased (pound)589
million, 39% to (pound)2,084 million due to an increased management charge
reflecting the services provided by the Royal Bank.
Provisions for bad and doubtful debts decreased by (pound)2 million to
(pound)508 million. Total provisions at 31 December 2002 were 82% of risk
elements in lending, compared with 74% at 31 December 2001.
22
The tax charge for the year was (pound)713 million (2001 - (pound)733 million)
equivalent to 28% (2001 - 28%) of profit before tax.
Profit attributable to ordinary shareholders increased by 1% from (pound)1,802
million to (pound)1,825 million.
Group total assets were (pound)171.9 billion at 31 December 2002. Loans and
advances to customers were (pound)112.1 billion.
Capital ratios at 31 December 2002 were 8.9% (tier 1) and 13.0% (total).
2001 compared with 2000
- -----------------------
During 2001, Financial Markets continued to migrate substantial parts of its
business to the Royal Bank.
Profit before tax at (pound)2,583 million was 11%, (pound)319 million lower
than the previous year which included (pound)967 million profit on disposal of
businesses and the final consideration relating to the disposal of Bancorp,
(pound)74 million. Operating profit was up 39%, (pound)722 million to
(pound)2,583 million.
Net interest income increased by 7%, (pound)246 million to (pound)3,921
million. Average interest-earning assets of the banking business rose by 2%,
(pound)1.8 billion to (pound)118.0 billion including 11% growth in average
loans and advances to customers. Net interest margin of the banking business
improved to 3.3% from 3.2%.
Non-interest income decreased 3%, (pound)118 million to (pound)3,703 million.
Fees and commissions receivable rose by 3%, (pound)79 million to (pound)3,036
million. Other operating income fell by 20%, (pound)161 million to (pound)642
million.
Operating expenses were down 14%, (pound)734 million to (pound)4,525 million.
Including in operating expenses are restructuring costs, up 21%, (pound)111
million to (pound)638 million. Staff costs were 18%, (pound)475 million lower
at (pound)2,097 million. Staff numbers fell by 22,800 to 33,000. Other
operating expense were (pound)1,495 million (2000: (pound)1,492 million).
Provisions for bad and doubtful debts were up 42%, (pound)151 million to
(pound)510 million. Total provisions at 31 December 2001 were 74% of risk
elements in lending, compared with 81% at 31 December 2000.
The tax charge for the year was (pound)733 million (2000 - (pound)692 million)
equivalent to 28% (2000 - 24%) of profit before tax.
Profit attributable to ordinary shareholders decreased by 17% from (pound)2,160
million to (pound)1,802 million.
Group total assets were (pound)172.7 billion at 31 December 2001. Loans and
advances to customers were (pound)100.6 billion.
Capital ratios at 31 December 2001 were 7.9% (tier 1) and 12.3% (total).
23
Net interest income
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Interest receivable 6,505 7,854 8,515
Interest payable (2,371) (3,933) (4,840)
-----------------------------------------------
Net interest income 4,134 3,921 3,675
-----------------------------------------------
% % %
Gross yield on interest-earning assets of banking business 5.8 6.7 7.3
Cost of interest-bearing liabilities of banking business (2.7) (4.0) (5.0)
-----------------------------------------------
Interest spread of banking business 3.1 2.7 2.3
Benefit from interest-free funds 0.5 0.6 0.9
-----------------------------------------------
Net interest margin of banking business 3.6 3.3 3.2
-----------------------------------------------
The following table gives average interest rates, yields and margins for the
three years ended 31 December 2002.
2002 2001 2000
---- ---- ----
% % %
Yields, spreads and margins of the banking business:
Gross yield (1)
Group 5.8 6.7 7.3
UK 6.0 6.8 7.5
Overseas 4.6 5.9 6.8
Interest spread (2)
Group 3.1 2.7 2.3
UK 3.2 3.0 2.6
Overseas 1.8 1.1 0.8
Net interest margin (3)
Group 3.6 3.3 3.2
UK 3.8 3.6 3.5
Overseas 2.8 2.3 1.7
The Bank's base rate 4.0 5.1 6.0
London inter-bank three month offered rate:
Sterling 4.1 5.0 6.2
Eurodollar 1.8 3.8 6.5
Euro 3.3 4.3 4.4
Notes:
(1) Gross yield is the interest rate earned on average interest-earning assets
of the banking business.
(2) Interest spread is the difference between the gross yield and the interest
rate paid on average interest-bearing liabilities of the banking business.
(3) Net interest margin is net interest income of the banking business as a
percentage of average interest-earning assets of the banking business.
24
2002 compared with 2001
- -----------------------
Net interest income increased by 5%, (pound)213 million to (pound)4,134
million. Average interest-earning assets of the banking business decreased by
5%, (pound)5.3 billion to (pound)112.7. Average loans and advances to customers
increased by (pound)4.9 billion, average loans and advances to banks decreased
by (pound)5.9 billion and debt securities decreased by (pound)4.2 billion.
Interest spread rose by 0.4% with growth in higher-yielding customer lending
offsetting the effect of the lower interest rate environment. Net interest
margin of the banking business improved to 3.6% from 3.3%.
2001 compared with 2000
- -----------------------
Net interest income increased by 7%, (pound)246 million to (pound)3,921
million. Growth in corporate and personal lending was partially offset by a
reduction in debt securities held. Average interest-earning assets of the
banking business were up 2%.
Interest spread increased 0.4% to 2.7%. Lower interest rates and a slight
decline in interest-free funds led to a reduction in the benefit from
interest-free funds. This partially offset the increase in spread resulting in
an increase of 0.1% in the net interest margin.
25
Average balance sheets and interest rates
The following table shows average balances and interest rates for each of the
past three years.
2002 2001 2000
----------------------------- -------------------------- ----------------------------
Average Average Average Average Average Average
balance Interest rate balance Interest rate balance Interest rate
----------------------------------------------------------- ----------------------------
ASSETS (pound)m (pound)m % (pound)m (pound)m % (pound)m (pound)m %
Treasury bills and other eligible bills
UK - - - 53 3 5.7 180 8 4.4
Overseas 29 1 3.5 93 3 3.2 126 6 4.8
Loans and advances to banks
UK 9,147 355 3.9 12,301 615 5.0 10,544 584 5.5
Overseas 4,543 121 2.7 7,264 383 5.3 7,571 506 6.7
Loans and advances to customers (1)
UK 86,274 5,353 6.2 80,858 5,759 7.1 72,391 5,795 8.0
Overseas 10,745 574 5.3 11,285 751 6.7 10,730 780 7.3
Debt securities
UK 1,253 62 5.0 2,530 152 6.0 10,114 577 5.7
Overseas 713 39 5.5 3,652 188 5.1 4,540 259 5.7
--------------------- -------------------- ---------------------
Total interest-earning assets 116,196 8,515 7.3
- Banking business 112,704 6,505 5.8 118,036 7,854 6.7 ----------
--------- --------- 52,844
- Trading business (2) 47,384 48,418 -----------
------------ ----------- 169,040
Total interest-earning assets 160,088 166,454 27,174
Non-interest-earning assets 19,326 21,322 -----------
------------ ----------- 196,214
Total assets 179,414 187,776 -----------
------------ -----------
Percentage of assets applicable to
overseas operations 35.6% 35.6% 29.8%
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits by banks
UK 12,054 424 3.5 10,227 495 4.8 10,197 542 5.3
Overseas 1,847 59 3.2 4,472 230 5.1 6,212 354 5.7
Customer accounts
- demand deposits
UK 32,744 494 1.5 31,869 820 2.6 29,098 995 3.4
Overseas 2,321 38 1.6 2,422 86 3.6 2,533 135 5.3
- savings deposits
UK 8,659 225 2.6 10,027 355 3.5 10,662 457 4.3
Overseas 65 1 1.5 69 2 2.9 61 2 3.3
- other time deposits
UK 21,559 791 3.7 25,497 1,193 4.7 25,701 1,495 5.8
Overseas 4,402 126 2.9 5,046 224 4.4 5,249 289 5.5
Debt securities in issue
UK 602 27 4.4 3,098 160 5.2 4,122 226 5.5
Overseas 1,345 54 4.0 5,997 311 5.2 5,921 376 6.4
Loan capital
UK 6,173 260 4.2 6,395 381 6.0 6,400 447 7.0
Overseas - - - 171 14 8.2 495 55 11.1
Internal funding of trading business
UK (5,183) (128) 2.5 (6,118) (287) 4.7 (9,951) (481) 4.8
Overseas (129) - - (1,220) (51) 4.2 (1,025) (52) 5.1
--------------------- -------------------- ---------------------
Total interest-bearing liabilities 95,675 4,840 5.0
- Banking business 86,459 2,371 2.7 97,952 3,933 4.0 ----------
--------- ---------
- Trading business (2) 46,162 45,660 49,628
------------ ----------- -----------
Total interest-bearing liabilities 132,621 143,612 145,303
Non-interest bearing liabilities
Demand deposits
UK 17,745 17,341 15,929
Overseas 1,874 1,595 1,320
Other liabilities 18,314 17,274 25,211
Shareholders' funds 8,860 7,954 8,451
------------ ----------- -----------
Total liabilities and shareholders' equity 179,414 187,776 196,214
------------ ----------- -----------
Percentage of liabilities applicable to
overseas operations 31.8% 32.7% 28.6%
The analysis into UK and Overseas has been compiled on the basis of location of
office.
Notes:
(1) Loans and advances to customers include non-accrual loans. Interest income
includes interest on non-accruing loans only to the extent that cash
payments have been received.
(2) Interest receivable and interest payable on trading assets and trading
liabilities are included in dealing profits.
26
Changes in net interest income - volume and rate analysis
Volume and rate variances have been calculated based on movements in average
balances over the year and changes in interest rates on average
interest-earning assets and average interest-bearing liabilities. Changes due
to a combination of volume and rate are allocated pro rata to volume and rate
movements.
2002 compared with 2001 2001 compared with 2000
--------------------------------------- -------------------------------------
Increase/(decrease) due to changes in:
-------------------------------------------------------------------------------
Average Average Net Average Average Net
volume rate change volume rate change
--------------------------------------- -------------------------------------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
INTEREST-EARNING ASSETS
Treasury bills and other eligible bills
UK (2) (1) (3) (7) 2 (5)
Overseas (2) - (2) (1) (2) (3)
Loans and advances to banks
UK (139) (121) (260) 91 (60) 31
Overseas (113) (149) (262) (20) (103) (123)
Loans and advances to customers
UK 368 (774) (406) 672 (708) (36)
Overseas (35) (142) (177) 40 (69) (29)
Debt securities
UK (67) (23) (90) (455) 30 (425)
Overseas (160) 11 (149) (48) (23) (71)
--------------------------------------- -------------------------------------
Total interest receivable of banking business
UK 160 (919) (759) 301 (736) (435)
Overseas (310) (280) (590) (29) (197) (226)
--------------------------------------- -------------------------------------
(150) (1,199) (1,349) 272 (933) (661)
--------------------------------------- -------------------------------------
INTEREST-BEARING LIABILITIES
Deposits by banks
UK (79) 150 71 (2) 49 47
Overseas 104 67 171 92 32 124
Customer accounts
- demand deposits
UK (22) 348 326 (89) 264 175
Overseas 3 45 48 6 43 49
- savings deposits
UK 44 86 130 26 76 102
Overseas - 1 1 - - -
- other time deposits
UK 168 234 402 12 290 302
Overseas 26 72 98 11 54 65
Debt securities in issue
UK 115 18 133 53 13 66
Overseas 199 58 257 (5) 70 65
Loan capital
UK 13 108 121 - 66 66
Overseas 7 7 14 29 12 41
Internal funding of trading business*
UK (39) (120) (159) (180) (14) (194)
Overseas (24) (27) (51) 9 (10) (1)
--------------------------------------- -------------------------------------
Total interest payable of banking business
UK 200 824 1,024 (180) 744 564
Overseas 315 223 538 142 201 343
--------------------------------------- -------------------------------------
515 1,047 1,562 (38) 945 907
--------------------------------------- -------------------------------------
Movement in net interest income
UK 360 (95) 265 121 8 129
Overseas 5 (57) (52) 113 4 117
--------------------------------------- -------------------------------------
365 (152) 213 234 12 246
--------------------------------------- -------------------------------------
* Interest receivable and interest payable on trading assets and liabilities
are included in dealing profits.
27
Non-interest income
---------------------------------------------------
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Dividend income 13 17 14
Fees and commissions receivable 2,908 3,036 2,957
Fees and commissions payable (715) (711) (637)
Dealing profits 735 719 684
Other operating income 619 642 800
---------------------------------------------------
3,560 3,703 3,818
---------------------------------------------------
2002 compared with 2001
- -----------------------
Non-interest income fell by 4%, (pound)143 million, to (pound)3,560 million.
Fees and commissions receivable decreased by 4%, (pound)128 million, to
(pound)2,908 million. Dealing profits increased by (pound)16 million, 2% to
(pound)735 million. Other operating income fell by 4%, (pound)23 million, to
(pound)619 million.
2001 compared with 2000
- -----------------------
Non-interest income fell by 3%, (pound)115 million, to (pound)3,703 million.
Fees and commissions receivable increased by 3%, (pound)79 million, to
(pound)3,036 million. Fees and commissions payable rose by 12%, (pound)74
million, to (pound)711 million. Dealing profits increased by (pound)35 million,
5% to (pound)719 million. Other operating income fell by 20%, (pound)158
million, to (pound)642 million.
Operating expenses
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Administrative expenses
staff costs* 1,755 2,097 2,572
premises and equipment * 285 368 609
other * 2,084 1,495 1,492
--------------- --------------- ---------------
Total administrative expenses 4,124 3,960 4,673
Depreciation and amortisation
tangible fixed assets* 444 541 559
goodwill* 26 24 27
--------------- --------------- ---------------
Operating expenses 4,594 4,525 5,259
--------------- --------------- ---------------
*Includes restructuring costs, comprised as follows:
Other operating income - - 3
Staff costs 447 413 297
Premises and equipment 92 57 158
Other administrative expenses 123 138 58
Depreciation 1 30 11
--------------- --------------- ---------------
663 638 527
--------------- --------------- ---------------
2002 compared with 2001
- -----------------------
Operating expenses were up 2%, (pound)69 million to (pound)4,594 million.
Including in operating expenses are restructuring costs, up 4%, (pound)25
million to (pound)663 million. The conversion of NatWest IT systems onto the
Royal Bank technology platform was completed in October 2002. Staff costs were
16%, (pound)342 million lower at (pound)1,755 million reflecting lower staff
numbers, which fell by 10,400 to 22,600. Other operating expenses increased
(pound)589 million, 39% to (pound)2,084 million.
28
2001 compared with 2000
- -----------------------
Operating expenses were down 14%, (pound)734 million to (pound)4,525 million.
Including in operating expenses are restructuring costs, up 21%, (pound)111
million to (pound)638 million. Staff costs were 18%, (pound)475 million lower
at (pound)2,097 million. Staff numbers fell by 22,800 to 33,000. Other
operating expense were (pound)1,495 million (2000: (pound)1,492 million).
Provisions
--------------------------------------------------
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Gross new provisions 533 535 525
Less: recoveries (17) (19) (152)
---------------- ---------------- ----------------
Charge to profit and loss account 516 516 373
---------------- ---------------- ----------------
Comprising
Provisions for bad and doubtful debts 508 510 359
Amounts written-off fixed asset investments 8 6 14
---------------- ---------------- ----------------
Charge to profit and loss account 516 516 373
---------------- ---------------- ----------------
2002 compared with 2001
- -----------------------
Provisions for bad and doubtful debts of (pound)508 million were down (pound)2
million. Total provisions for bad and doubtful debts at 31 December 2002 were
82% of risk elements in lending. Amounts written off fixed asset investments
increased from (pound)6 million to (pound)8 million.
2001 compared with 2000
- -----------------------
Provisions for bad and doubtful debts were up 42%, (pound)151 million
reflecting the growth in lending and the deterioration in the short-term
economic outlook combined with the impact of a small number of specific
customer situations. Total provisions at 31 December 2001 were 74% of risk
elements in lending.
Amounts written off fixed asset investments declined from (pound)14 million to
(pound)6 million due to the disposal, during 2000, of the venture capital
portfolio of NatWest Equity Partners.
Profit on disposal of businesses
---------------------------------------------
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Profit on disposals in the year - - 967
---------------------------------------------
In 2000, gains of (pound)967 million (tax charge (pound)103 million) were made
in respect of the disposals of Gartmore Investment Management plc, National
Westminster Life Assurance Limited and the investment management and services
businesses of Ulster Bank Group.
Additional consideration on sale of Bancorp
---------------------------------------------
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Additional consideration received in 2000 relating to the disposal in 1996 of
Bancorp, a subsidiary undertaking (tax charge - (pound)8 million) - - 74
---------------------------------------------
29
Applicable income taxes
The following table shows applicable income taxes split between continuing and
discontinued operations and tax rates for each of the past three years:
---------------------------------------------
2002 2001* 2000*
---- ----- -----
(pound)m (pound)m (pound)m
Continuing operations 713 733 716
Discontinued operations - - (24)
---------------------------------------------
Tax charge for the year 713 733 692
---------------------------------------------
UK corporate tax rate 30.0% 30.0% 30.0%
Effective tax rate 27.6% 28.4% 23.8%
The actual tax charge for continuing operations differs from the expected tax
charge for continuing operations computed by applying the UK corporate tax rate
as follows:
---------------------------------------------
2002 2001* 2000*
---- ----- -----
(pound)m (pound)m (pound)m
Expected tax charge - continuing operations 775 775 848
Goodwill amortisation 8 7 8
Disposal of businesses taxed at non-standard rates - - (187)
Non-deductible items 57 58 127
Non-taxable items (60) (27) (22)
Capital allowances in excess of depreciation (276) (184) (22)
Taxable foreign exchange movements (9) 5 9
Foreign profits taxed at other rates (4) (18) (17)
Unutilised losses brought forward and carried forward (11) (13) (15)
Current taxation adjustments relating to prior periods (22) (79) (71)
---------------------------------------------
Current tax charge for the year - continuing operations 458 524 658
---------------------------------------------
* Restated for the implementation of FRS 19 in 2002.
30
Divisional performance
The contribution of each division before goodwill amortisation and
restructuring costs and, where appropriate, manufacturing costs, is detailed
below.
---------------------------------------------
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Corporate Banking and Financial Markets * 1,723 1,443 1,497
Retail Banking 2,119 2,073 1,874
Retail Direct 472 403 243
Manufacturing (1,252) (1,128) (1,185)
Wealth Management 167 313 280
Ulster Bank * 244 229 189
Central items (200) (88) (749)
---------------------------------------------
Operating profit before goodwill amortisation, restructuring costs and
exited businesses 3,273 3,245 2,149
Goodwill amortisation (26) (24) (27)
Restructuring costs (663) (638) (527)
Exited businesses - - 266
---------------------------------------------
Operating profit 2,584 2,583 1,861
---------------------------------------------
* Restated to reflect the transfer of Ulster Bank's leasing business to
Corporate Banking and Financial Markets with effect from 1 January 2002
Note:
(1) Exited businesses comprises the results of Gartmore Investment Management
plc, National Westminster Life Assurance Limited and the venture capital
investment portfolios of NatWest Equity Partners all of which were
disposed of in 2000.
The management and control of costs in NatWest and the Royal Bank is
centralised and costs are apportioned on an appropriate basis to NatWest by way
of a management charge.
31
Corporate Banking and Financial Markets
--------------------------------------------
2002 2001* 2000*
---- ----- -----
(pound)m (pound)m (pound)m
Net interest income 1,282 1,251 1,200
Non-interest income 1,809 1,653 1,689
--------------------------------------------
Total income 3,091 2,904 2,889
Direct expenses
- - staff costs (430) (510) (763)
- - other (361) (330) (249)
- - operating lease depreciation (306) (276) (242)
--------------------------------------------
Contribution before provisions 1,994 1,788 1,635
Provisions (271) (345) (138)
--------------------------------------------
Contribution 1,723 1,443 1,497
--------------------------------------------
Direct cost:income ratio (%) 35.5 38.4 43.4
Total assets ** - Corporate Banking ((pound)bn) 47.8 50.9 44.5
- Financial Markets ((pound)bn) 32.0 38.6 64.6
Loans and advances to customers - gross ((pound)bn) ** 60.3 44.0 43.9
Customer deposits ((pound)bn) ** 26.8 26.5 28.7
Weighted risk assets ((pound)bn) 56.0 59.2 59.2
* restated (see page 31)
** excluding repos and reverse repos
2002 compared with 2001
- -----------------------
Contribution was up 19%, (pound)280 million to (pound)1,723 million.
Total income was up (pound)187 million, 6% to (pound)3,091 million. Net
interest income rose by 2%, (pound)31 million to (pound)1,282 million due to
growth in customer lending.
Non-interest income increased by 9%, (pound)156 million to (pound)1,809
million mainly through increased fees, reflecting growth in lending.
Direct expenses were down 2%, (pound)19 million to (pound)1,097 million. Staff
costs were down (pound)80 million, 16% to (pound)430 million. Other expenses,
excluding operating lease depreciation were 9%, (pound)31 million higher. The
direct cost:income ratio improved from 38.4% to 35.5%.
Provisions were down (pound)74 million, 21% to (pound)271 million.
2001 compared with 2000
- -----------------------
Contribution was down 4%, (pound)54 million to (pound)1,443 million.
Total income was up (pound)15 million to (pound)2,904 million. Net interest
income rose by 4%, (pound)51 million to (pound)1,251 million.
Non-interest income declined by 2%, to (pound)1,653 million due to the novation
to the Royal Bank of business within Financial Markets.
Direct expenses were down 11%, (pound)138 million to (pound)1,116 million
primarily due to lower staff costs. Other expenses, excluding operating lease
depreciation were 33%, (pound)81 million higher reflecting management fees paid
to the Royal Bank for business support. The direct cost:income ratio improved
from 43.4% to 38.4%.
Provisions were up (pound)207 million to (pound)345 million. The increase
reflects growth in lending, the global economic slowdown, a small number of
specific customer situations and lower recoveries.
32
Retail Banking
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Net interest income 2,083 1,941 1,793
Non-interest income 747 875 752
---------------------------------------------
Total income 2,830 2,816 2,545
Direct expenses
- - staff costs (436) (459) (521)
- - other (162) (213) (108)
---------------------------------------------
Contribution before provisions 2,232 2,144 1,916
Provisions for bad and doubtful debts (113) (71) (42)
---------------------------------------------
Contribution 2,119 2,073 1,874
---------------------------------------------
Direct cost:income ratio (%) 21.1 23.9 24.7
Total assets ((pound)bn) 36.7 33.1 30.1
Loans and advances to customers - gross ((pound)bn) 36.0 31.6 28.5
Customer deposits ((pound)bn) 44.6 41.0 39.2
Weighted risk assets ((pound)bn) 25.4 23.0 20.7
2002 compared with 2001
- -----------------------
Contribution increased by (pound)46 million, 2% to (pound)2,119 million.
Total income rose by (pound)14 million, 1% to (pound)2,830 million. Net
interest income was 7%, (pound)142 million higher at (pound)2,083 million,
reflecting growth in advances and deposits.
Non-interest income was down (pound)128 million, 15% at (pound)747 million
mainly as a result of the transfer of business to the Royal Bank.
Direct expenses were down (pound)74 million, 11% to (pound)598 million. Staff
costs fell by (pound)23 million, 5% to (pound)436 million reflecting lower
average staff numbers and other expenses decreased by (pound)51 million to
(pound)162 million. The direct cost:income ratio improved from 23.9% to 21.1%.
Provisions for bad and doubtful debts were up by (pound)42 million, 59% to
(pound)113 million primarily due to growth in lending.
2001 compared with 2000
- -----------------------
Contribution increased by (pound)199 million, 11% to (pound)2,073 million.
Total income rose by (pound)271 million, 11% to (pound)2,816 million. Net
interest income was 8%, (pound)148 million higher at (pound)1,941 million,
reflecting strong growth in advances and deposits.
Non-interest income was up (pound)123 million, 16% at (pound)875 million
resulting from growth in packaged accounts and increased lending.
Direct expenses were (pound)43 million, 7% higher at (pound)672 million. Staff
costs fell by (pound)62 million, 12% to (pound)459 million reflecting lower
average staff numbers and other expenses rose by (pound)105 million to
(pound)213 million. The direct cost:income ratio improved from 24.7% to 23.9%.
Provisions for bad and doubtful debts were up by (pound)29 million, 69% to
(pound)71 million primarily due to growth in lending.
33
Retail Direct
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Net interest income 317 288 230
Non-interest income 533 455 401
-----------------------------------------------
Total income 850 743 631
Direct expenses
- - staff costs (32) (62) (84)
- - other (227) (182) (186)
-----------------------------------------------
Contribution before provisions 591 499 361
Provisions for bad and doubtful debts (119) (96) (118)
-----------------------------------------------
Contribution 472 403 243
-----------------------------------------------
Direct cost:income ratio (%) 30.5 32.8 42.8
Total assets ((pound)bn) 5.9 5.7 5.0
Loans and advances to customers - gross ((pound)bn) 6.0 5.4 4.8
Customer accounts ((pound)bn) 1.6 1.8 0.9
Weighted risk assets ((pound)bn) 5.9 5.4 5.1
2002 compared with 2001
- -----------------------
Contribution rose by (pound)69 million, 17% to (pound)472 million.
Total income increased by (pound)107 million, 14% to (pound)850 million. Net
interest income at (pound)317 million was (pound)29 million, 10% higher.
Non-interest income was up (pound)78 million, 17% to (pound)533 million.
Direct expenses at (pound)259 million were up 6%, (pound)15 million. The direct
cost:income ratio improved from 32.8% to 30.5%.
Provisions for bad and doubtful debts were up (pound)23 million, 24% to
(pound)119 million.
2001 compared with 2000
- -----------------------
Contribution rose by (pound)160 million, 66% to (pound)403 million.
Total income increased by (pound)112 million, 18% to (pound)743 million. Net
interest income at (pound)288 million was (pound)58 million, 25% higher.
Non-interest income was up (pound)54 million, 13% to (pound)455 million.
Direct expenses at (pound)244 million were down 10%, (pound)26 million due
principally to lower staff costs. The direct cost:income ratio improved from
42.8% to 32.8%.
Provisions for bad and doubtful debts were down (pound)22 million, 19% to
(pound)96 million.
34
Manufacturing
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Staff costs 53 231 355
Other costs 1,199 897 830
------------------------------------------------
Total manufacturing costs 1,252 1,128 1,185
------------------------------------------------
Analysis:
Group Technology 476 456 516
Group Purchasing and Property Operations 368 332 349
Customer Support and other operations 408 340 320
------------------------------------------------
Total manufacturing costs 1,252 1,128 1,185
------------------------------------------------
2002 compared with 2001
- -----------------------
Total manufacturing costs increased by (pound)124 million, 11% to (pound)1,252
million.
Group Technology costs increased by 4%, (pound)20 million to (pound)476
million. Expenditure in Customer Support and other operations rose (pound)68
million, 20% to (pound)408 million.
The increase in costs reflects growth in business volumes arising from customer
accounts, mortgage applications, personal loans and ATM transactions, and
initiatives to enhance customer service, particularly in telephony. Extending
the scope of Manufacturing with transfers from other parts of the NatWest Group
also contributed to this increase.
2001 compared with 2000
Total manufacturing costs fell by (pound)57 million, 5% to (pound)1,128
million.
Group Technology costs reduced by 12%, (pound)60 million to (pound)456 million
reflecting lower staff costs and the benefits of de-duplication initiatives.
Expenditure in Customer support and other operations rose (pound)20 million, 6%
to (pound)340 million due to volume growth in lending and account management
and costs incurred on customer service improvement initiatives, in particular
telephony, supporting the new "another way" marketing campaign.
35
Wealth Management
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Net interest income 170 308 303
Non-interest income 293 376 392
----------------------------------------------
Total income 463 684 695
Expenses
- - staff costs (203) (235) (269)
- - other (105) (141) (151)
----------------------------------------------
Contribution before provisions 155 308 275
Net release of provisions for bad and doubtful debts 12 5 5
----------------------------------------------
Contribution 167 313 280
----------------------------------------------
Cost:income ratio (%) 66.5 55.0 60.4
Total assets ((pound)bn) 13.0 10.8 7.1
Investment management assets - excluding deposits ((pound)bn) 18.4 19.8 21.3
Customer deposits ((pound)bn) 11.8 10.9 17.7
Weighted risk assets ((pound)bn) 3.4 3.3 4.2
2002 compared with 2001
- -----------------------
Contribution decreased by 47%, (pound)146 million to (pound)167 million.
Total income was down 32%, (pound)221 million to (pound)463 million primarily
due to the disposal of NatWest Offshore in 2001 and the effect of the fall in
equity markets on the level of activity.
Net interest income decreased by (pound)138 million, 45%, to (pound)170
million, due to the disposal of NatWest Offshore in 2001 and a contraction in
deposit margins due to lower interest rates.
Non-interest income was (pound)83 million, 22% lower at (pound)293 million.
This reflected the disposal of NatWest Offshore in 2001 and the lower equity
markets, which continued to adversely affect fees and commissions. Investment
management assets at (pound)18.4 billion were (pound)1.4 billion, 7% lower as
new business inflow was more than offset by the significant decline in equity
markets.
Expenses at (pound)308 million were down by (pound)68 million, 18% principally
reflecting lower staff costs and transfer of operations to Manufacturing.
There was a net release of provisions for bad and doubtful debts of(pound)12
million (2001: release of(pound)5 million).
2001 compared with 2000
- -----------------------
Contribution increased by 12%, (pound)33 million to (pound)313 million.
Total income fell by (pound)11 million, 2% to (pound)684 million due to the
disposal of businesses. Net interest income, which was affected by the disposal
of NatWest Offshore in November 2001, grew by (pound)5 million, 2%, to
(pound)308 million. Non-interest income was (pound)16 million, 4% lower at
(pound)376 million.
Expenses at (pound)376 million were down by (pound)44 million, 10% principally
reflecting lower staff costs.
There was a net release of provisions for bad and doubtful debts of(pound)5
million (2000: release of(pound)5 million).
36
Ulster Bank
2002 2001* 2000*
---- ----- -----
(pound)m (pound)m (pound)m
Net interest income 339 313 259
Non-interest income 181 170 164
----------------------------------------------
Total income 520 483 423
Expenses
- - staff costs (145) (135) (134)
- - other (109) (104) (88)
----------------------------------------------
Contribution before provisions 266 244 201
Provisions for bad and doubtful debts (22) (15) (12)
----------------------------------------------
Contribution 244 229 189
----------------------------------------------
Cost:income ratio (%) 48.8 49.5 52.5
Total assets ((pound)bn) 12.9 10.9 10.1
Loans and advances to customers - gross ((pound)bn) 9.1 7.6 6.7
Customer deposits ((pound)bn) 8.8 7.7 7.1
Weighted risk assets ((pound)bn) 9.0 7.7 6.7
Average exchange rate -(euro)/(pound) 1.591 1.609 1.642
Spot exchange rate -(euro)/(pound) 1.536 1.637 1.606
* Restated (see page 31)
2002 compared with 2001
- -----------------------
Contribution increased by 7%, or (pound)15 million to (pound)244 million.
Total income increased by 8%, (pound)37 million to (pound)520 million.
Net interest income rose by 8% or (pound)26 million to (pound)339 million,
reflecting growth in loans and deposits despite a less buoyant economic
environment in the Republic of Ireland. Average customer lending and deposits
of the banking business increased by 10%, (pound)0.7 billion, to (pound)8.0
billion, and by 7%, (pound)0.5 billion, to (pound)7.9 billion respectively.
Average mortgage lending grew by 23% to (pound)1.5 billion and the number of
current accounts increased by 5%.
Non-interest income rose by 6% or (pound)11 million to (pound)181 million.
Increases of (pound)7 million in net fees and commissions and (pound)6 million
in other operating income were partially offset by a (pound)2 million reduction
in dealing profits.
Expenses increased by 6% or (pound)15 million to (pound)254 million to support
higher business volumes and pay awards.
The cost:income ratio improved from 49.5% to 48.8%.
Provisions were up by (pound)7 million, 47% to (pound)22 million reflecting a
small number of specific situations.
2001 compared with 2000
- -----------------------
Contribution increased by 21%, or (pound)40 million to (pound)229 million.
Total income increased by 14%, (pound)60 million to (pound)483 million. Net
interest income rose by 21% or (pound)54 million to (pound)313 million due to
strong growth in customer loans and deposits. Non-interest income rose by 4% or
(pound)6 million to (pound)170 million. The increase was mainly due to higher
card, lending and transmission fees.
Expenses increased by 8% or (pound)17 million to (pound)239 million to support
business expansion and expenditure related to the preparation for the issue of
euro notes and coins in the Republic of Ireland.
The cost:income ratio improved from 52.5% to 49.5%.
Provisions were up by (pound)3 million, 25% to (pound)15 million. The increase
was largely due to growth in lending.
37
Central items
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Funding costs 37 129 84
Central department costs
- - staff costs 60 60 76
- - other 53 45 175
Other corporate items - net 50 (146) 414
------------------------------------------------
Total central items 200 88 749
------------------------------------------------
2002 compared with 2001
- -----------------------
Total central items increased by (pound)112 million to (pound)200 million.
Funding costs at (pound)37 million were down 71%, (pound)92 million.
Central department costs increased by 8%, (pound)8 million to (pound)113
million.
Other corporate items increased by (pound)196 million to (pound)50 million
compared with 2001, which benefited from certain one-off items.
2001 compared with 2000
- -----------------------
Total central items reduced by (pound)661 million to (pound)88 million.
Funding costs at (pound)129 million were up 54%, (pound)45 million.
Central department costs at (pound)105 million declined (pound)146 million,
58%, due mainly to the benefit of integration initiatives.
Other corporate items - improved by (pound)560 million. This reduction reflects
the benefit of integration and a number of one-off items in 2000 - provisions
for pension mis-selling and litigation - arising from the reassessment of
provisions following the acquisition of the NatWest Group by the RBS Group.
38
Overview of balance sheet
Summary consolidated balance sheet
2002 2001*
---- -----
(pound)m (pound)m
Assets
Cash and balances at central banks and items in the
course of collection from other banks 3,336 3,572
Treasury bills and other eligible bills 1,724 1,475
Loans and advances to banks 23,664 31,269
Loans and advances to customers 112,122 100,618
Debt securities and equity shares 17,913 21,208
Other assets 13,128 14,585
---------------- ---------------
Total assets 171,887 172,727
---------------- ---------------
Liabilities
Deposits by banks and items in the course of
transmission to other banks 18,932 26,654
Customer accounts 111,477 99,951
Debt securities in issue 208 5,222
Other liabilities 26,087 26,288
Subordinated liabilities 5,933 6,396
Minority interests 47 110
Shareholders' funds including non-equity interests 9,203 8,106
---------------- ---------------
Total liabilities 171,887 172,727
---------------- ---------------
Contingent liabilities and commitments 66,465 73,474
---------------- ---------------
* Restated (see page 19)
Analysis of repurchase agreements
2002 2001
---- ----
(pound)m (pound)m
Reverse repurchase agreements and stock borrowing
Loans and advances to banks 10,188 13,085
Loans and advances to customers 15,611 7,694
---------------- ---------------
25,799 20,779
---------------- ---------------
Repurchase agreements and stock lending
Deposits by banks 7,529 7,662
Customer accounts 18,566 12,015
---------------- ---------------
26,095 19,677
---------------- ---------------
39
Overview - summary consolidated balance sheet
Total assets of (pound)171.9 billion at 31 December 2002 were down (pound)0.8
billion, from (pound)172.7 billion at 31 December 2001.
Cash and balances at central banks and items in the course of collection were
down (pound)0.2 billion, 7% at (pound)3.3 billion.
Treasury bills and other eligible bills increased (pound)0.2 billion, 17% to
(pound)1.7 billion.
Loans and advances to banks were down (pound)7.6 billion, 24% to (pound)23.7
billion, due to a decrease in both bank placings, down (pound)4.7 billion, and
reverse repos, down (pound)2.9 billion.
Loans and advances to customers rose (pound)11.5 billion, 11% to (pound)112.1
billion. Reverse repos increased (pound)7.9 billion, 103% to (pound)15.6
billion and lending was up (pound)3.6 billion at (pound)96.5 billion, primarily
in CBFM, Retail Banking and Ulster Bank.
Debt securities and equity shares declined (pound)3.3 billion, 16% to
(pound)17.9 billion, primarily due to transfer of business to the Royal Bank.
Other assets decreased (pound)1.5 billion, 10% to (pound)13.1 billion, partly
due to lower settlement balances, down (pound)2.7 billion to (pound)2.5
billion, primarily due to lower inter-bank deposits.
Deposits by banks and items in the course of transmission to other banks
decreased (pound)7.8 billion, 29% to (pound)18.9 billion.
Customer accounts were up (pound)11.5 billion, 12% to (pound)111.5 billion.
Excluding repos, deposits increased by (pound)4.9 billion to (pound)92.9
billion., with increases in CBFM and Retail Banking.
Debt securities in issue declined (pound)5.0 billion, 96% to (pound)0.2 billion
primarily due to the transfer of business to the Royal Bank.
Other liabilities were (pound)26.1 billion compared with (pound)26.3 billion.
Subordinated liabilities decreased (pound)0.5 billion, 7% to (pound)5.9 billion
primarily due to maturing US dollar denominated loan capital and the effect of
exchange rate movements.
Shareholders' funds increased (pound)1.1 billion, 14% to (pound)9.2 billion
primarily due to retentions.
40
Description of assets and liabilities
Assets
Loan portfolio
NatWest Group's loan portfolio consists of loans (including overdraft
facilities), instalment credit and finance lease receivables.
Overdraft facilities provide the customer with a demand deposit account and
demand credit facility combined in a single checking (current) account. An
overdraft is effected whenever a customer's drawings on a demand deposit
account exceed the credit balance of the account, the balance of which may
alternate between debit and credit. While overdrafts are contractually
repayable on demand, unless a fixed term has been agreed, in practice customers
will from time to time make deposits into the account thereby reducing
indebtedness or increasing a credit balance in accordance with their
requirements. Borrowing limits on the overdraft facility are established and
full repayment is normally only required if the customer fails to honour the
conditions on which the limit was granted or their financial position has so
deteriorated such that it is necessary to take protective action. Overdraft
facilities are usually reviewed at least annually. Interest is generally
calculated on the daily outstanding balance by reference to NatWest Group's
base rate and is typically charged monthly. Overdrafts accounted for
approximately 11.6% of NatWest Group's total domestic loan portfolio at 31
December 2002 (2001 - 14.0%).
Analysis of loans to customers by geographical area and type of customer
The following table analyses loans and advances to customers before provisions
by remaining maturity, geographical area and type of customer. Overdrafts are
included within the 'within 1 year' category.
After
1 but
Within within After 2002
1 year 5 years 5 years Total 2001 2000 1999 1998
------ ------- ------- ----- ---- ---- ---- ----
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
UK
Central and local government 213 1 1 215 95 1,822 1,853 1,765
Manufacturing 2,779 566 406 3,751 3,421 3,581 3,495 3,917
Construction 1,197 581 310 2,088 1,857 1,778 1,602 1,653
Finance 754 205 132 1,091 1,159 3,257 5,518 896
Service industries and business activities 5,696 3,043 2,792 11,531 12,263 11,500 11,352 12,073
Agriculture, forestry and fishing 801 375 513 1,689 1,647 1,660 1,619 1,549
Property 1,936 1,831 1,719 5,486 4,694 4,888 4,728 3,928
Individuals - home mortgages 1,323 2,631 18,332 22,286 20,425 19,265 18,613 17,794
- other 5,010 3,335 3,345 11,690 10,287 9,759 8,174 7,513
Finance leases and instalment credit 2,592 4,493 4,371 11,456 11,092 8,123 7,198 7,638
----------------------------------------------------------------------------------------
Total domestic 22,301 17,061 31,921 71,283 66,940 65,633 64,152 58,726
Overseas residents 13,119 621 1,708 15,448 17,694 14,788 10,519 9,514
----------------------------------------------------------------------------------------
Total UK offices 35,420 17,682 33,629 86,731 84,634 80,421 74,671 68,240
----------------------------------------------------------------------------------------
Overseas
United States 14,841 514 1,513 16,868 8,157 9,836 6,779 5,636
Rest of the World 6,330 2,281 2,007 10,618 9,950 10,651 9,727 7,654
----------------------------------------------------------------------------------------
Total overseas offices 21,171 2,795 3,520 27,486 18,107 20,487 16,506 13,290
----------------------------------------------------------------------------------------
Loans and advances to customers - gross 56,591 20,477 37,149 114,217 102,741 100,908 91,177 81,530
----------------------------------
Provisions for bad and doubtful debts (2,095) (2,123) (2,084) (2,179) (2,568)
------------------------------------------
Loans and advances to customers - net 112,122 100,618 98,824 88,998 78,962
------------------------------------------
Fixed rate 18,552 8,005 10,586 37,143 25,224 32,433 62,784 60,001
Variable rate 38,039 12,472 26,563 77,074 77,517 68,475 28,393 21,529
----------------------------------------------------------------------------------------
Gross loans and advances to customers -
by maturity 56,591 20,477 37,149 114,217 102,741 100,908 91,177 81,530
----------------------------------------------------------------------------------------
For further information regarding NatWest Group's operations by geographical
area, see Note 47 to the Consolidated Financial Statements.
41
Provisions for bad and doubtful debts
Provisioning policy
NatWest Group's approach to managing credit risk is discussed under Item 11 on
page 74 of this Annual Report and its accounting policy for loans and advances
is set out on pages 93 and 94. NatWest Group provides for losses existing in
its lending book to record loans and advances at their expected ultimate net
realisable value.
Specific provisions are made against loans when, as a result of review, it is
considered that recovery is in serious doubt. Each loan portfolio is considered
and monitored separately using a variety of systems, reports and models.
o Homogeneous portfolios, including credit card receivables and mortgages,
comprise a significant proportion of NatWest Group's loans. Provisions on
these portfolios are calculated using a formulaic approach based on number
of days in arrears and the predicted risk of loss on the loan.
o For other portfolios, customers are assigned a credit grading which is
mapped on to NatWest Group scale. Credit grades are reviewed at least
annually. Where deterioration is detected, the credit is downgraded as
appropriate. If it is determined that more intensive management is
required, the credit is passed to a specialist unit. Specific provision is
made where a review of the advance reveals that the credit-worthiness of
the borrower has undergone a significant deterioration and that recovery
of the advance is in significant doubt taking account of available
security. This review will also consider the cancellation or reduction of
unutilised limits, the appointment of an investigating accountant and
other actions that are designed to mitigate the credit risk faced by
NatWest Group. The amount of the specific provision will reflect the
financial condition of the borrower, the realisable value of any security
and the costs of recovery or realisation of that security as at the
balance sheet date.
NatWest Group establishes a general provision through charges to the profit and
loss account in order to cover losses that have not been specifically
identified but are known from experience to be present in any portfolio of
loans. The level of general provision reflects the size and diversity of
NatWest Group's loan portfolio, past experience, the current state of the
economies in which the NatWest Group operates and the scope of specific
provisioning procedures.
NatWest Group monitors its credit loss experience in each of its loan
portfolios. The assumptions used to determine the level of provisions, in
homogeneous portfolios and in other portfolios, are adjusted to reflect the
actual experience.
Bad and doubtful debt provisions made during the year (less amounts released
and recoveries of amounts written-off in previous years) are charged to the
profit and loss account. Where the collectability of interest is in doubt it is
not credited to the profit and loss account but to a suspense account. Loans
classified as bad debts and any related suspended interest are written-down to
their estimated net realisable value when it is identified that there is no
realistic prospect of recovery of all or part of the loan. There are
differences in accounting practices between UK and US banks. In the UK, loans
and the related accrued interest are written-off only when, as a matter of
banking judgement, there is no realistic prospect of recovery. When management
determines that a write-off is appropriate, the principal amount and accrued
interest on the obligation are written down their to estimated net realisable
value. Banks in the US may write-off impaired lending more quickly. In the UK,
interest receivable on loans is recognised as income as it accrues provided
that its collectability is not subject to significant doubt. In contrast, banks
in the US typically cease accruing interest when loans become overdue by 90
days. The effect of these differences is that NatWest Group's gross lending,
its provisions for bad and doubtful debts and provision cover ratios may be
greater than would be the case using US practice.
An analysis of NatWest Group's loans and advances to customers before
provisions is contained on page 41. An analysis of provisions for bad and
doubtful debts, write-offs and recoveries is also included on pages 43 to 45.
NatWest 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 SEC in the US. The table on page 46
shows the estimated amount of loans, which would be reported using the SEC's
classifications.
42
Provision for bad and doubtful debts
For a discussion of the factors considered in determining the amount of the
provisions, see 'Provisioning policy' on page 42. The following table shows the
elements of provisions for bad and doubtful debts:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(pound)m (pound)m (pound)m (pound)m (pound)m
Provisions at beginning of year
Domestic 1,656 1,723 1,756 1,897 2,198
Foreign 475 375 436 712 639
---------- ---------- ---------- ---------- ----------
2,131 2,098 2,192 2,609 2,837
---------- ---------- ---------- ---------- ----------
Currency translation and other adjustments
Domestic 5 (15) (3) 12 (1)
Foreign (15) 13 17 (17) 1
Acquisition/(disposal) of subsidiaries
Domestic - (28) 7 (3) (100)
Foreign - (10) - - (9)
Amounts written-off
Domestic (418) (372) (497) (546) (726)
Foreign (126) (84) (129) (283) (98)
Recoveries of amounts written-off in previous years
Domestic 13 10 144 172 198
Foreign 4 9 8 11 8
Charged to profit and loss account
Domestic 303 338 316 224 328
Foreign 205 172 43 13 171
Provisions at end of year
Domestic 1,559 1,656 1,723 1,756 1,897
Foreign 543 475 375 436 712
---------- ---------- ---------- ---------- ----------
2,102 2,131 2,098 2,192 2,609
---------- ---------- ---------- ---------- ----------
Gross loans and advances to customers
Domestic 71,283 66,940 65,633 64,152 58,726
Foreign 42,934 35,801 35,275 27,025 22,804
---------- ---------- ---------- ---------- ----------
114,217 102,741 100,908 91,177 81,530
---------- ---------- ---------- ---------- ----------
Closing customer provisions as a % of gross loans
and advances to customers
Domestic 2.19% 2.47% 2.63% 2.74% 3.23%
Foreign 1.25% 1.30% 1.02% 1.57% 2.94%
---------- ---------- ---------- ---------- ----------
1.83% 2.07% 2.07% 2.39% 3.15%
---------- ---------- ---------- ---------- ----------
Customer charge against profit as a % of gross
loans and advances to customers
Domestic 0.43% 0.50% 0.48% 0.35% 0.56%
Foreign 0.48% 0.48% 0.10% 0.06% 0.58%
---------- ---------- ---------- ---------- ----------
0.44% 0.50% 0.35% 0.27% 0.57%
---------- ---------- ---------- ---------- ----------
43
Provisions for bad and doubtful debts (continued)
The following table presents additional information with respect to provisions
for bad and doubtful debts:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(pound)m (pound)m (pound)m (pound)m (pound)m
Loans and advances to customers (gross) 114,217 102,741 100,908 91,177 81,530
--------------------------------------------------------------
Provisions at end of year:
Specific provisions - customers 1,727 1,725 1,682 1,786 2,161
Specific provisions - banks 7 8 14 13 41
General provision 368 398 402 393 407
--------------------------------------------------------------
2,102 2,131 2,098 2,192 2,609
--------------------------------------------------------------
Customer provision at end of year as a % of loans and advances
to customers at end of year:
Specific provisions 1.51% 1.68% 1.67% 1.96% 2.65%
General provision 0.32% 0.39% 0.40% 0.43% 0.50%
--------------------------------------------------------------
1.83% 2.07% 2.07% 2.39% 3.15%
--------------------------------------------------------------
Average loans and advances to customers (gross) 110,874 103,585 95,756 86,707 87,658
--------------------------------------------------------------
As a % of average loans and advances to customers during the year:
Total customer provisions charged to profit and loss 0.46% 0.49% 0.37% 0.28% 0.53%
--------------------------------------------------------------
Amounts written-off (net of recoveries) - customers 0.47% 0.42% 0.49% 0.72% 0.70%
--------------------------------------------------------------
Analysis of closing provisions for bad and doubtful debts
The following table analyses customer provisions for bad and doubtful debts by
geographical area and type of domestic customer.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
% of % of % of % of % of
loans to loans to loans to loans to loans to
Closing total Closing total Closing total Closing total Closing total
Provision loans provision loans provision loans provision loans provision loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(pound)m % (pound)m % (pound)m % (pound)m % (pound)m %
Domestic
Central and local
government - 0.2 - 0.2 - 1.8 - 2.1 - 2.2
Manufacturing 112 3.3 129 3.3 96 3.5 122 3.8 101 4.8
Construction 52 1.8 59 1.8 69 1.8 81 1.8 89 2.0
Finance 43 1.0 54 1.1 45 3.2 36 6.1 23 1.1
Service industries and
business activities 389 10.1 430 11.9 507 11.4 496 12.4 674 14.8
Agriculture, forestry
and fishing 24 1.5 21 1.6 24 1.6 26 1.8 28 1.9
Property 32 4.8 30 4.6 43 4.8 50 5.2 50 4.8
Individuals
- home mortgages 15 19.5 17 19.9 7 19.1 9 20.4 13 21.8
- other 444 10.2 487 10.0 523 9.7 516 9.0 501 9.2
Finance leases and
instalment credit 208 10.0 164 10.8 142 8.1 144 7.8 143 9.4
-------------------------------------------------------------------------------------------------------------
Total domestic 1,319 62.4 1,391 65.2 1,456 65.0 1,480 70.4 1,622 72.0
Foreign 408 37.6 334 34.8 226 35.0 306 29.6 539 28.0
-------------------------------------------------------------------------------------------------------------
Specific provisions 1,727 100.0 1,725 100.0 1,682 100.0 1,786 100.0 2,161 100.0
---------- ----------- ---------- ---------- ---------
General provision 368 398 402 393 407
----------- ------------ ------------ ----------- ------------
Total provisions 2,095 2,123 2,084 2,179 2,568
----------- ------------ ------------ ----------- ------------
44
Write-offs
The following table analyses amounts written-off by geographical area and type
of domestic customer:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(pound)m (pound)m (pound)m (pound)m (pound)m
Domestic
Manufacturing 76 37 60 15 36
Construction 15 11 29 10 29
Finance 28 2 4 6 3
Service industries and business activities 123 109 133 271 272
Agriculture, forestry and fishing 3 4 5 5 6
Property 5 9 14 4 24
Individuals - home mortgages 1 1 2 4 7
- others 122 136 180 141 170
Finance leases and instalment credit 45 63 70 90 179
-----------------------------------------------------------------------
Total domestic 418 372 497 546 726
Foreign 126 84 129 283 98
-----------------------------------------------------------------------
Total write-offs* 544 456 626 829 824
-----------------------------------------------------------------------
* Includes(pound)1 million relating to loans and advances to banks (2001
-(pound)6 million; 2000 -(pound)5 million; 1999 -(pound)20 million; 1998
-(pound)4 million).
Recoveries
The following table analyses recoveries of amounts written-off by geographical
area and type of domestic customer:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(pound)m (pound)m (pound)m (pound)m (pound)m
Domestic
Manufacturing - - 16 15 13
Construction - 1 14 11 13
Finance - - 1 1 2
Service industries and business activities 1 1 55 64 58
Agriculture, forestry and fishing - - 3 2 3
Property 1 - 5 9 15
Individuals - home mortgages - - 1 3 -
- others 4 5 45 56 63
Finance leases and instalment credit 7 3 4 11 31
-----------------------------------------------------------------------
Total domestic 13 10 144 172 198*
Foreign 4 9 8 11 8
-----------------------------------------------------------------------
Total recoveries 17 19 152 183 206
-----------------------------------------------------------------------
* Includes (pound)1 million relating to loans and advances to banks.
45
Risk elements in lending and potential problem loans
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 SEC. 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.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(pound)m (pound)m (pound)m (pound)m (pound)m
Loans accounted for on a non-accrual basis (3):
Domestic 1,781 2,238 2,164 2,111 2,425
Foreign 531 360 143 460 686
---------------------------------------------------------------
Total 2,312 2,598 2,307 2,571 3,111
---------------------------------------------------------------
Accruing loans which are contractually past due
90 days or more as to principal or interest: (4)
Domestic 195 237 223 230 263
Foreign 34 19 21 17 15
---------------------------------------------------------------
Total 229 256 244 247 278
---------------------------------------------------------------
Loans not included above which are classified as 'troubled debt
restructurings' by the SEC:
Domestic 7 24 24 17 24
Foreign 1 7 10 20 253
---------------------------------------------------------------
Total 8 31 34 37 277
---------------------------------------------------------------
Total risk elements in lending 2,549 2,885 2,585 2,855 3,666
---------------------------------------------------------------
Potential problem loans (5)
Domestic 523 765 516 511 671
Foreign 70 218 55 99 112
---------------------------------------------------------------
Total 593 983 571 610 783
---------------------------------------------------------------
Closing provisions for bad and doubtful debts as a % of total risk
elements in lending: 82% 74% 81% 77% 71%
---------------------------------------------------------------
Notes:
(1) For the analysis above, 'Domestic' consists of the UK 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 classification of a loan as non-accrual, past due 90 days or troubled
debt restructuring does not necessarily indicate that the principal of the
loan is uncollectable in whole or in part. Collection depends in each case
on the individual circumstances of the loan, including the adequacy of any
collateral securing the loan and therefore classification of a loan as
non-accrual, past due 90 days or troubled debt restructuring does not
always require that a provision be made against such a loan. In accordance
with NatWest Group's provisioning policy for bad and doubtful debts, it is
considered that adequate provisions for the above risk elements in lending
have been made.
(3) NatWest 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.
(4) Overdrafts generally have no fixed repayment schedule and consequently are
not included in this category.
(5) Loans that are current as to the 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.
46
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Gross income not recognised but which would have been recognised under the
original terms of non-accrual and restructured loans
Domestic 171 101 118
Foreign 32 24 24
---------------------------------------
203 125 142
---------------------------------------
Interest on non-accrual and restructured loans included in net interest income
Domestic 36 36 39
Foreign 5 7 1
---------------------------------------
41 43 40
---------------------------------------
Cross-border outstandings in excess of 0.75% of total assets
Cross-border outstandings consist of loans to banks and customers (including
instalment credit and finance lease receivables), acceptances and other
monetary assets, including non-local currency claims of overseas offices on
local residents. NatWest Group monitors the geographical breakdown of
outstandings based on the country of domicile of the borrower or guarantor of
ultimate risk. The table below sets out NatWest Group's cross-border
outstandings in excess of 0.75% of total assets (including acceptances) of
(pound)172.3 billion (2001 - (pound)172.9 billion; 2000 - (pound)186.6
billion). None of these countries has experienced repayment difficulties, which
have required refinancing of outstanding debt.
Banks Commercial,
As % of and other Governments industrial and
total financial and official other private
assets Total institutions institutions sector
------ ----- ------------ ------------ ------
% (pound)m (pound)m (pound)m (pound)m
2002
Netherlands 1.44 2,477 471 44 1,962
United States 0.98 1,684 1,009 - 675
Cayman Islands 0.80 1,375 2 - 1,373
2001
Netherlands 1.05 1,808 1,011 - 797
United States 1.03 1,789 516 59 1,214
Cayman Islands 0.92 1,585 1,518 - 67
2000
Germany 2.12 3,950 3,693 42 215
United States 1.97 3,682 2,130 13 1,539
Japan 1.83 3,420 3,025 1 394
Netherlands 1.15 2,150 1,101 - 1,049
Switzerland 1.03 1,915 1,578 - 337
France 0.96 1,787 1,593 - 194
Canada 0.95 1,782 1,030 125 627
Cayman Islands 0.81 1,504 197 - 1,307
47
Off balance sheet arrangements
NatWest Group is involved with several types of off-balance sheet arrangements,
including special purpose vehicles, lending commitments and financial
guarantees.
Special purpose vehicles ("SPVs") -- SPVs are vehicles set up for a specific,
limited purpose that do not carry out a business or trade and typically have no
employees. They take a variety of legal forms - trusts, partnerships and
companies - and fulfil many different functions. They constitute a key element
of securitisation transactions in which an SPV acquires financial assets funded
by the issue of securities.
In the normal course of business, NatWest Group arranges securitisations to
facilitate client transactions and undertakes securitisations to sell financial
assets or to obtain funding. It has established a number of SPVs to act as
commercial paper conduits for customers. SPVs are also utilised in its fund
management activities to structure investment funds to which the Group provides
investment management services.
Lending commitments and other commitments -- Under a loan commitment, NatWest
Group agrees to make funds available to a customer in the future. Loan
commitments, which are usually for a specified term, may be unconditionally
cancellable or may persist, provided all conditions in the loan facility are
satisfied or waived. Commitments to lend include commercial standby facilities
and credit lines, liquidity facilities to commercial paper conduits and
unutilised overdraft facilities. Other commitments include documentary credits,
which are commercial letters of credit providing for payment by NatWest Group
to a named beneficiary against presentation of specified documents, forward
asset purchases, forward deposits placed and undrawn note issuance and
revolving underwriting facilities.
Guarantees and other contingent liabilities -- NatWest Group gives guarantees on
behalf of customers. A financial guarantee represents an irrevocable
undertaking that NatWest Group will meet a customer's obligations to third
parties if the customer fails to do so. The maximum amount that the Group could
be required to pay under a guarantee is its principal amount. NatWest Group
expects most guarantees it provides to expire unused. Other contingent
liabilities include contingent liabilities arising out of acceptances,
endorsements, standby letters of credit, performance and customs bonds,
warranties and indemnities. In accepting a bill of exchange drawn on it by a
customer a bank undertakes to pay the holder of the bill at maturity. Most
acceptances are presented for payment and reimbursement by the customer is
usually immediate. In the UK, bills accepted by certain banks designated by the
Bank of England are eligible for rediscount at the Bank of England. Under US
GAAP, acceptances and the corresponding customer obligation are recognised on
the balance sheet. In endorsing a bill of exchange, a bank accepts liability
for payment of any shortfall on the bill at maturity. Unlike acceptances, the
endorsing bank receives value for the bill, which is then rediscounted.
NatWest Group's contingent liabilities and commitments are set out in Note 39
on the accounts.
Contractual obligations The table below summarises NatWest Group's contractual
obligations by remaining maturity as at 31 December 2002.
More than More than
1 year but 3 years but
Less than less than less than Over
1 year 3 years 5 years 5 years Total
------ ------- ------- ------- -----
(pound)m (pound)m (pound)m (pound)m (pound)m
Contractual cash obligations
Dated loan capital 310 815 299 1,917 3,341
Operating leases 110 201 206 1,079 1,596
Finance leases 30 10 5 125 170
Unconditional obligations to purchase goods or services 55 1 1 1 58
---------------------------------------------------------------------
505 1,027 511 3,122 5,165
---------------------------------------------------------------------
The table above does not include undated loan capital. The maturity of deposits
by banks is given in Note 23, of customer accounts in Note 24, and of debt
securities in issue in Note 25.
48
Liabilities
Deposits
A substantial portion of NatWest Group's assets are funded by deposits,
principally current accounts and various types of interest bearing deposit
accounts, collected through the Bank's UK branch network and Wealth Management.
The remainder of the assets of NatWest Group are funded by wholesale deposits,
debt securities in issue, loan capital and shareholders' equity.
Interest bearing demand deposits are current accounts with credit balances and
retail deposits repayable on demand, obtained primarily through the Bank's UK
branch network, and wholesale deposits repayable on demand, booked mainly
within the Bank's treasury operations. Interest rates applicable to such
deposits are generally calculated on the basis of a margin under base rate.
Deposits in currencies other than sterling are collected principally by
Corporate Banking and Financial Markets and Wealth Management. The former
raises most of its deposits through the wholesale markets whereas Wealth
Management's deposits are principally demand and savings deposits.
Savings deposits are specific products which are designed to attract larger
savings from personal customers who do not require withdrawals on demand and
therefore in general offer better rates of return than interest bearing demand
deposits.
Other time deposits are collected centrally from the money market to bridge the
gap between retail resources and sterling assets. Chief sources of wholesale
deposits are the inter-bank market, corporations and non-bank financial
institutions which place funds on the inter-bank market, and issuance of
certificates of deposit and medium term notes. All are priced in relation to
money market rates. Rate considerations and the ability to provide funds in the
maturity periods required by the Bank to fulfil its liquidity management
objectives affect the choice of instrument. Customers are offered rates related
to inter-bank market rates for the term of the deposit depending on the amounts
and term. Larger deposits (typically (pound)1 million and over) earn the money
market rates paid in the inter-bank market, and smaller amounts earn
progressively wider spreads under the money market rate. Rates are centrally
communicated throughout NatWest Group by the central treasury operation. While
competitive rates influence the quantity of deposits obtained through the
branch network, the branch network enables a wide variety of local depositor
sources to be accessed.
Analysis of deposits
The following table shows the distribution of deposits by banks and customer
accounts by sterling and other currencies at 31 December in each of the past
three years:
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Deposits by banks
Sterling 5,048 11,016 7,701
Other currencies 12,670 14,230 22,442
------------------------------------------------
Total deposits by banks 17,718 25,246 30,143
------------------------------------------------
Customer accounts
Sterling 79,355 75,854 78,434
Other currencies 32,122 24,097 31,288
------------------------------------------------
Total customer accounts 111,477 99,951 109,722
------------------------------------------------
Total deposits 129,195 125,197 139,865
------------------------------------------------
49
Certificates of deposit and other time deposits
The following table shows details of NatWest Group's certificates of deposit
issued and other time deposits over (pound)50,000 (or the equivalent of
$100,000 for currencies other than sterling) at 31 December 2002, by time
remaining until maturity:
Over 3 Over 6
Within but within but within Over 2002
3 months 6 months 12 months 12 months Total
-------- -------- --------- --------- -----
(pound)m (pound)m (pound)m (pound)m (pound)m
UK based companies and branches
Certificates of deposit 130 - - - 130
Other time deposits 25,471 559 379 1,909 28,318
Overseas based companies and branches
Other time deposits 27,661 421 684 151 28,917
------------------------------------------------------------------------------
Total 53,262 980 1,063 2,060 57,365
------------------------------------------------------------------------------
Analysis of deposits by product type and geographical area
The following table shows the distribution of NatWest Group's deposits by
product type and geographical area at 31 December for each of the past three
years:
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
UK
Domestic:
Demand deposits - interest-free 17,856 16,768 15,003
- interest-bearing 36,387 32,319 32,598
Time deposits - savings 4,436 13,748 10,754
- other 24,547 20,738 23,858
Overseas residents:
Demand deposits - interest-free 775 1,307 1,968
- interest-bearing 2,311 1,975 6,117
Time deposits - savings 1,283 4,739 5,890
- other 2,292 3,685 7,818
-----------------------------------------------------
Total UK offices 89,887 95,279 104,006
-----------------------------------------------------
Overseas
Demand deposits - interest-free 1,993 1,762 1,333
- interest-bearing 2,449 2,239 3,947
Time deposits - savings 169 1,639 5,076
- other 34,697 24,278 25,503
-----------------------------------------------------
Total overseas offices (see below) 39,308 29,918 35,859
-----------------------------------------------------
Total deposits 129,195 125,197 139,865
-----------------------------------------------------
Banking business 99,731 104,477 115,054
Trading business 29,464 20,720 24,811
-----------------------------------------------------
Total deposits 129,195 125,197 139,865
-----------------------------------------------------
Overseas
United States 28,476 20,285 22,137
Rest of the World 10,832 9,633 13,722
-----------------------------------------------------
Total overseas 39,308 29,918 35,859
-----------------------------------------------------
50
Short-term borrowings
The following table shows details of NatWest Group's short-term borrowings as
at 31 December for each of the past three years:
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Commercial paper:
Outstanding at 31 December - 273 681
Maximum amount outstanding at any month-end during the year 95 614 1,084
Approximate average amount outstanding during the year 41 566 873
Approximate weighted average interest rate during the year 2.1% 4.3% 6.1%
Approximate weighted average interest rate at 31 December n/a 4.2% 4.7%
Other short-term borrowings:
Outstanding at 31 December 26,543 23,428 25,566
Maximum amount outstanding at any month-end during the year 26,930 29,865 30,911
Approximate average amount outstanding during the year 23,431 27,283 25,673
Approximate weighted average interest rate during the year 2.7% 5.4% 5.9%
Approximate weighted average interest rate at 31 December 1.5% 4.3% 6.1%
Average interest rates during the year are computed by dividing total interest
expense by the average amount borrowed. Average interest rates at year end are
average rates for a single day and as such may reflect one-day market
distortions which may not be indicative of generally prevailing rates. Original
maturities of commercial paper are not in excess of one year. 'Other short-term
borrowings' consist principally of borrowings in the money markets included
within 'Deposits by banks' and 'Customer accounts' in the Consolidated
Financial Statements, and generally have original maturities of one year or
less.
51
Liquidity and capital resources
The following table analyses NatWest Group's regulatory capital resources.
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Capital base
Tier 1 capital 8,896 7,968 6,977
Tier 2 capital 5,929 6,369 6,484
Tier 3 capital - 172 167
-------------------------------------------
Total 14,825 14,509 13,628
Less investments in insurance subsidiaries, associated undertakings and
other supervisory deductions (1,804) (2,173) (1,676)
-------------------------------------------
Total capital 13,021 12,336 11,952
-------------------------------------------
Weighted risk assets Banking book:
On-balance sheet 84,400 83,600 80,500
Off-balance sheet 10,100 10,500 10,500
Trading book 6,000 6,400 7,300
-------------------------------------------
100,500 100,500 98,300
-------------------------------------------
Risk asset ratios % % %
Tier 1 8.9 7.9 7.1
Total 13.0 12.3 12.2
In the management of Capital Resources NatWest Group is governed by RBS Group's
policy which is to maintain a strong capital base, to expand it as appropriate
and to utilise it efficiently throughout its activities to optimise the return
to shareholders while maintaining a prudent relationship between the capital
base and the underlying risks of the business. In carrying out this policy,
NatWest Group has regard to the supervisory requirements of the Financial
Services Authority ("FSA"). The FSA uses Risk Asset Ratio ("RAR") as a measure
of capital adequacy in the UK banking sector, comparing a bank's capital
resources with its weighted risk assets (the assets and off-balance sheet
exposures are 'weighted' to reflect the inherent credit and other risks); by
international agreement, the RAR should be not less than 8% with a tier 1
component of not less than 4%. At 31 December 2002, NatWest Group's total RAR
ratio was 13.0% (2001 - 12.3%) and the tier 1 RAR was 8.9% (2001 - 7.9%).
TREND INFORMATION
In line with undertakings given by the RBS Group and three other major clearing
banks to the Office of Fair Trading ("OFT"), the NatWest Group's SME customers
have been offered, with effect from 1 January 2003, the choice of either
receiving interest on current accounts at a prescribed rate or free core money
transmission services. This, together with competitive pressures and the low
interest rate environment, is likely to adversely affect the Group's net
interest margin.
The RBS Group, along with seven other clearing banks, has also given
undertakings to the OFT to implement behavioural remedies, including measures
to achieve speedy and error free switching of accounts between banks,
unbundling of services and improving market information and transparency.
52
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
--------------------------------------------------
DIRECTORS AND SENIOR MANAGEMENT
The Board of directors comprised at 26 February 2003 of the Chairman, six
executive directors and eleven non-executive directors. The directors of the
Bank are also directors of RBS Group and the Royal Bank. Brief biographical
details of each member of the Board of directors is given below.
Chairman
Sir George Mathewson 0 #
CBE, DUniv, LLD, FRSE, FCIBS
(age 62), has a wide background in finance, technology and management and has
spent some of his career in the United States. He was appointed a director in
September 1987 and became Group Chief Executive in January 1992. In March 2000,
he was appointed Executive Deputy Chairman and, in April 2001, he was appointed
to his present position as Chairman. He is president of the British Bankers
Association. He is a director of Santander Central Hispano, S.A., The Scottish
Investment Trust PLC and The International Monetary Conference. He was chief
executive of the Scottish Development Agency from 1981 to 1987. (Chairman of
the Nominations Committee and the Chairman's Advisory Group)
Vice-chairmen
Sir Iain Vallance 0 #
FCIBS
(age 59), is an experienced businessman. He has held a range of positions,
including president, CBI, chairman, British Telecommunications p.l.c.,
chairman, European Advisory Committee to NYSE, deputy chairman, Financial
Reporting Council and a member of the board of directors of the Mobil
Corporation. He was appointed a director in January 1993 and became a
vice-chairman in March 1994. He is currently chairman, European Services Forum
and a member of the supervisory board of Siemens AG.
Sir Angus Grossart 0 #
CBE, LLD, FRSE, DL, FCIBS
(age 65), an advocate and chartered accountant, he has a background in merchant
banking and is chairman of Noble Grossart Limited. He was appointed a director
in September 1985 and became a vice-chairman in April 1996. He is also chairman
of The Scottish Investment Trust PLC. He is a director of other public
companies including Scottish and Newcastle PLC, Trinity Mirror PLC and
Edinburgh US Tracker Trust plc. He is a Trustee of the National Heritage
Memorial Fund and a former chairman of the Trustees of the National Galleries
of Scotland. He has served on the boards of a wide range of public companies in
the UK, the USA and Canada.
Executive directors
Fred Goodwin #
DUniv, FCIBS, FCIB
Group Chief Executive
(age 44), a chartered accountant, was appointed as Deputy Group Chief Executive
in August 1998 and to his present position in March 2000. He was formerly chief
executive and director, Clydesdale Bank PLC and Yorkshire Bank PLC. He is
chairman of The Prince's Trust: Scotland and a member of The Prince's Trust
Council. He is a former president of the Chartered Institute of Bankers in
Scotland.
Lawrence Fish
(age 58), was appointed a director in January 1993. He is Chairman, President
and Chief Executive Officer of Citizens Financial Group, Inc. He is also a
director of Textron, Inc., a trustee of The Brookings Institution, a director
of the Federal Reserve Bank of Boston, and a director of numerous community
organisations in the USA.
Norman McLuskie
FCIBS
(age 58), a chartered accountant, was appointed a director in June 1992 and is
Chief Executive, Retail Direct.
Gordon Pell
FCIB, FCIBS
(age 53), was appointed as a director and Chief Executive, Retail Banking on 6
March 2000. On 1 October 2001, he was appointed to his current position as
Chairman, Retail Banking and Wealth Management. He was formerly group director,
Lloyds TSB UK Retail Banking before joining National Westminster Bank Plc as a
director in February 2000.
53
Iain Robertson #
CBE, FCIBS
(age 57), a chartered accountant, was appointed a director in January 1993 and
became Chief Executive, Corporate Banking and Financial Markets on 6 March
2000. He was appointed to his present position as Chairman, Corporate Banking
and Financial Markets on 1 October 2001. He is also a chairman of British
Empire Securities and General Trust plc.
Fred Watt #
FCIBS
(age 42), a chartered accountant, was appointed to his current position as
Group Finance Director in September 2000. He was formerly finance director,
Wassall plc.
Non-executive directors
Emilio Botin
(age 68), of Spanish nationality, is chairman of Santander Central Hispano,
S.A. He is also chairman of several Santander Central Hispano Group
subsidiaries and a director of a number of Spanish companies including
Bankinter SA. He is chairman of Universia.net, an internet venture between
Santander Central Hispano and 650 universities in Spain, Portugal and the main
countries in Latin America.
Colin Buchan *
(age 49), was appointed on 1 June 2002. He was educated in South Africa and
spent the early part of his career in South Africa and the Far East. He retired
as a member of the group management board of UBS AG and head of equities of UBS
Warburg in March 2001. He has considerable international investment banking
experience, as well as experience with very large risk management in the
equities business. He was appointed a director of SG Warburg Group plc in 1995.
His public directorships include Merrill Lynch World Mining Trust Plc. His
other directorships include Merrill Lynch Gold Limited, Royal Scottish National
Orchestra Society Limited, Standard Life Investments Limited, UBS Bunting
Warburg Limited and World Mining Investment Company Limited.
Jim Currie +
(age 61), was appointed in November 2001. A highly experienced international
civil servant, he spent many years working in Brussels and Washington. He was
formerly Director General at the European Commission with responsibility for
the EU's Environmental Policy and previously Director General for Customs and
Indirect Taxation. He is also a director of British Nuclear Fuels Limited and
International Adviser to Eversheds.
Juan Inciarte
(age 50), of Spanish nationality, is a general manager of Santander Central
Hispano in charge of Europe and financial companies of the group. He is a
former director of First Union Corporation, now Wachovia, and Interbank On-line
System Limited. He is also a director of several Santander Central Hispano
Group subsidiaries and a number of Spanish and European companies including
CC-Bank AG and Sanpaolo IMI S.P.A.
Eileen Mackay + *
CB, FCIBS
(age 59), is a former UK civil servant who held posts in Scotland, HM Treasury
and the Cabinet Office and was principal finance officer at The Scottish
Office. She is a director of Edinburgh Investment Trust plc and Scottish
Financial Enterprise. She is chairman of Trustees of the David Hume Institute
and is a member of the Economic and Social Research Council and the Review
Board of the UK Accountancy profession and the Court of the University of
Edinburgh.
Sir Steve Robson *
(age 59), was appointed in July 2001. He was formerly a senior civil servant,
with responsibility for a wide variety of Treasury interests. His early career
included the post of Private Secretary to the Chancellor of the Exchequer and
secondment to ICFC, (now 3i). He retired in January 2001 as Second Permanent
Secretary of HM Treasury, where he was managing director of the Finance and
Regulation Directorate. He is a non-executive director of Cazenove Group Plc,
Xstrata Plc and Partnerships UK plc.
Bob Scott + 0 #
CBE
(age 61), of Australian nationality, was appointed in January 2001. He has many
years experience in the international insurance business and played a leading
role in the consolidation of the UK insurance industry. He is a former group
chief executive of CGNU plc and chairman of the Board of the Association of
British Insurers. He is also a non-executive director of Jardine Lloyd Thompson
Group plc, Swiss Reinsurance Company Zurich, Focus Wickes Group Limited, Yell
Group Limited and a Trustee of the Crimestoppers Trust. (Chairman of the
Remuneration Committee)
54
Peter Sutherland
(age 56), born in Ireland, was appointed in January 2001. He is a former
attorney general of Ireland and was, from 1985 to 1989, European Commissioner
responsible for competition policy. From 1989 to 1995, he was the chairman of
Allied Irish Bank. From 1993 to 1995 he was director general of GATT and,
subsequently, the World Trade Organisation. He is chairman of BP plc and
chairman of Goldman Sachs International. He is also a director of Investor AB
and Telefonaktiebolaget LM Ericsson.
Bill Wilson + * 0 #
FCIBS
(age 65), a chartered accountant, has a background in accounting and insurance
and spent a number of years based in North America. He was formerly deputy
chairman of Alexander & Alexander Services Inc., now part of the Aon Group. His
other public directorships are Edinburgh US Tracker Trust plc, First Title plc,
First American Title Insurance (U.K.) Co plc and Scottish Rugby Union Plc.
(Chairman of the Audit Committee)
Secretary
Miller McLean #
FCIBS
(age 53), was appointed Group Secretary in August 1994 and Group Director,
Legal and Regulatory Affairs and Group Secretary in March 2000. He is
vice-chairman of Banco Santander, Portugal S.A., a Trustee of the Industry and
Parliament Trust, non-executive chairman of The Whitehall and Industry Group
and a non-executive director of The Scottish Parliament and Business Exchange.
+ member of the Remuneration Committee
* member of the Audit Committee
0 member of the Nominations Committee
# member of the Chairman's Advisory Group
Mr Cameron McLatchie and Mr Murray Stuart retired from the Board on 25 April
2002.
Mr Colin Buchan was appointed to the Board as a non-executive director on 1
June 2002 and was re-elected at the annual general meeting on 28 April 2003.
The directors who retired by rotation and were re-elected at the annual general
meeting on 28 April 2003 were Mr Goodwin, Sir Angus Grossart, Mr Inciarte, Miss
Mackay, Sir George Mathewson and Mr Pell.
COMPENSATION
The current directors of the Bank are also directors of the ultimate holding
company and are remunerated for their services to the RBS Group as a whole.
Their emoluments are disclosed in the Report and Accounts of the ultimate
holding company. Pensions paid to former directors of the Bank and their
dependants amounted to (pound)281,000 (2001 - (pound)280,000). No director
(2001 - none) is accruing retirement benefits under defined benefit schemes.
BOARD PRACTICES
The Board has overall responsibility for leading and controlling the Bank and
is accountable for financial and operational performance.
The Board has adopted a formal schedule of matters detailing key aspects of the
Bank's affairs presented to it for decision. In particular, the Board is
responsible for approving policy and strategy. Responsibility for the
development of policy and strategy and operational management is delegated to
the Group Chief Executive and other executive directors.
The roles of Chairman and Group Chief Executive are distinct and separate, with
a clear division of responsibilities. Mr Bob Scott has been nominated as the
senior independent director. The non-executive directors combine broad business
and commercial experience with independent and objective judgement. The balance
enables the Board to provide clear and effective leadership and maintain the
highest standards of integrity across the company's business activities. The
Board has reviewed the independence of the non-executive directors and has
reaffirmed that, with the exception of Mr Botin and Mr Inciarte, who are
representatives of Santander Central Hispano S.A., all non-executive directors
are considered by the Board to be independent.
The Board is supplied with comprehensive Board papers in advance of each Board
meeting including financial and business reports covering each of the company's
principal business activities. All directors have access to the advice and
services of the secretary who is responsible to the Board for ensuring that
Board procedures are followed and that applicable rules and regulations are
complied with. In addition, all directors are able, if necessary, to obtain
independent professional advice at the company's expense.
55
Board Committees - In order to provide effective oversight and leadership the
RBS Group Board has established a number of RBS Group committees with
particular responsibilities. The principal committees are as follows:
The Audit Committee is responsible for assisting the Board in discharging its
responsibilities for accounting policies, financial reporting, internal
control, compliance and risk management. The Committee also reviews the
independence of the external auditors and the relationship between audit and
non-audit work performed by the external auditors. During 2002, it was agreed
that all non-audit work performed by the auditors would be approved in advance
by the Committee.
The Remuneration Committee assists the Board in discharging its
responsibilities for executive remuneration policy and the remuneration
arrangements for directors.
The Nominations Committee is responsible for assisting the Board in the formal
selection and appointment of directors. The Committee considers potential
candidates and recommends appointments of new directors to the Board. This
process was followed in respect of the appointment of Mr Colin Buchan to the
Board during 2002.
Terms of office of directors
At each annual general meeting of the Bank, the terms of office of directors
appointed since the previous annual general meeting, together with the terms of
one-third by rotation of the remaining directors, expire.
Service agreements
Information regarding executive directors' service contracts is summarised in
the table and notes below.
- ---------------------------------------------------------------------------------------------------------------------------------
Name Date of Current contract / Normal retirement age Notice period - from Notice period - from
Employing Company company executives
- ---------------------------------------------------------------------------------------------------------------------------------
Fred Goodwin 25 June 1998 60 12 months 6 months
The Royal Bank of Scotland plc
Norman McLuskie 9 October 1997 60 3 months 3 months
The Royal Bank of Scotland plc
Gordon Pell 22 May 2002 60 13 months 6 months
National Westminster Bank Plc
Iain Robertson 27 March 2002 60 12 months 6 months
The Royal Bank of Scotland plc
Fred Watt 28 September 2000 60 12 months 6 months
The Royal Bank of Scotland plc
Lawrence Fish 1 July 1996 - 24 months 12 months
Citizens Financial group Inc
- ---------------------------------------------------------------------------------------------------------------------------------
56
EMPLOYEES
The total number of full time equivalent employees in NatWest Group at 31
December 2002 was 22,600 (2001 - 33,000; 2000 - 55,800) analysed as follows:
2002 2001 2000
-----------------------------------
Corporate Banking and Financial Markets* 5,800 2,500 9,100
Retail Banking 6,700 19,400 18,800
Retail Direct 500 600 3,100
Manufacturing 1,000 1,500 14,000
Wealth Management 4,000 4,200 5,600
Ulster Bank* 4,400 4,500 4,300
Centre 200 300 900
-----------------------------------
22,600 33,000 55,800
-----------------------------------
* Prior periods have been restated to reflect the transfer of Ulster Bank's
leasing business to Corporate Banking and Financial Markets.
The reduction in employee numbers in 2002 reflects the continued migration of
operations and employees from NatWest Group to the Royal Bank.
Policies and practices in respect of employee issues are managed on a
consistent basis across the RBS Group, and these are detailed below.
Employee proposition - The Bank encourages employees to contribute to the RBS
Group's performance through Total Reward, one of the most comprehensive
remuneration packages in the financial services industry. Employee choice,
rewarding performance and sharing in the RBS Group's success are key features
of Total Reward.
Some 34,000 RBS Group employees participated in RBSelect, a benefits choice
programme, in 2002. Employees can choose from a range of options including
discounted childcare and shopping vouchers, private medical insurance and
telephone legal advice.
Employees can also participate in business-specific bonus or incentive plans,
RBS Group profit sharing and sharesave schemes. In each of the last five years,
eligible RBS Group employees have received a further ten percent of their basic
salary per annum through RBS Group profit sharing. Both RBS Group profit
sharing and sharesave allow employees to acquire shares, and therefore a stake,
in the future success of the RBS Group. A bonus of five per cent of basic
salary was paid to all UK employees in recognition of their contribution to the
successful integration of NatWest.
The RBS Group provides pension scheme membership for the majority of its
employees in the UK and overseas. The largest scheme is The Royal Bank of
Scotland Group Pension Fund, which has some 73,000 RBS Group employees as
members. This is a non-contributory, final salary pension fund and is open to
full-time and part-time staff, including fixed-term contractors.
Employee communication - The RBS Group also encourages employee involvement
through a process of employee communication. This includes internal
communication activities through a corporate intranet, an in-house magazine,
team meetings led by line managers, briefings held by senior managers and
regular dialogue with employees and employee representatives.
The RBS Group Chief Executive and other senior RBS Group executives regularly
communicate directly with employees via 'Question Time' style programmes
broadcast on the internal television network RBTV, and visits to Group offices.
Short films explaining the RBS Group's annual and interim financial results are
also broadcast on RBTV.
Employee consultation - The RBS Group places great importance on consulting
with employees. Every year the RBS Group undertakes an employee opinion survey,
which seeks views and feedback on a variety of key topics including leadership,
communication, employee involvement, training and development. The latest
survey took place in January 2003 when over 110,000 RBS Group employees were
invited to complete surveys either on paper or online, which have been
translated into seven different languages. A response rate of 83% was achieved,
which is significantly higher than the average for comparable organisations.
57
As a result of the growth in the RBS Group's business interests in mainland
Europe a process has been initiated to establish a European employee
information and consultation body to facilitate dialogue amongst employee
representatives on employment matters. In addition, an agreement covering the
RBS Group is being negotiated with employee representatives from across the RBS
Group's European operations.
Diversity - The RBS Group is committed to diversity in all areas of
recruitment, employment, training and promotion. The RBS Group supports a
business model that is based on meritocracy and inclusiveness, where all
members of staff can develop their full potential, irrespective of their race,
gender, marital status, age, disability, religious belief, political opinion,
or sexual orientation. To help it achieve its long term business objectives the
RBS Group draws on a wide ranging and diverse pool of talent. The RBS Group
also embraces and promotes individual, organisational and cultural differences.
Each year the RBS Group participates in a number of diversity-related
benchmarking exercises, including the Opportunity Now and Race for Opportunity
annual benchmarking exercises, on gender and ethnicity. This enables the RBS
Group to evaluate its current position in respect of diversity issues and to
identify actions required to further enhance diversity across its businesses.
In May 2002, the RBS Group received the Opportunity Now Silver Award. This
means that out of 20 financial sector organisations that participate in the
survey, the RBS Group was equal to or above the 'norm' for the sector in all
categories. In June 2002, the RBS Group received the Race for Opportunity
Bronze Award, coming 9th in the ranking of private sector organisations. The
RBS Group is also a Core Member of the Employer's Forum on Age and a Gold Card
Member of the Employer's Forum on Disability, as well as participating in a
number of other diversity networks.
The RBS Group has established a diversity team, which works across its
businesses to ensure that diversity remains a key driver in everything it does.
Health and safety - The health, safety and security of employees is of
paramount importance to the RBS Group. Where feasible, single, harmonised
policies are in force across the RBS Group. These are now subject to regular
review to ensure that they continue to meet current legislation, best practice
and the operational needs of the business.
Disabled staff - The RBS Group recognises its responsibility towards staff with
disabilities and seeks to eliminate discrimination on the grounds of
disability. The RBS Group recognises the wealth of experience, talent and skill
that people with disabilities can bring to the workforce and strives to achieve
equality of opportunity in the recruitment, employment and retention of all
staff, including those with disabilities.
Corporate social responsibility - The RBS Group recognises that environmental
and social imperatives continue to shape the future and the diversity and
flexibility of the RBS Group's businesses enables it to anticipate and respond
to these changes. Business excellence requires that the RBS Group meets
changing customer, shareholder, investor, employee and supplier expectations
and the RBS Group believes that meeting high standards of environmental, social
and ethical responsibility is key to the way it does business.
To assist in creating value for all stakeholders, the RBS Group has adopted
policies, which progressively integrate environmental and social issues into
all aspects of its business activities. The objective of these policies is to
ensure that its business is conducted in a sustainable and socially responsible
way, and to safeguard and enhance the RBS Group's business and reputation.
The RBS Group Board regularly considers corporate social responsibility issues
and receives a formal report on the relevant matters twice each year.
58
SHARE OWNERSHIP
The Bank was a wholly-owned direct subsidiary of The Royal Bank of Scotland
Group plc until January 2003, when ownership of the entire issued ordinary
share capital was transferred to The Royal Bank of Scotland plc.
The Royal Bank of Scotland Group plc's Register of Directors' Interests, which
is open to inspection, contains full details of directors' shareholdings and
options to subscribe.
No director had an interest in NatWest Group's preference shares during the
year.
No director had an interest in NatWest Group's loan notes during the year.
59
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
---------------------------------------------------------
MAJOR SHAREHOLDERS
The Bank's ultimate holding company and controlling party is The Royal Bank of
Scotland Group plc which is incorporated in Great Britain and registered in
Scotland. As at 31 December 2002, this company heads the only group in which
NatWest Group is consolidated. Copies of the consolidated accounts of The Royal
Bank of Scotland Group plc may be obtained from The Secretary, The Royal Bank
of Scotland Group plc, 42 St Andrew Square, Edinburgh EH2 2YE.
Related party transactions
Santander Central Hispano, S.A. ("SCH")
Under the terms of an alliance agreement, the RBS Group and SCH co-operate in
certain banking and financial activities in Europe. The RBS Group holds 2.83%
of SCH's capital stock and SCH holds 5.04% of the holding company's ordinary
shares.
For additional details of related party transactions see Note 50 to the
Consolidated Financial Statements.
Transactions with directors, officers and others
2002
At 31 December 2002, the amounts outstanding in relation to transactions,
arrangements and agreements entered into by authorised institutions in the
NatWest Group were (pound)36,276,342 in respect of loans to seven persons who
were directors of the Bank (or persons connected with them) at any time during
the financial year and (pound)7,615,388 to 41 people who were officers of the
Bank at any time during the financial year.
2001
At 31 December 2001, the amounts outstanding in relation to transactions,
arrangements and agreements entered into by authorised institutions in NatWest
Group were (pound)37,064,987 in respect of loans to 7 persons who were
directors of the Bank (or persons connected with them) at any time during the
financial year and (pound)2,969,046 to 32 people who were officers of the Bank
at any time during the financial year.
2000
At 31 December 2000, (pound)369,538 was outstanding in respect of loans by
NatWest Group companies to 27 persons who were directors of the Bank (or
persons connected with them) at any time during the financial year and
(pound)3,171,978 to 37 people who were officers of the Bank at any time during
the financial year.
Except as stated above, there were no contracts material to the business of
NatWest Group companies which subsisted at 31 December 2002, 31 December 2001
or 31 December 2000 or during the years then ended, in which any director of
NatWest Group had a material interest.
Each of the transactions described above were made in the ordinary course of
business and on substantially the same terms, including interest rates and
collateral, as for comparable transactions with persons of a similar standing
or, where applicable, with other employees. The transactions did not involve
more than the normal risk of collectability or present other unfavourable
features.
60
ITEM 8. FINANCIAL INFORMATION
-----------------------------
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The Consolidated Financial Statements are included in Item 18 of this Annual
Report.
Legal proceedings
Members of NatWest Group are engaged in litigation in the UK and a number of
overseas jurisdictions, including the US, involving claims by and against them,
which arise in the ordinary course of business. The directors of the Bank,
after reviewing the actual, threatened and known potential claims against
NatWest 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 NatWest Group.
SIGNIFICANT CHANGES
Post balance sheet events
In January 2003, the ownership of the Bank's entire issued ordinary share
capital was transferred from the holding company to The Royal Bank of Scotland
plc. Also in January 2003, the entire issued share capital of Lombard North
Central PLC was transferred by the Bank to The Royal Bank of Scotland plc.
No other significant changes have occurred between the date of the financial
statements and the date at which this report was approved.
61
ITEM 9. THE OFFER AND LISTING
-----------------------------
OFFER AND LISTING DETAILS
Nature of trading market
On 10 April 2000, following the acquisition by The Royal Bank of Scotland Group
plc, the Bank's ordinary shares were delisted from the London Stock Exchange
and the ordinary shares represented by American Depository Shares were delisted
from the New York Stock Exchange. All of the Bank's ordinary share capital is
ultimately held by The Royal Bank of Scotland Group plc.
On 9 June 1993 and 8 April 1997, the Bank issued respectively the following
American Depository Shares ("ADSs"), each in connection with a public offering
in the United States:
10,000,000 Series B ("Series B ADSs") representing 10,000,000 non-cumulative
dollar preference shares, Series B; 12,000,000 Series C ("Series C ADSs")
representing 12,000,000 non-cumulative dollar preference shares, Series C;
Each of the respective ADSs represents the right to receive one corresponding
preference share, is evidenced by an American Depository Receipt ("ADR") and is
listed on the New York Stock Exchange ("NYSE").
The ADRs evidencing the ADSs above were issued pursuant to a Deposit Agreement
dated as of 25 September 1991, covering both the Series B ADSs and the Series C
ADSs, among the Bank, Morgan Guaranty Trust Company of New York as the
depository, and all holders from time to time of ADRs issued thereunder.
Currently, there is no non-United States trading market for any of the
non-cumulative dollar preference shares although Series B dollar preference
shares are listed on the London Stock Exchange. All of the non-cumulative
dollar preference shares are held by the depository, as custodian, in bearer
form.
At 31 December 2002, there were 428 holders of record of the Series B ADSs and
109 holders of record of the Series C ADSs. Since certain of such Series B ADSs
and Series C ADSs are held by nominees, the number of holders of record may not
be representative of the number of beneficial holders.
On 4 November 1993, the Bank issued $500 million 7.875% Exchangeable Capital
Securities, $25 each, Series A ("Capital Securities") in connection with a
public offering in the United States. The Capital Securities are listed on the
New York Stock Exchange and commenced trading under the symbol 'NWXPRA' on 29
November 1993. Currently, there is no non-US market for the Capital Securities,
although they are listed on the London Stock Exchange.
62
The following table shows the high and low sales prices for each of the ADSs
and the capital securities for the period indicated, as reported on the NYSE
composite tape:
Series B Series C Capital
ADSs ADSs Securities
-----------------------------------------------
$ $ $
By month
May 2003 High 25.85 26.74 25.78
Low 25.55 26.30 25.44
April 2003 High 25.75 26.85 26.10
Low 25.35 26.35 25.45
March 2003 High 25.75 26.85 26.20
Low 25.15 26.35 25.72
February 2003 High 25.80 26.81 26.00
Low 25.52 26.53 25.60
January 2003 High 25.85 26.81 26.28
Low 25.40 26.25 25.52
December 2002 High 25.90 26.66 26.20
Low 25.25 26.03 25.70
By quarter
2003: First quarter High 25.85 26.81 26.28
Low 25.15 26.25 25.52
2002: Fourth quarter High 26.20 26.66 26.25
Low 25.20 25.70 25.48
2002: Third quarter High 25.54 26.35 25.90
Low 25.13 25.45 25.30
2002: Second quarter High 25.61 26.09 25.63
Low 24.96 25.46 25.00
2002: First quarter High 25.90 26.50 26.18
Low 25.00 25.41 25.34
2001: Fourth quarter High 26.15 26.95 26.59
Low 25.11 25.50 25.27
2001: Third quarter High 25.95 27.10 25.80
Low 24.88 25.25 24.91
2001: Second quarter High 25.50 26.25 25.75
Low 24.77 25.36 24.35
2001: First quarter High 25.50 25.96 26.20
Low 24.25 24.00 24.31
By year
2002 High 26.20 26.66 26.25
Low 24.88 25.41 25.00
2001 High 26.15 27.10 26.59
Low 24.25 24.00 24.31
2000 High 24.44 24.56 25.13
Low 20.94 21.44 20.88
1999 High 26.75 26.94 26.63
Low 20.63 21.00 22.23
1998 High 27.00 27.75 26.50
Low 24.88 25.25 25.33
MARKETS
The Series B non-cumulative dollar preference shares, Series C non-cumulative
dollar preference shares, ADSs and Capital Securities are listed on the New
York Stock Exchange. The Series B non-cumulative dollar preference shares and
the Capital Securities are also listed on the London Stock Exchange.
63
ITEM 10. ADDITIONAL INFORMATION
-------------------------------
MEMORANDUM AND ARTICLES OF ASSOCIATION
The following information is a summary of certain terms of the Bank's
Memorandum of Association (the "Memorandum") and Articles of Association (the
"Articles") as in effect at the date of this Annual Report and certain relevant
provisions of the Companies Act 1985, as amended (the "Act") as relevant to the
holders of any class of share. The following summary description is qualified
in its entirety by reference to the terms and provisions of the Memorandum and
Articles. The Memorandum and Articles are registered with the Registrar of
Companies of England and Wales. Holders of any class of share are encouraged to
read the full Memorandum and Articles, which have been filed with the SEC.
Incorporation and registration
The Bank was incorporated and registered in England and Wales under the
Companies Act 1948 to 1967 as a limited company on 18 March 1968 under the name
National Westminster Bank Limited. On 1 February 1982, it changed its name to
its present name and was reregistered under the Companies Act 1948 to 1980 as a
public company with limited liability. The Bank is registered under Company No.
929027.
Purpose and objects
The Memorandum provides that the Bank's principal objects are to carry on the
business of banking in all its forms. The objects of the Bank are set out in
full in paragraph 4 of the Memorandum.
Directors
At each annual general meeting of the Bank, one third of the directors (or the
number nearest to one third) subject to retirement will retire by rotation and
be eligible for re-election. The directors to retire will be those who are due
to retire by reason of age or who do not wish to stand for re-election and
those who have been longest in office since their last appointment or
reappointment or, in the case of those who were appointed or reappointed on the
same day, will (unless they otherwise agree) be determined by lot.
Directors may be appointed by the Bank by ordinary resolution or by the board.
A director appointed by the board holds office only until the next annual
general meeting, whereupon he will be eligible for re-election, and is not
taken into account in determining the directors who are to retire by rotation
at that meeting.
Unless and until otherwise determined by ordinary resolution, the directors
(other than alternative directors) shall be not more than twenty five. There is
no stipulation in the Articles regarding a minimum number of directors, but if
the number falls below twelve, the directors must appoint further directors to
make up the shortfall or convene a general meeting for the sole purpose of
appointing extra directors.
Directors' interests
A director shall not vote at a meeting of the board or a committee of the board
on any resolution of the board concerning a matter in which he has an interest
(otherwise than by virtue of his interest in shares, debentures or other
securities of, or otherwise in or through, the Bank) which (together with any
interest of any person connected with him) is, to his knowledge, material
unless his interest arises only because the resolution relates to one or more
of the following matters:
(i) the giving of any security or indemnity in respect of money lent, or
obligations incurred by him or any other person at the request of, or for
the benefit of, the Bank or any of its subsidiary undertakings;
(ii) the giving of any security or indemnity to a third party in respect of a
debt or obligation of the Bank or any of its subsidiary undertakings for
which he has assumed responsibility (in whole or in part) under a
guarantee or indemnity or by the giving of security;
(iii) a proposal concerning an offer of shares, debentures or other securities
of the Bank, or any of its subsidiary undertakings, for subscription or
purchase, in which offer he is, or may be, entitled to participate as a
holder of securities or in the underwriting or sub-underwriting of which
he is to participate;
64
(iv) any proposal about any other company if the director, and any person
connected with the director under section 346 of the Act, has a direct or
indirect interest of any kind, including holding any position in that
company, or being a shareholder of that company. But this does not apply
if he knows that he, and any persons connected with him, hold an interest
in shares representing 1% or more of any class of equity share capital of
the company or the voting rights in the company.
(v) an arrangement for the benefit of the employees of the Bank or any of its
subsidiary undertakings which does not award him any privilege or benefit
not generally accorded to the employees to whom the arrangement relates;
and
(vi) a proposal concerning any insurance which the Bank proposes to purchase
and/or maintain for, or for the benefit of, any directors or for persons
who include directors of the Bank.
A director may (or any firm of which he is a partner, employee or member may)
act in a professional capacity for the Bank (other than as auditor) and be
remunerated for so doing. A director may also be or become a director or other
officer of, or be otherwise interested in, any company promoted by the Bank or
in which the Bank may be interested and will not be liable to account to the
Bank or the members for any benefit received by him.
Borrowing powers
Subject to the Act, the directors may exercise all the powers of the Bank to
borrow money and to mortgage or charge its undertaking, property and uncalled
capital and to issue debentures and other securities, whether outright or as
collateral security for any debt, liability or obligation of the Bank, or of
any third party.
Retirement
In accordance with section 293 of the Act and the Articles, no person who has
attained the age of 70 may be appointed to the board and any serving director
reaching that age must vacate his office at the conclusion of the annual
general meeting commencing next after he or she attains the age of 70.
Notwithstanding the foregoing, directors of any age may be appointed to or
remain on the board if that appointment is or was made or approved by the Bank
in a general meeting provided that special notice containing the age of the
relevant director is given. On reappointment, the director will not be treated,
for the purpose of determining the time at which he or she is to retire by
rotation, as becoming a director on the day on which he or she was last
appointed before retirement.
Classes of shares
The Bank has two general classes of shares, ordinary shares and preference
shares, to which the provisions set forth below apply.
Dividends
Ordinary shares
Subject to the provisions of the Act and any special rights attached to any
shares, the holders of the ordinary shares are entitled pari passu amongst
themselves, but in proportion to the amounts paid up on the ordinary shares
held by them, to share in the profits of the Bank paid out as dividends.
Preference shares
Each preference share confers the right to a non-cumulative preferential
dividend payable half-yearly for the sterling preference shares and quarterly
for the dollar preference shares. Each preference share confers the right to a
preferential dividend (not exceeding a specified amount) payable in the
currency of the relevant share. The rate of such dividend and the date of
payment thereof, together with the terms and conditions of the dividend are as
may be determined by the directors prior to allotment.
The preference shares rank pari passu with each other and any shares expressed
to rank, in terms of participation in the profits of the Bank, in some or all
respects pari passu therewith and otherwise in priority to dividends payable on
the ordinary shares.
Dividends will be declared and paid in full on the preference shares if, in the
opinion of the directors of the Bank, the Bank has sufficient distributable
profits to cover full payment of dividends on the preference shares (including
all dividends accrued on any cumulative preference shares) and all dividends
payable at that time on any other shares which rank equally in sharing in
profits.
65
If, in the opinion of the directors, insufficient profits of the Bank are
available to cover the payment in full of dividends, dividends will be declared
by the directors pro rata on the preference shares to the extent of the
available distributable profits.
If any dividend is not payable for the reasons described above, or if payment
of any dividend would cause a breach of the UK Financial Services Authority's
capital adequacy requirements applicable to the Bank or its subsidiaries, none
of that dividend will be declared or paid.
If the whole or part of any dividend on any non-cumulative preference share is
not paid for any of the reasons, the directors will, as far as the law allows,
allot and issue extra non-cumulative preference shares to the holders of those
shares. The condition is that there must be an amount in the Bank's profit and
loss account, or in any of the Bank's reserves (including any share premium
account and capital redemption reserve), which can be used for paying up the
full nominal value of extra non-cumulative preference share.
The extra shares will be credited as fully paid and in the same currency, have
the same rights and restrictions, and rank pari passu with the shares on which
the dividend could not be paid in cash. The total nominal value of the extra
shares to be allotted will be decided by the directors on allotment. The extra
shares will be allotted and issued when the unpaid dividend was due to be paid.
If the Bank does not have sufficient authorised share capital, or the directors
do not have the requisite authority to allot the extra shares under section 80
of the Act, the directors must call a general meeting. The directors will
propose resolutions to increase the authorised share capital, or to grant the
necessary authority to allot the extra shares.
If the dividend payable on any series of preference shares on the most recent
payment date is not paid in full, or if a sum is not set aside to provide for
such payment in full, (or, if applicable, extra shares have not been allotted),
no dividends may be declared on any other share capital of the Bank that ranks
equally with, or behind the preference shares and no sum may be set aside for
the payment of a dividend on any other share capital, unless, on the date of
declaration, an amount equal to the dividend payable in respect of the then
current dividend period for such series of preference shares is set aside for
payment in full on the next dividend payment date.
If any dividend payable on the preference shares is not paid in full or if a
sum is not set aside to provide for such payment in full, the Bank may not
redeem or purchase or otherwise acquire any other share capital of the Bank
that ranks equally with, or behind the preference shares and may not set aside
any sum nor establish any sinking fund for its redemption, purchase or other
such acquisition, until such time as dividends have been declared and paid in
full in respect of successive dividend periods together aggregating not less
than twelve months.
Voting rights
General
Subject to any rights or restrictions as to voting attaching to any shares or
class of shares, on a show of hands every member who is present in person at a
general meeting shall have one vote and on a poll every member present in
person or by proxy shall have one vote for each share held by him. No member
shall be entitled to vote at a general meeting or at a separate meeting of the
holders of shares in the capital of the Bank, either in person or by proxy, in
respect of any share held by him unless all moneys presently payable by him in
respect of that share have been paid.
The quorum required for a meeting of members is not less than two members
present in person or by proxy and entitled to vote. If a meeting was called by
shareholders and adjourned because of the lack of a quorum, it will be
dissolved. Any other meeting will be adjourned for one week, reconvening at the
same time and in the same place. If there is still no quorum at the adjourned
meeting, the shareholders personally present and entitled to vote will be
quorum.
Preference shares
The holders of preference shares are not entitled to receive notice of, attend,
or vote at any general meeting unless the dividend for that series of
preference share has not been paid in full for the dividend period immediately
prior to the notice convening the relevant general meeting or the business of
the meeting includes the consideration of a resolution for the winding up of
the Bank or the sale of the whole of the business of the Bank or any resolution
directly affecting any of the special rights or privileges attached to any of
the classes of preference shares or other circumstances have arisen which the
directors had set out before a series of preference shares was first allotted.
66
Distribution of assets on liquidation
Ordinary shares
On a winding-up of the Bank, the liquidator may, with the authority of an
extraordinary resolution and any other sanction required by the Insolvency Act
1986 and subject to the rights attaching to any class of shares after payment
of all liabilities, including the payment to holders of preference shares,
divide amongst the members according to the number of ordinary shares held by
them in specie the whole or any part of the assets of the Bank or vest the
whole or any part of the assets in trustees upon such trusts for the benefit of
the members and may determine the scope and terms of those trusts. No member
shall be compelled to accept any assets on which there is a liability.
Preference shares
In the event of a return of capital on a winding-up or otherwise, the holders
of cumulative preference shares are entitled to receive out of the surplus
assets of the Bank available for distribution amongst the members in priority
to the holders of the ordinary shares, the amount paid up or credited as paid
up on such shares together with any premium paid on issue and the arrears of
any dividends including the amount of any dividend due for payment after the
date of commencement of any winding-up or liquidation.
Redemption
Unless the directors determine, prior to allotment of any particular series of
preference shares, that some or all of such series shall be non-redeemable, the
preference shares will be redeemable at the option of the Bank on any date (a
'Redemption Date') which (subject to certain exceptions described in the terms
of such shares) falls no earlier than such date (if any) as may be fixed by the
directors, prior to allotment of such shares. On redemption, there shall be
paid on each preference share the aggregate of its nominal amount together with
any premium paid on issue, where applicable a redemption premium and accruals
of dividend.
If the Bank is only going to redeem some of a series of preference shares, it
will arrange for a draw to decide which shares to redeem. This will be drawn at
the registered office of the Bank, or at any other place which the directors
decide on. The auditors of the Bank must be present at the draw.
Purchase
Subject to the Act, the Bank may, by special resolution, reduce its share
capital, any capital redemption reserve and any share premium account and may
also, subject to the Act, the requirements of the London Stock Exchange and the
rights attached to any class of shares, purchase its own shares (including
redeemable shares). The shares can be purchased upon such terms and conditions
as the directors shall determine and can be bought back through the market, by
tender or by private arrangement.
Conversion rights
If any preference shares are issued which can be converted into ordinary
shares, or into any other class of shares which rank equally with, or behind,
existing preference shares these are called 'convertible preference shares'.
The directors can decide to redeem any convertible preference shares at their
nominal value. The redemption must be made out of the proceeds of a fresh issue
of ordinary shares or any other shares which they can be converted into. When
the convertible preference shares become due to be converted they will give
their holders the right and obligation to subscribe for the number of ordinary
shares, or other shares, set by the terms of the convertible preference shares.
The new shares will be subscribed for at the premium (if any) which is equal to
the redemption money, less the nominal amount of the new shares. Each holder of
convertible preference shares will be treated as authorising and instructing
the company secretary, or anybody else the directors decide on, to subscribe
for the shares in this way.
Changes in share capital and variation of rights
Subject to the provisions of the Act and without prejudice to any rights
attached to any existing shares or class of shares, any share may be issued
with such rights or restrictions as the Bank may by ordinary resolution
determine or, subject to and in default of such determination, as the board
shall determine. Subject to the provisions of the Act, the Bank may issue
shares which are, or at the option of the Bank or the holder are liable, to be
redeemed. Subject to the provisions of the Act and the Articles, unissued
shares are at the disposal of the board.
The Bank may by ordinary resolution: increase its share capital; consolidate
and divide all or any of its share capital into shares of larger amount than
its existing shares; subject to the provisions of the Act, subdivide its
shares, or any of them, into shares of smaller amount than is fixed by the
Memorandum; or cancel any shares which have not been taken or agreed to be
taken by any person and diminish the amount of its share capital by the amount
of the shares so cancelled.
67
Subject to the Act, the Bank may by special resolution reduce its share
capital, capital redemption reserve or share premium account in any way. The
capital paid up on the preference shares cannot be reduced unless the holders
of such preference shares have approved this by passing an extraordinary
resolution at a separate meeting.
Subject to the provisions of the Act, if at any time the capital of the Bank is
divided into different classes of shares, the special rights attached to any
class of shares may (unless further conditions are provided by the terms of
issue of the shares of that class) be varied or abrogated, whether or not the
Bank is being wound up, either with the consent in writing of the holders of
three-quarters in nominal value of the issued shares of the class or with the
sanction of an extraordinary resolution passed at a separate general meeting of
holders of the shares of the class (but not otherwise).
To any such separate general meeting the provision of the Articles relating to
general meetings will apply, save that:
(i) at least two people who hold, or who act as proxies for, at least one
third of the total nominal value of the existing shares of the class will
form a quorum. However, if at any adjourned meeting of such holders, a
quorum as defined above is not present, one person who holds shares of the
class, or his proxy, will be a quorum; and
(ii) any such holder present in person or by proxy may demand a poll.
The rights attaching to any class of shares having preferential rights are not,
unless otherwise expressly provided by the terms of issue thereof, deemed to be
varied by the creation or issue of further shares ranking, as regards
participation in the profits or assets of the Bank, pari passu therewith, but
in no respect in priority thereto.
Disclosure of interests in shares
The Act gives the Bank the power to require persons who it believes to be, or
have been within the previous three years, interested in its shares, to
disclose prescribed particulars of those interests. Failure to supply the
information or supplying a statement which is materially false may lead to the
board imposing restrictions upon the relevant shares.
The restrictions available are the suspension of voting or other rights
conferred by membership in relation to meetings of the Bank in respect of the
relevant shares and, additionally, in the case of a shareholding representing
at least 0.25 per cent. of the class of shares concerned, the withholding of
payment of dividends on, and the restriction of transfers of, the relevant
shares.
Limitations on rights to own shares
There are no limitations imposed by English Law or the Memorandum and Articles
on the right of non-residents or foreign persons to hold or vote the Bank's
shares other than the limitations that would generally apply to all of the
Bank's shareholders.
Members resident abroad
Members with registered addresses outside the United Kingdom are not entitled
to receive notices from the Bank unless they have given the Bank an address
within the United Kingdom at which such notices may be served.
Certain other UK law provisions
Pre-emptive rights
As the Bank is a public company incorporated in Great Britain and registered in
England and Wales, in general, holders of ordinary shares have automatic
pre-emptive rights pursuant to section 89 of the Act.
Lien and forfeiture
The Bank will have a first and paramount lien (enforceable by sale) on every
partly paid share (including dividends payable on such a share) for all moneys
payable to the Bank in respect of that share. The board may call any moneys
unpaid on shares and may forfeit shares on which calls payable are not duly
paid. The forfeiture shall include all dividends payable in respect of the
forfeited shares, which have not been paid before the forfeiture.
68
Untraced shareholders
The Bank shall be entitled to sell, at the best price reasonably obtainable,
the shares of a member or the shares to which a person is entitled by
transmission if:
(i) during a period of 12 years prior to the date of advertising its
intention to sell such shares at least three cash dividends in respect of
such shares have become payable but all dividends or other moneys payable
remain unclaimed;
(ii) as soon as practicable after the expiry of the period referred to in
sub-paragraph (i) above, the Bank inserts advertisements in a leading
London daily newspaper and one newspaper circulating in the area of the
last known address of the member or other person giving notice of its
intention to sell the shares;
(iii) during the period referred to in sub-paragraph (i) above and the period
of three months following the publication of the advertisements referred
to in sub-paragraph (ii) above, the Bank receives no indication of the
whereabouts or existence of the member or other person; and
(iv) if the shares are listed on the London Stock Exchange, the Bank gives
notice to the London Stock Exchange of its intention to sell the shares
prior to publication of the advertisements.
The net proceeds of such sale shall belong to the Bank, which shall be obliged
to account to the former member or other person previously entitled to the
shares for an amount equal to the proceeds as a creditor of the Bank.
MATERIAL CONTRACTS
The Bank and its subsidiaries are party to various contracts in the ordinary
course of business. For the year ended 31 December 2002, there have been no
material contracts entered into outside the ordinary course of business.
EXCHANGE CONTROLS
The Bank has been advised that there are currently no UK laws, decrees or
regulations which would prevent the remittance of dividends or other payments
to non-UK resident holders of the Bank's non-cumulative dollar preference
shares.
There are no restrictions under the Articles of Association of the Bank or
under UK law, as currently in effect, which limit the right of non-UK resident
owners to hold or, when entitled to vote, freely to vote the Bank's
non-cumulative dollar preference shares.
TAXATION
The following discussion summarises certain US federal and UK tax consequences
of the acquisition, ownership and disposition of non-cumulative dollar
preference shares, ADSs or Capital Securities by a beneficial owner of
non-cumulative dollar preference shares, ADSs evidenced by ADRs or Capital
Securities that is (i) a citizen or resident of the United States for US
federal income tax purposes, (ii) a corporation, or other entity treated as a
corporation, created or organised under the laws of the United States or any
State thereof, (iii) an estate the income of which is subject to US federal
income tax without regard to its source or (iv) a trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more US persons have the authority to control all
substantial decisions of the trust or (v) that otherwise will be subject to US
federal income tax on a net income basis in respect of the non-cumulative
dollar preference shares, Capital Securities or ADSs and that holds such
non-cumulative dollar preference shares, ADSs evidenced by ADRs or Capital
Securities as capital assets (a "US Holder").
This summary does not address the tax consequences to a US Holder (i) that is
resident (or, in the case of an individual, ordinarily resident) in the UK for
UK tax purposes or, generally, (ii) that is a corporation which alone or
together with one or more associated companies, controls, directly or
indirectly, 10% or more of the voting stock of the company.
The statements and practices set forth below regarding US and UK tax laws
(including the US/UK double taxation convention relating to income and capital
gains which entered into force on 31 March 2003 (the "New Treaty"), the prior
US/UK double taxation convention relating to income and capital gains (the
"Prior "Treaty") and the US/UK double taxation convention relating to estate
and gift taxes (the "Estate Tax Treaty")) are based on those laws and practices
as in force and as applied in practice on the date of this Report. This summary
is not exhaustive of all possible tax considerations and holders are advised to
satisfy themselves as to the overall tax consequences, including specifically
the consequences under, state, local and other laws and possible changes in
taxation law, of the acquisition, ownership and disposition of non-cumulative
dollar preference shares, ADSs evidenced by ADRs or Capital Securities by
consulting their own tax advisers.
References below to "the Treaty" are references to either the Prior Treaty or
the New Treaty as applicable.
69
For the purposes of the Treaty and the Estate Tax Treaty and for purposes of
the US Internal Revenue Code of 1986, as amended (the "Code"), US Holders of
ADRs will be treated as owners of the non-cumulative dollar preference shares
underlying such ADRs.
Preference shares or ADSs evidenced by ADRs
Taxation of dividends
The Bank is not required to withhold tax at source from dividend payments it
makes or from any amount (including any amounts in respect of accrued
dividends) distributed by the company.
The New Treaty applies to dividend payments after 1 May 2003. If US Holders
would have been entitled to greater benefits under the Prior Treaty, US Holders
may elect to continue to apply the Prior Treaty until 1 May 2004.
New Treaty
Because payments of dividends by the Bank to non-UK investors are not subject
to a UK withholding tax, it is not necessary to apply the New Treaty in order
to receive a reduced rate of withholding. Since there is no UK withholding tax
on payments of dividends to US Holders, US Holders will not be entitled to a
foreign tax credit for foreign taxes paid as a result of the payment of
dividends by the Bank.
Prior Treaty - Effect of UK Tax Credit
An individual shareholder who is resident in the UK for UK tax purposes and who
receives a dividend from the Bank is entitled to claim a tax credit in the UK
against its income tax liability attributable to the dividend. Although a US
holder that receives a dividend from the Bank will not be entitled to this UK
tax credit, under the Prior Treaty certain US holders may treat an amount equal
to this credit (the "Tax Credit Amount") as a tax paid to the UK taxing
authorities, for which such US holder may claim a US foreign tax credit. A US
Holder that makes that election described above must include the Tax Credit
Amount in its income and will generally be entitled, subject to certain
limitations, to a credit against its US federal income tax liability equal to
the Tax Credit Amount.
For foreign tax credit proposes, dividends paid by the Bank (and any Tax Credit
Amount included in income) will generally constitute "passive income", or , in
the case of certain holders, "financial services income".
Taxation of capital gains
Subject to the provisions set out in the next paragraph in relation to
temporary non-residents, a US Holder that is not resident (or, in the case of
an individual, ordinarily resident) in the UK will not normally be liable for
UK tax on gains realized on the disposal of such holder's non-cumulative dollar
preference share or ADR unless at the time of the disposal such US Holder
carries on a trade, profession or vocation in the UK through a branch or agency
and such non-cumulative dollar preference share or ADR is or has been used,
held or acquired by or for the purposes of such trade (or profession or
vocation), branch or agency in which case such US Holder might, depending on
the circumstances, be liable to UK tax on a gain realized on disposal of such
holder's non-cumulative dollar preference share or ADS. Proposed legislation,
intended to enter into force in June 2003, would amend the above so that
corporate US Holders would be liable to UK tax a gain realized on disposal of
such holder's non-cumulative dollar preference share or ADS if they carried on
a trade, profession or vocation through a UK permanent establishment. The
proposed legislation is not final and is subject to change.
A US Holder who is an individual and who has, on or after March 17, 1998,
ceased to be resident or ordinarily resident for tax purposes in the UK for a
period of less than five years of assessment and who disposes of a
non-cumulative dollar preference share or ADR during that period may be liable
to UK taxation on chargeable gains arising during the period of absence,
subject to any available exemption or relief.
An exchange by a US Holder of non-cumulative dollar preference shares or ADRs
for other shares in the Bank will not give rise to a charge to UK tax on
capital gains even if such US Holder would be subject to tax on a disposal of
such holder's non-cumulative dollar preference shares or ADRs in accordance
with the tax paragraph referred to in the previous paragraphs.
A US Holder will, upon the sale, exchange or redemption of a non-cumulative
dollar preference share or ADS representing preference shares, generally
recognise capital gains or losses for US federal income tax purposes (assuming
in the case of a redemption, that such US Holder does not own, and is not
deemed to own, any ordinary shares of the Bank) in an amount equal to the
difference between the amount realised (excluding any declared but unpaid
dividends, which will be treated as a dividend for US federal income tax
purposes) and the US Holder's tax basis in the non-cumulative dollar preference
share or ADS. Gain or loss will generally be US source.
70
A US Holder who is liable for both UK and US tax on a gain recognised on the
disposal of the non-cumulative dollar preference share or ADS will generally be
entitled, subject to certain limitations, to credit the UK tax against its US
federal income tax liability in respect of such gain.
Holders should consult their tax advisors regarding the US federal income tax
treatment of capital gains (which may be taxed at lower rates than ordinary
income for certain taxpayers who are individuals) and losses (the deductibility
of which is subject to limitations).
Estate and gift tax
A non-cumulative dollar preference share or ADR held by an individual, whose
domicile is determined to be the United States for purposes of the Estate Tax
Treaty and who is not a national of the UK, will not be subject to UK
inheritance tax on the individual's death or on a lifetime transfer of the
non-cumulative dollar preference share or ADR, except in certain cases where
the non-cumulative dollar preference share or ADR (i) is comprised in a
settlement (unless, at the time of the settlement, the settlor was domiciled in
the United States and was not a national of the UK); (ii) is part of the
business property of a UK permanent establishment of an enterprise; or (iii)
pertains to a UK fixed base of an individual used for the performance of
independent personal services. The Estate Tax Treaty generally provides a
credit against US federal tax liability for the amount of any tax paid in the
UK in a case where the non-cumulative dollar preference share or ADR is subject
both to UK inheritance tax and to US federal estate or gift tax.
UK stamp duty and stamp duty reserve tax
The following is a summary of the UK stamp duty and stamp duty reserve tax
consequences of transferring an ADR in registered form (otherwise than to the
custodian on cancellation of the ADR). It does not set out the UK stamp duty or
stamp duty reserve tax consequences of transferring, or agreeing to transfer,
non-cumulative dollar preference shares or any interest therein or right
thereto (other than interests in ADRs) on which investors should consult their
own tax advisers.
A transfer of a registered ADR executed and retained in the US will not give
rise to stamp duty and an agreement to transfer a registered ADR will not give
rise to stamp duty reserve tax.
Capital Securities
United States
Because the Capital Securities have no stated maturity, can be exchanged for
preference shares or ADSs at the option of the Bank and would be treated as if
they were preference shares in a winding-up of the Bank, and because the Bank
may elect not to make payments on the Capital Securities, the Capital
Securities will be treated as equity for US federal income tax purposes.
Payments (including any UK tax withheld therefrom as to which see below) will
constitute foreign source dividend income for US federal income tax purposes to
the extent paid out of our current or accumulated earnings and profits, as
determined for US federal income tax purposes. Payments will not be eligible
for the dividends received deduction allowed to corporations. For foreign tax
credit limitation purposes, payments will generally constitute 'passive
income,' or in the case of certain US Holders, 'financial services income.' A
US holder who is entitled under the Treaty to a refund of UK tax, if any,
withheld on a payment will not be entitled to claim a foreign tax credit with
respect to such tax.
A US Holder will, upon the sale, exchange or redemption of Capital Securities,
generally recognise capital gain or loss for US federal income tax purposes in
an amount equal to the difference between the amount realised and the US
Holder's tax basis in the Capital Securities (assuming, in the case of a
redemption, that such US Holder does not own, and is not deemed to own, any
ordinary shares of the Bank).
Gain or loss will not be recognised by a US Holder upon the exchange of Capital
Securities for preference shares or ADSs pursuant to the Bank's exercise of its
exchange right. A US Holder's basis in the preference shares or ADSs received
in exchange for its Capital Securities will be the same as the US Holder's
basis in the Capital Securities at the time of the exchange and the US Holder's
holding period for the preference shares or ADSs received in the exchange will
include the holding period of the Capital Securities exchanged.
71
United Kingdom
Taxation of payments of interest
Payments on the Capital Securities will constitute interest rather than
dividends for UK withholding tax purposes. However, the Capital Securities will
constitute "quoted eurobonds" within the meaning of section 349 of the Income
and Corporation Taxes Act 1988 and therefore payments of interest will not be
subject to withholding or deduction for or on account of UK taxation as long as
Capital Securities are and remain at all times listed on the New York Stock
Exchange or some other 'recognised stock exchange' within the meaning of
section 841 of the Income and Corporation Taxes Act 1988. In all other cases an
amount must be withheld on account of UK income tax at the lower rate
(currently 20%) subject to any direction to the contrary by the Inland Revenue
under the Treaty and subject to any entitlement to pay gross to US Holders
within the charge to corporation tax.
If interest were paid under deduction of United Kingdom income tax (eg if the
Capital Securities lost their listing), US Holders may be able to claim a
refund of the tax deducted under the Treaty.
Any paying agent or other person through whom interest is paid to, or by whom
interest is received on behalf of, an individual, may be required to provide
information in relation to the payment and the individual concerned to the UK
Inland Revenue. The Inland Revenue may communicate this information to the tax
authorities of other jurisdictions.
The interest has a United Kingdom source and accordingly may be chargeable to
United Kingdom tax by direct assessment. Where the interest is paid without
withholding or deduction, the interest will not be assessed to United Kingdom
tax in the hands of holders of the Capital Securities who are not resident in
the United Kingdom, except where such persons carry on a trade, profession or
vocation in the United Kingdom through a United Kingdom branch or agency in
connection with which the interest is received or to which the Capital
Securities are attributable, in which case (subject to exemptions for interest
received by certain categories of agent) tax may be levied on the United
Kingdom branch or agency.
The UK Inland Revenue has confirmed that interest payments should not be
treated as distributions for UK tax purposes (i) by reason of the fact that
interest may be deferred under the terms of issue or (ii) by reason of the
undated nature of the Capital Securities, provided that at the time an interest
payment is made, the Capital Securities are not held by a Company which is
'associated' with the Bank or by a 'funded company'. A company will be
associated with the Bank if, broadly speaking, it is in the same group as the
Bank. A company will be a 'funded company' for these purposes if there are
arrangements involving that company being put in funds (directly or indirectly)
by the Bank, or an entity associated with the Bank. In this respect, the Inland
Revenue has confirmed that a bank holding an interest in Capital Securities
which incidentally has banking facilities with the Bank will not be a 'funded
company' by virtue of such facilities.
Proposed EU Directive on the Taxation of Savings Income
The Council of the European Union has published a revised draft directive
regarding the taxation of savings income. It is proposed that, subject to a
number of important conditions being met, Member States will be required to
provide to the tax authorities of another Member State details of payments of
interest (or other similar income) paid by a person within its jurisdiction to
an individual resident in that other Member State, except that Belgium,
Luxembourg and Austria will instead operate a withholding system for a
transitional period in relation to such payments. The proposed directive is not
yet final, and may be subject to further amendment.
Disposal (including Redemption)
Subject to the provisions set out in the next paragraph in relation to
temporary non-residents, a US Holder who is an individual or other non
corporation tax payer will not normally be liable for UK tax on gains realized
on the disposal of such holder's Capital Securities unless at the time of the
disposal such US Holder carries on a trade, profession or vocation in the UK
through a branch or agency and such Capital Securities are or have been used,
held or acquired by or for the purposes of such trade (or profession or
vocation), branch or agency in which case such US Holder might, depending on
the circumstances, be liable to UK tax on a gain realized on a disposal of
Capital Securities. Proposed legislation, intended to enter into force in June
2003, would amend the above so that corporate US Holders would be liable to UK
tax gains realized on any disposal of such holder's Capital Securities if they
carried on a trade, profession or vocation through a UK permanent
establishment. The proposed legislation is not final and is subject to change.
A US Holder who is an individual and who has, on or after March 17, 1998,
ceased to be resident or ordinarily resident for tax purposes in the UK for a
period of less than five years of assessment and who disposes of Capital
Securities during that period may be liable to UK taxation on capital gains
arising during the period of absence, subject to any available exemption or
relief.
72
The exchange by a US Holder of Capital Securities for non-cumulative dollar
preference shares or ADRs pursuant to the Bank's exercise of its exchange right
will not give rise to a charge to UK tax on capital gains even if such US
Holder would be subject to tax on a disposal of such Holder's Capital
Securities in accordance with the tax treatment referred to in the preceding
paragraphs.
A transfer of Capital Securities by a US Holder will not give rise to a charge
to UK tax on accrued but unpaid interest payments, unless the US Holder is an
individual or other non corporation tax payer and at any time in the relevant
year of assessment or accounting period carries on a trade in the UK through a
branch or agency to which the Capital Securities are attributable.
Corporate holders - Annual tax charges
Corporate holders of Capital Securities may be subject to annual UK tax charges
(or relief) by reference to fluctuations in exchange rates and in respect of
profits, gains and losses arising from the Capital Securities, in place of the
tax treatment referred to in the two preceding paragraphs but only if such
corporate US Holders carry on a trade, profession or vocation in the UK through
a branch or agency in the UK to which the Capital Securities are attributable.
Inheritance tax
Capital Securities in bearer form physically held outside the UK should not be
subject to UK inheritance tax in respect of a lifetime transfer by, or the
death of, a US Holder who is neither domiciled nor deemed to be domiciled in
the UK for inheritance tax purposes. However, in relation to Capital Securities
held through DTC (or any other clearing system), the position is not free from
doubt and the Inland Revenue are known to consider that the situs of securities
held in this manner is not necessarily determined by the place in which the
securities are physically held. If Capital Securities in bearer form are or
become situated in the UK, or if Capital Securities are held in registered
form, there may be a charge to UK inheritance tax as a result of a lifetime
transfer at less than fair market value by, or on the death of, such a US
Holder. However, exemption from, or a reduction of, any such UK tax liability
may be available under the Estate Tax Treaty in the same manner as for
non-cumulative dollar preference shares. US Holders should consult their
professional advisers in relation to such potential liability.
Stamp duty and stamp duty reserve tax
No UK stamp duty or SDRT is payable on the transfer or redemption of Capital
Securities, whether in definitive bearer form or in the form of one or more
bearer global Capital Securities or in registered form.
No UK stamp duty or SDRT will be payable on issue of ADRs in exchange for
Capital Securities pursuant to the Bank's exercise of its exchange rights. As a
result of a change in law since the Capital Securities were issued, the SDRT
consequences of the issue of the non-cumulative dollar preference shares
represented by the ADRs into the depository receipt system are not entirely
clear and it is possible that a charge to SDRT at the rate of 1.5% could arise.
DOCUMENTS ON DISPLAY
Documents concerning the Bank may be inspected at 135 Bishopsgate, London EC2M
3UR (020-7375-5000).
In addition, we file reports and other information with the SEC. You can read
and copy these reports and other information at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You can call the SEC at
1-800-SEC-0330 for further information on the Public Reference Room or at the
offices of The New York Stock Exchange, on which certain of our securities are
listed, at 20 Broad Street, New York, New York 10005. The SEC also maintains a
website at www.sec.gov, which contains in electronic form each of the reports
and other information that we have filed electronically with the SEC.
73
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
------------------------------------------------------------------
Risk management is conducted on an overall basis within the RBS Group.
Therefore in the following discussion on risk management references to "the
Group" or "Group" are to the RBS Group and its board and committees.
Risk management
The management of risk is a fundamental management activity performed
throughout the Group. As such it underpins the Group's reputation, performance
and future success. It is therefore critically important that the adequacy and
effectiveness of our risk management processes are of appropriate standard.
To achieve this the Group has put in place a risk management framework
comprising:
o Leadership, strategy and culture set by the Board and put into effect
through Executive Management.
o Policies, procedures, processes and systems to execute effective risk
management throughout the Group.
o A comprehensive committee structure operating at Group level to direct,
approve and review actions taken to manage risk. Where appropriate this is
replicated at a divisional level.
o Risk management functions that are independent of the business management
to enforce agreed policy.
Supporting the Board, the following executive committees operate that have risk
management as partly or wholly their mandate:
o Group Executive Management Committee ("GEMC"), a sub-committee of the
Board determines the Group's risk management framework.
o Group Risk Management Committee ("GRMC"), a sub-committee of the GEMC,
provides leadership and oversight of the Group's risk management and
control process, including policies and risk appetite.
o Group Credit Committee ("GCC"), a sub-committee of the Board, approves
facility limits in excess of the authorities delegated to business Credit
Committees and makes recommendations to the Board for facilities in excess
of its own authority.
o The Group Asset and Liability Management Committee ("GALCO"), a
sub-committee of the GEMC, sets policy for the management of the overall
Group balance sheet in respect of capital ratios, structural hedging and
liquidity.
The Group Risk Management function plays a key role in the Group's Risk
Management framework. The Group Risk Management function is independent from
the businesses and reports through the Group Finance Director to the Group
Chief Executive.
Within each Division independent risk management units operate, reporting to
both divisional executive management and the Director, Group Risk Management.
An assessment of the adequacy and effectiveness of each divisional risk
management unit is undertaken by Group Risk Management on a continuous basis to
ensure effective control.
Supporting GALCO, Group Treasury is responsible for capital raising, liquidity
and structural hedging policies and the management of the Group's balance
sheet. Operational responsibility for asset and liability management is in turn
delegated to appropriate management in each major business grouping.
The most significant risks managed by the Group are:
o Credit risk: the risk arising from the possibility that the Group will
incur losses from the failure of a customer to meet its obligations.
o Liquidity risk: the risk that the Group will be unable to meet its funding
requirements at acceptable rates and appropriate maturities.
o Market risk: the risk arising from the possibility that the Group will
incur losses from changes in interest rates, foreign exchange rates or the
prices of equity shares and indices, commodities, debt securities and
other financial contracts, including derivatives.
74
o Regulatory risk: the risk of material loss, reputational damage or
liability arising from the Group's failure to comply with the requirements
of the Group's regulators and relevant Codes of Best Practice that oversee
the conduct of regulated business in all geographic regions where the
Group has operations.
o Enterprise risk: the risk of loss from inadequate or failed internal
processes, people and systems or from external events.
Credit risk
Credit risk is the risk arising from the possibility that the Group will incur
losses from the failure of a customer to meet its obligations.
This risk is managed within the Group's Credit Risk Management framework
comprising:
o Executive involvement through the GRMC.
o The Group's principles for managing credit risk.
o The Group's credit approval processes and credit assessments.
o Credit portfolio management.
o The review and oversight of delegated authorities.
o Problem exposure management.
Executive involvement through the GRMC - This sub-committee of the GEMC is
chaired by the Group Finance Director and includes other executive directors.
It defines the credit risk strategy of the Group and approves both policy
changes and other enhancements to the credit risk management framework. On a
day-to-day basis, executive directors and other GEMC members participate in the
Group, divisional and subsidiary company Credit Committees. These committees
hold the highest levels of credit authority (below Board level) in the Group.
The Group's principles for managing credit risk set out minimum standards for
managing credit risk. These include principles for maintaining the credit
culture of the Group, approving credit risk taken by the Group, credit
stewardship and reviewing the effectiveness of the credit culture. As a
minimum:
o All credit risk exposures require approval before assumption by the Group.
Existing credit risk exposures are monitored and reviewed periodically
against approved risk limits. Review occurs at least annually with the
lower quality exposures being subject to greater frequency of analysis and
assessment. Approvals in respect of credit exposure can only be given by
duly authorised individuals or bodies (Credit Committees) or if below
certain specified thresholds through authorised automated processes.
o Credit authority is delegated only to competent individuals who are
independent of business revenue generation or to established credit
committees. Other than in specialist areas which operate under strict
parameters, credit authority is not extended to branch or account
relationship managers.
o Credit risk exposures originated anywhere in the Group that create
obligations from the same customer group are aggregated (subject to de
minimis thresholds) in order to determine the appropriate level of credit
approval required and to facilitate consolidated credit risk management.
o Customers are assigned a credit rating, which is mapped to a Group scale
that reflects the probability of default.
Credit approval processes exist for each of the significant customer types in
order to ensure appropriate skills and resources are employed in credit
assessment and approval:
o Retail and personal businesses use industry standard credit scoring
techniques, adapted for the Group, to process small scale, large volume
credit decisions. These are combined with traditional analysis and
judgement to support more significant credit risks in this area.
o Credit approvals for the professional counterparties of Financial Markets
are supported by a dedicated credit function, which provides expertise in
traded markets product risk and which specialises in the analysis and
assessment of financial institutions.
75
o For the Group's corporate businesses, the relationship management team,
the Analysis Rating and Research Unit and the Credit Risk Department,
support the judgement exercised over credit approvals.
The balance between risk and reward is managed by the credit approval process
and appropriate risk adjusted return measurement tools.
Credit portfolio management - The business units and the GEMC review monthly
reports on the Group's portfolio of credit risks. Portfolio information is
examined principally by the quality of credit ratings but is also further
sub-divided by: major division/subsidiary, by geography and by industrial
sector. Expected loss and other statistical tools are used in trend analysis.
The review and oversight of delegated authorities - Both Group Risk Management
and divisional credit risk functions undertake reviews in order to provide
independent oversight of delegated authorities and to ensure compliance with
Group practice.
Problem exposure management is facilitated through specialised units, which
provide intensive management to minimise the incidence of credit risk losses.
Credit management within each business unit is the responsibility of business
unit Credit Committees and specialist units within the Group provide
appropriate management and control over the Group's impaired and potential
problem loans.
o In the Group's corporate businesses, problem loans and exposures are
managed by Specialised Lending Services, which provides dedicated resource
experienced in corporate restructuring. The Problem Exposure Review Forum
reviews all such significant cases at least annually. This group is
chaired by the Group Chief Executive and includes the appropriate
divisional executive, account managers and credit managers.
o The Group's retail businesses operate automated triggers and filters as
part of the monthly monitoring of all accounts. Identified problems are
then managed through prescribed processes by centralised credit management
units.
Residual value risk - The NatWest Group's asset finance activities also expose
the NatWest Group to risk of loss if the value of the physical asset at the end
of the financing term is less than that required to achieve the planned return.
The NatWest Group mitigates this risk through portfolio diversification and
active management of asset exposures throughout their life, from pricing
through to re-marketing at the end of the transaction term.
Liquidity risk
The management of liquidity risk within the NatWest Group is fully integrated
on a consolidated basis with that for The Royal Bank of Scotland Group ("the
Group") as a whole. Day to day management of the Group's liquidity needs is
effected through the treasury activities of the Group's Financial Markets
division which accesses external wholesale markets as required primarily in the
name of The Royal Bank of Scotland plc (RBS). The day to day net liquidity
needs of NatWest Group are met primarily through the execution with RBS of
intra-group transactions of appropriate maturity, currency and principal
amount.
Liquidity management within the Group focuses on the management of both overall
balance sheet structure and the control within prudent limits of risk arising
from the mismatch of maturities across the balance sheet and from contingent
obligations.
The structure of the Group's balance sheet is managed to maintain substantial
diversification, to minimise concentration across its various deposit sources,
and to contain the level of reliance on total and net short-term wholesale
sources of funds within prudent levels.
The short-term maturity structure of the Group's liabilities and assets is also
managed on a daily basis to ensure that contractual cashflow obligations, and
potential cashflows arising from undrawn commitments and other contingent
obligations, may be met as they arise from day to day, either from cash inflows
from maturing assets, new borrowing or from the sale or repo of various debt
securities held.
That short-term liquidity risk is managed on a consolidated basis for the whole
Group excluding the activities of Citizens Financial Group (a US subsidiary of
RBS) and the insurance businesses in the UK which are subject to regulatory
regimes which necessitate the separate management of liquidity. Internal
liquidity mismatch limits are set for all other subsidiaries and non-UK
branches which have material local treasury activities in external markets, to
ensure those activities do not compromise daily maintenance of the Group's
overall liquidity risk position within the Group's policy parameters.
The level of large deposits taken from banks, corporate customers, non-bank
financial institutions and other customers, and significant cash outflows
therefrom, are also reviewed to monitor concentration and identify any adverse
trends.
76
The degree of maturity mismatch within the overall long-term structure of the
Group's assets and liabilities is also managed within internal policy limits,
to ensure that term asset commitments may be funded on an economic basis over
their life. In managing its overall term structure, the Group analyses and
takes into account the effect of retail and corporate customer behaviour on
actual asset and liability maturities where that differs materially from the
underlying contractual maturities.
Policy parameters for the control of overall balance sheet structure and
liquidity risk are set by GALCO. Compliance is monitored and co-ordinated by
the Group Treasury function both in respect of internal policy and the
regulatory requirements of the UK Financial Services Authority.
In addition to their consolidation within the Group's daily liquidity
management processes, it is also the responsibility of all Group subsidiaries
and branches outside of the UK to ensure compliance with all separate local
regulatory liquidity requirements applicable.
The Group also periodically evaluates various scenarios and undertakes stress
tests to analyse the potential impact on liquidity risk. Contingency plans are
maintained to anticipate and respond to any approaching or actual material
deterioration in market conditions.
Sources of funding
Excluding capital and other liabilities, customer accounts continue to provide
a substantial majority of the NatWest Group's funding and represent a well
diversified and stable source of funds from a wide range of retail, corporate
and non-bank institutional customers.
31 December 2002 31 December 2001
------------------------ -------------------------
(pound)m % (pound)m %
Customer accounts:
Repayable on demand 58,666 41 57,189 40
Time deposits (excluding repos) 34,245 24 30,747 22
----------- ---------- ------------ ----------
Total 92,911 65 87,936 62
Repos with customers 18,566 13 12,015 8
Deposits by banks (including repos) * 17,718 13 25,246 18
Debt securities in issue 208 - 5,222 4
Short positions 13,292 9 11,435 8
----------- ---------- ------------ ----------
Total deposits including repos, debt securities in issue and 142,695 100 141,854 100
short positions
----------- ---------- ------------ ----------
* Deposits by banks include from other RBS Group entities: 5,907 4 13,030 9
Customer accounts (excluding repos) in NatWest Group increased by (pound)4,975
million reflecting continuing growth in NatWest Group's retail and corporate
deposit base, and now represent 65% of NatWest Group's funding excluding
capital and other liabilities.
Repos with corporate and institutional customers are undertaken primarily by
Greenwich Capital Markets in the USA. Customer repo activity increased to
represent 13% of NatWest Group's funding excluding capital and other
liabilities at 31 December 2002 (compared with 9% at 31 December 2001). Growth
in Greenwich Capital Markets trading activities is managed within agreed risk
limit parameters.
Deposits by banks decreased to represent 12% of NatWest Group's funding
excluding capital and other liabilities, mainly due to reduced intra-group
borrowing needs from RBS. The largest single bank depositor other than RBS
continues to represent less than 1% of NatWest Group's total funding.
NatWest Group's debt securities in issue fell to a nominal level and now
represents a negligible proportion of NatWest Group's funding excluding capital
and other liabilities at 31 December 2002 (compared with 3.7% at 31 December
2001). This reflects the RBS Group policy to concentrate debt issuance in RBS
plc.
The NatWest Group remains well placed to access various wholesale funding
sources from a wide range of counterparties and markets to meet its funding and
liquidity needs.
77
Net customer activity
Customer accounts (excluding repos) increased to 94.2% of total loans and
advances to customers (excluding reverse repos) in 2002 in the NatWest Group.
31 December 31 December
2002 2001
---------------- ---------------
(pound)m (pound)m
Loans and advances to customers (excluding reverse repos) 98,606 95,047
Customer accounts (excluding repos) 92,911 87,936
---------------- ---------------
Net customer lending 5,695 7,111
---------------- ---------------
Customer accounts (excluding repos) as % of loans
and advances to customers (excluding reverse repos) 94.2% 92.5%
---------------- ---------------
Structural liquidity risk continues to be contained well within the Group's
policy parameters.
Net wholesale market activity
31 December 31 December
2002 2001
---------------- ---------------
(pound)m (pound)m
Deposits by banks (including repos):
o repayable on demand 2,025 2,533
o less than 3 months maturity 13,998 18,030
o over 3 months maturity 1,695 4,683
---------------- ---------------
o Total * 17,718 25,246
Repos with customers 18,566 12,015
Debt securities in issue 208 5,222
Short positions 13,292 11,435
---------------- ---------------
Wholesale liabilities 49,784 53,918
---------------- ---------------
* Deposits by banks include amounts from other RBS Group entities: 5,907 13,030
Loans and advances to banks (including reverse repos):
o repayable on demand 1,534 6,395
o less than 3 months maturity 20,640 21,852
o over 3 months maturity 1,497 3,030
---------------- ---------------
o Total ** 23,671 31,277
Reverse repos with customers 15,611 7,694
Debt securities, treasury bills and other eligible bills 18,570 21,610
---------------- ---------------
Wholesale assets 57,852 60,581
---------------- ---------------
** Loans and advances to banks include amounts to RBS units: 9,446 16,409
Net surplus of wholesale assets 8,068 6,663
---------------- ---------------
Loans and advances to banks net of deposits by banks fell from (pound)6,031
million to (pound)5,953 million. The changes to the NatWest Group positions
mainly reflect the switch of Money Market activity from the Bank to the Royal
Bank.
78
Sterling liquidity
53% of the Group's total assets are denominated in sterling. The FSA requires
the Group on a consolidated basis to maintain daily a minimum ratio of 100%
between:
a. a stock of qualifying high quality liquid assets (primarily UK government
securities, treasury bills, eligible bank bills, and cash held in
branches) and
b. the sum of:
o sterling wholesale net outflows contractually due within 5 working days
(offset up to a limit of 50%, by 85% of sterling certificates of deposit
held which mature beyond 5 working days), and
o 5% of retail deposits with a residual contractual maturity of 5 working
days or less.
The Group exceeded that minimum ratio requirement during 2002.
The FSA also sets an absolute minimum level for the stock of qualifying liquid
assets that the Group is required to maintain each day. The Group exceeded that
minimum stock requirement at all times during 2002.
The Group's operational processes are actively managed to ensure that both the
minimum sterling liquidity ratio and the minimum stock requirement are achieved
or exceeded at all times.
Liquidity in non-sterling currencies
For non-sterling currencies, no specific regulatory liquidity requirement is
set for the Group by the FSA. However, the importance of managing prudently the
liquidity risk in its non-sterling activities is recognised and the Group
manages its non-sterling liquidity risk daily within net mismatch limits set
for the 0-8 calendar day and 0-1 month periods as a percentage of the Group's
total deposit liabilities.
In measuring its non-sterling liquidity risk, due account is taken of the
marketability within a short period of the wide range of debt securities held.
Haircuts are applied in each case, dependent on various parameters, to
determine the Group's ability to realise cash at short notice if required to
meet unexpected outflows via the sale or repo of such marketable assets.
The level of contingent risk from the potential drawing of undrawn or partially
drawn commitments, back-up lines, standby lines and other similar facilities is
also actively monitored and reflected in the measures of the Group's
non-sterling liquidity risk. Particular attention is given to the US$
commercial paper market and the propensity of the Group's corporate
counterparties who are active in raising funds from that market to switch to
take up facilities offered by the Group in the event of either counterparty
specific difficulties or a significant widening of interest spreads generally
in the commercial paper market.
The Group also provides liquidity back-up facilities to both its own conduits
and certain other conduits which take funding from the US$ commercial paper
market. Limits sanctioned for such facilities from the NatWest Group totalled
less than (pound)1,600 million at 31 December 2002. The short-term contingent
liquidity risk in providing such back-up facilities is also mitigated by the
spread of maturity dates typically over a 3-month period of the commercial
paper taken by the conduits.
The Group has operated within its non-sterling liquidity policy mismatch limits
at all times during 2002 and operational processes are actively managed to
ensure that is the case going forward. Contingency plans are also maintained to
enable the Group to respond effectively to unforeseen market liquidity or major
payment systems problems which may emerge from time to time.
79
Market risk
The Group is exposed to market risk because of positions held in its treasury
and trading portfolios, as well as its non-trading activity.
Market risk in the treasury portfolios arises as a consequence of the
management of the Group's liquidity requirements. The instruments that give
rise to this type of risk are mainly money-market instruments and interest rate
derivatives and the main risk factor is therefore interest rates.
Market risk in the trading portfolios is mainly associated with customer-facing
trading businesses through the market-making operations and through taking
positions in tradeable securities. The associated instruments are held on the
trading (mark-to-market) books, and the main risk factors are interest rates,
credit spreads, and foreign exchange.
Non-trading market risk is associated with the mismatches between the
re-pricing of the Group's non-trading financial assets and liabilities; with
the Group's investment in overseas subsidiaries, associates and branches; and
with its strategic equity investments.
Option risk in the non-trading businesses principally occurs in certain fixed
rate assets and liabilities.
Mismatch risk mainly gives rise to interest-rate exposure that is then
transferred to the Group's trading or treasury units for management within
their approved limits.
The Group does not maintain material non-trading open currency positions other
than the structural foreign currency translation exposures arising from its
investments in overseas subsidiary and associated undertakings and their
related currency funding.
Non-trading equity risk arises principally from the Group's strategic
investments.
The Group manages the market risk in its trading and treasury portfolios
through its Market Risk Management framework, which is based on value-at-risk
("VaR") limits, together with, but not limited to, stress testing, scenario
analysis, and position and sensitivity limits. Stress testing measures the
impact of abnormal changes in market rates and prices on the fair value of the
Group's trading portfolios. GEMC approves the high-level VaR and stress limits
for the Group. The Group Market Risk function, independent from the Group's
trading businesses, is responsible for setting and monitoring the adequacy and
effectiveness of the Group's market risk management processes.
Value-at-risk - 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 given confidence levels. For internal risk management purposes, the
Group's VaR assumes a time horizon of one day and a confidence level of 95%. In
other words, a one-day loss greater than VaR is likely to occur on average on
only one in every 20-business days. The Group uses historical simulation models
in computing VaR. This approach, in common with many other VaR models, assumes
that risk factor changes observed in the past are a good estimate of those
likely to occur in the future and is, therefore, limited by the relevance of
the historical data used. The Group's method, however, does not make any
assumption about the nature or type of underlying loss distribution. The Group
typically uses the previous two years of market data. The Group's VaR should be
interpreted in light of the limitations of the methodology used. These
limitations include:
o Historical data may not provide the best estimate of the joint
distribution of risk factor changes in the future and may fail to capture
the risk of possible extreme adverse market movements which have not
occurred in the historical window used in the calculations.
o VaR using a one-day time horizon does not fully capture the market risk of
positions that cannot be liquidated or hedged within one day.
o VaR using a 95% confidence level does not reflect the extent of potential
losses beyond that percentile.
o The Group largely computes the VaR of trading portfolios at the close of
business and positions may change substantially during the course of the
trading day. Controls are in place to limit the Group's intra-day
exposure; such as the calculation of the VaR for selected portfolios.
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. For a discussion of the Group's accounting policies for, and
information with respect to, its exposures to derivative financial instruments,
see accounting policy 13 and Note 38 on the accounts.
80
Trading - The NatWest Group's trading activities comprise: market making -
quoting firm bid (buy) and offer (sell) prices with the intention of profiting
from the spread between the quotes; customer facilitation - providing products
to the Group's client base at competitive prices; arbitrage - entering into
offsetting positions in different but closely related markets in order to
profit from market imperfections; and proprietary activity - taking positions
in financial instruments as principal in order to take advantage of anticipated
market conditions.
Financial instruments held in the NatWest Group's trading portfolios include,
but are not limited to, debt securities, loans, deposits, securities sale and
repurchase agreements and derivative financial instruments (futures, forwards,
swaps and options).
The VaR for NatWest Group's trading portfolios, segregated by type of market
risk exposure, is presented in the tables below.
At Year ended 31 December 2002 At Year ended 31 December 2001
31 December --------------------------- 31 December ---------------------------
2002 Maximum Minimum Average(1) 2001 Maximum Minimum Average
---- ------- ------- ---------- ---- ------- ------- -------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Interest rate (2) 7.3 11.7 4.7 7.6 6.4 12.2 5.0 8.2
Currency 0.3 1.7 0.1 0.4 0.2 2.4 0.1 0.6
Equity 0.1 0.6 - 0.2 0.3 1.8 0.2 0.5
Diversification effects (0.4) (0.8)
------------- ------------
Total 7.3 11.6 4.7 7.6 6.1 12.3 5.3 8.4
------------------------------------------------------------------------------------------------
Notes:
(1) Calculated as the arithmetic average of daily VaR figures.
(2) Includes credit spreads.
Non-trading - The NatWest Group's portfolios of non-trading financial
instruments, arising from its treasury activities and, its retail and corporate
banking operations, mainly comprise loans (including finance leases), debt
securities, equity shares, deposits, certificates of deposit and other debt
securities issued, loan capital and derivatives (mainly interest rate swaps).
The VaR for these portfolios is presented below.
2002 2002 2002 2002 2001
Period end Maximum Minimum Average Period end
(pound)m (pound)m (pound)m (pound)m (pound)m
Interest rate 2.3 3.5 1.4 2.3 2.0
Currency (1) 0.1 0.1 0.1 0.1 0.1
Equity - 0.1 - - -
Diversification effects (0.1) - (0.2)
--------------- --------------
2.3 3.5 1.3 2.3 1.9
--------------------------------------------------------------------------
Notes:
(1) Excludes NatWest Group's structural foreign currency exposures
Treasury - The Group's treasury activities include its money-market business
and the management of internal funds flows with the Group's businesses.
Money-market portfolios include cash instruments (principally debt securities,
loans and deposits) and related hedging derivatives. VaR for NatWest Group's
treasury portfolios, which relates mainly to interest rate risk, is presented
below.
Year end Maximum Minimum Average
----------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
Year ended 31 December 2002 1.2 1.3 0.8 1.0
Year ended 31 December 2001 1.1 3.1 0.9 1.9
Retail and corporate banking - Structural interest rate risk arises in the
Group's commercial banking activities where assets and liabilities have
different repricing dates. Group policy seeks to minimise the sensitivity of
net interest income to changes in interest rates. The policy requires that all
material interest rate risk arising from retail and corporate banking
activities be transferred to a trading or treasury unit for management within
its approved limits.
Structural interest rate risk is calculated in each business unit on the basis
of establishing the repricing behaviour of each asset and liability product.
For many products, the actual interest rate repricing characteristics differ
from the contractual repricing.
81
In most cases, the repricing maturity is then determined by the market interest
rate that most closely fits the historical behaviour of the product interest
rate. For non-interest bearing current accounts, the repricing maturity is
determined by the stability of the portfolio. The repricing maturities used are
approved by Group Treasury and business unit asset and liability committees
annually, or more often if appropriate. The key conventions are reviewed
annually by GALCO.
A static maturity gap report is produced as at the month-end for each material
business unit, in each functional currency based on the behaviouralised
repricing for each product. It is Group policy to include non-financial assets
and liabilities, mainly tangible fixed assets and the Group's capital and
reserves, spread over medium and longer term maturities, in the gap report.
This report also includes hedge transactions, principally derivatives.
Residual non-trading interest rate exposures are controlled by limiting
repricing mismatches in the individual balance sheets. Potential exposures to
interest rate movements in the medium to long term are measured and controlled
using a version of the same VaR methodology, but without discount factors, that
is used for the Group's trading portfolios. Short-term exposures are measured
and controlled in terms of net interest income sensitivity over 12 months to a
1% parallel movement in interest rates. These exposures are monitored against
limits approved by GALCO and reported to GALCO monthly.
A VaR calculation aggregating all non-trading assets and liabilities in the
NatWest Group's balance sheet is undertaken quarterly. At 31 December 2002, the
total VaR exposure relating to structural interest rate risk was estimated to
be (pound)3.3 million (2001 - (pound)2.5 million). During the year, the maximum
VaR was (pound)3.3 million (2001 - (pound)2.5 million), the minimum (pound)1.0
million (2001 - (pound)1.1 million) and the average (pound)2.4 million (2001 -
(pound)1.6 million).
Option risk in the non-trading businesses principally occurs in certain fixed
rate assets and liabilities. An example is where customers can repay fixed rate
loans or withdraw fixed rate deposits before their maturity. Extensive
modelling is undertaken to identify potential levels of early repayment in
differing interest rate environments. The Group also seeks to protect itself
from early repayment risk through the imposition of early repayment interest
charges, where applicable. Option risk also arises where businesses undertake
to provide funding to, or to accept deposits from, customers at a future date
at a pre-determined fixed interest rate and where deposit pricing reaches
effective floors.
Currency risk
The Group does not maintain material non-trading open currency positions other
than the structural foreign currency translation exposures arising from its
investments in overseas subsidiary and associated undertakings and their
related currency funding. The Group's policy in relation to structural
positions is to match fund the structural foreign currency exposure arising
from net asset value, including goodwill, in overseas subsidiaries, equity
accounted investments and branches, except where doing so would materially
increase the sensitivity of either the Group's or the subsidiary's regulatory
capital ratios to currency movements. The policy requires structural foreign
exchange positions to be reviewed regularly by GALCO. Gains or losses on
foreign currency investments net of any gains or losses on related foreign
currency funding or hedges are recognised in the statement of total recognised
gains and losses.
The table below sets out the NatWest Group's structural foreign currency
exposures.
31 December 2002 31 December 2001
----------------------------------------- -------------------------------------------
Foreign Foreign
Net currency Structural Net currency Structural
investments borrowings Foreign investments borrowings foreign
in overseas hedging net Currency in overseas hedging net currency
operations investments Exposures operations investments exposures
----------------------------------------- -------------------------------------------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Functional currency of net investment
US dollar 1,591 1,563 28 1,523 1,508 15
Euro 850 388 462 731 202 529
Swiss franc 305 295 10 250 243 7
Other non-sterling 7 6 1 12 10 2
----------------------------------------- -------------------------------------------
Total 2,753 2,252 501 2,516 1,963 553
----------------------------------------- -------------------------------------------
Equity risk Non-trading equity risk arises principally from the NatWest Group's
strategic investments. VaR is not an appropriate risk measure for this
portfolio. At 31 December 2002, equity shares held as investment securities had
a book value of (pound)1,040 million (2001 - (pound)1,069 million) and a
valuation of (pound)909 million (2001 - (pound)1,031 million).
82
Regulatory risk
Regulatory risk is defined as the risk of material loss, reputational damage or
liability arising from failure to comply with the requirement of the Group's
lead regulator, the FSA and other regulators or related codes of best practice
that oversee regulated businesses in any locations in which the Group operates.
The Group analyses regulatory risk into:
Upstream risk: the risk to which the Group may be exposed by its failure to
identify and engage with regulators on developments, which are in course of
consideration or preparation by Government, regulators and other bodies,
including the European Union. This has become an increasingly important area
given the rapid and growing rate at which such developments have been tabled by
regulators and other relevant bodies round the world.
Downstream risk: the risk to the Group from failing to comply with extant rules
(analogous to traditional "compliance" risk). This is an increasing challenge
given the growing intricacy of the rules in place and the scale and complexity
of the Group's businesses.
Regulator risk: the risk to the Group of a failure to manage effectively its
relationships with its regulators. Given that the Group includes businesses
operating under the supervision of many regulatory bodies in many
jurisdictions, the management of this risk is a complex and continuous process.
During the year, a Group Regulatory Risk Team was created within Group Risk
Management, as a successor to the previous Group Compliance function. Its
objective has been to enhance management of regulatory risk by incorporating
the identification and management process into the Group's wider risk
management structure and methodologies.
Enterprise risk
Enterprise risk management is the term used within the Group to describe the
risk of an actual or potential loss to the Group that is not managed directly
by existing liquidity, regulatory, market or credit risk management processes.
Such risks can arise internally from inadequate or failed internal processes
and systems, staff error and management failure or externally from changes to
the legal, physical, political or business environment within any of the
territories where the Group conducts business. Enterprise risk management also
includes the potential or actual impact on our corporate reputation arising
from any of the Group's activities.
Operational risk management
Operational risk is defined as the risk arising from within the organisation.
It has four major components: .People - risks arising from an inappropriate
level of staff, inadequately skilled or managed.
o Process - risk caused by inadequate or failed internal processes.
o Systems - risks of inadequately designed or maintained systems.
o Assets - risk of damage, misappropriation or theft of the Group's
physical, logical and intangible assets.
Within each Division there are independent operational risk management units,
reporting to both divisional executive management, who have the final
responsibility for managing divisional operational risk, and Group Risk.
83
External risk management
External risk is defined as the risk arising from outside of the organisation
in three main areas;
o Business - risks arising from competitor activity, supplier unreliability
or customer activity.
o Political - risks caused by non-compliance with, or changes to, current
legislation, political unrest or uncertainty, lobbying activity or
targeted sabotage.
o Environment - risk caused by demographic, macro economic or environmental
change.
External risk management is primarily performed at a Group level and requires
close co-operation across Group functions. As these risks can arise from
changes to the legal, physical, political or business environment in any of the
territories where the Group conducts business, close liaison with the relevant
divisional risk management teams is also critical to the assessment and
management of the Group's risk exposure in these areas.
A key component of the risk management processes is the fight against financial
crime. This includes the anti-money laundering processes in place across the
Group. There are divisional and business unit anti-money laundering teams
acting under the licence of, and monitored by, a Group anti-money laundering
function. This monitoring ranges from monthly reporting of key indicators
through to a full annual report by the money laundering Reporting Officer to
the Board.
The monitoring and reporting covers the full spectrum of anti-money laundering
responsibilities as follows:
o Ensuring the required Know Your Customer procedures are in operation.
o Transaction monitoring in order to identify suspicious or untoward
incidents that may indicate money laundering activity.
o Documentation requirements are met to support information requests from
the regulators and law enforcement agencies.
o Training and competence assessments of the Group's staff.
The Group also manages insurance risk arising from insurance as a source of
risk and as a tool to reduce other risk exposures. Insurance is a source of
risk where the Group sells and underwrites general insurance and life
assurance. The essence of an insurance contract is the transfer of risk from
the policyholder to the insurer. The Group controls its insurance exposures
through product design and policy wordings, and through pricing and
underwriting procedures. Investment strategy reflects the maturity of
underwriting liabilities. Underwriting concentrations and catastrophe exposure
are reviewed and, where necessary, mitigated by reinsurance. Group Risk
Management provides the framework within which the consolidated insurance
exposure is managed and provides guidance and challenge as appropriate.
The Group's underwriting experience, the level of retained risk and solvency
are monitored at business and Group level.
The Insurance Risk Department is responsible for the Group-wide purchase of
insurance as a means of reducing other risk exposures. As such, it is a key
component of the Group Insurance Risk Management process and reports its
activities to the GEMC.
84
ITEM 15. CONTROLS AND PROCEDURES
--------------------------------
Sarbanes-Oxley Act
Under the US Sarbanes-Oxley Act of 2002, new and enhanced standards of
corporate governance, and business and financial disclosure, will apply to US
public companies and non-US companies, including the company, with securities
registered in the US. Some of the new standards and rules affecting the company
are already in force and others will come into force during 2003. New standards
directly applicable to the company include certifications of the Annual Report
on Form 20-F by the Group Chief Executive and Group Finance Director, changes
to the role of the Audit Committee and new rules relating to internal controls.
The NatWest Group is following these developments closely and intends to
implement all necessary changes as the new rules come into force.
Controls and procedures
Evaluation of disclosure controls and procedures - The Group Chief Executive
and Group Finance Director, after evaluating the effectiveness of the Bank's
disclosure controls and procedures (as defined in rules under the US Securities
Exchange Act) as of a date (the "evaluation date") within 90 days of the filing
date of this annual report, have concluded that as of the evaluation date, the
company's disclosure controls and procedures were adequate and effective and
designed to ensure that material information relating to the company and its
consolidated subsidiaries would be made known to them by others within those
entities.
Changes in internal controls - There were no significant changes in the
company's internal controls or, to the knowledge of the Group Chief Executive
and Group Finance Director, in other factors that could significantly affect
those internal controls subsequent to the evaluation date.
85
ITEM 18. CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
CONTENTS
Statement of directors' responsibilities..................................87
Report of independent accountants.........................................88
National Westminster Bank Plc
Consolidated profit and loss account for the years ended
31 December 2002, 2001 and 2000......................................89
Consolidated balance sheet at 31 December 2002 and 2001..............90
Statement of consolidated total recognised gains and losses
for the years ended 31 December 2002, 2001 and 2000..................91
Reconciliation of movements in consolidated shareholders' funds
for the years ended 31 December 2002, 2001 and 2000..................91
Consolidated cash flow statement for the years ended
31 December 2002, 2001 and 2000......................................92
Accounting policies..................................................92
Notes to the Consolidated Financial Statements.......................96
86
STATEMENT OF DIRECTORS' RESPONSIBILITIES
UK company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
Bank and the NatWest Group as at the end of the financial year and of the
profit or loss of the NatWest Group for that year. In preparing those financial
statements, the directors are required to:
o select suitable accounting policies and then apply them consistently;
o make judgements and estimates that are reasonable and prudent;
o state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements; and
o prepare the accounts on the going concern basis unless it is inappropriate
to presume that the Bank will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
NatWest Group and to enable them to ensure that the financial statements comply
with the Companies Act 1985. They are also responsible for safeguarding the
assets of the Bank and NatWest Group and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
By order of the Board.
Miller McLean
Secretary
26 February 2003
87
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF NATIONAL WESTMINSTER BANK PLC
We have audited the accompanying consolidated balance sheets of National
Westminster Bank Plc (the "Bank") and its subsidiaries (together the "NatWest
Group") as of 31 December 2002 and 2001, and the related consolidated profit
and loss accounts, statements of consolidated total recognised gains and
losses, reconciliations of movements in consolidated shareholders' funds and
consolidated cash flow statements for each of the three years in the period
ended 31 December 2002. These financial statements are the responsibility of
the NatWest Group directors. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NatWest
Group as of 31 December 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended 31 December
2002, in conformity with accounting principles generally accepted in the United
Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected the
determination of net income for each of the three years in the period ended 31
December 2002 and the determination of the consolidated shareholders' equity as
at 31 December 2002 and 2001, to the extent summarised in Note 52 to the
consolidated financial statements.
Deloitte & Touche
Chartered Accountants and Registered Auditors
Edinburgh
26 February 2003
88
CONSOLIDATED PROFIT AND LOSS ACCOUNT
2002 2001* 2000*
---- ---- ----
Note (pound)m (pound)m (pound)m
Interest receivable 6,505 7,854 8,515
Interest payable (2,371) (3,933) (4,840)
-------- -------- --------
Net interest income 4,134 3,921 3,675
-------- -------- --------
Dividend income 13 17 14
Fees and commissions receivable 2,908 3,036 2,957
Fees and commissions payable (715) (711) (637)
Dealing profits 1 735 719 684
Other operating income** 619 642 800
-------- -------- --------
Non-interest income 3,560 3,703 3,818
-------- -------- --------
Total income 7,694 7,624 7,493
-------- -------- --------
Administrative expenses
- - staff costs** 2 (1,755) (2,097) (2,572)
- - premises and equipment** (285) (368) (609)
- - other** (2,084) (1,495) (1,492)
-------- -------- --------
(4,124) (3,960) (4,673)
Depreciation and amortisation
- - tangible fixed assets** 21 (444) (541) (559)
- - goodwill 20 (26) (24) (27)
-------- -------- --------
(470) (565) (586)
-------- -------- --------
Operating expenses (4,594) (4,525) (5,259)
-------- -------- --------
Profit before provisions for bad and doubtful debts 3,100 3,099 2,234
Provisions for bad and doubtful debts 14 (508) (510) (359)
Amounts written off fixed asset investments (8) (6) (14)
-------- -------- --------
Operating profit 2,584 2,583 1,861
Profit on disposal of businesses 4 - - 967
Additional consideration on sale of Bancorp 5 - - 74
-------- -------- --------
Profit on ordinary activities before tax 6 2,584 2,583 2,902
Tax on profit on ordinary activities 7 (713) (733) (692)
-------- -------- --------
Profit on ordinary activities after tax 1,871 1,850 2,210
Minority interests - equity (5) (5) (9)
-------- -------- --------
Profit for the financial year 1,866 1,845 2,201
Preference dividends - non-equity 8 (41) (43) (41)
-------- -------- --------
Profit attributable to ordinary shareholders 1,825 1,802 2,160
Ordinary dividends 9 (695) (799) (4,573)
-------- -------- --------
Retained profit/(loss) 32 1,130 1,003 (2,413)
======== ======== ========
All items dealt with in arriving at operating profit relate to continuing
operations.
Profit on ordinary activities before taxation and the retained profit for the
year on a historical cost basis were not materially different from reported
amounts.
* Restated (see page 95)
** Includes restructuring costs (see Note 6)
89
CONSOLIDATED BALANCE SHEET
Note 2002 2001*
---- ---- ----
(pound)m (pound)m
Assets
Cash and balances at central banks 1,251 1,162
Items in the course of collection from other banks 2,085 2,410
Treasury bills and other eligible bills 11 1,724 1,475
Loans and advances to banks 12 23,664 31,269
Loans and advances to customers 13 112,122 100,618
Debt securities 16 16,846 20,135
Equity shares 17 1,067 1,073
Interests in associated undertakings 18 33 47
Intangible fixed assets 20 331 284
Tangible fixed assets 21 3,795 3,368
Other assets 22 7,774 9,737
Prepayments and accrued income 1,195 1,149
------- -------
Total assets 171,887 172,727
------- -------
Liabilities
Deposits by banks 23 17,718 25,246
Items in the course of transmission to other banks 1,214 1,408
Customer accounts 24 111,477 99,951
Debt securities in issue 25 208 5,222
Other liabilities 26 21,503 22,906
Accruals and deferred income 3,147 2,096
Provisions for liabilities and charges
- deferred taxation 27 1,213 1,069
- other provisions 28 224 217
Subordinated liabilities
- dated loan capital 29 3,341 3,651
- undated loan capital including convertible debt 30 2,592 2,745
Minority interests
- equity 44 106
- non-equity 3 4
Called up share capital 31 2,159 2,197
Share premium account 32 1,286 1,286
Other reserves 32 301 301
Revaluation reserve 32 99 119
Profit and loss account 32 5,358 4,203
- ---------------------------------------------------------------------------------------------------------
Shareholders' funds
- equity 8,722 7,587
- non-equity 481 519
- ---------------------------------------------------------------------------------------------------------
Total liabilities 171,887 172,727
------- -------
Memorandum items
Contingent liabilities 39 6,500 7,204
------- -------
Commitments (standby facilities, credit lines and other) 39 59,965 66,270
------- -------
* Restated (see page 95)
90
STATEMENT OF CONSOLIDATED TOTAL RECOGNISED GAINS AND LOSSES
2002 2001* 2000*
---- ---- ----
(pound)m (pound)m (pound)m
Profit attributable to ordinary shareholders 1,825 1,802 2,160
Currency translation adjustments and other movements 27 (4) 5
Revaluation of premises (22) 41 20
----------------------------------------------
Total recognised gains and losses in the year 1,830 1,839 2,185
----------------------------
Prior year adjustment arising from the implementation of FRS 19 30
-------
Total recognised gains and losses since 31 December 2001 1,860
-------
* Restated (see page 95)
RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS
2002 2001* 2000*
---- ---- ----
(pound)m (pound)m (pound)m
Profit attributable to ordinary shareholders 1,825 1,802 2,160
Ordinary dividends (695) (799) (4,573)
----------------------------------------------
Retained profit/(loss) for the year 1,130 1,003 (2,413)
Other recognised gains and losses 5 37 25
Issue of ordinary shares in relation to share option schemes for staff - - 57
Currency translation adjustment on preferences shares (38) 10 29
----------------------------------------------
Net increase/(decrease) in shareholders' funds 1,097 1,050 (2,302)
----------------------------------------------
Opening shareholders' funds as previously reported 8,076 7,040 9,344
Prior year adjustment arising from the implementation of FRS 19 30 16 14
----------------------------------------------
Opening shareholders' funds as restated 8,106 7,056 9,358
Net increase/(decrease) in shareholders' funds 1,097 1,050 (2,302)
----------------------------------------------
Closing shareholders' funds 9,203 8,106 7,056
----------------------------------------------
* Restated (see page 95)
91
Consolidated cash flow statement
2002 2001 2000
---- ---- ----
Note (pound)m (pound)m (pound)m
----
Net cash outflow from operating activities 41 (3,506) (2,534) (5,001)
Dividends received from associated undertakings 1 1 3
Returns on investments and servicing of finance
------- ------- -------
Preference dividends paid (42) (43) (40)
Dividends paid to minority shareholders in subsidiary undertakings (67) - (3)
Interest paid on subordinated liabilities (269) (423) (470)
------- ------- -------
Net cash outflow from returns on investments and
servicing of finance (378) (466) (513)
Taxation
------- ------- -------
UK tax paid (264) (542) (361)
Overseas tax paid (68) (197) (119)
------- ------- -------
Net cash outflow from taxation (332) (739) (480)
Capital expenditure and financial investment
------- ------- -------
Purchase of investment securities (733) (1,772) (7,792)
Sale and maturity of investment securities 2,347 9,397 18,132
Purchase of tangible fixed assets (1,441) (1,448) (977)
Sale of tangible fixed assets 607 1,088 737
------- ------- -------
Net cash inflow from capital expenditure and financial investment
780 7,265 10,100
Acquisitions and disposals
------- ------- -------
Purchase of subsidiary undertakings (net of cash acquired) 42 (109) (220) (86)
Investment in associated undertakings - (5) (5)
Sale of subsidiary and associated undertakings (net of cash sold) 43 29 (20) 1,966
------- ------- -------
Net cash (outflow)/inflow from acquisitions and disposals (80) (245) 1,875
Ordinary equity dividends paid (1,095) (999) (3,973)
------- ------- -------
Net cash (outflow)/inflow before financing (4,610) 2,283 2,011
Financing
------- ------- -------
Proceeds from issue of ordinary share capital - - 57
Issue of subordinated liabilities - 73 -
Repayments of subordinated liabilities (162) (690) (959)
------- ------- -------
Net cash outflow from financing (162) (617) (902)
------- ------- -------
(Decrease)/increase in cash 46 (4,772) 1,666 1,109
------- ------- -------
92
Accounting policies
The accounts have been prepared in accordance with applicable Accounting
Standards and the Statements of Recommended Accounting Practice issued by the
British Bankers' Association and by the Finance and Leasing Association. A
summary of the more important accounting policies is set out below. The
consolidated accounts and the accounts of the Bank are prepared in accordance
with the special provisions of Part VII of the Companies Act 1985 ("the Act")
relating to banking groups. As permitted by section 230(3) of the Act, no
profit and loss account is presented for the Bank.
1 Accounting convention and bases of consolidation -- The accounts are
prepared under the historical cost convention modified by the periodic
revaluation of premises and certain investments. To avoid undue delay in
the presentation of the Group's accounts, the accounts of certain
subsidiary undertakings have been made up to 30 November. There have been
no changes in respect of these subsidiary undertakings, in the period from
their balance sheet dates to 31 December, that materially affect the view
given by the NatWest Group's accounts.
2 Revenue recognition -- Interest receivable is credited to the profit and
loss account as it accrues unless there is significant doubt that it can
be collected (as described in the accounting policy on loans and
advances).
Fees receivable that represent a return for services provided are
recognised in the profit and loss account so as to match the cost of
providing the service. Certain front-end lending fees are recognised over
the life of the loan.
Securities and derivatives held for trading are recorded at fair value.
Changes in fair value are recognised in dealing profits together with
dividends from, and interest receivable and payable on, trading business
assets and liabilities.
3 Goodwill -- Goodwill is the excess of the cost of acquisition of
subsidiary and associated undertakings over the fair value of the Group's
share of net tangible assets acquired. Goodwill is capitalised on the
balance sheet and amortised on a straight-line basis over its estimated
useful economic life, currently over periods of up to 20 years.
Capitalised goodwill is reviewed for impairment at the end of the first
full year following an acquisition and subsequently if events or changes
in circumstances indicate that its carrying value may not be recoverable
in full.
4 Foreign currencies -- Monetary assets and liabilities denominated in
foreign currencies are translated into sterling at the rates of exchange
ruling at the balance sheet date. Profit and loss accounts of overseas
branches and subsidiary undertakings are translated at the average rates
of exchange for the period. Exchange differences arising from the
application of closing rates of exchange to the opening net assets of
overseas branches and subsidiary undertakings and from restating their
results from average to period-end rates are taken to profit and loss
account reserves, together with exchange differences arising on related
foreign currency borrowings. All other exchange differences are included
in operating profit.
5 Pensions and other post-retirement benefits -- The NatWest Group provides
post-retirement benefits in the form of pensions and healthcare plans to
eligible employees. The cost of defined benefit pension schemes and
healthcare plans is assessed by independent professionally qualified
actuaries and recognised on a systematic basis over employees' service
lives. Contributions to defined contribution pension schemes are
recognised in the profit and loss account when payable.
6 Leases -- Contracts to lease assets are classified as finance leases if
they transfer substantially all the risks and rewards of ownership of the
asset to the customer. Other contracts to lease assets are classified as
operating leases. Total gross earnings under finance leases are allocated
to accounting periods using the actuarial after tax method to give a
constant periodic rate of return on the net cash investment. Finance lease
receivables are stated in the balance sheet at the amount of the net
investment in the lease. Rental income from operating leases is credited
to the profit and loss account on a receivable basis over the term of the
lease. Balance sheet carrying values of finance lease receivables and
operating lease assets include amounts in respect of the residual values
of the leased assets. Unguaranteed residual values are subject to regular
review to identify potential impairments. Provisions are made for
impairment arising on specific asset categories.
7 Loans and advances -- The NatWest Group makes provisions for bad and
doubtful debts, through charges to the profit and loss account, so as to
record loans and advances at their expected ultimate net realisable value.
Specific provisions are made against individual loans and advances that
NatWest Group no longer expects to recover in full. For the Group's
portfolios of smaller balance homogeneous advances, such as credit card
receivables, specific provisions are established on a portfolio basis
taking into account the level of arrears, security and past loss
experience. For loans and advances that are individually assessed, the
specific provision is determined from a review of the financial condition
of the counterparty and any guarantor and takes into account the nature
and value of any security held.
93
Accounting policies (continued)
The general provision is made to cover bad and doubtful debts that have
not been separately identified at the balance sheet date but are known to
be present in any portfolio of advances. The level of general provision is
determined in the light of past experience, current economic and other
factors affecting the business environment and NatWest Group's monitoring
and control procedures, including the scope of specific provisioning
procedures.
Specific and general provisions are deducted from loans and advances. When
there is significant doubt that interest receivable can be collected, it
is excluded from the profit and loss account and credited to an interest
suspense account. Loans and advances and suspended interest are written
off in part or in whole when there is no realistic prospect of recovery.
8 Taxation -- Provision is made for taxation at current enacted rates on
taxable profits taking into account relief for overseas taxation where
appropriate. Timing differences arise where gains and losses are accounted
for in different periods for financial reporting purposes and for taxation
purposes. Deferred taxation is accounted for in full for all such timing
differences, except in relation to revaluations of fixed assets where
there is no commitment to dispose of the asset, taxable gains on sales of
fixed assets that are rolled over into the tax cost of replacement assets,
and unremitted overseas earnings. Deferred tax assets are only recognised
to the extent that it is considered more likely than not that they will be
recovered. Deferred tax amounts are not discounted.
9 Debt securities and equity shares -- Debt securities and equity shares
intended for use on a continuing basis in NatWest Group's activities are
classified as investment securities and are stated at cost less provision
for any permanent diminution in value. The cost of dated investment
securities is adjusted for the amortisation of premiums or discounts over
periods to redemption and the amortisation is included in interest
receivable. Debt securities held for the purpose of hedging are carried at
a value that reflects the accounting treatment of the items hedged. Other
debt securities and equity shares are carried at fair value, with changes
in fair value recognised in the profit and loss account.
10 Shares in Group undertakings -- The Bank's shares in Group undertakings
are stated in the balance sheet of the Bank at directors' valuation that
takes account of the Group undertakings' net asset values.
11 Interests in associated undertakings -- Interests in associated
undertakings are accounted for by the equity method and are stated in the
consolidated balance sheet at the Group's share of their net tangible
assets. NatWest Group's share of the results of associated undertakings is
included in the consolidated profit and loss account. For this purpose,
the latest available audited accounts are used together with available
unaudited interim accounts.
12 Tangible fixed assets -- Freehold and long leasehold properties are
revalued on a rolling basis, each property being revalued at least every
five years. Other tangible fixed assets are stated at cost less
depreciation and provisions for impairment. Costs of adapting premises for
the use of NatWest Group are separately identified and depreciated.
Tangible fixed assets are depreciated over their estimated useful economic
lives on a straight-line basis, as follows:
Freehold and long leasehold buildings 50 years
Short leaseholds unexpired period of the lease
Property adaptation costs 10 to 15 years
Computer equipment up to 5 years
Other equipment 4 to 15 years
Assets on operating leases are depreciated over their estimated useful
lives on a straight-line or reverse-annuity basis. Land has an unlimited
life and is not depreciated.
Investment properties are revalued annually to open market value. No
depreciation is charged on freehold investment properties, in accordance
with the requirements of Statement of Standard Accounting Practice 19
`Accounting for investment properties'. This is a departure from the
requirements of the Companies Act 1985 which requires all tangible fixed
assets to be depreciated. Investment properties are held not for
consumption but for investment and the directors consider that to
depreciate them would not give a true and fair view. It is not practicable
to assess estimated useful lives for investment properties, and
accordingly the effect of not depreciating them cannot be reasonably
quantified.
13 Derivatives -- NatWest Group enters into derivative transactions including
futures, forwards, swaps and options principally in the interest rate,
foreign exchange and equity markets. The accounting treatment for these
instruments is dependent upon whether they are entered into for trading or
non-trading (hedging) purposes.
94
Accounting policies (continued)
Trading -- Derivatives held for trading purposes are recognised in the
accounts at fair value. Gains or losses arising from changes in fair value
are included in dealing profits in the consolidated profit and loss
account. Fair value is based on quoted market prices. Where representative
market prices are not available, the fair value is determined from current
market information using appropriate pricing or valuation models.
Adjustments are made to quoted market prices where appropriate to cover
credit risk, liquidity risk and future operational costs. In the
consolidated balance sheet, positive fair values (assets) of trading
derivatives are included in Other assets and negative fair values
(liabilities) in Other liabilities. Positive and negative fair values of
trading derivatives are offset where the contracts have been entered into
under master netting agreements or other arrangements that give a legally
enforceable right of set-off.
Non-trading -- Non-trading derivatives are entered into by NatWest Group
to hedge exposures arising from transactions entered into in the normal
course of banking activities. They are recognised in the accounts in
accordance with the accounting treatment of the underlying transaction or
transactions being hedged. To be classified as non-trading, a derivative
must match or eliminate the risk inherent in the hedged item from
potential movements in interest rates, exchange rates or market values. In
addition, there must be a demonstrable link to an underlying transaction,
pool of transactions or specified future transaction or transactions.
Specified future transactions must be reasonably certain to arise for the
derivative to be accounted for as a hedge. In the event that a non-trading
derivative transaction is terminated or ceases to be an effective hedge,
the derivative is re-measured at fair value and any resulting profit or
loss amortised over the remaining life of the underlying transaction or
transactions being hedged. If a hedged item is derecognised, or a
specified future transaction is no longer likely to occur, the related
non-trading derivative is remeasured at fair value and the resulting
profit or loss taken to the profit and loss account.
14 Sale and repurchase transactions -- Securities which have been sold with
an agreement to repurchase continue to be shown on the balance sheet and
the sale proceeds recorded as a deposit. Securities acquired in reverse
sale and repurchase transactions are not recognised in the balance sheet
and the purchase price is treated as a loan. The difference between the
sale price and repurchase price is accrued evenly over the life of the
transaction and charged or credited to the profit and loss account as
interest payable or receivable.
RESTATEMENT
NatWest Group has implemented FRS 19 `Deferred Tax' which requires recognition
of deferred tax assets and liabilities on all timing differences, with
specified exceptions. Previously, provision was made for deferred tax only to
the extent that timing differences were expected to reverse and the deferred
tax liability crystallise in the foreseeable future. The effect of adopting the
new policy for the year ended 31 December 2002 is to increase goodwill
amortisation by (pound)6 million, reduce profit before tax by (pound)6 million,
increase the tax charge by (pound)58 million and, at 31 December 2002, reduce
profit and loss account reserves by (pound)34 million and increase intangible
fixed assets by (pound)110 million. Prior periods have been restated resulting,
at 31 December 2001, in an increase goodwill amortisation of (pound)6 million
(2000 - nil), a decrease in profit before tax of (pound)6 million (2000 - nil),
a decrease in the tax charge of (pound)20 million (2000 - decrease (pound)2
million) and, at 31 December 2001, an increase in profit and loss account
reserves of (pound)30 million (2000 - increase (pound)16 million) and an
increase in intangible fixed assets of (pound)116 million (2000 - nil).
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Dealing profits
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Foreign exchange (1) 74 107 282
Securities
Equities (2) 4 (3) 8
Debt (3) 595 636 355
Interest rate derivatives (4) 62 (21) 39
---------------------------------------------
735 719 684
---------------------------------------------
Dealing profits include interest income and expense recognised on
trading-related interest-earning assets and interest-bearing liabilities.
Notes:
(1) Includes spot and forward foreign exchange contracts and currency swaps,
futures and options and related hedges and funding.
(2) Includes equities and equity derivatives and related hedges and funding.
(3) Includes debt securities and related hedges and funding.
(4) Includes interest rate swaps, forward rate agreements, interest rate
options, interest rate futures and credit derivatives and related hedges
and funding.
2. Administrative expenses - staff costs
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Wages and salaries 1,192 1,462 2,018
Social security costs 78 91 148
Pension costs (see Note 3) 43 58 49
Other staff costs 442 486 357
---------------------------------------------
1,755 2,097 2,572
---------------------------------------------
The average number of persons employed by the NatWest Group during the year,
excluding temporary staff, was 31,200 (2001 - 48,300; 2000 - 62,000).
During the year, staff employed in the retail branch network of the Bank moved
to contracts of employment with The Royal Bank of Scotland plc.
3. Pension costs
The Bank participates in The Royal Bank of Scotland Group Pension Fund (the
main scheme), which is a funded defined benefit scheme whose assets are
independent of the Bank's finances. This scheme was formed from the merger of
the National Westminster Bank Pension Fund and The Royal Bank of Scotland Staff
Pension Scheme on 1 April 2002. Scheme valuations are carried out by
independent professionally qualified actuaries to determine pension costs,
using the projected unit method; any imbalance between assets and liabilities
is adjusted over the average future service life of members of the scheme. The
latest full valuation was carried out as at 31 March 2001 on a basis that
assumed the merger would occur and showed scheme assets representing 108% of
scheme liabilities. The pension costs of this scheme are assessed across its
membership as a whole, and it is not possible to determine the share of the
scheme's assets and liabilities that relates to the Bank. Accordingly, the
requirements of FRS 17 `Pension Costs' relating to multi-employer schemes
apply. Other pension schemes operated by NatWest Group are not material. The
pension costs included in the profit and loss account are (pound)43 million
(2001 - (pound)58 million; 2000 - (pound)49 million) of which the main scheme
was (pound)34 million (2001 - (pound)46 million; 2000 - (pound)27 million). At
31 December 2002, there was a pension cost accrual of (pound)36 million (2001 -
(pound)33 million). In accordance with FRS 17, a valuation of the whole scheme
was prepared as at 31 December 2002 using actuarial bases and assumptions
consistent with the requirements of that standard, and showed scheme assets
representing 86% of scheme liabilities. Further information on the scheme and
the actuarial valuations is given in the Report and Accounts of the RBS Group.
96
4. Profit on disposal of businesses
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Profit on disposals in the year - - 967
-----------------------------------------------
In 2000, gains of (pound)967 million (tax charge (pound)103 million) were made
in respect of the disposals of Gartmore Investment Management plc, National
Westminster Life Assurance Limited and the investment management and services
businesses of Ulster Bank Group. These businesses contributed (pound)105
million to NatWest Group profit before tax in 2000 up to the dates of their
respective disposals.
5. Additional consideration on sale of Bancorp
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Additional consideration received relating to
the disposal in 1996 of Bancorp, a subsidiary
undertaking (tax charge -(pound)8 million) - - 74
-----------------------------------------------
6. Profit on ordinary activities before tax
Profit on ordinary activities before tax is stated after taking account of the
following:
2002 2001 2000
---- ---- ----
Income (pound)m (pound)m (pound)m
Aggregate amounts receivable under finance
leases, hire purchase and conditional sale
contracts 1,288 1,474 1,027
Aggregate amounts receivable under operating
leases 464 396 355
Profit on disposals of investment securities
and associated undertakings 17 6 234
Share of associated undertakings' net
profit/(loss) 1 (3) (3)
Expenses
Management charge from fellow subsidiary 1,033 451 -
Operating lease rentals of premises 113 97 143
Operating lease rentals of computers and
other equipment 3 2 7
Finance charges on leased assets 11 33 24
Interest on subordinated liabilities 262 398 502
Restructuring costs* 663 638 527
*Restructuring costs comprise:
Other operating income - - 3
Staff costs 447 413 297
Premises and equipment 92 57 158
Other administrative costs 123 138 58
Depreciation 1 30 11
-----------------------------------------------
663 638 527
-----------------------------------------------
Auditors' remuneration
The auditors' remuneration for statutory audit work was (pound)0.5 million for
the Bank (2001 - (pound)0.5 million) and (pound)2.1 million for the NatWest
Group (2001 - (pound)2.0 million). Fees paid to the auditors and their
associates for non-audit work for the NatWest Group were (pound)0.8 million
(2001 - (pound)1.1 million) and comprised regulatory, tax, attestation and
other advisory services.
97
7. Tax on profit on ordinary activities
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Current taxation:
UK corporation tax charge for the year at 30% 338 451 631
Over provision in respect of prior periods (22) (77) (71)
Relief for overseas taxation (1) (31) (18)
--------------------------------------------
315 343 542
Overseas taxation:
Current year charge 142 182 122
Over provision in respect of prior periods - (2) (32)
--------------------------------------------
457 523 632
Share of associated undertakings 1 1 2
--------------------------------------------
Current tax charge for the year 458 524 634
Deferred taxation:
Origination and reversal of timing differences 303 179 (17)
(Over)/under provision in respect of prior periods (48) 30 75
--------------------------------------------
713 733 692
--------------------------------------------
The actual tax charge for continuing operations differs from the expected tax
charge for continuing operations computed by applying the standard rate of UK
corporation tax of 30% as follows:
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Expected tax charge - continuing operations 775 775 848
Goodwill amortisation 8 7 8
Disposal of businesses taxed at non-standard rates - - (187)
Non-deductible items 57 58 127
Non-taxable items (60) (27) (22)
Capital allowances in excess of depreciation (276) (184) (22)
Taxable foreign exchange movements (9) 5 9
Foreign profits taxed at other rates (4) (18) (17)
Unutilised losses brought forward and carried forward (11) (13) (15)
Current taxation adjustments relating to prior periods (22) (79) (71)
--------------------------------------------
Current tax charge for the year - continuing operations 458 524 658
Deferred taxation:
Origination and reversal of timing differences 303 179 (17)
Adjustments in respect of prior periods (48) 30 75
--------------------------------------------
Actual tax charge - continuing operations 713 733 716
--------------------------------------------
The following factors may affect future tax charges:
(1) No deferred tax is recognised on the unremitted reserves of overseas
subsidiary and associated undertakings. A substantial proportion of such
reserves are required to be retained by the overseas undertakings to meet
local regulatory requirements.
(2) Deferred tax assets of (pound)46 million (2001 - (pound)52 million)
resulting from tax losses carried forward have not been recognised as
there is insufficient evidence that the asset will be recoverable. These
assets may be recoverable if the losses can be offset against suitable
future taxable profits arising in the same tax jurisdiction.
(3) The fair values of certain financial assets are disclosed in Note 38. The
tax that could be payable if these assets were disposed of at the values
shown is estimated at (pound)169 million (2001 - (pound)84 million).
Because of the nature of these financial assets which are held as part of
the banking business, it is not possible to determine the amount that may
become payable in the foreseeable future.
98
7. Tax on profit on ordinary activities (continued)
(4) Freehold and long leasehold properties are revalued as discussed in Note
21. No provision has been made for deferred tax on gains recognised on
revaluing NatWest Group properties except where there is a commitment to
sell the asset and the taxable gain will not be subject to rollover
relief. The tax that could be payable if these assets were disposed of at
their revalued amount is estimated at (pound)152 million (2001 -
(pound)165 million). This amount includes tax on rolled over gains (see
note (5) below). No such tax is expected to be payable in the foreseeable
future.
(5) No provision has been made for deferred tax on certain gains realised on
disposals of property and other assets as there is an expectation of
rolling over such gains into replacement assets. Expenditure to date on
valid replacement assets together with forecasts of future such
expenditure indicate that these gains will be available for rollover
relief. The tax that could be payable if the conditions for rollover
relief were not met is estimated at (pound)82 million (2001 - (pound)80
million).
8. Preference dividends - non-equity
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
9% non-cumulative sterling preference shares, Series A 13 13 13
Non-cumulative dollar preference shares, Series B 13 14 13
Non-cumulative dollar preference shares, Series C 15 16 15
--------------------------------------------
Total non-equity dividends 41 43 41
--------------------------------------------
9. Ordinary dividends
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Interim 195 399 3,973
Second interim 500 - -
Proposed final - 400 600
--------------------------------------------
Total dividends on equity shares 695 799 4,573
--------------------------------------------
10. Profit dealt with in the accounts of the Bank
Of the profit attributable to shareholders, (pound)1,397 million (2001 -
(pound)1,229 million; 2000 - (pound)1,800 million) has been dealt with in the
accounts of the Bank.
11. Treasury bills and other eligible bills
2002 2001
---- ----
(pound)m (pound)m
Treasury bills and similar securities 1,581 1,453
Other eligible bills 143 22
--------------------------
1,724 1,475
--------------------------
Banking business 31 122
Trading business 1,693 1,353
--------------------------
Treasury bills and other eligible bills are principally of short term maturity
and their market value is not materially different from carrying value.
99
12. Loans and advances to banks
2002 2001
---- ----
(pound)m (pound)m
Repayable on demand 1,534 6,395
Remaining maturity
- - three months or less 20,640 21,852
- - one year or less but over three months 717 2,329
- - five years or less but over one year 208 175
- - over five years 572 526
--------------------------
23,671 31,277
Specific bad and doubtful debt provisions (7) (8)
--------------------------
23,664 31,269
--------------------------
Banking business 11,635 18,213
Trading business 12,029 13,056
--------------------------
Amounts above include:
Due from fellow subsidiary undertakings - unsubordinated 8,946 15,909
- subordinated 500 500
13. Loans and advances to customers
2002 2001
---- ----
(pound)m (pound)m
On demand or short notice 14,022 12,233
Remaining maturity
- three months or less 31,183 15,126
- one year or less but over three months 11,386 12,280
- five years or less but over one year 20,477 27,638
- over five years 37,149 35,464
--------------------------
114,217 102,741
General and specific bad and doubtful debt provisions (2,095) (2,123)
--------------------------
112,122 100,618
--------------------------
Banking business 94,544 91,921
Trading business 17,578 8,697
--------------------------
Amounts above include:
Due from holding company - unsubordinated - 401
Due from fellow subsidiary undertakings - unsubordinated 187 84
Due from associated undertakings - unsubordinated 180 145
Amounts receivable under finance leases 6,875 6,622
Amounts receivable under hire purchase and conditional
sale agreements 4,222 3,098
The cost of assets acquired during the year for the purpose of letting under
finance leases and hire purchase agreements was (pound)4,078 million (2001 -
(pound)3,544 million).
The NatWest Group's exposure to risk from its lending activities is widely
diversified both geographically and industrially. House mortgage lending, loans
to financial institutions and the services sector, other personal loans,
finance leasing and instalment credit and lending to property companies
exceeded 10% of total loans and advances to customers (before provisions).
100
13. Loans and advances to customers (continued)
Residual value exposures
The table below gives details of the unguaranteed residual values included in
the carrying value of finance lease receivables (see above) and operating lease
assets (see Note 21).
Year in which the residual value will be recovered
--------------------------------------------------
After After
1 year but 2 years but
Within within within After
1 year 2 years 5 years 5 years Total
(pound)m (pound)m (pound)m (pound)m (pound)m
--------------------------------------------------------------------------------
Operating leases
Transportation 6 8 28 696 738
Cars and light commercial vehicles 328 134 110 - 572
Other 16 11 41 113 181
Finance leases 36 62 65 142 305
--------------------------------------------------------------------------------
At 31 December 2002 386 215 244 951 1,796
--------------------------------------------------------------------------------
At 31 December 2001 262 137 363 555 1,317
--------------------------------------------------------------------------------
14. Provisions for bad and doubtful debts
2002 2001
-------------------------------- --------------------------------
Specific General Total Specific General Total
-------- ------- ----- -------- ------- -----
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
At 1 January 1,733 398 2,131 1,696 402 2,098
Currency translation and other adjustments (9) (4) (13) (3) 1 (2)
Acquisitions of subsidiaries - - - 7 - 7
Disposals - - - (41) (4) (45)
Amounts written off (544) - (544) (456) - (456)
Recoveries of amounts written off in previous years
17 - 17 19 - 19
Transfers between provisions 17 (17) - - - -
Transfers from/(to) fellow subsidiaries 4 (1) 3 - - -
Charge to profit and loss account 516 (8) 508 511 (1) 510
-------------------------------- --------------------------------
At 31 December 1,734 368 2,102 1,733 398 2,131
-------------------------------- --------------------------------
15. Interest in suspense
In certain cases, interest may be charged to a customer's account but, because
its recoverability is in doubt, not recognised in NatWest Group's consolidated
profit and loss account and held in a suspense account and netted off against
loans and advances in the consolidated balance sheet.
2002 2001
---- ----
(pound)m (pound)m
Loans and advances on which interest is being placed in suspense:
- - before specific provisions 1,049 1,167
- - after specific provisions 502 633
Loans and advances on which interest is not being applied:
- - before specific provisions 1,264 1,431
- - after specific provisions 469 577
101
16. Debt securities
2002 2001
----------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Book unrecognised unrecognised Book unrecognised unrecognised
Value gains losses Valuation value gains losses Valuation
----- ----- ------ --------- ----- ----- ------ ---------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Investment securities:
British government 138 3 - 141 204 2 - 206
Other government 229 9 - 238 401 2 (2) 401
Other public sector bodies - - - - 501 16 - 517
Bank and building society 19 - - 19 210 - - 210
Other issuers 957 17 (1) 973 1,645 12 (21) 1,636
----------------------------------------------- -----------------------------------------------
1,343 29 (1) 1,371 2,961 32 (23) 2,970
----------------------------------------------- -----------------------------------------------
Other debt securities:
British government 161 161 260 260
Other government 4,118 4,118 11,392 11,392
Other public sector bodies 38 38 - -
Bank and building society 294 294 339 339
Other issuers 10,892 10,892 5,183 5,183
-------- -------- -------- --------
15,503 15,503 17,174 17,174
-------- -------- -------- --------
Total debt securities 16,846 16,874 20,135 20,144
-------- -------- -------- --------
Due within one year 1,083 1,654
Due one year and over 15,763 18,481
-------- --------
16,846 20,135
-------- --------
Investment securities:
Listed 740 795 1,050 1,077
Unlisted 603 576 1,911 1,893
-------- -------- -------- --------
1,343 1,371 2,961 2,970
-------- -------- -------- --------
Other debt securities:
Listed 1,161 1,161 1,533 1,533
Unlisted 14,342 14,342 15,641 15,641
-------- -------- -------- --------
16,846 16,874 20,135 20,144
-------- -------- -------- --------
Banking business 1,639 3,295
Trading business 15,207 16,840
-------- --------
Amounts above include:
Subordinated debt securities 155 59
Unamortised discounts less premiums
on investment securities
(2) (3)
The cost of securities carried at market value is not disclosed as it cannot be
determined without unreasonable expense.
102
16. Debt securities (continued)
Movements in debt securities which are held as investment securities were as
follows:
Discounts
Cost and premiums Provisions Book value
---- ------------ ---------- ----------
(pound)m (pound)m (pound)m (pound)m
At 1 January 2002 2,974 (13) - 2,961
Currency translation and other adjustments (47) - - (47)
Additions 718 - - 718
Maturities and disposals including transfers to
fellow subsidiary (2,306) 17 1 (2,288)
Provisions made net of write backs - - (1) (1)
----------------------------------------------------------------------
At 31 December 2002 1,339 4 - 1,343
----------------------------------------------------------------------
17. Equity shares
2002 2001
------------------------------------------------- -------------------------------------------------
Gross Gross Gross Gross
unrecognised unrecognised unrecognised unrecognised
Book value gains losses Valuation Book value gains losses Valuation
---------- ----- ------ --------- ---------- ----- ------ ---------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Investment securities:
Listed 322 - (131) 191 376 - (45) 331
Unlisted 718 - - 718 693 7 - 700
------------------------------------------------- -------------------------------------------------
1,040 - (131) 909 1,069 7 (45) 1,031
Other securities (all listed) 27 - - 27 4 - - 4
------------------------------------------------- -------------------------------------------------
1,067 - (131) 936 1,073 7 (45) 1,035
------------------------------------------------- -------------------------------------------------
Banking business 1,039 1,065
Trading business 28 8
---------- ----------
The cost of securities carried at market value is not disclosed as it cannot be
determined without unreasonable expense.
Movements in equity shares which are held as investment securities were as
follows:
Cost Provisions Book value
---- ---------- ----------
(pound)m (pound)m (pound)m
At 1 January 2002 1,072 (3) 1,069
Currency translation and other adjustments 13 - 13
Additions 15 - 15
Disposals (47) 5 (42)
Provisions made net of write backs - (7) (7)
Transfers (8) - (8)
------------------------------------------------
At 31 December 2002 1,045 (5) 1,040
------------------------------------------------
103
18. Interests in associated undertakings
Movements in interests in associated undertakings were as follows:
(pound)m
At 1 January 2002 47
Additions 6
Change of status (18)
Disposal (1)
Share of losses (1)
------
At 31 December 2002 - unlisted 33
------
On the historical cost basis, interests in associated undertakings would have
been included as follows:
(pound)m
Cost 25
Provisions (16)
------
9
------
None of the associated undertakings is a bank.
Dividends receivable from associated undertakings (excluding related tax
credits) totalled (pound)1 million (2001 - (pound)1 million).
Associated undertakings are accounted for as such due to the NatWest Group's
interest being held on a long-term basis for the purpose of securing a
contribution to its activities by the exercise of influence.
19. Shares in Group undertakings
Movements in shares in Group undertakings during the year were as follows:
2002
----
(pound)m
As previously reported 9,092
Prior year adjustment* (74)
-------
At 1 January 2002 as restated 9,018
Currency translation and other adjustments (81)
Additions 26
Disposals (59)
Increase in net assets of subsidiary undertakings 274
-------
At 31 December 2002 9,178
-------
* Restated following the implementation of FRS 19 in 2002
2002 2001
(pound)m (pound)m
Banks 2,475 2,248
Other 6,703 6,770
------------------------
9,178 9,018
------------------------
On the historical cost basis, shares in Group undertakings at 31 December 2002
would have been included at a cost of (pound)6,325 million (31 December 2001 -
(pound)6,384 million).
104
19. Shares in Group undertakings (continued)
The principal subsidiary undertakings of the Bank are shown below. Their
capital consists of ordinary and preference shares, which are unlisted. All of
the subsidiary undertakings are owned directly or indirectly through
intermediate holding companies and are all wholly-owned. All of these
subsidiary undertakings are included in the NatWest Group's consolidated
financial statements and have an accounting reference date of 31 December.
Country of incorporation
and principal area of
Nature of business operations
- -------------------------------------------------------------------------------------------------------------------------------
Coutts & Co (1) Private banking Great Britain
Coutts Bank (Switzerland) Limited (2) Private banking Switzerland
Greenwich Capital Markets, Inc. (2) Broker dealer US
Lombard North Central PLC (4) Banking, credit finance, leasing and hire purchase Great Britain
National Westminster Home Loans Limited Home mortgage finance Great Britain
Ulster Bank Limited (3) Banking Northern Ireland
Notes:
(1) Coutts & Co is incorporated with unlimited liability. Its registered
office is 440 Strand, London WC2R 0QS.
(2) Shares are not directly held by the Bank.
(3) Ulster Bank Limited and its subsidiary undertakings also operate in the
Republic of Ireland.
(4) On 31 January 2003, the entire issued ordinary share capital of Lombard
North Central PLC was transferred to The Royal Bank of Scotland plc.
The above information is provided in relation to the principal subsidiaries as
permitted by section 231(5) of the Companies Act 1985. Full information on all
subsidiaries will be included in the Annual Return filed with the UK Companies
House.
20. Intangible fixed assets
2002
----
Goodwill (pound)m
Cost:
As previously reported 299
Prior year adjustment * 122
--------
At 1 January 2002 as restated 421
Currency translation and other adjustments (1)
Arising on acquisitions during the year 77
Disposals (5)
--------
At 31 December 2002 492
--------
Amortisation:
As previously reported 131
Prior year adjustment * 6
--------
At 1 January 2002 as restated 137
Currency translation and other adjustments (1)
Charge for the year 26
Disposals (1)
--------
At 31 December 2002 161
--------
Net book value at 31 December 2002 331
--------
Net book value at 31 December 2001 as restated 284
--------
* Restated following the implementation of FRS 19 in 2002.
105
21. Tangible fixed assets
Long Short Computers Assets on
Freehold leasehold leasehold and other operating
premises premises premises equipment leases Total
--------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Cost or valuation:
At 1 January 2002 1,251 259 268 536 2,124 4,438
Currency translation and other adjustments 4 1 - 4 (21) (12)
Reclassifications (5) 2 (9) 12 - -
Acquisitions of subsidiaries 32 - 8 20 - 60
Additions 51 16 15 41 1,318 1,441
Disposals and write-off of fully depreciated assets (27) (8) (6) (88) (724) (853)
Transfer to fellow subsidiary - - - (37) - (37)
Revaluation adjustments (25) 3 - - - (22)
--------------------------------------------------------------
At 31 December 2002 1,281 273 276 488 2,697 5,015
--------------------------------------------------------------
Consisting of:
At valuation - 2002 398 144 - - - 542
- 2001 and prior 682 87 - - - 769
At cost 201 42 276 488 2,697 3,704
--------------------------------------------------------------
1,281 273 276 488 2,697 5,015
--------------------------------------------------------------
Accumulated depreciation and amortisation:
At 1 January 2002 154 62 101 337 416 1,070
Currency translation and other adjustments 1 1 - 2 - 4
Reclassifications - - (9) 9 - -
Acquisitions of subsidiaries 1 - - 6 - 7
Disposals and write-off of fully depreciated assets (3) (4) (2) (73) (203) (285)
Transfer to fellow subsidiary - - - (20) - (20)
Charge for the year 29 8 18 83 306 444
--------------------------------------------------------------
At 31 December 2002 182 67 108 344 519 1,220
--------------------------------------------------------------
Net book value at 31 December 2002 1,099 206 168 144 2,178 3,795
--------------------------------------------------------------
Net book value at 31 December 2001 1,097 197 167 199 1,708 3,368
--------------------------------------------------------------
On the historical cost basis, the NatWest Group's freehold and long leasehold
premises would have been included at (pound)942 million (2001 - (pound)903
million).
Freehold and long leasehold properties are revalued on a rolling basis, each
property being valued at least every five years. Interim valuations outwith the
five year cycle will be carried out on properties where there is an indication
that their value has changed significantly, given market conditions. The
directors are not aware of any material change in the valuation of NatWest
Group's properties and therefore no additional interim valuations were
required.
Properties occupied by NatWest Group are valued on the basis of Existing Use
Value, except for certain specialised properties which are valued on a
Depreciated Replacement Cost basis. Investment and development properties and
properties to be disposed of are valued to reflect Open Market Value.
Valuations are carried out by internal and external qualified surveyors who are
members of the Royal Institution of Chartered Surveyors or, in the case of some
overseas properties, locally qualified valuers.
2002 2001
---- ----
(pound)m (pound)m
Land and buildings occupied for own use 1,365 1,375
Investment properties 53 36
Properties under development 49 35
Properties to be disposed of 6 15
---------------------------
Net book value at 31 December 1,473 1,461
---------------------------
Net book value of assets held under finance leases 20 25
---------------------------
Depreciation for the year of assets held under finance leases 3 2
---------------------------
Contracts for future capital expenditure not provided
for in the accounts at the year end 54 26
---------------------------
106
22. Other assets
2002 2001
---- ----
(pound)m (pound)m
Trading derivatives (Note 37) 4,099 2,649
Settlement balances 2,500 4,661
Deferred taxation (Note 27) 23 33
Long-term assurance assets attributable to policyholders 66 87
Other 1,086 2,307
------- -------
7,774 9,737
------- -------
23. Deposits by banks
2002 2001
---- ----
(pound)m (pound)m
Repayable on demand 2,025 2,533
With agreed maturity dates or periods of notice,
by remaining maturity
- - three months or less 13,998 18,030
- - one year or less but over three months 1,207 742
- - five years or less but over one year 237 438
- - over five years 251 3,503
------- -------
17,718 25,246
------- -------
Banking business 7,060 16,806
Trading business 10,658 8,440
------- -------
Amounts above include:
Due to fellow subsidiary undertakings - unsubordinated 5,907 13,030
24. Customer accounts
2002 2001
---- ----
(pound)m (pound)m
Repayable on demand 58,666 57,189
With agreed maturity dates or periods of notice,
by remaining maturity
- - three months or less 49,815 39,267
- - one year or less but over three months 1,552 2,059
- - five years or less but over one year 1,358 1,361
- - over five years 86 75
------- -------
111,477 99,951
------- -------
Banking business 92,671 87,671
Trading business 18,806 12,280
------- -------
Amounts above include:
Due to fellow subsidiary undertakings - unsubordinated 366 76
Due to associated undertakings - unsubordinated 49 3
107
25. Debt securities in issue
2002 2001
---- ----
(pound)m (pound)m
Bonds and medium-term notes, by remaining maturity
- - one year or less 20 49
- - two years or less but over one year 6 3
- - five years or less but over two years 30 554
- - over five years 16 76
-------------------------
72 682
-------------------------
Other debt securities in issue, by remaining maturity
- - three months or less 136 1,647
- - one year or less but over three months - 2,893
-------------------------
136 4,540
-------------------------
208 5,222
-------------------------
Banking business 207 5,222
Trading business 1 -
-------------------------
26. Other liabilities
2002 2001
---- ----
(pound)m (pound)m
Notes in circulation 270 272
Trading derivatives (Note 37) 3,579 2,583
Settlement balances 1,888 6,259
Short positions:
Debt securities - Government 11,884 10,188
- Other issuers 903 1,247
Treasury bills and other eligible bills 505 -
Current taxation 613 537
Dividends 8 409
Obligations under finance leases (analysed below) 170 197
Long-term assurance liabilities attributable to policyholders 66 87
Other liabilities 1,617 1,127
-------------------------
21,503 22,906
-------------------------
Analysis of obligations under finance leases:
Amounts falling due within one year 30 40
Amounts falling due between one and five years 15 37
Amounts falling due after more than five years 125 120
-------------------------
170 197
-------------------------
108
27. Deferred taxation
Provision for deferred taxation has been made as follows:
2002 2001
---- ----
(pound)m (pound)m
Deferred tax provision 1,213 1,069
Deferred tax asset (included in Note 22, Other assets) (23) (33)
-------------------------
Net deferred tax 1,190 1,036
-------------------------
Short-term timing differences (122) (155)
Capital allowances 1,416 1,306
Bad and doubtful debt provisions (104) (115)
-------------------------
Net deferred tax 1,190 1,036
-------------------------
Movements during the year:
As previously reported 950
Prior year adjustment * 86
------
At 1 January 2002 as restated 1,036
Currency translation and other adjustments 13
Acquisition of subsidiaries 4
Disposal of lease receivables (118)
Charge to profit and loss account 255
------
At 31 December 2002 1,190
------
* Restated following the implementation of FRS 19 in 2002
28. Other provisions
` Pensions and
other similar
Property (1) obligations (2) Other (3) Total
------------ --------------- --------- -----
(pound)m (pound)m (pound)m (pound)m
At 1 January 2002 142 13 62 217
Currency translation and other adjustments (2) 1 - (1)
Charge to profit and loss account 59 - (20) 39
Provisions utilised (20) (1) (10) (31)
---------------------------------------------------------------------------
At 31 December 2002 179 13 32 224
---------------------------------------------------------------------------
Notes:
(1) NatWest Group has a number of leasehold properties where rents payable and
other unavoidable costs exceed the value to NatWest Group. Such costs
arise over the period of the lease or to the expected termination date,
and the provision has been discounted due to the long-term nature of
certain of these obligations.
(2) NatWest Group operates various unfunded post-retirement benefit plans and
provision is made for the expected costs that will arise over the periods
in which pensions are paid to the members of these plans. Included within
this provision is (pound)2 million relating to former directors of the
Bank.
(3) Other provisions arise in the normal course of business.
109
29. Dated loan capital
2002 2001
---- ----
(pound)m (pound)m
The Bank
US$250 million guaranteed floating rate subordinated notes 2002 (1) - 172
US$500 million 9.375% guaranteed capital notes 2003 (2) 310 345
(pound)100 million 12.5% subordinated unsecured loan stock 2004 100 100
US$400 million guaranteed floating rate capital notes 2005 248 276
US$1,000 million 7.375% fixed rate subordinated notes 2009 616 684
US$650 million floating rate subordinated step-up notes 2009 (callable October 2004) 402 448
(euro)600 million 6.0% subordinated notes 2010 387 362
(pound)300 million 8.125% step-up subordinated notes 2011 (callable December 2006) 299 298
(euro)500 million 5.125% subordinated notes 2011 322 303
(pound)300 million 7.875% subordinated notes 2015 296 296
(pound)300 million 6.5% subordinated notes 2021 296 295
----------------------------
3,276 3,579
Greenwich Capital Holdings, Inc.
US$105 million subordinated loan capital 2004 floating rate notes 65 72
----------------------------
3,341 3,651
----------------------------
Dated loan capital in issue, by remaining term, repayable
- - in one year or less 310 172
- - two years or less but over one year 567 345
- - five years or less but over two years 547 1,194
- - in more than five years 1,917 1,940
----------------------------
3,341 3,651
----------------------------
Notes:
(1) Redeemed on maturity in September 2002.
(2) Loan due by a subsidiary undertaking and on-lent to National Westminster
Bank Plc on a subordinated basis. It has been guaranteed as to the payment
of principal and interest by National Westminster Bank Plc.
(3) In the event of certain changes in the tax laws of the UK, all of the
dated loan capital issues are redeemable in whole, but not in part, at the
option of the issuer, at the principal amount thereof plus accrued
interest, subject to prior approval of the UK Financial Services
Authority.
(4) Except as stated above, claims in respect of the NatWest Group's dated
loan capital are subordinated to the claims of other creditors. None of
NatWest Group's dated loan capital is secured.
(5) Interest payable on the NatWest Group's floating rate dated issues is at a
margin over London interbank rates. Interest on(pound)900 million,
US$1,500 million and(euro)1,100 million of fixed rate dated issues is
swapped into floating rates at a margin over London interbank rates.
110
30. Undated loan capital including convertible debt
2002 2001
---- ----
(pound)m (pound)m
NatWest Group and the Bank
US$500 million primary capital floating rate notes, Series A
(callable on any interest payment date) 310 345
US$500 million primary capital floating rate notes, Series B
(callable on any interest payment date) 310 345
US$500 million primary capital floating rate notes, Series C
(callable on any interest payment date) 310 345
US$500 million 7.875% exchangeable capital securities (callable November 2003) (1) 310 345
US$500 million 7.75% reset subordinated notes (callable October 2007) 308 342
(euro)100 million floating rate undated subordinated step-up notes (callable October 2009) 65 61
(euro)400 million 6.625% fixed/floating rate undated subordinated notes (callable October 2009) 259 242
(pound)325 million 7.625% undated subordinated step-up notes (callable January 2010) 323 323
(pound)200 million 7.125% undated subordinated step-up notes (callable October 2022) 197 197
(pound)200 million 11.5% undated subordinated notes (callable December 2022) (2) 200 200
----------------------
2,592 2,745
----------------------
Notes:
(1) Exchangeable at the option of the issuer into 20 million 8.75% (gross)
non-cumulative dollar preference shares of US$25 each of National
Westminster Bank Plc at any time.
(2) Exchangeable at the option of the issuer into 200 million 8.392% (gross)
non-cumulative sterling preference shares of(pound)1 each of National
Westminster Bank Plc at any time.
(3) Except as stated above, claims in respect of the NatWest Group's undated
loan capital are subordinated to the claims of other creditors. None of
the NatWest Group's undated loan capital is secured.
(4) Interest payable on the NatWest Group's floating rate undated issues is at
a margin over London interbank rates. Interest on(pound)525 million,
US$500 million and(euro)400 million of fixed rate undated issues is
swapped into floating rates at a margin over London interbank rates.
31. Share capital
Allotted, called up and fully paid Authorised
----------------------------------- ------------------------
At At At At
1 January Currency 31 December 31 December 31 December
2002 translation 2002 2002 2001
----------------------------------- ------------------------
(pound)m (pound)m (pound)m (pound)m (pound)m
Equity shares
Ordinary shares of(pound)1 each 1,678 - 1,678 2,250 2,250
----------------------------------- ------------------------
Total equity share capital 1,678 - 1,678 2,250 2,250
----------------------------------- ------------------------
Non-equity shares
Non-cumulative preference shares of US$25 each 379 (38) 341 1,240 1,379
Non-cumulative preference shares of(pound)1 each 140 - 140 1,000 1,000
----------------------------------- ------------------------
Total non-equity share capital 519 (38) 481 2,240 2,379
----------------------------------- ------------------------
Total share capital 2,197 (38) 2,159 4,490 4,629
----------------------------------- ------------------------
111
31. Called up share capital (continued)
Allotted, called up
and fully paid Authorised
--------------------------- ---------------------------
31 December 31 December 31 December 31 December
2002 2001 2002 2001
--------------------------- ---------------------------
Number of shares - millions
Equity shares
Ordinary shares of(pound)1 each 1,678 1,678 2,250 2,250
--------------------------- ---------------------------
Non-equity shares
Non-cumulative Series B and C preference
shares of US$25 each 22 22 80 80
Non-cumulative Series A preference shares of(pound)1 each 140 140 1,000 1,000
Preference shares
The non-cumulative dollar preference shares, Series B, of US$25 each which
carry the right to a gross dividend of 8.75% inclusive of associated tax
credit, are redeemable at the option of the Bank exercisable to 9 June 2003, at
a premium per share of US$0.30. There is no redemption premium if the date of
redemption falls after 9 June 2003.
The non-cumulative dollar preference shares, Series C, of US$25 each carry the
right to a gross dividend of 8.625% inclusive of associated tax credit. They
are redeemable at the option of the Bank from 9 April 2002 to 8 April 2008
inclusive, at a premium per share of US$1.20 in 2003 reducing by US$0.30 in
each successive year. There is no redemption premium if the date of redemption
falls after 8 April 2007.
The 9% non-cumulative sterling preference shares, Series A, of (pound)1 each
are non-redeemable.
The holders of sterling and dollar preference shares are entitled, on the
winding-up of the Bank, to priority over the ordinary shareholders as regards
payment of capital. Otherwise the holders of preference shares are not entitled
to any further participation in the profits or assets of the Bank and
accordingly these shares are classified as non-equity shares.
The holders of sterling and dollar preference shares are not entitled to
receive notice of, attend, or vote at any general meeting unless the business
of the meeting includes the consideration of a resolution for the winding-up of
the Bank or the sale of the whole of the business of the Bank or any resolution
directly affecting any of the special rights or privileges attached to any of
the classes of preference shares.
112
32. Reserves
2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Share premium account:
At 1 January 1,286 1,286 1,237
Employee share option payments - - 49
----------------------------------------------
At 31 December 1,286 1,286 1,286
----------------------------------------------
Other reserves:
At 1 January and 31 December 301 301 301
----------------------------------------------
Revaluation reserve:
At 1 January 119 46 30
Currency translation and other adjustments 2 - -
Revaluation of premises (22) 41 20
Transfer from/(to) profit and loss account - 32 (4)
----------------------------------------------
At 31 December 99 119 46
----------------------------------------------
Profit and loss account:
As previously reported 4,173 3,220 5,626
Prior year adjustment * 30 16 14
----------------------------------------------
At 1 January as restated 4,203 3,236 5,640
Currency translation and other adjustments 25 (4) 5
Retention for the year 1,130 1,003 (2,413)
Transfer (to)/from revaluation reserve - (32) 4
----------------------------------------------
At 31 December 5,358 4,203 3,236
----------------------------------------------
* Resulting from the implementation of FRS 19 in 2002.
Exchange gains of (pound)124 million (2001 - (pound)2 million; 2000 losses -
(pound)52 million) arising on foreign currency borrowings have been offset in
NatWest Group's profit and loss account reserves against differences on
retranslating the net investment in overseas subsidiary and associated
undertakings financed by these borrowings.
The tax effect of gains and losses taken directly to reserves in 2002, 2001 and
2000 was nil.
33. Lease commitments
The annual rental commitments under non-cancellable operating leases were as
follows:
2002 2001
---- ----
Premises Equipment Premises Equipment
-------- --------- -------- ---------
(pound)m (pound)m (pound)m (pound)m
Expiring within one year 3 1 8 -
Expiring between one and five years 11 - 27 -
Expiring after five years 96 - 97 -
------------------------------------------------------------------
110 1 132 -
------------------------------------------------------------------
113
34. Analysis of total assets and liabilities
2002 2001
---- ----
(pound)m (pound)m
Assets: denominated in sterling 99,094 102,149
denominated in currencies other than sterling 72,793 70,578
--------------------------
171,887 172,727
--------------------------
Liabilities: denominated in sterling 99,444 101,316
denominated in currencies other than sterling 72,443 71,411
--------------------------
171,887 172,727
--------------------------
35. Assets subject to sale and repurchase transactions
The NatWest Group enters into securities repurchase agreements as securities
lending transactions under which it receives or transfers cash or securities as
collateral in accordance with normal market practice. Securities transferred
under repurchase transactions included within securities on the balance sheet
were as follows:
2002 2001
---- ----
(pound)m (pound)m
Treasury and other eligible bills 420 1,353
Debt securities 15,247 27,576
--------------------------
15,667 28,929
--------------------------
36. Assets charged as security for liabilities
2002 2001
---- ----
(pound)m (pound)m
Loans and advances to customers - 413
Debt securities 7 -
Other 74 115
--------------------------
81 528
--------------------------
Included above are assets pledged with overseas government banks and margin
deposits placed with exchanges.
114
37. Derivatives
In the normal course of business, NatWest Group enters into a variety of
derivative transactions principally in the foreign exchange and interest rate
markets. These are used to provide financial services to customers and to take,
hedge and modify positions as part of trading activities. Derivatives are also
used to hedge or modify risk exposures arising on the balance sheet from a
variety of activities including lending and securities investment.
The principal types of derivative contracts into which NatWest Group enters are
described below.
Swaps -- These are over-the-counter ("OTC") agreements between two parties to
exchange periodic payments of interest, or payments for the change in value of
a commodity, or related index, over a set period based on notional principal
amounts. NatWest Group enters into swap transactions in several markets.
Interest rate swaps exchange fixed rates for floating rates of interest based
on notional amounts. Basis swaps exchange floating or fixed interest calculated
using different bases. Cross currency swaps are the exchange of interest based
on notional values of different currencies. Equity and commodity swaps exchange
interest for the return on an equity or commodity, or equity or commodity
index.
Options -- Currency and interest rate options confer the right, but not the
obligation, on the buyer to receive or pay a specific quantity of an asset or
financial instrument for a specified price at or before a specified date.
Options may be exchange traded or OTC agreements. NatWest Group principally
buys and sells currency and interest rate options.
Futures and forwards -- Short-term interest rate futures, bond futures and
forward foreign exchange contracts are all agreements to deliver, or take
delivery of, a specified amount of an asset or financial instrument based on
the specified rate, price or index applied against the underlying asset or
financial instrument, at a specified date. Futures are exchange traded at
standardised amounts of the underlying asset or financial instrument. Forward
contracts are OTC agreements and are principally dealt in by NatWest Group in
interest rates as forward rate agreements and in currency as forward foreign
exchange contracts.
Collateral -- NatWest Group may require collateral in respect of the credit
risk in derivative transactions. The amount of credit risk is principally the
positive fair value of contracts. Collateral may be in the form of cash or in
the form of a lien over a customer's assets entitling NatWest Group to make a
claim for current and future liabilities.
Maturity of replacement cost of OTC contracts (trading and non-trading) --
Replacement cost indicates NatWest Group's derivatives credit exposure. The
following table sets forth the gross positive fair values by maturity. It
includes the replacement cost of contracts entered into with fellow subsidiary
undertakings and NatWest Group's parent undertaking.
2002 2001
------------------------------------------ -----------------------------------------
Within One to Over Within One to Over
one year five years five years Total one year five years five years Total
-------- ---------- ---------- ----- -------- ---------- ---------- -----
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Before netting:
Exchange rate contracts 745 144 20 909 972 252 42 1,266
Interest rate contracts 1,465 5,320 7,959 14,744 3,406 1,697 575 5,678
Equity and commodity contracts 2 - - 2 10 3 - 13
------------------------------------------ ------------------------------------------
2,212 5,464 7,979 15,655 4,388 1,952 617 6,957
------------------------------------------ ------------------------------------------
Banks and investment firms 14,724 5,927
Others 931 1,030
-------- -------
15,655 6,957
-------- -------
At 31 December 2002, the potential credit risk exposure, which is after netting
and allowing for collateral received, of the NatWest Group's trading and
non-trading derivatives, was (pound)2,547 million (2001 - (pound)1,393 million)
to banks and investment firms and (pound)868 million (2001 - (pound)957
million) to other counterparties.
Exchange traded contracts are excluded from the above tables. Such contracts
generally involve lower credit risk than OTC contracts as they are cleared
through exchanges that require margin from participants and the daily
settlement of gains and losses.
115
37. Derivatives (continued)
Trading derivatives
The following table shows the fair values of instruments in the derivatives
trading portfolio.
2002 2001
------------------------- -------------------------
End of period fair value End of period fair value
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(pound)m (pound)m (pound)m (pound)m
Exchange rate contracts:
Spot, forwards and futures 568 578 664 568
Currency swaps 109 133 133 255
Options purchased 230 - 458 -
Options written - 230 - 458
------------------------- -------------------------
907 941 1,255 1,281
------------------------- -------------------------
Interest rate contracts:
Interest rate swaps 13,192 12,581 4,650 4,474
Options purchased 741 - 609 -
Options written - 806 - 630
Futures and forwards 656 653 43 106
------------------------- -------------------------
14,589 14,040 5,302 5,210
------------------------- -------------------------
Equity and commodity contracts 7 2 13 13
------------------------- -------------------------
15,503 14,983 6,570 6,504
Netting (11,404) (11,404) (3,921) (3,921)
------------------------- -------------------------
4,099 3,579 2,649 2,583
------------------------- -------------------------
Average fair values (before netting):
Exchange rate contracts 1,038 1,114 1,569 1,663
Interest rate contracts 8,815 8,495 4,166 4,653
Equity and commodity contracts 3 2 5 5
------------------------- -------------------------
9,856 9,611 5,740 6,321
------------------------- -------------------------
Gains and losses on exchange traded contracts subject to daily margining
requirements are settled daily. The fair value of such contracts included above
reflects the last day's variation margin.
The following table analyses, by maturity and contract type, the notional
principal amounts of NatWest Group's trading derivatives:
2002 2001
-------------------------------------------- -------------------------------------------
Within One to Over Within One to Over
one year five years five years Total one year five years five years Total
-------- ---------- ---------- ----- -------- ---------- ---------- -----
(pound)bn (pound)bn (pound)bn (pound)bn (pound)bn (pound)bn (pound)bn (pound)bn
Exchange rate contracts:
Spot, forwards and futures 20.1 2.0 - 22.1 32.1 4.0 0.1 36.2
Currency swaps 0.5 1.7 0.9 3.1 0.3 2.1 1.5 3.9
Options purchased 1.7 0.4 - 2.1 2.8 0.6 - 3.4
Options written 1.7 0.4 - 2.1 2.8 0.5 - 3.3
-------------------------------------------- --------------------------------------------
24.0 4.5 0.9 29.4 38.0 7.2 1.6 46.8
-------------------------------------------- --------------------------------------------
Interest rate contracts:
Interest rate swaps 65.4 161.0 136.4 362.8 61.5 114.3 83.5 259.3
Options purchased 52.3 17.2 1.6 71.1 51.6 24.1 2.4 78.1
Options written 32.2 22.5 1.6 56.3 36.8 31.8 1.8 70.4
Futures and forwards 166.8 15.3 0.5 182.6 155.1 19.7 0.2 175.0
-------------------------------------------- --------------------------------------------
316.7 216.0 140.1 672.8 305.0 189.9 87.9 582.8
-------------------------------------------- --------------------------------------------
Equity and commodity contracts 0.1 - - 0.1 0.2 - - 0.2
-------------------------------------------- --------------------------------------------
116
37. Derivatives (continued)
Non-trading derivatives
NatWest Group establishes non-trading derivatives positions externally with
third parties and also internally. It should be noted that the following tables
include the components of the internal hedging programme that transfers risks
to the trading portfolios in NatWest Group or to other members of the RBS
Group, or to external third party participants in the derivatives markets.
The following table summarises the fair values and book values of derivatives
held for non-trading activities and includes internal trades:
2002 2001
------------------------------------------- --------------------------------------------
Fair value Book value Fair value Book value
Positive Negative Positive Negative Positive Negative Positive Negative
-------- -------- -------- -------- -------- -------- -------- --------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Exchange rate contracts:
Spot, forwards and futures 1 2 - - 10 5 2 -
Currency swaps and options 13 16 - 8 11 14 2 -
------------------------------------------- --------------------------------------------
14 18 - 8 21 19 4 -
------------------------------------------- --------------------------------------------
Interest rate contracts:
Interest rate swaps 1,449 1,268 236 144 982 1,068 331 232
Futures, forwards and options 2 6 - - 4 4 - -
------------------------------------------- --------------------------------------------
1,451 1,274 236 144 986 1,072 331 232
------------------------------------------- --------------------------------------------
Total 1,465 1,292 236 152 1,007 1,091 335 232
------------------------------------------- --------------------------------------------
The following table analyses by maturity and contract type, the notional
principal amounts of NatWest Group's non-trading derivatives (third party and
internal):
2002 2001
------------------------------------------- -------------------------------------------
Within One to Over Within One to Over
one year five years five years Total one year five years five years Total
-------- ---------- ---------- ----- -------- ---------- ---------- -----
(pound)bn (pound)bn (pound)bn (pound)bn (pound)bn (pound)bn (pound)bn (pound)bn
Exchange rate contracts:
Spot, forwards and futures - - - - 0.5 - - 0.5
Currency swaps and options 0.2 0.3 0.2 0.7 0.1 0.2 0.4 0.7
------------------------------------------- -------------------------------------------
0.2 0.3 0.2 0.7 0.6 0.2 0.4 1.2
------------------------------------------- -------------------------------------------
Interest rate contracts:
Interest rate swaps 14.7 23.1 13.3 51.1 17.4 26.0 13.4 56.8
Futures, forwards and options 0.1 0.1 0.4 0.6 - 0.4 - 0.4
------------------------------------------- -------------------------------------------
14.8 23.2 13.7 51.7 17.4 26.4 13.4 57.2
------------------------------------------- -------------------------------------------
117
38. Financial instruments
NatWest Group's objectives and policies in managing the risk that arise in
connection with the use of financial instruments are set out under 'Risk
management' on pages 74 to 84, 'Financial instruments' on page 118 and
'Derivatives' on page 115.
Interest rate sensitivity gap
The tables below summarise NatWest Group's interest rate sensitivity gap for
its non-trading book at 31 December 2002 and 31 December 2001. The tables show
the contractual repricing for each category of asset, liability and for
off-balance sheet items. A liability (or negative) gap position exists when
liabilities reprice more quickly or in greater proportion than assets during a
given period and tends to benefit net interest income in a declining interest
rate environment. An asset or positive gap position exists when assets reprice
more quickly or in greater proportion than liabilities during a given period
and tends to benefit net interest income in a rising interest rate environment.
Contractual repricing terms do not reflect the potential impact of early
repayment or withdrawal. Positions may not be reflective of those in subsequent
periods. Major changes in positions can be made promptly as market outlooks
change. In addition, significant variations in interest rate sensitivity may
exist within the repricing periods presented and among the currencies in which
NatWest Group has interest rate positions.
After After After Non-
3 months 6 months 1 year but interest Banking Trading
2002 Within but within but within within After bearing book book
3 months 6 months 1 year 5 years 5 years funds total total Total
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------
Assets
Loans and advances to banks 10,637 359 143 13 26 457 11,635 12,029 23,664
Loans and advances to customers 66,160 3,662 4,387 13,131 6,415 789 94,544 17,578 112,122
Treasury bills and debt securities 967 96 193 359 55 - 1,670 16,900 18,570
Other assets - - - - - 10,293 10,293 7,238 17,531
----------------------------------------------------------------------------------------------
Total assets 77,764 4,117 4,723 13,503 6,496 11,539 118,142 53,745 171,887
----------------------------------------------------------------------------------------------
Liabilities
Deposits by banks 5,873 85 14 - - 1,088 7,060 10,658 17,718
Customer accounts 71,801 742 396 468 98 19,166 92,671 18,806 111,477
Debt securities in issue 139 12 5 41 10 - 207 1 208
Subordinated liabilities 1,397 248 620 707 2,896 - 5,868 65 5,933
Other liabilities 3 11 15 14 128 7,017 7,188 20,160 27,348
Shareholders' funds - - - - - 8,281 8,281 922 9,203
Internal funding of trading business (2,513) - (620) - - - (3,133) 3,133 -
----------------------------------------------------------------------------------------------
Total liabilities 76,700 1,098 430 1,230 3,132 35,552 118,142 53,745 171,887
----------------------------------------------------------------------------------------------
Off-balance sheet items 599 (1,038) (2,316) 3,285 (530) -
------------------------------------------------------------------
Interest rate sensitivity gap 1,663 1,981 1,977 15,558 2,834 (24,013)
------------------------------------------------------------------
Cumulative interest rate
sensitivity gap 1,663 3,644 5,621 21,179 24,013
--------------------------------------------------------
After After After Non-
3 months 6 months 1 year but interest Banking Trading
2001 Within but within but within within After bearing book book
3 months 6 months 1 year 5 years 5 years funds total total Total
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------
Assets
Loans and advances to banks 13,535 4,235 207 30 42 164 18,213 13,056 31,269
Loans and advances to customers 60,745 4,366 3,887 15,631 5,630 1,662 91,921 8,697 100,618
Treasury bills and debt securities 963 303 441 1,255 455 - 3,417 18,193 21,610
Other assets 13 - - - - 10,480 10,493 8,737 19,230
----------------------------------------------------------------------------------------------
Total assets 75,256 8,904 4,535 16,916 6,127 12,306 124,044 48,683 172,727
----------------------------------------------------------------------------------------------
Liabilities
Deposits by banks 14,932 528 323 188 148 687 16,806 8,440 25,246
Customer accounts 66,749 772 345 607 74 19,124 87,671 12,280 99,951
Debt securities in issue 2,298 2,566 144 138 76 - 5,222 - 5,222
Subordinated liabilities 1,715 276 - 1,088 3,245 - 6,324 72 6,396
Other liabilities 10 10 20 37 120 5,933 6,130 21,676 27,806
Shareholders' funds - - - - - 7,350 7,350 756 8,106
Internal funding of trading business (4,448) (903) (95) - - (13) (5,459) 5,459 -
----------------------------------------------------------------------------------------------
Total liabilities 81,256 3,249 737 2,058 3,663 33,081 124,044 48,683 172,727
----------------------------------------------------------------------------------------------
Off-balance sheet items (1,618) (2,221) (1,327) 401 4,765 -
------------------------------------------------------------------
Interest rate sensitivity gap (7,618) 3,434 2,471 15,259 7,229 (20,775)
------------------------------------------------------------------
Cumulative interest rate
sensitivity gap (7,618) (4,184) (1,713) 13,546 20,775
--------------------------------------------------------
118
38. Financial instruments (continued)
Currency risk
NatWest Group does not maintain material non-trading open currency positions
other than the structural foreign currency translation exposures arising from
its investments in overseas subsidiary and associated undertakings and their
related currency funding.
NatWest Group's structural foreign currency exposures were as follows:
2002 2001
------------------------------------ ------------------------------------
Net Foreign Net Foreign
investments currency Structural investments currency Structural
in borrowings foreign in borrowings foreign
overseas hedging net currency overseas hedging net currency
operations investments exposures operations investments exposures
------------------------------------ ------------------------------------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Functional currency of net investment
US dollar 1,591 1,563 28 1,523 1,508 15
Euro 850 388 462 731 202 529
Swiss franc 305 295 10 250 243 7
Other non-sterling 7 6 1 12 10 2
------------------------------------ ------------------------------------
Total 2,753 2,252 501 2,516 1,963 553
------------------------------------ ------------------------------------
Trading book market risk
An explanation of the Value-at-Risk ("VaR") methodology of estimating potential
losses arising from NatWest Group's exposure to market risk in its trading book
and the main assumptions and parameters underlying it is given on page 74.
The following table analyses the VaR for NatWest Group's trading portfolios by
type of market risk exposure at the year end and as an average for the year and
the maximum and minimum for the year:
At 2002 At 2001
31 December ---------------------------- 31 December ----------------------------
2002 Maximum Minimum Average 2001 Maximum Minimum Average
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
- --------------------------------------------------------------------------------------------------------------------
Interest rate 7.3 11.7 4.7 7.6 6.4 12.2 5.0 8.2
Currency 0.3 1.7 0.1 0.4 0.2 2.4 0.1 0.6
Equity 0.1 0.6 - 0.2 0.3 1.8 0.2 0.5
Diversification effects (0.4) (0.8)
------- ------
Total 7.3 11.6 4.7 7.6 6.1 12.3 5.3 8.4
--------------------------------------------------------------------------------------
119
38. Financial instruments (continued)
Fair values of financial instruments
The following tables set out the fair values of NatWest Group's financial
instruments. Fair value is the amount at which an instrument could be exchanged
in a current transaction between willing parties, other than in a forced or
liquidation sale. Quoted market values are used where available; otherwise,
fair values have been estimated based on discounted expected future cash flows
and other valuation techniques. These techniques involve uncertainties and
require assumptions and judgements covering prepayments, credit risk and
discount rates. Changes in these assumptions would significantly affect
estimated fair values. The fair values reported would not necessarily be
realised in an immediate sale; nor are there plans to settle liabilities prior
to contractual maturity. As there is a wide range of valuation techniques, it
may be inappropriate to compare NatWest Group's fair value information to
independent markets or other financial institutions' fair values.
2002 2001
------------------------- ------------------------
Trading business Carrying Fair Carrying Fair
amount value amount value
------------------------- ------------------------
(pound)m (pound)m (pound)m (pound)m
Assets
Treasury bills and other eligible bills (1) 1,693 1,693 1,353 1,353
Loans and advances to banks and customers (1) 29,607 29,607 21,753 21,753
Debt securities (1) 15,207 15,207 16,840 16,840
Equity shares (1) 28 28 8 8
Derivatives (2) 4,099 4,099 2,649 2,649
Liabilities
Deposits by banks and customer accounts (3) 29,464 29,464 20,720 20,720
Debt securities in issue (1) 1 1 - -
Short positions in securities (1) 13,292 13,292 11,435 11,435
Subordinated loan capital (1) 65 65 72 72
Derivatives (2) 3,579 3,579 2,583 2,583
2002 2001
------------------------- ------------------------
Banking business Carrying Fair Carrying Fair
amount value amount value
------------------------- ------------------------
(pound)m (pound)m (pound)m (pound)m
Assets
Cash and balances at central banks (1) 1,251 1,251 1,162 1,162
Items in the course of collection from other banks (1) 2,085 2,085 2,410 2,410
Treasury and other eligible bills (1) 31 31 122 122
Loans and advances to banks and customers (4) 106,179 106,824 110,134 110,633
Debt securities (5) 1,639 1,667 3,295 3,304
Equity shares (5) 1,039 908 1,065 1,027
Derivatives - net (2) 84 173 103 (84)
Liabilities
Items in the course of transmission to other banks (1) 1,214 1,214 1,408 1,408
Deposits by banks and customer accounts (3) 99,731 99,747 104,477 104,480
Debt securities in issue (6) 207 209 5,222 5,219
Subordinated loan capital (7) 5,868 6,350 6,324 6,656
Non equity minority interests (7) 3 3 4 4
Non-equity shareholders' funds (7) 481 550 519 573
Notes:
(1) Financial assets and financial liabilities carried at fair value or where
carrying value approximates to fair value because they are of short
maturity or repricing date.
(2) Fair values of derivatives are determined by market prices where
available. Otherwise fair value is based on current market information
using appropriate valuation models.
(3) The fair value of deposits repayable on demand is equal to their carrying
value. The fair values of term deposits and time certificates of deposit
are estimated by discounting expected future cash flows using rates
currently offered for deposits of similar remaining maturities.
(4) For loans which reprice frequently or are linked to the Group's base rate,
and for which there has been no significant change in credit risk since
inception, carrying value represents a reasonable estimate of fair value.
For other loans, fair values are estimated by discounting expected future
cash flows, using current interest rates appropriate to the type of loan,
and making adjustments for credit risk.
120
38. Financial instruments (continued)
Fair values of financial instruments (continued)
(5) Fair values of marketable securities are based on quoted market prices.
Where these are unavailable, fair value is estimated using other valuation
techniques.
(6) The fair value of short-term debt securities in issue is approximately
equal to their carrying value. The fair value of other debt securities in
issue is based on quoted market prices where available or, where these are
unavailable, is estimated using other valuation techniques.
(7) The fair value of loan capital, non-equity minority interests and
preference shares is based on quoted market prices where available. For
unquoted loan capital, fair value has been estimated using other valuation
techniques.
(8) Fair values are not given for financial commitments and contingent
liabilities. The diversity of the fee structures, the lack of an
established market and the difficulty of separating the value of the
instruments from the value of the overall relationship involve such
uncertainty that it is not meaningful to provide an estimate of their fair
value (The principal amounts of these instruments are given in Note 39).
Hedges
As described in the Accounting Policies on pages 93 to 95, derivatives and debt
securities held for hedging purposes are accounted for in accordance with the
treatment of the hedged transaction. As a result, any gains or losses on the
hedging instrument arising from changes in fair values are not recognised in
the profit and loss account immediately but are accounted for in the same
manner as the hedged item.
2002 2001
----------------------- -----------------------
Unrecognised Deferred Unrecognised Deferred
gains and gains and gains and gains and
losses losses losses losses
----------------------- -----------------------
(pound)m (pound)m (pound)m (pound)m
At 1 January - gains 726 42 609 4
- losses (913) (36) (918) (5)
----------------------- -----------------------
(187) 6 (309) (1)
Recognised gains that arose in previous years (150) (22) (171) (4)
Recognised losses that arose in previous years 241 20 262 5
Unrecognised gains and losses arising in the year 355 - 37 -
Unrecognised gains and losses deferred in the year (170) 170 (6) 6
Unrecognised gains and losses deferred and taken to
profit and loss in the year - (34) - -
----------------------- -----------------------
At 31 December 89 140 (187) 6
----------------------- -----------------------
Of which - gains 1,245 156 726 42
- losses (1,156) (16) (913) (36)
----------------------- -----------------------
89 140 (187) 6
----------------------- -----------------------
Gains expected to be recognised in the year to
31 December 2003 (year to 31 December 2002) 318 49 150 22
Gains expected to be recognised in the year to
31 December 2004 or later (year to 31 December 2003 or later)
927 107 576 20
----------------------- -----------------------
1,245 156 726 42
----------------------- -----------------------
Losses expected to be recognised in the year to
31 December 2003 (year to 31 December 2002) (313) (12) (237) (20)
Losses expected to be recognised in the year to
31 December 2004 or later (year to 31 December 2003 or later)
(843) (4) (676) (16)
----------------------- -----------------------
(1,156) (16) (913) (36)
----------------------- -----------------------
121
39. Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication
of the volume of business outstanding at 31 December. Although the NatWest
Group is exposed to credit risk in the event of non-performance of the
obligations undertaken by customers, the amounts shown do not, and are not
intended to, provide any indication of the NatWest Group's expectation of
future losses.
2002 2001
---- ----
(pound)m (pound)m
Contingent liabilities:
Acceptances and endorsements 379 380
Guarantees and assets pledged as collateral security 1,917 1,920
Other contingent liabilities 4,204 4,904
------- -------
6,500 7,204
------- -------
Commitments:
Documentary credits and other short-term trade related transactions 162 169
Undrawn formal standby facilities, credit lines and other commitments to lend
- - less than one year 45,897 51,075
- - one year and over 13,643 14,759
Other commitments 263 267
------- -------
59,965 66,270
------- -------
Acceptances are obligations to pay on maturity the face value of a bill of
exchange to a third party. Most acceptances are short-term and extend for one
year or less. By endorsing a document, NatWest Group accepts liability for
payment if it is dishonoured.
Documentary credits are commercial letters of credit providing for payment by
NatWest Group to a named beneficiary against presentation of specified
documents.
Commitments to lend include commitments which are unconditionally cancellable
and agreements to lend to a customer so long as all conditions established in
the loan agreement have been satisfied or waived. A substantial proportion of
NatWest Group's loans is by way of overdrafts. Unutilised overdraft facilities
constitute commitments to lend which, although unconditionally cancellable, are
normally granted for a specific period of time. Unutilised overdraft facilities
are included in commitments to lend.
Other commitments and contingent obligations have fixed expiry dates or other
termination clauses.
Banking commitments and contingent liabilities, which have been entered into on
behalf of customers and for which there are corresponding obligations by
customers are not included in assets and liabilities. NatWest Group's maximum
exposure to credit loss, in the event of non-performance by the other party
where all counterclaims, collateral or security prove valueless, is represented
by the contractual notional amount of those instruments. Many commitments are
expected to expire without being drawn and do not necessarily represent future
cash requirements.
Litigation
Members of the NatWest 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 of the Bank, after reviewing the actual, threatened and known
potential claims against NatWest 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 averse effect on the net assets of the NatWest
Group.
122
40. Acquisitions
Lombard North Central PLC acquired Dixon Motors PLC on 17 May 2002 and this has
been accounted for using acquisition accounting principles. The provisional fair
values of the assets and liabilities and the consideration paid are shown in the
table below:
Book value of net
assets acquired Fair value Fair value to NatWest
(pound)m adjustments Group
(pound)m (pound)m
------------------ ---------------- ---------------------
At date of acquisition:
- -----------------------
Intangible fixed assets 5 (5) -
Tangible fixed assets 55 (2) 53
Other assets 126 (2) 124
Subsidiaries held for resale 15 (12) 3
Deposits by banks (58) - (58)
Other liabilities (73) (8) (81)
------------------ ---------------- ---------------------
Net assets acquired 70 (29) 41
------------------ ----------------
Goodwill 77
---------------------
Total consideration 118
---------------------
Satisfied by:
Payment of cash 103
Loan notes 9
Fees and expenses relating to the acquisition 6
---------------------
118
---------------------
Fair value adjustments reflect the restatement of balances to their estimated
fair values at the date of acquisition, and the related tax effect.
123
41. Reconciliation of operating profit to net cash outflow from operating
activities
2002 2001 2000
-------- -------- --------
(pound)m (pound)m (pound)m
Operating profit 2,584 2,583 1,861
(Increase)/decrease in prepayments and accrued income (46) 1,073 (420)
Interest on subordinated liabilities 262 398 502
Increase/(decrease) in accruals and deferred income 1,049 (782) 501
Amortisation of and provisions against investment securities 8 19 50
Provisions for bad and doubtful debts 508 510 359
Loans and advances written off net of recoveries (527) (437) (474)
Profit on sale of tangible fixed assets (25) (99) (16)
(Profit)/loss from associated undertakings (1) 3 3
Profit on sale of investment securities (17) (6) (235)
Profit on sale of subsidiary and associated undertakings (12) - -
Provisions for liabilities and charges 39 28 99
Provisions utilised (31) (10) (27)
Depreciation and amortisation of tangible and intangible fixed assets 470 565 586
Increase in value of long-term assurance business - - (66)
--------------------------------------------------
Net cash inflow from trading activities 4,261 3,845 2,723
Decrease/(increase) in items in the course of collection 325 (324) 138
(Increase)/decrease in treasury and other eligible bills (249) 1,538 (433)
Decrease/(increase) in loans and advances to banks 2,745 4,453 (4,783)
Increase in loans and advances to customers (11,469) (4,074) (8,654)
Decrease/(increase) in securities 1,656 6,050 (4,173)
Decrease/(increase) in other assets 2,013 (3,778) 941
(Decrease)/increase in items in the course of transmission (194) 310 (101)
(Decrease)/increase in deposits by banks (7,595) (10,027) 2,037
Increase/(decrease) in customer accounts 11,497 (2,491) 11,271
Decrease in debt securities in issue (5,014) (3,950) (2,384)
(Decrease)/increase in other liabilities (1,067) 5,828 (1,556)
Effect of other accruals/deferrals and other non-cash movements (415) 86 (27)
--------------------------------------------------
Net cash outflow from operating activities (3,506) (2,534) (5,001)
--------------------------------------------------
42. Analysis of the net outflow of cash in respect of the purchase of interests
in subsidiary undertakings
2002 2001 2000
-------- -------- --------
(pound)m (pound)m (pound)m
Cash consideration paid 109 220 86
--------------------------------------------------
Net outflow of cash 109 220 86
--------------------------------------------------
43. Sale of subsidiary and associated undertakings
2002 2001 2000
-------- -------- --------
(pound)m (pound)m (pound)m
Net assets disposed of 17 694 946
Profit on disposal 12 - 1,041
Non-cash consideration - (634) -
--------------------------------------------------
Cash consideration 29 60 1,987
Cash disposed of - (80) (21)
--------------------------------------------------
Net inflow/(outflow) of cash in
respect of disposals (net of expenses) 29 (20) 1,966
--------------------------------------------------
124
44. Analysis of changes in financing during the year
2002 2001 2000
-------- -------- --------
(pound)m (pound)m (pound)m
Share capital (including share premium account)
At 1 January 3,483 3,473 3,387
Currency translation adjustments (38) 10 29
Net cash inflow from financing - - 57
------------------------------------------------
At 31 December 3,445 3,483 3,473
------------------------------------------------
Loan capital
At 1 January 6,396 6,904 7,541
Currency translation adjustments (301) 109 322
Net cash outflow from financing (162) (617) (959)
------------------------------------------------
At 31 December 5,933 6,396 6,904
------------------------------------------------
45. Analysis of cash
2002 2001 2000
-------- -------- --------
(pound)m (pound)m (pound)m
Cash and balances at central banks 1,251 1,162 1,195
Loans and advances to banks repayable on demand 1,534 6,395 4,696
-----------------------------------------------
Cash 2,785 7,557 5,891
-----------------------------------------------
The Bank and certain subsidiary undertakings are required to maintain balances
with the Bank of England which, at 31 December 2002, amounted to (pound)112
million (2001 - (pound)107 million; 2000 - (pound)133 million).
46. Analysis of changes in cash during the year
2002 2001 2000
-------- -------- --------
(pound)m (pound)m (pound)m
At 1 January 7,557 5,891 4,782
Net cash (outflow)/inflow (4,772) 1,666 1,109
-----------------------------------------------
At 31 December 2,785 7,557 5,891
-----------------------------------------------
125
47. Segmental analysis
In the tables below, the analyses of net assets are included in compliance with
Statement of Standard Accounting Practice 25 'Segmental Reporting'. The fungible
nature of liabilities within the banking industry results in allocations of
liabilities which, in some cases, are necessarily subjective. The directors
believe that it is more meaningful to analyse total assets and the result of
this analysis is therefore also included in the tables.
The prior year data in the tables below have been restated following the
implementation of FRS 19 in 2002. In addition, the divisional data have been
restated following the transfer of Ulster Bank's leasing business to Corporate
Banking and Financial Markets with effect from 1 January 2002.
(a) Classes of business
Profit/
(loss) on
Net Non- ordinary
interest interest Total Operating activities
2002 income income income expenses Provisions* before tax
-------------------------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Corporate Banking and Financial Markets 1,282 1,809 3,091 (1,097) (271) 1,723
Retail Banking 2,083 747 2,830 (598) (113) 2,119
Retail Direct 317 533 850 (259) (119) 472
Manufacturing - - - (1,252) - (1,252)
Wealth Management 170 293 463 (308) 12 167
Ulster Bank 339 181 520 (254) (22) 244
Central items (57) (3) (60) (137) (3) (200)
-------------------------------------------------------------------------------------
Profit before goodwill amortisation and
restructuring costs
4,134 3,560 7,694 (3,905) (516) 3,273
Goodwill amortisation - - - (26) - (26)
Restructuring costs - - - (663) - (663)
-------------------------------------------------------------------------------------
Profit on ordinary activities before tax 4,134 3,560 7,694 (4,594) (516) 2,584
-------------------------------------------------------------------------------------
Profit/
(loss) on
Net Non- ordinary
interest interest Total Operating activities
2001 income income income Expenses Provisions* before tax
-------------------------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Corporate Banking and Financial Markets 1,251 1,653 2,904 (1,116) (345) 1,443
Retail Banking 1,941 875 2,816 (672) (71) 2,073
Retail Direct 288 455 743 (244) (96) 403
Manufacturing - - - (1,128) - (1,128)
Wealth Management 308 376 684 (376) 5 313
Ulster Bank 313 170 483 (239) (15) 229
Central items (180) 174 (6) (88) 6 (88)
-------------------------------------------------------------------------------------
Profit before goodwill amortisation
and restructuring costs
3,921 3,703 7,624 (3,863) (516) 3,245
Goodwill amortisation - - - (24) - (24)
Restructuring costs - - - (638) - (638)
--------------------------------------------------------------------------------------
Profit on ordinary activities before tax 3,921 3,703 7,624 (4,525) (516) 2,583
--------------------------------------------------------------------------------------
*Comprises provisions for bad and doubtful debts and amounts written off fixed
asset investments.
126
47. Segmental analysis (continued)
Profit/
(loss) on
Net Non- ordinary
interest interest Total Operating activities
2000 income income income Expenses Provisions* before tax
---------------------------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Corporate Banking and Financial Markets 1,200 1,689 2,889 (1,254) (138) 1,497
Retail Banking 1,793 752 2,545 (629) (42) 1,874
Retail Direct 230 401 631 (270) (118) 243
Manufacturing - - - (1,185) - (1,185)
Wealth Management 303 392 695 (420) 5 280
Ulster Bank 259 164 423 (222) (12) 189
Central items (103) 57 (46) (647) (56) (749)
---------------------------------------------------------------------------------------
Profit before goodwill amortisation
and restructuring costs
3,682 3,455 7,137 (4,627) (361) 2,149
Goodwill amortisation - - - (27) - (27)
Restructuring costs - (3) (3) (524) - (527)
Exited business (7) 366 359 (81) (12) 266
--------------------------------------------------------------------------------------
Operating profit 3,675 3,818 7,493 (5,259) (373) 1,861
--------------------------------------------------------------------
Profit on disposal of businesses 1,041
--------
Profit on ordinary activities before tax 2,902
--------
*Comprises provisions for bad and doubtful debts and amounts written off fixed
asset investments.
Total assets Net assets
----------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
(pound)m (pound)m (pound)m (pound)m
Corporate Banking and Financial Markets 104,797 109,761 4,956 4,700
Retail Banking 36,747 33,125 2,262 1,844
Retail Direct 5,851 5,733 520 432
Manufacturing 1,491 1,301 108 101
Wealth Management 12,974 10,795 298 261
Ulster Bank 12,880 10,936 976 927
Central items (2,853) 1,076 83 (159)
----------------------- ----------------------------
171,887 172,727 9,203 8,106
----------------------- ----------------------------
127
47. Segmental analysis (continued)
(b) Geographical segments
The geographical analyses in the tables below have been compiled on the basis of
location of office where the transactions are recorded.
Rest of
2002 UK USA the World Total
--------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
Interest receivable 5,770 79 656 6,505
Dividend income 8 5 - 13
Fees and commissions receivable 2,583 107 218 2,908
Dealing profits 87 607 41 735
Other operating income 610 (3) 12 619
--------------------------------------------------------------------
Gross income 9,058 795 927 10,780
--------------------------------------------------------------------
Profit on ordinary activities before tax 2,053 239 292 2,584
--------------------------------------------------------------------
Total assets 106,612 48,416 16,859 171,887
--------------------------------------------------------------------
Net assets 6,520 1,127 1,556 9,203
--------------------------------------------------------------------
Rest of
2001 UK USA the World Total
-------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
Interest receivable 6,529 410 915 7,854
Dividend income 13 3 1 17
Fees and commissions receivable 2,746 74 216 3,036
Dealing profits 141 518 60 719
Other operating income 630 - 12 642
-------------------------------------------------------------------
Gross income 10,059 1,005 1,204 12,268
-------------------------------------------------------------------
Profit on ordinary activities before tax 2,053 215 315 2,583
-------------------------------------------------------------------
Total assets 112,147 45,120 15,460 172,727
-------------------------------------------------------------------
Net assets 6,692 552 862 8,106
-------------------------------------------------------------------
Rest of
2000 UK USA the World Total
-------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
Interest receivable 6,964 546 1,005 8,515
Dividend income 7 7 - 14
Fees and commissions receivable 2,684 64 209 2,957
Dealing profits 271 358 55 684
Other operating income 769 35 (4) 800
-------------------------------------------------------------------
Gross income 10,695 1,010 1,265 12,970
-------------------------------------------------------------------
Profit on ordinary activities before tax 2,421 227 254 2,902
-------------------------------------------------------------------
Total assets 128,868 38,120 19,245 186,233
-------------------------------------------------------------------
Net assets 5,799 399 842 7,040
-------------------------------------------------------------------
128
48. Directors' emoluments
The current directors of the Bank are also directors of the ultimate holding
company and are remunerated for their services to the RBS Group as a whole.
Their emoluments are disclosed in the Report and Accounts of the RBS Group.
Pensions paid to former directors of the Bank and their dependents amounted to
(pound)281,000 (2001 - (pound)280,000). Six directors (2001 - six) are members
of the Royal Bank of Scotland Group Pension Fund, which is a defined benefit
scheme.
49. Transactions with directors, officers and others
(a) At 31 December 2002, the amounts outstanding in relation to transactions,
arrangements and agreements entered into by authorised institutions in the
NatWest Group were (pound)36,276,342 in respect of loans to seven persons
who were directors of the Bank (or persons connected with them) at any time
during the financial year and (pound)7,615,388 to 41 people who were
officers of the Bank at any time during the financial year.
(b) There were no contracts of significance to the business of the Bank and its
subsidiaries which subsisted at 31 December 2002, or during the year then
ended, in which any director of the Bank had a material interest.
50. Related party transactions
Subsidiary undertakings -- Details of the principal subsidiary undertakings are
shown in Note 19. In accordance with Financial Reporting Standard 8 `Related
Party Disclosures' ("FRS 8"), transactions or balances between Group entities
that have been eliminated on consolidation and transactions with the holding
company and fellow subsidiaries are not reported.
Associated undertakings -- The amounts of loans and advances due from
associated undertakings at 31 December 2002 are shown in Note 13 and the
amounts of deposits received from associated undertakings as at 31 December
2002 are shown in Note 24. These transactions are conducted on similar terms to
third party transactions and are not material to the Group's results or
financial condition. Certain subsidiary undertakings in the Group provide
development and other types of capital support to businesses in their roles as
providers of finance. These investments are made in the normal course of
business and on arms-length terms depending on their nature. In some instances,
the investment may extend to ownership or control over 20% or more of the
voting rights of the investee company. However, these investments are not
considered to give rise to transactions of a materiality requiring disclosure
under FRS 8.
Santander Central Hispano, S.A. ("SCH") -- Under the terms of an alliance
agreement, the RBS Group and SCH co-operate in certain banking and financial
activities in Europe. The RBS Group holds 2.83% of SCH's capital stock and SCH
holds 5.04% of the holding company's ordinary shares.
Directors, officers and others -- Details of directors' emoluments are set out
in Note 48. Details of transactions with directors, officers and others
connected to them are shown in Note 49.
51. Ultimate holding company
Until January 2003, the NatWest Group's controlling party and immediate parent
company was The Royal Bank of Scotland Group plc, which is incorporated in Great
Britain and registered in Scotland. As at 31 December 2002, this company heads
the only group in which the NatWest Group is consolidated. Copies of the
consolidated accounts of The Royal Bank of Scotland Group plc may be obtained
from The Secretary, The Royal Bank of Scotland Group plc, 42 St Andrew Square,
Edinburgh EH2 2YE.
In January 2003, the ownership of the Bank's entire issued ordinary share
capital was transferred from the holding company to The Royal Bank of Scotland
plc. The ultimate holding company of the NatWest Group remains The Royal Bank of
Scotland Group plc.
129
52. Significant differences between UK and US generally accepted accounting
principles
The Consolidated Financial Statements of NatWest Group are prepared in
accordance with UK generally accepted accounting principles ("GAAP") that
differ in certain material respects from US GAAP. The significant differences
are summarised as follows:
(a) Goodwill -- Under NatWest Group's UK GAAP accounting policy, goodwill is
capitalised on the balance sheet and amortised on a straight-line basis
over its estimated useful economic life, currently over periods of up to 20
years. Under US GAAP, goodwill is recognised as an asset, and is not
amortised. Under the transition rules of SFAS 142 `Goodwill and Other
Intangible Assets', no amortisation is charged on acquisitions made after
30 June 2001; amortisation is charged up to 31 December 2001 for other
goodwill. All goodwill is tested for impairment at least annually.
(b) Property revaluation -- NatWest Group's freehold and leasehold properties
are carried at original cost or subsequent valuation. The surplus or
deficit on revaluation is included in the Group's reserves. Under US GAAP,
revaluations of property are not permitted to be reflected in the
financial statements.
(c) Property depreciation -- Depreciation charged under UK GAAP is based on
the revalued amount of freehold and long leasehold properties; no
depreciation is charged on investment properties. Under US GAAP, the
depreciation charge is based on the historical cost of all properties.
(d) Dividends -- Under UK GAAP, dividends are recorded in the period to which
they relate, whereas under US GAAP dividends are recorded in the period in
which they are declared.
(e) Loan origination fees -- Certain loan fees are recognised when received.
Under US GAAP, all loan fees and certain direct costs are deferred and
recognised as an adjustment to the yield on the related loan or facility.
(f) Pension costs -- Pension costs, based on actuarial assumptions and
methods, are charged in the consolidated accounts so as to allocate the
cost of providing benefits over the service lives of employees in a
consistent manner approved by the actuary. US GAAP prescribes the method
of actuarial valuation and also requires assets to be assessed at fair
value and the assessment of liabilities to be based on current interest
rates.
(g) Long-term assurance business -- The shareholders' interest in the
long-term assurance fund is valued as the discounted value of the cash
flows expected to be generated from in-force policies together with net
assets in excess of the statutory liabilities. Under US GAAP, for
traditional business, premiums are recognised as revenue when due from the
policyholders. Costs of claims are recognised when insured events occur. A
liability for future policy benefits is established based upon the present
value of future benefits less the present value of future net premiums.
Acquisition costs for traditional business contracts are charged to the
profit and loss account in proportion to premium revenue recognised. For
unit-linked business, premiums and front-end load-type charges receivable
from customers and acquisition costs relating to the acquisition of new
contracts are capitalised and depreciated in proportion to the present
value of estimated gross profits. Costs of claims are recognised when
insured events occur.
(h) Leasing -- In accordance with UK GAAP, NatWest Group's accounting policy
for finance lease income receivable is to allocate total gross earnings to
accounting periods so as to give a constant periodic rate of return on the
net cash investment, and certain operating lease assets are depreciated on
a reverse-annuity basis. Under US GAAP, finance lease income is recognised
so as to give a level rate of return on the investment in the lease but
without taking into account the associated tax flows, and all operating
lease assets are depreciated on a straight-line basis.
(i) Debt securities and equity shares -- Under UK GAAP, NatWest Group's
investments in debt securities and equity shares are classified as being
held as investment securities, held for the purpose of hedging or held for
dealing purposes. Investment securities are stated at cost less provision
for any permanent diminution in value. Premiums and discounts on dated
securities are amortised to interest income over the period to maturity.
Under US GAAP, NatWest Group's investment debt securities and marketable
investment equity shares are classified as available-for-sale securities
with unrealised gains and losses reported in a separate component of
shareholders' equity.
130
52. Significant differences between UK and US generally accepted accounting
principles (continued)
(j) Derivatives and hedging activities -- SFAS 133 `Accounting for Derivative
Instruments and Hedging Activities' was effective for NatWest Group's US
GAAP information from 1 January 2001. NatWest Group has not made changes
in its use of non-trading derivatives to meet the hedge criteria of SFAS
133. As a result, from 1 January 2001, for US GAAP purposes, NatWest
Group's portfolio of non-trading derivatives has been remeasured to fair
value and changes in fair value reflected in net income. Under UK GAAP,
these derivatives continue to be classified as non-trading and accounted
for in accordance with the underlying transaction or transactions. SFAS
133 does not permit non-derivative financial instruments to be designated
as the hedging instrument in a fair value hedge of the foreign exchange
exposure of available-for-sale securities. The Group's UK and US GAAP
reconciliations also reflect transition adjustments on initial application
of SFAS 133. These adjustments were: a cumulative-effect-type adjustment
increasing net income by(pound)15 million ((pound)21 million less tax
of(pound)6 million); and a cumulative-effect-type adjustment decreasing
other comprehensive income by(pound)174 million ((pound)249 million less
tax of(pound)75 million). SFAS 133 also requires derivatives embedded in
other financial instruments to be accounted for on a stand-alone basis if
they have economic characteristics and risks that differ from those of the
host instrument.
(k) Software development costs -- Under UK GAAP, most software development
costs are written off as incurred. Under US GAAP, certain costs relating
to software developed for own use that are incurred after 1 January 1999
are capitalised and depreciated over the estimated useful life of the
software.
(l) Acceptances -- Acceptances outstanding and the matching customers'
liabilities are not reflected in the consolidated balance sheet, but are
disclosed as memorandum items. Under US GAAP, acceptances outstanding and
the matching customers' liabilities are reflected in the consolidated
balance sheet.
(m) Offset of repurchase and reverse repurchase agreements -- Under UK GAAP,
debit and credit balances with the same counterparty are aggregated into a
single item where there is a right to insist on net settlement and the
debit balance matures no later than the credit balance. Under US GAAP,
repurchase and reverse repurchase agreements with the same counterparty
may be offset only where they have the same settlement date specified at
inception.
(n) Deferred taxation -- Following the implementation by NatWest Group of FRS
19 'Deferred Tax', accounting for deferred tax under UK GAAP is now
consistent with US GAAP except that deferred tax is not recognised under
UK GAAP on certain timing differences resulting from the roll-over of
gains on disposal of properties, but is provided under US GAAP on such
differences.
Recent developments in US GAAP
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
145 `Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections'. SFAS 145 rescinds existing
requirements for accounting for extinguishments of debt, removes an
inconsistency in the existing requirements for accounting by lessees for
certain lease amendments, and makes other technical corrections to existing
statements. The Group has determined that this Statement has no material effect
on its US GAAP reporting.
In July 2002, the FASB issued SFAS 146 `Accounting for Costs Associated with
Exit or Disposal Activities'. SFAS 146 addresses the recognition and
measurement of employee termination costs, contract termination costs and other
costs associated with exit or disposal activities, and related disclosures.
SFAS 146 is applicable to exit and disposal activities initiated after 31
December 2002. The Group is reviewing this statement to determine the effect on
its US GAAP reporting.
In October 2002, the FASB issued SFAS 147 `Acquisitions of Certain Financial
Institutions'. SFAS 147 requires certain acquisitions that fell within the
scope of SFAS 72 `Accounting for Certain Acquisitions of Banking or Thrift
Institutions' to be accounted for in accordance with SFAS 141 `Business
Combinations', and includes transitional provisions to deal with unidentified
intangible assets recognised under SFAS 72. SFAS 147 is effective from 1
October 2002. The Group has determined that this Statement has no material
effect on its US GAAP reporting.
In November 2002, the FASB issued FASB Interpretation No. 45 `Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34'. FIN 45 requires
guarantees entered into or modified after 31 December 2002 to be recognised and
measured initially at their fair value. The Group is reviewing the initial
recognition and measurement requirements of this Statement to assess their
effect on the US GAAP reporting.
131
52. Significant differences between UK and US generally accepted accounting
principles (continued)
In December 2002, the FASB issued SFAS 148 `Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123'. SFAS 148 addresses the treatment of a voluntary change in accounting for
stock-based employee compensation from the intrinsic value method under APB
Opinion No. 25 `Accounting for Stock Issued to Employees', to the fair-value
based method under SFAS 123. The Group is currently not contemplating moving to
accounting for stock-based compensation using the fair-value based method of
SFAS 123.
In January 2003, the FASB issued FASB Interpretation No. 46 `Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51'. FIN 46 addresses
accounting for variable interest entities, which are entities where the equity
investment at risk is not sufficient to permit the entity to finance its
activities without subordinated support from other parties to absorb losses, or
where the equity investors lack certain essential characteristics of a
controlling financial interest. FIN 46 requires the primary beneficiary of a
variable interest entity to consolidate that entity. An enterprise is the
primary beneficiary of a variable interest entity if it holds an interest that
will absorb the majority of its expected losses or receive a majority of its
expected residual returns. FIN 46 requires the holder of a significant variable
interest in a variable interest entity to make certain disclosures. The
requirements of FIN 46 apply to new variable interest entities created after 31
January 2003, or where the reporting entity acquires an interest after that
date, and to other variable interest entities in the first fiscal year or
interim period beginning after 15 June 2003.
However, FIN 46 requires disclosures in financial statements issued after 31
January 2003 about variable interest entities that, when FIN 46 becomes
effective, it is reasonably possible that the reporting enterprise will
consolidate or about which the enterprise will disclose information in
accordance with FIN 46. The Group has undertaken a review to identify variable
interest entities in which it is the primary beneficiary or in which it has a
significant variable interest. The Group has concluded that it is reasonably
possible that it is the primary beneficiary of, or has a significant interest
in, a number of commercial paper conduits and other asset securitisation
vehicles that meet FIN 46's definition of a variable interest entity. These
entities acquire financial assets from third parties or from the Group funded
by the issue of commercial paper or other debt instruments. The Group supplies
certain administrative services and provides credit enhancement, liquidity
facilities and derivative transactions to some or all of the entities on an
arm's length basis. In the case of the commercial paper conduits, the Group
provides programme wide credit enhancement by letters of credit or loan
facilities across all tranches of assets funded by conduits. The Group provides
funding in the form of reverse repurchase agreements on bonds owned by one
variable interest entity. At 31 December 2002, the Group held loan notes issued
by these entities with a principal amount of (pound)3.0 billion, had
outstanding undrawn liquidity lines amounting to (pound)1.6 billion; and total
rate of return swaps with a notional amount of (pound)0.7 billion. The Group's
maximum exposure to loss, in the event of non-performance of the entire
portfolios of assets in these entities and if all counterclaims proved
valueless, is represented by the contractual amount of these instruments.
As experience with FIN 46 develops, the Group is continuing to review its
existing interests to identify other variable interest entities in which the
Group may have a significant variable interest or of which the Group may be the
primary beneficiary.
132
52. Significant differences between UK and US generally accepted accounting
principles (continued)
Selected figures in accordance with US GAAP
The following tables summarise the significant adjustments to consolidated net
income available for ordinary shareholders and shareholders' equity which would
result from the application of US GAAP instead of UK GAAP. Where applicable,
the adjustments are stated gross of tax with the tax effect shown separately in
total.
Consolidated statement of income - net income 2002 2001 2000
---- ---- ----
(pound)m (pound)m (pound)m
Profit attributable to ordinary shareholders - UK GAAP 1,825 1,802 2,160
Adjustments in respect of:
Goodwill 26 - -
Property depreciation 5 5 6
Property disposals 4 51 73
Loan fees and costs 22 (7) (4)
Pension costs (15) 236 203
Long-term assurance business - - 14
Leasing (46) (49) (10)
Derivatives and hedging 380 18 117
Software development costs 220 371 (5)
Profit on disposal of NatWest Life - - 409
Tax effect on the above adjustments (168) (170) (219)
Deferred taxation - (115) (1)
------ ------ ------
Net income available for ordinary shareholders - US GAAP 2,253 2,142 2,743
====== ====== ======
Consolidated shareholders' equity 2002 2001
---- ----
(pound)m (pound)m
Shareholders' funds - UK GAAP 9,203 8,106
Adjustments in respect of:
Goodwill 26 -
Property revaluation and depreciation (558) (588)
Proposed dividend - 400
Loan fees and costs (141) (163)
Pension costs 268 283
Leasing (239) (193)
Available-for-sale securities (103) (35)
Derivatives and hedging 257 (156)
Software development costs 823 603
Tax effect on cumulative UK/US GAAP income adjustments (334) (166)
Tax effect on other comprehensive income 75 63
Deferred taxation (112) (112)
------ ------
Shareholders' equity - US GAAP 9,165 8,042
====== ======
Total assets under US GAAP, adjusted to reflect the inclusion of acceptances
and the grossing-up of certain repurchase agreements offset under UK GAAP,
together with the effect of adjustments made to net income and shareholders'
funds, were (pound)182 billion (2001 - (pound)182 billion).
133
52. Significant differences between UK and US generally accepted accounting
principles (continued)
Loan impairment
With effect from 1 January 1995, NatWest Group adopted SFAS 114 'Accounting by
Creditors for Impairment of a Loan' and the subsequent amendment SFAS 118
'Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures' for US GAAP purposes. SFAS 114 applies to impaired loans only.
Under SFAS 114, a loan is considered impaired, based on current information and
events, if it is probable that a creditor will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired loans is
primarily based on the present value of expected future cash flows discounted
at the loan's effective interest rate, except for collateral dependent loans
where impairment is based on the fair value of the collateral. Smaller balance
homogeneous consumer loans, (credit card advances, residential mortgages,
consumer instalment loans, overdrafts), that are collectively evaluated for
impairment, leases and debt securities are outside the scope of SFAS 114.
At 31 December 2002 and 31 December 2001, the NatWest Group estimated that the
difference between carrying value of its portfolio under SFAS 114 and its value
in NatWest Group's UK GAAP financial statements was such that no adjustment to
net income or consolidated shareholders' equity was required.
At 31 December 2002, the Group's non-accrual loans, loans past due 90 days and
troubled debt restructurings amounted to (pound)2,549 million (2001 -
(pound)2,885 million). Specific provisions of (pound)1,370 million (2001 -
(pound)1,449 million) were held against these loans. Average non-accrual loans,
loans past due 90 days and troubled debt restructurings for the year to 31
December 2002 were (pound)3,713 million (2001 - (pound)3,356 million).
Gross income not recognised, but which would have been recognised under the
original terms of non-accrual and restructured loans, amounted to (pound)171
million for the year ended 31 December 2002 (2001 - (pound)101 million; 2000 -
(pound)118 million) from domestic loans and (pound)32 million for the year
ended 31 December 2002 (2001 - (pound)24 million; 2000 - (pound)24 million)
from foreign loans. Interest on non-accruals and restructured loans included in
net income was (pound)36 million for the year ended 31 December 2002 (2001 -
(pound)36 million; 2000 - (pound)39 million) from domestic loans and (pound)5
million for the year ended 31 December 2002 (2001 - (pound)7 million; 2000 -
(pound)1 million) from foreign loans.
134
52. Significant differences between UK and US generally accepted accounting
principles (continued)
Cash flow statements - FRS 1/SFAS 95
There are many similarities between SFAS 95, 'Statement of Cash Flows' as
amended by SFAS 104 'Statement of Cash Flows - Net Reporting of Certain Cash
Receipts and Cash Payments and Classification of Cash Flows from Hedging
Transactions' and FRS 1 `Cash Flow Statements (Revised)'. The principal
differences are the classifications of certain transactions.
Classification under FRS 1 Classification under SFAS 95
-------------------------- ----------------------------
Dividends received Returns on investment and servicing Operating activities
of finance
Equity dividends paid Equity dividends paid Financing activities
Dividends paid on non-equity shares Returns on investment and servicing Financing activities
of finance
Tax paid Taxation Operating activities
Purchase and sale of associated and Acquisitions and disposals Investing activities
subsidiary undertakings
Purchase and sale of investment Capital expenditure and Investing activities
securities and fixed assets financial investment
Net change in loans and advances, Operating activities Investing activities
including finance lease receivables
Net change in deposits Operating activities Financing activities
Net change in debt securities in issue Operating activities Financing activities
Short-term funding not Operating activities Financing activities
included in cash
Under FRS 1, transactions designated as hedges are reported under the same
heading as the related assets or liabilities.
The composition of cash at 31 December 2002, 2001 and 2000, and the movements
in cash for the years then ended are shown in Note 45 and Note 46 respectively
to the Consolidated Financial Statements.
Stock-based compensation costs
SFAS 123 'Accounting for Stock-Based Compensation' requires disclosure of the
effects of accounting for share compensation schemes based on the estimated
fair value of options at the date of grant if this is not charged to net
income. The disclosures only apply to options and other awards granted on or
after 1 January 1995. NatWest Group's Executive Share Option Scheme and
Savings-Related Share Option Scheme fall within the scope of SFAS 123.
The effect of charging fair value of options granted since 1 January 1995 would
be to reduce net income in 2000 by (pound)93 million.
Following the acquisition of NatWest on 6 March 2000, options under former
NatWest option schemes were exchanged for options over RBS Group shares.
135
52. Significant differences between UK and US generally accepted accounting
principles (continued)
Available-for-sale debt securities
The following table categorises NatWest Group's investment debt securities
(which are classified as available-for-sale under US GAAP) by maturity and
yield (based on weighted averages) at 31 December 2002:
After 1 but After 5 but
Within 1 year within 5 years within 10 years After 10 years Total
------------------ ----------------- ----------------- -------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(pound)m % (pound)m % (pound)m % (pound)m % (pound)m %
British government securities 72 7.4 37 6.7 12 6.8 17 6.5 138 7.0
Other government securities 23 6.0 196 4.1 10 5.0 - - 229 4.3
Corporate debt securities 106 8.1 358 3.6 - - - - 464 4.7
Mortgage-backed securities - - 7 4.7 4 4.4 45 4.9 56 4.8
Bank and building society 19 4.6 - - - - - - 19 4.6
Other securities 77 2.5 351 6.7 1 4.5 8 3.4 437 5.9
------------------ ----------------- ----------------- -------------------- ------------------
Total book value 297 6.1 949 5.0 27 5.6 70 5.1 1,343 5.2
------------------ ----------------- ----------------- -------------------- ------------------
Total fair value 319 954 28 70 1,371
--------- --------- --------- --------- ---------
136
53. Balance sheet - the Bank
Note 2002 2001
---- -------- --------
(pound)m (pound)m
Assets
Cash and balances at central banks 1,075 1,000
Items in the course of collection from other banks 2,026 2,236
Treasury bills and other eligible bills 1,273 11
Loans and advances to banks 7,702 20,544
Loans and advances to customers 72,533 72,035
Debt securities 1,199 3,789
Equity shares 329 349
Participating interests - associated undertakings 12 9
Shares in Group undertakings 19 9,178 9,018
Tangible fixed assets 1,134 1,206
Other assets 1,852 2,123
Prepayments and accrued income 887 767
-------- --------
Total assets 99,200 113,087
-------- --------
Liabilities
Deposits by banks 2,515 13,208
Items in the course of transmission to other banks 1,278 1,376
Customer accounts 77,076 74,567
Debt securities in issue 53 4,728
Other liabilities 2,189 3,620
Accruals and deferred income 1,162 1,167
Provisions for liabilities and charges
- - other provisions 187 159
Subordinated liabilities
- - dated loan capital 29 3,276 3,579
- - undated loan capital including convertible debt 30 2,592 2,745
Called up share capital 31 2,159 2,197
Share premium account 32 1,286 1,286
Other reserves 298 298
Revaluation reserve 2,924 2,671
Profit and loss account 2,205 1,486
- -------------------------------------------------------------------------------------------------
Shareholders' funds
- - equity 8,391 7,419
- - non-equity 481 519
- -------------------------------------------------------------------------------------------------
Total liabilities 99,200 113,087
-------- --------
137
ITEM 19. EXHIBIT INDEX
----------------------
Sequentially
Exhibit number Description Numbered Page
- -------------- ----------- -------------
1.1* Memorandum and Articles of Association
of National Westminster Bank Plc
4.1** Service contract for Gordon Pell
4.1.1 Variation agreement to service contract
for Gordon Pell
7.1 Explanation of ratio calculations
8.1 Principal subsidiaries of National
Westminster Bank Plc
* Incorporated by reference to Exhibit 1.1 to the National Westminster Bank Plc
Annual Report on Form 20-F for the fiscal year ended 31 December 2001 (File No.
1-9266).
** Incorporated by reference to Exhibit 4.5 to The Royal Bank of Scotland Group
plc Annual Report on Form 20-F for the fiscal year ended 31 December 2000 (File
No. 1-10306).
138
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorised.
National Westminster Bank Plc
-----------------------------
Registrant
/s/ Fred Watt
Fred Watt
Group Finance Director
16 June 2003
139
I, Frederick Anderson Goodwin, certify that:
1. I have reviewed this annual report on Form 20-F of National Westminster Bank
Plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 16 June 2003
/s/ Fred Goodwin
- ----------------------
Group Chief Executive
140
I, Frederick Inglis Watt, certify that:
1. I have reviewed this annual report on Form 20-F of National Westminster Bank
Plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 16 June 2003
/s/ Fred Watt
- ----------------------
Group Finance Director
141
Sequentially
Exhibit number Description Numbered Page
- -------------- ----------- -------------
1.1* Memorandum and Articles of Association
of National Westminster Bank Plc
4.1** Service contract for Gordon Pell
4.1.1 Variation agreement to service contract
for Gordon Pell
7.1 Explanation of ratio calculations
8.1 Principal subsidiaries of National
Westminster Bank Plc
* Incorporated by reference to Exhibit 1.1 to the National Westminster Bank Plc
Annual Report on Form 20-F for the fiscal year ended 31 December 2001 (File No.
1-9266).
** Incorporated by reference to Exhibit 4.5 to The Royal Bank of Scotland Group
plc Annual Report on Form 20-F for the fiscal year ended 31 December 2000 (File
No. 1-10306).