Chairman's statement

2001 was another year of substantial improvement in the strength and profitability of our Group. All our businesses have grown income and improved efficiency, producing notable profit increases. Credit quality remains good, although we have made prudent increases in our level of provisions to reflect the growth in our business combined with the deterioration in the short-term economic outlook and a small number of specific customer situations.

The integration of NatWest is progressing well and we expect to achieve significantly greater revenue benefits and cost savings than originally envisaged.

The Group is well positioned to sustain growth momentum and thereby deliver superior returns to our shareholders.

Financial performance
Profit before tax, goodwill amortisation and integration costs increased by 32% to £5,801 million (31 December 2000 – £4,401 million on a pro forma basis). Total income grew by 18%, to £14,581 million, while operating expenses excluding goodwill amortisation and integration costs rose by just 3% to £6,841 million. The growth in income, combined with control of costs and the benefits of integration enabled us to improve the cost:income ratio from 53.5% to 46.9%. Adjusted earnings per share rose by 25% to 127.9p.

Dividend
The directors have recommended a final dividend of 27.0p, which, with the interim dividend of 11.0p, makes a total of 38.0p, an increase of 15%. Also, the first Additional Value Share dividend, of 15.0p per share, was paid on 3 December 2001.

Staff profit sharing
I am pleased to announce that the staff profit share has been set at the maximum of 10% of basic salaries for employees of the Group.

Business developments
We made a number of tactical acquisitions during 2001, including expanding Direct Line’s operations in Europe.

Strategically, we expanded our presence in the US with the acquisition by Citizens, in December 2001, of Mellon Financial Corporation’s regional banking franchise based in Pennsylvania for US$2.2 billion.

Board of directors
Viscount Younger of Leckie retired from the Board and as Chairman at our annual general meeting on 11 April 2001. As Chairman of the Group between 1991 and last year, George Younger presided over undoubtedly its most successful decade, culminating in the transformational acquisition of NatWest in March 2000. His patience, wisdom and strength were major factors in the success of The Royal Bank of Scotland Group under his leadership.

Murray Stuart and Cameron McLatchie  will not be seeking re-election at the annual general meeting on 26 April 2002 and will retire from the Board. Murray Stuart joined the Board in 1996 and Cameron McLatchie in 1998. Both have served the Board extremely well and their contributions to the progress of the Group and to Board discussions during their service were greatly valued.

A number of new non-executive directors were appointed during the year. Bob Scott, formerly group chief executive of CGNU plc, and Peter Sutherland, chairman and managing director of Goldman Sachs International and non-executive chairman of BP plc, both joined the Board on 31 January 2001. Sir Steve Robson, formerly Second Permanent Secretary of HM Treasury, joined the Board on 25 July 2001. On 28 November 2001, Dr Jim Currie, formerly Director General at the European Commission with responsibility for the EU’s environmental policy, joined the Board.

Economic situation
While the UK and US economies are not as strong as they were twelve months ago, we do have a more positive outlook than was the case immediately after the events of 11 September 2001. The initial signs of recovery in the US are encouraging although it may not be until the second half of 2002 that sustained recovery can be confirmed. In the UK, consumer confidence still holds up well, which should support the UK in continuing to be among the best performing major industrialised countries in 2002. Only time will tell whether this view is correct, and great vigilance is clearly required in case there is further deterioration.

Prospects
Our focus on building strategic options for the Group, together with our emphasis on growing income in ways which are beneficial for both customers and shareholders, has delivered another significant uplift in our performance. I am confident that the resultant strength, diversity and flexibility of the Group will enable us to continue to build value.

Sir George Mathewson
Chairman