The Royal Bank of Scotland Group Results for the Half Year to 30 June 2002

7 August 2002

• Profit up 15% to £3,151 million*

• Income up 20% to £8,182 million, expenses up 14% to £3,740 million

• Excluding acquisitions, income up 15%, expenses up 8%

• Customer growth in all divisions

• Net interest margin stable at 3.1%

• Further efficiency gains – cost:income ratio 45.7%, improved from 48.1%

• Profit and loss charge for provisions £652 million, against £622 million in second half of 2001 and £369 million in the first half of 2001

• Credit quality remains strong

• Balance sheet provision coverage of risk elements in lending maintained at 80%

• Increased targets for NatWest integration being met

• Accelerated delivery of Mellon Regional Franchise integration benefits

• Adjusted earnings per share up 12%, basic earnings per share up 13%

• Interim dividend 12.7p per share, up 15%

*before tax, goodwill amortisation and integration costs

The Royal Bank of Scotland Group has today reported a 15 per cent increase in profit, up £400 million to £3,151 million from £2,751 million.* All divisions contributed to the increase.

The Group continued to achieve strong growth in income, up 20 per cent, or £1,360 million, to £8,182 million. Excluding acquisitions, total income was up by 15 per cent.

Performance further improved across a number of key indicators: net interest margin increased to 3.1 per cent from 3.0 per cent; cost:income ratio has improved to 45.7 per cent, from 48.1 per cent in the first half of 2001. Capital ratios have also improved and customer numbers have grown across all divisions, reflecting the underlying strength of our core business.

During the last six months provisions have remained essentially flat, and in line with expectations. Earnings per share, adjusted for goodwill amortisation and integration costs, increased by 12 per cent from 62.6p to 69.8p. The Group has declared an interim dividend of 12.7p per ordinary share, an increase of 15 per cent.

Sir George Mathewson, Chairman of The Royal Bank of Scotland Group, said: "Strong income growth and improved efficiency are key factors in these results. Our focus on satisfying customers continues to reap rewards with increased customer numbers across the Group and in particular in Citizens, Direct Line, Retail Banking and Retail Direct.

"Provisions remain at a level consistent with the second half of 2001, influenced both by growth in our book and particular corporate situations. Overall credit quality remains strong.

"The strength, diversity and flexibility of our Group has enabled us to grow our profit before tax, goodwill amortisation and integration costs by 15 per cent and the Board is pleased to increase the interim dividend, also by 15 per cent."

Fred Goodwin, Group Chief Executive, said: "Despite the challenging economic environment we continue to make good progress across all areas of the Group, and I am particularly pleased with the level of income generation and the improvement in efficiency. The cost:income ratio has improved further to 45.7 per cent.

"We set stretching benefit targets for the NatWest integration. The original plans were reassessed in February and the level of benefits increased; we are well on target to deliver the new enhanced plan.

"The Mellon integration is going faster and better than originally planned."

Operating expenses (excluding goodwill amortisation and integration costs) rose by 14 per cent, or £456 million, to £3,740 million. Excluding acquisitions, operating expenses were up 8 per cent in support of the corresponding 15 per cent growth in income.

Overall credit quality remains strong, with no material change to the distribution by grade of the Group’s lending portfolio compared with the position at 31 December 2001. The profit and loss charge for provisions was £652 million in the first half of 2002, against £622 million in the second half of 2001.

Commenting on the future, Sir George Mathewson, said: "As ever, the outlook for the economies in which we operate is difficult to predict with any certainty. However, as our interim results have demonstrated, the strength, diversity and flexibility of our Group enables us to adopt a cautious stance relative to market conditions, whilst still being able to deliver superior business performance through the provision to our customers of the support, products and services which they want and need.

"We anticipate continuing with a cautious stance in the short term, however we remain confident in our ability to continue to deliver superior performance for our shareholders."

Compared with the first half of 2001, the divisional contributions were as follows:

• Corporate Banking and Financial Markets is the largest provider of banking services to medium and large businesses in the UK. It increased its total income by 15 per cent, up £392 million to £2,934 million, and its contribution by 3 per cent, or £45 million to £1,554 million.
   

• Retail Banking provides a wide range of banking, insurance and related financial services to individuals and small businesses through its network of Royal Bank of Scotland and NatWest branches and through the telephone. It increased its total income by 8 per cent, or £148 million to £2,037 million and its contribution by 8 per cent, or £111 million to £1,488 million.
   

• Retail Direct, which includes the Group’s cards business as well as Tesco Personal Finance, Virgin Direct Personal Finance, Direct Line Financial Services and Lombard Direct, increased its total income by 19 per cent, or £120 million to £756 million, and its contribution by 37 per cent, or £89 million to £330 million.
   

• Manufacturing supports customer-facing businesses, mainly Corporate Banking and Financial Markets, Retail Banking, and Retail Direct, with technology, account management, money transmission, property and other services. Its costs were £850 million, up 9 per cent. This increase in costs reflects support for growth in business volumes arising from new customer accounts opened, mortgage applications, new personal loans and ATM transactions, and for initiatives to enhance customer service, particularly in NatWest telephony.
   

• Wealth Management, which includes Coutts Group, Adam & Company, and the offshore banking businesses, saw a small reduction in income of 2 per cent, or £8 million, to £464 million. Its contribution was up £1 million to £235 million.
   

• Direct Line Group sells and underwrites retail and wholesale insurance on the telephone and the internet. It increased its total income by 46 per cent, or £310 million to £989 million, including strong growth of 47 per cent to £885 million in premium income. Its contribution increased by 37 per cent, or £41 million to £153 million.
   
• Ulster Bank provides a comprehensive range of retail and wholesale financial services in Northern Ireland and the Republic of Ireland. It increased its total income by 11 per cent, or £25 million to £257 million and its contribution by 9 per cent, or £10 million to £125 million.
   

• In the US, Citizens provides retail and corporate banking activities through its branch network in New England and through the Mellon Regional Franchise in Pennsylvania, Delaware and New Jersey. It increased its total income by 69 per cent, or £359 million to £876 million and its contribution by 65 per cent, or £151 million to £384 million. This reflects strong organic growth as well as the benefits of the acquisition of the Mellon Regional Franchise.

Photographs for the media are available at www.newscast.co.uk

*Profit of £3,151 million is before tax, goodwill amortisation and integration costs. Profit before tax was up by 12 per cent, from £2,072 million to £2,325 million