-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bdo4/d65cNP5etQNKzRxuFowJ22sly88FJS9T4TLr5jt+6n5R6VpRsyL7u/doOSF vXw/5zLcNUn+Ush1jUudaw== 0000950103-03-001409.txt : 20030617 0000950103-03-001409.hdr.sgml : 20030617 20030617133534 ACCESSION NUMBER: 0000950103-03-001409 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030617 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WESTMINSTER BANK PLC /ENG/ CENTRAL INDEX KEY: 0000702162 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL BANKS, NEC [6029] IRS NUMBER: 135634601 STATE OF INCORPORATION: X0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-09266 FILM NUMBER: 03747027 BUSINESS ADDRESS: STREET 1: 41 LOTHBURY CITY: LONDON ENGLAND EC2P STATE: X0 ZIP: 10015 MAIL ADDRESS: STREET 1: 41 LOTHBURY STREET 2: LONDON ENGLAND CITY: LONDON 20-F 1 may1903_20f.txt Form 20-F ------ (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 ---------------------------------------------------- ------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF ------ THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from --------------- -------------------- Commission file number 1 - 9266 ---------------------------------------------------- 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 -------------------------------------------------------------------- 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 ----------------------------------------------------------------------- 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 ----------------------------------------------------------------------- 69 41 43 41 39 51 -----------------------------------------------------------------------
Ordinary dividends ----------------------------------------------------------------------- 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 -----------------------------------------------------------------------
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). EX-4.1.1 3 may1903_ex0411.txt EXHIBIT 4.1.1 VARIATION AGREEMENT dated 2002 BETWEEN (1) NATIONAL WESTMINSTER BANK Plc whose registered office is at 135 Bishopsgate, London, EC2M 3UR ("NatWest"); and (2) GORDON PELL of Mulsanne Farm, Nightingales Lane, Chalfont St Giles, Buckinghamshire, HP8 4SQ (the "Executive"). WHEREAS (A) The Executive is employed by NatWest under the terms of a service agreement dated 5th January 2000 as varied by a Variation Agreement dated 6th March 2000 (the "Service Agreement"). (B) The parties wish to amend the Service Agreement so that NatWest will employ the Executive and the Executive shall serve NatWest on amended terms and conditions. NOW THEREFORE IT IS AGREED AS FOLLOWS: 1. Interpretation Capitalised words and expressions used in this Agreement which are not otherwise defined herein shall have the meanings ascribed to them in the Service Agreement. 2. Variations The parties agree that the Service Agreement shall, with effect from 1 January 2002 be varied as follows: (i) Clause 5.9 shall be deleted. (ii) Clauses 5.2 and 5.3 shall be deleted and replaced with the following words as a new clause 5.2: "(a) The Royal Bank of Scotland plc operates a flexible compensation and benefits package called RBSelect. NatWest shall procure the provision of RBSelect to the Executive. The Salary Element forms part of the Executive's Value Account under RBSelect and is used to calculate certain benefits such as pension, Profit Share and any discretionary bonus payment or any other payment directly linked to salary. (b) The Salary Element would also be used to calculate severance payments including redundancy. (c) Value Account is (pound)522,917, which includes a Salary Element of (pound)500,000 per annum. Full details of the RBSelect are contained in The Royal Bank of Scotland's guidebook in relation to the scheme. (c) The Executive's Value Account less the cost of any benefits elected through RBSelect will be paid monthly on the 18th day of each month (or on the last preceding working day where the 18th day falls on a weekend) and shall be at the absolute discretion of the Remuneration Committee subject to review annually on the 1st day of April of each year or any other day approved by the Remuneration Committee with any adjustments having immediate effect. Such a review will not result in a reduction in salary but neither the review nor the result of any previous review will imply that an increase will be made. (d) All remuneration payable in cash to the Executive under this Agreement shall be credited to a bank account to be maintained by the Executive with NatWest (or such other UK banking entity within the Group as the Executive may nominate)." 3. Effect Save as expressly varied hereby, the provisions of the Service Agreement shall remain in full force and effect in accordance with its terms. 4. Governing Law The terms of this Agreement shall be governed by and construed in all respects in accordance with the laws of England and Wales and the parties submit to the exclusive jurisdiction of the English Courts as regards any claim or matter arising under this Agreement. SIGNED for and on behalf of /s/ Miller Roy McLean NATIONAL WESTMINSTER BANK Plc by MILLER ROY MCLEAN, Secretary at Edinburgh on 26 April 2002 before the undernoted witness: Witness Full Name Address Occupation SIGNED by the said GORDON PELL /s/ G Pell at London on 22 May 2002 before the undernoted witness: Witness Full Name MRS. D S BATEMAN /s/ D S Bateman Address 54 Inks Green Catingford London E4 9EL Occupation Secretary EX-7.1 4 may1903_ex0701.txt EXHIBIT 7.1 Explanation of ratio calculations 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). EX-8.1 5 may1903_ex0801.txt EXHIBIT 8.1 Principal subsidiaries of National Westminster Bank Plc 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 Nature of business of 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. -----END PRIVACY-ENHANCED MESSAGE-----