ManagingManaging ComplexityComplexity

SirSir FredFred GoodwinGoodwin GroupGroup ChiefChief ExecutiveExecutive Managing Complexity

1 Step Process

▮ Reduce complexity

Slide 2 Managing Complexity

Reduce Complexity

Step 1.i Limit business activity to contiguous/complementary areas

▮ We haven’t diversified into – Equity trading and sales – Mergers and acquisitions advisory services – Institutional fund management – Life assurance manufacturing

Slide 3 Managing Complexity

Reduce Complexity

Step 1.i Limit business activity to contiguous/complementary areas

▮ We have diversified – geographically: Mellon, Charter One, other Citizens acquisitions, von Ernst, , People’s Bank, BIBIT, Lynk Systems – , Dixon Motors

Slide 4 Managing Complexity

Reduce Complexity

Step 1.ii Establish appropriate organisation structure

▮ Group similar activities together, creating – Centres of excellence – Specialisation –Economies of scale

▮ Maintain consistency

Slide 5 Group Structure

CUSTOMERS

•RBS Cards •Personal •Personal •Large Corporates - RBS • •Personal • NatWest Cards •Adam • Churchill • Small Business • Small Business • Mid Corporates and •First Active •Business •MINT •RSA Commercials-RBS/NW •Personal • NatWest Offshore •NIG • One Account •NW Life •Treasury - RBS •Commercial •Business •RBSI • International •Tesco PF •Greenwich Capital (US) • Lombard Direct •Lombard •Corporate •DLFS • • International • Specialist Businesses

Wealth RBS Retail RBS NatWest CBFM Ulster Citizens Management Direct Bank

MANUFACTURING

Technology Operations Services

Slide 6 Managing Complexity

Reduce Complexity

Step 1.iiiCreate appropriate operating model

▮ Featuring – Clear delegation of responsibility – Clear reporting requirements – Clear performance management regime – Effective communication (bi-directional) – Appropriate ‘clock speed’

▮ Must maintain consistency

Slide 7 Managing Complexity

Reduce Complexity

Step 1.iv Create clarity of objectives

▮ What are we trying to do? Objectives should be – Group wide –Aspirational – Achieveable – Not too detailed

▮ High level objective “We aim to deliver superior sustainable value for our shareholders, customers and staff” Slide 8 Managing Complexity

Reduce Complexity

Step 1.iv Create clarity of objectives

▮ More specific objectives – Achieve superior income growth –Improve cost:income ratio – Maintain/improve credit quality – Increase customer numbers and satisfaction – Improve employee opinion survey scores

▮ Must maintain consistency

Slide 9 Managing Complexity

Reduce Complexity

Step 1.v Create clarity of required outcome

▮ Disciplined approach to –Budgets –Action plans – Cost recharging (not favoured) – Project/transaction investment hurdles –Incentives and rewards

▮ Must maintain consistency

Slide 10 Managing Complexity

We have maintained consistency of our model since 1999

▮ But has it enabled us to cope with increasing complexity?

Slide 11 The Royal Bank of Group

Complexity Context 1999 2003 2004

Employees 32,670 120,900 133,500 Income (£m)(pre-NatWest) 4,138 19,229 US income (£m) 549 2,792 Operating profit (£m) 1,211 7,151

▮ Transformation of scope and scale of Group, through combination of –Acquisitions –Organic growth – New businesses Slide 12 Acquisitions 1999 – 2004

Date Division Acquisition Consideration (m)

1999 Oct State Street (commercial banking) Citizens $350 Nov Green Flag Direct Line £223 2000 Jan UST Corporation Citizens $1,400 Mar NatWest RBS £21,000 2001 Jul Balance of Virgin One Retail Direct £100 Aug International Aviation Management CBFM £16 Sep Euro Sales Finance CBFM £70 Sep Allstate Corporation (motor insurance, Germany/Italy) Direct Line $20 Dec Mellon Regional Franchise Citizens $2,200 2002 Jan Royal Insurance (motor insurance, Italy) Direct Line €20 May Dixon Motors CBFM £118 Oct Medford Bancorp Citizens $273 2003 Jan Commonwealth Bancorp Citizens $450 Jun Nordisk Renting CBFM €104 Jul Port Financial Corporation Citizens $285 Jul Santander Direkt Bank (credit cards, personal loans) Retail Direct €486 Sep Group Direct Line £1,100 Oct Community Bancorp Citizens $116 Nov Bank von Ernst Wealth Management Swfr 500 2004 Jan Roxborough Manayunk Bank Citizens $136 Jan First Active Ulster Bank €887 Mar People’s Bank (credit cards) Retail Direct $360 May Bibit Retail Direct €93 Sep Charter One Citizens $10,500 Sep Lynk Systems Inc Retail Direct $525

Slide 13 Income Growth 2000 – 2003

Pro forma

1999 2003 Change over 4 Yrs £m £m £m % Total income 11,065 19,229 8,164 +74%

Components of Income Growth £m % Total NatWest transaction benefits 872 11% Other acquisitions 1,865 23% Organic growth 5,427 66% Total 8,164 100%

Slide 14 UK Financial Services New Entrants 2003

Commenced Profit/(Loss)

Scottish Widows Bank 1995 £17m Goldfish 1996 (£30m) 1997 £27m Sainsbury’s Bank 1997 £22m Tesco Personal Finance 1997 £160m Egg 1998 (£34m) Standard Life Bank 1998 £5m Direct Line Rescue 1998 £31m Marbles 1999 not reported 1999 not reported 2000 (£15m) 2000 (£53m) Zurich Bank 2001-03 closed Mar 03 Profit/(loss) before exceptional items Slide 15 Managing Complexity

Model has had to cope with increasing complexity

▮ But has it delivered results in line with our objectives?

Slide 16 Creating Value for Shareholders

▮ Grow income

▮ Improve efficiency

▮ Maintain credit quality

Slide 17 Grow Income

RBS Income 1999 – 2003 £bn 20

15

10

5

0 1999 2000 2001 2002 2003 Pro forma Slide 18 Grow Income

Income Growth 1999 – 2003

HSBC

RBS

Wells Fargo

Citigroup

Bank of America

JPM Chase

0 20406080100 % Income as reported in US$, except RBS which reports in sterling Slide 19 Grow Income

Percentage Growth % 100 in Income 1999 – 2003 HSBC

80 RBS 60 Wells Fargo 40 Citigroup

20 0 JPM Chase

-20 1999 2000 2001 2002 2003

Income as reported in US$, except RBS which reports in sterling Slide 20 Grow Income

Income Growth 1H03

RBS - 1H04 in US Dollars HSBC

Bank of America

Citigroup

Wells Fargo

JPM Chase

0 10203040 %

Half year income as reported in US$, except RBS Slide 21

whose sterling income has been converted into US$ Grow Income

US Dollars Income in 2000 2001 2002 2003 1H04

RBS +5% +12% +21% +24% +36% HSBC +17% +5% +3% +54% +35% Bank of America +1% +7% 0% +11% +22% Citigroup +16% +6% +6% +9% +16% Wells Fargo +10% +1% +20% +12% +7% JPM Chase -4% -4% +3% +7% +4%

Income as reported in US$, except RBS whose sterling income has been converted into US$ Slide 22 Improve Efficiency

RBS Cost:Income Ratio 1999 – 1H04 % 70

65

60

55

50

45

40

35 1999 2000 2001 2002 2003 1H04 RBS: netting operating lease depreciation against rental income Slide 23 Improve Efficiency

Cost:Income Ratios 1999 – 1H04 % 70

65

60

55

50

45

40

35 99 00 01 02 03 1H 99 00 01 02 03 1H 99 00 01 02 03 1H 99 00 01 02 03 1H 99 00 01 02 03 1H 99 00 01 02 03 1H 04 04 04 04 04 04 Citigroup of A HSBC JPM Chase Wells Fargo RBS Cost:income ratios as reported by , or based on income and costs reported by banks RBS: netting operating lease depreciation against rental income Slide 24 Maintain Credit Quality

P&L Account Provisions: Customer Loans + Advances % 3.0

2.5

2.0

1.5

1.0

0.5

0.0 99 00 01 02 03 1H 99 00 01 02 03 1H 99 00 01 02 03 1H 99 00 01 02 03 1H 99 00 01 02 03 1H 99 00 01 02 03 1H 04 04 04 04 04 04 Citigroup B of A HBSC JPM Chase Wells Fargo RBS Slide 25 Maintain Credit Quality

RBS Balance Sheet Provisions as a Percentage of Risk Elements in Lending % 100

80 and Potential Problem Loans

60

40

20

0 1999 2000 2001 2002 2003 1H04 Slide 26 Creating Value for Shareholders

▮ Grow income

▮ Improve efficiency

▮ Maintain credit quality

Slide 27 Strategy

What is our goal?

▮ Generating superior sustainable value for our shareholders

▮ To achieve this we need to add value for –Our customers –Our people

Slide 28 Our Customers

1999 – 2003 Increase Increase 000s % Retail Banking Personal customers 1,900 +16% Retail Direct UK accounts 3,600 +55% RBS Insurance UK motor in-force policies 5,400 +203% Ulster Bank Personal customers 500 +68% Citizens Personal customers 1,400 +136% Slide 29 CBFM Customer Satisfaction

Overall Relationship Performance 75% RBS

60%

45%

30% Important Bank 15%

0% 350 500 650 Service Quality Index Slide 30 Retail Banking Customer Satisfaction

Telephony Satisfaction

RBS

NatWest

50 60 70 80 % GB Q2 average, extremely and very satisfied

Source: NOP FRS, quarterly rolling Slide 31 RBS Insurance Customer Satisfaction

Direct Line Motor

Motor quotes

Motor renewers

Motor purchasers

020406080100 %

Extremely/very satisfied

Source: RBS Insurance, August 2004 Slide 32 Tesco Personal Finance Customer Satisfaction

Customer Satisfaction % 90 % customers very satisfied % customers extremely satisfied 80 – Motor Insurance 70 60 50 40 30 20 10 0 TPF Other Providers Source: NOP FRS

Base: 6 months to end of June 2004 Slide 33 Citizens Customer Satisfaction

Customer Satisfaction Ratings % 90

New 85 Mid Atlantic

80

75 Completely or very satisfied

70 Q202 Q302 Q403 Q103 Q203 Q303 Q403 Q104 Q204

Source: Citizens Slide 34 Our People

RBS 2003 v UK Financial Services norm*

Employment security Communication Customer focus and quality Management leadership Training and development Job satisfaction and commitment Total reward Workload and stress Image and competitive position Performance management Employee involvement Management practices Co-operation and working relationships Organisation and efficiency

0 2 4 6 8 1012141618 * Percent difference between scores % Survey by International Survey Research, 1st quarter of 2003 Slide 35 Our People

2003 Employee Opinion Survey

I have a clear unders and objectives of our business tanding of the goals

86%

Slide 36 Our Shareholders

Total Shareholder Retu

Bank of America

RBS rn 6 Mar 2000 – 1 Oct 2004

Wells Fargo

HSBC

Citigroup

JPM Chase

-40 -20 0 20 40 60 80 100 120 140 %

Source: Merrill Lynch Slide 37 Strategy

What is our goal?

▮ Generating superior sustainable value for our shareholders

▮ To achieve this we need to add value for: –Our customers –Our people

Slide 38 Managing Complexity

Conclusion

▮ RBS model works

▮ Has helped to reduce complexity

▮ Remains relevant and viable

Slide 39 Charter One Update

▮ Transaction completed 1 September 2004, ahead of schedule

▮ Management transition completed ▮ Balance sheet positioning implemented ▮ Integration underway

▮ So far, so good

Slide 40 Other Recent Acquisitions

▮ Churchill integration fully on track ▮ First Active integration fully on track ▮ IT migration completed for – People’s Bank credit card business – Bank von Ernst

Slide 41 ManagingManaging ComplexityComplexity

SirSir FredFred GoodwinGoodwin GroupGroup ChiefChief ExecutiveExecutive