CapturingCapturing ValueValue inin aa ChallengingChallenging EnvironmentEnvironment
FredFred GoodwinGoodwin GroupGroup ChiefChief ExecutiveExecutive Capturing Value in a Challenging Environment
What Challenges, What Impact?
C Uncertain economic outlook income/provisions?
C Lower equity markets income?
C Increased competition income/margins?
Slide 2 Capturing Value in a Challenging Environment
What is our Goal?
C Generating superior sustainable value for our shareholders
C To achieve this we need to add value for: – Our customers – Our people
Slide 3 Capturing Value in a Challenging Environment
How?
C Income growth
C Improving efficiency
C Good credit quality
Slide 4 Income Growth
Average Growth in
RBS Bank of Scotland Income 1992 - 1999 Abbey National HSBC Standard Chartered Halifax Woolwich Lloyds TSB Barclays NatWest Alliance & Leicester
0 5 10 15 20 % pa Income excluding exceptional items Slide 5 Income Growth
Average Growth in
RBS
HBOS Income 1999 - 2002
HSBC
Lloyds TSB
Barclays
Standard Chartered
Alliance & Leicester
Abbey National
0 5 10 15 20 Income excluding exceptional items % pa HBOS 1999 income: Halifax income for 1999 plus Bank of Scotland income for year to 28 February 2000 Slide 6 Income Growth
Income Pro forma
Corporate Banking and Financial Markets 4,459 6,052 +36% Retail Banking 3,3051999 2002 Change 4,193 +27% Retail Direct 971£m £m 1,590 +64% Manufacturing – – – Wealth Management 782 907 +16% Direct Line Group 896 2,139 +139% Ulster Bank 379 520 +37% Citizens 576 1,716 +198% Central items (303) (302) 0% Total income 11,065 16,815 +52% Slide 7 Income Growth
Pro forma
1999 2002 Change Change £m £m £m Total income 11,065 16,815 +5,750 +52%
Components of Income Growth £m % Total NatWest transaction benefits +712 12% Acquisitions since NatWest +1,036 18% Organic growth +4,002 70% Total +5,750 100%
Slide 8 Income Growth
But what about the Challenging Environment?
C Uncertain economic outlook
C Lower equity markets
C Increased competition
Slide 9 Uncertain Economic Outlook
% Growth 2000 2001 2002 2003 2004 Real GDP Actual Actual Actual F’cast F’cast
US 3.8 0.3 2.4 2.3 3.6 UK 3.1 2.1 1.8 1.9 2.4 Germany 2.9 0.6 0.2 0.5 1.7 Japan 2.8 0.4 0.3 0.8 0.8
Source: Consensus Forecasts, 7 April 2003 Slide 10 Uncertain Economic Outlook
2002 Income £16,815m United States 16%
Europe 4% Rest of World 1%
United Kingdom 79%
Slide 11 Lower Equity Markets
% Change Peak from Peak Date to 25 Apr 03
US -41% Mar 2000 UK -44% Dec 1999 Germany -65% Mar 2000 Japan -80% Dec 1989
Source: Datastream, US S+P 500, UK FTSE 100, German Dax 30, Japan Nikkei 225 Slide 12 Lower Equity Markets
Activity RBS Involvement
Wealth management Some Mergers and acquisitions None Equity trading and sales None Fund management Negligible Life insurance Limited (joint ventures)
Slide 13 Increased Competition
Level of Competition
C UK personal banking C UK small business banking C UK corporate banking C UK general insurance C UK private banking C UK offshore banking C US retail banking
Slide 14 Increased Competition
Examples of UK Personal Banking New Entrants C Scottish Widows Bank 1995 C Goldfish 1996 C Sainsbury’s Bank 1997 C Tesco Personal Finance (RBS JV) 1997 C Egg 1998 C Standard Life Bank 1998 C Marbles 1999 C Smile 1999 C Cahoot 2000 C Intelligent Finance 2000 C Zurich Bank 2001-03 Slide 15 Increased Competition
RBS Net Interest Margin % 4.0
3.5
3.0
2.5
2.0 1H00 2H00 1H01 2H01 1H02 2H02 Slide 16 ”Headroom” for Growth
UK Market Shares RBS + Other Total
Current accounts 21% – 21% Savings accounts 6% 2% 8% Personal loansNatWest 6% RBS RBS 4% 10% Mortgages 4% 1% 5% Credit cards – 17% 17% Life insurance 2% – 2% Motor insurance – 16% 16% Home insurance 1% 6% 7% Small business relationships 30% – 30% Corporate lead relationships 33% – 33%
Source: NOP 2002, NFO 2002, RBS estimates Slide 17 Capturing Value in a Challenging Environment
How?
C Income growth
C Improving efficiency
C Good credit quality
Slide 18 Improving Efficiency
Cost:Income Ratio 1992 - 2002 % 60 RBS RBS + NatWest
50
40 92 93 94 95 96 97 98 99 00 01 02 Slide 19 Improving Efficiency
K B n s2002UK Banks Cost:Income % Ratios
RBS 45.6 HBOS 46.5 Lloyds TSB 50.0 Standard Chartered 52.9 Abbey National 53.5 Barclays 53.7 HSBC 55.0 Alliance & Leicester 56.1
Excluding exceptional items, goodwill amortisation and integration costs Slide 20 Improving Efficiency
RBS Cost:Income Ratio
2002 results 16,815 7,669 45.6% Income Costs Ratio Transaction benefits achieved 712 1,154* £m £m % Sub-total 16,103 8,823 Full transaction benefits 890 1,310*
Illustrative total 16,993 7,513 44.2%
* Cost savings less costs of income benefits Slide 21 Improving Efficiency
C Further progress possible C Continue to centralise Manufacturing, where appropriate C Eliminate duplication, simplify processes C Specific objectives with income/cost benefits C Self-financing programme C Largely insulated from the environmental challenges
Slide 22 Capturing Value in a Challenging Environment
How?
C Income growth
C Improving efficiency
C Good credit quality
Slide 23 Credit Quality
Group Risk Assets by Credit Grade
1
2
3
4
Dec 2002 5 Dec 2001
0 102030405060% Exposures net of provisions Slide 24 Credit Quality
Group Risk Assets by Geographic Area
United Kingdom
North America
Europe
Rest of World Dec 2002 Dec 2001
0 102030405060% Slide 25 Credit Quality
Group Risk Assets by Industry Sector Personal Banks Financial Services Public Sector & Quasi-Govt Commercial Property Manufacturing Transport & Storage Professional Services/Leasing Wholesale/Retail Trade Hotels/Tourism/Restaurants Building/Const ruct ion Ut ilities Leisure/Recreational Agriculture Telecommunications Dec 2002 Mining/Quarrying Dec 2001 Other
0 5 10 15 20 25 30 % Slide 26 Uncertain Economic Outlook
Risk Elements in Lending and Potential Problem Loans as Percentage of Loans and Advances to Customers % 3
2
1
0 Jun Dec Jun Dec Jun Dec 2000 2000 2001 2001 2002 2002 Slide 27 Acquisitions
b 2001£bn 2002 2003 2004
Gross capital generated 3.5 4.2 Less non-recurring items: Integration costs 0.6 0.7 0.1 – AVS dividends 0.4 0.8 1.5 – Total non-recurring items 1.0 1.5 1.6 – Net capital generated* 2.5 2.7
* Profit attributable to ordinary sh Slide 28
areholders before goodwill amortisation Acquisitions
C Not essential C Could be in US, Continental Europe or UK C Could be small, medium or large C Maintain bias towards lower volatility C Meet Group hurdle rate C If suitable acquisitions not available, consider share buy back
Slide 29 Capturing Value in a Challenging Environment
RBS Outlook
C Continuing superior income growth 4 C Continuing efficiency improvement 4 C Maintaining stable credit risk 4 C Maintaining bias towards lower volatility 4 C Maintaining options for future growth 4
Slide 30 Capturing Value in a Challenging Environment
Conclusion
We remain well positioned to continue
to capture value in a challenging environment
Slide 31 CapturingCapturing ValueValue inin aa ChallengingChallenging EnvironmentEnvironment
FredFred GoodwinGoodwin GroupGroup ChiefChief ExecutiveExecutive