Royal Bank Accounts 06 cover 29/3/07 11:14 Page 1 The Royal Bank ofThe Royal Scotland plc Annual Report and Accounts 2006 Annual Report and Accounts 2006 RBS_Accounts 06.qxp 2/4/07 07:45 Page 1 Contents 02 Board of directors and secretary 03 Financial review 21 Report of the directors 24 Statement of directors’ responsibilities 25 Independent auditors’ report to the members of The Royal Bank of Scotland plc 26 Accounting policies 35 Consolidated income statement 36 Balance sheets 37 Statements of recognised income and expense 38 Cash flow statements 39 Notes on the accounts Annual Report and Accounts 2006 1 Contents RBS_Accounts 06.qxp 2/4/07 07:45 Page 2 Board of directors and secretary Chairman Auditors Sir Tom McKillop Deloitte & Touche LLP C, N, R Chartered Accountants and Registered Auditors Saltire Court Executive directors 20 Castle Terrace Sir Fred Goodwin DUniv, FCIBS, FCIB, LLD Edinburgh EH1 2DB C Johnny Cameron FCIBS Registered office Lawrence Fish 36 St Andrew Square Edinburgh EH2 2YB Mark Fisher FCIBS Telephone: 0131 556 8555 Gordon Pell FCIBS, FCIB Guy Whittaker Head office C Gogarburn PO Box 1000 Non-executive directors Edinburgh EH12 1HQ Colin Buchan* A, C, R The Royal Bank of Scotland plc Jim Currie* D.Litt Registered in Scotland No. 90312 R Bill Friedrich* A Archie Hunter* A (Chairman), C, N Charles ‘Bud’ Koch Janis Kong* OBE, DUniv R Joe MacHale* A Sir Steve Robson* A Bob Scott* CBE, FCIBS C, N, R (Chairman) Peter Sutherland* KCMG C, N, R Secretary Miller McLean FCIBS C A member of the Audit Committee C member of the Chairman’s Advisory Group N member of the Nominations Committee R member of the Remuneration Committee * independent non-executive director 2 Annual Report and Accounts 2006 RBS_Accounts 06.qxp 13/4/07 11:59 Page 3 Financial review Description of business Retail also includes the Group’s non-branch based retail Introduction businesses that issue a comprehensive range of credit and The Royal Bank of Scotland plc is a wholly-owned subsidiary of charge cards to personal and corporate customers and provides The Royal Bank of Scotland Group plc, one of the world’s card processing services for retail businesses. Retail is the largest banking and financial services groups. The Group has a leading merchant acquirer in Europe and ranks fourth globally. large and diversified customer base and provides a wide range of products and services to personal, commercial and large It also includes Tesco Personal Finance, The One account, corporate and institutional customers. First Active UK, Direct Line Financial Services and Lombard Direct, all of which offer products to customers through direct Organisational structure and business overview channels principally in the UK. In continental Europe, Retail The Group’s activities are organised in the following business offers a similar range of products through the RBS and divisions: Corporate Markets (comprising Global Banking & Comfort Card brands. Markets and UK Corporate Banking), Retail Markets (comprising Retail and Wealth Management), Ulster Bank, Citizens and Wealth Management provides private banking and investment Manufacturing. A description of each of the divisions is given services to its clients through a number of leading UK and below. overseas private banking subsidiaries and offshore banking businesses. Coutts is one of the world's leading international Corporate Markets is focused on the provision of banking, wealth managers with offices in Switzerland, Dubai, Monaco, investment and risk management services to medium and Hong Kong and Singapore, as well as its premier position in the large businesses and financial institutions in the UK and UK. Adam & Company is the major private bank in Scotland. around the world. Corporate Banking and Financial Markets The offshore banking businesses – The Royal Bank of Scotland was renamed Corporate Markets on 1 January 2006 when we International and NatWest Offshore – deliver retail banking reorganised our activities into two businesses, Global Banking services to local and expatriate customers, principally in the & Markets and UK Corporate Banking, in order to enhance the Channel Islands, the Isle of Man and Gibraltar. service provided to these two customer segments. Ulster Bank Group brings together the Ulster Bank and First Global Banking & Markets (“GBM”) is a leading banking partner Active businesses to provide a comprehensive range of to major corporations and financial institutions around the world, products and services to retail and corporate customers in the providing an extensive range of debt financing, risk management island of Ireland. and investment services to its customers. GBM has a wide range of clients across its chosen markets. It has relationships Ulster Bank Retail Markets serves personal customers through with an overwhelming majority of the largest UK, European and both the Ulster Bank and First Active brands. Ulster Bank US corporations and institutions. GBM’s principal activity in the provides branch banking and direct banking services US is conducted through RBS Greenwich Capital. throughout the island of Ireland. First Active, through its branch network, serves personal customers in the Republic of Ireland UK Corporate Banking is the largest provider of banking, with its separately branded product offerings, including finance and risk management services to UK corporate mortgages and savings. customers. Through its network of relationship managers across the country it distributes the full range of Corporate Ulster Bank Corporate Markets caters for the banking needs of Markets’ products and services to companies. business and corporate customers, including treasury and money market activities, asset finance, e-banking, wealth Retail Markets was established in June 2005 to lead co- management and international services. Business and corporate ordination and delivery of our multi-brand retail strategy across banking services are provided via centrally-based relationship our product range and comprises Retail (including our direct management teams and dedicated Business Centres located channels businesses) and Wealth Management. across both Northern Ireland and the Republic of Ireland. Retail comprises both the Royal Bank and NatWest retail Citizens is the second largest commercial banking organisation brands, and a number of direct providers offering a full range in New England and the eighth largest commercial banking of banking products and related financial services to the organisation in the US measured by deposits. Citizens provides personal, premium and small business markets across several retail and corporate banking services under the Citizens brand distribution channels. in Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, New York state, Pennsylvania, Rhode Island and Vermont In core retail banking, Retail offers a comprehensive product and the Charter One brand in Illinois, Indiana, Michigan and range across the personal and small business market: money Ohio. Through its branch network Citizens provides a full range transmission, savings, loans and mortgages. Customer choice of retail and corporate banking services, including personal and product flexibility are central to the retail banking banking, residential mortgages and cash management. proposition and customers are able to access services through a full range of channels, including the largest network of branches and ATMs in the UK, the internet and the telephone. Annual Report and Accounts 2006 3 Financial review RBS_Accounts 06.qxp 2/4/07 07:45 Page 4 Financial review continued In addition, Citizens engages in a wide variety of commercial In the small business banking market, the Group competes lending, consumer lending, commercial and consumer deposit with other UK clearing banks, specialist finance providers products, merchant credit card services, trust services and retail and building societies. investment services. Citizens includes RBS National Bank, our US credit card business, RBS Lynk, our merchant acquiring In the personal banking segment the Group competes with UK business, and Kroger Personal Finance, our credit card joint banks and building societies, major retailers and internet-only venture with the second largest US supermarket group. players. In the mortgage market the Group competes with UK banks and building societies. Manufacturing supports the customer-facing businesses and provides operational, technology and customer support in In the UK credit card market large retailers and specialist card telephony, account management, lending and money issuers, including major US operators, are active in addition to transmission, global purchasing, property and other services. the UK banks. Competitive activity is across a number of dimensions including introductory and longer term pricing, Manufacturing drives optimum efficiencies and supports loyalty and reward schemes, and packaged benefits. In income growth across multiple brands and channels by using addition to physical distribution channels, providers compete a single, scalable platform and common processes wherever through direct marketing activity and the internet. The market possible. It also leverages the Group’s purchasing power and remains very competitive, both between issuers and with other has become the centre of excellence for managing large-scale payment methods. and complex change. In Wealth Management, The Royal Bank of Scotland International The expenditure incurred by Manufacturing relates to costs competes with