NatWest Group PLC (NWG) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and can I welcome you to our annual results conference for 2005. Before we go on to the results, I'd like to welcome several people who you are going to see more of throughout the years to come.

First, I'd like to introduce [Sir Tom McKilla]. Tom takes over from me as Chairman on April the 28th, the day of our annual general meeting. I'm sure I'm looking forward to it just as much as he is, and Tom brings to this job several years of Board experience at one of the biggest banks in the country, huge international experience, and what's important, in his last job as Chief Executive of Astra-Zeneca, large company experience. And I think- I'm absolutely delighted - delighted - that Tom is going to succeed me, and I think that our bank has done very well to attract him.

Can I also introduce to you Guy Whittaker, our new Finance Director. Guy also comes to us with many years international and banking experience, and I think it says something to the caliber and reputation of the Company that we can attract someone of his caliber.

And positively, his last appearance, and in a supporting role, I'd like Fred Watt to stand up, and I'd like to thank Fred for what he's done for the Royal Bank over the years in which he worked for us, and you go out with all our best wishes, Fred. Thank you very much. Now can I ask Guy Whittaker to take us through the numbers?

Good morning, everyone. George, thank you very much for that kind introduction. I'm absolutely delighted to be here, and I appreciate every single one of the 20 days you've given me to prepare for this moment. In fact, every hour of those 20 days to prepare for this moment.

I am delighted to report an excellent set of results for the group this year. Income at 25.6 billion pounds, is up 14%, operating profit, at 8.25 billion pounds, up 16%, and profit attributable to shareholders, up 17%, at almost 5.4 billion pounds. Our basic earnings per share rose 13%, reflecting a 1.6% increase in the tax rate, to 30%, as well as the full-year impact of prior-year share issuance.

Subtracting one-time gains and integration costs, adjusted EPS was 175.9 pence, up 8%.

I'm particularly pleased to see, with these strong earnings, disciplined balance sheet growth, lifted our tier one ratio to 7.6%, producing a very good return on equity of 18.2%.

All of our customer-facing businesses performed well in the context of the marketplace in which they operate, highlighting the strength of the business model that we have, and we'll go into each of the divisions later. As well as being diversified by customer, we are clearly diversified by type of activity. Our net interest income, from personal, business, loans, and deposits, domestic and international, rose 10%, to 9.9 billion pounds, and non-interest income, also again from personal and business activity, domestically and internationally, rose 16%, to 15.6 billion pounds. Non-interest income now accounts for 61% of group income, up 1% from 2004.

On net interest margin, 39% of income fell 26 basis points over the course of 2005, dropping from 281 to 2.55. As we indicated at the interims in the first half, the first half projection was 20 basis points, and in the second half, we declined a further 10. Across the company as large and diverse as RBS, there are many moving elements to this, but the key drivers of change were our growing share of the UK mortgage market, which was having a lower margin, has a better risk-adjusted return, our growing share of business deposits and long-term savings, some signs of stabilization in margins, particularly in the UK personal lending sector. On the other hand, corporate markets and margins there remained quite tight.

We continue to feel, as do many of our peers, the impact of the flatter curve across the United States and the sort of mix in underlying trends that we see here, whilst moderating slightly, show at least they'll point, the likely path we'll see in the early part of 2006.

In terms of operating efficiency, expenses rose 14%, to 11.3 billion pounds. Our headline cost income ratio at 42.4, reflected the full-year impact of Charter One and underlying expense control remains good, with our flat operating efficiency, 41.8.

We continue across the group to look for efficiency gains, though I think at this stage, we've accomplished an awful lot over the last five years or so, and there's maybe just modest scope for improvement from these sort of levels next year.

Overall, total loans and advances grew 16% across the company, and impairment losses grew 7%, to 1.7 billion pounds. We experienced higher losses in cards and retail, and lower losses in the corporate sector, where cash flows remain strong. Our risk elements in lending fell from 1.84% to 1.6%, as a function of write-offs and the higher proportion of secured lending that we're now doing, and impairments over the whole portfolio were one basis point better, at 46 basis points.

Our provisions coverage, which has typically hovered around 70%, fell from 70 to 65%. This again reflects the higher proportion of mortgage lending within the book as well as fourth quarter actions to bring our write-off policies in line with [Basil II] guidelines. X mortgages, our provision ratios remained stable, at 74%, year-over-year, and the overall portfolio credit quality and metrics remain stable.

Across the group, income rose 3 billion pounds, to 25.6, I said. Expenses up 1.4 billion pounds, to 11.298 billion. But insurance claims are up 9%, to-- or up 357 million pounds, or 9%, broadly in line with volume growth. And impairments rose 117 million, to the 1707 number, resulting in operating profit of 8.251 billion pounds, up 16%.

And again, similar story to the income across the group, each of the divisions making a very good contribution in the context of the marketplace or the geography in which they operate.

I'd like to take a few moments now to just go through each of the divisions. Corporate markets had an outstanding year. Corporate and institutional cash flows remained strong, and the resulting positive credit environment is very good in terms of lower losses, in terms of higher recoveries, in terms of gains from prior workout situations, as well as gains on other investments. We maintained our market-leading position in the UK corporate and commercial markets and around the world, underwriting volumes remained strong, and we were pleased to the fourth most-active arranger of loan financing in the world. We also had a much greater focus on distribution, particularly in the second half of the year, so building a distribution and origination strategy allowed us to see risk-weighted assets come down from the mid-year spike to show just the 14% year-over-year growth, with a 24% corresponding increase in contribution.

We were particularly pleased to see over half of the income growth in corporate markets come from outside the UK, with Europe and RBS Greenwich Capital doing particularly well, sales and trading was up 16% year over year, with the group trading [VAR] remaining very modest at 13 million pounds.

Across our retail markets, I think it was a very pleasing result in a challenging market environment. Total income was up 7% on the year, tight cost control helping mitigate rising credit costs in cards and in the retail sector, which would product a bottom line contribution up 4%.

RBS and NatWest are, respectively, the first and second brands in service quality in the UK retail space, based on customer feedback, and this is also evidenced by us gaining the largest share of net new accounts, switching amongst the UK banks. We're making excellent progress, highlighted in the interims, in leveraging our branch distribution network, taking increasing share in term savings products, in bank assurance, where premiums incomes rose 25% to 171 million pounds, in mortgages, where our share of the UK mortgage market has now risen to 8%, and in cards, where we originated 336,000 customers in the second half of the year, up 60% over the prior period last year, all through our branch channels. Credit criteria, as you might expect, remains strict, although there are some signs that margins are firming, and that some of the stress that we saw around the turn of last year is beginning to abate.

Our bias going forward is towards continued increase in our secured lending products.

Over in Ireland, Ulster Bank is a very good story - strong growth, contribution up 15%, we added 68,000 new customers, both business and personal, fueling a rise in mortgage and business lending. Ulster bank, in the Republic of Ireland, grew 9%, benefiting from its Easy Switch account program in Northern Ireland, we significantly enhanced our personal account offering. First Active remains very well on track.

In the United States, Citizens headline income grew 43% and our contribution was up 47%. This very obviously reflects the full-year impact of Charter One. Excluding Charter One, the Citizens business grew 10 percentage points.

At the time of the acquisition, we talked about a number of revenue and expense synergies that we would try to pursue over the following three years. And on the expense side of the equation, for systems, infrastructure, and operating efficiencies all remain on track.

On the revenue side, we're seeing good growth in terms of volumes, with loans up 18% and deposits up 10% What is irrefutable across the marketplace is the environment, is a significantly tougher one than we saw two years ago.

The combined Citizens Group overall has good underlying growth, we're making excellent progress in cards, with RBS National showing balances up 9%, to 2.5 billion. RBS Link, our merchant-acquiring business, adding 25% more customers over the yea, and our joint venture with Kroger to provide private label credit cards, going extremely well.

Credit quality is good, and the group was- had minimal impact from the spike in fourth quarter bankruptcies, due to the adoption of the bankruptcy laws in the U.S. in the fourth quarter of 2005.

The flatter yield curve and the positive credit environment in the United States is making the retail marketplace there extremely competitive, and putting pressure on margins, with narrow spreads coming through in both loans and deposits. In that environment, over time, we will clearly learn to adapt and evolve our business model, as we do, in fact, in other markets where we operate with a flat yield curve, it offers no respite in the short term, as it looks like this environment is the most likely one we'll continue to operate in over the course of 2006.

In our insurance division, direct, intermediate, and partnership motor insurance policies grew 4%, contributing to income growth of 8% and bottom line contribution of 5%, to 926 million pounds. We have the industry-leading combined ratio, of 93.6%, just slightly up from 93.3% last year, which reflects both the underlying operating efficiency of our business, along with continuing claims inflation.

On the business development front, we added 14% more policies across Europe, we added 10% more policies in the small and medium-size enterprises, through our NIG brand, and the Churchill integration remains- is now absolutely complete.

The size and scale of our insurance business has allowed us to reduce our reinsurance cover in 2005 while continuing to maintain protection against catastrophic events. The resultant reduction in this quota share has manifest mainly on the expense line, due to the nature of the arrangement with reinsurers, showing a headline increase of 13%, underlying expense growth across the business is only 4 percentage points.

Manufacturing, as you know, supports most of our client-facing, or many of our client-facing businesses. We spent 945 million pounds on technology costs last year, up 11% from 2004. The underlying growth in technology spend was up 2%, with the adoption of IFRS on the first of January, 2005. And the resulting amortization of software costs added 9 percentage points to that headline number.

Our property and purchasing costs were 1.013 billion pounds, up 9%. These reflect ongoing upgrades to our portfolio, including a city center strategy across the UK, with material improvements in Edinburgh, Birmingham, Manchester, and South End, along with extensive branch improvement programs across the country. Our customer support areas spent 785 million pounds, up 2% year over year, with an increasing efficiency, obviously the result of prior-year investments, offsetting wage inflation and of course, significantly increased business volumes, for example, 10% growth on mortgages processed over the course of the year.

Overall, core expenses, excluding the impact of IFRS, grew 4 percentage points.

Our central items grew 458 million pounds over the course of the year. These reflected the full year funding costs of the Charter One acquisition, reflected increased pension costs, and also reflected the hedge volatility that we record centrally for economic hedges, which have accounting in effectiveness and they also flow through the center. It also reflects a number of centrally managed initiatives, and group training and development programs, some group insurance policies, as well as a number of regulatory issues, see us compliant with [Basil II], Sarbanes-Oxley, and International Accounting Standards. We do not expect the same sort of jump to occur in 2006.

Balance sheet discipline was excellent. Overall assets grew 12%, risk-weighted assets grew 14%, while return on equity, at 18.2%, on a constant capital basis, 18.7%, help lift our tier one ratio from 6.7 to a very healthy 7.6% at the end of 2005, and allowed a number of the capital distribution initiatives that we announced this morning to begin.

So overall, I think a very, very good year from the group, across all of our operating divisions - profits up 16%, diversified income across the group up 14%, demonstrable capital strength and efficiency, stable credit metrics, and a company that is very well-positioned for 2006, and with that, I'll hand it over to Fred to make his comments. Thank you.

Thanks, Guy. Good morning, everyone. I think uniquely amongst this morning's presenters, I'm neither coming nor going, I'm just delighted to be here, as always. And building on this stream of good news this morning, I also just would like to intimate that I'm only going to cover off, in a short number of slides, just a couple of quite important topics and hope we can leave more time for questions at the end.

First topic I'd like to touch on, obviously, is capital. I think today does mark a milestone in the development of the group's capital base and in the development of its capital strategy. I know you all have a number of questions around this, and particularly around its context, and I'd like to begin by just touching on this. And as far context is concerned, I would like to begin what-- what I remind you all of what I would consider to be the most significant milestone in the capital development policy prior to this, and to do that, I have to take you back to the halcyon days of summer, 2003, when this chart first made its appearance, indicating for the first time our thinking around capital policy for the group. Interesting, I suppose, in a number of respects, firstly that we saw capital being-- or flexibility in capital being delineated by our tier one ratio and where it fell, also indicating that it wasn't precise science, but there was a zone in which buybacks were unlikely, there was a zone in which returning capital to shareholders was very likely, and-- I know some of you, at the time, found slightly unhelpful, maybe zone in the middle. But nevertheless, this was the last major milestone, and what we've been up to ever since has been moving down that path.

In simple terms, we run the business to a very simple set of metrics and objectives. I mean, it may seem, at some levels, disarmingly simple, but trying to grow our income seems quite an important thing to do. If you're not able to grow your income, everything else starts to go backwards on you pretty quickly. Improving your income, but having the benefit go backwards because your efficiency is not improving is not a great place to be, either, so improvement in efficiency is something which is important to us. Maintaining stable credit quality, always a good idea when you're a financial institution, but that was one of our key objectives and one of our key metrics. And also generating appropriate returns on capital. There's not point in doing all of the above if our returns on capital are going down.

So how have we been doing against that? I don't propose to go through all of these figures in detail. You'll be familiar with them yourselves. Those are the headline figures over the period, since the NatWest transaction -- good income growth, good growth in operating profit, impacted, of course, by acquisitions along the way, so let's have a look at the underlying, excluding acquisitions and at constant exchange rates. Again, you'll see a clear pattern emerging, evidencing the fact that we are growing income, we are maintaining and improving our efficiency, and we are enjoying stable credit metrics through that time.

Also, picture is slightly confused by the introduction of IFRS, obviously, and by the fact in the current year, we have stepped up the capital base, but strong returns on equity during that period.

Not surprisingly, from those numbers, you'll appreciate that we do generate a lot of capital in the business. The reason for putting this slide up 2003 was, I guess, was that some of your minds and our minds were turning to the fact that post-IVS, we announced the plan with NatWest, the group's capital generation was just going to arithmetically create a significant amount of capital generation. At the same time, we can't grow without consuming capital, so out of that gross capital generation, we have consumed some of it to support the growth in the business and support the growth in the balance sheet, and we have stepped up our dividend during that time as well. But as you can see, down at the bottom, we have generated quite a lot of free, [inverted commas] capital. We've also generated a number of uses for that capital, up until now, and again, you're familiar with all of these. I don't propose to go into them in any detail, but it is worth remembering the almost three billion pounds which were returned as part of the IVS and obviously the acquisitions which we made which absorbed capital also.

Mapping that on today the skeleton, or the framework, which we presented in the summer of 2003, and the following picture emerges. At the end of last year, it was pretty clear to everyone that we were not in a position to return capital to shareholders. The priority remained funding organic growth and getting our capital ratio up to a level that we felt was sustainable. At the end of this year, I'm pleased to-- at the end of 2005, I'm pleased to announce that we have reached that place. Our UK GAAP equivalent capital number would be up 7.8 or so, difficult to make a precise comparison, but under IFRS, any ceiling in all of this would be adjusted, so I would put it to you that the equivalent of about 8% threshold in GAAP would map to about 7.7 under IFRS, not a precisely scientific movement, but just as a rule of thumb. So you'll see that we are not only into the ``maybe zone,'' but well through the ``maybe zone,'' and given that we are already a couple of months in 2006, and remembering the previous slide about the amount of capital we generate, you can spot that we are well into the zone at which we've also signaled to you that we would wish to return capital to shareholders.

I think to allow some greater understanding around that, and to get a sense of what our thinking going forward is, and we do expect to continue generating capital, we expect that generation to remain strong. We have no plans for major acquisitions, as I've said before, no news there, no change there. We see-- crucially, though, we see many opportunities to generate profitable growth in the business, and a good many of them not particularly capital-intensive.

You have spotted, and Guy's slides-- [inaudible] the company announcement that our non-interest income now represents over 60% of our total income, significant because it tends not to tie up capital in the same way as the net interest income can. You have also seen in the figures and in the progression of risk-weighted assets through the years the fact that we have great capabilities, not just in originating, but in distributing, and I think as we go forward in the business, that will become a more integral part of the model, not just in corporate markets, but across our balance sheet more generally.

We will continue to evaluate opportunities. There are plenty of opportunities out there; I think it would be reckless of us not to. But we will maintain, against everything that we do, whether there be- whether they be acquisitions or whether they be business plans or enhancements of our business, strict investment criteria. And certainly we would expect to fund our future growth from our own resources.

All of that said, we remain committed to capital efficiency, we don't like carrying more capital than we need to. You've heard me before on the subject of building up war chests and carrying; that's not the way we would wish to operate at all. Which brings us, then, to that almost, as I say, almost arithmetic conclusion rather than a strategic or emotional one, that we would therefore expect that, you know, returning capital to shareholders is an integral part of our strategy going forward, and something which will be determined where our capital ratios fall, relative to the metrics that I've shown you.

Having got to a place this year where there was clearly capacity to return capital to shareholders, our first thought turned to dividend. We're very proud of our dividend track record, and I'll return to that a little later, but by the same token, our payout ratio was starting to fall behind those of our peers and those of the market more generally, so our first thought turned to dividend and to increase, going forward, our payout ratio, to something beginning with a four, rather than something beginning with a three. Hence, the 29% increase in the final dividend this year, bringing the total dividend up by 25%, and setting the new base for moving forward.

Therefore, you would easily spot that the numbers still support a redistribution through a simple buyback. That, we propose to do over the course of the next month- the next 12 months, starting from- that would be fun. No, no, I put that thought to one side now. That said, we would view it as a game-on from noon today. That's not to say we're going to be doing hasty [inaudible] we're going to go out and plan to do anything today. But from noon today, we are in the buyback market, albeit we're gong to be sensible, as you would appreciate. We're not rushing out to do anything, not to create distorting movements in the share price.

Also, going forward, we would aim to maintain our tier one ratios at or around the current level. I mean, I don't want to get locked in here to 7.6 but you know, in the mid 7s. There will be comings and goings, as we go through the normal course of business. I don't want to get too trapped. But just for guidance and for information, in the mid sort of 7s is where we would, you know, all other things being equal, expect to come out.

As I was going to say, on capital, I'm sure we're return to that and then questions later. Very quick comment on China, not to make a big fuss out of China, but I'm conscious that this is the first time that I've actually stood before you, face to face, since we announced the transaction in August, and a lot of has flowed under the bridge since then, but I thought I would just remind you of the salient features of our position in China, and again, happy to take any questions on this. I think the notable points being, the transaction completed just before the year end, we have no plans to increase our investment in China, we view this very much-- the shareholding very much as a- to get to the game, to enable us to access the joint venture, and business opportunities in China. This is not a takeover of Bank of China by stealth or building up a strategic stake. This was the minimum stake that we felt was consistent with the benefits that we've been able to secure. The IPO was planned for 2006. You've read all about that. One the very encouraging things about progress so far is that progress began and activity began on the ground last August, and there wasn't a holding back until we got the deal signed, so quite a lot of ground has already been covered. Inevitably, it's of a preparatory and preliminary nature, and it's been very encouraging we're making progress now across quite a wide number of fronts in developing joint venture opportunities and in helping Bank of China to get itself ready for its IPO.

The outlook, always a topic I like to cover, and I think it's important today as it ever is. Before diving in to talk about the economies we operate in, I thought it was just worth reminding ourselves that it isn't just about the UK anymore. There's always a temptation, when we talk about outlook and economy, to start in talking about what's happening to the UK consumer, and there's no doubt we will come back and talk about that, but it's worth reminding ourselves that, you know, the significance of the UK is still considerable to our business, but it's considerably less than it has been historically. An interesting figure on here I think is the European one. Clearly I was aware of the size of our European business, but a little metric that I hadn't picked up until we were just pulling the slides all together is that we make the same amount of money in Europe now as we did in Citizens prior to the Charter One acquisition, so Europe has grown primarily organically to quite a significant part of our business now, and it continues to grow as strongly. But you'll gather from the slide that the economies I'm going to talk about this morning in terms of the outlook are the UK, the U.S., and Europe.

This is not an economics lecture, incidentally, because I would not be very well equipped to deliver it, but I thought I'd just try and pick out some of the salient points as we see them. Firstly, and I think it is worth observing, that 2005, these economies really coped rather well, with quite a number of shocks. In the U.S., we had the hurricanes, we had the high energy prices, we had the Fed tightening by 200 or so basis points. In the UK, we saw quite a marked slowdown in growth, indeed, to the lowest growth we've had since 1992, albeit still at 1.8%, which in terms of low growth in the UK, doesn't feel so bad. And of a distinct signs of a pulse almost everywhere you looked in Europe, which again, was progress.

Going forward, in the UK, I think 2006 looks slightly better than 2005. The housing market is back on the rails. Retail sales are recovering. Not every retailer is doing well, but I think that's more to do, in many instances, with their position and strategy than it has to the attitudes and behavior of the consumer. We've seen a small rise in unemployment and we want to keep our eye on that, but you know, in the context of record low levels of unemployment and the actual size of the increase has been very modest indeed. And one of the more interesting features is the length of time someone now tends to be unemployed, for the flexibility of our labor markets have improved markedly, so typically people remain unemployed only for about six months before moving into something else, so I don't think unemployment is something we should be getting overly concerned about, but it pays to keep an eye on it.

Also worth reminding ourselves, I guess in relation to consumer lending, that unsecured consumer lending in the UK represents less than 7% of our total income, so it's not a big business activity for us. Corporate credit remains benign, the outlook remains very benign.

So 2006 in the UK looks like being an OK year, and certainly better than 2005. You'll have your own views as to where the growth lies, but certainly all the estimates we've seen seem to fall somewhere between 2, 2.5%.

The United States economy motoring along, as I say, absorbed a few shocks during the course of the year -- the hurricanes, high oil price, Fed tightening. The economy, there were some signs the economy was operating near to its capacity, unemployment below 5%, which is as probably as good as its going to get. Again, we're seeing a bit of a transition in consumer spending. We're starting to see companies coming to the fore to increase capacity and behavior. Credit quality, benign. We've been able, in particular in our business, to largely absorb the change in the bankruptcy laws in the United States, without undue pain. Rather against the run of play internationally, those changes favor the banks, but just- it created something of a rush to become insolvent before the new laws came in, but we managed to absorb the limited impact of that without difficulty.

And we're expecting good growth in the United States, perhaps a little slower than this year, but between 3% and 4%; that doesn't feel like a bad place to be.

Europe -- again, compared with the UK and compared with the United States, doesn't seem all that exciting, perhaps, but it's important to recognize that we are very skewed as to where we are in Europe. We're particularly exposed to the Irish economy, which amongst the European economies, is one of the strongest, and we're also particularly exposed to corporate activity in Europe, where we're seeing a lot of activity, a lot of transaction-related activity, so we would remain in a very positive frame of mind about Europe in 2006, certainly as it impacts on our businesses.

In summary, then, I think the economy backdrop in 2006 will provide ongoing opportunities for business and for the financial services business. Crucially, our platform, our existing platform, allows us to access them. It gives us the scale we need to be able to go in and compete from a position of advantage, a position of underlying of efficiency and underlying competitive advantage. We face into the economies going forward from a position of strength. We have a strong balance sheet, we have strong credit ratings, we have a good array of businesses and we have a good array of people and talent to go forward and develop the opportunities. We have diversity, which means that not everything hangs off of a single business initiative or off of a single market or off of a single income stream, again, something which I think is important, not least because is does allow us to respond flexibly, and the only thing we know about the future for sure is it will turn out slightly differently from how we imagined, and the diversity which we have in our business does gives us the flexibility to respond, both to opportunities and to threats.

So all in all, I think it would be fair to say we face 2006 with a good degree of confidence in our ability to generate value for our shareholders going forward.

At this point, I would normally stop the presentation, and move to questions, but there's just one other subject I would like to touch on, and you've already had a clue what it is. And that is, as you've deduced from George's earlier remarks, this will be George's last appearance at these gatherings. And your views about that may be different from George's views about that. He's confided what his are, but I couldn't let this occasion go past without paying publicly, and I know I'll have many opportunities to do this at other gatherings going forward, but nevertheless, in front of all of you, to pay tribute to George and to thank him, both personally and behalf on all of his colleagues for everything that he has brought to the Royal Bank of Scotland Group. I've always got on effortlessly and closely with George, and I will miss him when he goes. It doesn't quite seem real yet, because it's still in April, but we'll get to April soon enough. And modesty, which is not a quality often associated with George, but on this occasion, prohibited me, George, from putting this slide up earlier on, but I'd like to put it up, just- it charts, you know, when George took over as chief executive of the Royal Bank in 1992, and there would be very few chief executive's jobs that could, over that period of time, deliver those sorts of numbers, first as chief executive and then as chairman, as you move through. It's rather a pity that the IFRS intervened, in my opinion, but our legal advisers prevented me adjusting those blue bars to where they possibly would have been under GAAP. But I think you get general picture, ladies and gentlemen. And similarly, in terms of dividends per share, there would be few who have presided over such an achievement.

There are a huge number of anecdotes and trials and tribulations, and amongst all of that, I can attest to them personally from 1998 onwards. I fully intend to return to them, George, at your various retirement gatherings, but I'm conscious that today is a results presentation and not a retirement party, so I'll stop there, simply by again expressing my and our appreciation for everything that you've done for the group. Thank you very much.

If I could invite George and my other colleagues up to join me on the panel, we'll be happy to try and answer any questions.

OK, as usual, but for the last time, could you please give your name and organization, and await the microphone.

Good morning, it's Ian Smiley from ABN Amro. Could I ask two questions, and both on capital. The first one is the impact of the Bank of China transaction. I think at the time of the deal, you guided to a ten basis point benefit on the tier one, in the press release, you made at the Bank of China Day. My calculations today suggest it's like 40 basis points, the difference being the consolidation of 1.2 billions worth of minority investments, effectively consolidating your partner's money into that deal. Can I just clarify that's correct?

No, it's not correct, Ian. I think the number from Bank of China, combined Bank of China, plus disposal of SCH, would be about 20 basis points.

So what's driving the 1.2 billion increase in minority investments, which appears to be coming from outside the group and being capitalized inside your tier one--

[Pass--] some of it would be translation differences. There would be some in valuation, in minority interest, and [linear director].

The Bank of China number, if I recall correctly, is around 850, 850 million pounds, I think is the right number for that, so the 1.2 is not a number that I'm familiar with, so we'll have to look into that, or maybe just connect with you afterwards.

And the second question is, can we look forward at any stage a return on capital by division, showing separately identified capital across each of the divisions that the group operates, or should we continue to expect return on capital figures just to be provided at a group level? And obviously the subtext is there's something like 40% of our core equity tier one capital which is being deducted from total regulatory capital, so there's a fair degree of double counting going on.

I'm not sure about that, either, Ian, but I think we-- the basic difficulty of that is you need to get into allocation of manufacturing cost to make that viable, which is not something that we've proposed to do, so I think we take the view that capital is something that we absorb as a group, and we deploy within the group to deliver a single return to our shareholders, so the single return on capital figure is the metric that we use. I think we provide and disclose around the business units to allow you to understand the performance of those business units, so I don't think we plan to disclose it by division and the double counting point, I would, as you would expect me to, refute.

Thank you.

Simon?

Simon Simons fro Citigroup. Two questions, actually. I was wondering, first of all, can you just give some indication of, in your assessment, what you think a kind of sustainable growth rate and risk assets going forward should be? Obviously you've 14 for the year, it was a kind of very unusual year, with the big number in the first half and a much smaller second half, and I noticed some securitization activity in that second half. So thinking going forward, in terms of both the organic growth of the business and also scope for securitization, what you think RWA growth, medium-term, should trend towards?

You know my great enthusiasm for giving forward-looking statements, Simon, but the picture becomes more difficult than ever, I think, because you partly suggested it in your question, the impact of securitization, just generally our ability to distribute what we originate makes the picture more difficult. I mean, if I pass along to Johnny to give you a sense of what's happening in the corporate markets, where the chunkier numbers would be in most of the distribution would be, and then I'll come back to try and address the situation more generally.

I think- I don't want to put bands on how much we can originate, but we will manage to the capital allocation from group, so that we will manage it at the back end, by distributing more and more. But we won't be reigning in our efforts to originate, in terms of the number. It's a group number.

I mean, maybe if I can just rephrase the question, to give another way to answer it -- I mean, is 14%, which was the '05 performance, is that- is that good, bad, average, in terms of, you know, when you do your medium-term planning?

I mean, I would say it's not too shabby, Simon, but we don't go about the internal planning in that way. I mean, I think we can originate-- there are as many assets out there as you could possibly wish to have at the moment. The problem is the returns on them, and the problem, in some instances, are the degree to which people are prepared to compromise on credit to put those assets on. So neither of those - the profitability of the asset growth and the credit quality are sacrosanct, as far as we are concerned So, we don't sort of set out at the beginning of the year, saying, ``You must deliver X amount of asset growth.'' As Johnny says, we don't set out at the start of the year to bound what the business does, either, but there's a limited amount that would make sense to us to put on to our balance sheet. The greater availability of mechanisms for offloading assets we've originated give us a lot more flexibility in the area, so I'm not helping you here, really. I'm not trying not to help you, but there's not a number that we focus on, as, you know, ``Let's go out and do this amount of risk-weighted asset growth'' and shape everything back around that. It tends to be something of a product--

As you saw at the half-year, we had a great deal of risk-weighted assets on the balance sheet, as we saw something of a spike, and subsequently offloaded them, so that really gives you some insight into how we think around risk-weighted assets.

The second question is, I guess, for Larry, it's, you know, I know it's just the IT side, or the IT integration was completed last July on Charter One, so I was wondering if you could just give a sense of you know, how soon you think an indeed want to start making some of the infill acquisitions maybe in the Charter One footprint that, you know, I think most of us in this room are expecting at some point to be part of the U.S. strategy?

I think the answer to that, Simon, is when we begin to see the- a more realistic price that these smaller banks are trading at. Right now, I think there's too much optimism around what these franchises are worth. I was explaining to somebody earlier, there's still 403 banks in Chicago. So there's plenty to go for, but we should be careful not to be-- to race after the kind of valuations that are in the market at the moment. I think at some point, their ability to be competitive and also the relatively few number of buyers will put these valuations back in line, and then there will be opportunities for us.

Thanks, it's Tom Rainier, Citigroup. Could I just ask-- two questions, actually. The first, just a bit more color on what was said on the margin outlook. I think it was the trends, more sort of continuing to the early part of 2006, but obviously there's many different trends across many of the different divisions. Could you just maybe add a bit more color to those comments, on the margin overall, please?

Yeah, I think what I was trying to indicate there is there are a number of different drivers. There are- you know, widening margins in some products, as more sensible risk-based pricing is applied. There's also a change in our underlying business mix, where we're seeing a growing preponderance of mortgages, particularly in retail, which obviously have maybe lower margin characteristics but very good risk-adjusted returns, and you know, I think the- the spread pressures that we've seen in the U.S. will continue and be contributory, at least in the early part of 2006.

So I mean, if you wanted to pin it down as sort of you know, a lowish double-digit number I think is more likely on a sort of full-year horizon. I think we've sort of seen some signs that the accelerating trends in 2004, early 2005, have started to abate, and that would be sort of my best estimate, if you want me to narrow it down a bit further.

No, thank you, that's fine. Thanks very much. Just a second quick on the capital -- Fred, sort of- you suggested the mid 7s for the sort of total tier one. Just looking at your slide on, I suppose, the free cash flow generation, I think you used the 5% ratio to apply to risk-weighted asset. So is that suggesting a 5% equity tier one is pretty there, or thereabouts, where you'd be comfortable, on an ongoing basis?

The equity component of it will move around within it as well. I think, what is it, something like 4.9 or something, just now, equity tier one, so-- that's sort of the rule of thumb, Tom. It's not a precise science, either. I would imagine around that level.

Ed Ferth, [Sotgen]. Could I just ask you about the pensions deficit? I see that was up almost, what, 30% in the second half? And it's now, what, almost 15% of tier one equity, I guess. So I guess my two questions are, firstly, how do you look at that, in terms of when you're assessing your capital requirement going forward? And secondly, you highlighted some of the central costs included a big increase in the pension contribution. Should we expect that to continue, going forward? Is that how you're going to see this pension deficit come down, or--

I mean, I think as to the pension deficit that you see in the numbers today, it's driven, as you would have read about in a number of places, by the bond yield more than anything else. That's caused the increase. That's not to say that there aren't underlying issues with pension costs which drive our deficit. We mentioned last year, you'll remember, that we made our one-off contribution of 750 million towards the pension deficit, post-actual valuation. The actuarial valuation is considerably less than the deficit calculated on the basis you describe, and we also increased the contribution rate, based on salaries, that we make into the pension fund, to eat into the deficit. So on an actuarial basis, the picture is considerably different.

The way we look upon that deficit, I suppose, in simple terms, there, is what three months or so, is profit, three or four month's profit, post-- I'm not at all being flippant, but I think everyone understands why the numbers associated with pensions are quite large and quite volatile. Ours are no different. We're fortunate, I think, in the numbers as a proportion of our capital base, our market cap, our profitability, or any basis you want to look at, are relatively small, but it's- we have our eye on, I think, as to how we treat it going forward by our regulators, and under Basil II, there are still some vagaries around, but we're certainly looking at it. But the volatility is occasioned by the bond yield, which you would have known.

And in terms of the P&L contribution, would you expect the costs associated with pension contributions to continue to rise, or have we seen a sort of one-off step-up?

Yeah, you've seen a very big step up. We don't anticipate them rising at this point, but you know the underlying dynamics as well as we do.

Hi, it's Jonathan Pierce from Credit Suisse. I've got two ones, actually back on capital, and I'm afraid the other is on the corporate bank.

On capital, I mean, bearing in mind, the hints as discussed in a previous answer, that 5% equity tier one looks to be about the right level. Fitch, I think, recently as August, suggested that-- I think they said there was downside risk to both Barclays and RBS ratings unless they fairly rapidly rebuilt capital ratios following, obviously, [Abser] in Barclay's case, but Charter One in your case. I'm wondering whether you've had time to discuss the planned dividend and capital program today with the rating agencies, and what their position is?

The answer is yes, we did. We called the agencies, and as part of our decision-making process, and they all affirmed the financial strength and the ratings of the company and the outlook as prior to the announcement.

Thank you. On the corporate bank, and global banking specifically, there's quite a big increase in the sort of other non-interest income line, which we saw, to an extent, in the first half, and I think has accelerated in the second half. It's moved from over 300 million to just over 700 million, 2005 versus 2004. I was wondering if you could clarify what's in there and what the big drivers of the growth have been?

We said, as I said, at the half-year, I think we've had a good year in our private equity portfolio and also in some of the warrants and similar that we carry in our mezzanine portfolio. I'm pleased to say we've still got a very significant portfolio going forward, but that's the main driver.

It's David Williams from Morgan Stanley. Two questions, please - one on UK retail and one on the corporate markets. On the UK retail division, you say that you plan to refocus your strategy to grow sales at deposit and bank assurance. If you could just expand on that, what you think the implications are? Will it require cost investment? But also, is that a more pessimistic outlook on the direction UK credit quality going forward? The second question, in the corporate markets division, obviously mortgage-backed securities and asset-backed are two of your key product lines there, according to the [Deaologic] data. They got off to a very weak start to the year. Could you say what implications that has for your business in '06, please?

Yes, thank you, on the retail said, we said at the half-year that being realistic, we were in for a two-year slog in the retail sector, and I think that just means less demand for unsecured credit, both from the customer and actually from our point of view, actually wanting to lend it as well. So bearing that in mind, we decided to refocus on the mortgage market itself, obviously where we're relatively underweight and have huge distribution capability, but also on savings and investment generally, both areas where historically I think we've been underweight. That investment that you're talking has largely been made. The bank assurance business has been largely rebuilt over the last two years. The sales force is now getting up to a sort of level where we're actually beginning to see critical mass coming through. But it's interesting enough, we still have roughly 60% the number of financial planning consultants that, say, [H-Plus] has, on a customer base which is not that dissimilar, so you can that we can probably significantly increase our sales force, and we've got a huge amount of room to go.

I think on bank assurance, there's always been this sort of concept there is a glass ceiling, that the potential has never been quite realized, but from our point of view, I think we're still on the sort of the glass doorstep, relative to that ceiling, so we've got several years of growth, where really only the investment of sales people-- the actual structures are there, and obviously the joint venture with [Aviva].

On deposits, obviously when you're looking at net interest margin, the more of your business you can obtain without lending, the happier you are, and that has come through really well in the last six months. Our new sales systems point our sellers straight to people's savings base, when they actually open accounts, which is something we've had to rely on the past on experience, and now it's automated. That has shown through, and I wouldn't be totally surprised if next year, we see deposit growth actually outrunning asset growth in the retail bank, and that's partly a change in our customer's own attitudes, but also our own in connection. I think that just shows that if consumer credit slows down, we've got plenty of other irons in this fire, hence the big pick-up in performance in the second half of the year.

I think it's probably just worth stating the obvious as well -- I still [inaudible] refocus on things if it's not what our customers are doing, and I think the reality in the UK is that we have seen people becoming more conservative in their position, you know, their focus on deposits and savings has benefited the direction [Gordon] is going.

I guess I'd make a couple of points. One is, I think you're particularly referring to the States there. We are actually number two in the world in securitization, and that diversity is obviously beneficial. Secondly, I think to extrapolate from one month is a bit ambitious. I was interested in your report; you didn't focus on how well we did in '05, but picked on January, actually. But if it does turn down, if it were to turn down, and it may do one day, the real advantage is that we are now, with Greenwich coming much closer to our branch in New York and having it all run under one hand, the benefits of that are flowing through strongly. And using the Greenwich platform, to build on our corporate banking relationships, so for example, derivatives business in the States was up by over 100% last year, so other things will come through. It can't go on growing forever, I do agree with that.

Simon Willis from NCB Stockbrokers. I have two questions. The first one, on UK retail and the mortgage market, and second one, on the tax rate. On the mortgage bit, the growth was clearly very strong last year, and probably surprised a lot of us, relative to expectations 12 months ago. Can you give us some indication as to the scale of your ambitions for growth in that area this year, relative to your likely overall growth in UK lending? And the-- secondly, on the tax rate, is it fair to assume that it's likely to come down in '06, given the- the [steer] that I think you're giving is on the U.S. and the likely pick-up, relatively, in UK profits growth, if we see a peak in bad debt [in areas].

I think if you look at the results, actually, over the last two years, our share of net new lending has outgrown our share of stock by about 2% I think that's a reasonable run rate, as long as margins in the market allow you to do that. We're not in the business just to take on board assets, but the market is quite robust at the moment. The south is moving ahead quite rapidly, and traditionally we're very strong in that area. The advantage we've developed over the last year that really [path marked] our strong brand franchise, we now have [Avius] and [Tenedri's] which is a combined sales force, selling all our products in the intermediary market, and in that, we now have the first active brand, which has really grown from nothing to quite a significant player in the last 18 months. And 35% of that business is actually direct to consumer, not VAR intermediaries, so you've now got a brand franchise, a direct-to-consumer franchise, and pure intermediary franchise, and to some extent, I will take as much market share as I can make a sensible return on. It's good quality business, it plays to our core franchise, and we will see how margins. If anything, margins have proved remarkably stable over the last year, and that's suited us fine.

Actually, the tax rate, if anything, is probably going to creep maybe slightly higher from these sorts of levels, reflecting, obviously, some of the international income that we generate. U.S. tax rate, typically around 35 percentage points, obviously with New York operations, that can creep up close to 40 percentage points, so they sort of creep into the overall group numbers, and I think they sort of move up from 28.4 to 30%, reflected some of that.

Looking forward into '06, I think if anything, just a few sort of basis points higher from here.

Yes, it's [indecipherable]. Just a question on the insurance side, if I may. We seem to have seen sort of IT developments where you can aggregate, so the hassle of checking [price] is an awful lot easier. Are you see that having the impact on the business today, to looking forward, would you anticipate it having an impact?

Good morning. We are seeing quite a lot of actually with aggregators. Obviously, we're in the position where we have several strong brands -- Direct Line, Churchill, Privilege. They're all performing extremely well on the Internet. In fact, the growth that we're getting through the Internet channel has been quite substantial over the last 12 months and continues to increase. So, you know, obviously, the reason a lot of activity happening through that route, but I think we're still very well-positioned as a result of the strength of our brands.

Retail Direct, and the retail bank, saw comparable bad debt charges in H2 relative to H1, and that's in contrast to what we've seen from other institutions, so I wondered, is that because you tightened credit criteria quicker, or are there any other lessons you want to pass on to your competitors?

I know, they're all buying me drinks at the moment. I think the issue is-- actually, I was talking about this outside. We have a slightly different customer base from the two main competitors. Our market share of current accounts in the UK is about 21%. Our market share of high earners, which is anything over sort of 50,000, is actually nearly 30%. We're very much a southeast customer base, at one extreme, and the other extreme, we're a Scottish customer base, and those two customer bases are- tend to be relatively insulated from what's been going on over the last couple of years. We don't have the big CD customer base of the Lloyd's Business and we don't have the big Barclay Card base of people who don't have cards-- who have cards, but don't have bank relationships with you. So it's nice to see that it's sort of, perhaps, playing out as you have expected, that we've taken our share of the pain. But I said at the half-year we were stable, and at the end of the year, we're stable. But we are fragile. I mean, if unemployment ticks up dramatically, as Fred was saying, all of us will take our fair share of the pain. But I think with our southern customer base and our high-earning customer base, by and large, I think we're probably better equipped to sail through this particular storm than some of our competitors.

It's James Hampton at West LB. A couple, if I may. First, on the United States -- and obviously great the integration is complete. How much scope do you see for additional product penetration, now that you've finished sort of sorting the base level IT and training out, going forwards? And the second question is for John. I mean, clearly credit quality in corporate is fantastic at the moment. How long do you see this going on for, and realistically, what do you see as a more normal sort of charge? And a cheeky third one, if I may -- do you believe as a group that loan growth will yet again outpace the growth in loan impairment charge?

Yeah, James, thank you. I've come all the way from Providence, so I was hoping to get at least one question, so thank you very much for that. I think the opportunity on the revenue side continues to be exciting. Charter One did not have a small business banking program. We've hired, trained, and deployed 175-plus business bankers that offer now a range of loan, deposit, credit card, and merchant processing services. We've hired 50 middle market corporate bankers across the Midwest. They're selling RBS white label derivatives, foreign exchange products, Citizen's cash management products, and we've introduced on the retail side our family of Circle and Circle Green checking account products. Charter One did not offer credit cards, Charter One did not offer the ability to do mortgages in its branches, so there's still an awful lot to go for.

All I can say that is-- any inside information I have, so to speak, rather than looking forward three, four, five, six years, to the end of this benign environment, is that in the metrics that we look closely at, which is- the most important of which is cases moving into our workout unit, we see no sign of a change at all. The credit environment does remain benign, and I've also been pleased that our disciplines have remained strong, and in the few instances in the UK where there have been problems, though, I think we've had less than our fair share, so touch wood as far as forward as I can look, which isn't that far. We are comfortable.

One last question, please.

Hi, it's Sandy Trent, from [Colin Stewart]. Another question for Larry, actually, to make your trip worth it. The credit quality, you say it's stable, and I noticed that foreign loans, non-accrual, were down really quite sharply versus '04. What's your expectation in terms of a sustainable impairment charge on the U.S. business, particularly with an expansion into business banking and credit cards? And also in the U.S., the- with, you know, the economic slot that was put up, and 90% of personal lending being secured, what's your expectation for volume growth in the U.S. business?

Two very good questions. Thank you. The first one was the question about credit quality. 70% of what we do is consumer credit, 90% of that is secured. 30%, therefore, is commercial credit, 85 to 90% of that is secured. We rank either first or second in credit quality of the 20 largest banks in the United States. We've always had a history of being quite conservative on the asset side of the balance sheet, and I expect that to continue. So, the outlook, from my point of view, at the moment, continues to be positive, as it relates to credit.

I think what's going to happen, just to add a bit, with the yield curve, is that banks are going to be reaching on credit, and I think one of the things that will be very important for us is that we continue to be disciplined on that front and not let this cycle push us to do things we shouldn't do.

The second question?

On volume growth, given the--

I think what's happening is that volume growth is going to slow somewhat. Home prices are coming down, or at least leveling off. And therefore, individuals have less equity against which to borrow. Typically, we've had, the last four or five years, a very robust increase in home valuations, and that's given people the ability to dip into the equity in their homes and take some credit and be more dynamic in their spending. I think that's going to slow a bit.

OK, thank you very much, ladies and gentlemen.