20-F 1 dp02645_20f.htm

FORM 20-F

(Mark one) o 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  
         
OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
         
OR o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
     
  Date of event requiring shell company report ______________________  
     
For the fiscal year ended                                                                                     31 December 2005  
   
 

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.
    Title of each class   Name of each exchange on which registered
-   American Depositary Shares, each representing one Non-Cumulative    
    Dollar Preference Share of $25 each, Series B   New York Stock Exchange
-   American Depositary Shares, each representing one Non-Cumulative    
    Dollar Preference Share of $25 each, Series C   New York Stock Exchange
-   Exchangeable Capital Securities, Series A*   New York Stock Exchange
    *redeemed on 16 January 2006    

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.
None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2005, the close of the period covered by the annual report.

  - £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 £1 each, Series A 140,000,000  


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
  o   YES   x NO
             
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
  o   YES   x NO
             
Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
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   o NO
             
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer           o                              Accelerated filer           o                              Non accelerated filer           x
             
Indicate by check mark which financial statement item the registrant has elected to follow.
  o   Item 17   x Item 18
             
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  o   Yes   x No
             

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

  o   Yes   o No
             

As a wholly-owned subsidiary of The Royal Bank of Scotland plc, which in turn is a wholly-owned direct subsidiary of The Royal Bank of Scotland Group plc, a public company with limited liability incorporated in Great Britain and which has its registered office in Scotland, National Westminster Bank Plc meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K, as applied to reports on Form 20-F, and is therefore filing its Form 20-F with a reduced disclosure format.

1






NATIONAL WESTMINSTER BANK Plc

ANNUAL REPORT ON FORM 20-F
FOR THE YEAR ENDED 31 DECEMBER 2005
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   *
       Capitalisation and indebtedness   *
       Reasons for the offer and use of proceeds   *
       Risk factors   9
4   Information on the Bank   10
       History and development of the Bank   10
       Business overview   10
       Organisational structure   10
       Property, plant and equipment   10
5   Operating and Financial Review and Prospects   11
       Operating results   11
       Liquidity and capital resources   37
       Research and development, patents, licences etc   *
       Trend information   *
       Off balance sheet arrangements   *
       Contractual obligations   *
6   Directors, Senior Management and Employees   38
       Directors and senior management   *
       Compensation   *
       Board practices   38
       Employees   *
       Share ownership   39
7   Major Shareholders and Related Party Transactions   *
       Major shareholders   *
       Related party transactions   *
       Interests of experts and counsel   *
8   Financial Information   41
       Consolidated statements and other financial information   41
       Significant changes   41
   
*      Not required because this Form 20-F is filed as an Annual Report, is not applicable to National Westminster Bank Plc, is omitted on the basis of General Instruction I to Form 10-K or is otherwise not included herein.

2






9     The Offer and Listing   42
       Offer and listing details   42
       Plan of distribution   *
       Markets   43
       Selling shareholders   *
       Dilution   *
       Expenses of the issue   *
10     Additional Information   44
       Share capital   *
       Memorandum and articles of association   44
       Material contracts   44
       Exchange controls   44
       Taxation   44
       Dividends and paying agents   *
       Statement of experts   *
       Documents on display   *
       Subsidiary information   *
11     Quantitative and Qualitative Disclosure about Market Risk   49
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   50
16     Reserved   *
16     A     Audit Committee financial expert   *
    B     Code of ethics   *
    C     Principal Accountant Fees and Services   70
    D     Exemptions from the Listing Standards for Audit Committee   *
      E     Purchases of Equity Securities by the Issuer and Affiliated Purchasers   *
PART III  
17     Financial Statements   *
18     Financial Statements   51
19     Exhibits   136  
    Signatures   137  

* Not required because this Form 20-F is filed as an Annual Report, is not applicable to National Westminster Bank Plc, is omitted on the basis of General Instruction I to Form 10-K or is otherwise not included herein.
 

3






PRESENTATION OF INFORMATION

In this report, the term ‘Bank’ or ‘Company’ means National Westminster Bank Plc and ‘NatWest Group’ means the Bank and its subsidiary and associated undertakings.

National Westminster Bank Plc is a wholly-owned direct subsidiary of The Royal Bank of Scotland plc, which in turn is a wholly-owned direct subsidiary of The Royal Bank of Scotland Group 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, including the Bank, and the term the ‘Royal Bank’ refers to The Royal Bank of Scotland plc.

The Bank publishes its financial statements in pounds sterling (“£” or “sterling”). The abbreviations ‘£m’ and ‘£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 ‘€’ represents the ‘euro’, the European single currency and the abbreviations ‘€m’ and ‘€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 believes 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.

International Financial Reporting Standards

As required by the Companies Act 1985 and Article 4 of the European Union IAS Regulation, the consolidated financial statements of NatWest Group have been prepared, for the first time, in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (together “IFRS”) as endorsed by the European Union. NatWest Group, however, has taken advantage of the option in IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ to implement IAS 39 ‘Financial Instruments: Recognition and Measurement’ (IAS 39) and IAS 32 ‘Financial Instruments: Disclosure and Presentation’ (IAS 32) from 1 January 2005 without restating its 2004 income statement and balance sheet. The implementation of IAS 32 and IAS 39 on 1 January 2005 had a significant effect on NatWest Group’s balance sheet. To facilitate comparison, a balance sheet as at 1 January 2005 and a reconciliation of shareholders’ funds as at 31 December 2004 are shown on pages 126 and 128 respectively. For a further discussion of NatWest Group’s adoption of IFRS, see ‘Accounting Policies – Adoption of International Financial Reporting Standards’ on page 54.

NatWest Group’s 2004 financial statements were prepared in accordance with then current UK generally accepted accounting principles (“UK GAAP” or “previous GAAP”) comprising standards issued by the UK Accounting Standards Board, pronouncements of the Urgent Issues Task Force, relevant Statements of Recommended Accounting Practice and provisions of the Companies Act 1985.

NatWest Group also presents information under generally accepted accounting principles in the US (“US GAAP”).

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’, ‘believes’, ‘should’, ‘intend’, ‘plan’, ‘probability’, ‘risk’, ‘Value-at-Risk (“VaR”)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ 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 fluctuations 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 NatWest Group, see Risk Factors on page 9.

5






ITEM 3. KEY INFORMATION

The Company has omitted portions of this item on the basis of General Instruction I(2)(a) to Form 10-K.

As discussed on page 4, the consolidated financial statements of NatWest Group have been prepared in accordance with International Financial Reporting Standards. NatWest Group, however, has taken advantage of the option in IFRS 1 to implement IAS 32 and IAS 39 from 1 January 2005 without restating its 2004 income statement and balance sheet. The implementation of IAS 32 and IAS 39 on 1 January 2005 had a significant effect on NatWest Group's balance sheet. Therefore the income statements for 2005 and 2004 and the balance sheets at 31 December 2005 and 31 December 2004 discussed in the Operating and financial review are not directly comparable.

Financial data based upon IFRS:   2005      2004             
   
   
           
Return on average total assets (1)    0.99 %   1.21 %            
                         
Return on average ordinary shareholders' equity (2)    29.6 %   30.7 %            
                         
Average shareholders’ equity as a percentage of average
   total assets
  3.3 %   4.2 %            
Risk asset ratio                      
     Tier 1   10.1 %   n/a            
     Total   14.1 %   n/a            
                       
Ratio of earnings to combined fixed charges and
   preference share dividends(3)
     Including interest on deposits
     Excluding interest on deposits
  1.84
4.02
    2.11
5.62
           
                       
Ratio of earnings to fixed charges only(3)
     Including interest on deposits
     Excluding interest on deposits
  1.84
4.02
    2.14
5.92
           
                       
Financial data based upon US GAAP:   2005     2004   2003   2002   2001
   
   
   
   
   
 
Return on average total assets (1)   0.90 %   1.02 %   1.18 %   1.18 %   1.11 %
Return on average ordinary shareholders' equity (2)   22.3 %   23.7 %   25.7 %   27.5 %   30.5 %
Average shareholders' equity as a percentage of average              
 total assets   4.2 %   4.5 %   4.9 %   4.6 %   3.9 %
Ratio of earnings to combined fixed charges and            
 preference share dividends (3)            
     Including interest on deposits   1.74     1.99   2.50   2.28   1.73
     Excluding interest on deposits   3.66     5.19   6.82   4.48   5.12
Ratio of earnings to fixed charges only (3)            
     Including interest on deposits   1.75     2.01   2.55   2.32   1.75
     Excluding interest on deposits   3.78     5.48   7.37   4.69   5.42

6






Financial data based upon UK GAAP:   2004   2003   2002   2001
   
   
   
   
 
Return on average total assets (1)   1.30 %   1.21 %   1.02 %   0.95 %
Return on average ordinary shareholders' equity (2)   28.8 %   25.6 %   21.9 %   24.3 %
Average shareholders' equity as a percentage of average          
   total assets   4.8 %   5.0 %   5.0 %   4.2 %
Risk asset ratio        
     Tier 1   8.0 %   9.2 %   8.9 %   7.9 %
     Total   11.6 %   13.3 %   13.0 %   12.3 %
Ratio of earnings to combined fixed charges and        
   preference share dividends (3)        
     Including interest on deposits   2.20   2.52   2.04   1.58
     Excluding interest on deposits   6.10   6.92   3.82   4.30
Ratio of earnings to fixed charges only (3)        
     Including interest on deposits   2.23   2.57   2.07   1.60
     Excluding interest on deposits   6.44   7.48   4.00   4.56
 
 
 
 
 

Notes:
(1) Return on average total assets represents profit attributable to ordinary shareholders as a percentage of average total assets.
(2) Return on average ordinary shareholders' equity represents profit attributable to ordinary shareholders expressed as a percentage of average ordinary shareholders' equity.
(3) 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).
 

7






Exchange rates

Except as stated, the following tables 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 £1   May   April   March   February   January   December
  2006   2006   2006    2006   2006   2005
Noon buying rate  
 
 
 
 
 
High   1.8911   1.8220   1.7567   1.7807   1.7885   1.7740
Low   1.8286   1.7389   1.7256   1.7343   1.7404   1.7188

    31 December
US dollars per £1  








  2005   2004   2003   2002   2001
Noon buying rate  
 
 
 
 
Year end rate   1.7188   1.9160   1.7842   1.6095   1.4543
Average rate for the year (1)   1.8147   1.8356   1.6450   1.5043   1.4396
Consolidation rate (2)          
Year end rate   1.7214   1.9346   1.7857   1.6128   1.4498
Average rate for the year   1.8198   1.8325   1.6354   1.5032   1.4401

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 20 June 2006, the Noon Buying Rate was £1.00 = $1.8399.
 

8






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 are also 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 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 impairment losses 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, mainly RBS Greenwich Capital and Ulster Bank, 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 NatWest Group’s business. NatWest Group’s businesses are dependent on the ability to process a very large number of transactions efficiently and accurately. Operational losses can result from fraud, errors by employees, failure to document transactions properly or to obtain proper 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.

Future growth in NatWest Group’s 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.

The risk of litigation is inherent in NatWest Group’s operations In the ordinary course of NatWest Group’s business, legal actions, claims against and by NatWest Group and arbitrations arise; the outcome of such legal proceedings could affect the financial performance of NatWest Group.

NatWest Group is exposed to the risk of changes in tax legislation and its interpretation and to increases in the rate of corporate and other taxes in the jurisdictions in which in operates NatWest Group’s activities are subject to tax at various rates around the world computed in accordance with local legislation and practice. Action by governments to increase tax rates or to impose additional taxes would reduce the profitability of NatWest Group. Revisions to tax legislation or to its interpretation might also affect NatWest Group's results in the future.

9






ITEM 4. INFORMATION ON THE BANK

The Company has omitted portions of this item on the basis of General Instructions I(2)(a) and (d) to Form 10-K.

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.

National Westminster Bank Plc 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 acquired by The Royal Bank of Scotland Group plc on 6 March 2000 and was its wholly-owned direct subsidiary until 31 January 2003 when ownership of the entire issued ordinary share capital was transferred to the Royal Bank.

BUSINESS OVERVIEW

Since being acquired by The Royal Bank of Scotland Group plc in 2000, NatWest Group has operated and been managed as a member of the overall RBS Group. As part of the integration of NatWest Group to 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 the retail banking division 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 bases to individual legal entities, including NatWest.

At 31 December 2005, NatWest Group had total assets of £260.6 billion and shareholders’ equity of £9.4 billion.

The RBS Group operates on an integrated basis through a divisional structure. The divisions relevant to NatWest Group are Corporate Markets (formerly Corporate Banking & Financial Markets), Retail Markets (comprising Retail Banking, Retail Direct and Wealth Management), Ulster Bank and Manufacturing.

ORGANISATIONAL STRUCTURE

The company is a wholly-owned subsidiary of the Royal Bank. The ultimate holding company is The Royal Bank of Scotland Group plc, 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 14 to the Consolidated Financial Statements.

The ownership of National Westminster Home Loans Limited, a home mortgage finance business, was transferred to the Royal Bank on 31 December 2005.

DESCRIPTION OF PROPERTY AND EQUIPMENT

NatWest Group operates from a number of locations worldwide, principally in the UK. At 31 December 2005, NatWest had 1,631 retail branches in the UK. Ulster Bank including First Active had a network of 272 branches in Northern Ireland and the Republic of Ireland. A substantial majority of the UK branches are owned by NatWest and its subsidiaries or are held under leases with unexpired terms of over 50 years. NatWest Group’s properties include its principal office in London at 135 Bishopsgate.

Total capital expenditure on premises, computers and other equipment for the year ended 31 December 2005 was £270 million (2004 – £226 million).

10






ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The Company has omitted portions of this item on the basis of General Instruction I(2)(a) to Form 10-K. For a discussion of critical accounting policies that are considered by the directors to be the most important to the portrayal of its financial condition, see pages 54 to 62. In addition, for a discussion of accounting developments, see page 62.

OPERATING RESULTS

As discussed on page 4, the consolidated financial statements of NatWest Group have been prepared in accordance with International Financial Reporting Standards. NatWest Group has taken advantage of the option in IFRS 1 to implement IAS 32 and IAS 39 from 1 January 2005 without restating its 2004 income statement and balance sheet. The implementation of IAS 32 and IAS 39 on 1 January 2005 had a significant effect on NatWest Group's balance sheet. Therefore the income statements for 2005 and 2004 and the balance sheets at 31 December 2005 and 31 December 2004 are not directly comparable.

Overview of results

The following table summarises NatWest Group's results for each of the two years ended 31 December 2005:

Consolidated income statement   Discontinued*     Continuing     Discontinued*   Continuing
  2005   2005   2004   2004


 

 

 

  £m   £m   £m   £m
Net interest income   212   4,249   265   4,118











Fees and commissions receivable   43   3,663   51   3,384
Fees and commissions payable   (34 )   (926 )   (38 )   (845 )
Income from trading activities   -   808   -   887
Other operating income   -   635   -   201











Non-interest income   9   4,180   13   3,627











Total income   221   8,429   278   7,745











Administrative expenses        
   - staff costs**   -   1,477   -   1,326
   - premises and equipment**   -   114   -   197
   - other**   70   2,440   52   2,131
Depreciation and amortisation   -   382   1   461











Operating expenses   70   4,413   53   4,115











Operating profit before impairment losses   151   4,016   225   3,630
Impairment losses   4   752   (5 )   630











Operating profit before tax   147   3,264   230   3,000
Tax   44   904   69   797











Operating profit after tax   103   2,360   161   2,203


       
       
Discontinued operations     103     161




Profit for the year     2,463     2,364




* NatWest Group transferred its home mortgage finance business, National Westminster Home Loans Limited, to the Royal Bank on 31 December 2005 at neither a profit nor a loss.

**Includes integration expenditure.

2005 compared with 2004

Profit

The implementation of IAS 32 and IAS 39 on 1 January 2005 affected the timing of recognition of income and costs, classification of debt and equity and impairment provisions in 2005.

Operating profit before tax was up 6%, from £3,230 million to £3,411 million. Good underlying organic income growth was partially offset by the adverse impact on income of implementing IAS 32 and IAS 39 on 1 January 2005.

11






Total income

Total income was up 8% or £627 million to £8,650 million. This reflected growth across the NatWest Group and also included net gain of £332 million on sale of strategic investments. The effect of implementing the requirements of IAS 32 and IAS 39 on 1 January 2005 was to reduce total income. Under IFRS, certain lending fees are deferred over the life of the financial asset and interest is recognised on a constant yield basis. The implementation of IAS 32 also resulted in NatWest Group’s preference shares being reclassified as debt; accordingly the interest thereon is included in interest payable.

Net interest income increased by 2% to £4,461 million. Average loans and advances to customers and average customer deposits grew by 19% and 14% respectively. The implementation of IAS 32 and IAS 39 on 1 January 2005 led to a reduction in net interest income. Interest income is recognised on a constant yield basis under IFRS; under UK GAAP interest was recognised on an accrual basis. Interest payable also increased due to the reclassification of NatWest Group’s preference shares.

Non-interest income increased by 15% to £4,189 million with good growth in banking fee income and financial markets income. The effect of implementing the requirements of IAS 39 on 1 January 2005 was to reduce non-interest income, principally due to the deferral of certain lending fees.

Operating expenses

Operating expenses rose by 8% to £4,483 million, partly due to the implementation of IAS 39 on 1 January 2005.

Integration costs

Integration costs were £163 million compared with £297 million in 2004. Included are software costs relating to the integration of NatWest with RBS Group which were written-off as incurred under UK GAAP but on transition to IFRS were capitalised and amortised. All such software is now fully amortised.

Impairment losses

Impairment losses were £756 million compared with £625 million in 2004. Overall credit quality remained strong in 2005. The effect of implementing the requirements of IAS 39 on 1 January 2005 was to increase loan impairment losses.

Risk elements in lending and potential problem loans represented 2.19% of gross loans and advances to customers excluding reverse repos at 31 December 2005 (31 December 2004 – 2.61%).

Provision coverage of risk elements in lending and potential problem loans was 63% compared with 64% at 31 December 2004.

Balance sheet

Total assets of £260.6 billion at 31 December 2005 were up £63.4 billion, 32%, compared with 31 December 2004, with £35.8 billion of this increase arising from grossing-up following the implementation of IAS 32 and IAS 39 on 1 January 2005, and the balance reflecting business growth.

Loans and advances to customers (excluding £26.9 billion relating to NatWest Home Loans which was sold on 31 December 2005) were up 53%, £55.2 billion to £159.9 billion and loans and advances to banks increased by £26.0 billion to £56.0 billion, reflecting the implementation of IAS 32 and IAS 39 on 1 January 2005 and business growth.

Customer accounts were up £31.8 billion, 25% to £157.9 billion with £20.0 billion arising from the implementation of IAS 32 and IAS 39, largely reflecting the grossing up of previously netted deposits. Excluding this and repos, which decreased £3.7 billion, 15% to £20.7 billion, deposits rose by £15.5 billion, 13%, to £137.3 billion with good growth in all divisions.

Capital ratios at 31 December 2005 were 10.1% (Tier 1) and 14.1% (Total).

12






Net interest income    
  2005   2004
 
 
  £m   £m
         
Interest receivable   8,492   7,180
Interest payable   (4,031 )   (2,797 )




 
Net interest income   4,461   4,383




 
         
    %   %
Gross yield on interest-earning assets of banking business   5.73   5.66
Cost of interest-bearing liabilities of banking business   (3.22 )   (2.72 )




 
Interest spread of banking business   2.51   2.94
Benefit from interest-free funds   0.50   0.52




 
Net interest margin of banking business   3.01   3.46




 

The following table gives average interest rates, yields and margins.

  2005     2004  
 
   
 
  %     %  
Yields, spreads and margins of the banking business:        
Gross yield (1)      
   Group   5.73     5.66  
   UK   6.11     5.97  
   Overseas   4.55     4.43  
Interest spread (2)      
   Group   2.51     2.94  
   UK   2.89     3.21  
   Overseas   1.32     1.89  
Net interest margin (3)      
   Group   3.01     3.46  
   UK   3.32     3.65  
   Overseas   2.03     2.69  
The Bank’s base rate   4.65     4.38  
London inter-bank three month offered rate:        
   Sterling   4.76     4.64  
   Eurodollar   3.56     1.62  
   Euro   2.18     2.11  

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.
 

13






Average balance sheets and interest rates

The following table shows average balances and interest rates for each of the past two years.

        2005             2004      
   






 







 
    Average
balance
  Interest   Average
rate
    Average
balance
  Interest   Average
rate
 
   






 







 
ASSETS   £m   £m   %     £m   £m   %  
Loans and advances to banks              
     UK   18,461   762   4.13     17,652   733   4.15  
     Overseas   7,127   234   3.28     5,743   170   2.96  
Loans and advances to customers (1)              
     UK   93,135   6,066   6.51     82,335   5,273   6.40  
     Overseas   26,977   1,332   4.94     18,770   922   4.91  
Debt securities              
     UK   769   35   4.55     1,242   42   3.38  
     Overseas   1,689   63   3.73     1,023   40   3.91  








Total interest-earning assets – Banking business   148,158   8,492   5.73     126,765   7,180   5.66  




Total interest-earning assets – Trading business (2)   68,521         48,289    




Total interest-earning assets   216,679         175,054    
Non-interest-earning assets   30,077         16,303    




Total assets   246,756         191,357    




Percentage of assets applicable to overseas operations   46.7%         43.2%    
               
LIABILITIES AND SHAREHOLDERS' EQUITY              
Deposits by banks              
     UK   4,669   183   3.92     3,820   142   3.72  
     Overseas   11,251   374   3.32     6,924   167   2.41  
Customer accounts              
     - demand deposits              
     UK   46,585   1,156   2.48     39,899   808   2.03  
     Overseas   4,361   86   1.97     3,651   69   1.89  
     - savings deposits              
     UK   17,733   517   2.92     14,781   390   2.64  
     Overseas   1,078   26   2.41     969   23   2.37  
     - other time deposits              
     UK   21,531   921   4.28     20,285   753   3.71  
     Overseas   7,125   244   3.42     4,841   139   2.87  
Debt securities in issue              
     UK   1,650   75   4.55     844   42   4.98  
     Overseas   3,692   146   3.95     1,023   40   3.91  
Loan capital              
     UK   5,440   290   5.33     5,802   222   3.83  
     Overseas   488   28   5.74     133   8   6.02  
Internal funding of trading business   (509 )   (15 )   2.95     (211 )   (6 )   2.84  








Total interest-bearing liabilities – Banking business   125,094   4,031   3.22     102,761   2,797   2.72  




Total interest-bearing liabilities – Trading business (2)   67,726         47,659    




Total interest-bearing liabilities   192,820         150,420    
Non-interest bearing liabilities              
 Demand deposits              
     UK   13,855         13,732    
     Overseas   3,154         3,273    
 Other liabilities   28,670         15,947    
Shareholders' equity   8,257         7,985    




Total liabilities and shareholders' equity   246,756         191,357    




Percentage of liabilities applicable to overseas operations   45.3%         41.9%    
             
Notes:
(1) The analysis into UK and Overseas has been compiled on the basis of location of office.
(2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.

14




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.      

  2005 compared with 2004
 






  Increase/(decrease) due to changes in:
 






  Average volume   Average rate   Net change
 






  £m   £m   £m
                   
INTEREST-EARNING ASSETS                  
Loans and advances to banks                  
     UK   33     (4 )   29  
     Overseas   44     20     64  
Loans and advances to customers                  
     UK   701     92     793  
     Overseas   404     6     410  
Debt securities                  
     UK   (19 )   12     (7 )
     Overseas   25     (2 )   23  
   







Total interest receivable of banking business                  
     UK   715     100     815  
     Overseas   473     24     497  
   







    1,188     124     1,312  
   







INTEREST-BEARING LIABILITIES                  
Deposits by banks                  
     UK   (33 )   (8 )   (41 )
     Overseas   (129 )   (78 )   (207 )
Customer accounts                  
     - demand deposits   (150 )   (198 )   (348 )
     UK   (14 )   (3 )   (17 )
     Overseas                  
     - savings deposits   (83 )   (44 )   (127 )
     UK   (3 )   -     (3 )
     Overseas                  
     - other time deposits   (48 )   (120 )   (168 )
     UK   (75 )   (30 )   (105 )
     Overseas                  
Debt securities in issue                  
     UK   (37 )   4     (33 )
     Overseas   (106 )   -     (106 )
Loan capital                  
     UK   15     (83 )   (68 )
     Overseas   (20 )   -     (20 )
Internal funding of trading business   9     -     9  
   







Total interest payable of banking business                  
     UK   (327 )   (449 )   (776 )
     Overseas   (347 )   (111 )   (458 )
   







    (674 )   (560 )   (1,234 )
   







Movement in net interest income                  
     UK   388     (349 )    39  
     Overseas   126     (87 )    39  
   







    514     (436 )    78  








15

 






Net interest income

As discussed on page 4, the Group implemented IFRS with effect from 1 January 2004. The average balance sheet and related data presented for 2003 on pages 16 to 18 are based on UK GAAP and are therefore not directly comparable with the average balance sheet and related data for 2004 or 2005, each of which is based on IFRS. For a more complete discussion of the Group’s adoption of IFRS, see ‘Accounting Policies – Adoption of International Financial Reporting Standards’ on page 54.

  UK GAAP
  2003
 
  £m
     
Interest receivable   5,979
Interest payable   (1,947 )


Net interest income   4,032


  %
Gross yield on interest-earning assets of banking business   5.35
Cost of interest-bearing liabilities of banking business   (2.21 )


Interest spread of banking business   3.14
Benefit from interest-free funds   0.47


Net interest margin of banking business   3.61


The following table gives average interest rates, yields and margins.

  UK GAAP  
  2003  
 
 
  %  
Yields, spreads and margins of the banking business:      
Gross yield (1)  
     Group   5.35  
     UK   5.50  
     Overseas   4.35  
Interest spread (2)  
     Group   3.14  
     UK   3.26  
     Overseas   2.40  
Net interest margin (3)  
     Group   3.61  
     UK   3.70  
     Overseas   2.99  
The Bank’s base rate   3.74  
London inter-bank three month offered rate:      
     Sterling   3.74  
     Eurodollar   1.22  
     Euro   2.33  

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.
 

16






Average balance sheets and interest rates

The following table shows average balances and interest rates for the year ended 31 December 2003 under UK GAAP.

    UK GAAP
2003
 
   






 
    Average           Average  
    balance     Interest     rate  
   






 
ASSETS   £m     £m     %  
Loans and advances to banks                
     UK   17,576     590     3.36  
     Overseas   4,708     113     2.40  
Loans and advances to customers (1)                
     UK   78,053     4,695     6.02  
     Overseas   9,972     527     5.28  
Debt securities                
     UK   1,228     44     3.58  
     Overseas   247     10     4.05  
   




   
Total interest-earning assets – Banking business   111,784     5,979     5.35  
         

   
Total interest-earning assets – Trading business (2)   48,794            
   

         
Total interest-earning assets   160,578            
Non-interest-earning assets   16,514            
   

         
Total assets   177,092            
   

         
Percentage of assets applicable to overseas operations   41.3 %          
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Deposits by banks                
     UK   4,634     149     3.22  
     Overseas   2,725     60     2.20  
Customer accounts                
     - demand deposits                
     UK   38,161     518     1.36  
     Overseas   2,554     21     0.82  
     - savings deposits                
     UK   10,196     253     2.48  
     Overseas   369     5     1.36  
     - other time deposits                
     UK   20,321     638     3.14  
     Overseas   4,508     108     2.40  
Debt securities in issue                
     UK   263     8     3.04  
     Overseas   241     8     3.32  
Loan capital                
     UK   5,844     213     3.64  
     Overseas   30     1     3.33  
Internal funding of trading business   (1,621 )   (35 )   2.16  
   




   
Total interest-bearing liabilities – Banking business   88,225     1,947     2.21  
         

   
Total interest-bearing liabilities – Trading business (2)   48,241            
   

         
Total interest-bearing liabilities   136,466            
Non-interest bearing liabilities                
 Demand deposits                
     UK   13,577            
     Overseas   2,370            
 Other liabilities   15,865            
Shareholders’ funds   8,814            
   

         
Total liabilities and shareholders’ equity   177,092            
   

         
Percentage of liabilities applicable to overseas operations   40.0 %          
                   
Notes:
(1) The analysis into UK and Overseas has been compiled on the basis of location of office.
(2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
 

17






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.

  2004 compared with 2003
 
  Increase/(decrease) due to changes in








  Average   Average   Net
  volume   rate   change








  £m   £m   £m
INTEREST-EARNING ASSETS      
Loans and advances to banks      
     UK   3   140   143
     Overseas   28   29   57
Loans and advances to customers      
     UK   269   309   578
     Overseas   434   (39 )   395
Debt securities      
     UK   -   (2 )   (2 )
     Overseas   30   -   30








Total interest receivable of banking business      
     UK   272   447   719
     Overseas   492   (10 )   482








  764   437   1,201








INTEREST-BEARING LIABILITIES      
Deposits by banks      
     UK   28   (21 )   7
     Overseas   (101 )   (6 )   (107 )
Customer accounts      
     - demand deposits      
     UK   (25 )   (265 )   (290 )
     Overseas   (12 )   (36 )   (48 )
     - savings deposits      
     UK   (120 )   (17 )   (137 )
     Overseas   (12 )   (6 )   (18 )
     - other time deposits      
     UK   1   (116 )   (115 )
     Overseas   (8 )   (23 )   (31 )
Debt securities in issue      
     UK   (26 )   (8 )   (34 )
     Overseas   (30 )   (2 )   (32 )
Loan capital      
     UK   2   (11 )   (9 )
     Overseas   (6 )   (1 )   (7 )
Internal funding of trading business   (37 )   8   (29 )








Total interest payable of banking business      
     UK   (177 )   (430 )   (607 )
     Overseas   (169 )   (74 )   (243 )








  (346 )   (504 )   (850 )








Movement in net interest income      
     UK   95   17   112
     Overseas   323   (84 )   239








  418   (67 )   351








18






Overview of balance sheet
Summary consolidated balance sheet
  2005   2004  
 
 
 
  £m   £m  
Assets    
Cash and balances at central banks   1,568   1,589  
Treasury bills and other eligible bills   770   172  
Loans and advances to banks   55,995   29,982  
Loans and advances to customers   159,943   131,679  
Debt securities and equity shares   29,568   23,764  
Other assets   12,759   10,035  



 
Total assets   260,603   197,221  



 
Liabilities    
Deposits by banks   46,001   23,873  
Customer accounts   157,924   126,119  
Debt securities in issue   10,801   3,597  
Other liabilities   29,045   29,407  
Subordinated liabilities   6,648   5,808  
Minority interests   744   408  
Shareholders’ equity   9,440   8,009  



 
Total liabilities and equity   260,603   197,221  



 

Analysis of repurchase agreements

  2005   2004  
 
 
 
  £m   £m  
Reverse repurchase agreements and stock borrowing      
Loans and advances to banks   13,135   6,858  
Loans and advances to customers   15,036   17,596  



 
  28,171   24,454  



 
Repurchase agreements and stock lending    
Deposits by banks   19,569   14,855  
Customer accounts   20,664   15,486  



 
  40,233   30,341  



 

19






Overview – summary consolidated balance sheet

31 December 2005 compared with 31 December 2004

Total assets of £260.6 billion at 31 December 2005 were up £63.4 billion, 32%, compared with 31 December 2004, with £35.8 billion of this increase arising from the implementation of IAS 32 and IAS 39 on 1 January 2005, and the balance reflecting business growth.

Loans and advances to banks rose £26.0 billion to £56.0 billion. Excluding the effects of implementing IAS 32 and IAS 39, they increased £13.8 billion, 33%, with growth in reverse repurchase agreements and stock borrowing (“reverse repos”), which increased by £5.9 billion, 83%, to £13.1 billion, and bank placings up £7.8 billion, 22%, to £42.9 billion.

Loans and advances to customers were up £28.3 billion, 21%, at £159.9 billion of which £21.3 billion resulted from the implementation of IAS 32 and IAS 39, mainly due to the grossing up of previously netted customer balances. Excluding this and a decrease in reverse repos, down 43%, £11.4 billion to £15.0 billion, customer lending was up £18.4 billion, 15%, reflecting organic growth across all divisions.

Debt securities and equity shares increased by £5.8 billion, 24%, to £29.6 billion, principally due to increased holdings in Corporate Markets.

Other assets increased by £2.7 billion, 27% to £12.8 billion, largely due to the increase in derivatives at fair value resulting from the implementation of IAS 32 and IAS 39, with £2.0 billion arising from the grossing up of previously netted balances.

Deposits by banks increased by £22.1 billion, 93%, to £46.0 billion, of which £12.2 billion arose from the implementation of IAS 32 and IAS 39. The remaining £9.9 billion was raised to fund business growth both through higher inter-bank deposits, up £5.5 billion, 26%, to £26.4 billion and increased repurchase agreements and stock lending (“repos”), up 29%, from £15.2 billion to £19.6 billion.

Customer accounts were up £31.8 billion, 25% at £157.9 billion with £20.0 billion arising from the implementation of IAS 32 and IAS 39, largely reflecting the grossing up of previously netted deposits. Excluding this and repos, which decreased £3.7 billion, 15%, to £20.7 billion, deposits rose by £15.5 billion, 13%, to £137.3 billion with good growth in all divisions.

Debt securities in issue increased by £7.2 billion to £10.8 billion, with £1.5 billion resulting from the implementation of IAS 39, and £5.7 billion raised primarily to meet the NatWest Group’s funding requirements.

Subordinated liabilities were up £0.8 billion, 14%, to £6.6 billion, including £0.5 billion due to the reclassification as debt of NatWest Group’s existing preference share capital following the implementation of IAS 32. The balance, £0.3 billion, reflected the issue of £0.3 billion dated loan capital and exchange rate movements of £0.2 billion which were partially offset by the redemption of £0.2 billion dated loan capital.

Shareholders’ equity increased by £1.4 billion, 18%, to £9.4 billion. The implementation of IAS 32 and IAS 39 reduced shareholders’ equity by £0.6 billion, largely as a result of the reclassification as debt of NatWest Group’s preference share capital. Excluding this, shareholders’ equity was up by £2.1 billion, 28%, primarily reflecting the profit for the period of £2.4 billion, partly offset by the payment of ordinary dividends, £0.3 billion.

20






Description of assets and liabilities

Assets

Loan portfolio

NatWest Group’s loan portfolio consists of loans (including overdraft facilities) and finance leases and instalment credit.

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.

Analysis of loans to customers by geographical area and type of customer - IFRS

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.

Within
1 year
After
1 but within
5 years
After 5
years
IFRS 2005
Total
 
  IFRS
2004
 







  £m   £m   £m   £m
 
  £m
UK        
 
 
Central and local government   1,667   -   1   1,668
 
  128
Manufacturing   4,476   441   463   5,380
 
  2,742
Construction   2,818   711   744   4,273
 
  2,811
Finance   33,163   1,323   341   34,827
 
  1,597
Service industries and business activities   11,378   3,472   4,853   19,703
 
  13,876
Agriculture, forestry and fishing   859   393   597   1,849
 
  1,739
Property   3,697   2,859   4,143   10,699
 
  8,581
Individuals - home mortgages   1,297   584   865   2,746
 
  29,434
Individuals - other   7,326   4,703   2,623   14,652
 
  14,051
Finance leases and instalment credit   10   169   141   320
 
  356
Accrued interest   202   -   -   202
 
  -











Total domestic   66,893   14,655   14,771   96,319
 
  75,315
Overseas residents   9,617   525   2,307   12,449
 
  11,413











Total UK offices   76,510   15,180   17,078   108,768
 
  86,728











Overseas        
 
 
United States   15,261   857   7,821   23,939
 
  24,662
Rest of the World   14,814   3,540   10,910   29,264
 
  22,223











Total overseas offices   30,075   4,397   18,731   53,203
 
  46,885











Loans and advances to customers – gross   106,585   19,577   35,809   161,971
 
  133,613





 
Loan impairment provisions         (2,028 )   (1,934 )





Loans and advances to customers – net         159,943
 
  131,679





Fixed rate   17,853   6,322   7,648   31,823
 
  40,861
Variable rate   88,732   13,255   28,161   130,148
 
  92,752











Loans and advances to customers – gross   106,585   19,577   35,809   161,971
 
  133,613











For further information regarding NatWest Group’s operations by geographical area, see Note 40 to the Consolidated Financial Statements.

21




Loan impairment provisions

Provisioning policy

NatWest Group’s approach to managing credit risk is discussed in note 32 to the Consolidated Financial Statements and its accounting policy for impairment of financial assets is set out on page 58.

Loan impairment provisions - IFRS

For a discussion of the factors considered in determining the amount of the provisions, see ‘Provision analysis’ and ‘Provision methodology’ on page 98. The following table shows the elements of loan impairment provisions.

  2005   2004
 

 

  £m   £m
Provisions at beginning of year    
     Domestic   1,654   1,358
     Foreign   471   547





  2,125   1,905





Currency translation and other adjustments    
     Domestic   7     -
     Foreign   (9 )   (27 )
Acquisition/(disposal) of subsidiaries        
     Domestic   (23 )   -
     Foreign   16     35
Amounts written-off    
     Domestic   (639 )   (425 )
     Foreign   (179 )   (170 )
Recoveries of amounts written-off in previous years      
     Domestic   44   41
     Foreign   12   4
Transfers to immediate parent company    
     Domestic   -   (48 )
     Foreign   -   -
Charge to income statement    
     Domestic   704   470
     Foreign   49   155
Discount unwind    
     Domestic   (67 )  
     Foreign   (9 )  
Provisions at end of year    
     Domestic   1,680   1,396
     Foreign   351   544





  2,031   1,940





Gross loans and advances to customers    
Domestic   96,319   75,315
Foreign   65,652   58,298





  161,971   133,613





Closing customer provisions as a % of gross loans and advances to customers      
Domestic   1.74 %   1.85 %
Foreign   0.53 %   0.92 %





  1.25 %   1.45 %





Customer charge to income statement as a % of gross loans and advances to customers      
Domestic   0.73 %   0.62 %
Foreign   0.07 %   0.27 %





  0.46 %   0.47 %





22




The following table presents additional information with respect to loan impairment provisions.

  2005
  2004

   

£m     £m  
Loans and advances to customers (gross)   161,971   133,613





Loan impairment provisions at end of year:    
     Customers   2,028  
     Banks   3  
     Specific provisions – customers     1,651
     Specific provisions – banks     6
     General provision     283





  2,031   1,940





Customer provision at end of year as a % of loans and advances to customers at end of year:      
     Specific provisions     1.24 %
     General provision     0.21 %
   

    1.45 %
   

Average loans and advances to customers (gross)   162,733   117,249





As a % of average loans and advances to customers during the year:      
 Total customer provisions charged to income statement   0.46 %   0.53 %





 Amounts written-off (net of recoveries) – customers   0.47 %   0.47 %






Analysis of closing loan impairment provisions - IFRS

The following table analyses customer loan impairment provisions by geographical area and type of domestic customer.

    2005   2004
   
 
    Closing
provision
  % of
loans to
total
loans
  Closing
provision
  % of
loans to
total
loans
   
 
 
 
    £m   %   £m   %
Domestic        
Central and local government   -   1.0     0.1
Manufacturing   70   3.3   80   2.1
Construction   48   2.7   50   2.1
Finance   17   21.5   16   1.2
Service industries and business activities   411   12.2   299   10.4
Agriculture, forestry and fishing   20   1.1   17   1.3
Property   38   6.6   27   6.4
Individuals        
 - home mortgages   3   1.7   9   22.0
 - other   921   9.1   716   10.5
Finance leases and instalment credit   -   0.2   45   0.3
Accrued interest   -   0.1    







Total domestic   1,528   59.5   1,259   56.4
Foreign   298   40.5   392   43.6







Impaired book provisions   1,826   100.0     100.0


Latent book provisions   202      
Specific provisions       1,651  
General provision       283  


Total provisions   2,028     1,934  



23




Write-offs - IFRS

The following table analyses amounts written-off by geographical area and type of domestic customer:

  2005   2004
 
 
  £m   £m
Domestic    
Manufacturing   26   25
Construction   13   9
Finance   2   1
Service industries and business activities   82   78
Agriculture, forestry and fishing   3   3
Property   7   12
Individuals - home mortgages   1   -
Individuals - others   503   296



Total domestic   637   424
Foreign   179   171



Total write-offs   816   595



Recoveries - IFRS

The following table analyses recoveries of amounts written-off by geographical area and type of domestic customer:

  2005   2004
 
 
  £m   £m
Domestic    
Manufacturing   1   -
Service industries and business activities   1   1
Individuals - others   41   39



Total domestic   43   40
Foreign   -   5



Total recoveries   43   45




24





Risk elements in lending and potential problem loans - IFRS

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 following table shows the estimated amount of loans that would be reported using the SEC’s classifications. The figures are stated before deducting the value of security held or related provisions.

IAS 39 requires interest to be recognised on a financial asset (or a group of financial assets) after impairment at the rate of interest used to discount recoveries when measuring the impairment loss. Thus, interest on impaired financial assets is credited to profit or loss as the discount on expected recoveries unwinds. Despite this, such assets are not considered performing. All loans that have an impairment provision are classified as non-accrual. This is a change from past practice where certain loans with provisions were classified as past due 90 days or potential problem loans (and interest accrued on them).

  2005   2004
 
 
  £m   £m
Loans accounted for on a non-accrual basis (2):    
     Domestic   2,700   1,966
     Foreign   487   565





     Total   3,187   2,531





Accruing loans which are contractually past due    
 90 days or more as to principal or interest (3):    
     Domestic   2   342
     Foreign   7   60





     Total   9   402





Loans not included above which are classified as    
 “troubled debt restructurings” by the SEC:    
     Domestic   -   -
     Foreign   -   -





     Total   -   -





Total risk elements in lending   3,196   2,933





Potential problem loans (4)    
     Domestic   11   13
     Foreign   5   83





     Total   16   96





Closing provisions for impairment as a % of total risk elements in lending   63 %   66 %





Closing provisions for impairment as a % of total risk elements in lending    
and potential problem loans   63 %   64 %





Risk elements in lending as a % of gross lending to customers excluding reverse repos   2.18 %   2.53 %





Notes:  
(1) For the analysis above, “Domestic” consists of the United Kingdom domestic transactions of NatWest Group. “Foreign” comprises NatWest Group’s transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions.
(2) All loans against which an impairment provision is held are reported in the non-accrual category.
(3) Loans where an impairment event has taken place but no impairment recognised. This category is used for over-collateralised non-revolving credit facilities.
(4) Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for over-collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible.

25






  2005   2004
 
 
  £m   £m
Gross income not recognised but which would have been recognised under the original terms of      
 non-accrual and restructured loans      
     Domestic   99   130
     Foreign   21   31



  120   161



Interest on non-accrual and restructured loans included in net interest income      
     Domestic   67   41
     Foreign   9   -



  76   41



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.

At 31 December 2005 and 2004, NatWest Group had no cross border outstandings in excess of 0.75% of total assets (including acceptances).

26






Liabilities

Analysis of deposits - IFRS

Analysis of deposits by product type and geographical area - IFRS

The following table shows the distribution of NatWest Group's deposits by product type and geographical area.

  2005   2004

 
  £m   £m
UK    
Domestic:    
Demand deposits - interest-free   23,825   17,579
                           - interest-bearing   54,048   42,621
Time deposits - savings   17,234   13,506
                      - other   25,011   21,039
Overseas residents:    
Demand deposits - interest-free   329   221
                           - interest-bearing   4,326   1,773
Time deposits - savings   892   971
                      - other   873   3,588



Total UK offices   126,538   101,298



Overseas    
Demand deposits - interest-free   3,629   3,038
                           - interest-bearing   9,244   4,032
Time deposits - savings   1,097   1,064
                      - other   63,417   40,560



Total overseas offices (see below)   77,387   48,694



Total deposits   203,925   149,992



Held for trading   16,961  
Fair value through profit or loss   1,339  
Amortised cost   185,625  
       
Banking business     119,848
Trading business     30,144



Total deposits   203,925   149,992



Overseas offices    
United States   43,432   28,080
Rest of the World   33,955   20,614



Total overseas offices   77,387   48,694




Note:
(1) Presentation of product analysis data has been refined and 2004 has been restated onto a basis consistent with 2005.

27






Short-term borrowings - IFRS

The following table shows details of NatWest Group’s short-term borrowings.

  2005   2004
 
 
  £m   £m
Commercial paper:    
     Outstanding at 31 December   2,343   1,760
     Maximum amount outstanding at any month-end during the year   3,326   2,211
     Approximate average amount outstanding during the year   2,863   1,495
     Approximate weighted average interest rate during the year   3.0 %   2.4 %
     Approximate weighted average interest rate at 31 December   4.4 %   2.4 %
Other short-term borrowings:    
     Outstanding at 31 December   37,513   29,250
     Maximum amount outstanding at any month-end during the year   44,172   30,868
     Approximate average amount outstanding during the year   37,147   27,859
     Approximate weighted average interest rate during the year   3.9 %   2.1 %
     Approximate weighted average interest rate at 31 December   4.1 %   2.2 %

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.

Certificates of deposit and other time deposits - IFRS

The following table shows details of NatWest Group's certificates of deposit issued and other time deposits over £50,000 (or the equivalent of $100,000 for currencies other than sterling) at 31 December 2005, by time remaining until maturity:

  Within
3 months
  Over 3
but within
6 months
  Over 6
but within
12 months
   
Over
12 months
2005
Total
 
 
 
 
 
  £m   £m   £m   £m   £m
UK based companies and branches          
     Certificates of deposit   1,517   140   58   -   1,715
     Other time deposits   18,015   356   52   37   18,460
           
Overseas based companies and branches          
     Certificates of deposit   1,222   956   747   -   2,925
     Other time deposits   45,729   2,874   372   917   49,892









Total   66,483   4,326   1,229   954   72,992










28






Amounts in accordance with UK GAAP

Analysis of loans to customers by geographical area and type of customer – UK GAAP

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.

    2004   2003   2002   2001
   
 
 
 
    £m   £m   £m   £m
UK        
Central and local government   128   127   215   95
Manufacturing   2,742   2,896   3,751   3,421
Construction   2,811   2,356   2,088   1,857
Finance   1,278   742   1,091   1,159
Service industries and business activities   13,855   12,680   11,531   12,263
Agriculture, forestry and fishing   1,739   1,731   1,689   1,647
Property   8,581   6,964   5,486   4,694
Individuals - home mortgages   29,434   24,545   22,286   20,425
Individuals - other   14,051   12,760   11,690   10,287
Finance leases and instalment credit   356   1,961   11,456   11,092











Total domestic   74,975   66,762   71,283   66,940
Overseas residents   11,413   13,263   15,448   17,694











Total UK offices   86,388   80,025   86,731   84,634











Overseas        
United States   24,676   12,034   16,868   8,157
Rest of the World   22,223   12,411   10,618   9,950











Total overseas offices   46,899   24,445   27,486   18,107











Loans and advances to customers – gross   133,287   104,470   114,217   102,741
Provisions for bad and doubtful debts   (1,934 )   (1,898 )   (2,095 )   (2,123 )











Loans and advances to customers – net   131,353   102,572   112,122   100,618











Fixed rate   40,761   25,573   37,143   25,224
Variable rate   92,526   78,897   77,074   77,517











Gross loans and advances to customers – by maturity          
  133,287   104,470   114,217   102,741











For further information regarding NatWest Group's operations by geographical area, see Note 40 to the Consolidated Financial Statements.

29






Provision for bad and doubtful debts – UK GAAP

The following table shows the elements of provisions for bad and doubtful debts under UK GAAP:

  2004     2003     2002     2001

   
   
   
 
  £m     £m     £m     £m
Provisions at beginning of year                        
     Domestic   1,358     1,559     1,656     1,723  
     Foreign   547     543     475     375  
   

 

 

 

    1,905     2,102     2,131     2,098  
   

 

 

 

Currency translation and other adjustments                        
     Domestic   -     -     5     (15 )
     Foreign   (27 )   -     (15 )   13  
Acquisition/(disposal) of subsidiaries                        
     Domestic   -     (156 )   -     (28 )
     Foreign   35     4     -     (10 )
Amounts written-off                        
     Domestic   (425 )   (467 )   (418 )   (372 )
     Foreign   (170 )   (139 )   (126 )   (84 )
Recoveries of amounts written-off in previous years                        
     Domestic   41     8     13     10  
     Foreign   4     4     4     9  
Transfers to immediate parent company                        
     Domestic   (48 )   -     -     -  
     Foreign   -     -     -     -  
Charge to profit and loss account                        
     Domestic   470     414     303     338  
     Foreign   155     135     205     172  
Provisions at end of year                        
     Domestic   1,396     1,358     1,559     1,656  
     Foreign   544     547     543     475  
   

 

 

 

    1,940     1,905     2,102     2,131  
   

 

 

 

Gross loans and advances to customers                        
Domestic   74,975     66,762     71,283     66,940  
Foreign   58,312     37,708     42,934     35,801  
   

 

 

 

    133,287     104,470     114,217     102,741  
   

 

 

 

Closing customer provisions as a % of gross loans                        
     and advances to customers                        
Domestic   1.86 %   2.03 %   2.19 %   2.47 %
Foreign   0.93 %   1.45 %   1.25 %   1.30 %
   

 

 

 

    1.46 %   1.82 %   1.83 %   2.07 %
   

 

 

 

Customer charge against profit as a % of gross loans                        
     and advances to customers                        
Domestic   0.63 %   0.62 %   0.43 %   0.50 %
Foreign   0.27 %   0.36 %   0.48 %   0.48 %
   

 

 

 

    0.47 %   0.53 %   0.44 %   0.50 %
   

 

 

 


30






The following table presents additional information with respect to provisions for bad and doubtful debts.

  2004   2003   2002   2001
 
 
 
 
  £m   £m   £m   £m
                 
Loans and advances to customers (gross)   133,287   104,470   114,217   102,741











Provisions at end of year:        
     Specific provisions – customers   1,651   1,528   1,727   1,725
     Specific provisions – banks   6   7   7   8
     General provision   283   370   368   398











  1,940   1,905   2,102   2,131











Customer provision at end of year as a % of loans and        
 advances to customers at end of year:        
     Specific provisions   1.24 %   1.46 %   1.51 %   1.68 %
     General provision   0.21 %   0.36 %   0.32 %   0.39 %











  1.45 %   1.82 %   1.83 %   2.07 %











Average loans and advances to customers (gross)   116,917   106,967   110,874   103,585











As a % of average loans and advances to customers        
during the year:        
 Total customer provisions charged to profit and loss   0.53 %   0.51 %   0.46 %   0.49 %











 Amounts written-off (net of recoveries) – customers   0.47 %   0.56 %   0.47 %   0.42 %











Analysis of closing provisions for bad and doubtful debts – UK GAAP

The following table analyses customer provisions for bad and doubtful debts by geographical area and type of domestic customer.

    2004   2003   2002   2001
   


 


 


 


    Closing
provision
  % of
loans to
total
loans
  Closing
provision
  % of
loans to
total
loans
  Closing
provision
  % of
loans to
total
loans
  Closing
provision
  % of
loans to
total
loans
   
 
 
 
 
 
 
 
    £m   %   £m   %   £m   %   £m   %
Domestic                
Central and local government   -   0.1   -   0.1   -   0.2   -   0.2
Manufacturing   80   2.1   84   2.8   112   3.3   129   3.3
Construction   50   2.1   46   2.2   52   1.8   59   1.8
Finance   16   1.0   14   0.7   43   1.0   54   1.1
Service industries and business                
activities   299   10.4   326   12.1   389   10.1   430   11.9
Agriculture, forestry and fishing   17   1.3   16   1.7   24   1.5   21   1.6
Property   27   6.4   29   6.7   32   4.8   30   4.6
Individuals                
 - home mortgages   9   22.1   13   23.5   15   19.5   17   19.9
 - other   716   10.5   548   12.2   444   10.2   487   10.0
Finance leases and                
   instalment credit   45   0.3   45   1.9   208   10.0   164   10.8















Total domestic   1,259   56.3   1,121   63.9   1,319   62.4   1,391   65.2
Foreign   392   43.7   407   36.1   408   37.6   334   34.8















Specific provisions   1,651   100.0   1,528   100.0   1,727   100.0   1,725   100.0




General provision   283     370     368     398  




Total provisions   1,934     1,898     2,095     2,123  





31






Write-offs – UK GAAP

The following table analyses amounts written-off by geographical area and type of domestic customer:

  2004   2003   2002   2001
 
 
 
 
  £m   £m   £m   £m
Domestic        
Manufacturing   25   57   76   37
Construction   9   16   15   11
Finance   1   30   28   2
Service industries and business activities   78   150   123   109
Agriculture, forestry and fishing   3   3   3   4
Property   12   5   5   9
Individuals - home mortgages   -   -   1   1
Individuals - others   296   169   122   136
Finance leases and instalment credit   -   37   45   63







Total domestic   424   467   418   372
Foreign   171   139   126   84







Total write-offs*   595   606   544   456







* Includes amounts relating to loans and advances to banks of nil in 2004 (2003 – nil; 2002 - £1 million; 2001 - £6 million).

Recoveries – UK GAAP

The following table analyses recoveries of amounts written-off by geographical area and type of domestic customer:

  2004   2003   2002   2001
 
 
 
 
  £m   £m   £m   £m
Domestic        
Construction   -   -   -   1
Service industries and business activities   1   1   1   1
Property   -   -   1   -
Individuals - others   39   6   4   5
Finance leases and instalment credit   -   1   7   3







Total domestic   40   8   13   10
Foreign   5   4   4   9







Total recoveries   45   12   17   19








32






Risk elements in lending and potential problem loans – UK GAAP

  2004   2003   2002   2001
 
 
 
 
  £m   £m   £m   £m
Loans accounted for on a non-accrual basis (3):        
     Domestic   1,966   1,950   1,781   2,238
     Foreign   565   537   531   360











     Total   2,531   2,487   2,312   2,598











Accruing loans which are contractually past due        
90 days or more as to principal or interest (4):        
     Domestic   342   276   195   237
     Foreign   60   48   34   19











     Total   402   324   229   256











Loans not included above which are classified as        
 “troubled debt restructurings” by the SEC:        
     Domestic   -   16   7   24
     Foreign   -   -   1   7











     Total   -   16   8   31











Total risk elements in lending   2,933   2,827   2,549   2,885











Potential problem loans (5)        
     Domestic   13   276   523   765
     Foreign   83   50   70   218











     Total   96   326   593   983











Closing provisions for bad and doubtful debts as a % of total risk          
elements in lending   66 %   67 %   82 %   74 %











Closing provisions for bad and doubtful debts as a % of total risk          
elements in lending and potential problem loans   64 %   60 %   67 %   55 %











Risk elements in lending as a % of gross loans and advances to          
customers excluding reverse repos   2.54 %   2.96 %   2.59 %   3.04 %












Notes:
(1) For the analysis above, ‘Domestic’ consists of the UK domestic transactions of NatWest Group. ‘Foreign’ comprises NatWest 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 NatWest Group’s provisioning policy for bad and doubtful debts.

33






  2004   2003   2002
 
 
 
  £m   £m   £m
Gross income not recognised but which would have been recognised under the        
 original terms of non-accrual and restructured loans        
     Domestic   130   134   171
     Foreign   31   31   32





  161   165   203





Interest on non-accrual and restructured loans included in net interest income        
     Domestic   41   43   36
     Foreign   -   -   5





  41   43   41





Cross border outstandings in excess of 0.75% of total assets – UK GAAP

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.

At 31 December 2004 and 2003, NatWest Group had no cross border outstandings in excess of 0.75% of total assets (including acceptances) of £196.5 billion and £173.1 billion, respectively.

34






Analysis of deposits – UK GAAP

Analysis of deposits by product type and geographical area – UK GAAP

The following table shows the distribution of NatWest Group's deposits by product type and geographical area.

  2004   2003
 
 
  £m   £m
UK    
Domestic:    
Demand deposits - interest-free   16,799   15,739
Demand deposits - interest-bearing   48,165   43,351
Time deposits - savings   7,962   6,992
Time deposits - other   21,039   18,934
Overseas residents:    
Demand deposits - interest-free   210   706
Demand deposits - interest-bearing   2,165   2,013
Time deposits - savings   579   810
Time deposits - other   3,588   3,364



Total UK offices   100,507   91,909



Overseas    
Demand deposits - interest-free   3,038   2,973
                           - interest-bearing   4,032   2,469
Time deposits      - savings   1,064   415
                           - other   40,560   36,361



Total overseas offices (see below)   48,694   42,218



Total deposits   149,201   134,127



Banking business   119,057   105,336
Trading business   30,144   28,791



Total deposits   149,201   134,127



Overseas offices    
United States   28,080   28,678
Rest of the World   20,614   13,540



Total overseas offices   48,694   42,218



The following table shows the distribution of deposits by banks and customer accounts by sterling and other currencies.

  2004   2003
 
 
  £m   £m
Deposits by banks    
 Sterling   3,202   1,827
 Other currencies   19,880   15,731



Total deposits by banks   23,082   17,558



Customer accounts    
 Sterling   92,797   84,692
 Other currencies   33,322   31,877



Total customer accounts   126,119   116,569



Total deposits   149,201   134,127



35






Short-term borrowings – UK GAAP

  2004   2003
 
 
  £m   £m
Commercial paper:    
     Outstanding at 31 December   1,760   2,060
     Maximum amount outstanding at any month-end during the year   2,211   2,060
     Approximate average amount outstanding during the year   1,495   672
     Approximate weighted average interest rate during the year   2.4 %   1.3 %
     Approximate weighted average interest rate at 31 December   2.4 %   1.4 %
     
Other short-term borrowings:    
     Outstanding at 31 December   29,250   29,302
     Maximum amount outstanding at any month-end during the year   30,868   29,302
     Approximate average amount outstanding during the year   27,859   24,982
     Approximate weighted average interest rate during the year   2.1 %   2.0 %
     Approximate weighted average interest rate at 31 December   2.2 %   1.3 %

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.

36






LIQUIDITY AND CAPITAL RESOURCES

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 2005, NatWest Group’s total RAR ratio was 14.1% and the tier 1 RAR was 10.1%.

Upon the adoption of IFRS by listed banks in the UK on 1 January 2005, the FSA changed its regulatory requirements such that the measurement of capital adequacy was based on IFRS subject to a number of prudential filters. The data as at 31 December 2005 set out below have been presented in compliance with these revised FSA requirements.

  2005
 
  £m
Capital base  
Tier 1 capital   10,359
Tier 2 capital   6,043


 
Total   16,402
Less investments in insurance subsidiaries, associated undertakings and    
other supervisory deductions   (1,911 )  


 
Total capital   14,491


 
Weighted risk assets  
Banking book:  
 On-balance sheet   88,600
 Off-balance sheet   9,300
Trading book   4,600


 
  102,500


 
Risk asset ratios  
Tier 1   10.1 %  
Total   14.1 %  

The data set forth below are in accordance with the FSA regulations in force at the time and are based on UK GAAP.

  2004   2003
 
 
  £m   £m
Capital base    
Tier 1 capital   8,814   8,737
Tier 2 capital   5,640   5,652





Total   14,454   14,389
Less investments in insurance subsidiaries, associated undertakings and      
other supervisory deductions   (1,772 )   (1,702 )





Total capital   12,682   12,687





Weighted risk assets    
Banking book:    
 On-balance sheet   90,400   79,200
 Off-balance sheet   10,200   9,600
Trading book   9,200   6,500





  109,800   95,300





Risk asset ratios   %   %
Tier 1   8.0   9.2
Total   11.6   13.3

37






ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

The Company has omitted portions of this item on the basis of General Instructions I(2)(c) and (d) to Form 10-K.

BOARD PRACTICES

The company is committed to high standards of corporate governance, business integrity and professionalism in all its activities.

Under the US Sarbanes-Oxley Act of 2002, enhanced standards of corporate governance and business and financial disclosure apply to companies, including the company, with securities registered in the US. NatWest Group complies with all currently applicable sections of the Act.

Board of directors

The Board is the principal decision making forum for the company. It has overall responsibility for leading and controlling the company and is accountable to shareholders for financial and operational performance. The Board approves Group strategy and monitors performance. The Board has adopted a formal schedule of matters detailing key aspects of the company’s affairs reserved to it for its decision. This schedule is reviewed annually.

The roles of the Chairman and Group Chief Executive are distinct and separate, with a clear division of responsibilities. The Chairman leads the Board and ensures the effective engagement and contribution of all non-executive and executive directors. The Group Chief Executive has responsibility for all Group businesses and acts in accordance with the authority delegated from the Board. Responsibility for the development of policy and strategy and operational management is delegated to the Group Chief Executive and other executive directors.

All directors participate in discussing strategy, performance and financial and risk management of the company. Meetings of the Board are structured to allow open discussion. The Board met nine times during 2005 and was supplied with comprehensive papers in advance of each Board meeting covering the Group’s principal business activities. Members of the executive management attend and make regular presentations as appropriate at meetings of the Board.

Board Committees

In order to provide effective oversight and leadership, the Board has established a number of Board Committees with particular responsibilities. The Committee chairmanship and membership are reviewed on a regular basis.

Audit Committee

All members of the Audit Committee are independent non-executive directors. The Audit Committee holds at least five meetings each year. This core agenda is supplemented by additional meetings as required, four being added in 2005. Audit Committee meetings are attended by relevant executive directors, the internal and external auditors and risk management executives. At least twice per annum the Committee meets privately with the external auditors. The Audit Committee also visits business divisions and certain Group functions under a programme set at the beginning of each year.

The Audit Committee is responsible for:
  • assisting the Board in discharging its responsibilities and in making all relevant disclosures in relation to the financial affairs of the Group;

  • reviewing accounting and financial reporting and regulatory compliance;

  • reviewing the Group’s systems of internal control; and

  • monitoring the Group’s processes for internal audit, risk management and external audit.

The Audit Committee has adopted a policy on the engagement of the external auditors to supply audit and non-audit services, which takes into account relevant legislation regarding the provision of such services by an external audit firm. The Audit Committee reviews the policy annually and prospectively approves the provision of audit services and certain non-audit services by the external auditors. The Audit Committee approves all other permitted non-audit services on a case by case basis. The relevant submissions by management outline the service required and confirm that the external auditor’s independence will not be compromised. In addition, the Audit Committee reviews and monitors the independence and objectivity of the external auditors when it approves non-audit work to be carried out by them, taking into consideration relevant legislation and ethical guidance.

Information on the audit and non-audit services carried out by the external auditors is detailed in Note 4 to the Group’s accounts.

38






The Audit Committee undertakes an annual evaluation to assess the independence and objectivity of the external auditors and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements. The results of this evaluation are reported to the Board. The Audit Committee makes recommendations to the Board for it to put to the Shareholders for their approval at the Annual General Meeting, in relation to the appointment, re-appointment and removal of Deloitte & Touche LLP as the external auditors and to approve the remuneration and terms of engagement of the external auditors.

Remuneration Committee

The Remuneration Committee is responsible for assisting the Board in discharging its responsibilities and making all relevant disclosures in relation to the formulation and review of the Group’s executive remuneration policy. The Remuneration Committee makes recommendations to the Board on the remuneration arrangements for its executive directors and the Chairman. All members of the Remuneration Committee are independent non-executive directors. No director is involved in decisions regarding his or her own remuneration.

Nominations Committee

The Nominations Committee comprises independent non-executive directors, under the chairmanship of the Chairman of the Board. The Nominations Committee is responsible for assisting the Board in the formal selection and appointment of directors. It considers potential candidates and recommends appointments of new directors to the Board. The appointments are based on merit and against objective criteria including the time available, and commitment which will be required of, the potential director.

In addition, the Nominations Committee considers succession planning for the Chairman, Group Chief Executive and non-executive directors.

The Board is aware of the other commitments of its directors and is satisfied that these do not conflict with their duties as non-executive directors of the company.

Corporate responsibility

Business excellence requires that the RBS Group meets changing customer, shareholder, investor, employee and supplier expectations. The RBS Group believes that meeting high standards of environmental, social and ethical responsibility is key to the way it does business.

Further details of the RBS Group’s corporate responsibility policies will be contained in the 2005 Corporate Responsibility Report.

SHARE OWNERSHIP

The Bank is a wholly-owned direct subsidiary of The Royal Bank of Scotland plc which in turn is a wholly owned direct subsidiary of The Royal Bank of Scotland Group plc.

No director had an interest in NatWest Group’s preference shares or loan notes during the year.

39






ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

The Company has omitted this item on the basis of General Instruction I(2)(c) to Form 10-K.

40






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

Proceedings, including a consolidated class action, have been brought in the United States against a large number of defendants, including the RBS Group, following the collapse of Enron. The claims against the RBS Group could be significant but are largely unquantified. The RBS Group considers that it has substantial and credible legal and factual defences to these claims and it continues to defend them vigorously. A court ordered mediation commenced in September 2003 but no material progress has been made towards a resolution of the claims, although a number of other defendants have reached settlements in the principal class action. The RBS Group is unable reliably to estimate the possible loss in relation to these matters or the effect that the possible loss might have on the RBS Group’s consolidated net assets or its operating results or cash flows in any particular period. In addition, pursuant to requests received from the US Securities and Exchange Commission and the Department of Justice, the RBS Group has provided copies of Enron-related materials to these authorities and has co-operated fully with them.

Members of NatWest Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. NatWest Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, is satisfied that the outcome of these other claims and proceedings will not have a material adverse effect on its consolidated net assets, operating results or cash flows in any particular period.

SIGNIFICANT CHANGES

Post balance sheet events

There have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts.

41






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; and
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.

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 were listed on the New York Stock Exchange and all of the Capital Securities were redeemed on 16 January 2006.

42






The following table shows the high and low sales prices for each of the ADSs for the period indicated, as reported on the NYSE composite tape:

    Series B
ADSs
  Series C
ADSs



    $   $
By month      
May 2006   High   25.55   25.64
  Low   25.41   25.45
April 2006   High   25.58   25.52
  Low   25.45   25.39
March 2006   High   25.96   26.00
  Low   25.40   25.46
February 2006   High   25.75   25.95
  Low   25.54   25.75
January 2006   High   25.72   25.87
  Low   25.40   25.68
December 2005   High   25.82   25.90
  Low   25.39   25.42
By quarter      
2006 : First quarter   High   25.96   26.00
  Low   25.40   25.46
2005 : Fourth quarter   High   25.83   26.05
  Low   25.39   25.42
2005 : Third quarter   High   25.96   26.30
  Low   25.56   25.58
2005 : Second quarter   High   25.91   26.30
  Low   25.40   25.56
2005 : First quarter   High   25.94   26.23
  Low   25.35   25.80
2004 : Fourth quarter   High   25.85   26.61
  Low   25.38   25.86
2004 : Third quarter   High   26.00   26.52
  Low   25.37   25.65
2004 : Second quarter   High   25.67   26.45
  Low   24.94   25.40
2004: First quarter   High   26.00   26.55
  Low   25.41   25.94
By year      
2005   High   25.96   26.30
  Low   25.35   25.42
2004   High   26.00   26.61
  Low   24.94   25.40
2003   High   25.88   26.83
  Low   25.17   26.00
2002   High   25.90   26.63
  Low   25.00   25.45
2001   High   26.15   27.10
  Low   24.44   24.31

MARKETS

The Series B ADSs, each representing one non-cumulative dollar preference share and the, Series C ADSs, each representing one non-cumulative dollar preference share, are listed on the New York Stock Exchange. The Series B non-cumulative dollar preference shares are also listed on the London Stock Exchange.

43






ITEM 10. ADDITIONAL INFORMATION

MEMORANDUM AND ARTICLES OF ASSOCIATION

A summary of certain terms of the company’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 is contained in the company’s Annual Report on Form 20-F for the year ended 31 December 2002, which summary is incorporated by reference into this annual report. The 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.

MATERIAL CONTRACTS

The Bank and its subsidiaries are party to various contracts in the ordinary course of business. In the year ended 31 December 2005, 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 or Capital Securities that is for US federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation, or other entity taxable as a corporation, created or organised under the laws of the United States or any State thereof, or (iii) a trust or an estate the income of which is subject to US federal income tax without regard to its source and that holds such non-cumulative dollar preference shares, ADSs 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 Bank.

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 “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, which are subject to change, possibly with retroactive effect. 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 US state, local and other laws, of the acquisition, ownership and disposition of non-cumulative dollar preference shares, ADSs or Capital Securities by consulting their own tax advisers.

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 ADSs will be treated as owners of the non-cumulative dollar preference shares underlying such ADSs.

44






Preference shares or ADSs
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 Bank on a redemption or winding-up.

Distributions will constitute foreign source dividend income to the extent paid out of the Bank’s current or accumulated earnings and profits, as determined for US federal income tax purposes. Distributions will not be eligible for the dividends-received deduction generally allowed to corporate US Holders.

Subject to applicable limitations that may vary depending on a holder’s individual circumstances, dividends paid to certain non-corporate US Holders in taxable years beginning before 1 January 2011 will be taxable at a maximum rate of 15%. on-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at this favourable rate.

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 ADS unless at the time of the disposal, in the case of a corporate US Holder, such US Holder carries on a trade in the UK through a permanent establishment or, in the case of any other US Holder, 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 ADS is or has been used, held or acquired by or for the purposes of such trade (or profession or vocation), permanent establishment, branch or agency, in which case such US Holder might, depending on the circumstances, be liable to UK tax on gain realized on disposal of such holder’s non-cumulative dollar preference share or ADS.

An individual US Holder who has ceased to be resident or ordinarily resident for UK 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 ADS during that period may, for the year of assessment when that individual returns to the UK, be liable to UK taxation on chargeable gains arising during the period of absence, subject to any available exemption or relief.

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 gain or loss 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.

A US Holder who is liable for both UK and US tax on a gain recognised on the disposal of a 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.

US Holders should consult their tax advisers regarding the US federal income tax treatment of capital gains (which may be taxed at lower rates than ordinary income for certain non-corporate taxpayers) and losses (the deductibility of which is subject to limitations).

Finance (No. 2) Act 2005

If a corporate US Holder is subject to UK corporation tax by reason of carrying on a trade in the UK through a permanent establishment and such US Holder’s non-cumulative dollar preference share or ADS is, or has been, used, held or acquired for the purpose of that permanent establishment, certain provisions introduced by the Finance (No. 2) Act 2005 may apply if the US Holder holds its non-cumulative dollar preference share or ADS, as well as certain fair value credits and debits arising in respect of such non-cumulative dollar preference share or ADS, may be brought within the charge to UK corporation tax on income and the UK tax position outlined in the proceeding paragraphs under the sub-heading “Taxation of Capital Gains” in relation to such US Holder will not apply.

45






Estate and gift tax

A non-cumulative dollar preference share or ADS beneficially owned by an individual, whose domicile is determined to be the United States for the 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 ADS, except in certain cases where the non-cumulative dollar preference share or ADS (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 estate or gift tax liability for the amount of any tax paid in the UK in a case where a non-cumulative dollar preference share or ADS is subject both to UK inheritance tax and to US federal estate or gift tax.

UK stamp duty and stamp duty reserve tax (“SDRT”)

The following is a summary of the UK stamp duty and SDRT consequences of transferring an ADS in registered form (otherwise than to the custodian on cancellation of the ADS). It does not set out the UK stamp duty or SDRT consequences of transferring, or agreeing to transfer, non-cumulative dollar preference shares or any interest therein or right thereto (other than interests in ADSs) on which investors should consult their own tax advisers.

A transfer of an ADS in registered form executed and retained in the US will not give rise to stamp duty and an agreement to transfer an ADS in registered form will not give rise to SDRT.

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 withholding tax, as to which see below) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the Bank’s 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 corporate US Holders.

Subject to applicable limitations that may vary depending on a holder’s individual circumstances, dividends paid to certain non-corporate US Holders in taxable years beginning before 1 January 2011 will be taxable at a maximum rate of 15%. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at this favourable rate.

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.

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 a ‘recognised stock exchange’ within the meaning of section 841 of the Income and Corporation Taxes Act 1988 (the New York Stock Exchange is so recognised). 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 HM Revenue & Customs under the Treaty and subject to an entitlement to pay without withholding to US Holders within the charge to UK corporation tax.

46






If interest were paid under deduction of United Kingdom income tax (e.g., 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 HM Revenue & Customs. HM Revenue & Customs 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, in the case of a corporate US Holder, such US Holder carries on a trade in the UK through a permanent establishment or, in the case of other US Holders, 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 permanent establishment, branch or agency.

HM Revenue & Customs 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, HM Revenue & Customs 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.

EU Directive on the Taxation of Savings Income

The EU has adopted a Directive regarding the taxation of savings income. The Directive requires Member States to provide to the tax authorities of other Member State details of payments of interest (or other similar income) paid by a person within its jurisdiction to an individual resident in another Member State, except that Belgium, Luxembourg and Austria will instead operate a withholding system for a transitional period unless during such period they elect otherwise.

Disposal (including Redemption)

Subject to the provisions set out in the next paragraph in relation to temporary non-residents, a non-corporate US Holder 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.

A US Holder who is an individual and who has 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, for the year of assessment when that individual returns to the UK, be liable to UK taxation on capital gains arising during the period of absence, subject to any available exemption or relief.

Subject to certain conditions being met, an exchange by a US Holder of Capital Securities for non-cumulative dollar preference shares or ADSs 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 non-corporate US Holder will not give rise to a charge to UK tax on accrued but unpaid interest payments, unless the US Holder 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

A transfer of Capital Securities by a corporate US Holder that is not resident in the UK should not give rise to any UK tax charge unless such US Holder carries on a trade, profession or vocation in the UK through a permanent establishment to which the Capital Securities are attributable, in which case it may be subject to 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.

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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 HM Revenue & Customs 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 SDRT

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 ADSs 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 ADSs 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.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Risk management is conducted on an overall basis within the RBS Group. The financial risk management objectives and policies of the RBS Group and information on NatWest Group’s exposure to price, credit, liquidity and cash flow risk are contained in Note 32 on the financial statements, included in Item 18 of this Annual Report on Form 20-F.

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ITEM 15. CONTROLS AND PROCEDURES

Disclosure controls and procedures
As required by US regulations, the Group Chief Executive and the Group Finance Director have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the rules under the US Securities Exchange Act of 1934). This evaluation has been considered and approved by the Board which has authorised the Group Chief Executive and the Group Finance Director to certify that as at 31 December 2005, 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 was no change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 18. CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

  Page
     
Statement of directors’ responsibilities   52
     
Report of independent registered public accounting firm   53
   
Accounting policies   54
   
Consolidated income statement for the year ended 31 December 2005   63
     
Balance sheets at 31 December 2005   64
   
Statements of recognised income and expense for the year ended  
31 December 2005   65
   
Cash flow statements for the year ended 31 December 2005   66
     
Notes on the accounts   67

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Statement of directors’ responsibilities

The Directors are required by Article 4 of the IAS Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts and, as permitted by the Companies Act 1985 have elected to prepare Bank accounts for each financial year and have elected to prepare them in accordance with International Financial Reporting Standards. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of the Group and the Bank. In preparing those accounts, the directors are required to:

  • select suitable accounting policies and then apply them consistently;

  • make judgements and estimates that are reasonable and prudent;

  • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and

  • 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 Bank and to enable them to ensure that the Annual report and accounts complies with the Companies Act 1985. They are also responsible for safeguarding the assets of the Bank and the 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
29 March 2006

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Report of independent registered public accounting firm to the members of National Westminster Bank Plc


We have audited the accompanying consolidated balance sheets of National Westminster Bank Plc (the “Bank”) and its subsidiary undertakings (together “the Group”) as at 31 December 2005 and 2004, and the related consolidated income statements, the statements of recognised income and expense and the consolidated cash flow statements for each of the years then ended. These financial statements are the responsibility of the directors. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 present fairly, in all material respects, the financial position of National Westminster Bank Plc and subsidiaries as at 31 December 2005 and 2004, and the results of their operations and their cash flows for each of the years then ended in conformity with International Financial Reporting Standards (“IFRS”).

IFRS vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 46 to the consolidated financial statements.

Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
Edinburgh, United Kingdom

22 June 2006

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Accounting policies


1. Adoption of International Financial Reporting Standards

The annual accounts have, for the first time, been prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board (“IASB”), and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (together “IFRS”) as endorsed by the European Union (“EU”). The EU has not endorsed the complete text of IAS 39 ‘Financial Instruments: Recognition and Measurement’; it has relaxed some of the standard’s hedging requirements. The Group has not taken advantage of this relaxation and has adopted IAS 39 as issued by the IASB. The date of transition to IFRS for the Group and the Bank and the date of their opening IFRS balance sheets was 1 January 2004. The Bank accounts have been presented in accordance with the Companies Act 1985.

The main differences between IFRS and previously applied generally accepted accounting principles in the United Kingdom (“UK GAAP”) and the effect of implementing IFRS on the Group and Bank balance sheets and shareholders’ funds as at 1 January and 31 December 2004 and on the Group’s 2004 consolidated income statement are set out on pages 117 to 125.

On initial adoption of IFRS, the Group (and the Bank where relevant) applied the following exemptions from the requirements of IFRS and from their retrospective application as permitted by IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’:

Business combinations – the Group has applied IFRS 3 ‘Business Combinations’ to business combinations that occurred on or after 1 January 2004. Business combinations before that date have not been restated. Under UK GAAP, goodwill arising on acquisitions was capitalised and amortised over its estimated useful economic life. The carrying amount of goodwill in the Group’s opening IFRS balance sheet was £273 million, its carrying value under UK GAAP as at 31 December 2003.

Fair value or revaluation as deemed cost – under UK GAAP, the Group’s freehold and long leasehold property occupied for its own use was recorded at valuation on the basis of existing use value. The Group has elected to use this valuation as at 31 December 2003 as deemed cost for its opening IFRS balance sheet. At this date, the carrying value under UK GAAP of freehold and long leasehold property occupied for own use was £1,334 million.

Compound financial instruments – the Group has not separated compound instruments between liability and equity components, as required by IAS 32 ‘Financial Instruments: Disclosure and Presentation’, where the liability component was not outstanding at 1 January 2004. UK GAAP did not permit compound instruments to be separated between liability and equity components on issue.

Derecognition – the Group has applied the derecognition requirements of IAS 39 to transactions occurring on or after 1 January 1992.

Implementation of IAS 32 and IAS 39 – as allowed by IFRS 1, the Group and the Bank implemented IAS 32 and IAS 39 with effect from 1 January 2005 without restating the income statement, balance sheet and notes for 2004. The Group has adopted the Amendment to IAS 39 ‘The Fair Value Option’ issued by the IASB in June 2005 also from 1 January 2005. The effect of implementing IAS 32 and IAS 39 on the Group and Bank balance sheets and shareholders’ funds as at 1 January 2005 is set out on pages 126 to 128. In preparing the 2004 comparatives, UK GAAP principles then current have been applied to financial instruments. The main differences between UK GAAP and IFRS on financial instruments are summarised on pages 119 to 121.

IFRS 1 prohibits retrospective application of some aspects of IFRS:

 

Derecognition of financial assets and liabilities – non-derivative financial assets and liabilities derecognised before 1 January 1992 (the date from which the derecognition requirements of IAS 39 have been implemented) under the Group’s previous GAAP have not been recognised in its opening IFRS balance sheet.

   
  Hedge accounting – hedging relationships of a type that does not qualify for hedge accounting under IAS 39 are not reflected in the Group’s opening IFRS balance sheet.
   
  Discontinued operations and assets classified as held for sale – the Group has applied IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ from 1 January 2005.

The Group has adopted the Amendment ‘Actuarial Gains and Losses, Group Plans and Disclosures’ to IAS 19 ‘Employee Benefits’ from 1 January 2004.

2. Accounting convention

The Bank is incorporated in the UK and registered in England. The financial statements have been prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, held-for-trading financial assets and financial liabilities, financial assets and financial liabilities that are designated as at fair value through profit or loss, available-for-sale financial assets and investment property. Recognised financial assets and financial liabilities in fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged.

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Accounting policies continued

3. Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Bank and entities (including certain special purpose entities) controlled by the Group (its subsidiaries). Control exists where the Group has the power to govern the financial and operating policies of the entity; generally conferred by holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. Any excess of the cost (the fair value of assets given, liabilities incurred or assumed and equity instruments issued by the Group plus any directly attributable costs) of an acquisition over the fair value of the net assets acquired is recognised as goodwill. The interest of minority shareholders is stated at their share of the fair value of the subsidiary’s net assets.

The results of subsidiaries acquired are included in the consolidated income statement from the date control passes to the Group. The results of subsidiaries sold are included up until the Group ceases to control them.

All intra-group balances, transactions, income and expenses are eliminated on consolidation. The consolidated accounts are prepared using uniform accounting policies.

4. Revenue recognition

Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those at fair value through profit or loss are determined using the effective interest rate method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument’s initial carrying amount. Calculation of the effective interest rate takes into account fees receivable, that are an integral part of the instrument’s yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows.

Financial assets and financial liabilities held-for-trading or designated as at fair value through profit or loss are recorded at fair value. Changes in fair value are recognised in profit or loss together with dividends and interest receivable and payable.

Commitment and utilisation fees are determined as a percentage of the outstanding facility. If it is unlikely that a specific lending arrangement will be entered into, such fees are taken to profit or loss over the life of the facility otherwise they are deferred and included in the effective interest rate on the advance.

Fees in respect of services are recognised as the right to consideration accrues through the provision of the service to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable. The application of this policy to significant fee types is outlined below.

Payment services: this comprises income received for payment services including cheques cashed, direct debits, Clearing House Automated Payments (the UK electronic settlement system) and BACS payments (the automated clearing house that processes direct debits and direct credits). These are generally charged on a per transaction basis. The income is earned when the payment or transaction occurs. Payment services income is usually charged to the customer’s account, monthly or quarterly in arrears. Accruals are raised for services provided but not charged at period end.

Card related services: fees from credit card business include:

 

Commission received from retailers for processing credit and debit card transactions: income is accrued to the income statement as the service is performed.

   
  Interchange received: as issuer, the Group receives a fee (interchange) each time a cardholder purchases goods and services. The Group also receives interchange fees from other card issuers for providing cash advances through its branch and Automated Teller Machine networks. These fees are accrued once the transaction has taken place.
   
  An annual fee payable by a credit card holder is deferred and taken to profit or loss over the period of the service i.e. 12 months.

Insurance brokerage: this is made up of fees and commissions received from the agency sale of insurance. Commission on the sale of an insurance contract is earned at the inception of the policy as the insurance has been arranged and placed. However, provision is made where commission is refundable in the event of policy cancellation in line with estimated cancellations.

Investment management fees: fees charged for managing investments are recognised as revenue as the services are provided. Incremental costs that are directly attributable to securing an investment management contract are deferred and charged as expense as the related revenue is recognised.

5. Pensions and other post-retirement benefits

The Group provides post-retirement benefits in the form of pensions and healthcare plans to eligible employees.

For defined benefit schemes, scheme liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a rate that reflects the current rate of return on a high quality corporate bond of equivalent term and currency to the scheme liabilities. Scheme assets are measured at their fair value. Cumulative actuarial gains or losses that exceed 10 per cent of the greater of the assets or

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the obligations of the scheme are amortised to the income statement over the expected average remaining lives of participating employees. Past service costs are recognised immediately to the extent that benefits have vested; otherwise they are amortised over the period until the benefits become vested.

Any surplus or deficit of scheme assets over liabilities adjusted for unrecognised actuarial gains and losses and past service costs is recognised in the balance sheet as an asset (surplus) or liability (deficit).

Contributions to defined contribution pension schemes are recognised in the income statement when payable.

6. Intangible assets and goodwill

Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss using methods that best reflect the economic benefits over their estimated useful economic lives and is included in Depreciation and amortisation. The estimated useful economic lives are as follows:

  Core deposit intangibles   up to 8 years
  Other acquired intangibles   5-10 years
  Computer software   3-5 years

Expenditure on internally generated goodwill and brands is written-off as incurred. Acquired goodwill being the excess of the cost of an acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary, associate or joint venture acquired is initially recognised at cost and subsequently at cost less any accumulated impairment losses. Goodwill arising on the acquisition of subsidiaries and joint ventures is included in the balance sheet caption ‘Intangible assets’ and that on associates within their carrying amounts. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill.

7. Property, plant and equipment

Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for separately. Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified as investment property.

Depreciation is charged to profit or loss on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment (including assets owned and let on operating leases (except investment property – see note 18 below)) over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Land is not depreciated.

Estimated useful lives are 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

8. Impairment of intangible assets and property, plant and equipment

At each reporting date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If an asset does not generate cash flows that are independent from those of other assets or groups of assets, recoverable amount is determined for the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash generating unit that have not been reflected in the estimation of future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss. A reversal of an impairment loss on intangible assets (excluding goodwill) or property, plant and equipment is recognised as it arises provided the increased carrying value does not exceed that which it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed.

9. Foreign currencies

The Group’s consolidated financial statements are presented in sterling which is the functional currency of the Bank.

Transactions in foreign currencies are translated into sterling at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in profit or loss except for differences arising on cash flow hedges and hedges of net investments in foreign operations. Non-monetary items denominated in foreign currencies that are stated at fair value are translated into sterling at foreign exchange rates ruling at the dates the values were determined. Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale non-monetary financial assets, for example equity shares, which are included in the available-for-sale reserve in equity unless the asset is the hedged item in a fair value hedge.

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Accounting policies continued

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into sterling at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of foreign operations are recognised directly in equity.

10. 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.

Finance lease receivables are stated in the balance sheet at the amount of the net investment in the lease being the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Finance lease income is allocated to accounting periods so as to give a constant periodic rate of return before tax on the net investment. Unguaranteed residual values are subject to regular review to identify potential impairment. If there has been a reduction in the estimated unguaranteed residual value, the income allocation is revised and any reduction in respect of amounts accrued is recognised immediately.

Rental income from operating leases is credited to the income statement on a receivable basis over the term of the lease. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives (see note 7 above).

11. Taxation

Provision is made for taxation at current enacted rates on taxable profits, arising in income or in equity, taking into account relief for overseas taxation where appropriate. Deferred taxation is accounted for in full for all temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes, except in relation to overseas earnings where remittance is controlled by the Group, and goodwill.

Deferred tax assets are only recognised to the extent that it is probable that they will be recovered.

12. Financial assets

Financial assets are classified into held-to-maturity investments; available-for-sale financial assets; held-for-trading; designated as at fair value through profit or loss; or loans and receivables.

Held-to-maturity investments – a financial asset is classified as a held-to-maturity investment only if it has fixed or determinable payments, a fixed maturity and the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see note 4 above) less any impairment losses.

Held-for-trading – a financial asset is classified as held-for-trading if it is acquired principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial assets are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses on held-for-trading financial assets are recognised in profit or loss as they arise.

Designated as at fair value through profit or loss – financial assets that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss and are subsequently measured at fair value. Gains and losses on financial assets that are designated as at fair value through profit or loss are recognised in profit or loss as they arise.

Financial assets may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.

Loans and receivables – non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables except those that are classified as available-for-sale or as held-for-trading, or designated as at fair value through profit or loss. Loans and receivables are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at adjusted cost using the effective interest method (see note 4 above) less any impairment losses.

Available-for-sale – financial assets that are not classified as held-to-maturity; held-for-trading; designated at fair value through profit or loss; or loans and receivables are classified as available-for-sale. Financial assets can be designated as available-for-sale on initial recognition. Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Impairment losses and exchange differences resulting from retranslating the amortised cost of currency monetary available-for-sale financial assets are recognised in profit or loss together with interest calculated using the effective interest rate (see note 4 above). Other changes in the fair value of available-for-sale financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognised in profit or loss.

Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way purchases are recognised on trade date.

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Fair value for a net open position in a financial asset that is quoted in an active market is the current bid price times the number of units of the instrument held. Fair values for financial assets not quoted in an active market are determined using appropriate valuation techniques including discounting future cash flows, option pricing models and other methods that are consistent with accepted economic methodologies for pricing financial assets.

13. Impairment of financial assets

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets classified as held-to-maturity, available-for-sale or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.

Financial assets carried at amortised cost – if there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables or as held-to-maturity investments has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition. Impairment losses are assessed individually for financial assets that are individually significant and individually or collectively for assets that are not individually significant. In making collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of current observable data, to reflect the effects of current conditions not affecting the period of historical experience.

Impairment losses are recognised in profit or loss and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.

Financial assets carried at fair value – when a decline in the fair value of a financial asset classified as available-for-sale has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss is removed from equity and recognised in profit or loss. The loss is measured as the difference between the amortised cost of the financial asset and its current fair value. Impairment losses on available-for-sale equity instruments are not reversed through profit or loss, but those on available-for-sale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event.

14. Financial liabilities

A financial liability is classified as held-for-trading if it is incurred principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses are recognised in profit or loss as they arise. Financial liabilities that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss and are subsequently measured at fair value. Gains and losses on financial liabilities that are designated as at fair value through profit or loss are recognised in profit or loss as they arise.

Financial liabilities may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.

The principal category of financial liabilities designated as at fair value through profit or loss is structured liabilities issued by the Group: designation significantly reduces the measurement inconsistency between these liabilities and the related derivatives carried at fair value.

All other financial liabilities are measured at amortised cost using the effective interest method (see note 4 above).

58






Fair value for a net open position in a financial liability that is quoted in an active market is the current offer price times the number of units of the instrument held or issued. Fair values for financial liabilities not quoted in an active market are determined using appropriate valuation techniques including discounting future cash flows, option pricing models and other methods that are consistent with accepted economic methodologies for pricing financial liabilities.

15. Derecognition

A financial asset is derecognised when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive the asset’s cash flows; or (b) retains the right to the asset’s cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains on the balance sheet. If substantially all of the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not it has retained control of the asset. If it has not retained control, the asset is derecognised. Where the Group has retained control of the asset, it continues to recognise the asset to the extent of its continuing involvement.

A financial liability is removed from the balance sheet when the obligation is discharged, or cancelled, or expires.

16. Capital instruments

The Group classifies a financial instrument that it issues as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. The components of a compound financial instrument issued by the Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate.

17. Derivatives and hedging

Derivative financial instruments are recognised initially, and subsequently measured, at fair value. Derivative fair values are determined from quoted prices in active markets where available. Where there is no active market for an instrument, fair value is derived from prices for the derivative’s components using appropriate pricing or valuation models.

A derivative embedded in a contract is accounted for as stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the entire contract is carried at fair value through profit or loss.

Gains and losses arising from changes in fair value of a derivative are recognised as they arise in profit or loss unless the derivative is the hedging instrument in a qualifying hedge. There are three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a forecast transaction (cash flow hedges); and hedges of the net investment in a foreign entity.

Hedge relationships are formally documented at inception. The documentation includes identification of the hedged item and the hedging instrument, details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued.

Fair value hedge – in a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss. The gain or loss on the hedged item attributable to the hedged risk is recognised in profit or loss and adjusts the carrying amount of the hedged item. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting or if the hedging instrument expires or is sold, terminated or exercised or if hedge designation is revoked. If the hedged item is one for which the effective interest rate method is used, any cumulative adjustment is amortised to profit or loss over the life of the hedged item using a recalculated effective interest rate.

Cash flow hedge – where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability or a highly probable forecast transaction, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity. The ineffective portion is recognised in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity in the same periods in which the asset or liability affects profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same time as the hedged transaction. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no longer expected to occur; or if hedge designation is revoked. On the discontinuance of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss recognised in equity is recognised in profit or loss when the hedged cash flow occurs or, if the forecast transaction results in the recognition of a financial asset or financial liability, in the same periods during which the asset or liability affects profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is recognised in profit or loss immediately.

59






Hedge of net investment in a foreign operation – where a foreign currency liability hedges a net investment in a foreign operation, the portion of foreign exchange differences arising on translation of the liability determined to be an effective hedge is recognised directly in equity. Any ineffective portion is recognised in profit or loss.

18. Investment property

Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. It is not depreciated but is stated at fair value based on valuations by independent registered valuers. Fair value is based on current prices in an active market for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is recognised on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.

19. Cash and cash equivalents

Cash and cash equivalents comprises cash and demand deposits with banks together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.

20. Shares in Group entities

The Bank’s investments in its subsidiaries are stated at cost less any impairment.

Critical accounting policies and key sources of estimation uncertainty

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Group's financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB’s Framework for the Preparation and Presentation of Financial Statements.

The judgements and assumptions involved in the Group’s accounting policies that are considered by the Board to be the 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 Group would affect its reported results.

Loan impairment provisions

The Group’s loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost. A loan is impaired when there is objective evidence that events since the loan was granted have affected expected cash flows from the loan. The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan's original effective interest rate.

At 31 December 2005, gross loans and advances to customers totalled £161,974 million (2004 – £133,619 million) and customer loan impairment provisions amounted to £2,031 million (2004 – £1,940 million).

There are two components to the Group’s loan impairment provisions: individual and collective.

Individual component – all impaired loans that exceed specific thresholds are individually assessed for impairment.
Individually assessed loans principally comprise the Group's portfolio of commercial loans to medium and large businesses. Impairment losses are recognised as the difference between the carrying value of the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held. These estimates take into account the customer’s debt capacity and financial flexibility; the level and quality of its earnings; the amount and sources of cash flows; the industry in which the counterparty operates; and the realisable value of any security held. Estimating the quantum and timing of future recoveries involves significant judgement. The size of receipts will depend on the future performance of the borrower and the value of security, both of which will be affected by future economic conditions; additionally, collateral may not be readily marketable. The actual amount of future cash flows and the date they are received may differ from these estimates and consequently actual losses incurred may differ from those recognised in these financial statements.

Collective component – this is made up of two elements: loan impairment provisions for impaired loans that are below individual assessment thresholds (collective impaired loan provisions) and for loan losses that have been incurred but have not been separately identified at the balance sheet date (latent loss provisions). These are established on a portfolio basis taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates and the related average life. These portfolios include credit card receivables and other personal advances including mortgages. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends.

Pensions

The Group operates a number of defined benefit pension schemes as described in Note 3 on the financial statements. The assets of the schemes are measured at their fair value at

60




 


Accounting policies continued


the balance sheet date. Scheme liabilities are measured using the projected unit method, which takes account of projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. These cash flows are discounted at the interest rate applicable to high-quality corporate bonds of the same currency and term as the liabilities. Any surplus or deficit in excess of 10% of the greater of scheme assets and scheme liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). In determining the value of scheme liabilities, assumptions are made as to price inflation, dividend growth, pension increases, earnings growth and employees. There is a range of assumptions that could be adopted in valuing the schemes’ liabilities. Different assumptions could significantly alter the amount of the deficit recognised in the balance sheet and the pension cost charged to the income statement. The assumptions adopted for the Group’s pension schemes are set out in Note 3 on the financial statements. The pension deficit recognised in the balance sheet at 31 December 2005 was £1,235 million (2004 – £2,093 million).

Fair value

Financial instruments classified as held-for-trading or designated as at fair value through profit or loss and financial assets classified as available-for-sale are recognised in the financial statements at fair value. All derivatives are measured at fair value. In the balance sheet, financial assets carried at fair value are included within Treasury and other eligible bills, Loans and advances to banks, Loans and advances to customers, Debt securities and Equity shares as appropriate. Financial liabilities carried at fair value are included within the captions Deposits by banks, Customer accounts, Debt securities in issue and Subordinated liabilities. Derivative assets and Derivative liabilities are shown separately on the face of the balance sheets. Gains or losses arising from changes in fair value of financial instruments classified as held-for-trading or designated as at fair value through profit or loss are included in the income statement. Unrealised gains and losses on available-for-sale financial assets are recognised directly in equity unless an impairment loss is recognised. The carrying value of a financial asset or a financial liability carried at cost or amortised cost that is the hedged item in a qualifying hedge relationship is adjusted by the gain or loss attributable to the hedged risk.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair values are determined by reference to observable market prices where available and reliable. Where representative market prices for an instrument are not available or are unreliable because of poor liquidity, the fair value is derived from prices for its components using appropriate pricing or valuation models that are based on independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates.

Financial assets carried at fair value include government, asset backed and corporate debt securities, reverse repos, loans, corporate equity shares and derivatives. Financial liabilities carried at fair value include deposits, repos and short positions in securities. Fair value for a substantial proportion of these instruments is based on observable market prices or derived from observable market parameters. Where observable prices are not available, fair value is based on appropriate valuation techniques or management estimates.

The Group’s derivative products include swaps, forwards, futures and options. Exchange traded instruments are valued using quoted prices. The fair value of over-the-counter instruments is derived from pricing models which take account of contract terms, including maturity, as well as quoted market parameters such as interest rates and volatilities. Most of the Group’s pricing models do not entail material subjectivity because the methodologies utilised do not incorporate significant judgement and the parameters included in the models can be calibrated to actively quoted market prices. Values established from pricing models are adjusted for credit risk, liquidity risk and future operational costs.

A negligible proportion of the Group’s trading derivatives are valued directly from quoted prices, the majority being valued using appropriate valuation techniques. The fair value of substantially all securities positions carried at fair value is determined directly from quoted prices.

Details of financial instruments carried at fair value are given in Note 32 on the financial statements.

Goodwill

The Group capitalises goodwill arising on the acquisition of businesses, as disclosed in the Accounting policies. The carrying value of goodwill as at 31 December 2005 was £760 million (2004 – £739 million).

Goodwill is the excess of the cost of an acquisition over the fair value of its net assets. The determination of the fair value of assets and liabilities of businesses acquired requires the exercise of management judgement; for example those financial assets and liabilities for which there are no quoted prices, and those non-financial assets where valuations reflect estimates of market conditions such as property. Different fair values would result in changes to the goodwill arising and to the post-acquisition performance of the acquisition. Goodwill is not amortised but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

For the purposes of impairment testing goodwill acquired in a business combination is allocated to each of the Group’s cash-generating units or groups of cash-generating units expected to benefit from the combination. Goodwill impairment testing involves the comparison of the carrying value of a cash-

61






generating unit or group of cash generating units with its recoverable amount. The recoverable amount is the higher of the unit's fair value and its value in use. Value in use is the present value of expected future cash flows from the cash-generating unit or group of cash-generating units. Fair value is the amount obtainable for the sale of the cash-generating unit in an arm’s length transaction between knowledgeable, willing parties.

Impairment testing inherently involves a number of judgmental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of cash-generating units; and the valuation of the separable assets of each business whose goodwill is being reviewed.

Accounting developments

The International Accounting Standards Board (“IASB”) issued IFRS 7 ‘Financial Instruments: Disclosures’ in August 2005. The standard replaces IAS 30 ‘Disclosures in the Financial Statements of Banks and Similar Financial Institutions’ and the disclosure provisions in IAS 32 ‘Financial Instruments: Disclosure and Presentation’. IFRS 7 requires disclosure of the significance of financial instruments for an entity’s financial position and performance and of qualitative and quantitative information about exposure to risks arising from financial instruments. The standard is effective for annual periods beginning on or after 1 January 2007. Earlier application is encouraged.

At the same time the IASB issued an amendment ‘Capital Disclosures’ to IAS 1 ‘Presentation of Financial Statements’. It requires disclosures about an entity's capital and the way it is managed. This amendment is also effective for annual periods beginning on or after 1 January 2007. Earlier application is encouraged.

The IASB has also issued three amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’. The first, ‘Cash Flow Hedge Accounting of Forecast Intragroup Transactions’, published in April 2005, amends IAS 39 to permit the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in consolidated financial statements. The amendment is effective for annual periods beginning on or after 1 January 2006.

The second, ‘The Fair Value Option’, published in June 2005, places conditions on the option in IAS 39 to designate on initial recognition a financial asset or financial liability as at fair value through profit or loss. The amendment is effective for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. The Group has adopted this amendment from 1 January 2005 (see accounting policies on page 54).

The third, ‘Financial Guarantee Contracts’, published in August 2005, amends IAS 39 and IFRS 4 ‘Insurance Contracts’. The amendments define a financial guarantee contract. They require such contracts to be recorded initially at fair value and subsequently at the higher of the provision determined in accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and the amount initially recognised less amortisation. The amendments are effective for annual periods beginning on or after 1 January 2006.

In December 2005, the IASB issued amendments to IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’ to clarify that a monetary item can form part of the net investment in overseas operations regardless of the currency in which it is denominated and that the net investment in a foreign operation can include a loan from a fellow subsidiary. The amendments are effective immediately but have not been endorsed by the EU.

The Group is reviewing IFRS 7 and the amendments to IAS 1 and IAS 21 and those to IAS 39 that it has not implemented, to determine their effect on its financial reporting.

62






Consolidated income statement
for the year ended 31 December 2005


        2005     2004  
       



   



 
        Discontinued*     Continuing     Discontinued     Continuing  
    Note   £m     £m     £m     £m  















Interest receivable       203     8,289     251     6,929  
Interest payable       9     (4,040 )   14     (2,811 )















Net interest income       212     4,249     265     4,118  















Fees and commissions receivable       43     3,663     51     3,384  
Fees and commissions payable       (34 )   (926 )   (38 )   (845 )
Income from trading activities   1       808         887  
Other operating income           635         201  















Non-interest income       9     4,180     13     3,627  















Total income       221     8,429     278     7,745  















Staff costs           1,477         1,326  
Premises and equipment           114         197  
Other administrative expenses       70     2,440     52     2,131  
Depreciation and amortisation           382     1     461  















Operating expenses**   2   70     4,413     53     4,115  















Operating profit before impairment losses       151     4,016     225     3,630  
Impairment losses       4     752     (5 )   630  















Operating profit before tax   4   147     3,264     230     3,000  
Tax   5   44     904     69     797  















Operating profit after tax       103     2,360     161     2,203  




Discontinued operations             103           161  











Profit for the year             2,463           2,364  




 
Profit attributable to:                            
Minority interests             17           12  
Preference dividends – non equity                       36  
Ordinary shareholders             2,446           2,316  















              2,463           2,364  





*      the Group transferred its home mortgage finance business, National Westminster Home Loans Limited, to The Royal Bank of Scotland plc on 31 December 2005 at neither a profit nor a loss.
   
**      includes integration expenditure (see Note 4).

63






Balance sheets
at 31 December 2005


        Group   Bank
       
 
        2005   2004   2005   2004
    Note   £m   £m   £m   £m











Assets                    
Cash and balances at central banks       1,568   1,589   894   956
Treasury bills and other eligible bills   9   770   172    
Loans and advances to banks   10   55,995   29,982   20,829   15,994
Loans and advances to customers   11   159,943   131,679   97,569   77,619
Debt securities   12   28,745   22,426   51   39
Equity shares   13   823   1,338     587
Investment in Group undertakings   14       6,633   6,253
Intangible assets   16   1,198   1,244   347   434
Property, plant and equipment   17   1,531   1,542   1,044   1,247
Settlement balances       3,931   3,538    
Derivatives at fair value   18   2,976   1,366   1,203   704
Prepayments, accrued income and other assets   19   3,123   2,345   1,564   1,834











Total assets       260,603   197,221   130,134   105,667







                     
Liabilities                    
Deposits by banks   20   46,001   23,873   5,310   3,480
Customer accounts   21   157,924   126,119   109,942   87,925
Debt securities in issue   22   10,801   3,597   38   39
Settlement balances and short positions   23   21,574   21,670    
Derivatives at fair value   18   2,657   1,105   1,129   283
Accruals, deferred income and other liabilities   24   3,579   4,539   1,464   2,171
Retirement benefit liabilities   3   1,235   2,093   1,041   1,920
Subordinated liabilities   26   6,648   5,808   5,501   4,747











Total liabilities       250,419   188,804   124,425   100,565
                     
 
Equity*                    
Minority interests   27   744   408    
Shareholders’ equity                    
    Called up share capital   28   1,678   2,102   1,678   2,102
    Reserves   29   7,762   5,907   4,031   3,000
 
Total equity       10,184   8,417   5,709   5,102











                     
Total liabilities and equity       260,603   197,221   130,134   105,667







*      includes non-equity minority interests and preference shares in 2004.
   
  The accounts were approved by the Board of directors on 29 March 2006 and signed on its behalf by:


Sir George Mathewson   Sir Fred Goodwin   Guy Whittaker
Chairman   Group Chief Executive   Group Finance Director

64






Statements of recognised income and expense
for the year ended 31 December 2005


    Group     Bank  
   
   
 
    2005     2004     2005     2004  
    £m     £m     £m     £m  













Available-for-sale investments                        
Net valuation gains taken direct to equity   38           33        
Net profit taken to income on sales   (324 )         (320 )      
                         
Cash flow hedges                        
Net losses taken direct to equity   (28 )         (52 )      
                         
Exchange differences on translation of foreign operations   180     8     (5 )    













(Expense)/income before tax on items recognised direct in equity   (134 )   8     (344 )    
Tax on items recognised direct in equity   106         110      













Net (expense)/income recognised direct in equity   (28 )   8     (234 )    
Profit for the year   2,463     2,364     1,774     1,901  













Total recognised income and expense for the year