THE ROYAL BANK OF SCOTLAND GROUP plc ANNUAL REPORT ON FORM 20-F FOR THE YEAR ENDED SEPTEMBER 30, 1999 CONTENTS

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1 THE ROYAL BANK OF SCOTLAND GROUP plc ANNUAL REPORT ON FORM 20-F FOR THE YEAR ENDED SEPTEMBER 30, 1999 CONTENTS Item Item Caption Page Presentation of Information... 2 Exchange Rates Description of Business... 4 Description of Assets and Liabilities Competition Monetary Policy Supervision and Regulation Description of Property Legal Proceedings Control of Registrant Nature of Trading Market Exchange Controls and Other Limitations Affecting Security Holders Taxation Selected Consolidated Financial Data ManagementÕs Discussion and Analysis of Financial Condition and Results of Operations Divisional Analysis Results of Operations of the Group Capital Resources Quantitative and Qualitative Disclosures about Market Risk ,11,12 Directors and Officers of Registrant; Remuneration of Directors and Officers; Options to Purchase Securities from Registrant or Subsidiaries Interest of Management in Certain Transactions Description of Securities to be Registered... * 15 Defaults upon Senior Securities... * 16 Changes in Securities and Changes in Security for Registered Securities... * 17 Financial Statements... * 18 Financial Statements Exhibits... * Signatures * Not applicable or the answer is in the negative.

2 PRESENTATION OF INFORMATION In this Report, ÒcompanyÓ means The Royal Bank of Scotland Group plc and ÒGroupÓ means the company and its subsidiaries. Certain financial and statistical information in this Report is presented separately for domestic and foreign activities. The term ÒForeign activitiesó refers to transactions in which the debtor or customer is domiciled outside the United Kingdom (ÒUKÓ). ÒForeign activitiesó are further divided into ÒForeign-UK basedó, ÒContinental EuropeÓ, ÒUnited StatesÓ and ÒRest of the WorldÓ. The term ÒForeign-UK basedó refers to those Foreign activities conducted by offices in the UK. Foreign activities allocated to ÒContinental EuropeÓ, ÒUnited StatesÓ or ÒRest of the WorldÓ involve transactions in which the customer is domiciled in the countries included in these respective categories. For purposes of such financial and statistical information, the UK includes the Channel Islands and the Isle of Man. The separate presentation of domestic and foreign activities reflects allocations of loan capital interest, certain centralised expenditure and taxes that in some cases are necessarily subjective and to an extent arbitrary. The breakdown into UK and overseas sectors contained in the Average Interest Rates, Yields, Spreads and Margins presented on page 49 of this Report and the Average Balance Sheets and tables of Interest Rates presented on page 50 of this Report have been compiled on the basis of location of office. We believe that the presentation of the Average Balance Sheets and Inte rest Rates on such a basis provides more useful information on the yields, spreads and margins of the GroupÕs activities in the UK and overseas. Presenting the Average Balance Sheets and Interest Rates on the basis of the domestic and foreign activities analysis used elsewhere in this Report would not provide useful information because the average assets and liabilities arising from ÒForeign - UK basedó activities do not match. In its UK branch network, the Bank attracts more deposits from customers domiciled outside the UK than it lends to such customers; therefore, the interest spreads and margins obtained from an analysis into domestic and foreign would be distorted to the extent of this imbalance. Ignoring the effect of this distortion would result in materially different yields, spreads and margins for the foreign sector. Where average balances are shown in this Report, cleared balances are used in the case of The Royal Bank of Scotland plc (the ÒBankÓ), the UK clearing bank subsidiary of the company. Cheques deposited in an account by a customer which are awaiting clearance are therefore not included in these balances. In addition, where arrangements exist with a customer under which loans to and deposits from the customer are netted for the purpose of determining interest due to or from the customer, such loans and deposits are similarly netted for the purpose of computing average balances. As a result, the average balances shown are lower than they would be if the book values of customersõ accounts were used. Average balances, where used, are based upon daily averages for the Bank and Citizens Financial Group (ÒCFGÓ) and averages not less frequent than monthly for other Group operations. All such balances are considered to be fairly representative of the operations of the Group. The Group prepares its Consolidated Financial Statements on the basis of a fiscal year beginning on October 1 and ending on September 30 of the following year. References to a year in this Report are, unless otherwise indicated, references to the GroupÕs fiscal year ending on September 30 of such year. The Group publishes its Consolidated Financial Statements in pounds sterling (Ò Ó or ÒsterlingÓ). In this Report, references to ÒUS dollarsó, Ò$Ó or ÒcentsÓ are to United States currency and references to Òpounds sterlingó, ÒsterlingÓ, Ò Ó, ÒpenceÓ or ÒpÓ are to UK currency. Forward-looking statements Certain statements in this document may be considered to be Òforward-looking statementsó as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ÒexpectÓ, ÒestimateÓ, ÒprojectÓ, ÒanticipateÓ, ÒshouldÓ, ÒintendÓ, ÒprobabilityÓ, ÒriskÓ, ÒVaRÓ, ÒtargetÓ, ÒgoalÓ, ÒobjectiveÓ and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited, to the GroupÕs potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. See ÒLiquidity riskó, ÒMarket riskó, ÒValue at RiskÓ elsewhere in this document. Such statements are subject to certain 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. See ÒMarket RiskÓ and ÒValue at RiskÓ. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains and losses could materially differ 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 the Group has significant business activities or investments, including the United States and Spain; 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 turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; the effects of non-linear market behaviour that cannot be captured by linear statistical models such as the Value at Risk model used by the Group; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural 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 the Group in managing the risks involved in the foregoing. The forward-looking statements contained in this document speak only as of the date of this report, and the 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. EXCHANGE RATES 2

3 City of New York for cable transfers in sterling as certified for customsõ purposes by the Federal Reserve Bank of New York (the ÒNoon Buying RateÓ) and those rates used in the preparation of the GroupÕs Consolidated Financial Statements, expressed in US dollars per pound sterling: Year ended September Noon Buying Rate Period end Average rate (1) High Low Rates used in the preparation of the GroupÕs Consolidated Financial Statements (2) Period end Average rate NOTES (1) The average of the Noon Buying Rates of each business day during the period. (2) See Note 1 to the Consolidated Financial Statements for information regarding the rates of exchange used in translating the financial statements of overseas branches and subsidiaries. (3) On December 13, 1999, the Noon Buying Rate was 1.00 = $ A significant portion of the assets and liabilities of the Group are denominated in currencies other than sterling Fluctuations in the value of sterling relative to other currencies could have a significant effect on the sterling value of non-sterling assets, liabilities, interest income and interest expense and therefore affect the respective amounts presented for certain financial and statistical information in this Report. In accordance with Group policy, as at September 30, 1999 there were no net unhedged currency exposures in the nontrading book that would give rise to material net currency gains and losses recognised in the Consolidated Statement of Income. Further information on currency exposures is provided on page

4 ITEMÊ1.ÊDESCRIPTIONÊOFÊBUSINESS Introduction The Group is a diversified financial services group engaged in a wide range of banking, financial and finance-related activities in the UK and overseas. The GroupÕs operations are principally centered in the UK. At and for the year ended September 30, 1999, based on domicile of customer, no country outside the UK or the United States accounted for more than 10% of total assets or net income available for ordinary shares of the Group - see Note 50 to the Consolidated Financial Statements. At September 30, 1999, the Group had total assets of 88.9 billion ( billion), total deposits of 61.6 billion ( billion) and shareholdersõ equity of 4,202 million (1998-2,953 million). At September 30, 1999, the Group employed 32,670 staff (1998 Ð 31,680). The Bank is the companyõs principal operating subsidiary and it controls, directs and promotes the operations of the subsidiary companies. The Bank is a major UK clearing bank whose predecessors date back to At September 30, 1999, the Bank had 634 branches in the UK. The Bank was created by the merger in 1985 of the former The Royal Bank of Scotland plc, the largest of the Scottish clearing banks, and Williams & GlynÕs Bank plc, a wholly-owned English clearing bank subsidiary of the company. The Group is organised by division, each focusing on a key market segment. The UK Bank provides banking and other related financial services to individuals and small to medium-sized corporate clients through a UK-wide branch network, certain centralised banking services and various subsidiary companies. It also provides banking and other related financial services to larger corporate and institutional clients in the UK and internationally. Angel Trains acquires rolling stock from manufacturers and leases it to train operating companies. RBS Cards provides credit and debit card services and holds credit card receivables. The Royal Bank of Scotland International Limited provides offshore banking services to local and international customers. Investor Services provided investment administration solutions to institutional investors until the date of its sale on October 31, Direct Line Insurance principally provides automobile and household insurance. CFG constitutes the GroupÕs North American division. The various new businesses started by the Group in recent years are grouped together in a separate classification, New Retail Financial Services Businesses. Support is provided by central functions dealing with finance, strategy, legal and regulatory matters and external affairs. The UK Bank The operations of the UK Bank comprise three divisions, Retail Banking, Corporate and Institutional Banking and Service and Operations which are described below. Retail Banking Through its UK branch network and certain centralised banking services, Retail Banking provides a wide range of banking, insurance and other related financial services to individuals and to small business clients. It also operates direct banking telephone services and has complementary subsidiary businesses covering life assurance and pensions, and private banking. In the personal banking market, Retail Banking offers money transmission, savings and loan facilities (comprising mortgages, consumer loans and overdraft facilities). It also acts as a point of sale for credit cards on behalf of RBS Cards. In its small business banking market, Retail Banking provides a range of services which includes money transmission and cash management, short, medium and long-term finance and retail and wholesale deposit taking products. Through the operations of Royal Scottish Assurance (ÒRSAÓ), Retail Banking provides a wide range of life assurance, pension and unit linked investment products, together with discretionary portfolio management. Private Banking Adam & Company PLC, which is a wholly owned subsidiary of the Bank, provides private banking services in Scotland and England. RSA RSA was established as a joint venture to offer a wide range of life, pensions and investment products through the BankÕs UK branch network. Initially, the Bank held an 80% shareholding in RSA. In May 1997, the Bank acquired the remaining 20% of RSA from Scottish Equitable plc and then later that month sold a 30% interest in RSA to Scottish Widows Fund and Life Assurance Society (ÒScottish WidowsÓ), resulting in a 70% shareholding held by the Bank. Scottish Widows provides administration, processing, investment management and other services to RSA. On November 26, 1999, it was announced that the Group and CGU plc had entered into a memorandum of understanding for the provision of life, pensions and investment products to the RBS Group. CGU has agreed to acquire a 50% interest in RSA and will replace Scottish Widows in this venture. 4

5 Corporate and Institutional Banking Corporate and Institutional Banking provides commercial banking and other financial services to the BankÕs corporate and institutional clients selling a wide range of products to meet their financial needs. It consists of the following businesses: Corporate and Commercial Banking Corporate and Commercial Banking focuses on the needs of the BankÕs corporate customers and financial institutions. Due to their size and complexity, these customers demand a wide range of corporate banking skills which can best be provided by a separate dedicated business. Corporate and Commercial Banking provides a number of products and services including clearing, money transmission, syndicated lending and corporate finance. The Bank is committed to the concept of Òrelationship bankingó where each customer has one principal point of contact within the Bank. To achieve this, Corporate and Commercial Banking has small teams of managers in each of the BankÕs major centres (London, Edinburgh and Manchester) which are devoted exclusively to strengthening and deepening the BankÕs involvement with these customers. Treasury and Capital Markets The BankÕs Treasury and Capital Markets operation, based in London, Edinburgh and Manchester, is responsible for the funding and liquidity position of the Bank and for managing the BankÕs foreign exchange risk. Treasury and Capital Markets also offers a wide product range to an expanding customer base serviced from dealing rooms in London, Edinburgh and Manchester. Dealing operations are also located in New York and Singapore. The Bank operates in foreign exchange markets, sterling markets and the Eurocurrency deposit markets. The London operation controls all positions, both in the money markets and foreign exchange markets, within constraints established either by the applicable regulatory authorities or the BankÕs senior management as appropriate. Treasury and Capital Markets participates in the derivative markets to meet the financing needs of customers, to reduce the BankÕs exposure to fluctuations in exchange and interest rates and as an integral part of its trading activities. See ÒManagementÕs Discussion and Analysis of Financial Condition and Results of Operations - Risk ManagementÓ. Investment Finance The principal business units within Investment Finance are Leveraged Finance and Royal Bank Development Capital Limited. Leveraged Finance has established itself as one of the leading debt providers in the UK market. It has capabilities in arranging funds for acquisitions, for management buy-ins and buy-outs and for other situations requiring the arrangement of leveraged debt facilities. During 1998 RBS Mezzanine Limited, a mezzanine capital business, was launched and is already proving profitable and, during 1999, Leveraged Finance expanded into Europe, opening offices in Paris and Frankfurt. In July 1999, the Group formed a 50% joint venture company, Caledonian Capital Limited, with the Bank of Scotland to provide a single independent European underwriting capability for high value senior debt financing to leveraged buy-out transactions. Royal Bank Development Capital Limited provides equity finance for companies that have little or no access to capital markets. The companyõs activities cover start-ups, development capital situations, management buy-outs and buy-ins and share restructurings. Structured Finance The constituent areas of this business are loan syndications, leasing, project and export finance, shipping, structured trade finance and structured asset finance. It also has a specialist team to provide finance under the UK GovernmentÕs Private Finance Initiative. Royal Bank Leasing Limited provides asset based finance for large capital equipment projects. Over the past few years, it has concentrated on developing its reputation for providing individual financing solutions. Royal Bank Leasing Limited generates new business from its offices in London, Glasgow and its head office in Cheltenham. The Shipping unit provides mortgage finance together with corporate and personal banking services to the worldõs major shipping companies and high net worth individuals connected with the sector, from its two operational centres in London and Piraeus. Loan syndications within the Bank are managed by a dedicated team which is involved in the arrangement, structuring and underwriting of major corporate facilities and is acknowledged as a top ranking arranger/co-arranger of UK corporate debt transactions. The project and export finance group is active in a wide range of UK based and international project finance businesses and has a dedicated export credit team. A global mandate is pursued through its representation in London, Edinburgh, Singapore, Sydney and New York. UK and International Banking Services UK and International Banking Services is the BankÕs domestic and international payments and cash management business. Service and Operations 5

6 Service and Operations provides banking services, property and facilities management and technology for the UK Bank. It also provides support to the UK Bank through a network of Service Centres, Cash Centres and the Mortgage Centre in Greenock, Scotland. New Retail Financial Services Businesses In recent years, the Group has established various new retail businesses to extend and complement its existing financial services to customers. Direct Line Financial Services Limited was established in 1993 to provide personal financial services using a telephone based delivery system. The company offers mortgages, personal loans and savings products and recently launched its own low cost credit card. At September 30, 1999, the company had over 130,000 accounts. Privilege Insurance was established in 1994 and provides non-standard motor insurance through a telephone based delivery system and motor and household insurance through affinity schemes with third parties. At September 30, 1999, the company had 445,000 policies in-force. In 1994, Direct Line Group Limited entered into a joint venture agreement with Bank Inter S.A., a Spanish bank, to set up a direct marketing automobile insurance operation in Spain. The joint venture company, Linea Directa Aseguradora S.A., is 50% owned by Direct Line Group Limited. At September 30, 1999, there were 212,000 in-force policies (September 1998 Ð 177,000). In July 1997, a partnership between Direct Line and Scottish Widows resulted in the formation of a 50% joint venture. Through two subsidiary companies of Direct Line Life Holdings Ltd, the joint venture holding company, life insurance, personal pensions, Individual Savings Accounts and unit trust investment products are offered directly to the public by telephone. Direct Line Accident Management had four accident repair centres operational at September 30, 1999, having closed two centres during the year. In July 1997, the Group established a joint venture in financial services with Tesco PLC, one of the UKÕs leading supermarket groups. The new venture, Tesco Personal Finance Group Limited, allies the strengths of the Group with TescoÕs large customer base. In October 1997, the Group established a joint venture with Virgin Direct, Virgin Direct Personal Finance Limited. A 24 hour telephone based bank account, with a mortgage element, the Virgin One Account, was launched to VirginÕs own customers in October 1997 and more broadly in May Angel Trains Angel Trains was acquired by the company in December It is one of the three rolling stock leasing companies in the UK which were privatised in Angel Trains acquires rolling stock from manufacturers, leases the rolling stock to train operating companies and sub-contracts the maintenance of the rolling stock. During 1999, Angel Trains won the contract to invest in 53 new high-tech ÔAdvanced Tilting TrainsÕ to be leased to Virgin Rail Group for use on the West Coast main line. RBS Cards RBS Cards provides credit and debit card services including its own low cost, no fee MasterCard and Visa credit cards and the BankÕs multi-functional Highline debit cards, which can be used in every ATM in the UK. These debit cards incorporate the Cirrus and Maestro facilities which provide the ability to use both ATMÕs and debit card facilities worldwide. The BankÕs card services business has expanded in recent years with a series of joint ventures. In 1997, a new company, RBS Cards Limited, was created to lead the development of new products. Its first launch, the AU Gold MasterCard, offers low rates of interest to its target market of low-risk customers. In May 1995, a joint venture, RBS Advanta, was entered into with the Advanta Corporation of Pennsylvania (ÒAdvanta CorporationÓ) to promote and service credit cards in the UK. In July 1998, the Bank acquired Advanta CorporationÕs 49% minority shareholding to become sole shareholder of RBS Advanta. At September 30, 1999, credit card balances were over 2.2 billion and the number of accounts over 2.2 million. Investor Services On October 31, 1999, the Group completed the sale of its main investor services businesses to The Bank of New York. Direct Line Insurance 6

7 p ( ) g p domestic household insurance policies. Direct Line sells insurance by telephone directly to customers and does not use insurance brokers or other intermediaries. Direct Line operates with its head office and South of England regional office in Croydon and has regional offices in five other major cities in the UK. In the automobile insurance market Direct Line has increased the number of in-force motor policies by 6% to approximately 2.2 million at September 30, 1999 ( million), ranking it as one of the largest underwriters of private automobile insurance policies in the UK. Direct Line continued to expand its household insurance portfolio (including buildings, contents and personal possessions) with nearly 894,000 in-force policies at September 30, 1999 ( ,000 policies). Direct Line also offers creditor insurance to personal loan and credit card customers of the Bank and Direct Line Financial Services Limited, offering protection to those customers against inability to service debt due to unemployment, sickness or accident. It also offers travel and pet insurance and certain other ancillary services to its customers, including the arrangement of roadside assistance and recovery. In November 1999, Direct Line completed the acquisition of the roadside rescue specialist, Green Flag, which, with the rapidly growing Direct Line Rescue business, will make Direct Line the UKÕs third largest operator in this business sector, with almost three million customers. Citizens Financial Group (ÒCFGÓ) Citizens Financial Group, Inc. is a US bank holding company incorporated in 1984, the principal banking subsidiaries of which are Citizens Bank of Rhode Island, Citizens Bank of Connecticut, Citizens Bank of Massachusetts and Citizens Bank New Hampshire (ÒCBNHÓ). CFG has 280 branches covering Rhode Island, Connecticut, Massachusetts and New Hampshire and is the second largest bank in New England. CFG provides a range of retail and corporate banking services. Approximately half of its loan portfolio relates to personal banking, including residential mortgages and home equity loans, and half to corporate lending. See ÒDescription of Assets and Liabilities - Lending ConcentrationsÓ on page 11 of this Report. In addition, CFG engages in a wide variety of consumer lending activities, ATM and debit card services, trust services and retail investment services. CFG also operates subsidiaries primarily engaged in equipment lease financing. On April 26, 1996, the Group and Bank of Ireland completed the merger of their US banking operations in New England. This transaction involved the merger of CFG and Bank of Ireland First Holdings, the holding company of CBNH, and resulted in the Group retaining a holding of 76.5% of CFGÕs enlarged share capital, with the remaining 23.5% being held by Bank of Ireland. In September 1998, the Bank acquired the Bank of IrelandÕs 23.5% minority shareholding in CFG for a cash consideration of $750 million. On October 16, 1998, CFG completed the acquisition of four branches from Branford Savings Bank, a subsidiary of North Fork Bancorp, for a premium of $6 million over net assets acquired, payable in cash. On October 1, 1999, CFG completed the acquisition of the major part of the commercial banking business of State Street Corporation for a cash premium of $350 million over net assets acquired. This business has commercial loans totalling $2.3 billion and deposits of $1.1 billion. On June 21, 1999, it was announced that CFG had entered into an agreement to acquire the entire issued share capital of UST Corp. of Boston, Massachusetts (ÒUSTÓ) for a consideration of approximately $1.4 billion. As at March 31, 1999, UST had assets of $5.9 billion and deposits of $4.2 billion. The consideration will be payable in cash at completion, which is expected to take place in early 2000, subject to obtaining the consent of Federal and State regulators in the US. At September 30, 1999, CFG had total assets of $19.5 billion (including total loans of $11 billion and a securities portfolio of $7 billion), total customer deposits of $14 billion and stockholdersõ equity of $1.5 billion. All figures are stated in accordance with UK GAAP unless stated otherwise. 7

8 The Royal Bank of Scotland International Limited (ÒRBSIÓ) RBSI provides a wide range of offshore banking services to local and international customers through its subsidiaries in the Channel Islands, the Isle of Man, the Bahamas and Gibraltar. These offshore banking services include corporate banking, custod y, treasury and personal banking. Central items In October 1999, RBSI completed the sale of 30% of its investor services businesses to The Bank of New York. Central items include the GroupÕs principal associated undertakings, head office department costs (excluding those recharged to other divisions) and income from surplus capital less central financing costs. Relationship with Banco Santander Central Hispano, S.A. In October 1988, the Group and Banco Santander entered into an agreement (Òthe agreementó) whereby the Group and Banco Santander and its subsidiaries agreed to co-operate in certain banking and financial services activities in Europe, including representation in each otherõs bank branches to service their respective customers, offshore and investment banking, technology development, operational co-operation and the development of representation in Europe and the Far East. In January 1999, Banco Santander announced its intention to merge with Banco Central Hispanoamericano, another Spanish banking group. This merge r was completed in April 1999 and the merged entity is called Banco Santander Central Hispano, S.A. (ÒBSCHÓ). At September 30, 1999, the Group held 2.23% of BSCHÕs capital stock. The total cost of this shareholding is 160 million and the market value as at September 30, 1999 was 514 million. During the year ended September 30, 1998 the Group sold 3.6 million shares in Banco Santander realising a gain of 57 million. At September 30, 1999, BSCH held 9.64% of the companyõs ordinary shares. BSCH. The Group also has a 12.8% shareholding in Banco Santander, Portugal S.A., with the remainder of the shares being held by Recent events On November 29, 1999, the Group announced that it had made an offer to acquire National Westminster Bank Plc (ÒNatWestÓ). The company has offered new ordinary shares and loan notes in exchange for NatWest ordinary shares in proportions such that existing shareholders in the company would hold approximately 38% of the issued share capital of the enlarged group following the offer, whilst NatWest shareholders would hold approximately 62%. 8

9 Staff involvement At September 30, 1999, the Group employed 32,670 people. The Group encourages staff involvement by a process of communication and consultation. This takes the form of the provision of information through normal management channels, internal publications, video communication, regular dialogue with staff representatives and an opportunity for staff to voice their views in a confidential manner via an annual staff opinion survey. Significant developments to enhance staff involvement in the last year have included the introduction of a training and communication network which allows employees to participate in interactive training sessions from their place of work via their personal computer. Also launched within the last year was the BankÕs Intranet which gives employees electronic access to information including policies, employment information, job vacancies, news, publications and departmental information. Profit sharing schemes have existed since 1980 and these have included the opportunity to acquire shares in the company. Included in expenses for the year ended September 30, 1999 are sums totalling 47 million for payments to staff eligible to participate in the GroupÕs profit sharing schemes ( million). Staff option schemes were introduced in On June 3, 1999, options were granted over 3,525,518 ordinary shares, at a price of 1085p per share, under the companyõs sharesave scheme. On December 7, 1998, March 4 and June 3, 1999, options were granted over 935,209 ordinary shares, at prices of 943p, p and 1291p per share respectively, under the companyõs executive share option scheme. Equal opportunities The company is committed to providing equality of opportunity. The employment practices of companies in the Group follow the best practice of each country in which they operate. In the recruitment of staff and their subsequent career development, individuals are considered solely on the basis of their aptitude and ability, irrespective of sex, marital status, race, age, sexual orientation, religion or disability. The number of women in management positions continues to grow and women now make up almost 37% of middle management and over 11% of senior management. For serving employees who become disabled, every help is given to ensure their continued employment and to arrange rehabilitative training. An Occupational Health Service provides in-house expertise on such rehabilitation programmes. The Bank is a member of the EmployerÕs Forum on Disability and is committed to action to improve the position of disabled people both as valued employees and as customers of the Bank. The Bank is also a member of Race for Opportunity and is committed to eliminating racism in the workplace. Environmental issues The Group recognises that environmental and social responsibility is integral to the way we do business. Environmental and social imperatives are shaping all our futures and the diversity and flexibility of our businesses enable us to anticipate and respond to those changes. Our philosophy is that business excellence, of necessity, requires that we meet changing customer expectations and needs. The Group recognises this challenge and has adopted policies and management regimes which reinforce these wider human and material concerns. Our Values, Balanced Scorecard, Change Management, Staff Development, Equal Opportunities, Employee Assistance, Health, Safety and Environment programmes all reinforce these wider business principles. The objective is not only to manage the obvious direct operational impacts on the environment, such as energy, raw material, waste and transport, but also to integrate environmental and social concerns into all of our financial services activities. 9

10 Description of Assets and Liabilities Assets Loan Portfolio The GroupÕs loan portfolio consists of loans (including overdraft facilities) and instalment credit and finance lease receivables. The BankÕs 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 customerõs 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 business requirements. Borrowing limits on the overdraft facility are established, and full repayment is required only if the customer fails to honour the conditions on which the limit was granted or his financial position has so deteriorated 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 the BankÕs base rate and is typically charged monthly. Overdrafts accounted for approximately 10.8% of the BankÕs total domestic loan portfolio at September 30, 1999 and 12% at September 30, Analysis of Loans to Customers by Geographical Area and Type of Customer The following table analyses loans (including instalment credit and finance lease receivables) by geographical area and type of customer at September 30 for each of the five years ended September 30, The domestic categories of customer are based on the asset classification requirements of the Bank of England. SeptemberÊ m m m m m Domestic: Central and local government Manufacturing... 2,715 2,075 1,739 1,732 1,682 Construction Finance... 2,891 2,197 3,100 3,173 3,231 Service industries... 5,585 4,968 4,660 3,374 3,296 Agriculture, forestry and fishing Property... 3,668 2,935 2,617 1,525 1,263 Business and other services... 2,477 2,011 2,140 2,715 2,384 Individuals - home mortgages... 9,544 8,317 7,371 6,532 6,201 - other... 6,283 4,550 3,530 2,713 2,319 Instalment credit and other loans... 1, Finance leases... 2,555 2,587 2,569 2,333 1,623 Total domestic loans... 38,248 31,804 29,715 25,840 23,715 Foreign: Foreign Ð UK based... 2,799 2,248 1,880 1,403 1,178 Continental Europe... 1, United States... 6,807 5,811 6,063 5,416 3,942 Rest of the World... 1,177 1, Total foreign loans... 11,829 9,846 9,350 8,080 6,042 Total loans... 50,077 41,650 39,065 33,920 29,757 Less allowance for loan losses... (737) (633) (459) (474) (540) Loans to customers (net of provisions)... 49,340 41,017 38,606 33,446 29,217 Analysis of foreign loans by type of borrower: Governments and official institutions Other financial institutions Commercial and industrial... 7,692 5,834 4,873 3,895 2,943 Other... 3,865 3,755 4,374 3,967 2,969 Total foreign loans... 11,829 9,846 9,350 8,080 6,042 For further information regarding the GroupÕs operations by geographical area, see Note 50 to the Consolidated Financial Statements. 10

11 Lending Concentrations One of the principal factors influencing the quality of the GroupÕs earnings is the diversification of its loan portfolio by geographical area within the UK, by industry classification and by individual customer. The spread of the GroupÕs assets reduces concentration of risk. The Bank has a widely spread UK lending base through 634 branches servicing a broad range of corporate and personal customers. With the exception of lending to the service industries sector and to individuals in the UK, there were no loan concentrations to any individual sector or industry which exceeded 10% of total loans to customers (before provisions). Instalment credit loans and direct finance leases are largely conducted through the consumer and industrial finance business of RoyScot Trust and Royal Bank Leasing At September 30, 1999, loans to customers by CFG totalled $10.9 billion and comprised residential mortgages of $2.1 billion, commercial mortgages of $2.2 billion, commercial loans of $2.6 billion, consumer loans of $3.3 billion and other loans and leases of $0.7 billion. Analysis of Loans to Customers by Maturity and Repricing Interval The following table analyses loans (including instalment credit and finance lease receivables) to customers at September 30, 1999, by maturity or repricing interval, if earlier. Overdrafts are included in the ÒWithin 1 yearó category. SeptemberÊ30, 1999 After 1 Within but within After 5 1Êyear 5Êyears years Total Domestic: m m m m Central and local government Manufacturing... 1, ,074 2,715 Construction Finance... 2, ,891 Service industries... 2, ,422 5,585 Agriculture, forestry and fishing Property ,020 3,668 Business and other services ,194 2,477 Individuals - home mortgages ,232 9,544 - other... 3,730 2, ,283 Instalment credit and other loans ,059 Finance leases ,603 2,555 Total domestic loans... 13,913 6,058 18,277 38,248 Foreign: Governments and official institutions Other financial institutions Commercial and industrial... 4,607 2, ,692 Other ,075 1,962 3,865 Total foreign loans... 5,693 3,181 2,955 11,829 Total loans... 19,606 9,239 21,232 50,077 Less allowance for loan losses... (737) Loans to customers (net of provisions)... 49,340 Fixed rates... 5,569 4,898 5,492 15,959 Variable rates... 14,037 4,341 15,740 34,118 Total loans by maturity or repricing interval... 19,606 9,239 21,232 50,077 11

12 Loans to Banks The following table analyses loans to banks, including deposits placed with banks, based upon the currency of the transaction and the domicile of the head office of the correspondent bank: SeptemberÊ m m m m m Sterling Domestic banks... 2,676 3,442 3,117 4,009 3,218 Foreign banks... 3,038 3,152 4,180 1, Total sterling... 5,714 6,594 7,297 5,324 3,972 Other currencies Domestic banks... 1,432 1,189 1,526 1,356 1,416 Foreign banks... 3,229 3,731 5,268 5,301 3,798 Total other currencies... 4,661 4,920 6,794 6,657 5,214 Total loans to banks... 10,375 11,514 14,091 11,981 9,186 The Group places funds with other banks for a number of reasons, including liquidity management, facilitation of international money transfers and documentary credit business with correspondent banks. Limits on the aggregate amount of placings that may be made with individual institutions are established in accordance with Group risk management policy. The following table analyses loans to banks by repricing terms as at September 30, 1999: September 30, 1999 Domestic Foreign banks banks Total m m m Fixed rate... 3,348 5,645 8,993 Variable rate ,382 Total... 4,108 6,267 10,375 12

13 Cross-Border Outstandings Cross-border outstandings consist of loans to banks and customers, instalment credit and finance lease receivables, acceptances and other monetary assets, including non-local currency claims of overseas offices on local residents. The Group monitors the geographical breakdown of outstandings based on the country of domicile of the borrower or guarantor of ultimate risk. CFG has no material amount of cross-border outstandings. Cross-Border Outstandings in Excess of 1% of Total Assets The following table identifies countries where the GroupÕs cross-border outstandings to borrowers exceeded 1% of total assets and acceptances: Banks Commercial, As % of and other Governments industrial and total financial and official other private assets (1) Total institutions institutions sector % m m m m September 30, 1999 United States ,452 1, ,706 Germany ,135 2, France ,722 1, September 30, 1998 Germany ,810 2, United States , ,661 France ,022 1, Japan , Spain , September 30, 1997 United States ,139 1, ,366 France ,863 1, Japan ,135 1, Belgium ,056 1,050-6 Germany NOTE (1) Assets comprise total assets, as reported in the Consolidated Balance Sheet, and acceptances, which together totalled 89,746 million at September 30, 1999 (September 30, ,700 million, September 30, ,464 million). Cross-Border Outstandings Between 0.75% and 1% of Total Assets At September 30, 1999, cross-border outstandings totalling 2,434 million to borrowers in Belgium, Canada and Spain each amounted to between 0.75% and 1% of total assets. At September 30, 1998, cross-border outstandings totalling 2,608 million to borrowers in Canada, Belgium, the Netherlands and Italy each amounted to between 0.75% and 1% of total assets. At September 30, 1997, cross-border outstandings totalling 1,327 million to borrowers in the Netherlands and Italy each amounted to between 0.75% and 1% of total assets. 13

14 Provision and Allowance for Loan Losses Provisioning Policy Within the Bank and those of its subsidiaries engaged in banking (excluding CFG - see below), loan officers regularly review the quality of loans for which they are responsible. Specific provisions are made against loans when, as a result of a detailed appraisal of the loan portfolio, it is considered that recovery is doubtful, which depends in each case on the individual circumstances of the loan, including, among other things, the adequacy of any collateral securing the loan. Provisions made during a year (less amounts released and recoveries of amounts charged-off in previous years) are charged against income. Interest receivable on doubtful loans is brought into the Consolidated Statement of Income as it accrues only so long as its collectibility is not subject to significant doubt. Loans classified as bad debts are charged-off to their estimated net realisable value when there is no realistic prospect of recovery. In addition, general provisions are maintained at levels considered appropriate by management to cover losses from loans which have not been separately identified but are known from experience to be present in any portfolio of bank loans. Reviews of the level of general provisions are conducted throughout the year. A factor in establishing the level of general provisions is the scope and detail of the specific provisioning procedures in place at the time of the review. There are differences between the provisioning policies of banks in the UK and the United States. In the UK loans and related accrued interest are charged-off only when, as a matter of banking judgement, there is no realistic prospect of recovery. When management determines that a charge-off is appropriate, the principal amount and accrued interest on the obligation are written down to estimated net realisable value. Interest receivable on loans is recognised as income as it accrues provided that its collectibility is not subject to significant doubt. In contrast, banks in the United States (including CFGÕs bank subsidiaries) typically stop accruing interest when loans become overdue by 90 days and recovery is doubtful, and charge-off loans more rapidly. The cumulative effect of the GroupÕs policies is to increase the relative size of the GroupÕs loan portfolio and the allowance for loan losses compared with those of US banks, which has the effect of increasing the GroupÕs loan loss allowance ratios compared with those which would result from the application of US bank provisioning policies. The GroupÕs policies do not, however, result in a significant adjustment to the GroupÕs net income, shareholdersõ funds and total assets for restatement under US GAAP. See Note 52 to the Consolidated Financial Statements. CFG Loan officers in CFG evaluate the adequacy of the allowance for possible credit losses by performing reviews of certain individual loans and leases, analysing changes in the composition and size of the portfolio, reviewing previous loss experience and considering current and anticipated economic factors. The allowance is established through charges to earnings in the form of a provision for credit losses and is maintained at a level which management considers adequate based on the results of this evaluation. Amounts determined to be uncollectable are deducted from the allowance and subsequent recoveries, if any, are added to the allowance. Non-performing loans and leases consist of (a) non-accrual loans and leases and (b) accruing loans which are contractually past due 90 days or more. Loans and leases are generally placed on non-accrual when 90 days or more past due, or earlier when management deems the probability of collection to be insufficient to warrant further accrual. Certain loans, primarily consumer credits, remain on accrual when contractually past due 90 days or more if considered by management to be collectible. 14

15 Movements in the Allowance for Loan Losses The following table shows movements in the allowance for loan losses for each of the five years ended September 30, 1999: YearÊendedÊSeptemberÊ Specific General Specific General Specific General Specific General Specific Genera m m m m m m m m m m Allowance at beginning of year Domestic Foreign Total Currency translation adjustments Domestic Foreign (6) (2) (3) (1) 1 1 (1) - Amounts charged-off Domestic... (185) - (148) - (173) - (194) - (215) - Foreign... (51) - (26) - (38) - (34) - (32) - Additions on acquisition of subsidiaries Domestic Foreign Released on disposal Domestic Foreign (12) Recoveries of amounts charged-off in previous years Domestic Foreign Provisions charged against income Domestic Foreign Transfers between provisions Domestic Foreign (12) (3) 3 11 (11) 10 (10) - - Allowance at end of year Domestic Foreign Total The increase in allowance for loan losses from 633 million at September 30, 1998, to 737 million at September 30, 1999, is principally as a consequence of continued strong growth in credit cards, personal loans and corporate advances. The following table presents additional information with respect to the provision and allowance for loan losses for each of the five years ended September 30, 1999: YearÊendedÊSeptemberÊ m m m m m Loans to customers (gross)... 50,077 41,650 39,065 33,920 29,757 Allowance at end of period as a percentage of loans at end of period: Specific allowance % 1.09% 0.91% 1.12% 1.47% General allowance % 0.43% 0.27% 0.28% 0.35% 1.47% 1.52% 1.18% 1.40% 1.82% Average loans to customers (gross)... 45,807 39,456 34,879 30,383 26,728 As a percentage of average loans during the period: Total provisions charged against income % 0.84% 0.42% 0.37% 0.42% Amounts charged-off (net of recoveries) % 0.35% 0.51% 0.68% 0.82% 15

16 Charge-offs and Recoveries The following table shows amounts charged-off for each of the five years ended September 30, 1999: Charge-offs YearÊendedÊSeptemberÊ m m m m m Domestic: Manufacturing Construction Finance Service industries Agriculture, forestry and fishing Property Business and other services Individuals - home mortgages others Finance leases and instalment credit Total domestic Foreign... 51Ê Total charge-offs Charge-offs increased from 174 million in the year ended September 30, 1998 to 236 million in the current year. The increase in ÔIndividuals Ð othersõ was due to the increase in credit card lending. This increase was partly offset by a decrease of 13 million in Service industries. The following table shows recoveries of amounts charged-off in previous years for each of the five years ended September 30, 1999: Recoveries YearÊendedÊSeptemberÊ m m m m m Domestic: Manufacturing Construction Finance Service industries Property Business and other services Individuals - home mortgages others Total domestic Foreign Total recoveries For a discussion of the factors considered in determining the amount of the provision for loan losses, see ÒProvision for Loan LossesÓ on page

17 Analysis of the Allowance for Loan Losses The following table analyses the allowance for loan losses by geographical area and type of domestic customer for each of the five years ended September 30, 1999: September % of % of % of % of % of loans to loans to loans to loans to loans to total total total total total Amount loans Amount loans Amount Loans Amount loans Amount loans m % m % m % m % m % Domestic: Manufacturing Construction Finance Service industries Agriculture, forestry and fishing Property Business and other services Individuals - home mortgages other Finance leases and instalment credit Other Total domestic Foreign (1) Ê Specific allowance General allowance Total allowances NOTE All of the above allowances were in respect of loans to customers. (1) Included in the above figures are the following allowances for loan losses for CFG: Specific allowance General allowance Total allowances For an explanation of the movements in Allowance for Loan Losses, see ÒProvision for Loan LossesÓ on page

18 Risk Elements in Lending The Group makes provisions for loan losses in accordance with the method described under ÒProvision and Allowance for Loan Losses - Provisioning PolicyÓ on page 14. The GroupÕs loan control and review procedures generally do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the Securities and Exchange Commission (ÒSECÓ). Management has estimated, as set forth below, the amount of loans, without giving effect to available security, which would have been so reported had the SECÕs classifications been employed. SeptemberÊ m m m m m Loans accounted for on a non-accrual basis: Domestic Foreign Accruing loans which are contractually past due 90 days or more as to principal or interest: (1) Domestic Foreign Loans not included above which are classified as Òtroubled debt restructuringsó: Domestic Foreign ÊÊÊÊÊÊÊÊÊÊ ÊÊÊÊÊÊÊÊÊÊ ÊÊÊÊÊÊÊ ÊÊÊÊÊÊÊ ÊÊÊÊÊÊÊÊÊÊ 1,097 1, ,003 Allowances as a % of risk elements in lending: Specific allowance... 52% 45% 45% 42% 44% General allowance... 15% 18% 14% 11% 10% Total... 67% 63% 59% 53% 54% NOTE (1) Generally, loans by way of overdraft have no fixed repayment schedules and consequently are not included in this category. Loans that are current as to payment of principal and interest and not reflected in the above table, but as to which the Group has serious doubts as to the ability of the borrower to comply with loan repayment terms in the near future, totalled approximately 246 million at September 30, 1999 ( million). Of this amount, 171 million related to domestic loans and 75 million to foreign loans ( million to domestic loans and 45 million to foreign loans). The classification of a loan as non-accrual does not necessarily indicate that the principal of the loan is uncollectable in whole or in part as this depends in each case on the individual circumstances of the loan, including the adequacy of any collateral securing the loan. Therefore, classification of a loan as non-accrual does not always require that a provision be made against such a loan. In accordance with the GroupÕs provisioning policy for bad and doubtful debts, it is considered that adequate provisions for the above risk elements in lending have been made in the financial statements. Total allowances for loan losses as a percentage of loans to customers was 1.5% at September 30, 1999 and 1998, principally due to the new provisions exceeding the amounts charged-off in the year together with the growth in the loan portfolio (new loans not generally requiring provisions at least initially) and the continued growth in domestic mortgages which historically have required a low level of specific provisions. Gross interest income not recognised, but which would have been recognised in the year ended September 30, 1999 under the original terms of the non-accrual and restructured loans, amounted to 53 million ( million) from domestic loans and 32 million ( million) from foreign loans. Interest on non-accrual and restructured loans included in net income in the year ended September 30, 1999 totalled 4 million ( million) from domestic loans and 13 million ( million) from foreign loans. 18

19 Securities The following table shows the book value of the GroupÕs securities at September 30, 1999, 1998 and 1997 and the fair value at September 30, 1999: SeptemberÊ Book Fair Book Book value (1) value (2) value (1) value (1 m m m m Investment securities (3) Debt securities British government Other government... 2,288 2,218 2,271 2,583 Other public sector bodies Bank and building society... 1,623 1,627 1,287 1,424 Other issuers (4)... 5,632 5,522 3,243 1,970 Equity securities , Total... 11,054 11,331 8,226 6,684 Other securities (5) Debt securities British government ,169 Other government Other public sector bodies Bank and building society... 4,084 4,084 3,893 1,238 Other issuers (4) Equity securities Total (6) (7)... 16,302 16,581 13,631 10,388 NOTES (1) Note 1 (j) to the Consolidated Financial Statements describes the accounting treatment for securities held by the Group. (2) Fair value is based on quoted market prices, where available. If a quoted market price is not available, fair value is at directorsõ appraised value or at an estimated value using quoted market prices for similar securities adjusted for differences between the quoted instrument and the investment being valued. (3) Securities held for use on a continuing basis in the GroupÕs operations. (4) Mainly long term corporate debt securities. (5) Includes securities held for dealing purposes and, in the case of certain debt securities, for hedging purposes. (6) There were no material amounts of tax exempt securities in the GroupÕs portfolio at September 30, 1999, 1998 or (7) Included in the above tables are securities held by Direct Line Group totalling 800 million at September 30, 1999 ( million), comprising principally debt securities issued by the British government, banks & building societies and equity securities. (8) For the purposes of US GAAP all investment securities are classified as available for sale and other securities are classified as trading securities. The unrecognised gain on trading securities was 2 million at September 30, 1999 ( million gain). In addition to the above securities, long-term assurance fund assets attributable to policyholders of Royal Scottish Assurance, which are reflected in ÒOther assetsó in the Consolidated Balance Sheet, totalled 2,013 million at September 30, 1999 (1998-1,709 million) (see Note 26 to the Consolidated Financial Statements) and comprised principally of debt securities, issued by the British Government and other issuers, and equity securities. Total interest received on other securities detailed above in the year to September 30, 1999, amounted to 270 million ( million). At September 30, 1999 and 1998, the Group held the following securities issued by one source, which exceeded 10% of shareholdersõ equity: September 30, 1999 September 30, 1998 Book Fair Book Fair value value value value m m m m UK government securities ,161 1,161 US government securities... 2,372 2,309 2,343 2,406 An analysis of the GroupÕs investment debt securities by maturity and yield (based on weighted averages) at September 30, 1999, is shown in Note 52 on page 141 to the Consolidated Financial Statements. 19

20 Liabilities Deposits A substantial portion of the GroupÕs assets are funded by deposits, principally current accounts and various types of interest bearing deposit accounts, collected through the BankÕs UK branch network, CFG and RBSI. The remainder of the assets of the Bank, CFG and RBSI are funded by wholesale deposits, debt securities in issue, loan capital and shareholdersõ equity. At September 30, 1999, 1998 and 1997, approximately 8.9%, 11% and 14.4% respectively, of domestic deposits were in non-interest bearing current accounts. At September 30, 1999, 1998 and 1997, approximately 57.8%, 56.0% and 52.4% respectively, of domestic deposits were interest bearing deposits repayable on demand. Interest bearing demand deposits are current accounts with credit balances and retail deposits repayable on demand, obtained primarily through the BankÕs UK branch networks, and wholesale deposits repayable on demand, booked mainly within the BankÕs treasury operation. Interest rates applicable to such deposits are generally calculated on the basis of a margin under the BankÕs base rate. Deposits in currencies other than sterling are collected principally by Corporate and Institutional Banking, CFG and RBSI. The former raises most of its deposits through the wholesale markets whereas CFGÕs and RBSIÕs deposits are principally demand and savings deposits. Savings deposits are specific products which are designed to attract larger savings from personal customers who do not require withdrawals on demand and therefore in general offer better rates of return than interest bearing demand deposits. At September 30, 1999, 1998 and 1997, approximately 7.5%, 10.0% and 8.7% respectively, of the BankÕs domestic deposits were in savings deposits. Other time deposits are collected centrally from the money market to bridge the gap between retail resources and sterling assets. Chief sources of wholesale deposits are the inter-bank market, corporations and non-bank financial institutions which place funds on the inter-bank market, and issuance of certificates of deposit and medium term notes. All are priced in relation to money market rates. Rate considerations and the ability to provide funds in the maturity periods required by the Bank to fulfil its liquidity management objectives affect the choice of instrument. Customers are offered rates related to inter-bank market rates for the term of the deposit depending on the amounts and term. Larger deposits (typically 1 million and over) earn the money market rates paid in the inter-bank market, and smaller amounts earn progressively wider spreads under the money market rate. Rates are centrally communicated throughout the Bank by the BankÕs central treasury operation. While competitive rates influence the quantity of deposits obtained through the branch network, the branch network enables a wide variety of local depositor sources to be accessed. Analysis of Deposits The following table shows the distribution of deposits by banks and customer accounts by sterling and other currencies at September 30, 1999, 1998 and 1997: SeptemberÊ m m m Deposits by banks Sterling... 3,347 1,958 1,217 Other currencies... 3,071 2,479 4,178 Total deposits by banks... 6,418 4,437 5,395 Customer accounts Sterling... 36,663 33,785 30,827 Other currencies (1)... 18,517 16,900 16,755 Total customer accounts... 55,180 50,685 47,582 Total deposits... 61,598 55,122 52,977 NOTE (1) Includes non-sterling deposits in CFG of 8,919 million at September 30, 1999 (1998-8,065 million, ,300 million). 20