NATWEST GROUP ANNOUNCES £1,011M PROFIT FOR 1997

Financial Highlights

• The group's profit before tax was #1,011m compared with £1,122m in 1996.
• Headline post tax return on average equity was 10.8% (1996 16.4%). The Group, excluding NatWest markets, generated headline post-tax return on average equity of 20.1% (1996 20.6%.)
• NatWest Markets' loss before tax was #706m - including a charge of £292m for the termination of Equities operations.
• Attributable profit was #627m against #402m in 1996 which included an after tax loss of £608m on disposal of interests in subsidiary and associated undertakings.
• Earnings per ordinary share were 36.5p (1996 23p)
• Final dividend of 21.6p, payable on May 5, 1998. Total dividend for the year increased 11% to 32.2p.

Tier 1 ratio improved to 7.2% (1996 6.7%)

NatWest's Group's Chairman, Lord Alexander, said: "As is well known, 1997 was a difficult year and our overall results were poor. This was largely because of losses at NatWest Markets and our decision to exit the equities business and take the restructuring costs.

"Looking forward, we have an excellent franchise at the heart of NatWest. That is why we are concentrating on those commercial and retail banking businesses which are our core strengths. Our immediate task is to improve sharply the Group's profitability."

Derek Wanless, Group Chief Executive, commented:

"This has been a very tough year for the NatWest Group. The businesses generated a post-tax return on equity of only 8.4%. This disappointing performance reflects large losses on the termination of our Equities operations, together with poor underlying performance of NatWest Markets.

"Excluding this sector, the Group's headline return on equity was an encouraging 20.1%. There is great strength and potential in our core banking business.

"Going forward our objectives are clear.

• Improving the efficiency of the retail and commercial banking operations - our programme for building a new retail bank is going well.
• Making better use of our tremendous customer franchise - this year we achieved good sales growth in a number of areas.
• Our Capital Markets operations have to achieve a level of profitability that no longer detracts from shareholder value.
• Improving Group profitability; we are determined to achieve a return on equity of 17.5% for 1998.

"I am confident that delivery of these objectives will generate significant shareholder value."

Efficiency of operations

"The banking business relies on a strong brand and good service. Success comes to high volume, low cost suppliers. Our programme to build a new retail bank at NatWest UK is vital to our future success.

"Implementing a programme such as this inevitably results in short term cost growth. Operating expenses at NatWest UK were up a total of 3% in 1997 including an additional #105m of investment spend (£82m excluding the cost of Millennium compliance). It is very encouraging that despite this period of change and investment the business is still making a return on equity of over 27%

"This programme is on track in terms of both timing and cost. The branch network is down to its target level of 1,750 one year ahead of schedule, and 18 of our planned 56 operating centres are already open. A further 34 centres will open in 1998.

"Permanent staff numbers in Retail Banking Services are down 4,700, a reduction of 13% since the programme began. The benefit of this has been diluted by a short-term increase in contract staff primarily connected with implementation of investment programmes."

Better use of franchise

"Creation of sustainable long term value requires growth in income as well as reduction in costs. We have strong relationships with a very large number of UK retail and commerical customers.

"Growing income means building on these relationships. To sell more products we must be able to deliver products and services consistently to customers when and where they want them - at a competitive price.

"By forming the new NatWest Wealth Management sector ('Wealth Management'), we are well placed to meet more of our business and personal banking customers.

"Progress has already been made: embedded value profits from life assurance operations have grown 59% to £86m. The sale of life and investment products to NatWest UK's personal and small business customers was up 22% in 1997.

"Two-thirds of the mortgages we sold directly or through our mortgage advisers included an associated life policy. At Gartmore, whilst there have been much publicised losses of balanced pension fund mandates, these have been more than offset by business won elsewhere in the company.

"Retail sides grew significantly reflecting the gains from closer integration with NatWest UK's retail operation. Investment performance for retail funds was outstanding."

Profitability of Capital Markets

"NatWest Markets ('NWM') had an awful year in 1997 - its profit before tax was down #804m to a loss of #706m. We announced the sale of part of Equities in December 1997. The closure of the remaining business has resulted in a charge of £292m.

"We have already reduced weighted risk asset ('WRAs') by almost #8bn in the second half, excluding WRAs transferred to NatWest UK. Further reductions will bring the level of WRAs down front #23bn to no more than £18bn by the end of 1998.

"Following this restructuring the Global Debt business will be renamed Greenwich NatWest in March. We will no longer use the name NWM for this business. Debt Markets provides an important part of the services required by our corporate customers. Greenwich NatWest has also developed key skills such as asset securitisation which give us a distinct competitive advantage. We expect that, within the next three years, this business will generate acceptable returns."

Group profitability

"In addition to NatWest UK, the Group has a number of other strong businesses. Global Financial Markets ('GFM') continues to generate superior returns - Ulster Bank Group's ('Ulster Bank') return on equity for the year exceeded 29%

"However, certain businesses continued to underperform. Coutts Group's ('Coutts') results were disappointing; pre-tax profit was down 72%, reflecting a small number of large provisions in the US corporate loan book. We have taken decisive action by strengthening the management.

"Coutts' offices in New York and the West Coast of the US are being closed. The underlying business is strong. Coutts' trading surplus (excluding restructuring costs) was up 14%."

Current issues

"Credit quality remains satisfactory overall. At NatWest UK our focus on the quality of lending has resulted in specific provisions falling by #105m to #184m. This was partially offset by the problems at Coutts and the effect of a change in mix of business at Lombard. A general provision of £80m has been established to reflect the uncertainty surrounding the economic situation in South East Asia and South Korea.

"The next few years present two particular challenges: the Millennium and the Euro. To date we have incurred total revenue expenditure of #40m in preparation for the Millennium, against a total expected figure of £150m. The bulk of the systems work will be done in 1998.

"The timing and extent of UK involvement in Economic and Monetary Union remains uncertain. However, our corporate customers are gearing up for a single currency. We have introduced Euro business accounts. On the wholesale side a single European currency is likely to result in a larger and stronger market for debt securities. This will open up substantial opportunities to develop Greenwich NatWest in Europe."

Capital management

"Overall, we continue to believe that tier 1 capital at the upper end of the range 6.5% to 7% is appropriate, given our current mix of business. At this time, we are well capitalised. In the year ahead we have already highlighted the capital to be released from NWM and we expect limited additional demands elsewhere in the Group. Our policy is to return surplus capital to shareholders and we expect to do so in 1998.

Summary

"I see the NatWest Group as a unified organisation focused mainly on UK and Irish financial services. All the parts - banking; asset finance; capital markets; financial markets and wealth management - fit together to provide a complete service for both personal and business customers.

"Despite the difficulties of this last year we have emerged a stronger organisation. We recognise that there is still much to be done. The way forward is clear and I believe that 1997 will prove to have been a watershed in the development of the NatWest Group."

SOURCE NatWest