NATN.L Regulatory News (NATN)

●

NatWest has become the main provider of shared services activities for the Group in preparation for ring-fencing. Principally as a result of the transfer of shared services activities, operating expenses increased by £244 million, 13%, to £2,183 million.

●

Entered in to a Memorandum of Understanding with the Trustees of the Main scheme of the RBS Group Pension Fund to address the historical funding weakness of the pension scheme, recognising a pre-tax £2.0 billion contribution against reserves.

●

The Common Equity Tier 1 (CET1) ratio decreased by 700 basis points to 16.5%, mainly due to increases in RWAs resulting from the Ring-Fencing Transfer Scheme (RFTS).

●

Treasury related activities and balances from NWM Plc to NatWest.

●

Shared services activities transferred from NWM Plc to NatWest. NatWest will now be the main shared services provider for the RBS Group.

Net

Non-

Impairment

interest

interest

Total

Operating

(losses)/

Operating

income

income

income

expenses

releases

profit

Half year ended 30 June 2018

£m

£m

£m

£m

£m

£m

UK Personal & Business Banking

1,876 

463 

2,339 

(1,180)

(102)

1,057 

Commercial Banking

783 

423 

1,206 

(611)

(70)

525 

Private Banking

215 

121 

336 

(209)

- 

127 

Commercial & Private Banking

998 

544 

1,542 

(820)

(70)

652 

Central items & other

(75)

600 

525 

(183)

14 

356 

Total

2,799 

1,607 

4,406 

(2,183)

(158)

2,065 

Half year ended 30 June 2017

UK Personal & Business Banking

1,852 

286 

2,138 

(1,105)

(87)

946 

Commercial Banking

774 

424 

1,198 

(484)

(40)

674 

Private Banking

187 

84 

271 

(177)

(5)

89 

Commercial & Private Banking

961 

508 

1,469 

(661)

(45)

763 

Central items & other

(107)

847 

740 

(173)

- 

567 

Total

2,706 

1,641 

4,347 

(1,939)

(132)

2,276 

Total income increased by £59 million, 1%, to £4,406 million compared with £4,347 million in H1 2017.

· Net interest income increased by £93 million, 3%, to £2,799 million, compared with £2,706 million in H1 2017, reflecting increases in:

o UK PBB, £24 million to £1,876 million driven by mortgage balance growth, albeit with lower interest margins on new business, offset by an increase in interest expense on savings;

o Commercial Banking, £9 million to £783 million primarily driven by the transfer in of the Western Europe loan portfolio from NWM Plc in preparation for ring-fencing and loan portfolio growth, offset by an increase in interest expense on savings;

o Private Banking, £28 million to £215 million, consisting of an increase in income from growth in mortgage and business term lending, offset by an increase in interest expense on savings;

o With the remainder of the increase, £32 million, primarily reflecting Treasury money market positions.

· Non-interest income decreased by £34 million, 2%, to £1,607 million, compared with £1,641 million in H1 2017. The decrease was comprised of reductions in other operating income of £97 million and income from trading activities of £6 million reflecting IFRS and market volatility in relation to hedging activities. This was offset by increases in net fees and commissions income of £23 million, which included an increase in mortgage fee income of £15 million, and a gain on redemption of own debt of £46 million following the redemption of debt securities in H1 2018.

o The decrease in other operating income reflects the non-repeat of income generated by the sale of subsidiaries (RBS International, £444 million and Ulster Bank Ireland Holdings, £132 million) in H1 2017 in preparation for ring-fencing, together with the sale of Vocalink, £63 million. This was offset by income from the disposal of NWGH and the transfer in of shared services activities in H1 2018.

Group business review continued

Operating expenses

Operating expenses increased by £244 million, 13%, to £2,183 million, compared with £1,939 million in H1 2017. Increases in staff costs of £307 million, 73%, to £730 million, premises and equipment costs of £116 million to £234 million, depreciation and amortisation costs of £62 million to £197 million primarily reflects shared service activities costs and the Treasury business transferring from NWM Plc in Q2 2018 in preparation for ring-fencing. Other administrative expenses decreased by £248 million to £1,015 million, compared with £1,263 million in H1 2017, primarily due to a reduction in legal entity recharges as shared service costs are included directly.

Impairments

Impairment losses increased by £26 million, 20%, to £158 million, compared with £132 million in H1 2017, primarily driven by increased impairments in UK PBB, £15 million, and Commercial Banking, £30 million, offset by a reduction in impairments in Private Banking, £5 million.

UK PBB operating profit was £1,057 million, compared with £946 million in H1 2017. Net interest income increased by £24 million, 1%, to £1,876 million compared with £1,852 million in H1 2017, principally reflecting £26 million in relation to mortgage balance growth, albeit with mortgage market pricing pressure from a competitive market. This was offset with by an increase in interest expense principally due to deposit growth and margin benefits partly offset by mortgage margin reductions. Non-interest income increased by £177 million, 62%, to £463 million, primarily reflecting the non repeat of a one off charge in H1 2017 in respect of the disposal of UBIH. Operating expenses increased by £75 million to £1,180 million. Impairment losses increased by £15 million, 17%, to £102 million, compared with £87 million in H1 2017, largely driven by fewer portfolio releases, lower recoveries following debt sales and one-off adjustments in business and commercial. Loans and advances to customers increased by £2.2 billion, to £125.8 billion, compared with £123.7 billion at 31 December 2017, with the increase driven by continued mortgage growth. Customer deposits increased by £1.2 billion, 1%, to £136.8 billion, compared with £135.6 billion at 31 December 2017, driven by growth in personal savings and business deposits.

Commercial & Private Banking (CPB)

Commercial Banking

Commercial Banking operating profit was £525 million, compared with £674 million in H1 2017. Net interest income increased by £9 million, 1%, to £783 million, compared with £774 million in H1 2017, primarily as a result of the migration of Western Europe customers from NWM Plc in preparation for ring-fencing and growth in other corporate lending, offset by an increase in interest expense, principally due to the phasing in of the base rate rise in November 2017. Non-interest income was stable, decreasing by £1 million to £423 million. Operating expenses increased by £127 million to £611 million. Impairment losses increased by £30 million, 75%, to £70 million, primarily due to credit impaired loans. Loans and advances to customers increased by £2.9 billion to £58.2 billion, primarily due to the migration of Western Europe customer loans, £3.0 billion, in preparation for ring-fencing. Customer deposits reduced by £0.5 billion, 1%, to £65.8 billion, compared with £66.3 billion at 31 December 2017, driven by the outflow of large corporate deposits.

Private Banking

Private Banking operating profit was £127 million compared with £89 million in H1 2017. Total income was £336 million compared with £271 million in H1 2017, comprised of increases in net interest income, £28 million, principally in relation Treasury funding, and an increase in non-interest income, £37 million, driven by the transfer in of the Collective Investment business. Operating expenses increased by £32 million to £209 million. Impairments were nil for H1 2018, compared with £5 million in H1 2017. Loans and advances to customers increased by £0.4 billion, reflecting a £0.4 billion increase in mortgage lending. Deposits remained stable at £24.6 billion.

Note:

The balance sheet movements in the period are materially impacted by the Treasury and other transfers completed in the period. The balance sheet is presented on page 8 and an analysis of the key movements is on page 5.

Assets

Total assets increased by £16.8 billion to £357.7 billion at 30 June 2018, compared with £340.8 billion at 31 December 2017.

Movements due to the RFTS and Treasury transfers;

●

Cash and balances at central banks increased by £39.9 billion to £75.6 billion, compared with £35.8 billion. The increase primarily reflects the increase in placements of cash as a result of moving certain Treasury activities to the Group.

●

Loans and advances to banks decreased by £52.0 billion to £27.9 billion, compared with £79.8 billion. The reduction mainly relates to balances with fellow subsidiaries transferring from NWM Plc and being placed directly with the Bank of England.

●

Debt securities increased by £43.4 billion to £45.0 billion, primarily reflecting Treasury bonds transferred in, £41.9 billion, together with the purchase of mortgage backed securities, £0.6 billion, with the remainder of the increase primarily comprised of bonds for optimising liquidity.

Other business movements:

●

Loans and advances to customers increased by £6.7 billion, 3% to £198.6 billion, reflecting increases in UK PBB (£2.2 billion), Commercial Banking (£2.9 billion) and Private Banking (£0.4 billion), together with the novation of lending (£1.1 billion), to a direct subsidiary of NatWest and other inter-company loans, £0.6 billion, from NWM Plc in preparation for ring-fencing. The increase in UK PBB was driven by mortgage lending growth of £2.3 billion. In Commercial Banking, a reduction of £0.8 billion in Invoice Finance facilities was more than offset by the migration of Western Europe customer loans, £3.0 billion, as part of ring-fence preparation, and an increase in other large corporate lending of £1.0 billion. The increase in Private Banking was primarily in relation to personal mortgages.

●

Deferred tax increased by £780 million to £1,859 million, reflecting tax on retirement benefit liabilities, on account of additional funding being committed to the Main scheme, with the remainder of the increase due to transfers from NWM Plc in preparation for ring-fencing.

●

Assets of disposal groups decreased by £24.5 billion to £0.1 billion, reflecting the transfer of NWGH to NWM Plc in Q1 2018.

Liabilities

Total liabilities increased by £13.8 billion to £338.3 billion at 30 June 2018, compared with £324.5 billion at 31 December 2017.

Movements due to the RFTS and Treasury transfers;

●

Deposits by banks increased by £24.9 billion to £78.8 billion, reflecting the transfer of inter-company deposits from NWM Plc together with a £2.0 billion increase in the Bank of England's Term Funding Scheme drawdowns.

●

Debt securities in issue increased by £5.4 billion to £5.8 billion, compared with £0.4 billion, reflecting the transfer of Treasury covered bonds from NWM Plc.

Other business movements

●

Customer deposits increased by £7.7 billion to £241.1 billion, compared with £233.4 billion. The increase primarily reflects growth in UK PBB savings and business deposits, £1.2 billion, the transfer in of deposits from NWM Plc in preparation for ring-fencing, £7.0 billion, offset by a reduction in Commercial Banking deposits, £0.5 billion, driven by the outflow of large corporate deposits.

●

Retirement benefit liabilities increased by £2.0 billion, from £31 million at 31 December 2017. The increase reflects a commitment to provide £2.0 billion in additional funding to the Main scheme, following an agreement reached with the Main scheme Trustees.

●

Liabilities of disposal groups decreased by £23.8 billion to nil, reflecting the transfer of NWGH to NWM Plc in Q1 2018

Equity

Total equity increased by £3.0 billion, 19%, to £19.4 billion, compared with £16.4 billion at 31 December 2017. The increase reflects an equity issuance to NatWest Holdings Limited, US$3.3 billion (£2.4 billion), in preparation for ring-fencing and H1 2018 attributable profit and the transfer of reserves from NWM Plc. This was offset by the impact on equity from the planned contribution to the Main scheme and the distribution of NWGH.

Term Funding Scheme

The RBS Group has received £19 billion of funding under the Bank of England's Term Funding Scheme as at 30 June 2018, unchanged from 31 December 2017. From 1 January 2018, the participation of the scheme was entirely within NatWest (at December 2017, £2.0 billion had been drawn by NWM Plc). This scheme has now closed so no new drawings will be made. Repayment of the funding is due to be completed over a four year period.

Key balance sheet movements in the period

The following table summarises the balance sheet movements.

Treasury

31 December

Business

Business

Other

Business

30 June

2017

acquired

transfers

transfers

movements

2018

£bn

£bn

£bn

£bn

£bn

£bn

Assets

Cash and balances at central banks (1)

35.8 

- 

46.0 

- 

(6.2)

75.6 

Loans and advances

 - to banks

1.9 

0.3 

- 

- 

0.7 

2.9 

 - to customers (2)

191.9 

- 

- 

3.0 

2.6 

197.5 

 - due from intermediate holding company

and fellow subsidiaries (3)

77.9 

- 

(51.1)

- 

(0.8)

26.0 

Debt securities - liquidity portfolio

- 

41.9 

- 

- 

3.1 

45.0 

Derivatives (4)

2.3 

1.3 

- 

- 

- 

3.6 

Assets of disposal groups (5)

24.5 

- 

- 

(24.4)

- 

0.1 

Other assets (6)

6.5 

- 

- 

2.0 

(1.5)

7.0 

Total assets

340.8 

43.5 

(5.1)

(19.4)

(2.1)

357.7 

Liabilities

Deposits

 - by banks

20.5 

1.7 

- 

- 

(0.4)

21.8 

 - by customers

226.6 

- 

3.2 

- 

0.8 

230.6 

 - due to intermediate holding company

and fellow subsidiaries (3)

40.1 

- 

26.7 

- 

0.6 

67.4 

Debt securities in issue (7)

0.4 

5.1 

- 

- 

0.3 

5.8 

Derivatives (4)

3.2 

1.7 

- 

- 

(0.4)

4.5 

Liabilities of disposal groups (5)

23.8 

- 

- 

(23.8)

- 

- 

Other liabilities (8)

9.9 

- 

- 

1.7 

(3.4)

8.2 

Total Liabilities

324.5 

8.5 

29.9 

(22.1)

(2.5)

338.3 

(1)

Includes the migration of Treasury cash on deposit with central banks related to the Treasury activities transferred to the Group.

(2)

Includes the transfer in of the Western Europe loan portfolio (£3.0 billion) from NWM Plc in preparation for ring-fencing.

(3)

Includes the net impact of the Treasury funding activities transferred to the Group, in addition to other transfers completed in preparation for ring-fencing. Includes both loans and advances and deposits to/from banks and customers.

(4)

Transfer balances are all in relation to derivatives with the intermediate holding company and fellow subsidiaries.

(5)

NatWest Group Holdings Corp (NWGH), which was a direct subsidiary of the Group, and which wholly owns NatWest Markets Securities Inc. (NWSSI) (formerly RBSSI, renamed in Q2 2018), which was transferred to NatWest Markets Plc in Q1 2018 in preparation for ring-fencing.

(6)

The Other transfers include amounts relating to the transfer of the shared services activity from NWM Plc to the Group. These transfers mainly relate to property, plant and equipment.

(7)

The transfer relate to the covered bond securities.

(8)

The Other transfers include amounts relating to the transfer of the shared services activity from NWM Plc to the Group. These transfers mainly relate to accruals and other liabilities.

30 June 2018

31 December 2017

Risk asset ratios

%

%

CET1

16.5 

23.5 

Tier 1

19.6 

23.5 

Total

21.9 

30.9 

Capital

£m

£m

CET1

12,007 

13,301 

Tier 1

14,290 

13,301 

Total

15,932 

17,536 

Risk-weighted assets

Credit risk

- non-counterparty

60,756 

48,575 

- counterparty

290 

266 

Market risk

55 

136 

Operational risk

11,660 

7,724 

Total RWAs

72,761 

56,701 

Leverage (1)

Leverage exposure (£m) (CRR basis)

319,321 

213,474 

Tier 1 capital (£m)

14,290 

13,301 

Leverage ratio (%)

4.5 

6.2 

(1)

Leverage exposure is broadly aligned to the accounting value of on and off-balance sheet exposures albeit subject to specific adjustments for derivatives, securities financing positions and off-balance sheet exposures.

(2)

CRR end-point for UK banks set by the PRA is 10.5% minimum total capital ratio, with a minimum CET1 ratio of 7.0%.

●

The CET 1 ratio decreased by 700 basis points to 16.5%, mainly due to increased RWAs resulting from the RFTS.

●

RWAs increased by £16.1 billion and the leverage ratio on a PRA transitional basis has reduced to 4.5%, both of which are driven by the exposure increases resulting from the RFTS.

Half year ended

30 June 

30 June 

2018 

2017 

£m 

£m 

Interest receivable

3,377 

3,058 

Interest payable

(578)

(352)

Net interest income

2,799 

2,706 

Fees and commissions receivable

1,054 

1,029 

Fees and commissions payable

(243)

(241)

Income from trading activities

69 

75 

Gain on redemption of own debt

46 

- 

Other operating income

681 

778 

Non-interest income

1,607 

1,641 

Total income

4,406 

4,347 

Operating expenses

(2,183)

(1,939)

Profit before impairment losses

2,223 

2,408 

Impairment losses

(158)

(132)

Operating profit before tax

2,065 

2,276 

Tax charge

(473)

(417)

Profit before continuing operations

1,592 

1,859 

Loss from discontinued operations, net of tax

(3)

(363)

Profit for the year

1,589 

1,496 

Attributable to:

Non-controlling interests

3 

1 

Ordinary shareholders

1,586 

1,495 

1,589 

1,496 

Profit for the period

1,589 

1,496 

Items that do not qualify for reclassification

Loss on remeasurement of retirement benefit schemes

- 

(26)

Fair value through other comprehensive income (FVOCI) (1)

(6)

- 

Funding commitment to retirement benefit schemes (2)

(2,000)

- 

Tax

516 

5 

(1,490)

(21)

Items that do qualify for reclassification

FVOCI financial assets (1)

457 

(312)

Currency translation

(390)

(710)

Tax

(135)

14 

(68)

(1,008)

Other comprehensive loss after tax

(1,558)

(1,029)

Total income for the period

31 

467 

Attributable to:

Non-controlling interests

3 

1 

Ordinary shareholders

28 

466 

31 

467 

Notes:

(1)

Refer to Note 2 for further information on the impact of IFRS 9 on classification and basis of preparation, half year ended 30 June 2018 prepared under IFRS 9 and half year ended 30 June 2017 under IAS 39.

(2)

On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the MoU NatWest will make a contribution of £2 billion to strengthen funding of the Main section in recognition of the changes in covenant. The contribution will be made later in 2018.

30 June

31 December

2018

2017

£m 

£m 

Assets

Cash and balances at central banks

75,649 

35,799 

Amounts due from intermediate holding company and fellow subsidiaries

24,929 

77,926 

Other loans and advances to banks

2,939 

1,919 

Loans and advances to banks

27,868 

79,845 

Amounts due from fellow subsidiaries

1,057 

- 

Other loans and advances to customers

197,531 

191,889 

Loans and advances to customers

198,588 

191,889 

Debt securities

45,023 

1,612 

Equity shares

42 

43 

Settlement balances

2 

3 

Amounts due from intermediate holding company and fellow subsidiaries

3,202 

1,709 

Other derivatives

353 

606 

Derivatives

3,555 

2,315 

Intangible assets

1,015 

522 

Property, plant and equipment

3,262 

2,580 

Deferred tax

1,859 

1,079 

Prepayments, accrued income and other assets

746 

630 

Assets of disposal groups

67 

24,526 

Total assets

357,676 

340,843 

Liabilities

Amounts due to intermediate holding company and fellow subsidiaries

56,936 

33,303 

Other deposits by banks

21,846 

20,544 

Deposits by banks

78,782 

53,847 

Amounts due to fellow subsidiaries

10,490 

6,774 

Other customer accounts

230,599 

226,598 

Customer accounts

241,089 

233,372 

Debt securities in issue

5,808 

396 

Settlement balances

32 

4 

Amounts due to intermediate holding company and fellow subsidiaries

4,334 

2,966 

Other derivatives

120 

212 

Derivatives

4,454 

3,178 

Provisions for liabilities and charges

1,395 

1,398 

Accruals and other liabilities

2,019 

2,646 

Retirement benefit liabilities

2,033 

31 

Amounts due to intermediate holding company

1,400 

4,515 

Other subordinated liabilities

1,266 

1,240 

Subordinated liabilities

2,666 

5,755 

Liabilities of disposal groups

- 

23,849 

Total liabilities

338,278 

324,476 

Equity

Non-controlling interests

10 

81 

Owners' equity

19,388 

16,286 

Total equity

19,398 

16,367 

Total liabilities and equity

357,676 

340,843 

Half year ended

30 June 

30 June 

2018 

2017 

£m 

£m 

Called up share capital - at beginning and end of period

1,678 

1,678 

Paid-in equity - at beginning of period

- 

- 

Securities issued during the year (1)

2,370 

- 

At end of period

2,370 

- 

Share premium - at beginning and end of period

2,225 

2,225 

Merger reserve - At beginning of period

- 

- 

Transfer from intermediate holding company (2)

- gross

553 

- 

- tax

124 

- 

At end of period

677 

- 

Fair value through other comprehensive income reserve - at beginning of period (3)

(5)

307 

Implementation of IFRS 9 on 1 January 2018 (3)

46 

- 

Unrealised gains

35 

131 

Realised gains

(38)

(443)

Tax

(11)

- 

Transfer from intermediate holding company (2)

- gross

460 

- 

- tax

(124)

- 

At end of period

363 

(5)

Foreign exchange reserve - at beginning of period

826 

1,626 

Retranslation of net assets

(42)

20 

Foreign currency gains/(losses) on hedges of net assets

4 

(55)

Tax

- 

14 

Recycled to profit or loss on disposal of businesses

(352)

(675)

At end of period

436 

930 

Capital redemption reserve - at beginning and end of period

796 

647 

Retained earnings - at beginning of period

10,766 

9,097 

Implementation of IFRS 9 on 1 January 2018

(317)

- 

Profit/(loss) attributable to ordinary shareholders

- continuing operations

1,589 

1,858 

- discontinued operations

(3)

(363)

Distribution (4)

(902)

- 

Capital contribution (5)

1,200 

51 

Realised losses in period on FVOCI equity shares

(6)

- 

Remeasurement of retirement benefit schemes

- gross

- 

(26)

- tax

- 

5 

Funding commitment to retirement benefit schemes (5)

- gross

(2,000)

- 

- tax

516 

- 

At end of period

10,843 

10,622 

Owners' equity at end of period

19,388 

16,097 

Non-controlling interests - at beginning of period

81 

420 

Profit attributable to non-controlling interests

3 

1 

Equity transferred from fellow subsidiary

- 

8 

Equity withdrawn and disposals

(74)

(345)

At end of period

10 

84 

Total equity at end of period

19,398 

16,181 

Total equity is attributable to:

Non-controlling interests

10 

84 

Ordinary shareholders

19,388 

16,097 

19,398 

16,181 

Notes:

(1)

AT1 capital notes totalling £2.4 billion issued in April 2018 in preparation for ring-fencing

(2)

During H1 2018 the Bank acquired RBS Treasury at net asset value. As described in Note 8, the assets, liabilities and IFRS reserves were recognised at inherited values. The difference has been recognised in the merger reserve.

(3)

Refer to Note 2 for further information on the impact of IFRS 9 on classification and basis of preparation, half year ended 30 June 2018 prepared under IFRS 9 and half year ended 30 June 2017 under IAS 39.

(4)

On 2 March 2018, in preparation for ring-fencing, NatWest Group Holdings Corp, parent of NatWest Markets Securities Inc, was distributed to NatWest Markets plc.

(5)

On 17 April 2018 the RBS Group agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees and agreed to contribute £1.2 billion to the ring-fenced bank. Under the MoU NatWest will make a contribution of £2 billion to strengthen funding of the Main section in recognition of the changes in covenant. The contribution will be made later in 2018.

Half year ended

30 June 

30 June 

2018 

2017 

£m 

£m

Operating activities

Operating profit before tax from continuing operations

2,065 

2,276 

Loss before tax from discontinued operations

(3)

(359)

Adjustments for non-cash items

(4,291)

(515)

(2,229)

1,402 

Changes in operating assets and liabilities

41,173 

9,427 

Net cash flows from operating activities before tax

38,944 

10,829 

Income taxes received/(paid)

48 

(8)

Net cash flows from operating activities

38,992 

10,821 

Net cash flows from investing activities

(40,295)

4,386 

Net cash flows from financing activities

548 

(361)

Effects of exchange rate changes on cash and cash equivalents

589 

(563)

Net (decrease)/increase in cash and cash equivalents

(166)

14,283 

Cash and cash equivalents at beginning of period

97,940 

79,764 

Cash and cash equivalents at end of period

97,774 

94,047 

Impact of IFRS 9

Expected

31 December

Classification &

credit

1 January

2017

measurement

losses

Tax

2018

£m

£m

£m

£m

£m

Cash and balances at central banks

35,799 

- 

- 

- 

35,799 

Net loans and advances to banks

79,845 

- 

(19)

- 

79,826 

Net loans and advances to customers

191,889 

(54)

(301)

- 

191,534 

Debt securities and equity shares

1,655 

47 

- 

- 

1,702 

Other assets

29,340 

- 

- 

97 

29,437 

Total assets

340,843 

(7)

(320)

97 

340,613 

Total liabilities

324,476 

- 

44 

(3)

324,517 

Total equity

16,367 

(7)

(364)

100 

16,096 

Total liabilities and equity

340,843 

(7)

(320)

97 

340,613 

3. Operating expenses

Half year ended

30 June 

30 June 

2018 

2017 

£m 

£m 

Staff costs

(730)

(423)

Premises and equipment

(234)

(118)

Other administrative expenses (1)

(1,015)

(1,263)

Depreciation and amortisation

(197)

(135)

Write down of other intangible assets

(7)

- 

(2,183)

(1,939)

(1)

Includes costs relating to customer redress and litigation and other regulatory - refer to Note 9 for further details.

Half year ended

30 June 

30 June 

2018 

2017 

£m 

£m 

Profit before tax

2,065 

2,276 

Expected tax charge

(392)

(438)

Losses and temporary differences in period where no deferred tax asset recognised

1 

- 

Foreign profits taxed at other rates

(2)

- 

Items not allowed for tax

- losses on disposals and write-downs

(24)

(72)

- UK bank levy

(14)

- 

- regulatory and legal actions

(3)

6 

- other disallowable items

- 

(2)

Non-taxable items

- non taxable gain on transfer of fellow subsidiaries

97 

180 

- other

3 

24 

Taxable foreign exchange movements

- 

(1)

Losses brought forward and utilised

- 

(1)

Reduction in carrying value of deferred tax asset in respect of UK losses

(15)

- 

Banking surcharge

(124)

(113)

Actual tax charge

(473)

(417)

Amortised cost

MFVPL (1)

FVOCI (2)

Other assets

Total 

Assets

£m 

£m 

£m 

£m 

£m 

Cash and balances at central banks

- 

- 

75,649 

75,649 

Loans and advances to banks

- amounts due from intermediate holding company and fellow subsidiaries

36 

- 

24,893 

24,929 

- other

44 

- 

2,895 

2,939 

Loans and advances to customers

- amounts due from fellow subsidiaries

- 

- 

1,057 

1,057 

- other

615 

- 

196,916 

197,531 

Debt securities

- 

39,213 

5,810 

45,023 

Equity shares

35 

7 

- 

42 

Settlement balances

- 

- 

2 

2 

Derivatives

- amounts due from intermediate holding company and fellow subsidiaries

3,202 

3,202 

- other

353 

353 

Assets of disposal groups

67 

67 

Other assets

6,882 

6,882 

30 June 2018

4,285 

39,220 

307,222 

6,949 

357,676 

Held-for-

Amortised

Other 

trading

DFV (3)

AFS (4)

cost

assets 

Total

£m 

£m 

£m 

£m 

£m 

£m 

Cash and balances at central banks

- 

- 

- 

35,799 

35,799 

Loans and advances to banks

- amounts due from intermediate holding company and fellow subsidiaries

22 

132 

- 

77,772 

77,926 

- other

- 

- 

- 

1,919 

1,919 

Loans and advances to customers

- other

7 

- 

- 

191,882 

191,889 

Debt securities

- 

- 

553 

1,059 

1,612 

Equity shares

- 

34 

9 

- 

43 

Settlement balances

- 

- 

- 

3 

3 

Derivatives

- amounts due from intermediate holding company and fellow subsidiaries

1,709 

1,709 

- other

606 

606 

Assets of disposal groups

24,526 

24,526 

Other assets

4,811 

4,811 

31 December 2017

2,344 

166 

562 

308,434 

29,337 

340,843 

Held-for-

Amortised

Other 

trading

DFV (3)

 cost

liabilities 

Total 

Liabilities

£m 

£m 

£m 

£m 

£m 

Deposits by banks

- amounts due to intermediate holding company and fellow subsidiaries

3 

- 

56,933 

56,936 

- other

- 

- 

21,846 

21,846 

Customer accounts

- amounts due to fellow subsidiaries

- 

- 

10,490 

10,490 

- repos

- 

- 

3,160 

3,160 

- other

58 

43 

227,338 

227,439 

Debt securities in issue

172 

- 

5,636 

5,808 

Settlement balances

- 

- 

32 

32 

Derivatives

- amounts due to intermediate holding company and fellow subsidiaries

4,334 

4,334 

- other

120 

120 

Subordinated liabilities

- amounts due to intermediate holding company

- 

- 

1,400 

1,400 

- other

- 

- 

1,266 

1,266 

Other liabilities

807 

4,640 

5,447 

30 June 2018

4,687 

43 

328,908 

4,640 

338,278 

Held-for-

Amortised 

Other 

trading

DFV (3)

 cost 

liabilities 

Total 

£m 

£m 

£m 

£m 

£m 

Deposits by banks

- amounts due to intermediate holding company and fellow subsidiaries

608 

- 

32,695 

33,303 

- other

- 

- 

20,544 

20,544 

Customer accounts

- 

- 

- 

- 

- amounts due to fellow subsidiaries

- 

- 

6,774 

6,774 

- other

9 

166 

226,423 

226,598 

Debt securities in issue

- 

- 

396 

396 

Settlement balances

- 

- 

4 

4 

Derivatives

- amounts due to intermediate holding company and fellow subsidiaries

2,966 

2,966 

- other

212 

212 

Subordinated liabilities

- amounts due to intermediate holding company

- 

- 

4,515 

4,515 

- other

- 

- 

1,240 

1,240 

Liabilities of disposal groups

23,849 

23,849 

Other liabilities

808 

3,267 

4,075 

31 December 2017

3,795 

166 

293,399 

27,116 

324,476 

(1)

Mandatory fair value through profit or loss.

(2)

Fair value through other comprehensive income.

(3)

Designated as at fair value through profit or loss.

(4)

Available-for-sale

30 June 2018

31 December 2017

Level 1 

Level 2 

Level 3

Total 

Level 1 

Level 2 

Level 3

Total 

Assets

£bn 

£bn 

£bn 

£bn 

£bn 

£bn 

£bn 

£bn 

Loans and advances

- 

0.6 

0.1 

0.7 

- 

0.2 

- 

0.2 

Debt securities - FVOCI (4)

36.8 

2.3 

0.1 

39.2 

0.4 

0.2 

- 

0.6 

Derivatives

- 

3.6 

- 

3.6 

- 

2.3 

- 

2.3 

36.8 

6.5 

0.2 

43.5 

0.4 

2.7 

- 

3.1 

Proportion

84.6%

14.9%

0.5%

100.0%

12.9%

87.1%

- 

100%

Liabilities

Deposits

- 

0.1 

- 

0.1 

- 

0.8 

- 

0.8 

Debt securities in issue

- 

0.2 

- 

0.2 

- 

- 

- 

- 

Derivatives

- 

4.5 

- 

4.5 

- 

3.2 

- 

3.2 

- 

4.8 

- 

4.8 

- 

4.0 

- 

4.0 

Proportion

- 

100.0%

- 

100.0%

- 

100%

- 

100%

(1)

Level 1: valued using unadjusted quoted prices in active markets, for identical financial instruments. Examples include G10 government securities, listed equity shares, certain exchange-traded derivatives and certain US agency securities.

Level 2: valued using techniques based significantly on observable market data. Instruments in this category are valued using:

(a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or

(b) valuation techniques where all the inputs that have a significant effect on the valuations are directly or indirectly based on observable market data.

Level 2 instruments included non-G10 government securities, most government agency securities, investment-grade corporate bonds, certain mortgage products, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most OTC derivatives.

Level 3: instruments in this category have been valued using a valuation technique where at least one input which could have a significant effect on the instrument's valuation, is not based on observable market data. Level 3 instruments primarily include cash instruments which trade infrequently, mortgage loans, unlisted equity shares, certain residual interests in securitisations, CDOs, other mortgage-backed products and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.

(2)

Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred. There were no significant transfers between level 1 and level 2.

(3)

(4)

Level 3 balances at 30 June 2018 comprise loans and advances of £0.1 billion (31 December 2017 - nil) with a sensitivity of +£10 million/-nil (31 December 2017 - nil) and debt securities of £0.1 billion (31 December 2017 - nil) with a sensitivity of +nil/-nil.

Refer to Note 2 for further information on the impact of IFRS 9 on classification and basis of preparation, half year ended 30 June 2018 prepared under IFRS 9 and year ended 31 December 2017 under IAS 39.

30 June 2018

31 December 2017

Carrying value 

Fair value 

Carrying value 

Fair value