RBS.L Regulatory News (RBS)

Contents

Page

Introduction

2

Highlights

3

Summary consolidated results

11

Analysis of results

13

Segment performance

20

Statutory results

Condensed consolidated income statement (unaudited)

53

Condensed consolidated statement of comprehensive income (unaudited)

54

Condensed consolidated balance sheet (unaudited)

55

Condensed consolidated statement of changes in equity (unaudited)

56

Condensed consolidated cash flow (unaudited)

58

Notes

59

Independent review report to The Royal Bank of Scotland Group plc

93

Risk factors

94

Forward-looking statements

97

Statement of directors' responsibilities

99

Additional information

Share information

100

Financial calendar

100

Appendix 1 - Capital and risk management

Appendix 2 - Segmental income statement reconciliations

Analyst enquiries:

Matt Waymark

Investor Relations

+44 (0) 207 672 1758

Media enquiries:

RBS Press Office

+44 (0) 131 523 4205

Analyst and investor presentation

Fixed income

Web cast and dial in details

Date:

Friday 4 August 2017

Friday 4 August 2017

www.rbs.com/results

Time:

9:30 am UK time

2:30 pm UK time

International - +44 1452 568 172

Conference ID:

59333436

59285614

UK Free Call - 0800 694 8082

US Toll Free - 1 866 966 8024

●

Interim Results 2017 and background slides.

●

A financial supplement containing income statement, balance sheet and segment performance information for the nine quarters ended 30 June 2017.

●

Pillar 3 supplement at 30 June 2017.

●

Financial information in the segmental performance section on pages 20 to 52 except for risk-weighted assets (RWAs), RWAs after capital deductions (RWAes), the related metrics, return on equity (ROE), adjusted return on equity and employee numbers.

●

Statutory results on pages 53 to 92 comprising the condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity, condensed consolidated cash flow statement and the related Notes 1 to 16.

●

Appendix 1 Capital and risk management except for those items indicated as not within the scope of the independent review.

●

'Adjusted' measures of financial performance, principally operating performance before: own credit adjustments; gain or loss on redemption of own debt; strategic disposals; restructuring costs; litigation and conduct costs and write down of goodwill (refer to Appendix 2 for reconciliations of the statutory to adjusted basis);

●

Performance, funding and credit metrics such as 'return on tangible equity', 'adjusted return on tangible equity' and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives (funded assets), net interest margin (NIM) adjusted for items designated at fair value through profit or loss (non-statutory NIM), cost:income ratio, loan:deposit ratio and REIL/impairment provision ratios. These are internal metrics used to measure business performance;

●

Personal & Business Banking (PBB) franchise results, combining the reportable segments of UK Personal & Business Banking (UK PBB) and Ulster Bank RoI, Commercial & Private Banking (CPB) franchise results, combining the reportable segments of Commercial Banking, Private Banking and RBS International (RBSI); and

●

Cost savings progress and 2017 target calculated using operating expenses excluding litigation and conduct costs, restructuring costs, write down of goodwill and the VAT recoveries.

Half year ended

Quarter ended

30 June

30 June

30 June

31 March

30 June

Key metrics and ratios

2017 

2016 

2017

2017 

2016

Attributable profit/(loss)

£939m

(£2,045m)

£680m

£259m

(£1,077m)

Operating profit/(loss)

£1,951m

(£274m)

£1,238m

£713m

(£695m)

Operating profit - adjusted (2)

£3,061m

£1,156m

£1,690m

£1,371m

£716m

Net interest margin

2.18%

2.18%

2.13%

2.24%

2.21%

Cost:income ratio (3)

69.8%

97.7%

64.4%

76.1%

117.2%

Cost:income ratio - adjusted (3,4,5)

53.1%

71.4%

50.7%

55.8%

66.6%

Earnings/(loss) per share

- basic

7.9p

(17.6p)

5.7p

2.2p

(9.3p)

- basic fully diluted

7.9p

(17.6p)

5.7p

2.2p

(9.3p)

- adjusted (4,5)

16.4p

(5.5p)

9.2p

7.1p

2.6p

- adjusted fully diluted(4,5,8)

16.3p

(5.5p)

9.2p

7.1p

2.6p

Return on tangible equity (6,7)

5.6%

(10.3%)

8.0%

3.1%

(11.0%)

Return on tangible equity - adjusted (4,5,7)

11.5%

(3.2%)

12.9%

9.7%

3.2%

Average tangible equity (6)

£33,705m

£39,870m

£33,974m

£33,357m

£39,283m

Average number of ordinary shares

outstanding during the period (millions)

11,817 

11,639 

11,841 

11,793 

11,673 

Average number of ordinary shares

outstanding during the period - fully diluted (millions) (8)

11,897 

11,680 

11,923 

11,872 

11,714 

PBB, CPB & NatWest Markets

Total income - adjusted (4)

£6,297m

£5,801m

£3,143m

£3,154m

£2,986m

Operating profit - adjusted (2)

£2,678m

£2,070m

£1,352m

£1,326m

£1,047m

Return on tangible equity - adjusted (4,5,6)

14.1%

10.9%

14.3%

13.8%

11.0%

30 June

31 March

31 December

Balance sheet related key metrics and ratios

2017 

2017 

2016 

Tangible net asset value (TNAV) per ordinary share (7)

300p

297p

296p

Tangible net asset value (TNAV) per ordinary share - fully diluted (7)

298p

295p

294p

Liquidity coverage ratio (LCR) (9,10)

145%

129%

123%

Liquidity portfolio

£178bn

£160bn

£164bn

Net stable funding ratio (NSFR) (11)

123%

120%

121%

Loan:deposit ratio (12,13)

91%

93%

91%

Short-term wholesale funding (12,14)

£18bn

£16bn

£14bn

Wholesale funding (12,14)

£70bn

£67bn

£59bn

Common Equity Tier 1 (CET1) ratio

14.8%

14.1%

13.4%

Risk-weighted assets (RWAs)

£215.4bn

£221.7bn

£228.2bn

CRR leverage ratio (15)

5.1%

5.0%

5.1%

UK leverage ratio (16)

5.8%

5.7%

5.6%

Tangible equity (7)

£35,682m

£35,186m

£34,982m

Number of ordinary shares in issue (millions) (17)

11,876 

11,842 

11,823 

Number of ordinary shares in issue (millions) - fully diluted (8,17)

11,956 

11,925 

11,906 

(1)

Attributable to ordinary shareholders.

(2)

Operating profit before tax excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring, litigation and conduct costs.

(3)

Operating lease depreciation included in income (H1 2017 - £72 million; Q2 2017 - £36 million, H1 2016 - £76 million; Q1 2017 - £36 million and Q2 2016 - £38 million).

(4)

Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.

(5)

Excluding restructuring costs and litigation and conduct costs.

(6)

Calculated using profit/(loss) for the period attributable to ordinary shareholders.

(7)

Tangible equity is equity attributable to ordinary shareholders less intangible assets.

(8)

Includes the effect of dilutive share options and convertible securities. Dilutive shares on an average basis for H1 2017 were 80 million shares (Q2 2017 - 81 million; H1 2016 - 41 million; Q1 2017 - 79 million; Q2 2016 - 41 million) and as at 30 June 2017 were 80 million (31 March 2017 - 83 million; 31 December 2016 - 83 million).

(9)

On 1 October 2015 the LCR became the Prudential Regulation Authority's (PRA) primary regulatory liquidity standard; UK banks are required to meet a minimum standard of 90% from 1 January 2017, rising to 100% by 1 January 2018. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretation of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other institutions.

(10)

The LCR of 145% at 30 June 2017 excludes the impact of the litigation settlement with the FHFA in respect of claims relating to RBS issuance and underwriting of RMBS in the US, as announced on 12 July 2017. The estimated impact of the settlement on the LCR is a 6% reduction to 139%.

(11)

NSFR for all periods have been calculated using RBS's current interpretations of the revised BCBS guidance on NSFR issued in late 2014. Therefore, reported NSFR will change over time with regulatory developments. Due to differences in interpretation, RBS's ratio may not be comparable with those of other financial institutions.

(12)

Excludes repurchase agreements and stock lending.

(13)

Includes disposal groups.

(14)

Excludes derivative collateral.

(15)

Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.

(16)

Based on end-point CRR Tier 1 capital and UK leverage exposures reflecting the post EU referendum measures announced by the Bank of England in the third quarter of 2016.

(17)

Includes 17 million treasury shares (31 March 2017 - 28 million; 31 December 2016 - 39 million).

●

Core adjusted income increased by £496 million, or 8.6%, compared with H1 2016. NatWest Markets income increased by 43.9% to £980 million, navigating markets well compared to a more difficult H1 2016. Across PBB and CPB income increased by 3.8% supported by increased lending;

●

Core adjusted operating expenses reduced by £151 million, or 4.2%, compared with H1 2016. This represents 31% of our overall cost reduction in H1 2017 and we retain our expectation that around half of the full year reduction will be across the core businesses. Cost:income ratio across the core businesses improved from 61.6% to 54.3%, with operating JAWS of 12.7%; and

●

Excluding volume growth, RWAs reduced by £8.6 billion across the core businesses in H1 2017 and we remain committed to achieving a reduction of at least £20 billion by the end of 2018.

●

Capital Resolution RWAs reduced by £7.9 billion in H1 2017 to £26.6 billion and, excluding RBS's stake in Alawwal Bank (£7.4 billion at 30 June 2017), are now in the £15-£20 billion range we guided to for the end of 2017;

●

In H1 2017, settlement was reached with the Federal Housing Finance Agency (FHFA) in the US and we also incurred a further provision in relation to settling the 2008 rights issue shareholder litigation; and

●

On 26 July, it was announced that an alternative remedies package, in respect of RBS's remaining State Aid obligation regarding Williams & Glyn, has now been agreed in principle between HM Treasury (HMT) and the EC Commissioner responsible for competition.

●

RBS reported an attributable profit of £939 million for H1 2017 compared with a loss of £2,045 million in H1 2016 which included payment of the final Dividend Access Share (DAS) dividend of £1,193 million.

●

Adjusted income of £6,843 million was £1,294 million, or 23.3%, higher than H1 2016 reflecting strong income growth across the core PBB, CPB and NatWest Markets businesses and a £154 million gain in respect of IFRS volatility compared with a loss of £668 million in H1 2016.  

●

The net interest margin (NIM) was stable on H1 2016 at 2.18%. A 9 basis point reduction across PBB and CPB, associated with asset margin pressure and higher liquidity requirements, has been broadly offset by the benefit of a reduction in low yielding Capital Resolution and centrally held assets, down from 12% of total interest earning assets to 5%.

●

Excluding VAT recoveries of £51 million in H1 2017 and £227 million in H1 2016, adjusted operating expenses reduced by £494 million, or 11.7%, compared with H1 2016. The adjusted cost:income ratio for H1 2017 was 53.1% compared with 71.4% in H1 2016.

●

Restructuring costs were £790 million in H1 2017, an increase of £160 million compared with H1 2016, and included a charge of £217 million relating to the reduction of our property portfolio.

●

Litigation and conduct costs of £396 million include a £151 million charge in respect of the settlement with the FHFA and a £25 million charge relating to the settlement of the UK 2008 rights issue shareholder litigation.

●

A net impairment loss of £116 million, 7 basis points of gross customer loans, compared with a loss of £409 million in H1 2016, with the reduction principally reflecting a £264 million shipping impairment in H1 2016. REIL represented 2.8% of gross customer loans compared with 3.5% at 30 June 2016 and 2.9% at 31 March 2017.

●

A gain of £156 million was recognised in relation to the disposal of RBS's stake in Vocalink.

●

PBB and CPB net loans and advances have increased by 4.1% on an annualised basis in H1 2017 principally driven by mortgage growth within UK PBB.

●

H1 2017 lending growth has been achieved while remaining within our risk appetite. Personal mortgage lending represented 49% of net loans and advances, compared with 47% as at 31 December 2016, whilst personal unsecured and commercial real estate were flat over the first half at 4% and 8% respectively. Overall LTV across our mortgage portfolio was stable at 58%.

●

Tangible net asset value (TNAV) per share of 300p increased by 4p, compared with 31 December 2016, principally reflecting the H1 2017 attributable profit.

●

Across our three customer facing businesses, PBB, CPB and NatWest Markets, adjusted operating profit of £2,678 million was £608 million, or 29.4%, higher than H1 2016.

●

UK PBB adjusted operating profit of £1,270 million was £205 million, or 19.2%, higher than H1 2016. Total income of £2,755 million was £140 million, or 5.4%, higher driven by increased lending, with net loans and advances 9.9% higher at £138.5 billion.

●

Ulster Bank RoI adjusted operating profit of £90 million was £32 million, or 26.2%, lower than H1 2016 principally reflecting a lower net impairment release and reduced income on free funds.

●

Commercial Banking adjusted operating profit of £781 million was £118 million, or 17.8%, higher than H1 2016 primarily reflecting reduced expenses associated with lower headcount and an intangible asset write-down in H1 2016. In addition income was £51 million, or 3.0%, higher at £1,750 million driven by customer deposit growth and re-pricing benefits across lending and deposits.

●

Private Banking adjusted operating profit of £96 million was £23 million, or 31.5%, higher than H1 2016 driven by a £38 million, or 14.8%, reduction in adjusted operating expenses principally reflecting cost reduction initiatives.

●

RBS International adjusted operating profit of £100 million reduced by £6 million, or 5.7%, compared with H1 2016 driven by a £22 million, or 32.4%, increase in adjusted operating expenses principally reflecting increased regulatory costs in relation to ring-fencing.

●

NatWest Markets adjusted income of £980 million was £299 million, or 43.9%, higher than H1 2016. An adjusted operating profit of £341 million compared with £41 million in H1 2016.

●

Capital Resolution adjusted operating loss of £135 million was £848 million lower than H1 2016 principally reflecting materially lower disposal losses and impairment charges in H1 2017 and a £282 million, or 68.0%, reduction in adjusted operating expenses to £133 million. RWAs of £26.6 billion were £15.7 billion, or 37.1%, lower than H1 2016.

●

Williams & Glyn adjusted operating profit increased by £37 million, or 18.8%, to £234 million driven by a £39 million, or 19.8%, reduction in adjusted operating expenses reflecting a substantial reduction in headcount.

●

Central items adjusted operating profit of £284 million, compared with a loss of £128 million in H1 2016, included a £51 million VAT recovery (H1 2016 - £227 million) and a £154 million gain in respect of IFRS volatility (H1 2016 - £668 million loss).

●

An attributable profit of £680 million compared with a loss of £1,077 million in Q2 2016 and a profit of £259 million in Q1 2017. The Q2 2016 loss included litigation and conduct costs of £1,284 million.

●

An adjusted operating profit of £1,690 million was £974 million higher than Q2 2016 and was £319 million above Q1 2017 principally reflecting an IFRS volatility gain of £172 million, compared with a loss of £18 million in Q1 2017.

●

Across our three customer facing businesses, PBB, CPB and NatWest Markets, adjusted operating profit of £1,352 million was £305 million, or 29.1%, higher than Q2 2016. Adjusted RoTE was 14.3% compared with 11.0% in Q2 2016.

●

Q2 2017 NIM of 2.13% was 8 basis points lower than Q2 2016 principally reflecting the impact of asset margin pressure and mix impacts across the core businesses. Compared with Q1 2017, NIM reduced by 11 basis points to 2.13%, with the majority of the reduction driven by a conscious build-up in liquidity as we manage for litigation and conduct costs, including FHFA, and accelerate MREL and other wholesale funding plans into H1 2017. In addition, conditions in the UK mortgage market have become more competitive, contributing to a 9 basis point reduction in UK PBB NIM.

●

Net loans and advances across PBB and CPB increased by £1.8 billion in the quarter to £277.7 billion driven by mortgage growth in UK PBB.

●

The CET1 ratio remains ahead of our 13% target at 14.8%, a 140 basis point increase on Q4 2016 driven by a £12.8 billion reduction in RWAs and the £939 million attributable profit.

●

RWAs decreased by £12.8 billion compared with Q4 2016 principally reflecting £7.9 billion of disposals and run-off in Capital Resolution and planned RWA reductions in the core businesses. Excluding volume growth, core RWAs reduced by £8.6 billion comprising £0.7 billion in PBB, £4.4 billion in CPB and £3.5 billion in NatWest Markets.

●

During H1 2017, RBS has issued a Sterling equivalent of £3.6 billion (€1.5 billion and $3.0 billion) of senior holding company (RBSG) debt which it expects to be eligible to meet its 'Minimum Requirement for Own Funds and Eligible Liabilities' (MREL). Total estimated 'Loss Absorbing Capital' (LAC) is now £54.9 billion, or 25.5% of RWAs. In addition, RBS successfully completed its first covered bond issuance in over five years comprising €1.25 billion 7 year and £1.25 billion three year tranches.

●

During H1 2017, RBS successfully redeemed £4.1 billion Sterling equivalent of legacy capital securities through calls and repurchase. RBS has decided not to exercise the current call option on the non-cumulative US Dollar preference share series U and Euro Preference Shares Series 3. RBS has instead prioritised calling nine other legacy Tier 1 instruments with higher economic benefit. Further details are available in the Capital, liquidity and funding risk section on page 3.

●

Leverage ratio was stable on Q4 2016 at 5.1%.

●

Risk elements in lending (REIL) of £9.3 billion were £1.0 billion lower than 31 December 2016 and represented 2.8% of gross customer loans, compared with 3.1% at 31 December 2016 and 3.5% as at 30 June 2016. Excluding REIL in Capital Resolution and Ulster Bank RoI, REIL were £4.0 billion or 1.3% of the respective gross customer loans.

●

As at 30 June 2017, there has been no material change to the surplus ratio of assets to liabilities in the Main Scheme of The Royal Bank of Scotland Group Pension Fund which at 31 December was c.115% under IAS valuation principles.

●

RBS has continued to utilise the Bank of England's Term Funding Scheme with £9 billion drawn since 31 December 2016, taking total RBS participation to £14 billion as at 30 June 2017.

●

On 15 June 2017, Moody's announced that they had upgraded their senior debt rating of The Royal Bank of Scotland Group plc (RBS Group) by one notch to Baa3 from Ba1. As a result, all three ratings agencies have now given RBS Group an investment grade senior debt rating.

●

RBS continued to deliver strong support for both household and business customers. Within UK PBB, gross new mortgage lending was £14.5 billion, with market share of new mortgages at approximately 12% supporting growth in stock share to approximately 9.1%, up from 8.8% at 31 December 2016. Positive momentum continued across business banking lending with net balances up 4%, excluding transfers of £0.6 billion from Commercial Banking as at 30 June 2017, compared with H1 2016.

●

RBS continued to enhance the capability of its mobile app, with a corresponding increase in customer usage. We now have 5.0 million customers regularly using the app, up 19% on FY 2016. In the final month of H1 2017 customers logged into the app an average of 58 times a second and sent close to ten million payments. RBS remains the only UK bank to allow customers to use the app to withdraw money from a cash machine without needing to carry a debit card, with customers now using the 'Get Cash' service over 200,000 times a month.

●

We continued to improve our product and service delivery channels to support our lending and income growth targets. In mortgages, while in the past a mortgage renewal would have required an appointment at a branch or a phone call, Royal Bank and NatWest customers can now renew online in a matter of minutes, with close to 19,000 customers renewing online in H1 2017. In addition, for new customers we have piloted a paperless mortgage process which has cut the time taken to issue a firm offer in half, to around ten days.

●

During H1 2017, RBS launched NatWest Invest, our new digital investment service, which offers NatWest personal and private customers the opportunity to select their own investment online, from a range of five personal portfolio funds.

●

NatWest Markets has reviewed ways to minimise disruption to the business and continue to serve its customers well in the event of any loss of EU passporting. Should the outcome of the current EU separation negotiations make it necessary, NatWest Markets is ensuring our existing RBS N.V. banking licence in the Netherlands is operationally ready.

Q2 2016

Q1 2017

Q2 2017

Personal Banking

NatWest (England & Wales)(1)

12

15

13

Royal Bank of Scotland (Scotland)(1)

(7)

(13)

(21)

Ulster Bank (Northern Ireland)(2)

(16)

(15)

(8)

Ulster Bank (Republic of Ireland)(2)

(11)

(8)

(5)

Business Banking

NatWest (England & Wales)(3)

4

(3)

(8)

Royal Bank of Scotland (Scotland)(3)

(4)

(7)

(12)

Business & Commercial

Ulster Bank (Northern Ireland)(4)

3

(6)

(5)

Ulster Bank (Republic of Ireland)(5)

N/A

N/A

13

Commercial Banking(6)

18

21

22

Q2 2016

Q1 2017

Q2 2017

Customer trust(7)

NatWest (England & Wales)

48

55

58

Royal Bank of Scotland (Scotland)

23

28

27

(1)

Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest (England & Wales) (3365) Royal Bank of Scotland (Scotland) (510). Based on the question: "How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?" Base: Claimed main banked current account customers.

(2)

Source: Coyne Research 12 month rolling data. Latest base sizes: Ulster Bank NI (309) Ulster Bank RoI (273) Question: "Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely".

(3)

Source: Charterhouse Research Business Banking Survey, YE Q2 2017. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes: NatWest England & Wales (1228), RBS Scotland (401). Question: "How likely would you be to recommend (bank)". Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.

(4)

Source: Charterhouse Research Business Banking Survey, YE Q2 2017. Based on interviews with businesses with an annual turnover up to £1 billion. Base size: 383. Question: "How likely would you be to recommend (bank)". Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Northern Ireland.

(5)

Source: Red C SME survey based on interviews with businesses with an estimated annual turnover of €2-25m (6-monthly study only). Latest sample size: Ulster Bank (252).

(6)

Source: Charterhouse Research Business Banking Survey, YE Q2 2017. Commercial £2m+ in GB (RBSG sample size, excluding don't knows: 913). Question: "How likely would you be to recommend (bank)". Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.

(7)

Source: Populus. Latest quarter's data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest,

England & Wales (942), RBS Scotland (206).

●

Following a resolution at the parent company's 2017 Annual General Meeting, on 15 June 2017 we announced completion of the legal capital reduction process to cancel the share premium account and capital redemption reserve whose combined balances were £30.3 billion. As a result, the parent company's retained earnings increased by an equal amount. There has been no change in the interests of ordinary and preference shareholders.

●

●

In terms of CET1 capital, under the current rules, the increase in credit impairment provisions is fully offset by a reduction in the regulatory expected loss deduction, so is anticipated to have no CET1 capital impact. The increase in asset values of £1.0 billion noted above is partially offset by tax and an expected additional prudential valuation deduction driving an overall increase in CET1 capital of some £0.6 billion. As at end Q2 2017, this would have equated to an increase in the CET1 ratio of approximately 30 basis points.

●

RBS will continue to calibrate and refine its models and methodologies during 2017 and 2018 which may impact IFRS 9 at adoption on 1 January 2018; changes will also follow from disposals, changes in the portfolio composition, economic or credit conditions. For further information on the implementation of IFRS 9 refer to pages 308 to 313 of the 2016 Annual Report and Accounts.

Strategy goal

2017 target

Q2 2017 Progress

Strength and sustainability

Maintain bank CET1 ratio of 13%

CET1 ratio of 14.8%; up 70 basis points from Q1 2017 and 140 basis points from Q4 2016

Customer experience

Significantly increase NPS or maintain No.1 in chosen customer segments

Our Commercial Banking franchise remains a clear market leader. We still have significant work to do to improve customer experience across some of our other businesses and brands

Simplifying the bank

Reduce operating expenses by at least £750 million (2)

Operating expenses down £494 million, or 11.7%, excluding VAT recoveries; 66% of the total full year target

Supporting growth

Net 3% growth on total PBB and CPB loans to customers

Net customer loans in PBB and CPB are up 4.1% on an annualised basis for the year to date; 69% of the total full year target

Employee engagement

Improve employee engagement

Employee engagement improved by 4 points in H1 2017

(1)

The expectations and trends discussed in this section represent management's current expectations and are subject to change, including as a result of the factors described in this document and in the "Risk Factors" on pages 432 to 463 of the Annual Report and Accounts 2016. These statements constitute forward-looking statements; refer to Forward-looking statements in this announcement.

(2)

Cost saving target and progress 2017 calculated using operating expenses excluding restructuring costs, litigation and conduct costs, write down of goodwill and VAT recoveries.

●

On 26 July, RBS announced that it had been informed by HM Treasury (HMT) that, following the consultation process carried out by the European Commission (EC) and a market testing exercise carried out by HMT, an alternative remedies package has now been agreed in principle between HMT and the EC Commissioner responsible for competition.  

●

This revised package is focused on the following two remedies to promote competition in the market for banking services to small and medium enterprises ("SMEs") in the UK.

○

A £425 million Capability and Innovation Fund, to be administered by an independent body, that will grant funding to a range of competitors in the UK banking and financial technology sectors; and

○

An Incentivised Switching Scheme which will provide £275 million of funding for eligible challenger banks to help them incentivise SME customers of the business previously described as Williams & Glyn to switch their accounts and loans from RBS paid in the form of "dowries" to the receiving bank. An additional £75 million will be made available by RBS to cover customers' costs of switching.

●

This revised package will be submitted to the EC's College of Commissioners for approval and if agreed will form the basis of a new term sheet in relation to RBS's remaining State Aid commitments. It is expected to come into effect during H2 2017, upon which RBS will no longer be obliged to achieve separation and divestment of the business previously described as Williams & Glyn by 31 December 2017.

●

A £750 million provision was recognised in RBS's 2016 Annual Results in relation to the previously proposed package of measures. An incremental charge of £50 million has been recognised in Q2 2017 in relation to the revised package and its implementation costs, taking the total provision to £800 million.

●

RBS will incur running costs for the duration of the scheme, which are estimated at around £35 million and will be substantially incurred before the end of 2019. Furthermore, under the terms of the revised package, should the uptake within the Incentivised Switching Scheme not be sufficient, RBS could be required to make a further contribution, capped at £50 million.

●

We retain the 2017 full year financial guidance and medium term financial outlook we provided in the 2016 Annual Results document. In addition, and subject to providing substantially for remaining significant legacy issues in 2017, our expectation remains that we will be profitable in 2018.

●

Excluding RBS's stake in Alawwal Bank, we now expect that Capital Resolution RWAs will be at the lower end of our previous £15-£20 billion guidance for end 2017. We anticipate that Capital Resolution disposal losses will be substantially higher in H2 2017, at around £0.7 billion.

●

In Q3 2017 we expect to recognise a debt sale gain of approximately £160 million in UK PBB.

Half year ended

Quarter ended

30 June

30 June

30 June

31 March

30 June

2017

2016

2017

2017

2016

£m

£m

£m

£m

£m

Net interest income

4,472 

4,333 

2,238 

2,234 

2,177 

Own credit adjustments

(73)

450 

(44)

(29)

194 

(Loss)/gain on redemption of own debt

(7)

(130)

(9)

2 

(130)

Strategic disposals

156 

195 

156 

- 

201 

Other operating income

2,371 

1,216 

1,366 

1,005 

558 

Non-interest income

2,447 

1,731 

1,469 

978 

823 

Total income

6,919 

6,064 

3,707 

3,212 

3,000 

Restructuring costs

(790)

(630)

(213)

(577)

(392)

Litigation and conduct costs

(396)

(1,315)

(342)

(54)

(1,284)

Other costs

(3,666)

(3,984)

(1,844)

(1,822)

(1,833)

Operating expenses

(4,852)

(5,929)

(2,399)

(2,453)

(3,509)

Profit/(loss) before impairment losses

2,067 

135 

1,308 

759 

(509)

Impairment losses

(116)

(409)

(70)

(46)

(186)

Operating profit/(loss) before tax

1,951 

(274)

1,238 

713 

(695)

Tax charge

(727)

(340)

(400)

(327)

(260)

Profit/(loss) for the period

1,224 

(614)

838 

386 

(955)

Attributable to:

Non-controlling interests

29 

30 

18 

11 

8 

Other owners

256 

208 

140 

116 

114 

Dividend access share

- 

1,193 

- 

- 

- 

Ordinary shareholders

939 

(2,045)

680 

259 

(1,077)

Notable items memo

Adjusted basis

Total income - adjusted (1)

6,843 

5,549 

3,604 

3,239 

2,735 

Operating expenses - adjusted (2)

(3,666)

(3,984)

(1,844)

(1,822)

(1,833)

Operating profit - adjusted (1,2)

3,061 

1,156 

1,690 

1,371 

716 

Within adjusted total income

IFRS volatility in Central items (3)

154 

(668)

172 

(18)

(312)

FX (losses)/gains in Central items

(108)

253 

(56)

(52)

201 

Capital Resolution disposal losses

(103)

(53)

(53)

(50)

(57)

Unwind of securitisations in the property portfolio

(105)

- 

- 

(105)

- 

Within adjusted operating expenses

VAT recovery in Central items

51 

227 

- 

51 

227 

Within restructuring costs

Property exit costs

(217)

- 

18 

(235)

- 

Williams & Glyn restructuring costs

(58)

(345)

(46)

(12)

(187)

Within impairment (losses)/releases

Capital Resolution impairment releases/(losses)

78 

(263)

33 

45 

(67)

Capital Resolution shipping portfolio impairment releases/(losses)

21 

(264)

17 

4 

(38)

Ulster Bank RoI impairment releases/(losses)

11 

27 

(13)

24 

14 

Commercial Banking impairment losses

(94)

(103)

(33)

(61)

(89)

(1)

Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.

(2)

Excluding restructuring costs and litigation and conduct costs.

(3)

IFRS volatility relates to loans which are economically hedged but for which hedge accounting is not permitted under IFRS.

30 June

31 March

31 December

2017

2017

2016

£m

£m

£m

Cash and balances at central banks

86,807 

83,160 

74,250 

Net loans and advances to banks (1)

20,685 

20,513 

17,278 

Net loans and advances to customers (1)

326,059 

326,733 

323,023 

Reverse repurchase agreements and stock borrowing

40,030 

45,451 

41,787 

Debt securities and equity shares

86,687 

77,347 

73,225 

Other assets

28,855 

26,019 

22,112 

Funded assets

589,123 

579,223 

551,675 

Derivatives

193,531 

204,052 

246,981 

Total assets

782,654 

783,275 

798,656 

Bank deposits (2)

38,965 

40,276 

33,317 

Customer deposits (2)

359,882 

351,498 

353,872 

Repurchase agreements and stock lending

43,038 

44,966 

32,335 

Debt securities in issue

31,997 

28,163 

27,245 

Subordinated liabilities

14,724 

15,514 

19,419 

Derivatives

184,161 

196,224 

236,475 

Provisions for liabilities and charges

11,227 

11,619 

12,836 

Other liabilities

48,611 

45,504 

33,753 

Total liabilities

732,605 

733,764 

749,252 

Non-controlling interests

844 

805 

795 

Owners' equity

49,205 

48,706 

48,609 

Total liabilities and equity

782,654 

783,275 

798,656 

Contingent liabilities and commitments

143,493 

148,324 

150,691 

(1)

Excludes reverse repurchase agreements and stock borrowing.

(2)

Excludes repurchase agreements and stock lending.

Half year ended

Quarter ended

30 June

30 June

30 June

31 March

30 June

2017 

2016 

2017 

2017 

2016 

Net interest income

£m

£m

£m

£m

£m

Net interest income

RBS

4,472 

4,333 

2,238 

2,234 

2,177 

- UK Personal & Business Banking

2,231 

2,109 

1,120 

1,111 

1,090 

- Ulster Bank RoI

206 

198 

101 

105 

93 

- Commercial Banking

1,141 

1,067 

574 

567 

531 

- Private Banking

226 

226 

114 

112 

113 

- RBS International

161 

151 

81 

80 

76 

- NatWest Markets

42 

43 

13 

29 

24 

- Capital Resolution

24 

168 

(9)

33 

82 

- Williams & Glyn

333 

324 

168 

165 

162 

- Central items & other

108 

47 

76 

32 

6 

Average interest-earning assets (IEA)

RBS

413,598 

399,751 

421,981 

405,122 

396,118 

- UK Personal & Business Banking

151,659 

138,192 

153,714 

149,581 

140,591 

- Ulster Bank RoI

24,858 

24,233 

25,288 

24,424 

24,288 

- Commercial Banking

131,807 

117,312 

132,719 

130,885 

119,768 

- Private Banking

18,068 

16,441 

18,533 

17,597 

16,622 

- RBS International

23,997 

21,436 

25,034 

22,949 

21,798 

- NatWest Markets

17,021 

11,745 

16,853 

17,192 

11,923 

- Capital Resolution

15,959 

29,962 

15,156 

16,771 

29,157 

- Williams & Glyn

25,334 

23,764 

25,495 

25,170 

24,172 

- Central items & other

4,895 

16,666 

9,189 

553 

7,799 

Yields, spreads and margins of the banking business

Gross yield on interest-earning assets

of the banking business (1,2)

2.63%

2.85%

2.56%

2.70%

2.87%

Cost of interest-bearing liabilities of banking business (1)

(0.67%)

(1.00%)

(0.65%)

(0.69%)

(1.00%)

Interest spread of the banking business (1,3)

1.96%

1.85%

1.91%

2.01%

1.87%

Benefit from interest-free funds

0.22%

0.33%

0.22%

0.23%

0.34%

Net interest margin (4)

RBS

2.18%

2.18%

2.13%

2.24%

2.21%

- UK Personal & Business Banking

2.97%

3.07%

2.92%

3.01%

3.12%

- Ulster Bank RoI

1.67%

1.64%

1.60%

1.74%

1.54%

- Commercial Banking

1.75%

1.83%

1.73%

1.76%

1.78%

- Private Banking

2.52%

2.76%

2.47%

2.58%

2.73%

- RBS International

1.35%

1.42%

1.30%

1.41%

1.40%

- NatWest Markets

0.50%

0.74%

0.31%

0.68%

0.81%

- Capital Resolution

0.30%

1.13%

(0.24%)

0.80%

1.13%

- Williams & Glyn

2.65%

2.74%

2.64%

2.66%

2.70%

Half year ended

Quarter ended

30 June

30 June

30 June

31 March

30 June

Third party customer rates (5)

2017 

2016 

2017 

2017 

2016 

Third party customer asset rate

- UK Personal & Business Banking

3.54%

3.96%

3.50%

3.57%

3.96%

- Ulster Bank RoI (6)

2.37%

2.20%

2.28%

2.47%

2.07%

- Commercial Banking

2.66%

2.85%

2.65%

2.67%

2.82%

- Private Banking

2.70%

3.00%

2.68%

2.71%

2.97%

- RBS International

2.73%

3.14%

2.72%

2.75%

3.02%

Third party customer funding rate

- UK Personal & Business Banking

(0.18%)

(0.54%)

(0.18%)

(0.17%)

(0.46%)

- Ulster Bank RoI (6)

(0.36%)

(0.56%)

(0.31%)

(0.40%)

(0.53%)

- Commercial Banking

(0.13%)

(0.36%)

(0.11%)

(0.14%)

(0.36%)

- Private Banking

(0.07%)

(0.22%)

(0.07%)

(0.07%)

(0.20%)

- RBS International

(0.02%)

(0.18%)

(0.01%)

(0.03%)

(0.13%)

(1)

For the purpose of calculating gross yields and interest spread, interest receivable has been decreased by £77 million (Q2 2017 - £42 million; Q1 2017 - £35 million) and interest payable has decreased by £77 million (Q2 2017 - £42 million; Q1 2017 - £35 million) in respect of negative interest relating to both financial assets and financial liabilities that attracted negative interest.

(2)

Gross yield is the interest earned on average interest-earning assets as a percentage of average interest-earning assets.

(3)

Interest spread is the difference between the gross yield and interest paid on average interest-bearing liabilities as a percentage of average interest-bearing liabilities.

(4)

Net interest margin is net interest income as a percentage of average interest-earning assets.

(5)

Net interest margin includes Treasury allocations and interest on intercompany borrowings, which are excluded from third party customer rates.

(6)

Ulster Bank Ireland DAC manages its funding and liquidity requirements locally. Its liquid asset portfolios and non-customer related funding sources are included within its net interest margin, but excluded from its third party asset and liability rates.

Half year ended

Half year ended

30 June 2017

30 June 2016

Average

Average

balance

Interest

Rate

balance

Interest

Rate

Average balance sheet

£m

£m

%

£m

£m

%

Assets

Loans and advances to banks

70,191 

81 

0.23 

66,179 

115 

0.35 

Loans and advances to customers

296,421 

5,114 

3.48 

287,575 

5,364 

3.75 

Debt securities

46,986 

190 

0.82 

45,997 

177 

0.77 

Interest-earning assets

- banking business (1,2)

413,598 

5,385 

2.63 

399,751 

5,656 

2.85 

- trading business (3)

116,600 

132,839 

Non-interest earning assets

235,615 

338,903 

Total assets

765,813 

871,493 

Memo: Funded assets

539,196 

535,848 

Liabilities

Deposits by banks

16,905 

31 

0.37 

4,437 

12 

0.54 

Customer accounts

227,730 

290 

0.26 

237,126 

575 

0.49 

Debt securities in issue

23,883 

254 

2.14 

21,742 

298 

2.76 

Subordinated liabilities

15,944 

317 

4.01 

19,837 

442 

4.48 

Internal funding of trading business

(9,776)

21 

(0.43)

(17,508)

(4)

0.05 

Interest-bearing liabilities

- banking business (1,2)

274,686 

913 

0.67 

265,634 

1,323 

1.00 

- trading business (3)

126,164 

141,714 

Non-interest-bearing liabilities

- demand deposits

99,029 

84,660 

- other liabilities

216,181 

325,071 

Owner's equity

49,753 

54,414 

Total liabilities and owner's equity

765,813 

871,493 

(1)

For the purpose of calculating gross yields and interest spread, interest receivable has been decreased by £77 million (H1 2016 - £36 million) and interest payable has decreased by £77 million (H1 2016 - £36 million) in respect of negative interest relating to both financial assets and financial liabilities that attracted negative interest.

(2)

Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.

(3)

Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.

●

Net interest income of £4,472 million increased by £139 million, or 3.2%, compared with H1 2016 principally reflecting higher volumes in UK PBB, up £122 million or 5.8%, and increased deposit volumes and re-pricing benefits in Commercial Banking, up £74 million or 6.9%. Partially offsetting, Capital Resolution reduced by £144 million in line with the planned shrinkage of the balance sheet.

●

The net interest margin (NIM) was stable on H1 2016 at 2.18%. A 9 basis point reduction across PBB and CPB, associated with asset margin pressure and higher liquidity requirements, has been broadly offset by the benefit of a reduction in low yielding Capital Resolution and centrally held assets, down from 12% of total interest earning assets to 5%.

○

UK PBB declined by 10 basis points to 2.97% driven by lower mortgage margins and reduced current account hedge yield, partially offset by savings re-pricing benefits from actions taken in 2016.

○

Ulster Bank RoI NIM of 1.67% was 3 basis points higher than H1 2016 reflecting a combination of improved deposit and loan margins, one off income adjustments in H1 2017 and deleveraging measures in 2016 which have reduced the concentration of low yielding non-performing loans.

○

In Commercial Banking, active re-pricing of assets and deposits has been offset by wider asset margin pressure in a lower rate environment causing net interest margin to fall by 8 basis points to 1.75%.

○

Private Banking fell 24 basis points to 2.52% reflecting the competitive market and lower rate environment.

○

RBS International NIM of 1.35% was 7 basis points lower as margin pressures outweigh mitigating pricing actions.

●

Structural hedges of £126 billion generated a benefit of £651 million through net interest income for H1 2017.

●

Compared with Q1 2017, NIM reduced by 11 basis points to 2.13%, with the majority of the reduction driven by a conscious build-up in liquidity as we manage for litigation and conduct costs, including FHFA, and accelerate MREL and other wholesale funding plans into H1 2017. In addition, conditions in the UK mortgage market have become more competitive, contributing to a 9 basis point reduction in UK PBB NIM. Front book mortgage NIM was around 40 basis points lower than the back book. SVR balances were around 11% of total mortgage balances, broadly in line with Q1 2017.

●

NIM was 8 basis points lower than Q2 2016 principally reflecting asset margin pressure and mix impacts across the core businesses.

Half year ended

Quarter ended

30 June

30 June

30 June

31 March

30 June

2017

2016

2017

2017 

2016

Non-interest income

£m

£m

£m

£m

£m

Net fees and commissions

1,218 

1,284 

613 

605 

630 

Income from trading activities

957 

(267)

529 

428 

(157)

Own credit adjustments (OCA)

(73)

450 

(44)

(29)

194 

(Loss)/gain on redemption of own debt

(7)

(130)

(9)

2 

(130)

Strategic disposals

156 

195 

156 

- 

201 

Other operating income

196 

199 

224 

(28)

85 

Total non-interest income

2,447 

1,731 

1,469 

978 

823 

·

Non-interest income of £2,447 million increased by £716 million, or 41.4%, compared with H1 2016.

○

Across PBB and CPB, non-interest income reduced by £23 million, or 1.7%, to £1,349 million.

○

NatWest Markets non-interest income increased by £115 million, or 14.8%, to £890 million reflecting strong underlying income growth partially offset by a £185 million adverse movement in own credit adjustment.

○

Capital Resolution non-interest income was a loss of £126 million compared with £340 million in H1 2016, which included a £330 million funding valuation adjustment. An own credit adjustment loss of £22 million compared with a gain of £184 million in H1 2016.

○

Central items non-interest income was a gain of £250 million compared with a loss of £163 million largely reflecting a £154 million gain in respect of IFRS volatility compared with a £668 million loss in H1 2016.

·

Income from trading activities increased by £1,224 million compared with H1 2016 largely reflecting a £154 million IFRS volatility gain, compared with a £668 million loss in H1 2016, increased NatWest Markets income and a £330 million funding valuation adjustment in Capital Resolution in H1 2016.

Half year ended

Quarter ended

30 June

30 June

30 June

31 March

30 June

2017

2016

2017

2017

2016

Operating expenses

£m

£m

£m

£m

£m

Staff costs

2,041 

2,329 

1,017 

1,024 

1,127 

Premises and equipment

602 

630 

292 

310 

315 

Other administrative expenses

678 

625 

358 

320 

179 

Restructuring costs (see below)

790 

630 

213 

577 

392 

Litigation and conduct costs

396 

1,315 

342 

54 

1,284 

Administrative expenses

4,507 

5,529 

2,222 

2,285 

3,297 

Depreciation and amortisation

337 

352 

169 

168 

174 

Write down of other intangible assets

8 

48 

8 

- 

38 

Operating expenses

4,852 

5,929 

2,399 

2,453 

3,509 

Adjusted operating expenses (1)

3,666 

3,984 

1,844 

1,822 

1,833 

Restructuring costs comprise:

- staff expenses

406 

366 

115 

291 

245 

- premises, equipment, depreciation and amortisation

250 

24 

9 

241 

15 

- other

134 

240 

89 

45 

132 

790 

630 

213 

577 

392 

Staff costs as a % of total income

29.5%

38.4%