RBS.L Regulatory News (RBS)

Contents

Page

Introduction

1

Forward-looking statements

2

Highlights

3

Summary consolidated results

9

Analysis of results

11

Segment performance

18

Selected statutory financial statements

27

Notes

31

Appendix 1 - Parent company information

Appendix 2 - Segmental income statement reconciliation

●

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

●

'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) and net interest margin (NIM) adjusted for designated at fair value through profit or loss items (non-statutory NIM) which are internal metrics used to measure business performance;

●

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

●

Cost savings progress and 2016 target calculated using operating expenses excluding litigation and conduct costs, restructuring costs, the impairment of other intangible assets, the operating costs of Williams & Glyn and the VAT recovery.

For analyst enquiries:

Alexander Holcroft

Investor Relations

+44 (0) 20 7672 1758

For media enquiries:

RBS Press Office

+44 (0) 131 523 4205

Date:

Friday 28 October 2016

Time:

9.00 am UK time

Conference ID:

95686059

Webcast:

www.rbs.com/results

Dial in details:

International - +44 (0) 1452 568 172

UK Free Call - 0800 694 8082

US Toll Free - 1 866 966 8024

●

Q3 2016 results and background slides;

●

Financial supplement containing income statement and balance sheet information for the five quarters ending 30 September 2016; and

●

Pillar 3 supplement at 30 September 2016.

Nine months ended

Quarter ended

30 September

30 September

30 September

30 June

30 September

Key metrics and ratios

2016 

2015 

2016 

2016 

2015 

Attributable (loss)/profit

(£2,514m)

£761m

(£469m)

(£1,077m)

£940m

Operating (loss)/profit

(£19m)

£247m

£255m

(£695m)

(£14m)

Operating profit - adjusted (2)

£2,489m

£3,719m

£1,333m

£716m

£826m

Net interest margin

2.18%

2.12%

2.17%

2.21%

2.09%

Cost:income ratio

94%

101%

88%

117%

103%

Cost:income ratio - adjusted (3,4)

66%

67%

58%

67%

75%

(Loss)/earnings per share from continuing operations

- basic

(21.5p)

(3.2p)

(3.9p)

(9.3p)

(1.0p)

- adjusted (3,4)

(1.6p)

24.1p

3.9p

2.6p

5.6p

Return on tangible equity (5,6)

(8.5%)

2.4%

(4.8%)

(11.0%)

9.0%

Return on tangible equity - adjusted (3,4,6)

(0.6%)

12.4%

4.6%

3.2%

16.3%

Average tangible equity (6)

£39,516m

£42,050m

£38,696m

£39,283m

£41,911m

Average number of ordinary shares

outstanding during the period (millions)

11,668 

11,503 

11,724 

11,673 

11,546 

PBB, CPB & CIB

Total income - adjusted (3)

£8,916m

£8,750m

£3,115m

£2,986m

£2,852m

Operating profit - adjusted (2)

£3,401m

£3,558m

£1,331m

£1,047m

£1,119m

Return on tangible equity - adjusted (3,4,6)

12.0%

13.1%

14.2%

11.0%

12.6%

30 September

30 June

31 December

Balance sheet related key metrics and ratios

2016 

2016 

2015 

Tangible net asset value (TNAV) per ordinary share (6)

338p

345p

352p

Loan:deposit ratio (7,8)

91%

92%

89%

Short-term wholesale funding (7,9)

£14bn

£15bn

£17bn

Wholesale funding (7,9)

£56bn

£55bn

£59bn

Liquidity portfolio

£149bn

£153bn

£156bn

Liquidity coverage ratio (LCR) (10)

112%

116%

136%

Net stable funding ratio (NSFR) (11)

119%

119%

121%

Common Equity Tier 1 (CET1) ratio

15.0%

14.5%

15.5%

Risk-weighted assets (RWAs)

£235.2bn

£245.2bn

£242.6bn

Leverage ratio (12)

5.6%

5.2%

5.6%

Tangible equity (6)

£39,822m

£40,541m

£40,943m

Number of ordinary shares in issue (millions) (13)

11,792 

11,755 

11,625 

(1)

Attributable to ordinary shareholders.

(2)

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

(3)

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

(4)

Excluding restructuring costs and litigation and conduct costs.

(5)

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

(6)

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

(7)

Excludes repurchase agreements and stock lending.

(8)

Includes disposal groups.

(9)

Excludes derivative collateral.

(10)

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 80% initially, 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 that of other institutions.

(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)

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

(13)

Includes 41 million treasury shares (30 June 2016 - 41 million; 31 December 2015 - 26 million).

●

RBS reported an attributable loss of £469 million in Q3 2016 compared with a profit of £940 million in Q3 2015 which included a £1,147 million gain on loss of control of Citizens. Q3 2016 included a £469 million restructuring cost, £425 million of litigation and conduct costs and a £300 million deferred tax asset impairment. The attributable loss for the first nine months of the year was £2,514 million and operating loss before tax was £19 million.

●

Q3 2016 operating profit of £255 million compared with an operating loss of £14 million in Q3 2015. Adjusted operating profit of £1,333 million was £507 million, or 61%, higher than Q3 2015 reflecting increased income and reduced expenses.

●

Income across PBB and CPB was 2% higher than Q3 2015, adjusting for transfers(1), and was stable for the year to date, as increased lending volumes more than offset reduced margins. CIB adjusted income increased by 71% to £526 million, adjusting for transfers(1), the highest quarterly income for the year, driven by Rates, which benefited from sustained customer activity and favourable market conditions following the EU referendum and central bank actions.

●

NIM of 2.17% for Q3 2016 was 8 basis points higher than Q3 2015, as the benefit associated with the reduction in low yielding assets more than offset modest asset margin pressure and mix impacts across the core franchises. NIM fell 4 basis points compared with Q2 2016 reflecting asset and liability margin pressure.

●

PBB and CPB net loans and advances have increased by 13% on an annualised basis since the start of 2016, with strong growth across both residential mortgages and commercial lending.

●

Excluding expenses associated with Williams & Glyn(2), write down of intangible assets and the Q2 VAT recovery, adjusted operating expenses have been reduced by £695 million for the year to date. Adjusted cost:income ratio for the year to date was 66% compared with 67% in the prior year. Across PBB, CPB and CIB cost:income ratio of 60% year to date was stable compared with 2015.

●

Restructuring costs were £469 million in the quarter, a reduction of £378 million compared with Q3 2015. Williams & Glyn restructuring costs of £301 million include £127 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.

●

Litigation and conduct costs of £425 million include an additional charge in respect of the recent settlement with the National Credit Union Administration Board to resolve two outstanding lawsuits in the United States relating to residential mortgage backed securities.

●

RBS has reviewed the recoverability of its deferred tax asset and, in light of the weaker economic outlook and recently enacted restrictions on carrying forward losses, an impairment of £300 million has been recognised in Q3 2016. This action has reduced TNAV per share by 3p.

●

TNAV per share reduced by 7p in the quarter to 338p principally reflecting the attributable loss, 4p, and a loss on redemption of preference shares, 4p, partially offset by gains recognised in foreign exchange reserves.

●

Across our three customer facing businesses, PBB, CPB and CIB, adjusted operating profit of £1,331 million, was £212 million higher than Q3 2015.

○

UK Personal and Business Banking (UK PBB) adjusted operating profit of £591 million was £14 million higher than Q3 2015 as increased income and lower adjusted operating expenses more than offset increased impairment losses.

○

Ulster Bank RoI adjusted operating profit of £68 million compared with £108 million in Q3 2015 reflecting one-off income gains in Q3 2015 and reduced impairment releases.

○

Commercial Banking adjusted operating profit of £382 million was £7 million higher than Q3 2015, principally reflecting a 1% increase in income, adjusting for transfers(3).

○

Private Banking(4) adjusted operating profit of £53 million was £16 million higher than Q3 2015, benefiting from a £13 million VAT recovery, whilst RBS International (RBSI) was broadly stable at £53 million.

○

CIB adjusted income of £526 million was 71% higher than Q3 2015, adjusting for transfers(1), principally driven by Rates. Adjusted operating profit of £184 million compared with a loss of £30 million in Q3 2015.

●

Capital Resolution adjusted operating loss of £118 million compared with a loss of £245 million in Q3 2015. The Q3 2016 loss included a £190 million impairment loss on the shipping portfolio and a £160 million valuation adjustment gain. RWAs reduced by £3.7 billion in the quarter to £38.6 billion

●

Central items adjusted operating profit of £24 million compared with a loss of £163 million in Q3 2015 and included a £97 million foreign exchange (FX) reserve recycling gain and other gains partially offset by a £150 million charge in respect of IFRS volatility(5) (Q3 2015 - £125 million charge).

Strategy goal

2016 target

Q3 2016 Progress

Strength and sustainability

Maintain Bank CET1 ratio of 13%

CET1 ratio of 15.0%

£2 billion AT1 issuance

£2.0 billion equivalent issued in Q3 2016

Capital Resolution RWAs around £30-35 billion

RWAs down £10.4 billion to £38.6 billion for the year to date

Customer experience

Narrow the gap to No.1 in Net Promoter Score (NPS) in every primary UK brand

Year on year Commercial Banking(6) has seen an improvement in NPS and is the highest it has ever been.

Simplifying the bank

Reduce operating expenses by £800 million

Operating expenses down £695 million(7)

Supporting growth

Net 4% growth in PBB and CPB customer loans

Net customer loans in PBB and CPB are up 13% on an annualised basis for the year to date

Employee engagement

Raise employee engagement to within two points of the GFS norm

Down 3 points to within 6 points of GFS norm

(1)

CIB's results include the following financials for businesses subsequently transferred to Commercial Banking: total income of £98 million for nine months ended 2015 (Q3 2015 - £20 million).

(2)

Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK.

(3)

The business transfers included: total income of £42 million (Q3 2015 - nil); operating expenses of £25 million (Q3 2015 - nil) and impairments of £7 million (Q3 2015 - nil).

(4)

Private Banking serves high net worth individuals through Coutts and Adam & Co.

(5)

IFRS volatility arises from the changes to fair value of hedges of loans which do not qualify for hedge accounting under IFRS.

(6)

£2m+ combination of NatWest & Royal Bank of Scotland in GB (954) 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)

Cost saving target and progress for the nine months ended 2016 calculated using operating expenses excluding restructuring costs £1,099 million (2015 - £2,317 million), litigation and conduct costs £1,740 (2015 - £1,444), write down of other intangible assets of £48 million (2015 - nil), the operating costs of Williams and Glyn £296 million (2015 - £252 million) and the VAT recovery £227 million.

●

RBS is progressing with its plan to build a strong, simple, fair bank for customers and shareholders.

●

CET1 remains ahead of our 13% target at 15.0%, a 50 basis point increase compared with Q2 2016 driven by a £10.0 billion reduction in RWAs principally reflecting a £5.1 billion reduction in UK PBB, largely due to the unwind of mortgage risk parameter model uplifts taken in the first half, and £3.7 billion of disposals and run-off in Capital Resolution.

●

On 10 August 2016 RBS announced that it had successfully completed the pricing of US$2.65 billion 8.625% AT1 capital notes, with £4.0 billion equivalent now issued since August 2015.

●

In addition, on 7 September 2016 we successfully issued US$2.65 billon seven year senior debt which is eligible to meet RBS's 'Minimum Requirement for Own Funds and Eligible Liabilities', with £4.2 billion equivalent issued this year.

●

Leverage ratio increased by 40 basis points to 5.6% largely driven by the AT1 issuance.

●

Risk elements in lending (REIL) of £12.6 billion were 3.8% of gross customer loans, down from 4.5% at 30 September 2015.

●

In June 2016, the triennial funding valuation of the Main Scheme of The Royal Bank of Scotland Group Pension Fund was agreed which showed that as at 31 December 2015 the value of liabilities exceeded the value of assets by £5.8 billion. In March 2016, to mitigate this anticipated deficit, RBS made a cash payment of £4.2 billion. The next triennial valuation is due to occur at the end of 2018 with agreement on any additional contributions by the end of March 2020. As at 30 September 2016, the Main Scheme had an unrecognised surplus reflected by a ratio of asset to liabilities of c.115% under IAS19 valuation principles. The surplus is unrecognised because the trustee's power to enhance member benefits could consume that surplus meaning that RBS does not control its ability to realise an asset. The existence of the asset, albeit unrecognised, does limit RBS's exposure to changes in actuarial assumptions and investment performance.

●

RBS continued to deliver strong support for both household and business customers. Within UK PBB, gross new mortgage lending of £7.9 billion was 12% higher than Q3 2015. Our market share of gross new mortgage lending in Q3 2016 was approximately 12% compared with a stock share of 8.7%. Commercial Banking net loans and advances have grown by an annualised 12% since the start of the year.

●

The Reward account continues to show positive momentum and now has over one million fee-paying customers compared with 202,000 at 31 December 2015.

●

We continue to make better use of our digital channels to make it simpler to serve our customers and for them to do business with us. We now have more than 4.3 million customers regularly using our mobile app, with over 20% of our customers now exclusively using digital banking for their day to day banking needs. We anticipate that this number will continue to grow as we make more of our products and services available digitally. Our new 'Online Account Opening' service allows start up business customers to submit an application online in just ten minutes and get a sort code and account number in under an hour.

●

As part of the Q3 2016 results we have reviewed the value of the investments in subsidiaries held in the parent company, RBSG plc, and in light of the deterioration in the economic outlook we have reduced the carrying value of the investments by £6.0 billion to £44.7 billion. This has the effect of reducing distributable reserves of RBSG plc by £6.0 billion to £7.2 billion. Whilst this level of distributable reserves does not impact upon our ability to pay coupons on existing securities, it is our intention to implement a capital reorganisation in 2017 in order to increase parent company distributable reserves, providing greater flexibility for future distributions and preference share redemptions. The capital reduction will be subject to shareholder approval (to be sought at the next Annual General Meeting) and court approval. The reorganisation in carrying value of the parent company's investment in its subsidiaries does not impact upon the Group's consolidated regulatory capital, including CET1, or tangible net asset value.

●

Work has continued to explore means to achieve separation and divestment of the business previously described as Williams & Glyn. RBS has had positive discussions with a number of interested parties concerning a transaction related to substantially all of the business. These discussions are ongoing and may or may not lead to a viable transaction. However, none of the proposals under discussion can deliver full separation and divestment by 31 December 2017. RBS is therefore in discussion with HM Treasury, and expects further engagement with the European Commission, to agree a solution with regards to its State Aid obligations.

As we no longer intend to pursue divestment by way of an Initial Public Offering, on 21 October 2016 RBS redeemed the £600 million exchangeable bond issued to a consortium of investors, led by Centerbridge and Corsair, in 2013 in accordance with the terms of the bond.

●

The current low interest rate and low growth environment presents a range of uncertainties which could impact the performance of our core business. Whilst we remain committed to achieving our long term cost:income ratio and returns targets, set out in 2014, we now do not expect to achieve these by 2019 as previously indicated. We also recognise that the ongoing discussions around further tightening of regulatory capital rules could result in RWA inflation in the medium term.

●

We expect PBB and CPB income to be broadly stable in 2016 compared with 2015 as strong planned balance sheet growth, particularly in mortgages but also in core commercial lending, is balanced by headwinds from low interest rates and the uncertain macroeconomic environment. We now anticipate that CIB will report a modest increase in income in 2016 compared with 2015.

●

RBS remains on track to achieve an £800 million cost reduction in 2016 after achieving a £695 million reduction in the first nine months of the year. Core franchise profitability will be adversely impacted by the annual bank levy charge in Q4 2016, around £200 million, and expense inflation associated with weaker sterling. We retain our expectation that the adjusted cost:income ratio across our combined PBB, CPB and CIB businesses will improve in 2016 compared with 2015. We plan to provide further cost guidance for 2017 as part of the 2016 year end results.

●

We do not anticipate a material change to the current impairment loss rate for 2016. The impairment charges taken during 2016 year to date largely relate to sector specific issues particularly in the shipping portfolio and oil and gas sector. We recognise the continuing risk of large single name/sector driven events across our portfolios given the uncertain macroeconomic environment. In the current environment there is an increased level of uncertainty; however it continues to be too early at this point to quantify the impact of potential credit losses that may result.

●

We now anticipate a restructuring charge of around £1.5 billion in 2016 compared with previous guidance of over £1.0 billion, as a result of additional Williams & Glyn charges in respect of the decision to discontinue the programme to create a cloned banking platform.

●

We now expect Capital Resolution disposal losses to total approximately £2.0 billion, up from the previous guidance of £1.5 billion. Total losses to date have been £997 million (of which 2015; £367 million and 2016 year to date; £630 million) including an impairment charge of £454 million in relation to the shipping portfolio during 2016 year to date. We anticipate that Capital Resolution RWAs will be in the range £30-£35 billion by the end of 2016. Excluding RBS's stake in Saudi Hollandi Bank (£7.9 billion at Q3 2016), we would expect RWAs to be in the range £15-£20 billion by end 2017.

●

We continue to deal with a range of uncertainties in the external environment and also manage conduct-related investigations and litigation, including US RMBS. Substantial additional charges and costs may be recognised in the coming quarters which would have an impact on the Group's level of capital.

●

In view of the above, the timing of returning excess capital to shareholders through dividends or buybacks remains uncertain.

Nine months ended

Quarter ended

30 September

30 September

30 September

30 June

30 September

2016

2015*

2016

2016

2015*

£m

£m

£m

£m

£m

Net interest income

6,500 

6,605 

2,167 

2,177 

2,187 

Own credit adjustments

294 

424 

(156)

194 

136 

(Loss)/gain on redemption of own debt

(127)

- 

3 

(130)

- 

Strategic disposals

164 

(135)

(31)

201 

- 

Other operating income

2,543 

3,545 

1,327 

558 

860 

Non-interest income

2,874 

3,834 

1,143 

823 

996 

Total income

9,374 

10,439 

3,310 

3,000 

3,183 

Restructuring costs

(1,099)

(2,317)

(469)

(392)

(847)

Litigation and conduct costs

(1,740)

(1,444)

(425)

(1,284)

(129)

Other costs

(6,001)

(6,831)

(2,017)

(1,833)

(2,300)

Operating expenses

(8,840)

(10,592)

(2,911)

(3,509)

(3,276)

Profit/(loss) before impairment (losses)/releases

534 

(153)

399 

(509)

(93)

Impairment (losses)/releases

(553)

400 

(144)

(186)

79 

Operating (loss)/profit before tax

(19)

247 

255 

(695)

(14)

Tax (charge)/credit

(922)

(284)

(582)

(260)

3 

Loss from continuing operations

(941)

(37)

(327)

(955)

(11)

Profit from discontinued operations,

net of tax

- 

1,451 

- 

- 

1,093 

(Loss)/profit for the period

(941)

1,414 

(327)

(955)

1,082 

Attributable to:

Non-controlling interests

37 

389 

7 

8 

45 

Other owners

343 

264 

135 

114 

97 

Dividend access share

1,193 

- 

- 

- 

- 

Ordinary shareholders

(2,514)

761 

(469)

(1,077)

940 

Memo:

Total income - adjusted (1)

9,043 

10,150 

3,494 

2,735 

3,047 

Operating expenses - adjusted (2)

(6,001)

(6,831)

(2,017)

(1,833)

(2,300)

Operating profit - adjusted (1,2)

2,489 

3,719 

1,333 

716 

826 

*Restated - refer to page 31 for further details

(1)

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

(2)

Excluding restructuring costs and litigation and conduct costs.

30 September

30 June 

31 December 

2016

2016

2015

£m

£m

£m

Cash and balances at central banks

69,254 

65,307 

79,404 

Net loans and advances to banks (1)

19,741 

21,763 

18,361 

Net loans and advances to customers (1)

326,736 

326,503 

306,334 

Reverse repurchase agreements and stock borrowing

45,955 

45,778 

39,843 

Debt securities and equity shares

80,512 

84,807 

83,458 

Assets of disposal groups (2)

13 

396 

3,486 

Other assets

27,118 

31,047 

22,008 

Funded assets

569,329 

575,601 

552,894 

Derivatives

283,049 

326,023 

262,514 

Total assets

852,378 

901,624 

815,408 

Bank deposits (3)

32,172 

31,377 

28,030 

Customer deposits (3)

358,844 

355,719 

343,186 

Repurchase agreements and stock lending

36,408 

40,881 

37,378 

Debt securities in issue

28,357 

27,148 

31,150 

Subordinated liabilities

19,162 

20,113 

19,847 

Derivatives

275,364 

322,390 

254,705 

Liabilities of disposal groups (2)

15 

252 

2,980 

Other liabilities

47,728 

50,017 

43,985 

Total liabilities

798,050 

847,897 

761,261 

Non-controlling interests

853 

820 

716 

Owners' equity

53,475 

52,907 

53,431 

Total liabilities and equity

852,378 

901,624 

815,408 

Contingent liabilities and commitments

151,394 

151,433 

153,752 

(1)

Excludes reverse repurchase agreements and stock borrowing.

(2)

Primarily international private banking business at 31 December 2015.

(3)

Excludes repurchase agreements and stock lending.

Nine months ended

Quarter ended

30 September

30 September

30 September

30 June

30 September

2016

2015

2016

2016

2015

Net interest income

£m

£m

£m

£m

£m

Net interest income (1)

RBS

6,500 

6,605 

2,167 

2,177 

2,187 

- UK Personal & Business Banking

3,194 

3,122 

1,085 

1,090 

1,055 

- Ulster Bank RoI

304 

280 

106 

93 

90 

- Commercial Banking

1,601 

1,485 

534 

531 

504 

- Private Banking

338 

328 

112 

113 

109 

- RBS International

226 

225 

75 

76 

73 

- Corporate & Institutional Banking

75 

59 

32 

24 

29 

- Capital Resolution

195 

359 

27 

82 

78 

- Williams & Glyn

488 

493 

164 

162 

167 

- Central items & other

79 

254 

32 

6 

82 

Average interest-earning assets (IEA)

RBS

398,943 

415,463 

397,345 

396,118 

413,778 

- UK Personal & Business Banking

140,696 

129,359 

145,649 

140,591 

131,406 

- Ulster Bank RoI

24,835 

23,244 

26,026 

24,288 

23,456 

- Commercial Banking

119,496 

104,686 

123,817 

119,768 

105,905 

- Private Banking

16,621 

15,770 

16,978 

16,622 

15,878 

- RBS International

22,073 

20,432 

23,332 

21,798 

20,244 

- Corporate & Institutional Banking

11,817 

18,696 

11,960 

11,923 

18,686 

- Capital Resolution

27,407 

67,659 

22,352 

29,157 

51,786 

- Williams & Glyn

24,044 

22,810 

24,597 

24,172 

23,020 

- Central items & other

11,954 

12,807 

2,634 

7,799 

23,397 

Yields, spreads and margins of the banking business

Gross yield on interest-earning assets

of the banking business (2)

2.82%

2.92%

2.78%

2.87%

2.84%

Cost of interest-bearing liabilities of banking business

(0.98%)

(1.15%)

(0.92%)

(1.00%)

(1.09%)

Interest spread of banking business (3)

1.84%

1.77%

1.86%

1.87%

1.75%

Benefit from interest-free funds

0.34%

0.35%

0.31%

0.34%

0.34%

Net interest margin (1,4)

RBS

2.18%

2.12%

2.17%

2.21%

2.09%

- UK Personal & Business Banking (5)

3.03%

3.23%

2.96%

3.12%

3.19%

- Ulster Bank RoI (5)

1.64%

1.61%

1.62%

1.54%

1.52%

- Commercial Banking (5)

1.79%

1.90%

1.72%

1.78%

1.89%

- Private Banking (5)

2.72%

2.78%

2.62%

2.73%

2.72%

- RBS International (5)

1.37%

1.47%

1.28%

1.40%

1.43%

- Corporate & Institutional Banking

0.85%

0.42%

1.06%

0.81%

0.62%

- Capital Resolution

0.95%

0.71%

0.48%

1.13%

0.60%

- Williams & Glyn

2.71%

2.89%

2.65%

2.70%

2.88%

Third party customer rates (6)

Third party customer asset rate

- UK Personal & Business Banking

3.90%

4.18%

3.79%

3.96%

4.15%

- Ulster Bank RoI (7)

2.19%

2.29%

2.17%

2.07%

2.26%

- Commercial Banking

2.81%

2.96%

2.74%

2.82%

2.93%

- Private Banking

2.95%

3.18%

2.86%

2.97%

3.12%

- RBS International

3.08%

3.10%

2.95%

3.02%

3.11%

Third party customer funding rate

- UK Personal & Business Banking

(0.50%)

(0.68%)

(0.44%)

(0.46%)

(0.65%)

- Ulster Bank RoI (7)

(0.53%)

(0.92%)

(0.46%)

(0.53%)

(0.82%)

- Commercial Banking

(0.35%)

(0.38%)

(0.32%)

(0.36%)

(0.36%)

- Private Banking

(0.20%)

(0.26%)

(0.18%)

(0.20%)

(0.25%)

- RBS International

(0.15%)

(0.33%)

(0.10%)

(0.13%)

(0.25%)

(1)

For the purpose of net interest margin (NIM) calculations, no decrease for the nine months ended 2016 (nine months ended 2015 - £12 million) and no decrease for Q3 2016 (Q2 2016 - nil; Q3 2015 - £4 million) was made in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related average interest-earning assets and average interest-bearing liabilities have also been adjusted.

(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)

PBB NIM was 2.82% (nine months ended 2015 - 2.98%; Q3 2016 - 2.76%; Q2 2016 - 2.89%; Q3 2015 - 2.93%). CPB NIM was 1.83% (nine months ended 2015 - 1.93%; Q3 2016 - 1.75%; Q2 2016 - 1.83%; Q3 2015 - 1.92%).

(6)

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

(7)

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.

·

Net interest income of £2,167 million decreased by £20 million, or 1%, compared with Q3 2015 principally driven by a £51 million reduction in Capital Resolution in line with the planned shrinkage of the balance sheet. Across our PBB and CPB franchises, net interest income increased by £81 million, or 4%, reflecting increased lending.

·

NIM was 2.17% for Q3 2016, 8 basis points higher than Q3 2015 as the benefit associated with reductions in the low yielding 'non-core' assets has been partially offset by modest asset margin pressure and mix impacts across PBB and CPB.

·

NIM decreased by 4 basis points compared with Q2 2016 reflecting asset and liability margin pressure across PBB and CPB and a release of previously suspended credit card interest in Q2 2016.

·

NIM across the combined PBB and CPB franchises was 2.27% in Q3 2016 compared with 2.45% in Q3 2015 and 2.37% in Q2 2016.

·

UK PBB, NIM decreased by 23 basis points to 2.96% reflecting the change in mix of our asset base towards mortgage lending from unsecured lending, mortgage customers switching from standard variable rate (SVR) and lower returns on current account structural hedges. SVR mortgages represented 12% of the mortgage book compared with 15% a year earlier. Compared with Q2 2016, UK PBB NIM reduced by 16 basis points reflecting a £22 million reduction in suspended interest releases, 6 basis points, and asset and liability margin pressure.

·

Commercial Banking NIM decreased by 17 basis points to 1.72%, compared with Q3 2015, principally reflecting asset margin pressure.

·

Structural hedges of £122 billion as at 30 September 2016 generated a benefit of £0.9 billion through net interest income for the year to date. Around 72% of these hedges are part of a five year rolling hedge programme that will progressively roll-off over the coming years.

Nine months ended

Quarter ended

30 September

30 September

30 September

30 June

30 September

2016

2015*

2016

2016

2015*

Operating expenses

£m

£m

£m

£m

£m

Staff costs

3,457 

3,824 

1,128 

1,127 

1,281 

Premises and equipment

951 

1,061 

321 

315 

352 

Other administrative expenses

1,018 

1,338 

393 

179 

477 

Restructuring costs (see below)

1,099 

2,317 

469 

392 

847 

Litigation and conduct costs

1,740 

1,444 

425 

1,284 

129 

Administrative expenses

8,265 

9,984 

2,736 

3,297 

3,086 

Depreciation and amortisation

527 

608 

175 

174 

190 

Write down of intangible assets

48 

- 

- 

38 

- 

Operating expenses

8,840 

10,592 

2,911 

3,509 

3,276 

Adjusted operating expenses (1)

6,001 

6,831 

2,017 

1,833 

2,300 

Restructuring costs comprise:

- staff expenses

525 

625 

159 

245 

281 

- premises, equipment, depreciation and amortisation

57 

705 

33 

15 

375 

- other

517 

987 

277 

132 

191 

1,099 

2,317 

469 

392 

847 

Of which: Williams & Glyn

646 

449 

301 

187 

190 

Staff costs as a % of total income

37%

37%

34%

38%

40%

Cost:income ratio

94%

101%

88%

117%

103%

Cost:income ratio - adjusted (2)

66%

67%

58%

67%

75%

Employee numbers (FTE - thousands)

82.5 

92.4 

82.5 

89.2 

92.4 

(1)

Excluding restructuring costs and litigation and conduct costs.

(2)

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

·

Operating expenses of £2,911 million were £365 million, or 11%, lower than Q3 2015 reflecting a £378 million reduction in restructuring costs and a £283 million reduction in adjusted operating expenses, partially offset by a £296 million increase in litigation and conduct expenses.

·

Adjusted operating expenses reduced by £283 million, or 12%, compared with Q3 2015 to £2,017 million. Excluding expenses associated with Williams & Glyn, write down of intangible assets (£48 million) and a £227 million VAT recovery, adjusted expenses reduced by £695 million for the year to date, and we remain on target to achieve an £800 million reduction for the year.

·

Staff costs of £1,128 million were down £153 million, or 12%, compared with Q3 2015, reflecting a 9,900 reduction in FTEs.

·

Restructuring costs of £469 million compared with £847 million in Q3 2015. Williams & Glyn restructuring costs of £301 million include £127 million of termination costs associated with the decision to discontinue the programme to create a cloned banking system.

·

Litigation and conduct costs of £425 million include an additional charge in respect of the recent settlement with the National Credit Union Administration Board to resolve two outstanding lawsuits in the United States relating to residential mortgage backed securities.

Nine months ended

Quarter ended

30 September

30 September

30 September

30 June

30 September

2016

2015

2016

2016

2015

Impairment losses/(releases)

£m

£m

£m

£m

£m

Loan impairment losses/(releases)

- individually assessed

575 

(135)

217 

172 

(15)

- collectively assessed

219 

(8)

176 

27 

(13)

- latent

(191)

(380)

(202)

(10)

(64)

Customer loans

603 

(523)

191 

189 

(92)

Bank loans

- 

(4)

- 

- 

(4)

Total loan impairment losses/(releases)

603 

(527)

191 

189 

(96)

Securities

(50)

127 

(47)

(3)

17 

Total impairment losses/(releases)

553 

(400)

144 

186 

(79)

30 September 

30 June 

31 December 

Credit metrics (1)

2016 

2016 

2015 

Gross customer loans

£332,917m

£333,017m

£315,111m

Loan impairment provisions

£6,181m

£6,456m

£7,139m

Risk elements in lending (REIL)

£12,625m

£11,789m

£12,157m

Provisions as a % of REIL

49%

55%

59%

REIL as a % of gross customer loans

3.8%

3.5%

3.9%

(1)

Includes disposal groups and excludes reverse repos.

·

A net impairment loss of £144 million was reported in Q3 2016 compared with a release of £79 million in Q3 2015 and a loss of £186 million in Q2 2016.

·

Capital Resolution reported a net impairment loss of £120 million in Q3 2016 compared with a release of £50 million in Q3 2015. The loss for the quarter included a £190 million charge (year to date - £454 million) in respect of the shipping portfolio reflecting difficult conditions in some parts of the sector.

·

Commercial Banking reported an impairment loss of £20 million for Q3 2016 compared with £16 million in Q3 2015 and £89 million in Q2 2016. Q2 2016 included a single name charge taken in respect of the oil and gas portfolio.

·

Ulster Bank RoI reported a net impairment release of €48 million in Q3 2016 compared with €75 million in Q3 2015. The Q3 2016 impairment release included a write back associated with the sale of a portfolio of loans partially offset by additional provisions in respect of mortgages. On completion in Q4 2016, the portfolio sale is expected to reduce gross customer loans in Ulster Bank RoI by €1.8 billion and reduce REIL as a percentage of gross customer loans by around 6 percentage points.

·

REIL increased by £836 million in the quarter to £12,625 million, principally relating to the shipping portfolio along with the implementation of a revised mortgage methodology in Ulster Bank RoI and foreign exchange movements. REIL represented 3.8% of gross customer loans compared with 3.5% at 30 June 2016 and 3.9% at 31 December 2015. Provision coverage was 49% compared with 55% at 30 June 2016 and 59% at 31 December 2015.

Selected credit risk portfolios

30 September 2016

30 June 2016

31 December 2015

 CE (1)

PE (1)

EAD (2)

 CE (1)

PE (1)

EAD (2)

 CE (1)

PE (1)

EAD (2)

Natural resources

£m

£m

£m

£m

£m

£m

£m

£m

£m

Oil and gas

2,989 

6,000 

4,739 

3,298 

6,356 

5,039 

3,544 

6,798 

5,606 

Mining and metals

652 

1,782 

1,375 

816 

1,941 

1,608 

729 

1,823 

1,555 

Electricity

3,256 

8,466 

5,782 

3,374 

8,583 

5,940 

2,851 

7,683 

5,205 

Water and waste

5,875 

8,772 

7,381 

5,347 

8,665 

6,679 

4,657 

8,261 

5,873 

12,772 

25,020 

19,277 

12,835 

25,545 

19,266 

11,781 

24,565 

18,239 

Shipping

5,514 

6,043 

6,154 

6,765 

7,246 

7,496 

6,776 

7,301 

7,509 

(1)

Current exposure (CE) and potential exposure (PE) are both net of impairment provisions and credit valuation adjustments and after the effect of risk transfer. For a full description of what is included and excluded from current and potential exposure refer to page 16 of Appendix 1 of the Interim Results 2016.

(2)

Exposure at default (EAD) reflects an estimate of the extent to which a bank will be exposed under a specific facility on the default of a customer or counterparty.

Uncommitted undrawn facilities are excluded from current exposure but included within EAD; therefore EAD can exceed current exposure.

·

Oil and gas - Exposure to the sector remained stable and there was no material change in the credit quality of the portfolio during the quarter. Provisions increased by £10 million to £167 million. AQ10 potential exposure, net of provisions, was £178 million (30 June 2016 - £207 million). Exposures classified as risk of credit loss were minimal.

·

Mining and metals - The sector continued to be affected by a slowdown in demand and the oversupply of key metal commodities. RBS's strategic focus in this sector is on investment grade customers and there was no material change in the credit quality during the quarter. Provisions also remained stable. AQ10 potential exposure, net of provisions was £56 million (30 June 2016 - £82 million). Exposures classified as risk of credit loss were minimal.

·

Shipping - The reduction in exposure was due to disposals and loan amortisation. Challenging market conditions continued to affect vessel values in the bulk and container sectors, where values remain severely depressed and close to historic lows, and also in the tanker sector, where values have reduced from recent highs. Portfolio credit quality deteriorated during the quarter as a result of the difficult market conditions. Impairment charges of £190 million partially offset by write offs of £58 million in Q3 2016 increased provisions by £126 million to £571 million (30 June 2016 - £445 million; 31 December 2015 - £181 million). AQ10 current exposure, net of provisions, was £1,031 million (30 June 2016 - £579 million). In addition £775 million of current exposure was classified as at risk of credit loss (30 June 2016 - £78 million).

Capital and leverage ratios

End-point CRR basis (1)

PRA transitional basis

30 September 

30 June 

31 December 

30 September 

30 June 

31 December 

2016 

2016 

2015 

2016 

2016 

2015 

Risk asset ratios

% 

% 

% 

% 

% 

% 

CET1

15.0 

14.5 

15.5 

15.0 

14.5 

15.5 

Tier 1

16.7 

15.4 

16.3 

19.1 

17.7 

19.1 

Total

20.6 

19.0 

19.6 

24.1 

23.0 

24.7 

Capital

£m

£m

£m

£m

£m

£m

Tangible equity

39,822 

40,541 

40,943 

39,822 

40,541 

40,943 

Expected loss less impairment provisions

(862)

(831)

(1,035)

(862)

(831)

(1,035)

Prudential valuation adjustment

(734)

(603)

(381)

(734)

(603)

(381)

Deferred tax assets

(838)

(1,040)

(1,110)

(838)

(1,040)

(1,110)

Own credit adjustments

(435)

(587)

(104)

(435)

(587)

(104)

Pension fund assets

(209)

(209)

(161)

(209)

(209)

(161)

Cash flow hedging reserve

(1,565)

(1,603)

(458)

(1,565)

(1,603)

(458)

Other deductions

(9)

(14)

(86)

(9)

(14)

(64)

Total deductions

(4,652)

(4,887)

(3,335)

(4,652)

(4,887)

(3,313)

CET1 capital

35,170 

35,654 

37,608 

35,170 

35,654 

37,630 

AT1 capital

4,041 

1,997 

1,997 

9,662 

7,756 

8,716 

Tier 1 capital

39,211 

37,651 

39,605 

44,832 

43,410 

46,346 

Tier 2 capital

9,181 

9,028 

8,002 

11,773 

13,043 

13,619 

Total regulatory capital

48,392 

46,679 

47,607 

56,605 

56,453 

59,965 

Risk-weighted assets

Credit risk

- non-counterparty

166,600 

172,500 

166,400 

- counterparty

25,100 

26,100 

23,400 

Market risk

17,800 

20,900 

21,200 

Operational risk

25,700 

25,700 

31,600 

Total RWAs

235,200 

245,200 

242,600 

Leverage (2)