RBS.L Regulatory News (RBS)

Page 

Highlights

1 

Contacts

5 

Presentation of information

6 

Summary consolidated results

8 

Comment

11 

Business update

13 

Analysis of results

14 

Divisional performance

25 

Statutory results

66 

Condensed consolidated income statement

66 

Condensed consolidated statement of comprehensive income

67 

Condensed consolidated balance sheet

68 

Average balance sheet

69 

Condensed consolidated statement of changes in equity

72 

Condensed consolidated cash flow statement

75 

Notes

76 

Risk and balance sheet management

126 

Presentation of information

127 

General overview

127 

Capital management

130 

Capital ratios

130 

Capital resources

131 

Risk-weighted assets

133 

Liquidity, funding and related risks

134 

Overview

134 

Funding sources

135 

Liquidity portfolio

136 

Basel III liquidity ratios and other metrics

137 

Credit risk

138 

Loans and related credit metrics

138 

Debt securities

139 

Derivatives

141 

Market risk

142 

Country risk

145 

Independent review report to The Royal Bank of Scotland Group plc

151 

Risk factors

153 

Statement of directors' responsibilities

156 

Additional information

157 

Share information

157 

Statutory results

157 

Financial calendar

157 

Appendix 1 Capital and leverage ratios

Appendix 2 Funding and related risks

Appendix 3 Credit risk

Appendix 4 Market risk

Appendix 5 Country risk

Appendix 6 Income statement reconciliations

·;

RBS further improved its capital strength through continued delivery against its established business plan, with the Core Tier 1 ratio increasing to 11.1%, or 8.7% on a fully loaded Basel III basis.

·;

The Group remains confident of achieving a fully loaded Basel III Core Tier 1 ratio of over 9% by the end of 2013, which incorporates the capital needed to fund targeted loan growth.

·;

The CRR leverage ratio improved to 3.4%.

·;

Liquidity metrics remained very strong, with a liquidity portfolio maintained at £158 billion, short-term wholesale funding of £37 billion and a loan:deposit ratio of 96%. Customer deposits now exceed net loans in our Core businesses by £51 billion, giving a strong platform to respond to customer growth as it occurs.

·;

Funded assets fell to £843 billion, down £86 billion from 30 June 2012, with Non-Core assets down £27 billion to £45 billion.

·;

Credit quality continued to improve, with H1 2013 impairments down 15% from the prior year in Core and 24% in Non-Core. Credit trends in Ireland showed further encouraging signs, with Ulster Bank Core and Non-Core impairments in Q2 2013 down 6% from Q1 2013 and 12% from Q2 2012. Arrears formation on the mortgage portfolio continued to slow.

·;

Tangible net asset value at 30 June 2013 was 445p per share, compared with 446p per share at 31 December 2012.

·;

Group operating profit(1) was £1,678 million in H1 2013, up 5% from H1 2012. After one-off and other items amounting to a net charge of £304 million, Group pre-tax profit was £1,374 million, compared with a loss of £1,682 million in H1 2012.

·;

Profit attributable to shareholders was £535 million, compared with a loss of £2,032 million in H1 2012. Excluding own credit adjustments, attributable profit was £250 million in H1 2013.

·;

Core operating profit of £2,464 million was down 17% from H1 2012, driven largely by the significant reduction in Markets income as the division managed down the scale and capital intensity of its balance sheet. Retail & Commercial operating profits were down 4%, with improved operating results in UK Retail and reduced losses in Ulster Bank, but weaker performance in International Banking. UK Corporate results improved in the second quarter.

·;

Non-Core losses were 42% lower at £786 million in H1 2013 as impairment losses diminished further and the division continued to cut expenses. 

·;

After a comprehensive review, a new strategy for the Markets division was announced in June. The new strategy will enable RBS to concentrate on its core customers' needs in those areas where the Markets business is strongest. This means focusing on our core fixed income capabilities across rates, foreign exchange, asset-backed products, credit and debt capital markets, while de-emphasising some more capital intensive structured product areas. Markets is on track to reduce its risk-weighted assets to £80 billion on a Basel III basis by the end of 2014, despite significant regulatory uplifts to risk weightings.

·;

The Group is currently working with HM Treasury (HMT) on a review of its assets to support an assessment of the case for transferring some of those assets into a so-called 'bad bank'. HMT's stated objectives are to maximise the Group's ability to support the British economy, get the best value for money for the taxpayer and assist in the return of RBS to private ownership. Any material proposal arising from the review, depending on its structure, may require approval by the Group's Board and by a majority of shareholders, excluding HMT. The review aims to understand whether the creation of a 'bad bank' would accelerate the achievement of these objectives. RBS is working closely with HMT and its appointed advisors to provide conclusions by the autumn.

·;

RBS is still dealing with the costs of past conduct issues. Non-operating charges for legal actions and regulatory investigations totalled £620 million in H1 2013, including a further £185 million provision for the costs of Payment Protection Insurance (PPI) redress, taking the cumulative PPI charges to £2.4 billion.

·;

As RBS moves beyond its restructuring phase, efforts to reinforce a positive culture in the bank have stepped up as an essential foundation to build a "really good bank". In July colleagues were introduced to Our Code, a fresh and simplified look at what was previously the Group's Code of Conduct. Our Code sets out the way we will bring to life our values of serving customers, working together, doing the right thing and thinking long term.

·;

The Group has invested to improve customer experience, with all divisions having now built in customer experience as a significant component of their strategic planning. In UK Retail and UK Corporate investment has included simplification of the account opening process and improvements to online service options.

·;

The Group continues to hold strong market positions across its major customer franchises, with stable or improving trends in most areas. Customer satisfaction and advocacy scores are also trending upwards in a number of important segments.

·;

A key element of our support for customers is making credit available to support their financing needs. RBS's capital plans include a substantial allowance to support incremental lending growth at more than double the projected growth of the UK economy as a whole.

·;

In the first half of 2013 RBS offered £26.7 billion of loans and facilities to UK businesses, of which £15.6 billion were to SMEs. In addition, the Group renewed £12.9 billion of UK business overdrafts, including £3.3 billion to SMEs. In Q2 2013, the £7.8 billion of loans and other facilities, including asset and invoice finance, was 6% higher than in Q2 2012.

·;

There have been welcome signs of an increase in SME loan demand in Q2 2013, with loan and overdraft applications up 8% from Q1 2013 to £2.9 billion. Nevertheless, SME demand for bank finance remains subdued; core loans and advances outstanding to non-commercial property SMEs fell slightly from Q1 2013 to £33 billion and many customers continued to build their cash balances, with SME deposits up £2.1 billion in Q2 to £56.8 billion and overdraft utilisation rates continuing their downward trajectory to 42%, compared with 47% in Q2 2012.

·;

RBS has proactively written to more than 1,400 SME customers stating its appetite to lend them more than £1.4 billion.

·;

To ensure that all avenues to further increasing SME lending are explored, RBS announced the appointment of Sir Andrew Large and Oliver Wyman on 3 July 2013 to undertake a thorough and independent review of the lending standards and practices used by RBS and NatWest. The review will aim to identify any further steps that RBS and NatWest can take to enhance support to SMEs and the wider UK economic recovery while maintaining safe and sound lending practices.

·;

Larger corporate use of bank debt remains volatile, with some large repayments causing a 4% fall in balances during H1 2013, partly reflecting the continuing strength of corporate bond issuance. Non-Core UK balances declined by 10% during H1 2013 as RBS continues to run off its excess real estate exposures in line with its established strategy and with regulatory requirements.

·;

New mortgage approvals in the UK have built rapidly over the last three months after slowing in Q1 as a result of a retraining and accreditation programme for all mortgage advisors, which substantially reduced advisor availability for new appointments. Approvals totalled £4.0 billion in Q2, up 42% from Q1 2013 and 15% from Q2 2012. Mortgage balances outstanding at 30 June 2013 were up 7% from the prior year at £109.3 billion, but fell by 1% in Q2 2013 as a result of the advisor retraining. The building pipeline of approvals is expected to feed into completions and drawdowns from Q3 2013 onwards.

·;

RBS has continued to promote the Bank of England's Funding for Lending Scheme, offering £2.2 billion of discounted loans to 12,000 SMEs in association with the FLS during the first half of 2013. Since the Scheme's inception, RBS has lent £58.7 billion to UK businesses and households, with £29.1 billion of this during H1 2013.The Group's very strong liquidity means that it has again had no need to draw on this public funding during the period.

(1)

Operating profit before tax, own credit adjustments, Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals and RFS Holdings minority interest ('operating profit'). Statutory operating profit before tax was £1,374 million for the half year ended 30 June 2013.

For analyst enquiries:

Richard O'Connor

Head of Investor Relations

+44 (0) 20 7672 1758

For media enquiries:

Group Media Centre

+44 (0) 131 523 4205

Date:

Friday 2 August 2013

Time:

9.30 am UK time

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

·;

own credit adjustments;

·;

Payment Protection Insurance (PPI) costs;

·;

Interest Rate Hedging Products (IRHP) redress and related costs;

·;

regulatory and legal actions;

·;

integration and restructuring costs;

·;

gain/(loss) on redemption of own debt;

·;

Asset Protection Scheme (APS);

·;

amortisation of purchased intangible assets;

·;

strategic disposals; and

·;

RFS Holdings minority interest (RFS MI).

Half year ended

Quarter ended

30 June 

2013 

30 June 

2012 

30 June 

2013 

31 March 

2013 

30 June 

2012 

£m 

£m 

£m 

£m 

£m 

Net interest income

5,442 

5,830 

2,770 

2,672 

2,907 

Non-interest income

5,166 

5,855 

2,677 

2,489 

2,613 

Total income (1)

10,608 

11,685 

5,447 

5,161 

5,520 

Operating expenses (2)

(6,780)

(7,433)

(3,399)

(3,381)

(3,634)

Operating profit before impairment losses (3)

3,828 

4,252 

2,048 

1,780 

1,886 

Impairment losses

(2,150)

(2,649)

(1,117)

(1,033)

(1,335)

Operating profit (3)

1,678 

1,603 

931 

747 

551 

Own credit adjustments

376 

(2,974)

127 

249 

(518)

Payment Protection Insurance costs

(185)

(260)

(185)

- 

(135)

Interest Rate Hedging Products redress and

related costs

(50)

- 

- 

(50)

- 

Regulatory and legal actions

(385)

- 

(385)

- 

- 

Integration and restructuring costs

(271)

(619)

(149)

(122)

(181)

Gain/(loss) on redemption of own debt

191 

577 

242 

(51)

- 

Other items

20 

(9)

(33)

53 

115 

Operating profit/(loss) before tax

1,374 

(1,682)

548 

826 

(168)

Tax charge

(678)

(399)

(328)

(350)

(261)

Profit/(loss) from continuing operations

696 

(2,081)

220 

476 

(429)

Profit from discontinued operations, net of tax

- Direct Line Group

127 

105 

- 

127 

17 

- Other

11 

1 

9 

2 

(4)

Profit from discontinued operations, net of tax

138 

106 

9 

129 

13 

Profit/(loss) for the period

834 

(1,975)

229 

605 

(416)

Non-controlling interests

(117)

25 

14 

(131)

11 

Other owners' dividends

(182)

(82)

(101)

(81)

(82)

Profit/(loss) attributable to ordinary and B

shareholders

535 

(2,032)

142 

393 

(487)

Half year ended

Quarter ended

30 June 

2013 

30 June 

2012 

30 June 

2013 

31 March 

2013 

30 June 

2012 

£m 

£m 

£m 

£m 

£m 

Net interest income

5,460 

5,718 

2,751 

2,709 

2,859 

Non-interest income

4,782 

5,697 

2,423 

2,359 

2,660 

Total income (1)

10,242 

11,415 

5,174 

5,068 

5,519 

Operating expenses (2)

(6,459)

(6,908)

(3,243)

(3,216)

(3,372)

Operating profit before impairment losses (3)

3,783 

4,507 

1,931 

1,852 

2,147 

Impairment losses

(1,319)

(1,553)

(719)

(600)

(728)

Operating profit (3)

2,464 

2,954 

1,212 

1,252 

1,419 

Key metrics

Core performance ratios

- Net interest margin

2.21% 

2.15% 

2.21% 

2.21% 

2.19% 

- Cost:income ratio

63% 

61% 

63% 

63% 

61% 

- Return on equity

7.4% 

9.4% 

7.2% 

7.7% 

8.7% 

- Adjusted earnings per ordinary and B share

10.9p 

8.6p 

5.6p 

5.3p 

3.6p 

- Adjusted earnings per ordinary and B share

assuming an expected tax rate of 23.25%

(2012 - 24.5%)

15.3p 

19.6p 

7.4p 

7.9p 

9.0p 

(1)

Excluding own credit adjustments, gain/(loss) on redemption of own debt, Asset Protection Scheme, strategic disposals and RFS Holdings minority interest.

(2)

Excluding PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, amortisation of purchased intangible assets and RFS Holdings minority interest.

(3)

Operating profit/(loss) before tax, own credit adjustments, PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals and RFS Holdings minority interest.

30 June 

2013 

31 March 

2013 

31 December 

2012 

£m 

£m 

£m 

Cash and balances at central banks

89,613 

86,718 

79,290 

Net loans and advances to banks (1,2)

30,241 

34,025 

29,168 

Net loans and advances to customers (1,2)

418,792 

432,360 

430,088 

Reverse repurchase agreements and stock borrowing

99,283 

103,105 

104,830 

Debt securities and equity shares

149,625 

165,109 

172,670 

Settlement balances

17,966 

15,805 

5,741 

Intangible assets

13,997 

13,928 

13,545 

Other assets (3)

23,020 

24,688 

35,060 

Funded assets

842,537 

875,738 

870,392 

Derivatives

373,692 

432,435 

441,903 

Total assets

1,216,229 

1,308,173 

1,312,295 

Bank deposits (2,4)

45,287 

54,536 

57,073 

Customer deposits (2,4)

437,097 

437,437 

433,239 

Repurchase agreements and stock lending

123,740 

128,233 

132,372 

Debt securities in issue

79,721 

92,740 

94,592 

Settlement balances

17,207 

14,640 

5,878 

Short positions

27,979 

30,610 

27,591 

Subordinated liabilities

26,538 

27,788 

26,773 

Other liabilities (3)

18,955 

21,143 

29,996 

Liabilities excluding derivatives

776,524 

807,127 

807,514 

Derivatives

370,047 

429,881 

434,333 

Total liabilities

1,146,571 

1,237,008 

1,241,847 

Non-controlling interests

475 

532 

1,770 

Owners' equity

69,183 

70,633 

68,678 

Total liabilities and equity

1,216,229 

1,308,173 

1,312,295 

Memo: Tangible equity (5)

49,894 

51,413 

49,841 

(1)

Excludes reverse repurchase agreements and stock borrowing.

(2)

Excludes disposal groups.

(3)

Includes disposal groups.

(4)

Excludes repurchase agreements and stock lending.

(5)

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

·;

Funded assets decreased by £27.9 billion compared with 31 December 2012 due to the ongoing reduction in Non-Core assets and downsizing of the Markets balance sheet in line with the strategic decision to reduce risk and focus on core strengths.

·;

Debt securities and equity shares were down £23.0 billion, primarily as a result of disposals of available-for-sale securities, with cash and liquid balances increasing as a result.

·;

Debt securities in issue decreased by £14.9 billion as short term wholesale funding fell in line with the overall reduction in the size of the balance sheet.

·;

Safety and Soundness; our clean-up job, unprecedented in scale, is nearing successful completion. The balance sheet we fund is down £720 billion from the worst point, with just £45 billion of Non-Core assets left. All other measures of safety are also hugely improved and core capital strength has been more than tripled on a like-for-like basis.

·;

Support for 28 million Customers; our Core businesses have been worked well and as a result have held their own against competitors, despite the disruption of restructuring. Fundamental retooling has laid stronger foundations for the future and is steadily improving what we can do for customers. UK core lending to households and companies has been sustained at c.£170 billion in a market down overall since 2008. RBS now has £51 billion more customer deposits than core loans and both the will and the wherewithal to fund future customer growth, as is our role.

·;

Recovery for Shareholders; in January 2009 RBS shares traded down to 9p/share (90p equivalent) as it looked possible that all could be lost. At around 330p today, £37 billion of stock market value is preserved. Along the way we have earned cumulative profits of £47 billion, pre-impairment and clean-up costs, from RBS's Core businesses. This has been a hard fought but essential result. All of that profit has been needed to pay for the clean-up process, whilst Government support gave time for the restructuring to work. First half operating losses from remaining "bad assets" in Non-Core and Ireland are 89% below their respective peaks and on track to being eliminated. RBS has now reported the first two consecutive quarters of overall profit since 2008. The prospects of attractive future profits and dividends to RBS shareholders are much improved.

Key Measures

Worst 

point 

H1 2013 

Medium- 

term target 

Value drivers

Core 

Core 

·; Return on equity (1)

(31%)(2)

7.4% 

>12% 

·; Cost:income ratio

97%(3)

63% 

Risk measures

Group 

Group 

·; Core Tier 1 ratio

4%(4)

11.1% 

>10% 

·; Loan:deposit ratio

154%(5)

96% 

c.100% 

·; Short-term wholesale funding (STWF)

£297bn(6)

£37bn 

(7)

·; Liquidity portfolio (8)

£90bn(6)

£158bn 

>1.5x STWF 

·; Leverage ratio (9)

28.7x(10)

14.3x 

(1) Based on indicative Core attributable profit taxed at standard rates and Core average tangible equity per the average balance sheet (88% of Group tangible equity based on RWAs at 30 June 2013); (2) Group return on tangible equity for 2008; (3) Year ended 31 December 2008; (4) As at 1 January 2008; (5) As at October 2008; (6) As at December 2008; (7) Third party assets (TPAs); (8) Eligible assets held for contingent liquidity purposes including cash, Government issued securities and other eligible securities with central banks; (9) Funded tangible assets divided by total Tier 1 capital; (10) As at June 2008.

·;

The Group further strengthened its capital position, increasing its fully loaded Basel III Core Tier 1 ratio to 8.7%. It remains on track to reach a fully loaded Basel III Core Tier 1 ratio of over 9% by the end of 2013, as previously communicated.

·;

The Group loan:deposit ratio fell to 96% at the end of Q2 2013 as customers continued to grow deposit balances despite a market-wide easing in pricing. The Group continues to target a ratio of c.100% and is focused on increasing its lending to support the UK economy, although demand for bank finance remains subdued.

·;

Liquidity metrics remained very strong in the quarter, with both short-term wholesale funding and liquidity portfolio metrics well ahead of the Group's medium-term targets.

Half year ended

Quarter ended

30 June 

2013 

30 June 

2012 

30 June 

2013 

31 March 

2013 

30 June 

2012 

Net interest income

£m 

£m 

£m 

£m 

£m 

Net interest income (1)

5,435 

5,837 

2,748 

2,687 

2,913 

Average interest-earning assets (1)

556,294 

616,527 

552,072 

560,563 

602,850 

Net interest margin

- Group

1.97% 

1.90% 

2.00% 

1.94% 

1.94% 

- Retail & Commercial (2)

2.91% 

2.92% 

2.92% 

2.90% 

2.93% 

- Non-Core

(0.06%)

0.28% 

0.15% 

(0.25%)

0.24% 

(1)

For further analysis and details refer to pages 70 and 71.

(2)

Retail & Commercial (R&C) comprises the UK Retail, UK Corporate, Wealth, International Banking, Ulster Bank and US R&C divisions.

·;

Group net interest margin improved by 7 basis points to 1.97%, reflecting the increasing preponderance of R&C in the Group's asset mix. In addition, a benefit was seen from a one-off recovery in Non-Core in H1 2013.

·;

R&C net interest margin fell by 1 basis point to 2.91%. Improved deposit market conditions enabled some repricing of retail and corporate deposits in Q2, helping to offset the impact of lower rates on current account hedges.

·;

Average interest-earning assets fell by £60 billion, driven by Non-Core run-off and disposals and a reduction in Markets.

·;

As a result of these trends, net interest income fell by 7% from the prior year, with deposit pricing initiatives starting to deliver income benefits later in the period. Net interest income was also affected by a decline in cash management income in International Banking, reflecting a deterioration in rates, and higher liquidity buffer funding costs.

·;

Average interest-earning assets were £8 billion lower, largely driven by Non-Core run-off and a reduction in R&C.

·;

R&C net interest margin increased by 2 basis points. A significant factor was the margin improvement in UK Retail as a result of good mortgage balance retention and strategic savings repricing. The 6 basis point improvement in Group net interest margin was driven by the recovery on disposal in Non-Core.

·;

Net interest income improved by 2%, mainly driven by the one-off recovery in Non-Core and the benefit of an extra day in the quarter, partly offset by lower average asset balances.

·;

Average interest-earning assets declined by £51 billion, with decreases in International Banking, reflecting customer repayments, and Non-Core, as assets were sold and run off. 

·;

Group net interest margin improved by 6 basis points to 2.00%, primarily reflecting the trend in the Group's asset mix towards R&C as well as the one-off recovery in Non-Core. 

·;

R&C net interest margin fell by 1 basis point compared with Q2 2012, which benefited from a deferred income recognition change in UK Corporate. Margins were also held back by lower returns on current account hedges in UK Retail and a smaller investment pool in US Retail & Commercial. These downward pressures were substantially offset by deposit re-pricing and the run-down of low margin assets in International Banking. 

·;

Net interest income was 6% lower, primarily as a result of lower asset volumes. 

Half year ended

Quarter ended

30 June 

2013 

30 June 

2012 

30 June 

2013 

31 March 

2013 

30 June 

2012 

Non-interest income

£m 

£m 

£m 

£m 

£m 

Net fees and commissions

2,248 

2,555 

1,142 

1,106 

1,249 

Income from trading activities

1,890 

2,193 

874 

1,016 

929 

Other operating income

1,028 

1,107 

661 

367 

435 

Total non-interest income

5,166 

5,855 

2,677 

2,489 

2,613 

·;

Net fees and commissions were £307 million lower with declines in Markets and International Banking. UK Retail was also affected by the impact of the Retail Distribution Review (RDR) on advisory income.

·;

The majority of the change in income from trading activities was in Markets, down £802 million as it managed down the scale and capital intensity of its balance sheet. This was partially offset by a £580 million increase in Non-Core trading income, driven by improved market conditions and the non-repeat of significant one-off losses in H1 2012.

·;

Other operating income fell by £79 million, predominantly driven by a reduction in Non-Core rental income following the disposal of RBS Aviation Capital in Q2 2012.

·;

Income from trading activities was £142 million lower, as revenue fell in Asset Backed Products and Credit Markets following the Federal Reserve's indication that quantitative easing may be tapered earlier than anticipated, partially offset by stronger Currencies income and an improvement in Non-Core.

·;

Other operating income increased by £294 million, with available-for-sale securities disposal gains £250 million higher and lower disposal losses in Non-Core.

·;

A strong improvement in Non-Core income from trading activities, reflecting favourable market conditions, was more than offset by lower Markets revenue, resulting in £55 million lower Group income from trading activities.

·;

The £226 million increase in other operating income reflected higher available-for-sale securities disposal gains and improvement in Non-Core. Q2 2012 had benefited from a £47 million gain in US Retail & Commercial on the sale of Visa B shares.

Half year ended

Quarter ended

30 June 

2013 

30 June 

2012 

30 June 

2013 

31 March 

2013 

30 June 

2012 

Operating expenses

£m 

£m 

£m 

£m 

£m 

Staff expenses

3,585 

4,116 

1,764 

1,821 

1,945 

Premises and equipment

1,079 

1,062 

526 

553 

511 

Other

1,479 

1,498 

801 

678 

804 

Administrative expenses

6,143 

6,676 

3,091 

3,052 

3,260 

Depreciation and amortisation

637 

757 

308 

329 

374 

Operating expenses

6,780 

7,433 

3,399 

3,381 

3,634 

Staff costs as a % of total income

34% 

35% 

32% 

35% 

35% 

Cost:income ratio - Core

63% 

61% 

63% 

63% 

61% 

Cost:income ratio - Group

64% 

64% 

 62% 

66% 

66% 

·;

Operating expenses were down 9% with headcount and compensation reduction in Markets and International Banking, together with lower operating lease depreciation and run-down in Non-Core.

·;

Non-staff operating costs were broadly flat as a Group-wide focus on cost management was offset by investment in technology to simplify processes and deliver better customer service in UK Retail, investment programmes in Ulster Bank to help support customers in arrears and higher investment spend in UK Corporate.

·;

Group cost:income ratio held flat at 64% with the strong reduction in expenses balancing lower income. Core cost:income ratio rose to 63% reflecting investment programmes.

·;

Staff costs were 3% lower as lower compensation in Markets and lower headcount across a number of divisions were partly offset by the non-repeat of Q1 2013 performance incentive releases across a number of divisions.

·;

Expenses in Group Centre increased by £82 million principally due to litigation and conduct costs.

·;

The Group's cost:income ratio improved by 400 basis points as total expenses were tightly controlled and income increased. Core cost:income ratio was maintained at 63%.

·;

Operating expenses decreased by 6% with a significant decline in Markets, driven by headcount and compensation reductions, and Non-Core, reflecting the run down of the division and a £55 million fall in operating lease depreciation. In addition, International Banking saw expense benefits from the run-off of discontinued businesses and headcount reductions while Ulster Bank costs increased with investment and change spend.

·;

Staff costs as a percentage of total income were 300 basis points lower, in line with improvements in processes and lower headcount.

·;

The Group's cost:income ratio improved by 400 basis points as expenses were managed down and income contracted slightly.

Half year ended

Quarter ended

30 June 

2013 

30 June 

2012 

30 June 

2013 

31 March 

2013 

30 June 

2012 

Impairment losses

£m 

£m 

£m 

£m 

£m 

Loan impairment losses

2,161 

2,730 

1,125 

1,036 

1,435 

Securities

(11)

(81)

(8)

(3)

(100)

Group impairment losses

2,150 

2,649 

1,117 

1,033 

1,335 

Loan impairment losses

- individually assessed

1,472 

1,690 

826 

646 

945 

- collectively assessed

734 

1,129 

293 

441 

534 

- latent

(36)

(113)

15 

(51)

(56)

Customer loans

2,170 

2,706 

1,134 

1,036 

1,423 

Bank loans

(9)

24 

(9)

- 

12 

Loan impairment losses

2,161 

2,730 

1,125 

1,036 

1,435 

Core

1,258 

1,515 

659 

599 

719 

Non-Core

903 

1,215 

466 

437 

716 

Group

2,161 

2,730 

1,125 

1,036 

1,435 

Customer loan impairment charge as a % of

gross loans and advances (1)

Group

1.0% 

1.1% 

1.0% 

0.9% 

1.2% 

Core

0.6% 

0.7% 

0.7% 

0.6% 

0.7% 

Non-Core

3.9% 

3.6% 

4.0% 

3.3% 

4.2% 

(1)

Customer loan impairment charge as a percentage of gross customer loans and advances excludes reverse repurchase agreements and includes disposal groups.

·;

Group loan impairment losses improved by £569 million or 21%, largely driven by a significant fall in Non-Core impairments (down £312 million) particularly in the non-Ulster Bank portfolios.

·;

Core Ulster Bank impairments also demonstrated a major improvement, falling by £214 million, or 30%, mainly as a result of improved retail mortgage debt-flow. UK Retail impairments also fell, reflecting lower default volumes across all products while International Banking impairments were higher as a result of two large single-name provisions totalling £109 million.

·;

Customer loan impairments as a percentage of gross loans declined slightly in Core. While Non-Core impairments were lower in absolute terms, they represented a higher percentage of Non-Core's declining loans and advances.

·;

Group loan impairment losses rose by £89 million driven by an increase in Core impairments (predominantly International Banking and Markets).

·;

Loan impairments as a percentage of gross loans and advances ticked up by 10 basis points in Core and 70 basis points in Non-Core.

·;

Group loan impairment losses improved by £310 million or 22%, predominantly reflecting a significant drop in Non-Core impairments with the non-recurrence of a single large Project Finance provision in Q2 2012.

·;

Core impairments were slightly lower as declines in Ulster Bank, reflecting a stabilisation in the macroeconomic environment in the Republic of Ireland, and in UK Retail, with lower default volumes, were largely offset by two significant cases in International Banking. 

·;

Customer loan impairments as a percentage of gross loans fell by 20 basis points, primarily reflecting the significant movements in Non-Core. 

Half year ended

Quarter ended

30 June 

2013 

30 June 

2012 

30 June 

2013 

31 March 

2013 

30 June 

2012 

One-off and other items

£m 

£m 

£m 

£m 

£m 

Payment Protection Insurance costs

(185)

(260)

(185)

- 

(135)

Interest Rate Hedging Products redress and

related costs

(50)

- 

- 

(50)

- 

Regulatory and legal actions

(385)

- 

(385)

- 

- 

Integration and restructuring costs

(271)

(619)

(149)

(122)

(181)

Gain/(loss) on redemption of own debt

191 

577 

242 

(51)

- 

Other items

- Asset Protection Scheme

- 

(45)

- 

- 

(2)

- Amortisation of purchased intangible assets

(79)

(99)

(38)

(41)

(51)

- Strategic disposals**

- 

152 

6 

(6)

160 

- RFS Holdings minority interest

99 

(17)

(1)

100 

8 

(680)

(311)

(510)

(170)

(201)

Own credit adjustments*

376 

(2,974)

127 

249 

(518)

One-off and other items

(304)

(3,285)

(383)

79 

(719)

* Own credit adjustments impact:

Income from trading activities

175 

(1,280)

76 

99 

(271)

Other operating income

201 

(1,694)

51 

150 

(247)

Own credit adjustments

376 

(2,974)

127 

249 

(518)

**Strategic disposals

Gain/(loss) on sale and provision for loss on disposal of investments in:

- RBS Aviation Capital

- 

197 

- 

- 

197 

- Other

- 

(45)

6 

(6)

(37)

- 

152 

6 

(6)

160 

·;

One-off items totalled a £304 million charge in H1 2013, compared with a charge of £3,285 million in H1 2012.

·;

Own credit adjustment was a gain of £376 million as the Group's credit spreads widened marginally, compared with a charge of £2,974 million in H1 2012, when there was a significant tightening in spreads.

·;

Provisions in H1 2013 totalled £620 million, including a provision of £385 million for regulatory and legal actions and an additional provision of £185 million, booked in Q2, for PPI redress. This takes the cumulative charges in respect of PPI to £2.4 billion, of which £1.7 billion has so far been paid out.

·;

Integration and restructuring costs of £271 million were lower in H1 2013 compared with H1 2012, which included restructuring costs for Markets and International Banking.

·;

A €1.5 billion note repurchase conducted by Ulster Bank in June generated a gain of £242 million, resulting in a net gain on redemption of own debt of £191 million in H1 2013 compared with £577 million in H1 2012.

·;

The increase in one-off and other items was principally driven by a provision for legal proceedings and regulatory investigations and an additional provision booked for PPI redress during the second quarter.

·;

This was partially offset by the £242 million gain on redemption of own debt resulting from the successful liability management exercise conducted by Ulster Bank, which contrasted with a loss of £51 million on own debt redemptions in the first quarter.

·;

Gains on strategic disposals in Q2 2012 arose principally from the sale of RBS Aviation Capital.

·;

Widening credit spreads resulted in a gain of £127 million from own credit adjustments, compared with a charge of £518 million in Q2 2012.

Capital resources and ratios

30 June 

2013 

31 March 

2013 

31 December 

2012 

Core Tier 1 capital

£48bn 

£48bn 

£47bn 

Tier 1 capital

£58bn 

£57bn 

£57bn 

Total capital

£69bn 

£69bn 

£67bn 

Risk-weighted assets

£436bn 

£446bn 

£460bn 

Core Tier 1 ratio

11.1% 

10.8% 

10.3% 

Tier 1 ratio

13.3% 

12.9% 

12.4% 

Total capital ratio

15.8% 

15.5% 

14.5% 

·;

The Group's Core Tier 1 ratio increased by 30 basis points to 11.1%, largely driven by a decline in risk-weighted assets (RWAs). On a fully loaded Basel III basis, the ratio strengthened by 50 basis points to 8.7% as the Group remained on track to meet its target of over 9% by the end of 2013, well ahead of the Basel implementation timetable which would require RBS to have a fully loaded ratio of 8.5% by 2018.

·;

RWAs were managed down by £10 billion including an £8 billion reduction in Non-Core. Core RWAs were flat as credit model uplifts of £9 billion, particularly affecting UK Corporate and International Banking, were offset by other reductions across the Core divisions.

·;

The 80 basis points increase in the Core Tier 1 ratio was predominantly driven by a £24 billion fall in RWAs. On a fully loaded Basel III basis, the ratio increased from 7.7% to 8.7%.

·;

The decline in RWAs was largely in Non-Core, with a fall of £14 billion from run-off and disposals, and in Markets, down £14 billion as a result of lower operational, credit and market risk.

Balance sheet

30 June 

2013 

31 March 

2013 

31 December 

2012 

Funded balance sheet (1)

£843bn 

£876bn 

£870bn 

Total assets

£1,216bn 

£1,308bn 

£1,312bn 

Loans and advances to customers (2)

£420bn 

£433bn 

£432bn 

Customer deposits (3)

£437bn 

£438bn 

£434bn 

Loan:deposit ratio - Core (4)

88% 

90% 

90% 

Loan:deposit ratio - Group (4)

96% 

99% 

100% 

Tangible net asset value per ordinary and B share (5)

445p 

459p 

446p 

Tier 1 leverage ratio (6)

14.3x 

15.0x 

15.0x 

Tangible equity leverage ratio (7)

6.0% 

6.0% 

5.8% 

(1)

Funded balance sheet represents total assets less derivatives.

(2)

Excluding reverse repurchase agreements and stock borrowing, and including disposal groups.

(3)

Excluding repurchase agreements and stock lending, and including disposal groups.

(4)

Net of provisions, including disposal groups and excluding repurchase agreements. Excluding disposal groups, the loan:deposit ratios of Core and Group at 30 June 2013 were 88% and 96% respectively (31 March 2013 - 90% and 99%; 31 December 2012 - 89% and 99%).

(5)

Tangible net asset value per ordinary and B share is total tangible equity divided by the number of ordinary shares in issue and the effect of convertible B shares.

(6)

Funded tangible assets divided by total Tier 1 capital.

(7)

Tangible equity leverage ratio is tangible equity attributable to ordinary and B shareholders divided by funded tangible assets.

·;

Customer deposits remained strong at £437 billion despite strategic repricing initiatives intended to counter surplus funding.

·;

Loans and advances to customers fell by £13 billion driven by Non-Core run-off of £6 billion, lower collateral posting in Markets of £5 billion and targeted reductions in UK Corporate commercial property and shipping portfolios of £0.9 billion. This drove the Group loan:deposit ratio 300 basis points lower. The Group remains focused on new lending growth particularly in the UK, despite continued subdued levels of demand in the market.

·;

The funded balance sheet decreased by £33 billion, principally as a result of focused balance sheet management in Markets (down £20 billion), and run-off and disposals in Non-Core (down £8 billion).

·;

Tangible net asset value per ordinary and B share was 445 pence, down from 459 pence with movement in cash flow hedging, available-for-sale and other reserves largely responsible for the reduction.

·;

Customer deposits increased by £3 billion, reflecting a strengthening of the US dollar against sterling and deposit inflows in most R&C businesses in Q1 2013. The inflow of deposits was mitigated by pricing initiatives in Q2 2013.

·;

Loans and advances to customers were £12 billion lower, with a £9 billion reduction in Non-Core through run-off and disposals.

·;

The funded balance sheet fell by £27 billion, reflecting successful balance sheet reduction in Q2 2013, reversing a temporary increase in Q1 2013 in central bank deposits and Markets counterparty positions.

Funding & liquidity metrics

30 June 

2013 

31 March 

2013 

31 December 

2012 

Deposits (1)

£482bn 

£493bn 

£491bn 

Deposits as a percentage of funded balance sheet

57% 

56% 

56% 

Short-term wholesale funding (2)

£37bn 

£43bn 

£42bn 

Wholesale funding (2)

£129bn 

£147bn 

£150bn 

Short-term wholesale funding as a percentage of funded balance sheet

4% 

5% 

5% 

Short-term wholesale funding as a percentage of total wholesale funding

29% 

29% 

28% 

Liquidity portfolio

£158bn 

£158bn 

£147bn 

Liquidity portfolio as a percentage of funded balance sheet

19% 

18% 

17% 

Liquidity portfolio as a percentage of short-term wholesale funding

427% 

367% 

350% 

Net stable funding ratio

120% 

119% 

117% 

(1)

Excludes repurchase agreements and stock lending and includes disposal groups.

(2)

Excludes derivative collateral.

·;

Short-term wholesale funding fell in the quarter to £37 billion, just 4% of the funded balance sheet.

·;

The Group's liquidity portfolio held flat as deposit inflows were mitigated by re-pricing initiatives. The liquidity portfolio continues to cover short-term wholesale funding balances by considerably more than the Group's medium-term target of 1.5 times, and now covers short-term wholesale funding by 4.3 times.

·;

Short-term wholesale funding fell in the latter part of the period and remained around 4% of the total funded balance sheet throughout.

·;

The liquidity portfolio increased during the earlier part of the period as a result of deposit growth and Non-Core run-down.