20-F 1 dp29251_20f.htm FORM 20-F



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________


FORM 20-F
(Mark One)
 
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2011
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

 
Commission file number: 001-10306
 
THE ROYAL BANK OF SCOTLAND GROUP plc
 (Exact name of Registrant as specified in its charter)
 
United Kingdom
(Jurisdiction of incorporation)
 
RBS Gogarburn, PO Box 1000, Edinburgh EH12 1HQ, United Kingdom
(Address of principal executive offices)
 
Aileen Taylor, Group Secretary, Tel: +44 (0) 131 626 4099, Fax: +44 (0) 131 626 3081
 
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
 
Name of each exchange on which registered
American Depositary Shares, each representing 20 ordinary shares, nominal value £0.25 per share
Ordinary shares, nominal value £0.25 per share
American Depositary Shares Series F, H, L, M, N, P, Q, R, S, T and U each representing one Non-Cumulative Dollar Preference Share, Series F, H, L, M, N, P, Q, R, S, T and U respectively
Dollar Perpetual Regulatory tier one securities, Series 1
Senior Floating Rate Notes due 2013
3.400% Senior Notes due 2013
3.250% Senior Notes due 2014
3.950% Senior Notes due 2015
4.875% Senior Notes due 2015
4.375% Senior Notes due 2016
5.625% Senior Notes due 2020
6.125% Senior Notes due 2021
 
New York Stock Exchange
 
New York Stock Exchange*
New York Stock Exchange
 
 
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
______________________________________
* Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares pursuant to the requirements of the Securities and Exchange Commission.
 
 
 

 

 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
 
_______________
 
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 
None
 
_______________
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2011, the close of the period covered by the annual report:
 
 
(Title of each class)
 
 
(Number of outstanding shares)
Ordinary shares of 25 pence each
B Shares
Dividend Access Share
11% cumulative preference shares
5½% cumulative preference shares
Non-cumulative dollar preference shares, Series F, H and L to U
Non-cumulative convertible dollar preference shares, Series 1
Non-cumulative euro preference shares, Series 1 to 3
Non-cumulative convertible sterling preference shares, Series 1
Non-cumulative sterling preference shares, Series 1
 
 
59,228,412,207
51,000,000,000
1
500,000
400,000
209,609,154
64,772
2,044,418
14,866
54,442
 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
x  Yes      o  No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
o  Yes      x  No
 
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
x  Yes      o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
o  Yes      o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated filer  x  Accelerated filer  o  Non-Accelerated filer o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
o    U.S. GAAP
x  International Financial Reporting Standards as issued by the International Accounting Standards Board
o    Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
o   Item 17        o   Item 18

 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
o  Yes        x  No
 
 
 

 
SEC Form 20-F cross reference guide
 
 
Item    Item Caption    Pages
         
PART I        
1   Identity of Directors, Senior Management and Advisers   Not applicable
         
2   Offer Statistics and Expected Timetable   Not applicable
         
3  
Key Information
Selected financial data
Capitalisation and indebtedness
Reasons for the offer and use of proceeds
Risk factors
 
8-9, 350-352, 386-387, 394, 424-425
Not applicable
Not applicable
7, 405-418
         
4   Information on the Company    12-16, 57, 74-165, 323-324, 327-328, 332-333, 386-394
    History and development of the Company
Business overview
Organisational structure
Property, plant and equipment
  4-6, 257-259, 334-335, 430, 451
4-6, 257-259, 370-375, 395-398
4-5
332-333, 398
         
4A   Unresolved Staff Comments   Not applicable
         
5  
Operating and Financial Review and Prospects
Operating results
Liquidity and capital resources
 
 
6, 8-57, 325-326, 395-397
56-57, 68-91, 299-323, 325-328, 332-333,
351-352, 360, 368-369, 393-394
         
    Research and development, patents, licences etc
Trend information
Off balance sheet arrangements
Contractual obligations
  Not applicable
4-7, 405-418
82-85, 359-360
74-81, 353-356
         
6   Directors, Senior Management and Employees
Directors and senior management
Compensation 
Board practices
Employees
Share ownership
  211-214
232-253, 288-296, 376
216-225, 230-231, 247-253, 261
25, 258, 288-290
250-251, 262
         
7  
Major Shareholders and Related Party Transactions
Major shareholders
Related party transactions
Interests of experts and counsel
  261, 398
377-378
Not applicable
         
8   Financial Information
Consolidated statements and other financial information
Significant changes
  257, 264-384, 425
5, 378
 
 
 

 
 
 
Item    Item Caption    Pages
         
9  
The Offer and Listing
Offer and listing details 
Plan of distribution
Markets
Selling shareholders
Dilution
Expenses of the issue
 
423-424
Not applicable
422
Not applicable
Not applicable
Not applicable
         
10  
Additional Information
Share capital
Memorandum and articles of association
Material contracts
Exchange controls
Taxation
Dividends and paying agents
Statement of experts 
Documents on display
Subsidiary information 
  Not applicable
430-438
398-403
429
426-429
Not applicable
Not applicable
439
Not applicable
         
11  
Quantitative and Qualitative Disclosure  
about Market Risk
  58-207, 299-320, 325-326
         
12  
Description of Securities other than
Equity Securities
  404
         
PART II        
         
13   Defaults, Dividend Arrearages and Delinquencies   Not applicable
         
14  
Material Modifications to the Rights of Security
Holders and Use of Proceeds
  Not applicable
         
15   Controls and Procedures   223-225, 265
         
16    [Reserved]    
         
    A Audit Committee financial expert
B Code of ethics 
C Principal Accountant Fees and services
D Exemptions from the Listing Standards for Audit Committees    
E Purchases of Equity Securities by the  
F Change in Registrant’s Certifying Accountant
G Corporate Governance
H Mine Safety Disclosure
 
221-225
259
221-225, 296
Not applicable
Not applicable
Not applicable
216-220
Not applicable
         
PART III        
17   Financial Statements   Not applicable
         
18   Financial Statements    264-384
         
19   Exhibits   452-455
         
    Signature    456
 
 
 
 

 
                                               
 
Form 20-F
 
 
2
Presentation of information
3
Forward-looking statements
4
Description of business
5
Recent developments
6
Competition
7
Risk factors
8
Key financials
9
Summary consolidated income statement
9
Results summary
12
Analysis of results
23
Divisional performance
53
Consolidated balance sheet
56
Cash flow
57
Capital resources
58
Risk and balance sheet management
58
  Introduction
68
  Balance sheet management
68
    - Capital management
74
    - Liquidity and funding risk
89
    - Interest rate risk
91
    - Structural foreign currency exposures
91
    - Equity risk
92
  Risk management
92
    - Credit risk
166
    - Country risk
187
    - Market risk
194
    - Insurance risk
194
    - Operational risk
197
    - Compliance risk
202
    - Reputational risk
202
    - Business risk
203
    - Pension risk
205
  Asset Protection Scheme


 
1

 
 
Presentation of information
 
In this document and unless specified otherwise, the term ‘company’ or ‘RBSG’ means The Royal Bank of Scotland Group plc, ‘RBS’, ‘RBS Group’ or the ‘Group’ means the company and its subsidiaries, ‘the Royal Bank’ means The Royal Bank of Scotland plc and ‘NatWest’ means National Westminster Bank Plc.

The company publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’). Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, the European single currency, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.

Certain information in this report is presented separately for domestic and foreign activities. Domestic activities primarily consist of the UK domestic transactions of the Group. Foreign activities comprise the Group's transactions conducted through those offices in the UK specifically organised to service international banking transactions and transactions conducted through offices outside the UK.

The geographic analysis in the Business Review, including the average balance sheet and interest rates, changes in net interest income and average interest rates, yields, spreads and margins in this report have been compiled on the basis of location of office - UK and overseas. Management believes that this presentation provides more useful information on the Group's yields, spreads and margins of the Group's activities than would be provided by presentation on the basis of the domestic and foreign activities analysis used elsewhere in this report as it more closely reflects the basis on which the Group is managed. ‘UK’ in this context includes domestic transactions and transactions conducted through the offices in the UK which service international banking transactions.

The results, assets and liabilities of individual business units are classified as trading or non-trading based on their predominant activity. Although this method may result in some non-trading activity being classified as trading, and vice versa, the Group believes that any resulting misclassification is not material.

International Financial Reporting Standards
As required by the Companies Act 2006 and Article 4 of the European Union IAS Regulation, the consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (together ‘IFRS’). They also comply with IFRS as issued by the IASB.

RBS Holdings N.V. (formerly ABN AMRO Holding N.V.)
In 2007, RFS Holdings B.V., which was jointly owned by the Group, the Dutch State (successor to Fortis) and Santander (together, the “Consortium Members”) completed the acquisition of ABN AMRO Holding N.V.
 
On 6 February 2010, the businesses of ABN AMRO Holding N.V. acquired by the Dutch State were legally demerged to a newly established company, ABN AMRO Bank N.V., which on 1 April 2010 was transferred to ABN AMRO Group N.V., itself owned by the Dutch State. Following legal separation, RBS Holdings N.V. (formerly ABN AMRO Holding N.V.) has one operating subsidiary, The Royal Bank of Scotland N.V. (“RBS N.V.”), a fully operational bank within the Group. RBS N.V. is independently rated and regulated by the Dutch Central Bank. Certain assets within RBS N.V. continue to be shared by the Consortium Members.

On 19 April 2011, the Group announced the proposed transfers of a substantial part of the business activities of RBS N.V. to the Royal Bank. Subject to, among other matters, regulatory and other approvals and procedures, it is expected that the transfers will be implemented on a phased basis over a period ending 31 December 2013. A large part of the transfers is expected to have taken place by the end of 2012.

On 17 October 2011, the Group completed the transfer of a substantial part of the UK activities of RBS N.V. to the Royal Bank pursuant to Part VII of the UK Financial Services and Markets Act 2000.

Approximately 98% of the issued share capital of RFS Holdings B.V. is held by the Group.

Non-GAAP financial information
The directors manage the Group’s performance by class of business, before certain reconciling items, as is presented in the segmental analysis on pages 371 to 375 (the “managed basis”). Discussion of the Group’s performance focuses on the managed basis as the Group believes that such measures allow a more meaningful analysis of the Group’s financial condition and the results of its operations. These measures are non-GAAP financial measures. A body of generally accepted accounting principles such as IFRS is commonly referred to as ‘GAAP’. A non-GAAP financial measure is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Reconciliations of these non-GAAP measures are presented throughout this document or in the segmental analysis on pages 371 to 375. These non-GAAP financial measures are not a substitute for GAAP measures. Furthermore, RBS has divided its operations into “Core” and “Non- Core”. Certain measures disclosed in this document for Core operations and used by RBS management are non-GAAP financial measures as they represent a combination of all reportable segments with the exception of Non-Core. In addition, RBS has further divided parts of the Core business into “Retail & Commercial” consisting of the UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank and US Retail & Commercial divisions. This is a non GAAP financial measure. Lastly, the Basel III net stable funding ratio (see page 81) represents a non-GAAP financial measure given it is a metric that is not yet required to be disclosed by a government, governmental authority or self-regulatory organisation.

Glossary
A glossary of terms is provided on pages 440 to 447.
 
 
2

 
 
 
Forward-looking statements
 
Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘believes’, ‘should’, ‘intend’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on such expressions.

In particular, this document includes forward-looking statements relating, but not limited to: the Group’s restructuring plans, divestments, capitalisation, portfolios, net interest margin, capital ratios, liquidity, risk weighted assets (RWAs), return on equity (ROE), profitability, cost:income ratios, leverage and loan:deposit ratios, funding and risk profile; certain ring-fencing proposals; sustainability targets; the Group’s future financial performance; the level and extent of future impairments and write-downs, including sovereign debt impairments; the protection provided by the Asset Protection Scheme (APS); and the Group’s potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: the global economic and financial market conditions and other geopolitical risks, and their impact on the financial industry in general and on the Group in particular; the ability to access sufficient sources of liquidity and funding; the recommendations made by the Independent Commission on Banking (ICB) and their potential implications; the ability to implement strategic plans on a timely basis, or at all, including the disposal of certain Non-Core assets and assets and businesses required as part of the State Aid restructuring plan; organisational restructuring, including any adverse consequences of a failure to transfer, or delay in transferring, certain business assets and liabilities from RBS N.V. to RBS; the full nationalisation of the Group or other resolution procedures under the Banking Act 2009; deteriorations in borrower and counterparty credit quality; costs or exposures borne by the Group arising out of the origination or sale of mortgages or mortgage-backed securities in the United States; the extent of future write-downs and impairment charges caused by depressed asset valuations; the value and effectiveness of any credit protection purchased by the Group; unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices and basis, volatility and correlation risks; changes in the credit ratings of the Group; ineffective management of capital or changes to capital adequacy or liquidity requirements; litigation and regulatory investigations; changes to the valuation of financial instruments recorded at fair value; competition and consolidation in the banking sector; the ability of the Group to attract or retain senior management or other key employees; regulatory or legal changes (including those requiring any restructuring of the Group’s operations) in the United Kingdom, the United States and other countries in which the Group operates or a change in United Kingdom Government policy; changes to regulatory requirements relating to capital and liquidity; changes to the monetary and interest rate policies of central banks and other governmental and regulatory bodies; changes in UK and foreign laws, regulations, accounting standards and taxes, including changes in regulatory capital regulations and liquidity requirements; impairments of goodwill; pension fund shortfalls; general operational risks; HM Treasury exercising influence over the operations of the Group; insurance claims; reputational risk; the ability to access the contingent capital arrangements with HM Treasury; the participation of the Group in the APS and the effect of the APS on the Group’s financial and capital position; the conversion of the B Shares in accordance with their terms; limitations on, or additional requirements imposed on, the Group’s activities as a result of HM Treasury’s investment in the Group; and the success of the Group in managing the risks involved in the foregoing.

The forward-looking statements contained in this document speak only as of the date of this announcement, and the Group does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.

 
3

 
 

 
Description of business
Introduction
The Royal Bank of Scotland Group plc is the holding company of a large global banking and financial services group. Headquartered in Edinburgh, the Group operates in the United Kingdom, the United States and internationally through its principal subsidiaries, the Royal Bank and NatWest. Both the Royal Bank and NatWest are major UK clearing banks. In the United States, the Group's subsidiary Citizens is a large commercial banking organisation. Globally, the Group has a diversified customer base and provides a wide range of products and services to personal, commercial and large corporate and institutional customers.

Following the placing and open offers in December 2008 and in April 2009, HM Treasury owned approximately 70.3% of the enlarged ordinary share capital of the company. In December 2009, the company issued a further £25.5 billion of new capital to HM Treasury. This new capital took the form of B shares, which do not generally carry voting rights at general meetings of ordinary shareholders but are convertible into ordinary shares and qualify as Core Tier 1 capital. Following the issuance of the B shares, HM Treasury's holding of ordinary shares of the company remained at 70.3% although its economic interest rose to 84.4%.

At 31 December 2011, HM Treasury’s holding in the company’s ordinary shares was 66.9% and its economic interest was 82.2%.

The Group had total assets of £1,506.9 billion and owners' equity of
£74.8 billion at 31 December 2011. The Group's risk asset ratios at 31 December 2011, were a Total capital ratio of 13.8%, a Core Tier 1 capital ratio of 10.6% and a Tier 1 capital ratio of 13.0%.

Organisational structure and business overview
The Group’s activities are organised on a divisional basis as follows:
 
UK Retail offers a comprehensive range of banking products and related financial services to the personal market. It serves customers through a number of channels including: the RBS and NatWest network of branches and ATMs in the United Kingdom, telephony, online and mobile. UK Retail remains committed to delivering ‘Helpful and Sustainable’ banking and to the commitments set out in its Customer Charter - the results of which are externally assessed and published every six months.

UK Corporate is a leading provider of banking, finance and risk management services to the corporate and SME sector in the United Kingdom. It offers a full range of banking products and related financial services through a nationwide network of relationship managers, and also through telephone and internet channels. The product range includes asset finance through the Lombard brand.

Wealth provides private banking and investment services in the UK through Coutts & Co and Adam & Company, offshore banking through RBS International, NatWest Offshore and Isle of Man Bank, and international private banking through Coutts & Co Ltd.

Global Transaction Services (GTS) ranks among the top tier of global transaction banks, offering payments, cash and liquidity management, trade finance and commercial card products and services. Through the network and extensive partner bank agreements, GTS is able to support and connect customers across 128 countries.

Ulster Bank is the leading retail and business bank in Northern Ireland and the third largest banking group on the island of Ireland. It provides a comprehensive range of financial services. The Retail Markets division which has a network of 236 branches, operates in the personal and financial planning sectors. The Corporate Markets division provides services to SME business customers, corporates and institutional markets.

US Retail & Commercial provides financial services primarily through the Citizens and Charter One brands. US Retail & Commercial is engaged in retail and corporate banking activities through its branch network in 12 states in the United States and through non-branch offices in other states.

The divisions discussed above are collectively referred to as Retail & Commercial.

Global Banking & Markets (GBM) is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt and equity financing, risk management and investment services to its customers. The division is organised along six principal business lines: money markets; rates flow trading; currencies; equities; credit and mortgage markets; and portfolio management & origination.

RBS Insurance provides a wide range of general insurance products to consumers through a number of well known brands including; Direct Line, Churchill and Privilege. It also provides insurance services for third party brands, through its UKI Partnerships business. In the commercial sector, its NIG and Direct Line for Business operations provide insurance products for businesses via brokers or direct respectively. Through its international division, RBS Insurance sells general insurance, mainly motor, in Germany and Italy. In addition to insurance services, RBS Insurance continues to provide support and reassurance to millions of UK motorists through its Green Flag breakdown recovery service and Tracker stolen vehicle recovery and telematics business. On 15 February 2012, a new corporate brand, Direct Line Group, was announced.

To comply with EC State Aid requirements, the Group has agreed to dispose of RBS Insurance.  It continues to be reported as a separate operating segment rather than within the Non-Core division as its business is distinct from the activities of the Non-Core division.

Central Functions comprises Group and corporate functions, such as treasury, funding and finance, risk management, legal, communications and human resources. The Centre manages the Group's capital resources and Group-wide regulatory projects and provides services to the operating divisions.

 
4

 
 
Business review continued
 
Non-Core division manages separately assets that the Group intends to run off or dispose of. The division contains a range of businesses and asset portfolios primarily from the GBM division, higher risk profile asset portfolios including excess risk concentrations, and other illiquid portfolios. It also includes a number of other portfolios and businesses including regional markets businesses that the Group has concluded are no longer strategic.

Business Services supports the customer-facing businesses and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services. Business Services drives efficiencies and supports income growth across multiple brands and channels by using a single, scalable platform and common processes wherever possible. It also leverages the Group's purchasing power and is the Group's centre of excellence for managing large-scale and complex change. For reporting purposes, Business Services costs are allocated to the divisions above. It is not deemed a reportable segment.

Organisational change
In January 2012, the Group announced changes to its wholesale banking operations in light of a changed market and regulatory environment.  The changes will see the reorganisation of the Group’s wholesale businesses into ‘Markets’ and ‘International Banking’ and the exit and downsizing of selected activities.  The changes will ensure the wholesale businesses continue to deliver against the Group’s strategy.

The changes will include an exit from cash equities, corporate brokering, equity capital markets and mergers and acquisitions businesses.  Significant reductions in balance sheet, funding requirements and cost base in the remaining wholesale businesses will be implemented.

Existing GBM and GTS divisions will be reorganised as follows:

·
The ‘Markets’ business will maintain its focus on fixed income, with strong positions in debt capital raising, securitisation, risk management, foreign exchange and rates. It will serve the corporate and institutional clients of all Group businesses.
 
 
·
GBM's corporate banking business will combine with the international businesses of our GTS arm into a new ‘International Banking’ unit and provide clients with a 'one-stop shop' access to the Group’s debt financing, risk management and payments services. This international corporate business will be self-funded through its stable corporate deposit base.

·
The domestic small and mid-size corporates currently served within GTS will be managed within RBS's domestic corporate banking businesses in the UK, Ireland (Ulster Bank) and the US (US Retail & Commercial).

Our wholesale business will be retaining its international footprint to ensure that it can serve our customers' needs globally. We believe, that despite current challenges to the sector, wholesale banking services can play a central role in supporting cross border trade and capital flows, financing requirements and risk management and we remain committed to this business.

Going forward the Group will comprise the following segments:

·
Retail and Commercial
 
  - UK Retail
 
  - UK Corporate
 
  - Wealth
 
  - US Retail & Commercial
 
  - Ulster Bank
 
  - International Banking
·
Markets
·
RBS Insurance
·
Group Centre
·
Core
·
Non-Core

Business divestments
To comply with EC State Aid requirements the Group agreed a series of restructuring measures to be implemented over a four year period from December 2009. This supplements the measures in the Strategic Plan previously announced by the Group. These include divesting RBS Insurance, 80.01% of GMS (completed in 2010) and substantially all of RBS Sempra Commodities JV business (largely completed in 2010), as well as divesting the RBS branch-based business in England and Wales and the NatWest branches in Scotland, along with the Direct SME customers across the UK.

Recent developments
Liability management: Exchange offer
On 28 February 2012, The Royal Bank of Scotland plc announced an invitation to offer to exchange certain Canadian Dollar, Australian Dollar, US Dollar, Euro and Swiss Franc denominated subordinated notes for new Canadian Dollar, Australian Dollar, US Dollar, Euro and Swiss Franc denominated subordinated notes, due 2022 and callable 2017. The new notes, other than the Australian Dollar denominated new notes, were issued on 16 March 2012, and the Australian Dollar denominated new notes were issued on 19 March 2012, in each case under the £90,000,000,000 Euro Medium Term Note Programme of The Royal Bank of Scotland plc and The Royal Bank of Scotland Group plc.

National Loan Guarantee Scheme
On 20 March 2012, RBS agreed to participate in the National Loan Guarantee Scheme (the Scheme), pursuant to which The Commissioners of Her Majesty’s Treasury (HM Treasury) have agreed to unconditionally and irrevocably guarantee the due payment of all sums due and payable by RBS under any senior unsecured notes issued by RBS in accordance with the terms of the Scheme in respect of which HM Treasury issues a Guarantee Certificate (as defined in a deed of guarantee dated 20 March 2012 (the “Deed of Guarantee”)). The Guarantor’s obligations in that respect, are contained in the Deed of Guarantee, the form of which is available at www.dmo.gov.uk.
 
2012 Budget
In the Budget statement on 21 March 2012, the Chancellor of the Exchequer announced a further reduction of 1% in the rate of corporation tax such that the rate will fall by 2% from 26% to 24% in April 2012, to 23% in April 2013 and to 22% in April 2014.
 
It was also announced in the Budget statement that the full rate of the bank levy will increase to 0.105 per cent. from 1 January 2013.

 
5

 
 
Business review continued

Competition
The Group faces strong competition in all the markets it serves. Banks’ balance sheets have strengthened whilst loan demand has been subdued as many customers have sought to delever and the UK economy has remained weak. Competition for retail deposits remains intense as institutions continue to target strong and diverse funding platforms for their balance sheets.

Competition for corporate and institutional customers in the UK is from UK banks and from large foreign financial institutions who are also active and offer combined investment and commercial banking capabilities. In asset finance, the Group competes with banks and specialist asset finance providers, both captive and non-captive. In European and Asian corporate and institutional banking markets the Group competes with the large domestic banks active in these markets and with the major international banks.

In the small business banking market, the Group competes with other UK clearing banks, specialist finance providers and building societies.

In the personal banking segment, the Group competes with UK clearing banks and building societies, major retailers and life assurance companies. In the mortgage market, the Group competes with UK clearing banks and building societies. The ambitions of non-traditional players in the UK market remain strong, with new entrants active and potentially seeking to build their platforms by acquiring businesses made available through restructuring of incumbents. The Group distributes life assurance products to banking customers in competition with independent advisors and life assurance companies.

In the UK credit card market large retailers and specialist card issuers are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and the internet.

In Wealth Management, The Royal Bank of Scotland International competes with other UK and international banks to offer offshore banking services. Coutts and Adam & Company compete as private banks with UK clearing and private banks, and with international private banks. Competition in wealth management remains strong as banks maintain their focus on competing for affluent and high net worth customers.

RBS Insurance competes in personal lines insurance and, to a more limited extent, in commercial insurance. There is strong competition from a range of insurance companies which now operate telephone and internet direct sales businesses. Competition in the UK motor market remains intense, and price comparison internet sites now play a major role in the marketplace. These sites are now extending their scope to home insurance and other lines. RBS Insurance also competes with local insurance companies in the direct motor insurance markets in Italy and Germany.

In Ireland, Ulster Bank competes in retail and commercial banking with the major Irish banks and building societies, and with other UK and international banks and building societies active in the market. The challenging conditions in the Irish economy persist and many of the domestic Irish banks have required State support and are engaged in significant restructuring actions.

In the United States, Citizens competes in the New England, Mid-Atlantic and Mid-West retail and mid-corporate banking markets with local and regional banks and other financial institutions. The Group also competes in the US in large corporate lending and specialised finance markets, and in fixed-income trading and sales. Competition is principally with the large US commercial and investment banks and international banks active in the US. The economic recovery in the US is proving weaker than expected and loan demand is weak in Citizens’ markets.

 
6

 
Business review continued
 
 
Risk factors

Set out below is a summary of certain risks which could adversely affect the Group; it should be read in conjunction with the Risk and balance sheet management section of the Business review (pages 58 to 207). This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. A fuller description of these and other risk factors is included on pages 405 to 418.

·
The Group’s businesses, earnings and financial condition have been and will continue to be affected by geopolitical conditions, the global economy, the instability in the global financial markets and increased competition. Together with a perceived increased risk of default on the sovereign debt of certain European countries and unprecedented stresses on the financial system within the eurozone, these factors have resulted in significant changes in market conditions including interest rates, foreign exchange rates, credit spreads, and other market factors and consequent changes in asset valuations.

·
The Group’s ability to meet its obligations’ including its funding commitments, depends on the Group’s ability to access sources of liquidity and funding. The inability to access liquidity and funding due to market conditions or otherwise could adversely affect the Group’s financial condition. Furthermore, the Group’s borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and the UK Government’s credit ratings.

·
The Independent Commission on Banking has published its final report on competition and possible structural reforms in the UK banking industry. The Government has indicated that it supports and intends to implement the recommendations substantially as proposed which could have a material adverse effect on the Group.

·
The Group’s ability to implement its Strategic Plan depends on the success of its efforts to refocus on its core strengths and its balance sheet reduction programme. As part of the Group’s Strategic Plan and implementation of the State Aid restructuring plan agreed with the European Commission and HM Treasury, the Group is undertaking an extensive restructuring which may adversely affect the Group’s business, results of operations and financial condition and give rise to increased operational risk and may impair the Group’s ability to raise new Tier 1 capital due to restrictions on its ability to make discretionary dividend or coupon payments on certain securities.

·
The occurrence of a delay in the implementation of (or any failure to implement) the approved proposed transfers of a substantial part of the business activities of RBS N.V. to the Royal Bank may have a material adverse effect on the Group.

·
The Group or any of its UK bank subsidiaries may face the risk of full nationalisation or other resolution procedures and various actions could be taken by or on behalf of the UK Government, including actions in relation to any securities issued, new or existing contractual arrangements and transfers of part or all of the Group’s businesses.

·
The actual or perceived failure or worsening credit of the Group’s counterparties or borrowers and depressed asset valuations resulting from poor market conditions have adversely affected and could continue to adversely affect the Group.

·
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate.

·
The Group’s insurance businesses are subject to inherent risks involving claims on insured events.

·
The Group’s business performance, financial condition and capital and liquidity ratios could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy and liquidity requirements, including those arising out of Basel III implementation (globally or by European or UK authorities), or if the Group is unable to issue Contingent B Shares to HM Treasury under certain circumstances.

·
The Group could fail to attract or retain senior management, which may include members of the Group Board, or other key employees, and it may suffer if it does not maintain good employee relations.

·
Any significant developments in regulatory or tax legislation could have an effect on how the Group conducts its business and on its results of operations and financial condition, and the recoverability of certain deferred tax assets recognised by the Group is subject to uncertainty.

·
The Group is subject to substantial regulation and oversight, and any significant regulatory or legal developments could have an adverse effect on how the Group conducts its business and on its results of operations and financial condition.  In addition, the Group is, and may be, subject to litigation and regulatory investigations that may impact its business, results of operations and financial condition.

·
Operational and reputational risks are inherent in the Group’s operations.

·
The Group may be required to make contributions to its pension schemes and government compensation schemes, either of which may have an adverse impact on the Group’s results of operations, cash flow and financial condition.

·
As a result of the UK Government’s majority shareholding in the Group it can, and in the future may decide to, exercise a significant degree of influence over the Group including on dividend policy, modifying or cancelling contracts or limiting the Group’s operations. The offer or sale by the UK Government of all or a portion of its shareholding in the company could affect the market price of the equity shares and other securities and acquisitions of ordinary shares by the UK Government (including through conversions of other securities or further purchases of shares) may result in the delisting of the Group from the Official List.

 
7

 
 
Business review continued

 
Key financials
for the year ended 31 December
2011 
£m 
2010 
£m 
2009 
£m 
Total income
28,937 
31,868 
33,026 
Operating loss before tax
(766)
(399)
(2,647)
Loss attributable to ordinary and B shareholders
(1,997)
(1,125)
(3,607)
Cost:income ratio
62% 
57% 
52% 
Basic loss per ordinary and B share from continuing operations (pence)
(1.8p)
(0.5p)
(6.3p)


at 31 December
2011 
£m 
2010 
£m 
2009 
£m 
Funded balance sheet (1)
977,249 
1,026,499 
1,255,032 
Total assets
1,506,867 
1,453,576 
1,696,486 
Loans and advances to customers
515,606 
555,260 
728,393 
Deposits
611,759 
609,483 
756,346 
Owners' equity
74,819 
75,132 
77,736 
Risk asset ratios
- Core Tier 1
10.6% 
10.7% 
11.0% 
 
- Tier 1
13.0% 
12.9% 
14.1% 
 
- Total
13.8% 
14.0% 
16.1% 
Note:
 (1)
Funded balance sheet represents total assets less derivatives.


Overview of results
The results of RFS Holdings B.V., the entity that acquired ABN AMRO, are fully consolidated in the Group’s financial statements. The interests of the State of the Netherlands and Santander in RFS Holdings are included in non-controlling interests. Legal separation of ABN AMRO Bank N.V. took place on 1 April 2010. As a result, RBS presents the interests of the Consortium Members in ABN AMRO as discontinued operations.
 
 
8

 
 
 
Summary consolidated income statement
for the year ended 31 December 2011
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Net interest income
12,679 
14,209 
13,388 
Fees and commissions receivable
6,384 
8,193 
8,738 
Fees and commissions payable
(1,460)
(2,211)
(2,790)
Other non-interest income
7,078 
6,549 
8,424 
Insurance net premium income
4,256 
5,128 
5,266 
Non-interest income
16,258 
17,659 
19,638 
Total income
28,937 
31,868 
33,026 
Operating expenses
(18,026)
(18,228)
(17,417)
Profit before insurance net claims and impairment losses
10,911 
13,640 
15,609 
Insurance net claims
(2,968)
(4,783)
(4,357)
Impairment losses
(8,709)
(9,256)
(13,899)
Operating loss before tax
(766)
(399)
(2,647)
Tax (charge)/credit
(1,250)
(634)
429 
Loss from continuing operations
(2,016)
(1,033)
(2,218)
Profit/(loss) from discontinued operations, net of tax
47 
(633)
(105)
Loss for the year
(1,969)
(1,666)
(2,323)
Non-controlling interests
(28)
665 
(349)
Other owners’ dividends
— 
(124)
(935)
Loss attributable to ordinary and B shareholders
(1,997)
(1,125)
(3,607)
       
Basic loss per ordinary and B share from continuing operations
(1.8p)
(0.5p)
(6.3p)
       

Results summary
2011 compared with 2010
Operating profit
Group operating loss before tax for the year was £766 million compared with £399 million in 2010.  Group operating profit on a managed basis was £1,892 million compared with £1,913 million in 2010.  Adjusting for the impact of the disposal of GMS in 2010, which recorded an operating profit of £207 million, Group operating profit on a managed basis was up 11%. The improvement was driven by a strong Retail & Commercial (R&C) operating performance and the return to profit of RBS Insurance. Ulster Bank and GBM faced more difficult conditions, leaving total Core operating profit on a managed basis at £6,095 million. Non-Core operating loss in 2011 was 24% lower compared with 2010, despite the acceleration of disposals in the second half of the year.

Total income
Total income fell by 9% to £28,937 million, primarily reflecting lower net interest income, lower trading income in GBM and Non-Core and a fall in insurance net premium income.

Net interest income
Group net interest income fell 11% to £12,679 million largely driven by the run-off of balances and exit of higher margin and higher risk segments in Non-Core. Group NIM was 14 basis points lower, reflecting the cost of carrying a higher liquidity portfolio and by the impact of non-performing assets in the Non-Core division. However, R&C NIM was up 7 basis points, with strengthening asset margins in the first half of the year offsetting the impact of a competitive deposit market.

Non-interest income
Non-interest income decreased to £16,258 million from £17,659 million in 2010. This included movements in the fair value of the Asset Protection Scheme resulting in a £906 million charge (2010 - £1,550 million), gain on redemption of own debt of £255 million (2010 - £553 million) and a gain on movements in the fair value of own debt of £1,846 million (2010 - £174 million gain). Excluding these items, non-interest income was down 19% primarily reflecting a reduction in income from trading activities and lower net fees and commissions.

 
9

 
 
Business review continued


Operating expenses
Operating expenses decreased to £18,026 million (2010 - £18,228 million). Operating expenses on a managed basis fell to £15,478 million from £16,710 million in 2010.

This decrease was primarily driven by cost savings achieved as a result of the cost reduction programme and Non-Core run-off, largely reflecting the disposal of RBS Sempra and specific country exits. Staff costs fell 9%, driven by lower GBM variable compensation as a result of its decrease in revenues, and in Non-Core, given the impact of a 32% reduction in headcount and continued business disposals and country exits.

The Group cost:income ratio was 62% in 2011 compared with 57% in 2010.

Net insurance claims
Bancassurance and general insurance claims, after reinsurance, reduced by 38% to £2,968 million.

General insurance claims were £1,730 million lower, mainly due to the non-repeat of bodily injury reserve strengthening in 2010, de-risking of the motor book, more benign weather in 2011 and claims in Non-Core decreasing as legacy policies ran-off.
 
Impairment losses
Impairment losses were £8,709 million compared with £9,256 million in 2010, with Core loan impairments falling by £260 million and Non-Core by £1,557 million, despite continuing challenges in Ulster Bank and corporate real estate portfolios, partially offset by an impairment of £1,099 million and interest rate hedge adjustments on impaired available-for-sale Greek government bonds of £169 million.

Risk elements in lending represented 8.6% of gross loans and advances to customers excluding reverse repos at 31 December 2011
(2010 - 7.3%).

Provision coverage of risk elements in lending was 49% (2010 - 47%).

Tax
The tax charge was £1,250 million in 2011, compared with £634 million in 2010. The high tax charge in the year reflects profits in high tax regimes (principally US) and losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland and the Netherlands) and the effect of the two reductions of 1% in the rate of UK corporation tax enacted in March 2011 and July 2011 on the net deferred tax balance.

Earnings
Basic loss per ordinary and B share from continuing operations increased from a loss of 0.5p to a loss of 1.8p.

 
10

 
 
Business review continued
 
Results summary continued
2010 compared with 2009

Operating loss
Operating loss before tax for the year was £399 million compared with a loss of £2,647 million in 2009. The improvement in performance is primarily driven by stronger Core Retail & Commercial operating profits offsetting more normal results from Global Banking & Markets, coupled with lower impairments in the Non-Core division.

After tax, non-controlling interests and preference share and other dividends, the loss attributable to ordinary and B shareholders was £1,125 million, compared with an attributable loss of £3,607 million in 2009.

Total income
Total income decreased 4% to £31,868 million in 2010 reflecting the return to more normal levels in Global Banking & Markets compared with the favourable market conditions seen in 2009.  This was offset by good growth in Core Retail & Commercial and the improvement in Non-Core.

Net interest income
Net interest income increased by 6% to £14,209 million, reflecting improvements in net interest margin which more than offset lower interest-earning assets and interest-bearing liabilities. Group net interest margin increased from 1.83% to 2.06% largely reflecting expanding asset margins in UK Retail and UK Corporate divisions as well as in US Retail & Commercial. The run-off of low-yielding Non-Core assets also contributed to this increase. The Group net interest margin was also affected by increased funding costs.

Non-interest income
Non-interest income decreased to £17,659 million from £19,638 million in 2009. This included movements in the fair value of the Asset Protection Scheme - credit default swap resulting in a £1,550 million charge and gain on redemption of own debt of £553 million (2009 - £3,790 million). Excluding these items, non-interest income was up 18% primarily reflecting an increase in income from trading activities.
 
Operating expenses
Operating expenses increased to £18,228 million (2009 - £17,417 million). The main driver of this 5% increase was the impact of a £2,148 million gains on pension curtailment in 2009. This was partially offset by gains on the recognition of benefits from the Group-wide efficiency programme. The programme continues to deliver material savings which have been funding investments to strengthen our Core franchises. Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013. Integration and restructuring costs were £1,032 million compared with £1,286 million in 2009. Write-down of goodwill and other intangible assets was £10 million compared with £363 million in 2009. Premises and equipment costs fell by 7% in the year largely driven by efficiency cost savings, significant
one-off property impairments recognised in 2009 and country exits following Non-Core disposals.

Net insurance claims
Bancassurance and general insurance claims, after reinsurance, increased by 10% to £4,783 million.

Impairment losses
Impairment losses were £9,256 million compared with £13,899 million in 2009, with Core impairments falling by £898 million and Non-Core by £3,745 million. The decrease reflects an overall improvement in the economic environment. Impairments fell in all businesses, except Ulster Bank, which has faced an economic environment that remains challenging.

Risk elements in lending and potential problem loans represented 7.4% of gross loans and advances to customers excluding reverse repos at 31 December 2010 (2009 - 5.5%).

Provision coverage of risk elements in lending and potential problem loans was 46% (2009 - 45%).

Tax
The Group recorded a tax charge of £634 million in 2010, compared with a tax credit of £429 million in 2009.

Earnings
Basic loss per ordinary and B share from continuing operations improved from a loss of 6.3p to a loss of 0.5p.
 
11

 
 
Business review continued
 
 
Analysis of results
Net interest income
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Interest receivable
21,410 
22,776 
33,836 
Interest payable
(8,731)
(8,567)
(17,332)
Net interest income
12,679 
14,209 
16,504 
       
 
   
Gross yield on interest-earning assets of the banking business (1)
3.24 
3.30 
3.76 
Cost of interest-bearing liabilities of the banking business
(1.68)
(1.47)
(2.18)
Interest spread of the banking business (2)
1.56 
1.83 
1.58 
Benefit from interest-free funds
0.36 
0.23 
0.25 
Net interest margin of the banking business (3)
1.92 
2.06 
1.83 
       
Yields, spreads and margins of the banking business
% 
% 
Gross yield (1)
     
  - Group
3.24 
3.30 
3.76 
  - UK
3.56 
3.42 
3.35 
  - Overseas
2.77 
3.15 
4.09 
Interest spread (2)
     
  - Group
1.56 
1.83 
1.58 
  - UK
1.81 
2.01 
1.50 
  - Overseas
1.22 
1.59 
1.67 
Net interest margin (3)
     
  - Group
1.92 
2.06 
1.83 
  - UK
2.07 
2.22 
1.81 
  - Overseas
1.70 
1.84 
1.85 
       
The Royal Bank of Scotland plc base rate (average)
0.50 
0.50 
0.64 
London inter-bank three month offered rates (average)
     
  - Sterling
0.87 
0.70 
1.21 
  - Eurodollar
0.33 
0.34 
0.69 
  - Euro
1.36 
0.75 
1.21 

Notes:
(1)
Gross yield is the interest earned on average interest-earning assets of the banking book.
(2)
Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business.
(3)
Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business.
(4)
The analysis into UK and overseas has been compiled on the basis of location of office.
(5)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
 
 
12

 
Business review continued
 
 
 
Average balance sheet and related interest

   
2011
 
2010
   
Average 
 Balance 
Interest  
Rate 
 
Average 
 balance 
Interest 
Rate 
   
£m 
£m 
% 
 
£m 
£m 
% 
Assets
               
Loans and advances to banks
- UK
31,994 
293 
0.92 
 
22,714 
222 
0.98 
 
- Overseas
41,840 
404 
0.97 
 
30,148 
369 
1.22 
Loans and advances to customers
- UK
294,301 
12,105 
4.11 
 
310,712 
11,989 
3.86 
 
- Overseas
171,979 
5,864 
3.41 
 
195,858 
6,900 
3.52 
Debt securities
- UK
62,231 
1,449 
2.33 
 
66,765 
1,459 
2.19 
 
- Overseas
58,773 
1,295 
2.20 
 
63,334 
1,837 
2.90 
Interest-earning assets
- UK
388,526 
13,847 
3.56 
 
400,191 
13,670 
3.42 
 
- Overseas
272,592 
7,563 
2.77 
 
289,340 
9,106 
3.15 
Total interest-earning assets
- banking business
661,118 
21,410 
3.24 
 
689,531 
22,776 
3.30 
 
- trading business
278,975 
     
276,330 
   
Interest-earning assets
 
940,093 
     
965,861 
   
Non-interest-earning assets (5)
 
595,062 
     
706,343 
   
Total assets
 
1,535,155 
     
1,672,204 
   
                 
Percentage of assets applicable to overseas operations
40.2% 
     
44.0% 
   
                 
Liabilities
               
Deposits by banks
- UK
17,224 
242 
1.41 
 
21,816 
334 
1.53 
 
- Overseas
47,371 
740 
1.56 
 
59,799 
999 
1.67 
Customer accounts: demand deposits
- UK
112,522 
664 
0.59 
 
120,796 
621 
0.51 
 
- Overseas
43,177 
483 
1.12 
 
39,127 
607 
1.55 
Customer accounts: savings deposits
- UK
76,719 
1,177 
1.53 
 
68,142 
935 
1.37 
 
- Overseas
25,257 
130 
0.51 
 
25,587 
213 
0.83 
Customer accounts: other time deposits
- UK
39,672 
481 
1.21 
 
39,934 
431 
1.08 
 
- Overseas
33,971 
594 
1.75 
 
43,996 
914 
2.08 
Debt securities in issue
- UK
108,406 
2,606 
2.40 
 
111,277 
2,212 
1.99 
 
- Overseas
42,769 
765 
1.79 
 
72,175 
1,065 
1.48 
Subordinated liabilities
- UK
16,874 
470 
2.79 
 
19,442 
398 
2.05 
 
- Overseas
5,677 
270 
4.76 
 
8,714 
19 
0.22 
Internal funding of trading business
- UK
(40,242)
149 
(0.37)
 
(41,451)
(140)
0.34 
 
- Overseas
(8,783)
(40)
0.46 
 
(6,864)
(41)
0.60 
Interest-bearing liabilities
- UK
331,175 
5,789 
1.75 
 
339,956 
4,791 
1.41 
 
- Overseas
189,439 
2,942 
1.55 
 
242,534 
3,776 
1.56 
Total interest-bearing liabilities
- banking business
520,614 
8,731 
1.68 
 
582,490 
8,567 
1.47 
 
- trading business (5)
307,564 
     
293,993 
   
Interest-bearing liabilities
 
828,178 
     
876,483 
   
Non-interest-bearing liabilities:
               
Demand deposits
- UK
46,495 
     
46,692 
   
 
- Overseas
19,909 
     
23,994 
   
Other liabilities (5)
 
565,534 
     
648,129 
   
Owners' equity
 
75,039 
     
76,906 
   
Total liabilities and owners' equity
 
1,535,155 
     
1,672,204 
   
                 
Percentage of liabilities applicable to overseas operations
37.1% 
     
41.7% 
   


For notes relating to this table refer to page 12.

 
13

 
 
Business review continued

 
Average balance sheet and related interest continued

   
2009
   
Average 
balance 
Interest 
Rate 
   
£m 
£m 
% 
Assets
       
Loans and advances to banks
- UK
21,616 
310 
1.43 
 
- Overseas
32,367 
613 
1.89 
Loans and advances to customers
- UK
333,230 
11,940 
3.58 
 
- Overseas
376,382 
16,339 
4.34 
Debt securities
- UK
52,470 
1,414 
2.69 
 
- Overseas
84,822 
3,220 
3.80 
Interest-earning assets
- UK
407,316 
13,664 
3.35 
 
- Overseas
493,571 
20,172 
4.09 
Total interest-earning assets
- banking business
900,887 
33,836 
3.76 
 
- trading business (5)
291,092 
   
Interest-earning assets
 
1,191,979 
   
Non-interest-earning assets
 
831,501 
   
Total assets
 
2,023,480 
   
         
Percentage of assets applicable to overseas operations
 
47.4% 
   
         
Liabilities
       
Deposits by banks
- UK
24,837 
679 
2.73 
 
- Overseas
104,396 
2,362 
2.26 
Customer accounts: demand deposits
- UK
110,294 
569 
0.52 
 
- Overseas
82,177 
1,330 
1.62 
Customer accounts: savings deposits
- UK
54,270 
780 
1.44 
 
- Overseas
83,388 
2,114 
2.54 
Customer accounts: other time deposits
- UK
68,625 
932 
1.36 
 
- Overseas
71,315 
2,255 
3.16 
Debt securities in issue
- UK
116,536 
2,830 
2.43 
 
- Overseas
117,428 
2,500 
2.13 
Subordinated liabilities
- UK
26,053 
834 
3.20 
 
- Overseas
12,468 
656 
5.26 
Internal funding of trading business
- UK
(60,284)
(317)
0.53 
 
- Overseas
(14,845)
(192)
1.29 
Interest-bearing liabilities
- UK
340,331 
6,307 
1.85 
 
- Overseas
456,327 
11,025 
2.42 
Total interest-bearing liabilities
- banking business
796,658 
17,332 
2.18 
 
- trading business (5)
331,380 
   
Interest-bearing liabilities
 
1,128,038 
   
Non-interest-bearing liabilities:
       
Demand deposits
- UK
38,220 
   
 
- Overseas
27,149 
   
Other liabilities (5)
 
772,770 
   
Owners' equity
 
57,303 
   
Total liabilities and owners' equity
 
2,023,480 
   
         
Percentage of liabilities applicable to overseas operations
 
45.8% 
   


 
For notes relating to this table refer to page 12.
 
 
14

 
Business review continued

 
Analysis of change in net interest income - volume and rate analysis
Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated pro rata to volume and rate movements.

 
2011 over 2010
 
Increase/(decrease) due to changes in:
 
Average 
 volume 
Average 
 rate 
Net 
 change 
 
£m 
£m 
£m 
Interest-earning assets
     
Loans and advances to banks
     
  UK
86 
(15)
71 
  Overseas
124 
(89)
35 
Loans and advances to customers
     
  UK
(652)
768 
116 
  Overseas
(820)
(216)
(1,036)
Debt securities
     
  UK
(102)
92 
(10)
  Overseas
(125)
(417)
(542)
Total interest receivable of the banking business
     
  UK
(668)
845 
177 
  Overseas
(821)
(722)
(1,543)
 
(1,489)
123 
(1,366)
Interest-bearing liabilities
     
Deposits by banks
     
  UK
66 
26 
92 
  Overseas
197 
62 
259 
Customer accounts: demand deposits
     
  UK
45 
(88)
(43)
  Overseas
(58)
182 
124 
Customer accounts: savings deposits
     
  UK
(125)
(117)
(242)
  Overseas
80 
83 
Customer accounts: other time deposits
     
  UK
(53)
(50)
  Overseas
189 
131 
320 
Debt securities in issue
     
  UK
58 
(452)
(394)
  Overseas
494 
(194)
300 
Subordinated liabilities
     
  UK
58 
(130)
(72)
  Overseas
(260)
(251)
Internal funding of trading business
     
  UK
(4)
(285)
(289)
  Overseas
10 
(11)
(1)
Total interest payable of the banking business
     
  UK
101 
(1,099)
(998)
  Overseas
844 
(10)
834 
 
945 
(1,109)
(164)
Movement in net interest income
     
  UK
(567)
(254)
(821)
  Overseas
23 
(732)
(709)
 
(544)
(986)
(1,530)

 
15

 
 
Business review continued

Analysis of change in net interest income - volume and rate analysis continued

 
2010 over 2009
 
Increase/(decrease) due to changes in:
 
Average 
 volume 
Average 
 rate 
Net 
 change 
 
£m 
£m 
£m 
Interest-earning assets
     
Loans and advances to banks
     
  UK
15 
(103)
(88)
  Overseas
(40)
(204)
(244)
Loans and advances to customers
     
  UK
(836)
885 
49 
  Overseas
(6,776)
(2,663)
(9,439)
Debt securities
     
  UK
342 
(297)
45 
  Overseas
(716)
(667)
(1,383)
Total interest receivable of the banking business
     
  UK
(479)
485 
  Overseas
(7,532)
(3,534)
(11,066)
 
(8,011)
(3,049)
(11,060)
Interest-bearing liabilities
     
Deposits by banks
     
  UK
75 
270 
345 
  Overseas
845 
518 
1,363 
Customer accounts: demand deposits
     
  UK
(54)
(52)
  Overseas
670 
53 
723 
Customer accounts: savings deposits
     
  UK
(192)
37 
(155)
  Overseas
965 
936 
1,901 
Customer accounts: other time deposits
     
  UK
336 
165 
501 
  Overseas
708 
633 
1,341 
Debt securities in issue
     
  UK
123 
495 
618 
  Overseas
799 
636 
1,435 
Subordinated liabilities
     
  UK
180 
256 
436 
  Overseas
152 
485 
637 
Internal funding of trading business
     
  UK
(83)
(94)
(177)
  Overseas
(75)
(76)
(151)
Total interest payable of the banking business
     
  UK
385 
1,131 
1,516 
  Overseas
4,064 
3,185 
7,249 
 
4,449 
4,316 
8,765 
Movement in net interest income
     
  UK
(94)
1,616 
1,522 
  Overseas
(3,468)
(349)
(3,817)
 
(3,562)
1,267 
(2,295)

 
16

 
Business review continued
 
 
Non-interest income
   
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Fees and commissions receivable
6,384 
8,193 
8,738 
Fees and commissions payable
(1,460)
(2,211)
(2,790)
Income from trading activities
     
  - managed basis
3,382 
6,142 
3,954 
  - Asset Protection Scheme
(906)
(1,550)
— 
  - movements in the fair value of own debt
225 
(75)
(193)
 
2,701
4,517
3,761
Gain on redemption of own debt
255 
553 
3,790 
Other operating income (excluding insurance net premium income)
     
  - managed basis
2,525 
1,059 
690 
  - strategic disposals
(24)
171 
132 
  - movements in the fair value of own debt
1,621 
249 
51 
 
4,122 
1,479 
873 
Insurance net premium income
4,256 
5,128 
5,266 
Total non-interest income
16,258 
17,659 
19,638 

2011 compared with 2010
Non-interest income decreased by £1,401 million in 2011 principally driven by lower trading income in GBM and Non-Core and a fall in insurance net premium income, partially offset by a higher gain on movements in the fair value of own debt.

Volatile market conditions led to a reduction in GBM trading income, driven by the deterioration in global credit markets as sovereign difficulties in the eurozone grew.

Non-Core trading losses increased by £690 million, reflecting costs incurred as part of the division’s focus on reducing capital trading assets, with activity including the restructuring of monoline exposures, which mitigated both significant immediate and future regulatory uplifts in risk-weighted assets.

A gain on movements in the fair value of own debt of £1,846 million was recorded as a result of Group credit spreads widening, partially offset by the 2011 charges. This compares with a smaller gain of £174 million in 2010.

Insurance net premium income fell by 17% largely driven by RBS Insurance’s exit from certain business segments, along with reduced volumes driven by the de-risking of the motor book.  Insurance net premium income in Non-Core also decreased as legacy policies ran-off.

2010 results included £482 million of income recorded for GMS prior to its disposal in November 2010.

2010 compared with 2009
Net fees and commissions increased by £34 million to £5,982 million primarily due to improved performance in GBM (£160 million), driven by higher portfolio management and origination income, and UK Corporate (£94 million), principally reflecting strong refinancing levels and increased operating lease activity. This increase was partially offset by reduced fees in UK Retail (£144 million) and Ulster Bank (£72 million) principally reflecting the restructuring of current account overdraft fees.

Income from trading activities, excluding fair value movements in the Asset Protection Scheme, rose substantially during the year by £2,306 million to £6,067 million. Trading revenues in GBM were lower than 2009, which saw unusually buoyant market conditions as rapidly falling interest rates generated significant revenue opportunities. This was more than offset by the improvement in Non-Core trading losses from £5,161 million for 2009 to £31 million for 2010 as underlying asset prices recovered and monoline spreads tightened. The unwinding of some banking book hedges also helped reduce trading losses.

The Asset Protection Scheme is accounted for as a credit derivative, and movements in the fair value of the contract are recorded as income from trading activities. The charge of £1,550 million in 2010 reflects improving credit spreads on the portfolio of covered assets.

A gain of £553 million was booked associated with the liability management exercise undertaken in May 2010, through which the Group strengthened its Core Tier 1 capital base by repurchasing existing Tier 1 securities and exchanging selected existing Upper Tier 2 securities for new senior debt securities. A similar series of exchange and tender offers concluded in April 2009 resulted in a gain of £3,790 million.

Other operating income increased by £606 million to £1,479 million. This improvement principally reflected a profit on sale of securities of £496 million compared with £162 million in 2009, higher profits from associated entities and an increased credit of £249 million compared with £51 million in 2009 relating to movements in fair value of own debt. These were partially offset by losses in the fair value of securities and investment properties.

Insurance net premium income fell by £138 million to £5,128 million principally reflecting lower general insurance premiums, driven by a managed reduction in the risk of the UK motor book, largely offset by price increases.

 
17

 
 
Business review continued


Operating expenses and insurance claims
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Staff costs
     
  - excluding gains on pensions curtailment
8,678 
9,671 
9,993 
  - gains on pensions curtailment
— 
— 
(2,148)
 
8,678 
9,671 
7,845 
Premises and equipment
2,451 
2,402 
2,594 
Other administrative expenses
     
  - managed basis
2,722 
2,963 
3,163
  - Payment Protection Insurance costs
850 
— 
— 
  - integration and restructuring costs
1,059 
1,032 
1,286
  - bank levy
300 
— 
— 
 
4,931
3,995 
4,449 
Administrative expenses
16,060 
16,068 
14,888 
Depreciation and amortisation
1,875 
2,150 
2,166 
Write-down of goodwill and other intangible assets
91 
10 
363 
Operating expenses
18,026 
18,228 
17,417 
       
General insurance
2,968 
4,698 
4,223 
Bancassurance
— 
85 
134 
Insurance net claims
2,968 
4,783 
4,357 
       
Staff costs as a percentage of total income
30% 
30% 
30% 



2011 compared with 2010
Group operating expenses fell by 1% in 2011, driven by cost savings achieved as a result of the cost reduction programme and Non-Core run-off, largely reflecting the disposal of RBS Sempra and specific country exits, partially offset by Payment Protection Insurance costs.

Staff costs fell 10%, driven by lower GBM discretionary compensation as a result of its decrease in revenues, and in Non-Core, given the impact of a 32% reduction in headcount and continued business disposals and country exits.

In May 2011, following the decision of the British Bankers’ Association not to appeal the judgement of the judicial review, the Group recorded a provision of £850 million in respect of the costs of Payment Protection Insurance redress.

General insurance claims were £1,730 million lower, mainly due to the non-repeat of bodily injury reserve strengthening in 2010, de-risking of the motor book, more benign weather in 2011 and claims in Non-Core decreasing as legacy policies ran-off.

The Group’s cost reduction programme delivered cost savings with an underlying run rate of over £3 billion by the end of 2011.

 
18

 
 
Business review continued

 
Operating expenses and insurance claims continued
2010 compared with 2009
The main driver of a 7% decrease in operating expenses, excluding gains on pensions curtailment of £2,148 million, is the recognition of benefits from the Group-wide efficiency programme. The programme continues to deliver material savings which have been funding investments to strengthen our Core franchises.  Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013.

Staff costs, excluding pension schemes curtailment gains, fell by £322 million to £9,671 million, driven by savings in Global Banking & Markets, UK Retail and Non-Core partially offset by higher costs in Group Centre.

Premises and equipment costs fell by 7% in the year to £2,402 million largely driven by efficiency cost savings, significant one-off property impairments recognised in 2009 and country exits following Non-Core disposals.

Other administrative expenses fell by £454 million to £3,995 million principally reflecting continued savings from the Group’s efficiency programme.

Insurance net claims increased 10% to £4,783 million.

Integration costs
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Staff costs
38 
210 
365 
Premises and equipment
78 
Other administrative expenses
51 
143 
398 
Depreciation and amortisation
11 
20 
18 
 
106 
376 
859 

Note:
(1)
Integration costs for 2011 above exclude £2 million charge included within net interest income and a loss of £3 million within other operating income in respect of integration activities.


2011 compared with 2010
Integration costs were £106 million compared with £376 million in 2010. Integration costs decreased primarily due to a reduction of RBS N.V. (formerly ABN AMRO) integration activity during the year.

2010 compared with 2009
Integration costs were £376 million compared with £859 million in 2009. The fall in integration costs primarily relates to RBS N.V., as they migrate onto RBS systems.


Accruals in relation to integration costs are set out below.
 
At  
1 January 
Charge 
to income 
Utilised 
during 
At 
31 December 
 
2011 
statement 
the year 
2011 
 
£m 
£m 
£m 
£m 
Staff costs - redundancy
— 
(8)
— 
Staff costs - other
— 
30 
(30)
— 
Premises and equipment
24 
(19)
11 
Other administrative expenses
— 
51 
(48)
Depreciation and amortisation
— 
11 
(11)
— 
 
24 
106 
(116)
14 

 
19

 
 
Business review continued
 
 
Restructuring costs
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Staff costs
356 
353 
328 
Premises and equipment
156 
117 
48 
Other administrative expenses
276 
104 
51 
 
788 
574 
427 

2011 compared with 2010
Restructuring costs were £788 million compared with £574 million in 2010. The increase is due to the number of Group restructuring projects increasing during the year.

2010 compared with 2009
Restructuring costs were £574 million compared with £427 million in 2009. The increase is a result of the number of restructuring projects being undertaken.
 
Accruals in relation to restructuring costs are set out below.
 
At 
Currency 
Charge 
Utilised 
At 
 
1 January 
translation 
to income 
during 
  31 December 
 
2011 
adjustments 
statement 
the year 
2011 
 
£m 
£m 
£m 
£m 
£m 
Staff costs - redundancy
201 
— 
274 
(349)
126 
Staff costs - other
17 
(1)
82 
(58)
40 
Premises and equipment
117 
— 
156 
(107)
166 
Other administrative expenses
46 
(2)
276 
(210)
110 
 
381 
(3)
788 
(724)
442 

Divestment costs
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Staff costs
95 
51 
— 
Premises and equipment
11 
— 
Other administrative expenses
59 
25 
— 
 
165 
82 
— 

2011 compared with 2010
Divestment costs of £165 million compared to £82 million in 2010 related to the European Commission mandated divestments.

2010 compared with 2009
Divestment costs of £82 million in the year relate to the European Commission mandated divestments.
 
Accruals in relation to divestment costs are set out below.
 
At 
Charge 
Utilised 
At 
 
1 January 
to income 
during 
31 December 
 
2011 
statement 
the year 
2011 
 
£m 
£m 
£m 
£m 
Staff costs - redundancy
22 
36 
(13)
45 
Staff costs - other
59 
(66)
Premises and equipment
— 
11 
(11)
— 
Other administrative expenses
59 
(40)
21 
 
32 
165 
(130)
67 

 
20

 
 
Business review continued
 
 
Impairment losses
   
 
2011 
2010 
2009 
 
£m 
£m 
£m 
New impairment losses
9,236 
9,667 
14,224 
Less: recoveries of amounts previously written-off
(527)
(411)
(325)
Charge to income statement
8,709 
9,256 
13,899 
       
Comprising:
     
Loan impairment losses
7,241 
9,144 
13,090 
Securities
 
 
 
  - managed bases
200 
112 
809 
  - sovereign debt impairment
1,099 
— 
— 
  - interest rate hedge adjustments on impaired available-for-sale Greek government bonds
169 
— 
 
1,468 
112 
809 
Charge to income statement
8,709 
9,256 
13,899 

2011 compared with 2010
Impairment losses decreased by 6% compared with 2010, driven largely by a £1,569 million reduction in Non-Core loan impairments, despite continuing challenges in Ulster Bank and corporate real estate portfolios. This was partially offset by impairments taken on the Group’s available-for-sale bond portfolio, as a result of the decline in the value of Greek sovereign bonds.

Retail & Commercial impairment losses fell by £153 million, driven by improving credit metrics in UK Retail and US Retail & Commercial partially offset by increases in Ulster Bank, largely reflecting a deterioration in credit metrics on the mortgage portfolio, and a single name provision in GTS.

Total Core and Non-Core Ulster Bank impairment losses decreased by 4%, as the £223 million increase in Core Ulster Bank losses was more than offset by a decrease in losses recognised in Non-Core.

The Group holds Greek government bonds with a notional amount of £1.45 billion. As a result of Greece’s continuing fiscal difficulties, the Group recorded impairment charges on these bonds totalling £1,099 million during the year. These charges were recorded to write the bonds down to their market price as at 31 December 2011 (c.21% of notional).
 
2010 compared with 2009
Impairment losses were £9,256 million, compared with £13,899 million in 2009. The 33% decrease reflects an overall improvement in the economic environments in which the Group operates.

Impairments fell in all Core businesses, except Ulster Bank Group, which faced an economic environment that remains challenging, with rising default levels across both personal and corporate portfolios.

Impairments for Ulster Bank Group (Core and Non-Core) increased to £3,843 million compared with £1,927 million in 2009.

A significant proportion of the reduction in Core impairments relates to lower specific and latent provisions in UK Corporate, US Retail & Commercial and GBM.

Non-Core impairments fell by 41% in 2010 reflecting the gradual improvement in the economic environment through 2010 and lower specific provisions, alongside a non-repeat of the large single name losses seen in 2009.

 
21

 
 
Business review continued


Tax
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Tax (charge)/credit
(1,250)
(634)
429 
       
 
% 
% 
UK corporation tax rate
26.5 
28.0 
28.0 
Effective tax rate
nm 
nm 
16.2 

nm = not meaningful

The actual tax (charge)/credit differs from the expected tax credit computed by applying the standard rate of UK corporation tax as follows:

 
2011 
2010 
2009 
 
£m 
£m 
£m 
Expected tax credit
203 
112 
741 
Sovereign debt impairment where no deferred tax asset recognised
(275)
— 
— 
Other losses in year where no deferred tax asset recognised
(530)
(450)
(780)
Foreign profits taxed at other rates
(417)
(517)
(276)
UK tax rate change - deferred tax impact
(110)
(82)
— 
Unrecognised timing differences
(20)
11 
274 
Non-deductible goodwill impairment
(24)
(3)
(102)
Items not allowed for tax
     
  - losses on strategic disposals and write-downs
(72)
(311)
(152)
  - UK Bank levy
(80)
— 
— 
  - employee share schemes
(113)
(32)
(29)
  - other disallowable items
(271)
(296)
(327)
Non-taxable items
     
  - gain on sale of Global Merchant Services
12 
221 
— 
  - gain on redemption of own debt
— 
11 
693 
  - other non-taxable items
245 
341 
410 
Taxable foreign exchange movements
1 
Losses brought forward and utilised
94 
Adjustments in respect of prior years
196 
355 
(118)
Actual tax (charge)/credit
(1,250)
(634)
429 

2011 compared with 2010
The high tax charge in 2011 reflects profits in high tax regimes (principally US) and losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland and the Netherlands) and the effect of two reductions of 1% in the rate of UK corporation tax enacted in March 2011 and July 2011 on the net deferred tax balance.

2010 compared with 2009
The high tax charge in 2010 reflects profits in high tax regimes and losses in low tax regimes, together with £450 million relating to losses in overseas subsidiaries for which a deferred tax asset has not been recognised, and £311 million mainly in respect of losses on disposal of businesses for which no tax relief if available. This was offset in part by the non-taxable gain arising on the disposal of 80.01% of the GMS business.
 

 
 
22

 
Business review continued

Divisional performance

Operating profit/(loss) by division
2011  
£m  
2010 
£m 
2009 
£m 
UK Retail
1,991 
1,372 
229 
UK Corporate
1,414 
1,463 
1,125 
Wealth
321 
304 
420 
Global Transaction Services
743 
1,088 
973 
Ulster Bank
(1,024)
(761)
(368)
US Retail & Commercial
479 
306 
(113)
Retail & Commercial
3,924 
3,772 
2,266 
Global Banking & Markets
1,561 
3,364 
5,758 
RBS Insurance
454 
(295)
58 
Central items
156 
577 
385 
Core
6,095 
7,418 
8,467 
Non-Core
(4,203)
(5,505)
(14,557)
Managed basis
1,892 
1,913 
(6,090)
       
Reconciling items
     
Fair value of own debt
1,846 
174 
(142)
Asset Protection Scheme
(906)
(1,550)
 
Payment Protection Insurance costs
(850)
— 
— 
Sovereign debt impairment
(1,099)
— 
— 
Amortisation of purchased intangible assets
(222)
(369)
(272)
Integration and restructuring costs
(1,064)
(1,032)
(1,286)
Gain on redemption of own debt
255 
553 
3,790 
Strategic disposals
(104)
171 
132 
Bank levy
(300)
— 
— 
Other
(214)
(259)
1,221 
Group operating loss before tax
(766)
(399)
(2,647)
 

 
 
23

 
Business review continued
 
Impairment losses/(recoveries) by division
2011 
£m 
2010 
£m 
2009 
£m 
UK Retail
788 
1,160 
1,679 
UK Corporate
785 
761 
927 
Wealth
25 
18 
33 
Global Transaction Services
166 
39 
Ulster Bank
1,384 
1,161 
649 
US Retail & Commercial
325 
517 
702 
Retail & Commercial
3,473 
3,626 
4,029 
Global Banking & Markets
49 
151 
640 
RBS Insurance
— 
— 
Central items
(2)
Core
3,520 
3,780 
4,678 
Non-Core
3,919 
5,476 
9,221 
Managed basis
7,439 
9,256 
13,899 
Reconciling items
     
Sovereign debt impairment
1,099 
— 
— 
Interest rate hedge adjustments on impaired available-for-sale Greek government bonds
169 
— 
— 
RFS Holdings minority interest
— 
— 
Group impairment losses
8,709 
9,256 
13,899 


Net interest margin by division
2011 
% 
2010 
2009 
UK Retail
3.92 
3.91 
3.59 
UK Corporate
2.58 
2.51 
2.22 
Wealth
3.59 
3.37 
4.38 
Global Transaction Services
5.52 
6.73 
9.22 
Ulster Bank
1.77 
1.84 
1.87 
US Retail & Commercial
3.06 
2.85 
2.37 
Retail & Commercial
3.21 
3.14 
2.89 
Global Banking & Markets
0.73 
1.05 
1.38 
Non-Core
0.64 
1.16 
0.69 
       
Group net interest margin
1.92 
2.06 
1.76 


Risk-weighted assets by division
2011 
£bn 
2010 
£bn 
2009 
£bn 
UK Retail
48.4 
48.8 
51.3 
UK Corporate
76.1 
81.4 
90.2 
Wealth
12.9 
12.5 
11.2 
Global Transaction Services
17.3 
18.3 
19.1 
Ulster Bank
36.3 
31.6 
29.9 
US Retail & Commercial
58.8 
57.0 
59.7 
Retail & Commercial
249.8 
249.6 
261.4 
Global Banking & Markets
151.1 
146.9 
123.7 
Other
10.8 
18.0 
9.4 
Core
411.7 
414.5 
394.5 
Non-Core
93.3 
153.7 
171.3 
Group before benefit of Asset Protection Scheme
505.0 
568.2 
565.8 
Benefit of Asset Protection Scheme
(69.1)
(105.6)
(127.6)
Group before RFS Holdings minority interest
435.9 
462.6 
438.2 
RFS Holdings minority interest
3.1 
2.9 
102.8 
Group
439.0 
465.5 
541.0 
 
 
 
24

 
Business review continued


 
Divisional performance continued
Employee numbers at 31 December
(full time equivalents in continuing operations rounded to the nearest hundred)

 
2011 
2010 
2009 
UK Retail
27,700 
28,200 
30,000 
UK Corporate
13,500 
13,100 
12,300 
Wealth
5,700 
5,200 
4,600 
Global Transaction Services
2,600 
2,600 
3,500 
Ulster Bank
4,200 
4,200 
4,500 
US Retail & Commercial
15,200 
15,700 
15,500 
Retail & Commercial
68,900 
69,000 
70,400 
Global Banking & Markets
17,000 
18,700 
17,900 
RBS Insurance
14,900 
14,500 
13,900 
Central items
6,200 
4,700 
4,200 
Core
107,000 
106,900 
106,400 
Non-Core
4,700 
6,900 
15,100 
 
111,700 
113,800 
121,500 
Business Services
34,000 
34,400 
38,600 
Integration and restructuring
1,100 
300 
500 
RFS Holdings minority interest
— 
— 
300 
Group
146,800 
148,500 
160,900 

 
25

 
Business review continued


UK Retail
 
2011 
2010 
2009 
 
£m 
£m 
£m 
Net interest income
4,272 
4,078 
3,452 
Net fees and commissions
1,066 
1,100 
1,244 
Other non-interest income
140 
322 
391 
Non-interest income
1,206 
1,422 
1,635 
Total income
5,478 
5,500 
5,087 
Direct expenses
     
  - staff
(839)
(889)
(968)
  - other
(437)
(480)
(458)
Indirect expenses
(1,423)
(1,514)
(1,619)
 
(2,699)
(2,883)
(3,045)
Insurance net claims
—  
(85)
(134)
Impairment losses
(788)
(1,160)
(1,679)
Operating profit
1,991 
1,372 
229 
       
Analysis of income by product
     
Personal advances
1,089 
993 
1,192 
Personal deposits
961 
1,102 
1,349 
Mortgages
2,277 
1,984 
1,214 
Cards
950 
962 
869 
Other, including bancassurance
201 
459 
463 
Total income
5,478 
5,500 
5,087 
       
Analysis of impairments by sector
     
Mortgages
182 
177 
124 
Personal
437 
682 
1,023 
Cards
169 
301 
532 
Total impairment losses
788 
1,160 
1,679 
       
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
     
Mortgages
0.2% 
0.2% 
0.1% 
Personal
4.3% 
5.8% 
7.5% 
Cards
3.0% 
4.9% 
8.6% 
Total
0.7% 
1.1% 
1.6% 
       
Performance ratios
     
Return on equity (1)
26.4% 
18.0% 
3.0% 
Net interest margin
3.92% 
3.91% 
3.59% 
Cost:income ratio
49% 
52% 
60% 
Adjusted cost:income ratio (2)
49% 
53% 
61% 
       
 
£bn 
£bn 
£bn 
Capital and balance sheet
     
Loans and advances to customers (gross) (3)
     
  - mortgages
95.0 
90.6 
83.2 
  - personal
10.1 
11.7 
13.6 
  - cards
5.7 
6.1 
6.2 
 
110.8 
108.4 
103.0 
Customer deposits (excluding bancassurance) (3)
101.9 
96.1 
87.2 
Assets under management (excluding deposits)
5.5 
5.7 
5.3 
Risk elements in lending(3)
4.6 
4.6 
5.7 
Loan:deposit ratio (excluding repos)
106% 
110% 
115% 
Risk-weighted assets
48.4 
48.8 
51.3 
 
Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 9% of the monthly average of divisional RWAs, adjusted for capital  deductions).
(2)
Adjusted cost:income ratio is based on total income after netting insurance claims, and operating expenses.
(3)
Includes disposal groups: loans and advances to customers - £7.3 billion; customer deposits - £8.8 billion; risk elements in lending - £0.5 billion.
 
 
 
26

 
Business review continued

 
UK Retail continued
In 2010, UK Retail set out an aspiration to become the UK’s most helpful bank and launched the Customer Charter.  In 2011, we made good progress on our Customer Charter commitments and the roll-out of innovation that actually helps customers. In December 2011, UK Retail refined its staff incentive scheme to further strengthen the role of customer service and to help build long lasting customer relationships.

Progress against the Customer Charter commitments is independently assessed and has shown encouraging results. By the end of 2011, we achieved the goal of serving 80% of our customers in less than 5 minutes in our busiest branches. Branch opening hours have also been extended and standardised, which means that our branches are now open for an additional 5,000 hours per week at times our customers have told us suit them.

Innovation has supported the delivery of Helpful Banking by focusing on solutions that make it easier for customers to bank with RBS and NatWest. An important example has been giving customers access to 24 hour emergency cash from NatWest and RBS ATMs when their cards are lost or stolen. We also updated our market-leading iPhone application and by the end of the year 1 million customers had downloaded the application. With successful apps also launched for iPad, Android and Blackberry, RBS is now the leading mobile bank in the UK.

2011 compared with 2010
UK Retail delivered strong full year results, as operating profit increased by £619 million to £1,991 million, despite continued uncertainty in the economic climate and the low interest rate environment. Impairments fell by £372 million, with further improvements in the unsecured book and continued careful mortgage underwriting. Return on equity improved to 26.4%.

The division continued to focus on growing secured lending while at the same time building customer deposits, thereby reducing the Group’s reliance on wholesale funding. Loans and advances to customers grew 2%, with a change in mix from unsecured to secured as the Group actively sought to improve its risk profile. Mortgage balances grew by 5%, while unsecured lending contracted by 11%.
 
-
Mortgage growth reflected continued strong new business levels. Gross mortgage lending market share of 10% continues above our stock position of 8%.

-
Customer deposits grew 6%, outperforming the market total deposit growth of 3%.  Savings balances grew by £6 billion, or 9%, with 1.5 million accounts opened, demonstrating the strength of our customer franchise and our strategy to further develop primary banking relationships.

Net interest income increased by 5% to £4,272 million, driven by strong balance sheet growth. Net interest margin remained broadly flat with recovering asset margins largely offset by more competitive savings rates and lower long term swap rate returns adversely impacting liability margins.

Non-interest income declined 15% to £1,206 million, primarily driven by lower investment and protection income as a result of the dissolution of the bancassurance joint venture.  In addition, a number of changes have been made to support delivery of Helpful Banking, such as ‘Act Now’ text alerts, which have decreased fee income.

Overall expenses decreased by 6%, with the adjusted cost:income ratio improving from 53% to 49%.  Cost reductions were driven by a clear management focus on process re-engineering and operational efficiency together with benefits from the dissolution of the bancassurance joint venture, partly offset by higher inflation rates in utility and mail costs.

Impairment losses decreased 32% to £788 million reflecting the impact of a strengthened risk appetite, and a more stable economic environment.

Risk-weighted assets were broadly stable, with volume growth in lower risk secured mortgages partly offset by a decrease in the unsecured portfolio.


 
27

 
Business review continued

2010 compared with 2009
Operating profit recovered strongly from the low levels recorded in 2008 and 2009 to £1,372 million and impairments fell by £519 million as the economic environment continued to recover.

The division has continued to focus in 2010 on growing secured lending while at the same time building customer deposits, thereby reducing the Group’s reliance on wholesale funding. Loans and advances to customers grew 5%, with a change in mix from unsecured to secured as the Group actively sought to improve its risk profile. Mortgage balances grew by 9% while unsecured lending contracted by 10%.

·  
Mortgage growth was due to good retention of existing customers and new business, the majority of which comes from the existing customer base. Gross mortgage lending market share remained broadly in line with 2009 at 12%, with the Group on track to meet its Government target on net mortgage lending.

·  
Customer deposits grew 10% on 2009, reflecting the strength of the UK Retail customer franchise, which outperformed the market in an increasingly competitive environment. Savings balances grew by £8 billion or 13% with 1.8 million accounts opened, outperforming the market total deposit growth of 3%. Personal current account balances increased by 3% on 2009.

Net interest income increased significantly by 18% to £4,078 million, driven by strong balance sheet growth and repricing. Net interest margin improved by 32 basis points to 3.91%, with widening asset margins partially offset by contracting liability margins in the face of a competitive deposit market.
 
Non-interest income declined 13% to £1,422 million, principally reflecting the restructuring of current account overdraft fees in the final quarter of 2009.

Expenses decreased by 5%, with the cost:income ratio (net of insurance claims) improving from 61% to 53%.

·  
Direct staff costs declined by 8%, largely driven by a clear management focus on process re-engineering enabling a 7% reduction in headcount.

·  
RBS continues to progress towards a more convenient, lower cost operating model, with over 4.8 million active users of online banking and a record share of new sales achieved through direct channels. More than 7.8 million accounts have switched to paperless statements and 276 branches now utilise automated cash deposit machines.

Impairment losses decreased 31% to £1,160 million primarily reflecting the recovery in the economic environment.

·  
The mortgage impairment charge was £177 million (2009 - £124 million) on a total book of £91 billion. Mortgage arrears rates marginally increased in 2010 but remain below the industry average, as reported by the Council of Mortgage Lenders. Repossessions showed only a small increase on 2009, as the Group continues to support customers facing financial difficulties.

·  
The unsecured lending impairment charge was £983 million (2009 - £1,555 million) on a total book of £18 billion.

Risk-weighted assets decreased by 5% to £48.8 billion, with lower unsecured lending, improving portfolio credit metrics and small procyclicality benefits more than offsetting growth in mortgages.

 
28

 
Business review continued


UK Corporate

 
2011 
2010 
2009 
 
£m 
£m 
£m 
Net interest income
2,585 
2,572 
2,292 
Net fees and commissions
948 
952 
858 
Other non-interest income
327 
371 
432 
Non-interest income
1,275 
1,323 
1,290 
Total income
3,860 
3,895 
3,582 
Direct expenses
     
  - staff
(780)
(778)
(753)
  - other
(335)
(359)
(260)
Indirect expenses
(546)
(534)
(517)
 
(1,661)
(1,671)
(1,530)
Impairment losses
(785)
(761)
(927)
Operating profit
1,414 
1,463 
1,125 
       
Analysis of income by business
     
Corporate and commercial lending
2,676 
2,598 
2,131 
Asset and invoice finance
660 
617 
501 
Corporate deposits
683 
728 
986 
Other
(159)
(48)
(36)
Total income
3,860 
3,895 
3,582 
       
Analysis of impairments by sector
     
Banks and financial institutions
20 
20 
15 
Hotels and restaurants
59 
52 
98 
Housebuilding and construction
103 
131 
106 
Manufacturing
34 
51 
Other
163 
127 
150 
Private sector education, health, social work, recreational and community services
113 
30 
59 
Property
170 
245 
259 
Wholesale and retail trade, repairs
85 
91 
76 
Asset and invoice finance
38 
64 
113 
Total impairment losses
785 
761 
927 
       
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
     
Banks and financial institutions
0.4% 
0.3% 
0.2% 
Hotels and restaurants
1.0% 
0.8% 
1.5% 
Housebuilding and construction
2.6% 
2.9% 
2.5% 
Manufacturing
0.7% 
— 
0.9% 
Other
0.5% 
0.4% 
0.5% 
Private sector education, health, social work, recreational and community services
1.3% 
0.3% 
0.9% 
Property
0.6% 
0.8% 
0.8% 
Wholesale and retail trade, repairs
1.0% 
0.9% 
0.7% 
Asset and invoice finance
0.4% 
0.6% 
1.3% 
Total
0.7% 
0.7% 
0.8% 
       
Performance ratios
     
Return on equity (1)
12.4% 
12.1% 
9.4% 
Net interest margin
2.58% 
2.51% 
2.22% 
Cost:income ratio
43% 
43% 
43% 

Note:
(1)
Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 9% of the monthly average of divisional RWAs, adjusted for capital deductions).


 
29

 
Business review continued


 
2011 
2010 
2009 
 
£bn 
£bn 
£bn 
Capital and balance sheet
     
Total third party assets
111.8 
114.6 
114.9 
Loans and advances to customers (gross) (1)
     
  - banks and financial institutions
5.7 
6.1 
6.3 
  - hotels and restaurants
6.1 
6.8 
6.7 
  - housebuilding and construction
3.9 
4.5 
4.3 
  - manufacturing
4.6 
5.3 
5.9 
  - other
32.6 
31.0 
29.9 
  - private sector education, health, social work, recreational and community services
8.7 
9.0 
6.5 
  - property
28.2 
29.5 
33.0 
  - wholesale and retail trade, repairs
8.5 
9.6 
10.2 
  - asset and invoice finance
10.4 
9.9 
8.8 
 
108.7 
111.7 
111.6 
       
Customer deposits (1)
100.9 
100.0 
87.8 
Risk elements in lending (1)
5.0 
4.0 
2.3 
Loan:deposit ratio (excluding repos)
106% 
110% 
126% 
Risk-weighted assets
76.1 
81.4 
90.2 

Note:
(1)
Includes disposal groups: loans and advances to customers - £12.2 billion; customer deposits - £21.8 billion; risk elements in lending - £1.0 billion.

In 2011, UK Corporate focused on supporting its customers through challenging economic times. As a result of over 5,000 hours of customer research, UK Corporate launched the ‘Ahead for Business’ promise to its small and medium-sized enterprise (SME) customers.

To deliver on this, the division launched a number of initiatives to improve the service it offers to customers. For example, the ‘Working with You’ initiative, has seen over 4,600 visits to customer businesses since its launch in Q2 2011.  Additionally, following the launch of the relationship manager accreditation programme, also in Q2 2011, almost all relationship managers have gained full accreditation in the initial phase.

UK Corporate continued to support new and existing businesses during 2011:
·  
launching its best ever fixed rate loan product for SMEs;
·  
reacting quickly after the August riots to give affected businesses access to special interest rate and fee free lending products;
·  
answering over 4,000 calls on the Start-up Hotline, offering free advice and a complementary business plan review service; and
·  
supporting more debt capital and loan market deals for larger corporates than any other bank.

The division also took measures to reduce the risk retained in the business allowing for quicker and more consistent decisions by simplifying the credit underwriting process and improving automated decision making.

2011 compared with 2010
Operating profit decreased 3% to £1,414 million, as lower income and higher impairments were only partially offset by a decrease in expenses. Net interest income remained broadly flat.  Net interest margin improved 7 basis points with benefits from re-pricing the lending portfolio and the revision to income deferral assumptions in Q1 2011 partially offset by increased funding costs together with continued pressure on deposit margins.  A 1% increase in deposit balances supported an improvement in the loan:deposit ratio to 106%.

Non-interest income decreased by 4% as a result of lower GBM cross-sales and fee income, partially offset by increased Invoice Finance and Lombard income.

Excluding the £29 million OFT penalty in 2010, total costs increased by 1%, largely reflecting increased investment in the business and higher costs of managing the non-performing book.

Impairments of £785 million were 3% higher due to increased specific impairments and collectively assessed provisions, partially offset by lower latent loss provisions.

2010 compared with 2009
Operating profit grew by £338 million, 30%, compared with 2009, driven by strong income growth and significantly lower impairments, partially offset by higher costs.

UK Corporate performed strongly in the deposit market, with customer deposit balance growth of £12 billion contributing to a 16 percentage point improvement in the loan:deposit ratio in 2010. While customer lending increased only marginally (with gross lending largely offset by customer deleveraging) net interest income rose by £280 million, 12%, and net interest margin rose by 29 basis points driven primarily by the good progress made on loan repricing.

Non-interest income increased 3% reflecting strong refinancing levels and increased operating lease activity, partially offset by lower sales of financial market products.

Total costs increased 9% (£141 million) or 5% excluding the OFT penalty in 2010, legal recovery in 2009 and the normalisation of staff compensation phasing.

Impairments were 18% lower, primarily as a result of higher charges taken during the first half of 2009 to reflect potential losses in the portfolio not yet specifically identified.

Return on equity increased from 9.4% to 12.1%, reflecting higher operating profit and lower RWAs as a result of improved risk metrics.
 
30

 
Business review continued


Wealth

 
2011 
2010 
2009 
 
£m 
£m 
£m 
Net interest income
718 
609 
663 
Net fees and commissions
375 
376 
363 
Other non-interest income
84 
71 
83 
Non-interest income
459 
447 
446 
Total income
1,177 
1,056 
1,109 
Direct expenses
     
  - staff
(413)
(382)
(357)
  - other
(195)
(142)
(144)
Indirect expenses
(223)
(210)
(155)
 
(831)
(734)
(656)
Impairment losses
(25)
(18)
(33)
Operating profit
321 
304 
420 
       
Analysis of income
     
Private banking
975 
857 
916 
Investments
202 
199 
193 
Total income
1,177 
1,056 
1,109 
       
Performance ratios
     
Return on equity (1)
18.7% 
18.9% 
30.3% 
Net interest margin
3.59% 
3.37% 
4.38% 
Cost:income ratio
71% 
70% 
59% 
       
 
£bn 
£bn 
£bn 
Capital and balance sheet
     
Loans and advances to customers (gross)
     
  - mortgages
8.3 
7.8 
6.5 
  - personal
6.9 
6.7 
4.9 
  - other
1.7 
1.6 
2.3 
 
16.9 
16.1 
13.7 
Customer deposits (2)
38.2 
37.1 
35.7 
Assets under management (excluding deposits) (2)
30.9 
33.9 
32.5 
Risk elements in lending
0.2 
0.2 
0.2 
Loan:deposit ratio (excluding repos) (2)
44%