6-K 1 dp40396_6k.htm FORM 6-K
Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

30 August 2013



The Royal Bank of Scotland Group plc


Gogarburn
PO Box 1000
Edinburgh EH12 1HQ
Scotland
United Kingdom

(Address of principal executive offices)



Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F                                              Form 40-F    

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):__

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):__

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes                                                                 No  X 

If "Yes" is marked, indicate below the file number assigned to
the registrant in connection with Rule 12g3-2(b): 82-            

This report on Form 6-K shall be deemed incorporated by reference into the company's Registration Statement on Form F-3 (File Nos. 333-184147 and 333-184147-01) and to be a part thereof from the date which it was filed, to the extent not superseded by documents or reports subsequently filed or furnished.
 
 
 

 
 
Contents

 
Page 
   
Forward-looking statements
Presentation of information
Condensed consolidated income statement
Core summary consolidated income statement
Comment
Highlights
10 
Analysis of results
13 
Divisional performance
24 
   
Results
65 
   
Condensed consolidated income statement
65 
Condensed consolidated statement of comprehensive income
66 
Condensed consolidated balance sheet
67 
Average balance sheet
68 
Condensed consolidated statement of changes in equity
71 
Condensed consolidated cash flow statement
74 
Notes
75 
   
Risk and balance sheet management
131 
   
Presentation of information
132 
General overview
132 
Capital management
135 
  Capital ratios
135 
  Capital resources
136 
  Risk-weighted assets
138 
Liquidity, funding and related risks
139 
  Overview
139 
  Funding sources
140 
  Liquidity portfolio
141 
  Basel III liquidity ratios and other metrics
142 
Credit risk
143 
  Loans and related credit metrics
143 
  Debt securities
144 
  Derivatives
146 
Market risk
147 
Country risk
150 
   
Risk factors
156 
Additional information
159 
   
Share information
159 
Other financial data
160 

 
1

 
 
Contents (continued)

   
   
Appendix 1 Capital and leverage ratios
 
Appendix 2 Funding and related risks
 
Appendix 3 Credit risk
 
Appendix 4 Market risk
 
Appendix 5 Country risk
 
Appendix 6 Revisions
 
Signature page  

 
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; discretionary coupon and dividend payments; certain ring-fencing proposals; sustainability targets; regulatory investigations; the Group’s future financial performance; the level and extent of future impairments and write-downs, including sovereign debt impairments; and the Group’s potential exposures to various types of political and 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: 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 implement strategic plans on a timely basis, or at all, including the disposal of certain Non-Core assets and of certain assets and businesses required as part of the State Aid restructuring plan; organisational restructuring in response to legislative and regulatory proposals in the United Kingdom (UK), European Union (EU) and United States (US); the ability to access sufficient sources of capital, liquidity and funding when required; deteriorations in borrower and counterparty credit quality; litigation, government and regulatory investigations including investigations relating to the setting of LIBOR and other interest rates; costs or exposures borne by the Group arising out of the origination or sale of mortgages or mortgage-backed securities in the US; 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; 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 UK, the US and other countries in which the Group operates or a change in UK 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; the implementation of recommendations made by the Independent Commission on Banking and their potential implications and equivalent EU legislation; 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 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

 

Presentation of information


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 85 to 91 (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 85 to 91. 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, International Banking, Ulster Bank and US Retail & Commercial divisions. This is a non-GAAP financial measure. Lastly, the Basel III net stable funding ratio, fully loaded Basel III ratio, liquidity coverage ratio, stressed outflow coverage and further metrics included in Appendix 2 (Funding and related risks) represent non-GAAP financial measures given they are metrics that are not yet required to be disclosed by a government, governmental authority or self-regulatory organisation.

Revisions

Direct Line Group
The Group sold the first tranche of ordinary shares representing 34.7% of the share capital of DLG in October 2012 via an Initial Public Offering. On 13 March 2013, the Group sold a further 16.8% of ordinary shares in DLG and has ceded control. This fulfils the Group’s plan to cede control of DLG by the end of 2013 and is a step toward complete disposal by the end of 2014, as required by the European Commission.

The Group now holds 48.5% of the issued ordinary share capital of DLG. Consequently, in the H1 2013 Group results DLG is treated as a discontinued operation until 12 March 2013 and as an associated undertaking thereafter, with associate income reported in Group Centre from 13 March 2013.

The ceding of control has resulted in the Group no longer treating DLG as an operating segment. Appendix 6 updates the Group’s prior period results on a statutory and managed basis for this change in treatment of DLG. While these restatements affect the reported results on a statutory and managed basis, they have no impact on the Group’s profit or loss for the periods, balance sheet or other primary statements.

Revised allocation of Business Services costs
In the first quarter of 2013, the Group reclassified certain costs between direct and indirect expenses for all divisions. Comparatives have been restated accordingly; the revision did not affect total expenses or operating profit.

 
4

 
 
Presentation of information (continued)


Revisions (continued)

Implementation of IAS 19 ‘Employee Benefits’ (revised)
The Group implemented IAS 19 with effect from 1 January 2013. IAS 19 requires: the immediate recognition of all actuarial gains and losses; interest cost to be calculated on the net pension liability or asset at the long-term bond rate, such that an expected rate of return will no longer be applied to assets; and all past service costs to be recognised immediately when a scheme is curtailed or amended. Implementation of IAS 19 resulted in an increase in the loss after tax of £42 million for the half year ended 30 June 2012 and £21 million for the quarter ended 30 June 2012. Prior periods have been restated accordingly.

Implementation of IFRS 10 ‘Consolidated Financial Statements’
The Group implemented IFRS 10 with effect from 1 January 2013. IFRS 10 adopts a single definition of control: a reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity so as to vary returns for the reporting entity. IFRS 10 requires retrospective application. Following implementation of IFRS 10, certain entities that have trust preferred securities in issue are no longer consolidated by the Group. As a result there has been a reduction in non-controlling interests of £0.5 billion with a corresponding increase in Owners’ equity (Paid-in equity); prior periods have been restated accordingly.

Recent Developments

Litigation, investigations and reviews

Investigations and reviews

Card Protection Plan Limited
On 22 August 2013 the Financial Conduct Authority (FCA) announced that Card Protection Plan Limited (“CPP”) and 13 banks and credit card issuers, including the Group, had agreed to a compensation scheme in relation to the sale of card and/or identity protection insurance to certain retail customers.  From 29 August 2013, CPP will write to affected policyholders to confirm the details of the proposed scheme, which requires to be approved by a policyholder vote and by the High Court of England and Wales.  The ultimate level of redress that the Group may be required to pay under the scheme cannot be estimated.

 
5

 

Condensed consolidated income statement
for the period ended 30 June 2013


 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012* 
 
30 June 
2013 
31 March 
2013 
30 June 
2012* 
 
£m 
£m 
 
£m 
£m 
£m 
             
Interest receivable
8,560 
9,635 
 
4,281 
4,279 
4,701 
Interest payable
(3,123)
(3,815)
 
(1,514)
(1,609)
(1,796)
             
Net interest income
5,437 
5,820 
 
2,767 
2,670 
2,905 
             
Fees and commissions receivable
2,708 
2,935 
 
1,392 
1,316 
1,450 
Fees and commissions payable
(460)
(380)
 
(250)
(210)
(201)
Income from trading activities
2,064 
867 
 
949 
1,115 
655 
Gain/(loss) on redemption of own debt
191 
577 
 
242 
(51)
Other operating income
1,332 
(440)
 
720 
612 
360 
             
Non-interest income
5,835 
3,559 
 
3,053 
2,782 
2,264 
             
Total income
11,272 
9,379 
 
5,820 
5,452 
5,169 
             
Staff costs
(3,727)
(4,545)
 
(1,840)
(1,887)
(2,037)
Premises and equipment
(1,104)
(1,090)
 
(548)
(556)
(528)
Other administrative expenses
(2,181)
(1,894)
 
(1,418)
(763)
(1,011)
Depreciation and amortisation
(736)
(883)
 
(349)
(387)
(426)
             
Operating expenses
(7,748)
(8,412)
 
(4,155)
(3,593)
(4,002)
             
Profit before impairment losses
3,524 
967 
 
1,665 
1,859 
1,167 
Impairment losses
(2,150)
(2,649)
 
(1,117)
(1,033)
(1,335)
             
Operating profit/(loss) before tax
1,374 
(1,682)
 
548 
826 
(168)
Tax charge
(678)
(399)
 
(328)
(350)
(261)
             
Profit/(loss) from continuing operations
696 
(2,081)
 
220 
476 
(429)
             
Profit from discontinued operations, net of tax
           
  - Direct Line Group
127 
105 
 
127 
17 
  - Other
11 
 
(4)
             
Profit from discontinued operations, net of tax
138 
106 
 
129 
13 
             
Profit/(loss) for the period
834 
(1,975)
 
229 
605 
(416)
Non-controlling interests
(117)
25 
 
14 
(131)
11 
Preference share and other dividends
(182)
(82)
 
(101)
(81)
(82)
             
Profit/(loss) attributable to ordinary and B
  shareholders
535 
(2,032)
 
142 
393 
(487)
             
Basic and diluted earnings/(loss) per ordinary and
  B share from continuing operations
3.8p 
(19.6p)
 
1.2p 
2.6p 
(4.6p)
             
Basic earnings/(loss) per ordinary and B share from
  continuing and discontinued operations
4.8p 
(18.6p)
 
1.2p 
3.5p 
(4.5p)
             
Diluted earnings/(loss) per ordinary and B share from
  continuing and discontinued operations
4.7p 
(18.6p)
 
1.2p 
3.5p 
(4.5p)

*Restated – see page 77

 
6

 
 
Core summary consolidated income statement
for the period ended 30 June 2013


 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
 
£m 
£m 
 
£m 
£m 
£m 
             
Net interest income
5,460 
5,718 
 
2,751 
2,709 
2,859 
Non-interest income
4,782 
5,697 
 
2,423 
2,359 
2,660 
             
Total income (1)
10,242 
11,415 
 
5,174 
5,068 
5,519 
Operating expenses (2)
(6,459)
(6,908)
 
(3,243)
(3,216)
(3,372)
             
Profit before impairment losses (3)
3,783 
4,507 
 
1,931 
1,852 
2,147 
Impairment losses
(1,319)
(1,553)
 
(719)
(600)
(728)
             
Operating profit (3)
2,464 
2,954 
 
1,212 
1,252 
1,419 

Key metrics
           
             
Core performance ratios
           
  - Net interest margin
2.21% 
2.15% 
 
2.21% 
2.21% 
2.19% 
  - Cost:income ratio
63% 
61% 
 
63% 
63% 
61% 
  - Return on equity
7.4% 
9.4% 
 
7.2% 
7.7% 
8.7% 

Notes:
(1)
Excluding own credit adjustments, gain/(loss) on redemption of own debt, Asset Protection Scheme, strategic disposals and RFS Holdings minority interest.
(2)
Excluding PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, amortisation of purchased intangible assets and RFS Holdings minority interest.
(3)
Operating profit before tax, own credit adjustments, PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals and RFS Holdings minority interest.

Analysis of results is set out on pages 13 to 23.

 
7

 

Comment


Stephen Hester, Group Chief Executive, commented:
This will be my last half year report before handing over the leadership of RBS, which I accepted in October 2008. Working intensely and effectively together, all 122,000 staff at RBS can take credit for the immense improvements made since then, from difficult beginnings and in a challenging environment.

RBS’s journey from “bust bank” to “normal bank” is largely done. But no small task remains - to harness the energies and strengths that have driven the Bank’s recovery, and to take RBS towards the target of being a “really good bank” for customers, shareholders and society as a whole.

I congratulate Ross McEwan on his appointment as RBS’s next Chief Executive. He has made a very positive impact since joining RBS last year and has a track record of strong accomplishment in customer focused banking. We will work closely and well together during the transition period, and he has my warmest best wishes for succeeding in the role. It is good for RBS that my successor comes internally - a broader compliment to the management team who serve the Bank so well.

During my tenure, RBS has stayed true to three goals. Through a fundamental reshaping of the Bank, in strategic, financial and human terms, we sought to re-establish:
·
Safety and Soundness; our clean-up job, unprecedented in scale, is nearing successful completion. The balance sheet we fund is down £720 billion from the worst point, with just £45 billion of Non-Core assets left. All other measures of safety are also hugely improved and core capital strength has been more than tripled on a like-for-like basis.
   
·
Support for 28 million Customers; our Core businesses have been worked well and as a result have held their own against competitors, despite the disruption of restructuring. Fundamental retooling has laid stronger foundations for the future and is steadily improving what we can do for customers. UK core lending to households and companies has been sustained at c.£170 billion in a market down overall since 2008. RBS now has £51 billion more customer deposits than core loans and both the will and the wherewithal to fund future customer growth, as is our role.
   
·
Recovery for Shareholders; in January 2009 RBS shares traded down to 9p/share (90p equivalent) as it looked possible that all could be lost. At around 330p today, £37 billion of stock market value is preserved. Along the way we have earned cumulative profits of £47 billion, pre-impairment and clean-up costs, from RBS’s Core businesses. This has been a hard fought but essential result. All of that profit has been needed to pay for the clean-up process, whilst Government support gave time for the restructuring to work. First half operating losses from remaining “bad assets” in Non-Core and Ireland are 89% below their respective peaks and on track to being eliminated. RBS has now reported the first two consecutive quarters of overall profit since 2008. The prospects of attractive future profits and dividends to RBS shareholders are much improved.

Achieving these results has required three main elements - a business with inherent strengths that was needed by customers and serving them well; a strategic and financial plan that was well crafted and effective; and a dedicated and loyal staff whose efforts have been remarkable. We have made huge changes to staff numbers, management and culture over this period. All RBS stakeholders owe much to the efforts of our people.

 
8

 

Comment (continued)


I will not talk here about future strategy which is now for others to set. But I will say this. My colleagues at RBS know what is needed to create a “really good bank”. They want to do just that. This will require time, tools to do the job, clarity and consistency of direction and yes, some luck too. It’s a very worthwhile goal.

RBS half year results show the huge progress since 2008. They also highlight the challenges left. While completing capital build and loss elimination looks wholly achievable, the Bank needs some time to finish these tasks. More importantly, future success in the ongoing business cannot be taken for granted. It will need to be worked at. RBS’s business mix is vastly changed, but inevitably a product of what was practical to achieve rather than starting from a blank sheet of paper. And the challenges of restructuring have had different consequences across the business. For all banks, legacy conduct and litigation costs also seem likely to remain features for some time.

Nevertheless, the banking industry has come a huge distance since the financial crisis, as have the economies we serve. A platform for safety and soundness and future avoidance of Government bailouts is largely in place. The industry is now more focused, perhaps than ever before, on better meeting the needs of its customers.

I am grateful to all who have helped me and worked together on the many tasks at RBS these last five years. To leave things better than you have found them is a valuable prize in business, as in life generally.

 
9

 
 
Highlights


Delivery of business plan continues to build financial strength
·
RBS further improved its capital strength through continued delivery against its established business plan, with the Core Tier 1 ratio increasing to 11.1%, or 8.7% on a fully loaded Basel III basis.
   
·
The Group remains confident of achieving a fully loaded Basel III Core Tier 1 ratio of over 9% by the end of 2013, which incorporates the capital needed to fund targeted loan growth.
   
·
The CRR leverage ratio improved to 3.4%.
   
·
Liquidity metrics remained very strong, with a liquidity portfolio maintained at £158 billion, short-term wholesale funding of £37 billion and a loan:deposit ratio of 96%. Customer deposits now exceed net loans in our Core businesses by £51 billion, giving a strong platform to respond to customer growth as it occurs.
   
·
Funded assets fell to £843 billion, down £86 billion from 30 June 2012, with Non-Core assets down £27 billion to £45 billion.
   
·
Credit quality continued to improve, with H1 2013 impairments down 15% from the prior year in Core and 24% in Non-Core. Credit trends in Ireland showed further encouraging signs, with Ulster Bank Core and Non-Core impairments in Q2 2013 down 6% from Q1 2013 and 12% from Q2 2012. Arrears formation on the mortgage portfolio continued to slow.

Operating performance is resilient
·
Group operating profit before tax was £1,374 million, compared with a loss of £1,682 million in H1 2012.
   
·
Profit attributable to shareholders was £535 million, compared with a loss of £2,032 million in H1 2012.
   
·
Core operating profit of £2,464 million was down 17% from H1 2012, driven largely by the significant reduction in Markets income as the division managed down the scale and capital intensity of its balance sheet. Retail & Commercial operating profits were down 4%, with improved operating results in UK Retail and reduced losses in Ulster Bank, but weaker performance in International Banking. UK Corporate results improved in the second quarter.
   
·
Non-Core losses were 42% lower at £786 million in H1 2013 as impairment losses diminished further and the division continued to cut expenses.

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

 
10

 
 
Highlights (continued)


Good progress in business restructuring (continued)
·
The Group is currently working with HM Treasury (HMT) on a review of its assets to support an assessment of the case for transferring some of those assets into a so-called ‘bad bank’. HMT’s stated objectives are to maximise the Group’s ability to support the British economy, get the best value for money for the taxpayer and assist in the return of RBS to private ownership. Any material proposal arising from the review, depending on its structure, may require approval by the Group’s Board and by a majority of shareholders, excluding HMT. The review aims to understand whether the creation of a ‘bad bank’ would accelerate the achievement of these objectives. RBS is working closely with HMT and its appointed advisors to provide conclusions by the autumn.
   
·
RBS is still dealing with the costs of past conduct issues. One-off and other charges for legal actions and regulatory investigations totalled £620 million in H1 2013, including a further £185 million provision for the costs of Payment Protection Insurance (PPI) redress, taking the cumulative PPI charges to £2.4 billion.

Building a really good bank
·
As RBS moves beyond its restructuring phase, efforts to reinforce a positive culture in the bank have stepped up as an essential foundation to build a “really good bank”. In July colleagues were introduced to Our Code, a fresh and simplified look at what was previously the Group’s Code of Conduct. Our Code sets out the way we will bring to life our values of serving customers, working together, doing the right thing and thinking long term.
   
·
The Group has invested to improve customer experience, with all divisions having now built in customer experience as a significant component of their strategic planning. In UK Retail and UK Corporate investment has included simplification of the account opening process and improvements to online service options.
   
·
The Group continues to hold strong market positions across its major customer franchises, with stable or improving trends in most areas. Customer satisfaction and advocacy scores are also trending upwards in a number of important segments.

Supporting our customers
·
A key element of our support for customers is making credit available to support their financing needs. RBS’s capital plans include a substantial allowance to support incremental lending growth at more than double the projected growth of the UK economy as a whole.
   
·
In the first half of 2013 RBS offered £26.7 billion of loans and facilities to UK businesses, of which £15.6 billion were to SMEs. In addition, the Group renewed £12.9 billion of UK business overdrafts, including £3.3 billion to SMEs. In Q2 2013, the £7.8 billion of loans and other facilities, including asset and invoice finance, was 6% higher than in Q2 2012.
   
·
There have been welcome signs of an increase in SME loan demand in Q2 2013, with loan and overdraft applications up 8% from Q1 2013 to £2.9 billion. Nevertheless, SME demand for bank finance remains subdued; core loans and advances outstanding to non-commercial property SMEs fell slightly from Q1 2013 to £33 billion and many customers continued to build their cash balances, with SME deposits up £2.1 billion in Q2 to £56.8 billion and overdraft utilisation rates continuing their downward trajectory to 42%, compared with 47% in Q2 2012.
   
·
RBS has proactively written to more than 1,400 SME customers stating its appetite to lend them more than £1.4 billion.

 
11

 
 
Highlights (continued)


Supporting our customers (continued)
·
To ensure that all avenues to further increasing SME lending are explored, RBS announced the appointment of Sir Andrew Large and Oliver Wyman on 3 July 2013 to undertake a thorough and independent review of the lending standards and practices used by RBS and NatWest. The review will aim to identify any further steps that RBS and NatWest can take to enhance support to SMEs and the wider UK economic recovery while maintaining safe and sound lending practices.
   
·
Larger corporate use of bank debt remains volatile, with some large repayments causing a 4% fall in balances during H1 2013, partly reflecting the continuing strength of corporate bond issuance. Non-Core UK balances declined by 10% during H1 2013 as RBS continues to run off its excess real estate exposures in line with its established strategy and with regulatory requirements.
   
·
New mortgage approvals in the UK have built rapidly over the last three months after slowing in Q1 as a result of a retraining and accreditation programme for all mortgage advisors, which substantially reduced advisor availability for new appointments. Approvals totalled £4.0 billion in Q2, up 42% from Q1 2013 and 15% from Q2 2012. Mortgage balances outstanding at 30 June 2013 were up 7% from the prior year at £109.3 billion, but fell by 1% in Q2 2013 as a result of the advisor retraining. The building pipeline of approvals is expected to feed into completions and drawdowns from Q3 2013 onwards.
   
·
RBS has continued to promote the Bank of England’s Funding for Lending Scheme, offering £2.2 billion of discounted loans to 12,000 SMEs in association with the FLS during the first half of 2013. Since the Scheme’s inception, RBS has lent £58.7 billion to UK businesses and households, with £29.1 billion of this during H1 2013.The Group’s very strong liquidity means that it has again had no need to draw on this public funding during the period.

Outlook
RBS expects good progress to continue on all safety and soundness measures including achievement of a fully loaded Basel III Core Tier 1 ratio of over 9% by the end of 2013.

The Bank is strongly positioned with capital and funding capacity in place to support lending growth as customer demand increases; there are good early indicators of increasing customer confidence in both our retail and corporate franchises.
 
Operating results in Retail & Commercial are expected to be resilient with a modest improvement in net interest margin, cost reductions and improving impairment trends. Ulster Bank impairments are expected to continue to gently decline as the economy continues to recover in Ireland.
 
Markets-related income remains difficult to predict but we continue to expect a muted year overall as the business transitions towards its revised shape and size.
 
Non-Core continues to perform well and we have improved our end-2013 third party asset target from c.£40 billion to c.£36 to £38 billion.
 
We continue to focus on simplification and efficiency. We expect to deliver Group operating costs of around £13 billion in 2013, with a further target of under £12 billion in 2015.

 
12

 
 
Analysis of results


 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
Net interest income
£m 
£m 
 
£m 
£m 
£m 
             
Net interest income
5,437 
5,820 
 
2,767 
2,670 
2,905 
             
Average interest-earning assets
555,709 
615,740 
 
551,375 
559,672 
601,987 
             
Net interest margin
           
  - Group
1.97% 
1.90% 
 
2.01% 
1.93% 
1.94% 
  - Retail & Commercial (1)
2.91% 
2.92% 
 
2.92% 
2.90% 
2.93% 
  - Non-Core
(0.06%)
0.28% 
 
0.15% 
(0.25%)
0.24% 

Note:
(1)
Retail & Commercial (R&C) comprises the UK Retail, UK Corporate, Wealth, International Banking, Ulster Bank and US R&C divisions.

Key points

H1 2013 compared with H1 2012
·
Group net interest margin improved by 7 basis points to 1.97%, reflecting the increasing preponderance of R&C in the Group’s asset mix. In addition, a benefit was seen from a one-off recovery in Non-Core in H1 2013.
   
·
R&C net interest margin fell by 1 basis point to 2.91%. Improved deposit market conditions enabled some repricing of retail and corporate deposits in Q2, helping to offset the impact of lower rates on current account hedges.
   
·
Average interest-earning assets fell by £60 billion, driven by Non-Core run-off and disposals and a reduction in Markets.
   
·
As a result of these trends, net interest income fell by 7% from the prior year, with deposit pricing initiatives starting to deliver income benefits later in the period. Net interest income was also affected by a decline in cash management income in International Banking, reflecting a deterioration in rates, and higher liquidity buffer funding costs.

Q2 2013 compared with Q1 2013
·
Average interest-earning assets were £8 billion lower, largely driven by Non-Core run-off and a reduction in R&C.
   
·
R&C net interest margin increased by 2 basis points. A significant factor was the margin improvement in UK Retail as a result of good mortgage balance retention and strategic savings  repricing. The 8 basis point improvement in Group net interest margin was driven by the recovery on disposal in Non-Core.
   
·
Net interest income improved by 4%, mainly driven by the one-off recovery in Non-Core and the benefit of an extra day in the quarter, partly offset by lower average asset balances.

 
13

 

Analysis of results (continued)


Key points (continued)

Q2 2013 compared with Q2 2012
·
Average interest-earning assets declined by £51 billion, with decreases in International Banking, reflecting customer repayments, and Non-Core, as assets were sold and run off.
   
·
Group net interest margin improved by 7 basis points to 2.01%, primarily reflecting the trend in the Group’s asset mix towards R&C as well as the one-off recovery in Non-Core.
   
·
R&C net interest margin fell by 1 basis point compared with Q2 2012, which benefited from a deferred income recognition change in UK Corporate. Margins were also held back by lower returns on current account hedges in UK Retail and a smaller investment pool in US Retail & Commercial. These downward pressures were substantially offset by deposit re-pricing and the run-down of low margin assets in International Banking.
   
·
Net interest income was 5% lower, primarily as a result of lower asset volumes.

For details on the Group’s average balance sheet refer to pages 68 to 70.

 
14

 
 
Analysis of results (continued)


The following tables reconcile the managed basis results (a non-GAAP financial measure) to the statutory basis results.
 
 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013
31 March 
2013 
30 June 
2012 
Non-interest income
£m 
£m 
 
£m
£m 
£m 
             
Fees and commissions receivable
2,708 
2,935 
 
1,392
1,316 
1,450 
Fees and commissions payable
(460)
(380)
 
(250)
(210)
(201)
Managed and statutory basis
2,248 
2,555 
 
1,142
1,106 
1,249 
Income from trading activities
           
  - managed basis
1,890 
2,193 
 
874
1,016 
929 
  - Asset protection scheme
(45)
 
-
(3)
  - own credit adjustments*
175 
(1,280)
 
76
99 
(271)
  - RFS Holdings minority interest
(1)
(1)
 
(1)
Statutory basis
2,064 
867 
 
949
1,115 
655 
Gain/(loss) on redemption of own debt
191 
577 
 
242
(51)
Other operating income
           
  - managed basis
1,028 
1,107 
 
661
367 
435 
  - strategic disposals**
152 
 
6
(6)
160 
  - own credit adjustments*
201 
(1,694)
 
51
150 
(247)
  - RFS Holdings minority interest
103 
(5)
 
2
101 
12 
Statutory basis
1,332 
(440)
 
720
612 
360 
             
Total non-interest income – managed basis
5,166 
5,855 
 
2,677
2,489 
2,613 
Total non-interest income – statutory basis
5,835 
3,559 
 
3,053
2,782 
2,264 
             
*Own credit adjustments impact:
           
Income from trading activities
175 
(1,280)
 
76
99 
(271)
Other operating income
201 
(1,694)
 
51
150 
(247)
             
Own credit adjustments
376 
(2,974)
 
127
249 
(518)
             
**Strategic disposals
           
Gain/(loss) on sale and provision for loss on
  disposal of investments in:
           
  - RBS Aviation Capital
197 
 
-
197 
  - Other
(45)
 
6
(6)
(37)
             
 
152 
 
6
(6)
160 

Key points

H1 2013 compared with H1 2012
·
Net fees and commissions were £307 million lower with declines in Markets and International Banking. UK Retail was also affected by the impact of the Retail Distribution Review (RDR) on advisory income.
   
·
Income from trading activities increased by £1,197 million, primarily due to a £175 million gain in relation to own credit adjustments compared with a charge of £1,280 million in HY 2012. On a managed basis, the majority of the change in income from trading activities was in Markets, down £802 million as it managed down the scale and capital intensity of its balance sheet. This was partially offset by a £580 million increase in Non-Core trading income, driven by improved market conditions and the non-repeat of significant one-off losses in H1 2012.
   
·
Other operating income increased by £1,772 million, primarily due to a £201 million gain in relation to own credit adjustments compared with a charge of £1,694 million in HY 2012. On a managed basis, other operating income fell by £79 million, predominantly driven by a reduction in Non-Core rental income following the disposal of RBS Aviation Capital in Q2 2012.

 
15

 
 
Analysis of results (continued)


Q2 2013 compared with Q1 2013
·
Income from trading activities was £166 million lower, as revenue fell in Asset Backed Products and Credit Markets following the Federal Reserve’s indication that quantitative easing may be tapered earlier than anticipated, partially offset by stronger Currencies income and an improvement in Non-Core.
   
·
Other operating income increased by £108 million. On a managed basis, other operating income increased by £294 million, with available-for-sale securities disposal gains £250 million higher and lower disposal losses in Non-Core.

Q2 2013 compared with Q2 2012
·
Income from trading activities increased by £294 million, primarily due to a £76 million gain in relation to own credit adjustments compared with a charge of £271 million in Q2 2012. On a managed basis, a strong improvement in Non-Core income from trading activities, reflecting favourable market conditions, was more than offset by lower Markets revenue, resulting in £55 million lower Group income from trading activities.
   
·
Other operating income increased by £360 million, primarily due to a £51 million gain in relation to own credit adjustments compared with a charge of £247 million in Q2 2012. On a managed basis, the £226 million increase in other operating income reflected higher available-for-sale securities disposal gains and improvement in Non-Core. Q2 2012 had benefited from a £47 million gain in US Retail & Commercial on the sale of Visa B shares.

 
16

 
 
Analysis of results (continued)


The following tables reconcile the managed basis results (a non-GAAP financial measure) to the statutory basis results.
 
 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013
31 March 
2013 
30 June 
2012 
Operating expenses
£m 
£m 
 
£m
£m 
£m 
             
Staff expenses
           
  - managed basis
3,585 
4,116 
 
1,764
1,821 
1,945 
  - integration and restructuring costs
142 
429 
 
76
66 
92 
Statutory basis
3,727 
4,545 
 
1,840
1,887 
2,037 
Premises and equipment
           
  - managed basis
1,079 
1,062 
 
526
553 
511 
  - integration and restructuring costs
25 
28 
 
22
17 
Statutory basis
1,104 
1,090 
 
548
556 
528 
Other administrative expenses
           
  - managed basis
1,479 
1,498 
 
801
678 
804 
  - Payment Protection Insurance costs
185 
260 
 
185
135 
  - Interest Rate Hedging Products redress and related costs
50 
 
-
50 
  - regulatory and legal actions
385 
 
385
  - integration and restructuring costs
84 
135 
 
48
36 
72 
  - RFS Holdings minority interest
(2)
 
(1)
(1)
Statutory basis
2,181 
1,894 
 
1,418
763 
1,011 
Depreciation and amortisation
           
  - managed basis
637 
757 
 
308
329 
374 
  - amortisation of purchased intangible assets
79 
99 
 
38
41 
51 
  - integration and restructuring costs
20 
27 
 
3
17 
  - RFS Holdings minority interest
 
-
Statutory basis
736 
883 
 
349
387 
426 
             
Operating expenses - managed basis
6,780 
7,433 
 
3,399
3,381 
3,634 
Operating expenses - statutory basis
7,748 
8,412 
 
4,155
3,593 
4,002 

Key points
In 2013, the Group is continuing its focus on cost control, whilst at the same time funding investment in order to make it simpler and easier for customers to do business with us by improving systems and processes and enhancing compliance and risk management infrastructure.

H1 2013 compared with H1 2012
·
Operating expenses were down 8% primarily due to lower integration and restructuring costs (down £348 million), lower charges in respect of Payment Protection Insurance (PPI) costs (down £75 million), partially off-set by Interest Rate Hedging Products redress and related costs (IRHP) of £50 million and regulatory and legal actions of £385 million in HY 2013. On a managed basis, operating expenses were down 9% with headcount and compensation reduction in Markets and International Banking, together with lower operating lease depreciation and run-down in Non-Core.
   
·
On a managed basis, non-staff operating costs were broadly flat as a Group-wide focus on cost management was offset by investment in technology to simplify processes and deliver better customer service in UK Retail, investment programmes in Ulster Bank to help support customers in arrears and higher investment spend in UK Corporate.

 
17

 

Analysis of results (continued)


Key points (continued)

Q2 2013 compared with Q1 2013
·
Staff costs were 2% lower as lower compensation in Markets and lower headcount across a number of divisions were partly offset by the non-repeat of Q1 2013 performance incentive releases across a number of divisions.
   
·
Expenses in Group Centre increased by £82 million principally due to litigation and conduct costs.

Q2 2013 compared with Q2 2012
·
Operating expenses increased by 4% primarily due to regulatory and legal actions of £385 million in Q2 2013, and an increase of PPI costs of £50 million. On a managed basis, operating expenses decreased by 6% with a significant decline in Markets, driven by headcount and compensation reductions, and Non-Core, reflecting the run down of the division and a £55 million fall in operating lease depreciation. In addition, International Banking saw expense benefits from the run-off of discontinued businesses and headcount reductions while Ulster Bank costs increased with investment and change spend.

 
18

 

Analysis of results (continued)


 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
Impairment losses
£m 
£m 
 
£m 
£m 
£m 
             
Loan impairment losses
2,161 
2,730 
 
1,125 
1,036 
1,435 
Securities
(11)
(81)
 
(8)
(3)
(100)
             
Group impairment losses – managed and statutory basis
2,150 
2,649 
 
1,117 
1,033 
1,335 
             
Loan impairment losses
           
  - individually assessed
1,472 
1,690 
 
826 
646 
945 
  - collectively assessed
734 
1,129 
 
293 
441 
534 
  - latent
(36)
(113)
 
15 
(51)
(56)
             
Customer loans
2,170 
2,706 
 
1,134 
1,036 
1,423 
Bank loans
(9)
24 
 
(9)
12 
             
Loan impairment losses
2,161 
2,730 
 
1,125 
1,036 
1,435 
             
Core
1,258 
1,515 
 
659 
599 
719 
Non-Core
903 
1,215 
 
466 
437 
716 
             
Group
2,161 
2,730 
 
1,125 
1,036 
1,435 
             
Customer loan impairment charge as a % of
  gross loans and advances (1)
           
Group
1.0% 
1.1% 
 
1.0% 
0.9% 
1.2% 
Core
0.6% 
0.7% 
 
0.7% 
0.6% 
0.7% 
Non-Core
3.9% 
3.6% 
 
4.0% 
3.3% 
4.2% 

Note:
(1)
Customer loan impairment charge as a percentage of gross customer loans and advances excludes reverse repurchase agreements and includes disposal groups.

Key points

H1 2013 compared with H1 2012
·
Group loan impairment losses improved by £569 million or 21%, largely driven by a significant fall in Non-Core impairments (down £312 million) particularly in the non-Ulster Bank portfolios.
   
·
Core Ulster Bank impairments also demonstrated a major improvement, falling by £214 million, or 30%, mainly as a result of improved retail mortgage debt-flow. UK Retail impairments also fell, reflecting lower default volumes across all products while International Banking impairments were higher as a result of two large single-name provisions totalling £109 million.
   
·
Customer loan impairments as a percentage of gross loans declined slightly in Core. While Non-Core impairments were lower in absolute terms, they represented a higher percentage of Non-Core’s declining loans and advances.

Q2 2013 compared with Q1 2013
·
Group loan impairment losses rose by £89 million driven by an increase in Core impairments (predominantly International Banking and Markets).
   
·
Loan impairments as a percentage of gross loans and advances ticked up by 10 basis points in Core and 70 basis points in Non-Core.

 
19

 

Analysis of results (continued)


Key points (continued)

Q2 2013 compared with Q2 2012
·
Group loan impairment losses improved by £310 million or 22%, predominantly reflecting a significant drop in Non-Core impairments with the non-recurrence of a single large Project Finance provision in Q2 2012.
   
·
Core impairments were slightly lower as declines in Ulster Bank, reflecting a stabilisation in the macroeconomic environment in the Republic of Ireland, and in UK Retail, with lower default volumes, were largely offset by two significant cases in International Banking.
   
·
Customer loan impairments as a percentage of gross loans fell by 20 basis points, primarily reflecting the significant movements in Non-Core.

For further details of the Group’s exposures and provisioning refer to page 143.

 
20

 
 
Analysis of results (continued)


Capital resources and ratios
30 June 
2013 
31 March 
2013 
31 December 
2012 
       
Core Tier 1 capital
£48bn 
£48bn 
£47bn 
Tier 1 capital
£58bn 
£57bn 
£57bn 
Total capital
£69bn 
£69bn 
£67bn 
Risk-weighted assets
£436bn 
£446bn 
£460bn 
Core Tier 1 ratio
11.1% 
10.8% 
10.3% 
Tier 1 ratio
13.3% 
12.9% 
12.4% 
Total capital ratio
15.8% 
15.5% 
14.5% 

Key points
The Group’s capital ratios strengthened further in the period. We remain on track to meet regulatory requirements significantly ahead of implementation dates.

30 June 2013 compared with 31 March 2013
·
The Group’s Core Tier 1 ratio increased by 30 basis points to 11.1%, largely driven by a decline in risk-weighted assets (RWAs). On a fully loaded Basel III basis, the ratio strengthened by 50 basis points to 8.7% as the Group remained on track to meet its target of over 9% by the end of 2013, well ahead of the Basel implementation timetable which would require RBS to have a fully loaded ratio of 8.5% by 2018.
   
·
RWAs were managed down by £10 billion including an £8 billion reduction in Non-Core. Core RWAs were flat as credit model uplifts of £9 billion, particularly affecting UK Corporate and International Banking, were offset by other reductions across the Core divisions.

30 June 2013 compared with 31 December 2012
·
The 80 basis points increase in the Core Tier 1 ratio was predominantly driven by a £24 billion fall in RWAs. On a fully loaded Basel III basis, the ratio increased from 7.7% to 8.7%.
   
·
The decline in RWAs was largely in Non-Core, with a fall of £14 billion from run-off and disposals, and in Markets, down £14 billion as a result of lower operational, credit and market risk.

For further details of the Group’s capital resources refer to page to 136.

 
21

 
 
Analysis of results (continued)


Balance sheet
30 June 
2013 
31 March 
2013 
31 December 
2012 
       
Total assets
£1,216bn 
£1,308bn 
£1,312bn 
Derivatives
£374bn 
£432bn 
£442bn 
Funded balance sheet (1)
£842bn 
£876bn 
£870bn 
Loans and advances to customers (2)
£420bn 
£433bn 
£432bn 
Customer deposits (3)
£437bn 
£438bn 
£434bn 
Loan:deposit ratio - Core (4)
88% 
90% 
90% 
Loan:deposit ratio - Group (4)
96% 
99% 
100% 

Notes:
(1)
Funded balance sheet represents total assets less derivatives.
(2)
Excluding reverse repurchase agreements and stock borrowing, and including disposal groups.
(3)
Excluding repurchase agreements and stock lending, and including disposal groups.
(4)
Net of provisions, including disposal groups and excluding repurchase agreements. Excluding disposal groups, the loan:deposit ratios of Core and Group at 30 June 2013 were 88% and 96% respectively (31 March 2013 - 90% and 99%; 31 December 2012 - 89% and 99%).

Key points
The Group’s balance sheet remains strong and conservatively funded.

30 June 2013 compared with 31 March 2013
·
Customer deposits remained strong at £437 billion despite strategic repricing initiatives intended to counter surplus funding.
   
·
Loans and advances to customers fell by £13 billion driven by Non-Core run-off of £6 billion, lower collateral posting in Markets of £5 billion and targeted reductions in UK Corporate commercial property and shipping portfolios of £0.9 billion. This drove the Group loan:deposit ratio 300 basis points lower. The Group remains focused on new lending growth particularly in the UK, despite continued subdued levels of demand in the market.
   
·
The funded balance sheet decreased by £33 billion, principally as a result of focused balance sheet management in Markets (down £20 billion), and run-off and disposals in Non-Core (down £8 billion).
   

30 June 2013 compared with 31 December 2012
·
Customer deposits increased by £3 billion, reflecting a strengthening of the US dollar against sterling and deposit inflows in most R&C businesses in Q1 2013. The inflow of deposits was mitigated by pricing initiatives in Q2 2013.
   
·
Loans and advances to customers were £12 billion lower, with a £9 billion reduction in Non-Core through run-off and disposals.
   
·
The funded balance sheet fell by £27 billion, reflecting successful balance sheet reduction in Q2 2013, reversing a temporary increase in Q1 2013 in central bank deposits and Markets counterparty positions.

 
22

 
 
Analysis of results (continued)


Funding & liquidity metrics
30 June 
2013 
31 March 
2013 
31 December 
2012 
       
Deposits (1)
£482bn 
£493bn 
£491bn 
Deposits as a percentage of funded balance sheet
57% 
56% 
56% 
Short-term wholesale funding (2)
£37bn 
£43bn 
£42bn 
Wholesale funding (2)
£129bn 
£147bn 
£150bn 
Short-term wholesale funding as a percentage of funded balance sheet
4% 
5% 
5% 
Short-term wholesale funding as a percentage of total wholesale funding
29% 
29% 
28% 
       
Liquidity portfolio
£158bn 
£158bn 
£147bn 
Liquidity portfolio as a percentage of funded balance sheet
19% 
18% 
17% 
Liquidity portfolio as a percentage of short-term wholesale funding
427% 
367% 
350% 
       
Net stable funding ratio
120% 
119% 
117% 

Notes:
(1)
Excludes repurchase agreements and stock lending and includes disposal groups.
(2)
Excludes derivative collateral.

Key points

30 June 2013 compared with 31 March 2013
·
Short-term wholesale funding fell in the quarter to £37 billion, just 4% of the funded balance sheet.
   
·
The Group’s liquidity portfolio held flat as deposit inflows were mitigated by re-pricing initiatives. The liquidity portfolio continues to cover short-term wholesale funding balances by considerably more than the Group’s medium-term target of 1.5 times, and now covers short-term wholesale funding by 4.3 times.

30 June 2013 compared with 31 December 2012
·
Short-term wholesale funding fell in the latter part of the period and remained around 4% of the total funded balance sheet throughout.
   
·
The liquidity portfolio increased during the earlier part of the period as a result of deposit growth and Non-Core run-down.

For further details of the Group’s liquidity and funding metrics refer to page 139.

 
23

 

Divisional performance


The operating profit/(loss) of each division is shown below.

 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
 
£m 
£m 
 
£m 
£m 
£m 
             
Operating profit/(loss) by division
           
UK Retail
954 
914 
 
477
477 
437 
UK Corporate
753 
1,004 
 
395
358 
512 
Wealth
112 
104 
 
56
56 
61 
International Banking
136 
264 
 
42
94 
167 
Ulster Bank
(329)
(555)
 
(165)
(164)
(245)
US Retail & Commercial
363 
331 
 
174
189 
229 
             
Retail & Commercial
1,989 
2,062 
 
979
1,010 
1,161 
Markets
371 
1,075 
 
93
278 
251 
Central items
104 
(183)
 
140
(36)
             
Core
2,464 
2,954 
 
1,212
1,252 
1,419 
Non-Core
(786)
(1,351)
 
(281)
(505)
(868)
             
Managed basis
1,678 
1,603 
 
931
747 
551 
             
Reconciling items:
           
Own credit adjustments
376 
(2,974)
 
127
249 
(518)
Payment Protection Insurance costs
(185)
(260)
 
(185)
(135)
Interest Rate Hedging Products redress and related
  costs
(50)
 
-
(50)
Regulatory and legal actions
(385)
 
(385)
Integration and restructuring costs
(271)
(619)
 
(149)
(122)
(181)
Gain on redemption of own debt
191 
577 
 
242
(51)
Asset Protection Scheme
(45)
 
-
(2)
Amortisation of purchased intangible assets
(79)
(99)
 
(38)
(41)
(51)
Strategic disposals
152 
 
6
(6)
160 
RFS Holdings minority interest
99 
(17)
 
(1)
100 
             
Statutory basis
1,374 
(1,682)
 
548
826 
(168)
             
Impairment losses/(recoveries) by division
           
UK Retail
169 
295 
 
89
80 
140 
UK Corporate
379 
357 
 
194
185 
181 
Wealth
22 
 
2
12 
International Banking
154 
62 
 
99
55 
27 
Ulster Bank
503 
717 
 
263
240 
323 
US Retail & Commercial
51 
47 
 
32
19 
28 
             
Retail & Commercial
1,263 
1,500 
 
679
584 
711 
Markets
59 
21 
 
43
16 
19 
Central items
(3)
32 
 
(3)
(2)
             
Core
1,319 
1,553 
 
719
600 
728 
Non-Core
831 
1,096 
 
398
433 
607 
             
Managed and statutory basis
2,150 
2,649 
 
1,117
1,033 
1,335 



 
24

 

Divisional performance (continued)

 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
 
 
             
Net interest margin by division
           
UK Retail
3.53 
3.59 
 
3.56
3.49 
3.57 
UK Corporate
3.03 
3.13 
 
3.05
3.01 
3.17 
Wealth
3.48 
3.68 
 
3.41
3.55 
3.69 
International Banking
1.68 
1.62 
 
1.62
1.74 
1.65 
Ulster Bank
1.85 
1.85 
 
1.85
1.85 
1.82 
US Retail & Commercial
2.92 
3.01 
 
2.91
2.93 
3.00 
             
Retail & Commercial
2.91 
2.92 
 
2.92
2.90 
2.93 
Non-Core
(0.06)
0.28 
 
0.15
(0.25)
0.24 
             
Group net interest margin
1.97 
1.90 
 
2.01
1.93 
1.94 


 
30 June 
2013
31 March 
2013 
31 December 
2012 
 
£bn
£bn 
£bn 
       
Total funded assets by division
     
UK Retail
116.1
117.1 
117.4 
UK Corporate
107.6
109.9 
110.2 
Wealth
21.3
21.7 
21.4 
International Banking
51.9
54.4 
53.0 
Ulster Bank
30.3
30.6 
30.6 
US Retail & Commercial
74.1
76.3 
72.1 
       
Retail & Commercial
401.3
410.0 
404.7 
Markets
267.9
288.0 
284.5 
Central Items
126.9
123.8 
110.3 
       
Core
796.1
821.8 
799.5 
Non-Core
45.4
52.9 
57.4 
       
 
841.5
874.7 
856.9 
Direct Line Group
-
12.7 
RFS Holdings minority interest
1.0
1.0 
0.8 
       
Group
842.5
875.7 
870.4 


 
25

 
Divisional performance (continued)

 
30 June 
2013 
31 March 
2013 
   
31 December 
2012 
 
 
£bn 
£bn 
Change 
 
£bn 
Change 
             
Risk-weighted assets by division
           
UK Retail
44.1 
44.5 
(1%)
 
45.7 
(4%)
UK Corporate
88.1 
87.0 
1% 
 
86.3 
2% 
Wealth
12.5 
12.5 
 
12.3 
2% 
International Banking
49.7 
48.9 
2% 
 
51.9 
(4%)
Ulster Bank
33.9 
36.8 
(8%)
 
36.1 
(6%)
US Retail & Commercial
58.2 
58.9 
(1%)
 
56.5 
3% 
             
Retail & Commercial
286.5 
288.6 
(1%)
 
288.8 
(1%)
Markets
86.8 
88.5 
(2%)
 
101.3 
(14%)
Other (primarily Group Treasury)
12.3 
10.2 
21% 
 
5.8 
112% 
             
Core
385.6 
387.3 
 
395.9 
(3%)
Non-Core
46.3 
54.6 
(15%)
 
60.4 
(23%)
             
Group before RFS Holdings minority
  interest
431.9 
441.9 
(2%)
 
456.3 
(5%)
RFS Holdings minority interest
4.1 
3.9 
5% 
 
3.3 
24% 
             
Group
436.0 
445.8 
(2%)
 
459.6 
(5%)


Employee numbers by division
(full time equivalents rounded to the nearest hundred)
30 June 
2013 
31 March 
2013 
31 December 
2012 
       
UK Retail
25,300 
25,800 
26,000 
UK Corporate
13,800 
13,600 
13,300 
Wealth
5,100 
5,100 
5,100 
International Banking
4,800 
4,800 
4,600 
Ulster Bank
4,800 
5,000 
4,500 
US Retail & Commercial
18,500 
18,600 
18,700 
       
Retail & Commercial
72,300 
72,900 
72,200 
Markets
11,200 
11,300 
11,300 
Group Centre
6,700 
6,800 
6,800 
       
Core
90,200 
91,000 
90,300 
Non-Core
2,200 
2,600 
3,100 
       
 
92,400 
93,600 
93,400 
Business Services
29,000 
29,100 
29,100 
Integration and restructuring
300 
300 
500 
       
Group
121,700 
123,000 
123,000 
 
 

 
 
26

 
UK Retail

 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013
31 March 
2013 
30 June 
2012 
 
£m 
£m 
 
£m
£m 
£m 
             
Income statement
           
Net interest income
1,952 
1,989 
 
987
965 
988 
             
Net fees and commissions
427 
451 
 
215
212 
214 
Other non-interest income
24 
57 
 
10
14 
28 
             
Non-interest income
451 
508 
 
225
226 
242 
             
Total income
2,403 
2,497 
 
1,212
1,191 
1,230 
             
Direct expenses
           
  - staff
(358)
(424)
 
(180)
(178)
(213)
  - other
(227)
(189)
 
(115)
(112)
(111)
Indirect expenses
(695)
(675)
 
(351)
(344)
(329)
             
 
(1,280)
(1,288)
 
(646)
(634)
(653)
             
Profit before impairment losses
1,123 
1,209 
 
566
557 
577 
Impairment losses
(169)
(295)
 
(89)
(80)
(140)
             
Operating profit
954 
914 
 
477
477 
437 
             
             
Analysis of income by product
           
Personal advances
443 
458 
 
220
223 
222 
Personal deposits
227 
353 
 
124
103 
168 
Mortgages
1,277 
1,159 
 
649
628 
596 
Cards
419 
431 
 
210
209 
212 
Other
37 
96 
 
9
28 
32 
             
Total income
2,403 
2,497 
 
1,212
1,191 
1,230 
             
             
Analysis of impairments by sector
           
Mortgages
25 
58 
 
15
10 
24 
Personal
85 
166 
 
50
35 
84 
Cards
59 
71 
 
24
35 
32 
             
Total impairment losses
169 
295 
 
89
80 
140 
             
             
Loan impairment charge as % of gross customer
  loans and advances (excluding reverse
  repurchase agreements) by sector
           
Mortgages
0.1% 
0.1% 
 
0.1%
0.1% 
Personal
2.0% 
3.6% 
 
2.4%
1.6% 
3.7% 
Cards
2.1% 
2.5% 
 
1.7%
2.5% 
2.3% 
             
Total
0.3% 
0.5% 
 
0.3%
0.3% 
0.5% 
 
 
 
27

 
UK Retail (continued)

Key metrics
 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
             
Performance ratios
           
Return on equity (1)
25.8% 
23.3% 
 
26.1%
25.5% 
22.5% 
Net interest margin
3.53% 
3.59% 
 
3.56%
3.49% 
3.57% 
Cost:income ratio
53% 
52% 
 
53%
53% 
53% 

 
30 June 
2013 
31 March 
2013 
   
31 December 
2012 
 
 
£bn 
£bn 
Change 
 
£bn 
Change 
             
Capital and balance sheet
           
Loans and advances to customers (gross)
           
  - mortgages
98.3 
99.1 
(1%)
 
99.1 
(1%)
  - personal
8.3 
8.6 
(3%)
 
8.8 
(6%)
  - cards
5.6 
5.5 
2% 
 
5.7 
(2%)
             
 
112.2 
113.2 
(1%)
 
113.6 
(1%)
Loan impairment provisions
(2.5)
(2.6)
(4%)
 
(2.6)
(4%)
             
Net loans and advances to customers
109.7 
110.6 
(1%)
 
111.0 
(1%)
             
Risk elements in lending
4.3 
4.4 
(2%)
 
4.6 
(7%)
Provision coverage (2)
58% 
58% 
 
58% 
             
Customer deposits
111.6 
110.1 
1% 
 
107.6 
4% 
Assets under management (excluding deposits)
5.8 
6.2 
(6%)
 
6.0 
(3%)
Loan:deposit ratio (excluding repos)
98% 
100% 
(200bp)
 
103% 
(500bp)
             
Risk-weighted assets (3)
           
  - Credit risk (non-counterparty)
36.3 
36.7 
(1%)
 
37.9 
(4%)
  - Operational risk
7.8 
7.8 
 
7.8 
             
Total risk-weighted assets
44.1 
44.5 
(1%)
 
45.7 
(4%)

Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(3)
Divisional RWAs are based on a long-term conservative average secured mortgage probability of default methodology rather than the current lower point in time basis required for regulatory reporting.

Key points
UK Retail continues to focus on making RBS and NatWest easy to deal with, delivering some great improvements for its customers. To be the best retail bank in the UK, UK Retail needs to deliver a consistently excellent service experience for its customers across all its channels. The division has continued to make progress, launching its new Private 24 service which gives Private Banking customers direct access to a Private Banking Officer any time of the day or night.

In June 2013, NatWest was voted the ‘Most Trusted Mainstream Bank’ in the UK by 20,000 people in an independent survey. Customers are our business and trust is the cornerstone of sustainable, long term relationships.

 
28

 
UK Retail (continued)

Key points (continued)
During Q2 2013, UK Retail launched the mortgage “NatYes” and “RBYES” advertising campaigns following significant investment in re-training its mortgage advisors during Q1 2013. Applications increased significantly in Q2 reaching their highest level since early 2012 and, supported by improved customer management information systems, advisors continue to help customers buy a home based on making the right financial decision for their individual circumstances.

UK Retail received a 5 star Defaqto award for the current account switcher service. This reinforces its commitment to make it easy and simple for customers to switch their current account in preparation for the launch of Industry Switcher in September 2013.
 
 
H1 2013 compared with H1 2012
·
Operating profit increased by £40 million or 4% to £954 million. Impairment losses were lower and income trends improved in the second quarter.
   
·
Customer deposits were 5% higher than 30 June 2012 with both instant access savings and current account balances continuing to grow. Mortgage balances grew marginally, with H1 2013 affected by the completion of the advisor re-training programme. Unsecured lending balances declined 7%, reflecting muted demand from customers and continued consumer deleveraging.
   
·
Net interest income declined by 2%, reflecting lower rates on current account hedges, partly offset by good mortgage income growth mainly due to widening of back book margins. Savings margins improved as market pricing eased, although on new business this was offset by tighter mortgage margins.
   
·
Non-interest income has been adversely affected by changes to the investment advice business following the Retail Distribution Review (RDR) resulting in lower front book advice income.
   
·
Costs remained tightly controlled with continued business focus on efficiency.
 
Staff costs were 16% lower following a headcount reduction of 2,200 as the division continues to streamline processes to improve customer experience.
 
Other direct costs increased due to higher Financial Services Compensation Scheme levy charges.
 
Greater investment in technology drove the increase in indirect costs.
   
·
In addition, the provision relating to historic Payment Protection Insurance (PPI) was increased by £0.2 billion, bringing the total PPI expense to date to £2.4 billion. This expense is not included in operating profit.
   
·
Impairment losses decreased by 43% as a result of lower default levels across all products, reflecting continued improvement in quality.
   
·
Risk-weighted assets fell by 7%, reflecting quality improvements and balance reductions across the unsecured portfolio.

 
29

 

UK Retail (continued)

Key points (continued)

Q2 2013 compared with Q1 2013
·
Operating profit was stable with a 2% increase in income offset by slightly higher costs and impairment losses.
   
·
Mortgage balances declined by 1% as advisor training during Q1 2013 affected mortgage completions. Mortgage application values increased by 72% versus Q1 2013, indicating a strong pipeline of lending which will flow through to completion from Q3 2013 onwards. Customer deposits continued to grow, driving the loan:deposit ratio down to 98%.
   
·
Net interest income increased by 2%, reflecting improved back book mortgage margins and wider savings margins as market pricing eased. These were partly offset by the continuation of lower rates on current account hedges.
   
·
Non-interest income was flat. Strong transactional income from higher debit and credit card volumes was offset by increased regulatory provisions relating to card payment protection. Investment advice income post-RDR remained at subdued levels.
   
·
Costs increased by 2%, mainly due to higher levels of marketing spend and increased investment in technology.
   
·
Impairment losses increased by 11%. Default levels remained broadly flat; however, the level of recoveries on previously defaulted unsecured debt was slightly lower than Q1 2013.

Q2 2013 compared with Q2 2012
·
Operating profit increased by 9% mainly due to lower impairments.
   
·
Net interest income from mortgages increased due to improved back book margins, partially offset by lower rates on current account hedges. Overall net interest income remained flat. Non-interest income was lower, reflecting a decline in investment advice income.
   
·
Total costs were down 1% as a fall in staff costs resulting from lower headcount was partially offset by higher regulatory charges and investment in technology.
   
·
Impairment losses fell by 36%, with improvements in asset quality resulting in lower default volumes.


 
30

 
UK Corporate

 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
 
£m 
£m 
 
£m 
£m 
£m 
             
Income statement
           
Net interest income
1,421 
1,528 
 
715
706 
772 
             
Net fees and commissions
656 
682 
 
335
321 
346 
Other non-interest income
149 
202 
 
92
57 
93 
             
Non-interest income
805 
884 
 
427
378 
439 
             
Total income
2,226 
2,412 
 
1,142
1,084 
1,211 
             
Direct expenses
           
  - staff
(454)
(485)
 
(226)
(228)
(236)
  - other
(218)
(174)
 
(113)
(105)
(89)
Indirect expenses
(422)
(392)
 
(214)
(208)
(193)
             
 
(1,094)
(1,051)
 
(553)
(541)
(518)
             
Profit before impairment losses
1,132 
1,361 
 
589
543 
693 
Impairment losses
(379)
(357)
 
(194)
(185)
(181)
             
Operating profit
753 
1,004 
 
395
358 
512 
             
             
Analysis of income by business
           
Corporate and commercial lending
1,287 
1,351 
 
665
622 
664 
Asset and invoice finance
334 
333 
 
170
164 
171 
Corporate deposits
156 
340 
 
83
73 
174 
Other
449 
388 
 
224
225 
202 
             
Total income
2,226 
2,412 
 
1,142
1,084 
1,211 
             
             
Analysis of impairments by sector
           
Financial institutions
 
(1)
Hotels and restaurants
30 
23 
 
12
18 
Housebuilding and construction
18 
104 
 
6
12 
79 
Manufacturing
13 
19 
 
5
19 
Private sector education, health, social work,
  recreational and community services
69 
43 
 
44
25 
21 
Property
162 
64 
 
93
69 
34 
Wholesale and retail trade, repairs
39 
49 
 
7
32 
16 
Asset and invoice finance
20 
 
5
11 
Shipping
32 
11 
 
24
Other
20 
 
(1)
10 
(18)
             
Total impairment losses
379 
357 
 
194
185 
181 


 
31

 
UK Corporate (continued)

 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
             
Loan impairment charge as % of gross customer
  loans and advances (excluding reverse
  repurchase agreements) by sector
           
Financial institutions
0.1% 
 
(0.1%)
0.2% 
0.1% 
Hotels and restaurants
1.1% 
0.8% 
 
0.9%
1.3% 
0.5% 
Housebuilding and construction
1.2% 
5.9% 
 
0.8%
1.5% 
9.0% 
Manufacturing
0.6% 
0.8% 
 
0.5%
0.7% 
1.6% 
Private sector education, health, social work,
  recreational and community services
1.6% 
1.0% 
 
2.0%
1.1% 
0.9% 
Property
1.3% 
0.5% 
 
1.5%
1.1% 
0.5% 
Wholesale and retail trade, repairs
1.0% 
1.1% 
 
0.3%
1.5% 
0.7% 
Asset and invoice finance
0.1% 
0.4% 
 
0.2%
0.4% 
Shipping
0.9% 
0.3% 
 
1.3%
0.4% 
0.5% 
Other
0.1% 
0.2% 
 
-
0.1% 
(0.3%)
             
Total
0.7% 
0.6% 
 
0.7%
0.7% 
0.7% 

Key metrics
 
Half year ended
 
Quarter ended
 
30 June 
2013 
30 June 
2012 
 
30 June 
2013 
31 March 
2013 
30 June 
2012 
             
Performance ratios
           
Return on equity (1)
11.3% 
16.5% 
 
11.8%
10.7% 
16.8% 
Net interest margin
3.03% 
3.13% 
 
3.05%
3.01% 
3.17% 
Cost:income ratio
49% 
44% 
 
48%
50% 
43% 

Note:
(1)
Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).


 
32

 
UK Corporate (continued)

 
30 June 
2013 
31 March 
2013 
   
31 December 
2012 
 
 
£bn 
£bn 
Change 
 
£bn 
Change 
             
Capital and balance sheet
           
Loans and advances to customers (gross)
           
  - financial institutions
4.6 
5.1 
(10%)
 
5.8 
(21%)
  - hotels and restaurants
5.5 
5.6 
(2%)
 
5.6 
(2%)
  - housebuilding and construction
2.9 
3.1 
(6%)
 
3.4 
(15%)
  - manufacturing
4.4 
4.7 
(6%)
 
4.7 
(6%)
  - private sector education, health, social
    work, recreational and community services
8.7 
8.8 
(1%)
 
8.7 
  - property
24.1 
24.4 
(1%)
 
24.8 
(3%)
  - wholesale and retail trade, repairs
8.2 
8.6 
(5%)
 
8.5 
(4%)
  - asset and invoice finance
11.6 
11.4 
2% 
 
11.2 
4% 
  - shipping
7.3 
7.7 
(5%)
 
7.6 
(4%)
  - other
27.3 
27.4 
 
26.7 
2% 
             
 
104.6 
106.8 
(2%)
 
107.0 
(2%)
Loan impairment provisions
(2.4)
(2.4)
 
(2.4)
             
Net loans and advances to customers
102.2 
104.4 
(2%)
 
104.6 
(2%)
             
Total third party assets
107.6 
109.9 
(2%)
 
110.2 
(2%)
Risk elements in lending
6.2 
5.3 
17
 
5.5 
13
Provision coverage (1)
39% 
45% 
(600bp)
 
45% 
(600bp)
             
Customer deposits
126.2 
123.9 
2% 
 
127.1 
(1%)
Loan:deposit ratio (excluding repos)
81% 
84% 
(300bp)
 
82% 
(100bp)
             
Risk-weighted assets
           
  - Credit risk (non-counterparty)
79.7 
78.6 
1% 
 
77.7 
3% 
  - Operational risk
8.4 
8.4 
 
8.6 
(2%)
             
 
88.1 
87.0 
1% 
 
86.3 
2% 

Note:
(1)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

Key points
In 2013, UK Corporate has continued to demonstrate its commitment to supporting the UK’s economic recovery through a number of lending and other initiatives.

The division continued its full support of the Funding for Lending (FLS) scheme. Surpassing its original FLS commitment, UK Corporate has now allocated in excess of £3.9 billion of new FLS-related lending to over 23,000 customers, £2.3 billion of which has already been drawn. Mid-sized manufacturers are being offered targeted support, with interest rates reduced by more than 1% in some cases. Small and Medium Enterprise (SME) customers benefited from both lower interest rates and the removal of arrangement fees.

The division has also begun proactively reviewing the business needs of SME customers to understand if they could benefit from the offer of additional facilities. 'Statements of Appetite' have already been issued, to 1,400 customers offering over £1.4 billion of funding. By the end of this year all eligible SME customers will have been reviewed.

 
33

 
UK Corporate (continued)

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

In H1 2013 over 7,000 customers benefited from the Business Banking Enterprise Programme, underlining UK Corporate’s commitment to supporting the communities it operates in. Through its nationwide Start-Up Surgeries, Mobile Business School and Business Academies the Programme offers support and advice to aspiring entrepreneurs, new start-up businesses and established SMEs looking to grow. H1 2013 also saw UK Corporate expand its Two Percent Club nationwide. A high-level networking group, the Two Percent Club aims to help women from 500 UK organisations to achieve senior business roles.

H1 2013 compared with H1 2012
·
After a subdued first quarter, improving income trends in the second quarter helped operating profit for H1 2013 recover to £753 million, albeit down 25% on H1 2012.
   
·
Net interest income was down 7% due to tightening yield curves and dampened lending volumes. In addition, H1 2012 had the benefit from a revision to deferred income recognition of £58 million. Excluding this revision, underlying net interest margin increased as a result of deposit re-pricing, initiated in Q4 2012, and moderately increased asset margins.
   
·
Non-interest income contracted by 9%, including higher equity gains of £23 million offset by lower Markets revenue share income, down £38 million, and higher derivative close-out charges associated with impaired assets of £21 million.
   
·
Expenses were up 4%, reflecting continued investment spend, provisions for customer remediation and an increased share of branch network costs. These have been partially offset by management actions on staff incentives and lower Markets revenue share related costs.
   
·
Impairments were 6% higher as increased specific and latent provisions in the mid-to-large corporate business were substantially offset by reduced individual and collectively assessed provisions in the SME business.
   
·
The loan to deposit ratio improved by 400 basis points with deposit volumes broadly flat and lending volumes down 5% as business demand for credit remains weak.
   
·
Risk-weighted assets increased due to industry-wide regulatory capital model changes applying the slotting approach to real estate and also due to changes to models for the shipping portfolio.


 
34

 
UK Corporate (continued)

Key points (continued)

Q2 2013 compared with Q1 2013
·
Operating profit improved by 10%, reflecting an increase in non-interest income which was partly offset by slightly higher impairments. Return on equity rose from 10.7% to 11.8%.
   
·
Net interest income increased by 1% as a result of management actions taken on deposit and asset re-pricing in order to help mitigate the impact of continued lacklustre loan demand and an additional day in the quarter.
   
·
Non-interest income was up 13%, largely reflecting an equity gain of £20 million and improved transaction services income.
   
·
Expenses increased by 2% due to lower staff incentive cost releases, along with higher SME marketing and customer remediation costs.
   
·
Impairments increased by 5%, driven by a small number of individual cases, partially offset by a modest reduction in collectively assessed provisions.
   
·
Risk elements in lending increased by 17% to £6.2 billion, primarily driven by a small number of legacy commercial real estate and shipping-related exposures.
   
·
Risk-weighted assets increased by 1% due to regulatory capital model changes in shipping, partially offset by a number of assets moving into default.

Q2 2013 compared with Q2 2012
·
Operating profit declined by 23% reflecting the impact of economic factors, mainly interest rate driven, higher allocation of indirect costs and increased customer remediation provisions.
   
·
Net interest income fell by 7%, with the economic factors impacting deposit returns, subdued lending demand and the non-repeat of the deferred income recognition in Q2 2012 of £30 million, partially offset by improved asset margins as a result of re-pricing initiatives.
   
·
Non-interest income declined by 3% as a result of lower Markets revenue share and higher derivative close out charges, partially offset by an equity gain in Q2 2013.
   
·
Expenses increased by 7% as a result of higher customer remediation provisions and an increased share of branch network expenditure, partially offset by lower Markets revenue share related costs.
   
·
Impairments were up 7% due to higher individual and latent provisions partially offset by the releases in collectively assessed provisions.

 
35

 

Wealth