rbs201311016k.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For November 1, 2013
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(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 X
  
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- ________

 
 
The following information was issued as a Company announcement in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

 
 


 
 
Interim Management Statement
 
Q3 2013
 
 

 
 

 
 
Contents
 
 
Page 
   
Highlights
1
Chief Executive's message
4
Relationship with HM Treasury
9
Internal Bad Bank
10
Contacts
13
Presentation of information
14
Summary consolidated results
16
Analysis of results
19
Divisional performance
27
   
Statutory results
66
   
Condensed consolidated income statement
66
Condensed consolidated statement of comprehensive income
67
Condensed consolidated balance sheet
68
Average balance sheet
69
Condensed consolidated statement of changes in equity
72
Notes
74
   
Risk and balance sheet management
89
   
Presentation of information
89
Capital management
89
Capital and leverage ratios
89
Capital resources
90
Risk-weighted assets flow statement
92
Liquidity, funding and related risks
93
Overview
93
Funding sources
94
Liquidity portfolio
95
Basel III liquidity ratios and other metrics
95
Credit risk
96
Loans and related credit metrics
96
Debt securities: IFRS measurement classification by issuer
100
Derivatives
101
Market risk
102
Country risk
104
   
Risk factors
107
   
Additional information
111
   
Share information
111
Statutory results
111
Financial calendar
111
   
Appendix 1 Risk management supplement
  
Appendix 2 Income statement reconciliations and Segmental analysis
  
 
 
 
 
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 and new strategic 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 exposure to political risks and 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: 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 assets to be included in the internal "bad bank" and the disposal of certain other assets and businesses as stated in the new strategic plan or required as part of the State Aid restructuring plan; the achievement of capital and costs reduction targets; ineffective management of capital or changes to capital adequacy or liquidity requirements; 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 and foreign exchange trading activities; 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; 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; 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.
 
 

 
 

 
Highlights
 
RBS announces actions to accelerate capital strengthening and enhance strategic focus
 
Full review of bank to improve customer service reporting February 2014
 
Q3 2013 pre-tax loss £634 million, after £496 million accounting charge for improved own credit
 
Core Tier 1 ratio up to 11.6%, or 9.1% on a fully loaded Basel III basis
 
 
 
 
Highlights
 
Restoring financial strength
 
●
RBS announces management actions to accelerate the building of its capital strength and to enhance its strategic focus on its core UK businesses and its international corporate capabilities.
   
●
The measures will include the creation of an internal "bad bank" to manage the run-down of high risk assets projected to be £38 billion by the end of 2013. The goal is to remove 55-70% of these assets over the next two years. While there is inevitable uncertainty associated with running down such assets, there is a clear aspiration to remove all these assets from the balance sheet in three years.
   
●
Faster run-down of high risk assets is expected to entail accelerated and increased impairments in Q4 2013 of £4.0 billion to £4.5 billion but the capital impact of this will be neutralised by a commensurate reduction in expected loss capital deductions. The net impact on the current Core Tier 1 ratio is expected to be a reduction of c.10 basis points. However, the new strategy will result in a strengthening of the Group's capital ratios in the medium term.     
   
●
In light of a changing regulatory landscape and other capital headwinds RBS will target a Core Tier 1 ratio of c.11% on a fully loaded Basel III basis by the end of 2015, 200 basis points higher than the current position, rising to 12% or beyond by the end of 2016. 
   
●
The Group will accelerate the divestment of Citizens, the Group's US banking subsidiary. A partial initial public offering is now planned for 2014 and the Group intends to fully divest the business by the end of 2016.
   
●
RBS's capital strength improved in Q3 2013 as the Group delivered a Core Tier 1 ratio of 11.6%. On a fully loaded Basel III basis Core Tier 1 ratio was 9.1%, up from 8.7% at 30 June 2013.
 
Sharpening our customer focus
 
●
To capture the full potential of its customer businesses RBS is undertaking a comprehensive business review of its:
   
 
○
Customer-facing businesses
 
○
IT and operations
 
○
Organisational and decision-making structures
   
●
The review will aim to improve the bank's performance and effectiveness in serving its customers, shareholders and wider stakeholders. The results of the review will be announced in February 2014 alongside the 2013 annual results. This will include detailed plans to realign the Group's cost base, with a cost:income percentage target in the mid 50s, down from 65% currently.


Highlights
Q3 2013 operating results
 
●
Q3 2013 Core operating profit of £1,283 million was 6% higher than the prior quarter, driven by continuing reductions in impairment losses in Retail & Commercial and an improvement in Markets operating profits. Core operating profit was down 14% from Q3 2012, driven by ongoing strategic contraction of the Markets business, with income down 9% and costs down 4%. Core return on equity was 7.7%.
   
●
Non-Core operating losses of £845 million compared with losses of £281 million in the prior quarter and £586 million in Q3 2012, reflecting exit and restructuring costs as the division saw accelerated disposals and asset run-off, and higher impairment losses.
   
●
Group operating profit(1) was £438 million in Q3 2013, compared with £931 million in Q2 2013 and £909 million in Q3 2012. After one-off items totalling £576 million, including £99 million of regulatory provisions and an additional charge of £250 million for Payment Protection Insurance redress, a pre-tax loss of £138 million was recorded, excluding own credit adjustments.
   
●
Own credit adjustments represented a charge of £496 million, reflecting the strengthening of Group's credit profile during the quarter. After these and a tax charge of £81 million (including a £197 million charge relating to the UK corporation tax change) and preference and other dividends of £102 million, the Group reported a loss attributable to ordinary and B shareholders of £828 million.
   
●
Tangible net asset value at 30 September 2013 was 431 pence per share, with foreign exchange movements accounting for 12 pence of the 14 pence fall since 30 June 2013.
   
●
RBS maintained its strong track record of running off legacy assets, with Non-Core's funded balance sheet down £8 billion to £37 billion, hitting its year-end target three months ahead of schedule. The reshaping of the Markets business also made strong progress, with funded assets down £20 billion to £248 billion and RWAs down £14 billion to £73 billion.
 
Serving our customers
 
●
UK Retail made good progress in the UK mortgage market, with applications up 14% in Q3 2013 from the prior quarter to £6.4 billion and net new lending of £607 million representing the strongest quarterly performance since 2010. Mortgage balances remained strong at £99 billion.
   
·
RBS and NatWest were first to make mortgages available to customers with smaller deposits under the second phase of the UK Government's Help To Buy mortgage guarantee scheme, with strong demand evident in the early days of the scheme's operation. 
   
·
During Q3 2013 UK Retail has simplified pricing on its savings accounts and launched Cashback Plus, which rewards current account holders for using their debit cards in selected retailers.
   
·
The detailed recommendations of Sir Andrew Large's independent review of RBS's lending to SMEs will be addressed in the Group's comprehensive business review, due in February 2014.
   
·
UK Business & Commercial has received a positive response to 10,000 letters sent to advise customers of its appetite to lend to them if they should wish to increase their borrowing or take out new credit. Over £3.8 billion of funding had been offered through these statements of appetite by the end of Q3 2013.
   
·
In Q3 2013 RBS offered more than £15.0 billion of loans and facilities to UK businesses, of which £7.7 billion was to SMEs. In addition, the Group renewed £7.3 billion of UK business overdrafts, including £1.5 billion to SMEs. 
   
·
There have been continuing signs of improving credit demand, with Q3 2013 SME loan and overdraft applications up 6% from Q2 2013.


Highlights
Serving our customers (continued)
 
·
RBS continues to support the Bank of England's Funding for Lending Scheme (FLS). Net lending within the scope of the extended FLS was £273 million in Q3 2013, despite £1,240 million of run-off in Non-Core and commercial real estate portfolios. This compares with a reduction in net lending of £2,793 million in Q2 2013.
   
·
In Q3 2013 Markets helped UK corporates raise £2.4 billion, by acting as bookrunner for debt capital market issues, including £1.0 billion sterling bonds, meeting UK customers' needs in both domestic and international markets.
 
 
Outlook
We see signs that the UK economic recovery is gaining traction and have observed higher levels of activity and confidence among our customers. Nevertheless, we expect a continued muted performance from our core businesses in the short term, due primarily to the continued effects of low interest rates, excess liquidity, a smaller balance sheet, and lower securities gains from our liquidity portfolio. We expect Markets performance in Q4 2013 to reflect normal seasonal trends. Our strategic review will start to drive cost reductions and improve efficiencies from our core businesses during 2014 but will take two to three years to embed.
 
We expect margins to be stable or slightly up, our underlying cost base to be at c.£13 billion for 2013 (excluding penalties and fines). Non-Core is forecast to be below £35 billion of funded assets, well ahead of our recent guidance. Whilst timings are uncertain, conduct and litigation charges are expected to continue as we work through the remaining outstanding issues.
 
In light of the new strategy to deal with our high risk assets we expect a significant increase in impairments in Q4 2013 which is likely to result in the Group reporting a substantial loss for the full year. The effect on the Group's Core Tier 1 ratio is however anticipated to be minimal.
 
 
 
Note:
 
(1)
Operating profit before tax, own credit adjustments, Payment Protection Insurance costs, regulatory and legal actions, integration and restructuring costs, gain on redemption of own debt, amortisation of purchased intangible assets, strategic disposals and RFS Holdings minority interest ('operating profit'). Statutory operating loss before tax was £634 million for the quarter ended 30 September 2013.
 
 
 
 
 
Chief Executive's message
This is my first message to you as Chief Executive. I took on the job because I believe we can make this a great bank for our customers. That's also the best way to make RBS an attractive investment and a good place to work for all our employees. As I write today, we still have a long way to travel to achieve all of these goals.
 
We are a bank with a significant international reach but the UK is our home. It accounts for the majority of our income and it's where our reputation for customer service, community support and corporate governance will be won or lost. It is also the place where we have the most opportunity to build long-term shareholder value. We have unique responsibilities to the UK and meeting them will have financial rewards for our business.
 
Our purpose is to serve our customers and to meet more of their financial needs. And we need to find a way to serve them from a more efficient, effective and agile business platform than the one we have today. I will provide full details in February 2014 on how we intend to do this. Today, I want to set out my assessment of our current performance and the management actions we must take on capital and risk to ensure nothing distracts us from the task of making this a great customer bank again.
 
Recent performance
Our third quarter results show the areas where the bank is making progress and those where we still have more to do. I joined RBS just over a year ago because I respect Stephen Hester and admired the work he and his team had done to bring this bank back from the brink. I have seen at first hand both the scale of the challenge they took on and the success they had in what will go down as a remarkable corporate rescue. This has been a major achievement.
 
I know, however, that a balance sheet clean-up does not make a great bank on its own. We have posted our seventh consecutive quarterly operating profit today. But for the most part our improved profitability is driven by a fall in impairments rather than an increase in income. Revenue growth in our main business franchise - UK Retail and Commercial - is not what we would like it to be at this point in our recovery. I'm encouraged that costs are down 8% on last year, but they are still unsustainably high. Our Core Return on Equity was 7.7% in Q3 2013 - down from 8.9% and 9.3% for the full year 2012 and 2011 respectively. We must do better and we can do better.
 
RBS is a very complex business that is difficult for our employees and the outside world to navigate. But the heart of our performance problem is quite easy to understand: we make it too hard for customers to do business with us and too hard for our people to serve those customers well.
 
Our personal customers do only part of their everyday banking with us and there is no reason why we can't do more to support more of our customers' needs. We still receive far too many complaints, often on issues that would never arise if our systems and processes were more effective. We are the biggest backer of small businesses in the UK. Every year we speak to thousands of potential new small business customers but at the moment we don't convert enough of those conversations into actual new loans. And we haven't made the most of the opportunities in our international network by connecting the different parts of our corporate franchise to the needs of our customers. There is a big opportunity here and we are already beginning to seize it. The restructuring of our investment bank to lower its risk profile is in full swing and it is encouraging to see some signs of delivery from the business focus on our corporate and institutional customers.
 
No-one is more frustrated by this gap between our potential and our performance than our own people. I will make turning this situation around the top priority of everyone at RBS. We must become a company that knows what it means to obsess about our customers. This is a fundamental challenge that will involve the whole organisation.


 
Chief Executive's message
Improving our customer performance - February 2014
So realising the full potential of our customer businesses is now our major challenge and opportunity. I am confident that we can do it. The potential I saw in the Retail Bank exists across the other businesses - strong market positions, stable businesses and good staff who are eager to serve the customer better. I have launched a full review of our ongoing businesses that places the needs of our customers at its centre. It will consider three broad areas:
 
 
1)
What can we do to meet more of our customers' needs and make ourselves simple and easy to do business with?
2)
How do our operations and IT systems function for the benefit of customers? How do our core systems help or impede our employees in their work for customers?
3)
How well does RBS work together as an organisation built to serve our customers? What can we do to make life simpler for employees and how can we simplify things so the whole of RBS can be greater than the sum of its parts?
 
The business review will also capture the tough calls on costs where they are needed to improve the performance and effectiveness of the bank. We currently have a cost:income ratio of 65%. That means we only have 35p left from every £1 we earn to invest in making our business better for customers and improving returns for shareholders. Our cost:income percentage needs to be down in the mid 50s. I will announce a new plan for the way the bank serves its customers around the time of our full year results in February 2014. That plan will require full focus from all our people.
 
Good Bank/Bad Bank Review
While everyone at RBS has been working hard for the last five years and the vast bulk of our balance sheet restructuring is now complete, we still have some hard work ahead of us. An important early challenge for me is to resolve the remaining legacy issues that have taken up a lot of the top management's time for the last few years. Without doing so we will not make the most of the plan I will set out in February.
 
Five years ago, our Non-Core assets totalled £258 billion. Through the good bank/bad bank review we have, over the last few months, been working with our major shareholder, the UK Government and their advisers to assess how far we've come in tackling the assets that continue to be a drag on our performance. We have a richer shared understanding of where we are today than we would have if we had not applied the rigour of this process. It is important for investors, regulators, and the management of the company that we have an agreed, robust assessment of our problematic assets.
 
We worked closely with HM Treasury and their advisers and identified a pool of £38 billion that we agreed would be a drag on our performance. These assets consume 20% of our capital and are made up predominantly of the most high risk assets we have in RBS.
 


 
Chief Executive's message
Good Bank/Bad Bank Review (continued)
Through this review it has become clear that the effort, risk and expense involved in the creation of an external bad bank is not justified. The good bank/bad bank review has from the start been carried out in conjunction with the Prudential Regulation Authority (PRA). This has allowed us to address our shared objective of identifying ways in which to strengthen the capital position of the bank, speed up the recovery in our core UK businesses and accelerate the path to privatisation. The options open to the Group have been debated extensively by the Board and the Board has decided that RBS should take the actions we are announcing today.
 
One of the first steps we are taking is to create an internal "bad bank" to manage these assets down so as to release capital. Our goal is to remove between 55% and 70% of these assets over the next two years. While there is inevitable uncertainty associated with running down such assets, we have a clear aspiration to remove all these assets from the balance sheet in three years. Our track record in delivering the Non-Core run-down to date should give everyone confidence that we can deliver on this plan. It will be called RBS Capital Resolution Group and will have strong and transparent governance and disclosure via an oversight committee which reports regularly to the main Board.
 
Disposing of these assets over a shorter timeframe will reduce the value we can expect to recover, and will lead to accelerated and increased impairments. This will result in an immediate reduction in our expected loss capital deduction. The net impact of this on our CT1 capital ratio today is a reduction of c.10 basis points. However, by the end of 2016 we anticipate an incremental £35 billion reduction in RWAs; and a net incremental improvement in our CT1 ratio and a strong improvement in our stressed capital ratio. This is the right thing to do as we sharpen our focus on our customer businesses, which account for over 90% of our assets. 
 
Actions to improve our capital
Great banks have strong liquidity and capital positions. Our liquidity position is already strong without question. I also want to dispel any impression that RBS is travelling light on capital.
 
The Board has decided to lift our capital targets and take new actions in order to meet them. There are three drivers of our decisions:
 
 
1.
You only have to pick up the newspaper every day to know that the sector faces capital risks from the continued cost of litigation and charges for bad conduct with our customers. As we have been disclosing for some time, we are squarely in the mix on some of the issues that have proved expensive elsewhere. The only option is to plan to carry more capital so we can absorb these costs as we work to put things right for customers.
2.
The PRA has established a capital regime which gives it sufficient scope to vary capital requirements based on its assessment of the risk an individual bank poses to the UK financial system. Having completed a consultation period with relevant institutions, the PRA is expected to publish finalised rules for the new capital regime in December 2013. We expect that the PRA will require banks to hold a higher quality of capital in greater amounts and it is therefore prudent that RBS respond in a pro-active manner.
3.
The current pace of momentum in our core businesses means we are not rebuilding capital as quickly as we planned.
 


 
Chief Executive's message
Actions to improve our capital (continued)
There is a range of possible outcomes on the actual capital position at different points in time. It is our prudent judgment that RBS should now be targeting a fully loaded Basel III Core Tier 1 ratio of c.11% by the end of 2015, rising to 12% or beyond by the end of 2016 - an increase of 300 basis points from our current position.
 
In order to meet our new capital targets we are announcing several new actions today:
 
●
We will accelerate our divestment of Citizens with a partial IPO now planned for next year. We plan to fully divest the business by the end of 2016. It is a good business, with the potential to build profitability and its own shareholder base, but it's not one that is an essential element of our strategy. The rationale for the original IPO holds and we envisage secondary sell-downs to complete the process, as we have done successfully with Direct Line Group.
●
Across the business we are intensifying management action to reduce risk-weighted-assets. The creation of our internal bad bank will on its own have a significant positive impact on our capital in the latter period of its rundown. The reduction of risk-weighted assets should position us safely above regulatory requirements and alongside the world's strongest financial institutions.
 
Ulster Bank
Like all of our businesses, Ulster Bank will form part of our February 2014 review.  Subject to regulatory approval, a number of Ulster Bank assets (approximately £9 billion) will be managed by the "bad bank" and run down. But we also need to have full confidence that the rest of the Ulster Bank business is doing all it can for its customers and is playing its part within the wider company.  We need to ensure that we have a viable and sustainable business model for Ulster Bank as part of this review.  It's an important business for the whole island of Ireland and we understand the need to get this right. 
 
Dividend Access Share
We are in advanced discussions with the UK Government about the removal of the Dividend Access Share.  We are making very good progress in dealing with this issue which I know is important to many current and prospective investors in the company.
 
Lending
Today Sir Andrew Large will publish the summary of his review into lending to small and medium-sized businesses, which we commissioned earlier this year. The picture he will paint will not be an entirely comfortable one, but it's one we have to confront. I know that a successful, vibrant, and well-regarded SME bank is central to the overall value and reputation of this company. We must ensure our policies, processes and systems help our people to do the best job they can for customers and shareholders in this area. Our aim is to become the number one bank for SME customer service in the UK - including as measured in a new survey of SMEs by the Federation of Small Businesses and the British Chambers of Commerce - and to grow our lending along the way.
 
We have taken a number of steps to change and improve the way we do business but the Large review will show that there is significantly more we can do to expand our lending to small and medium-sized businesses. More recently, some of our competitors have managed to increase their lending in this area while we continue to contract. The detailed report will be published in one month's time. Its thematic findings are difficult to argue with and we will address all of the detailed issues it raises in the comprehensive business review I mentioned earlier in this letter.
 
 
Chief Executive's message
Conclusion
We now have a shared vision for the bank that includes the Board, our principal prudential regulator and the UK Government. I believe this is beneficial for all of our shareholders. The actions we are announcing today, when complete, will create a less complex, more effective customer business capable of delivering returns that will be attractive to prospective shareholders. They will create a bank that can reward the faith of UK taxpayers and all our investors.
 
RBS has made a lot of progress since 2009. As ever with any long and difficult job, a degree of weariness and even defensiveness has crept in. We have got to move on as a company. The bar has been set at a higher level for RBS than for other UK banks because we were rescued at the public's expense. I have asked all our people to embrace the higher expectations that people have placed on our bank. That's the only way we will build a really great business for our customers, our people and our shareholders. That's my aim.
 
Ross McEwan
 
 
 
Relationship with HM Treasury
Following the Report from the UK Parliamentary Commission on Banking Standards in June 2013, HMT announced its intention to conduct a  "good bank"/"bad bank" review in relation to RBS. Throughout this review, the Group worked closely with HMT and its advisors to consider whether the separation and transfer of a pool of the Group's assets into an external "bad bank" was in the interests of the Group, HMT and the Group's other shareholders. As the review progressed, it became clear that the benefit of removing those assets from the Group to an external bad bank would not justify the effort, risk and expense which such separation would entail.
 
During this process, HMT and the PRA proposed certain actions for consideration by the Board. Key elements of these proposals were already being contemplated by the Board. In conjunction the Group has also been having discussions, initiated by the PRA, in relation to its capital planning and actions which the Group might take to enhance its capital position.
 
Separately, the Group's new executive management team has been reviewing with the Board, and continues to review, the Group's strategy including its business mix, operating structure and cost base. This has included a review of the Group's current capital plan and market guidance with a view to improving the Group's capital strength in the light of potential regulatory changes, conduct and litigation headwinds and other developments which may impact the Group's future capital position.
 
Throughout this period, the Board has met several times to discuss these issues, determine how best to approach them and ultimately to take decisions in the interests of all of the Group's shareholders and other stakeholders in accordance with its statutory duties.  Today's announcements relating to the Group's strategy as well as revised guidance on the Group's capital targets reflect the Board's decisions.
 
 
 
Internal Bad Bank
Background
 
●
In June 2013, in response to a recommendation by the Parliamentary Commission on Banking Standards, the UK Government announced that it would review the case for an  external "bad bank" to deal with RBS's legacy and poorly-performing assets, based on three objectives:
 
○
accelerating the return of RBS to the private sector;
 
○
supporting the British economy; and
 
○
getting best value for the taxpayer.
●
Following this announcement, RBS worked closely with HMT and its advisers and identified a pool of c.£38 billion of assets with particularly high long-term capital intensity and/or potentially volatile outcomes in stressed environments.
   
●
HMT is publishing the results of its own review separately. The review concluded that the effort, risk and expense involved in the creation of an external bad bank could not be justified.
   
●
The options open to the Group for addressing its highest risk assets were reviewed and debated extensively by the Board, which decided to create an internal "bad bank" ('IBB') to manage these assets down so as to release capital. The IBB will bring assets under common management and increase focus on the run down (much as Non-Core does now).
   
●
Based on the July 2013 forecast of the 31 December 2013 balance sheet, c.£38 billion of funded assets were identified (see page 12), which together with associated derivatives, attract c.£116 billion of RWA equivalent. 
   
●
While the IBB is of a similar size to the current Non-Core division, the assets have been selected on a different basis and no direct comparisons can be drawn:
 
○
Non-Core assets were selected in 2009 on the basis of five strategic tests and comprised non-strategic businesses and countries; the lift and drop of entire activities; creditworthy assets and activities with low returns or low growth potential; high or volatile wholesale funding requirements; and assets with credit losses or capital intensity; whereas
 
○
The IBB will comprise assets with potentially volatile outcomes in stressed environments or with long-term capital intensity.
●
The IBB being established to manage these assets will be fully operational on 1 January 2014. It will be separately managed, but within the existing legal and governance structures of the Group including the creation of an IBB oversight board.
   
●
As part of its external reporting, the Group will provide comprehensive and transparent disclosures on the progress of the IBB, including funding and capital employed and released.
   
●
At 31 December 2013, approximately 50% of the portfolio's funded assets are from Non-Core (excluding Ulster Bank), 20% from Ulster Bank (Core and Non-Core) and the remainder are from UK Corporate, International Banking and Markets, most of which are managed by the Global Restructuring Group (GRG). Additional details are set out on page 12.
   
●
Approximately £10 billion to £12 billion of assets currently managed in Non-Core will be returned to relevant Core divisions.
 
   


 
Internal Bad Bank
Impact of the revised strategy
 
●
The IBB will target a reduction of between 55% and 70% of assets by the end of 2015. While there is inevitable uncertainty associated with running down such assets, it is the Group's aspiration to remove most of these assets from the balance sheet in three years. RBS believes that under many of the possible outcomes, and assuming favourable market conditions, no more than 15% of the IBB assets should be left on the RBS balance sheet after 3 years. The IBB is expected to be capital accretive and neutral for shareholder value, taking account of the benefits of a material reduction in the credit risk profile of the Group.
   
●
The new strategy to exit these assets over a shorter timeframe than envisaged in current plans will lead to accelerated and increased impairment losses on the non-performing assets. An estimated £4.0 billion to £4.5 billion is expected to be recognised in Q4 2013.
   
●
At the same time, there will be an immediate reduction in the Group's expected loss capital deduction and a net capital benefit of c.£2 billion to the Group's fully loaded Basel III Common Equity Tier 1 (CET1) capital is expected by the end of 2016. 
   
●
The Group's regulatory stress capital requirements and Pillar 2B stressed loss capital buffer are also expected to be reduced over time.
   
●
The new strategy will also normalise credit metrics, particularly REIL, contributing approximately 50% of the planned reductions in the Group NPL ratio from c.9% to c.3% (the original plan had a reduction to 6% by the end of 2016).
   
●
An additional c.£1 billion of impairments is expected to be incurred during the period 2014 to 2016 on assets which are currently performing.
   
●
Of the total c.£5.0 billion to £5.5 billion of IBB accelerated and increased impairment losses noted above, approximately 50% to 60% were expected in the original plan to be incurred in 2017 or later.
   
●
The cost of disposal of the IBB assets is expected to be in the range of c.£1.5 billion to £2.0 billion over 2014 to 2016. 
   
●
As many of the IBB assets are in Ireland, the tax relief on the losses is expected to be relatively limited.
   
●
Operating and funding costs of the IBB in 2014 to 2016 of c.£1.5 billion are already included in previous Group forecasts.
 
Other aspects
 
●
All numbers are indicative only at this stage.
   
●
The new IBB will formally commence on 1 January 2014 and will be called RBS Capital Resolution Group. For the fourth quarter of 2013 and 2013 as a whole, the Group's results will continue to be reported on the existing basis.
 

 
 
Internal Bad Bank
Estimated funded assets and RWAe of the IBB
Analysis of the estimated funded assets and RWAe of the IBB at 31 December 2013 and the related position at 30 June 2013 (the starting point for the identification of the portfolios of the IBB) are set out below.
 
 
 
31 December 2013
  
30 June 2013
 
Forecast total
  
Non-performing
  
Performing
  
Total
 
Gross 
TPA 
Net 
 TPA 
RWAe 
  
Gross 
TPA 
Net 
 TPA 
RWAe 
  
Gross 
 TPA 
Net 
 TPA 
RWAe 
  
Gross 
 TPA 
Net 
 TPA 
RWAe 
 
£bn 
£bn 
£bn 
  
£bn 
£bn 
£bn 
  
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
                               
Non-Core
                              
  - CRE 
10.4 
8.4 
17.5 
  
7.2 
4.8 
14.2 
  
6.1 
6.1 
13.2 
  
13.3 
10.9 
27.4 
  - Ulster Bank
10.9 
4.6 
15.6 
  
12.5 
5.3 
20.8 
  
- 
- 
- 
  
12.5 
5.3 
20.8 
  - Corporate
4.6 
3.7 
17.1 
  
1.6 
1.0 
3.0 
  
4.8 
4.7 
7.6 
  
6.4 
5.7 
10.6 
  - Asset Finance
2.9 
2.7 
4.8 
  
0.6 
0.4 
1.2 
  
2.4 
2.5 
4.2 
  
3.0 
2.9 
5.4 
  - Markets
4.1 
4.1 
5.8 
  
0.4 
0.3 
0.2 
  
4.6 
4.6 
6.6 
  
5.0 
4.9 
6.8 
                               
Total Non-Core
32.9 
23.5 
60.8 
  
22.3 
11.8 
39.4 
  
17.9 
17.9 
31.6 
  
40.2 
29.7 
71.0 
                               
Core
                              
Ulster Bank
6.2 
4.1 
17.4 
  
5.1 
2.8 
12.9 
  
1.4 
1.4 
5.2 
  
6.5 
4.2 
18.1 
UK Corporate
                              
  - CRE
2.1 
1.8 
5.5 
  
1.5 
1.2 
3.6 
  
1.8 
1.8 
5.7 
  
3.3 
3.0 
9.3 
  - Asset Finance
2.2 
2.2 
5.0 
  
1.0 
1.0 
3.5 
  
1.4 
1.4 
2.5 
  
2.4 
2.4 
6.0 
  - Corporate
1.6 
1.5 
4.1 
  
0.4 
0.3 
0.5 
  
1.4 
1.4 
4.1 
  
1.8 
1.7 
4.6 
                               
Total UK Corporate
5.9 
5.5 
14.6 
  
2.9 
2.5 
7.6 
  
4.6 
4.6 
12.3 
  
7.5 
7.1 
19.9 
International Banking
2.9 
2.6 
7.3 
  
0.9 
0.6 
3.2 
  
2.4 
2.4 
4.8 
  
3.3 
3.0 
8.0 
Markets
2.7 
2.6 
15.5 
  
- 
- 
- 
  
2.8 
2.8 
19.8 
  
2.8 
2.8 
19.8 
                               
Total Core
17.7 
14.8 
54.8 
  
8.9 
5.9 
23.7 
  
11.2 
11.2 
42.1 
  
20.1 
17.1 
65.8 
                               
Total IBB
50.6 
38.3 
115.6 
  
31.2 
17.7 
63.1 
  
29.1 
29.1 
73.7 
  
60.3 
46.8 
136.8 
 
Notes:
 
(1)
The amounts at 31 December 2013 are based on the July 2013 forecast of the 31 December 2013 balance sheet.
(2)
Funded assets or third party assets excluding derivatives (TPA) are shown gross and net of impairment provisions.
(3)
Performing assets are shown gross and net of latent provisions and valuation adjustments.
(4)
RWAs and RWA equivalent (RWAe) are on a fully loaded Basel III basis. RWAe include RWA equivalent of capital deductions.
(5)
Non-Core Ulster Bank predominantly comprises commercial real estate lending (CRE).
(6)
Core Ulster Bank comprises corporate and CRE lending.
 
 
 
Contacts
 
For analyst enquiries:
    
     
Richard O'Connor
Head of Investor Relations
+44 (0) 20 7672 1758
     
     
For media enquiries:
    
     
Group Media Centre
  
+44 (0) 131 523 4205
 
Analysts' and Investor Presentation
The Royal Bank of Scotland Group will be hosting a presentation for analysts and investors following the release of the results for the quarter ended 30 September 2013. This will also be available via a live webcast and audio call. The details are as follows:
 
 
Date:
  
Friday 1 November 2013
Time:
  
9.00 am UK time
Webcast:
  
www.rbs.com/results
Dial in details:
  
International - +44 (0) 1452 568 172
UK Free Call - 0800 694 8082
US Toll Free - 1 866 966 8024
 
* Note: We will take questions from the phone lines and the webcast.
 
Slides
Slides accompanying this presentation will be available on www.rbs.com/results
 
Financial supplement
A financial supplement containing income and balance sheet information for the last nine quarters will be available on www.rbs.com/results
 
 
 
Presentation of information
The financial information on pages 16 to 65 prepared using the Group's accounting policies, shows the underlying performance of the Group on a managed basis which excludes certain one-off and other items. Information is provided in this form to give a better understanding of the results of the Group's operations. Group operating profit/(loss) on this basis excludes:
 
 
·
own credit adjustments;
   
·
Payment Protection Insurance (PPI) costs;
   
·
Interest Rate Hedging Products (IRHP) redress and related costs;
   
·
regulatory and legal actions;
   
·
integration and restructuring costs;
   
·
gain/(loss) on redemption of own debt;
   
·
Asset Protection Scheme (APS);
   
·
amortisation of purchased intangible assets;
   
·
strategic disposals; and
   
·
RFS Holdings minority interest (RFS MI).
 
The ceding of control following the partial disposal of the Group's shareholding in Direct Line Group (DLG) resulted in the Group no longer treating DLG as an operating segment. Consequently, prior period data for 2012 on a managed basis (including disclosures relating to our Core business and segmental analysis) have been restated to exclude DLG. These restatements resulted in a decrease in Group operating profit of £110 million for the quarter ended 30 September 2012 and £285 million for the nine months ended 30 September 2012. They have no impact on the Group's statutory results. For further information on the restatements refer to the announcement dated 24 July 2013, available on www.rbs.com/ir
 
Statutory results
The condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity and related notes presented on pages 66 to 88 inclusive are on a statutory basis. Reconciliations between the managed basis and statutory basis are included in Appendix 2.


 
Presentation of information
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 ceded control. This fulfilled the Group's plan to cede control of DLG by the end of 2013. On 20 September 2013, the Group sold a further 20% of the ordinary shares in DLG which is a further step towards complete disposal by the end of 2014, as required by the European Commission.
 
The Group now holds 28.5% of the issued ordinary share capital of DLG. Consequently, in the 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.
 
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.
 
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 £21 million for the quarter ended 30 September 2012 and £63 million for the nine months ended 30 September 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.
 
 
 
Summary consolidated income statement
for the period ended 30 September 2013
 
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Net interest income
2,783 
2,770 
2,811 
  
8,225 
8,641 
Non-interest income
2,111 
2,677 
2,747 
  
7,277 
8,602 
             
Total income (1)
4,894 
5,447 
5,558 
  
15,502 
17,243 
Operating expenses (2)
(3,286)
(3,399)
(3,473)
  
(10,066)
(10,906)
             
Operating profit before impairment losses (3)
1,608 
2,048 
2,085 
  
5,436 
6,337 
Impairment losses
(1,170)
(1,117)
(1,176)
  
(3,320)
(3,825)
             
Operating profit (3)
438 
931 
909 
  
2,116 
2,512 
Own credit adjustments
(496)
127 
(1,455)
  
(120)
(4,429)
Payment Protection Insurance costs
(250)
(185)
(400)
  
(435)
(660)
Interest Rate Hedging Products redress and          
            
  related costs
- 
- 
- 
  
(50)
- 
Regulatory and legal actions
(99)
(385)
- 
  
(484)
- 
Integration and restructuring costs
(205)
(149)
(229)
  
(476)
(848)
Gain/(loss) on redemption of own debt
13 
242 
(123)
  
204 
454 
Other items
(35)
(33)
(70)
  
(15)
(79)
             
Operating (loss)/profit before tax
(634)
548 
(1,368)
  
740 
(3,050)
Tax charge
(81)
(328)
(3)
  
(759)
(402)
             
(Loss)/profit from continuing operations
(715)
220 
(1,371)
  
(19)
(3,452)
             
(Loss)/profit from discontinued operations, net of tax
            
  - Direct Line Group
- 
- 
62 
  
127 
167 
  - Other
(5)
9 
5 
  
6 
6 
             
(Loss)/profit from discontinued operations,
            
  net of tax
(5)
9 
67 
  
133 
173 
             
(Loss)/profit for the period
(720)
229 
(1,304)
  
114 
(3,279)
Non-controlling interests
(6)
14 
3 
  
(123)
28 
Other owners' dividends
(102)
(101)
(104)
  
(284)
(186)
             
(Loss)/profit attributable to ordinary and
            
  B shareholders
(828)
142 
(1,405)
  
(293)
(3,437)
             
For the notes to this table refer to the following page.
          
 
 
 
Core summary consolidated income statement
for the quarter ended 30 September 2013
 
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Net interest income
2,826 
2,751 
2,732 
  
8,286 
8,450 
Non-interest income
2,187 
2,423 
2,776 
  
6,969 
8,473 
             
Total income (1)
5,013 
5,174 
5,508 
  
15,255 
16,923 
Operating expenses (2)
(3,141)
(3,243)
(3,261)
  
(9,600)
(10,169)
             
Operating profit before impairment losses (3)
1,872 
1,931 
2,247 
  
5,655 
6,754 
Impairment losses
(589)
(719)
(752)
  
(1,908)
(2,305)
             
Operating profit (3)
1,283 
1,212 
1,495 
  
3,747 
4,449 
             
Key metrics
            
             
Core performance ratios
            
  - Net interest margin
2.24%
2.21%
2.15%
  
2.21%
2.15%
  - Cost:income ratio
63%
63%
59%
  
63%
60%
  - Return on equity
7.7%
7.2%
8.8%
  
7.5%
9.2%
  - Adjusted earnings per ordinary and B share
4.0p
5.6p
5.1p
  
14.9p
13.7p
  - Adjusted earnings per ordinary and B share   
            
    assuming a normalised tax rate of 23.25%
            
    (2012 - 24.5%)
7.9p
7.4p
9.3p
  
23.2p
29.0p
 
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 19 to 26.
 
 
Summary consolidated balance sheet
at 30 September 2013
 
 
 
30 September
30 June
31 December
 
2013
2013
2012
 
£m
£m
£m
       
Cash and balances at central banks
87,066 
89,613 
79,290 
Net loans and advances to banks (1,2)
28,206 
30,241 
29,168 
Net loans and advances to customers (1,2)
406,927 
418,792 
430,088 
Reverse repurchase agreements and stock borrowing
95,971 
99,283 
104,830 
Debt securities and equity shares
133,249 
149,625 
172,670 
Settlement balances
18,099 
17,966 
5,741 
Intangible assets
13,742 
13,997 
13,545 
Other assets (3)
22,519 
23,020 
35,060 
       
Funded assets
805,779 
842,537 
870,392 
Derivatives
323,657 
373,692 
441,903 
       
Total assets
1,129,436 
1,216,229 
1,312,295 
       
Bank deposits (2,4)
38,601 
45,287 
57,073 
Customer deposits (2,4)
434,305 
437,097 
433,239 
Repurchase agreements and stock lending
105,384 
123,740 
132,372 
Debt securities in issue
71,781 
79,721 
94,592 
Settlement balances
18,514 
17,207 
5,878 
Short positions
31,020 
27,979 
27,591 
Subordinated liabilities
23,720 
26,538 
26,773 
Other liabilities (3)
18,517 
18,955 
29,996 
       
Liabilities excluding derivatives
741,842 
776,524 
807,514 
Derivatives
319,464 
370,047 
434,333 
       
Total liabilities
1,061,306 
1,146,571 
1,241,847 
Non-controlling interests
462 
475 
1,770 
Owners' equity
67,668 
69,183 
68,678 
       
Total liabilities and equity
1,129,436 
1,216,229 
1,312,295 
       
Memo: Tangible equity (5)
48,634 
49,894 
49,841 
 
Notes:
 
(1)
Excludes reverse repurchase agreements and stock borrowing.
(2)
Excludes disposal groups.
(3)
Includes disposal groups.
(4)
Excludes repurchase agreements and stock lending.
(5)
Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.
 
Key points
 
·
The ongoing reduction in Non-Core assets and strategic reshaping of the Markets balance sheet significantly reduced the Group's funded assets, down by £64.6 billion compared with 31 December 2012.
·
Loans and advances to customers decreased by £23.2 billion, primarily led by the Non-Core and Markets reductions.
·
Debt securities and equity shares were down £39.4 billion, mainly due to the sale of available-for-sale securities as part of the Group's on-going liquidity management, and the focus on balance sheet reduction and capital management in Markets.
·
Bank deposits decreased by £18.5 billion and debt securities in issue decreased by £22.8 billion in line with the overall reduction in the size of the Group's balance sheet and the planned reduction in wholesale funding.
·
Derivative assets and liabilities decreased by £118.2 billion and £114.9 billion respectively, primarily due to decreases in fair values of interest rate contracts driven by upward shifts in interest rate yield curves.
 
 
Analysis of results
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
Net interest income
£m
£m
£m
  
£m
£m
             
Net interest income (1)
2,726 
2,748 
2,804 
  
8,161 
8,641 
             
Average interest-earning assets (1)
539,396 
552,072 
576,833 
  
550,599 
603,240 
             
Net interest margin
            
  - Group
2.01%
2.00%
1.93%
  
1.98%
1.91%
  - Retail & Commercial (2)
2.95%
2.92%
2.91%
  
2.92%
2.92%
  - Non-Core
(0.35%)
0.15%
0.41%
  
(0.15%)
0.32%
             
Notes:
 
(1)
For further analysis and details refer to pages 69 to 71.
(2)
Retail & Commercial (R&C) comprises the UK Retail, UK Corporate, Wealth, International Banking, Ulster Bank and US R&C divisions.
 
Key points
 
Q3 2013 compared with Q2 2013
 
·
Retail & Commercial net interest income increased by £52 million, 2%. Net interest margin rose by 3 basis points as deposit repricing took effect, with asset spreads broadly stable in most R&C businesses.
   
·
Non-Core net interest income decreased by £63 million compared with Q2 2013, which included a one-off interest in suspense recovery of £54 million.
   
·
Group net interest margin (NIM) increased by 1 basis point in Q3 2013. Reduced funding costs in Markets and the margin improvement in R&C were partially offset by the non-repeat of the Non-Core recovery in Q2 2013.
 
Q3 2013 compared with Q3 2012
 
·
Group net interest income decreased by £78 million, 3%, largely due to a decline in interest earning assets, down 6%, partially offset by deposit repricing.
   
·
Group NIM increased by 8 basis points to 2.01%, driven by deposit repricing partially offset by a reduction in higher yielding securities.
   
·
The reduction in rates on rolling current account hedges continued to have a negative impact, though the drag on net interest income has started to diminish.
 
 
 
Analysis of results
 
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
Non-interest income
£m
£m
£m
  
£m
£m
             
Net fees and commissions
1,144 
1,142 
1,191 
  
3,392 
3,746 
Income from trading activities
599 
874 
769 
  
2,489 
2,962 
Other operating income
368 
661 
787 
  
1,396 
1,894 
             
Total non-interest income
2,111 
2,677 
2,747 
  
7,277 
8,602 
 
Key points
 
Q3 2013 compared with Q2 2013
 
·
Income from trading activities was £275 million lower. While Markets income remained steady, with improved results from flow rates trading, Non-Core was a loss of £109 million in Q3 2013 compared with a £134 million gain in Q2 2013 reflecting the exit and restructuring costs on a number of transactions.
   
·
Disposal gains on available-for-sale securities, primarily in Group Treasury, were £251 million lower at £168 million.  
 
Q3 2013 compared with Q3 2012
 
·
Lower non-interest income primarily reflects the targeted reduction in Markets balance sheet and risk-weighted assets.
   
·
The decrease in other operating income reflects lower disposal gains on available-for-sale securities as noted above and lower operating lease income, together with higher Non-Core disposal losses in Q3 2013.
 

 
Analysis of results
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
Operating expenses
£m
£m
£m
  
£m
£m
             
Staff expenses
1,758 
1,764 
1,882 
  
5,343 
5,998 
Premises and equipment
540 
526 
510 
  
1,619 
1,572 
Other
683 
801 
716 
  
2,162 
2,214 
             
Administrative expenses
2,981 
3,091 
3,108 
  
9,124 
9,784 
Depreciation and amortisation
305 
308 
365 
  
942 
1,122 
             
Operating expenses
3,286 
3,399 
3,473 
  
10,066 
10,906 
             
Staff costs as a % of total income
36%
32%
34%
  
34%
35%
Cost:income ratio - Core
63%
63%
59%
  
63%
60%
Cost:income ratio - Group
67%
62%
62%
  
65%
63%
 
 
Key points
 
Q3 2013 compared with Q2 2013
 
·
Staff expenses were £6 million lower, with headcount down by 1,400, principally in UK Retail, Markets and Non-Core. Premises and equipment costs, however, were £14 million higher, as the Group stepped up investment to improve its IT delivery capability.
   
·
Conduct-related costs were £83 million lower, including reduced legal costs in Centre and customer remediation charges in UK Corporate.
   
·
The deterioration in the Group cost:income ratio was principally driven by reduced income in Non-Core. The Core cost:income ratio was stable at 63%.
 
Q3 2013 compared with Q3 2012
 
·
Staff costs were 7% lower, driven by the Markets headcount reductions implemented since Q3 2012. Markets' compensation ratio in the first nine months of the year was 37%, an increase of 1% compared with the same period of 2012.
   
·
The Core cost:income ratio worsened to 63% from 59% in Q3 2012, largely driven by weaker income in Markets.
 


 
 
Analysis of results
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013 
2013 
2012 
  
2013 
2012 
Impairment losses
£m
£m
£m
  
£m
£m
             
Loan impairment losses
1,120 
1,125 
1,183 
  
3,281 
3,913 
Securities
50 
(8)
(7)
  
39 
(88)
             
Group impairment losses
1,170 
1,117 
1,176 
  
3,320 
3,825 
             
Loan impairment losses
            
  - individually assessed
580 
826 
661 
  
2,052 
2,351 
  - collectively assessed
287 
293 
562 
  
1,021 
1,691 
  - latent
253 
15 
(40)
  
217 
(153)
             
Customer loans
1,120 
1,134 
1,183 
  
3,290 
3,889 
Bank loans
- 
(9)
- 
  
(9)
24 
             
Loan impairment losses
1,120 
1,125 
1,183 
  
3,281 
3,913 
             
Core
584 
659 
751 
  
1,842 
2,266 
Non-Core
536 
466 
432 
  
1,439 
1,647 
             
Group
1,120 
1,125 
1,183 
  
3,281 
3,913 
             
Customer loan impairment charge as a % of
            
  gross loans and advances to customers (1)
            
Group
1.0%
1.0%
1.0%
  
1.0%
1.1%
Core
0.6%
0.7%
0.7%
  
0.6%
0.8%
Non-Core
5.2%
4.0%
2.8%
  
4.7%
3.6%
 
Note:
 
(1)
Customer loan impairment charge as a percentage of gross loans and advances to customers excludes reverse repurchase agreements and includes disposal groups.
 
Key points
 
Q3 2013 compared with Q2 2013
 
·
Core Retail & Commercial loan impairments fell by £158 million, or 23%, with charges relating to a small number of large single name cases in International Banking and UK Corporate in Q2 not being repeated. Core Ulster Bank also showed improvements, with a reduction in losses on the mortgage portfolio as arrears formation continued to fall and residential property prices stabilised.
   
·
Non-Core loan impairments were up £70 million to £536 million. The increase primarily related to Ulster Bank's CRE development portfolio. This was partially offset by reduced losses on the UK Corporate portfolio.
 
Q3 2013 compared with Q3 2012
 
·
Core Retail & Commercial loan impairments fell by £238 million or 31%, including a £125 million reduction in Core Ulster Bank, accompanied by significant improvements in UK Retail and UK Corporate.
   
·
Non-Core loan impairments increased by £104 million due to higher impairment charges on commercial real estate loans in the Ulster Bank-originated book, partly offset by continued portfolio run-off.
 
For further details of the Group's exposures and provisioning refer to page 96 and Appendix 1.


 
 
Analysis of results
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
One-off and other items
£m
£m
£m
  
£m
£m
             
Payment Protection Insurance costs
(250)
(185)
(400)
  
(435)
(660)
Interest Rate Hedging Products redress and
            
  related costs
- 
- 
- 
  
(50)
- 
Regulatory and legal actions
(99)
(385)
- 
  
(484)
- 
Integration and restructuring costs
(205)
(149)
(229)
  
(476)
(848)
Gain/(loss) on redemption of own debt
13 
242 
(123)
  
204 
454 
Other items
            
  - Asset Protection Scheme
- 
- 
1 
  
- 
(44)
  - Amortisation of purchased intangible assets
(39)
(38)
(47)
  
(118)
(146)
  - Strategic disposals**
(7)
6 
(23)
  
(7)
129 
  - RFS Holdings minority interest
11 
(1)
(1)
  
110 
(18)
             
 
(576)
(510)
(822)
  
(1,256)
(1,133)
Own credit adjustments*
(496)
127 
(1,455)
  
(120)
(4,429)
             
One-off and other items
(1,072)
(383)
(2,277)
  
(1,376)
(5,562)
             
* Own credit adjustments impact:
            
Income from trading activities
(155)
76 
(435)
  
20 
(1,715)
Other operating income
(341)
51 
(1,020)
  
(140)
(2,714)
             
Own credit adjustments
(496)
127 
(1,455)
  
(120)
(4,429)
             
** Strategic disposals
            
(Loss)/gain on sale and provision for loss on
            
  disposal of investments in:
            
  - Direct Line Group
(13)
- 
- 
  
(13)
- 
  - RBS Aviation Capital
- 
- 
- 
  
- 
197 
  - Other
6 
6 
(23)
  
6 
(68)
             
 
(7)
6 
(23)
  
(7)
129 
 
Key points
The Group does not allocate one-off and other items to individual divisions. However, of the one-off and other items of significance, Regulatory and legal actions of £484 million in the first nine months of 2013 relate predominantly to Markets and Payment Protection Insurance (PPI) costs of £435 million relate mainly to UK Retail. Of the total integration and restructuring costs of £476 million, UK Retail accounts for c.30%, Markets account for c.25%, Centre c.15% and other divisions <10% each.
 
Q3 2013 compared with Q2 2013
 
·
Excluding own credit adjustments (OCA), one-off items totalled £576 million compared with £510 million in Q2. This included £205 million of restructuring charges, principally relating to the strategic reshaping of the Markets division and to streamlining UK Retail operations.
   
·
Regulatory provisions of £99 million were recorded in the quarter. An additional charge of £250 million was booked in respect of PPI redress.
   
·
OCA represented a charge of £496 million as the Group's credit spreads tightened, reversing the OCA credits booked in the first half of the year.
 
Q3 2013 compared with Q3 2012
 
·
The significant reduction in one-off items principally reflected a smaller charge for OCA and lower PPI redress charges.
 


 
 
Analysis of results
 
       
30 September
30 June
31 December
Capital resources and ratios
2013
2013
2012
       
Core Tier 1 capital
£48bn
£48bn
£47bn
Tier 1 capital
£57bn
£58bn
£57bn
Total capital
£67bn
£69bn
£67bn
Risk-weighted assets (RWAs)
£410bn
£436bn
£460bn
Core Tier 1 ratio
11.6%
11.1%
10.3%
Tier 1 ratio
13.8%
13.3%
12.4%
Total capital ratio
16.2%
15.8%
14.5%
 
Key points
 
30 September 2013 compared with 30 June 2013
 
·
The Group's Core Tier 1 ratio strengthened further to 11.6%, driven by a substantial reduction in risk-weighted assets, principally reflecting the strategic reshaping of the Markets division.
   
·
Group RWAs fell by £26 billion to £410 billion. Markets was £14 billion lower, with a reduced balance sheet and declining market risk while Non-Core fell £5 billion. Retail & Commercial RWAs were down £6 billion, largely driven by foreign exchange movements. 
   
·
On a fully loaded Basel III basis, the Core Tier 1 ratio strengthened by 40 basis points to 9.1%, above the Group's year end capital target of over 9%.
 
30 September 2013 compared with 31 December 2012
 
·
The Group's Core Tier 1 ratio was 130 basis points higher at 11.6%. On a fully loaded Basel III basis, the Core Tier 1 ratio was 140 basis points higher.
   
·
Since 31 December 2012, Group RWAs have fallen by £50 billion, with Markets declining by £28 billion and Non-Core £19 billion lower.
   
·
The total capital ratio increased by 170 basis points to 16.2%.
 
 
For further details of the Group's capital resources refer to page 90.


 
 
Analysis of results
 
       
30 September
30 June
31 December
Balance sheet
2013
2013
2012
       
Funded balance sheet (1)
£806bn
£843bn
£870bn
Total assets
£1,129bn
£1,216bn
£1,312bn
Loans and advances to customers (2)
£408bn
£420bn
£432bn
Customer deposits (3)
£434bn
£437bn
£434bn
Loan:deposit ratio - Core (4)
87%
88%
90%
Loan:deposit ratio - Group (4)
94%
96%
100%
Tangible net asset value per ordinary and B share (5)
431p
445p
446p
Tier 1 leverage ratio (6)
14.0x
14.3x
15.0x
Tangible equity leverage ratio (7)
6.1%
6.0%
5.8%
 
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 September 2013 were 87% and 94% respectively (30 June 2013 - 88% and 96%; 31 December 2012 - 90% and 99%)
(5)
Tangible net asset value per ordinary and B share is total tangible equity divided by the number of ordinary shares in issue and the effect of convertible B shares.
(6)
Funded tangible assets divided by total Tier 1 capital. See also Appendix 1 for the regulatory leverage ratio.
(7)
Tangible equity leverage ratio is tangible equity attributable to ordinary and B shareholders divided by funded tangible assets.
 
Key points
 
30 September 2013 compared with 30 June 2013
 
·
The Group's funding position remained strong, reflecting continuing Non-Core run-off and reduced Markets collateral requirements. Total customer deposits declined by only 1% despite tighter pricing.
   
·
Retail & Commercial loans and advances were down £2 billion, as the strength of sterling reduced dollar and euro-denominated balances. UK Corporate property balances declined, offset by growth in International Banking trade finance balances.
   
·
Tangible net asset value per ordinary and B share was 431 pence, with exchange rate movements accounting for 12 pence of the 14 pence fall.
 
30 September 2013 compared with 31 December 2012
 
·
The Group loan:deposit ratio was 94% compared with 100% at the end of 2012. The Group has continued to attract deposits despite tightening its pricing, leaving a significant customer funding surplus as Non-Core loans and advances continue to run off.
   
·
Funded assets fell to £806 billion, a reduction of £64 billion since 31 December 2012, principally reflecting strategic reshaping of Markets and Non-Core run-off.
   
·
The Group's funded balance sheet has been reduced by £757 billion from its worst point, with only £37 billion of Non-Core assets remaining.
 


 
 
Analysis of results
 
       
30 September
30 June
31 December
Funding and liquidity metrics
2013
2013
2012
       
Deposits (1)
£473bn
£482bn
£491bn
Deposits as a percentage of funded balance sheet
59%
57%
56%
Short-term wholesale funding (2)
£35bn
£37bn
£42bn
Wholesale funding (2)
£114bn
£129bn
£150bn
Short-term wholesale funding as a percentage of funded balance sheet
4%
4%
5%
Short-term wholesale funding as a percentage of total wholesale funding
31%
29%
28%
       
Liquidity portfolio
£151bn
£158bn
£147bn
Liquidity portfolio as a percentage of funded balance sheet
19%
19%
17%
Liquidity portfolio as a percentage of short-term wholesale funding
431%
427%
350%
       
Net stable funding ratio
119%
120%
117%
 
Notes:
 
(1)
Excludes repurchase agreements and stock lending and includes disposal groups.
(2)
Excludes derivative collateral.
 
Key points
 
30 September 2013 compared with 30 June 2013
 
·
Short-term wholesale funding fell in the quarter to £35 billion, just 4% of the funded balance sheet.
   
·
The Group's liquidity portfolio was reduced to £151 billion compared with £158 billion at 30 June 2013, but remained flat as a proportion of the total funded balance sheet at 19%.  
 
30 September 2013 compared with 31 December 2012
 
·
Short-term wholesale funding fell by £7 billion in the year-to-date to £35 billion, 4% of the funded balance sheet and 31% of total wholesale funding.
   
·
Liquidity metrics improved during the year-to-date reflecting continuing balance sheet improvements.
 
For further details of the Group's funding and liquidity metrics refer to page 93.
 
 
 
Divisional performance
The operating profit/(loss)(1) of each division is shown below.
 
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Operating profit/(loss) before impairment
            
  losses by division
            
UK Retail
599 
566 
605 
  
1,722 
1,814 
UK Corporate
572 
589 
615 
  
1,704 
1,976 
Wealth
61 
58 
71 
  
180 
197 
International Banking
111 
141 
187 
  
401 
513 
Ulster Bank
72 
98 
87 
  
246 
249 
US Retail & Commercial
201 
206 
244 
  
615 
622 
             
Retail & Commercial
1,616 
1,658 
1,809 
  
4,868 
5,371 
Markets
209 
136 
289 
  
639 
1,385 
Central items
47 
137 
149 
  
148 
(2)
             
Core
1,872 
1,931 
2,247 
  
5,655 
6,754 
Non-Core
(264)
117 
(162)
  
(219)
(417)
             
Group operating profit before impairment losses
1,608 
2,048 
2,085 
  
5,436 
6,337 
             
Impairment losses/(recoveries) by division
            
UK Retail
82 
89 
141 
  
251 
436 
UK Corporate
150 
194 
247 
  
529 
604 
Wealth
1 
2 
8 
  
8 
30 
International Banking
28 
99 
12 
  
182 
74 
Ulster Bank
204 
263 
329 
  
707 
1,046 
US Retail & Commercial
59 
32 
21 
  
110 
68 
             
Retail & Commercial
524 
679 
758 
  
1,787 
2,258 
Markets
(1)
43 
(6)
  
58 
15 
Central items
66 
(3)
- 
  
63 
32 
             
Core
589 
719 
752 
  
1,908 
2,305 
Non-Core
581 
398 
424 
  
1,412 
1,520 
             
Group impairment losses
1,170 
1,117 
1,176 
  
3,320 
3,825 
 
Note:
 
(1)
Operating profit/(loss) before own credit adjustments, Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals and RFS Holdings minority interest.
 


 
 
Divisional performance
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
 
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Operating profit/(loss) by division
            
UK Retail
517 
477 
464 
  
1,471 
1,378 
UK Corporate
422 
395 
368 
  
1,175 
1,372 
Wealth
60 
56 
63 
  
172 
167 
International Banking
83 
42 
175 
  
219 
439 
Ulster Bank
(132)
(165)
(242)
  
(461)
(797)
US Retail & Commercial
142 
174 
223 
  
505 
554 
             
Retail & Commercial
1,092 
979 
1,051 
  
3,081 
3,113 
Markets
210 
93 
295 
  
581 
1,370 
Central items
(19)
140 
149 
  
85 
(34)
             
Core
1,283 
1,212 
1,495 
  
3,747 
4,449 
Non-Core
(845)
(281)
(586)
  
(1,631)
(1,937)
             
Group operating profit
438 
931 
909 
  
2,116 
2,512 
             
             
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
 
2013
2013
2012
  
2013
2012
 
%
%
%
  
%
%
             
Net interest margin by division
            
UK Retail
3.62 
3.56 
3.53 
  
3.56 
3.57 
UK Corporate
3.09 
3.05 
2.99 
  
3.05 
3.08 
Wealth
3.56 
3.41 
3.88 
  
3.51 
3.74 
International Banking
1.47 
1.62 
1.70 
  
1.61 
1.65 
Ulster Bank
1.86 
1.85 
1.92 
  
1.85 
1.87 
US Retail & Commercial
2.99 
2.91 
2.96 
  
2.94 
3.00 
             
Retail & Commercial
2.95 
2.92 
2.91 
  
2.92 
2.92 
Non-Core
(0.35)
0.15 
0.41 
  
(0.15)
0.32 
             
Group net interest margin
2.01 
2.00 
1.93 
  
1.98 
1.91 
 
 
 
 
30 September
30 June
31 December
2013
2013
2012
 
£bn
£bn
£bn
       
Total funded assets by division
      
UK Retail
117.0 
116.1 
117.4 
UK Corporate
107.0 
107.6 
110.2 
Wealth
21.0 
21.3 
21.4 
International Banking
53.3 
51.9 
53.0 
Ulster Bank
29.2 
30.3 
30.6 
US Retail & Commercial
71.4 
74.1 
72.1 
       
Retail & Commercial
398.9 
401.3 
404.7 
Markets
248.2 
267.9 
284.5 
Central items
120.5 
126.9 
110.3 
       
Core
767.6 
796.1 
799.5 
Non-Core
37.3 
45.4 
57.4 
       
 
804.9 
841.5 
856.9 
Direct Line Group
- 
- 
12.7 
RFS Holdings minority interest
0.9 
1.0 
0.8 
       
Group
805.8 
842.5 
870.4 


 
 
Divisional performance
 
 
30 September
30 June
  
31 December
  
2013
2013
2012
 
£bn
£bn
Change
£bn
Change
           
Risk-weighted assets by division
          
UK Retail
44.8 
44.1 
2%
45.7 
(2%)
UK Corporate
87.2 
88.1 
(1%)
86.3 
1%
Wealth
12.1 
12.5 
(3%)
12.3 
(2%)
International Banking
48.4 
49.7 
(3%)
51.9 
(7%)
Ulster Bank
31.8 
33.9 
(6%)
36.1 
(12%)
US Retail & Commercial
56.1 
58.2 
(4%)
56.5 
(1%)
           
Retail & Commercial
280.4 
286.5 
(2%)
288.8 
(3%)
Markets
73.2 
86.8 
(16%)
101.3 
(28%)
Other (primarily Group Treasury)
11.6 
12.3 
(6%)
5.8 
100%
           
Core
365.2 
385.6 
(5%)
395.9 
(8%)
Non-Core
40.9 
46.3 
(12%)
60.4 
(32%)
           
Group before RFS Holdings minority interest
406.1 
431.9 
(6%)
456.3 
(11%)
RFS Holdings minority interest
3.9 
4.1 
(5%)
3.3 
18%
           
Group
410.0 
436.0 
(6%)
459.6 
(11%)
 
 
 
Employee numbers by division
(full time equivalents rounded to the nearest hundred)
30 September
30 June
31 December
2013
2013
2012
       
UK Retail
23,900 
25,300 
26,000 
UK Corporate
13,700 
13,800 
13,300 
Wealth
5,000 
5,100 
5,100 
International Banking
4,800 
4,800 
4,600 
Ulster Bank
4,800 
4,800 
4,500 
US Retail & Commercial
18,300 
18,500 
18,700 
       
Retail & Commercial
70,500 
72,300 
72,200 
Markets
10,900 
11,200 
11,300 
Group Centre
7,300 
6,700 
6,800 
       
Core
88,700 
90,200 
90,300 
Non-Core
1,900 
2,200 
3,100 
       
 
90,600 
92,400 
93,400 
Business Services
29,500 
29,000 
29,100 
Integration and restructuring
200 
300 
500 
       
Group
120,300 
121,700 
123,000 
 
 
UK Retail
      
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
 
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Income statement
            
Net interest income
1,013 
987 
990 
  
2,965 
2,979 
             
Net fees and commissions
243 
215 
231 
  
670 
682 
Other non-interest income
11 
10 
21 
  
35 
78 
             
Non-interest income
254 
225 
252 
  
705 
760 
             
Total income
1,267 
1,212 
1,242 
  
3,670 
3,739 
             
Direct expenses
            
  - staff
(177)
(180)
(201)
  
(535)
(625)
  - other
(137)
(115)
(93)
  
(364)
(282)
Indirect expenses
(354)
(351)
(343)
  
(1,049)
(1,018)
             
 
(668)
(646)
(637)
  
(1,948)
(1,925)
Operating profit before impairment losses
599 
566 
605 
  
1,722 
1,814 
Impairment losses
(82)
(89)
(141)
  
(251)
(436)
             
Operating profit
517 
477 
464 
  
1,471 
1,378 
             
Analysis of income by product
            
Personal advances
233 
220 
230 
  
676 
688 
Personal deposits
125 
124 
158 
  
352 
511 
Mortgages
664 
649 
598 
  
1,941 
1,757 
Cards
213 
210 
218 
  
632 
649 
Other
32 
9 
38 
  
69 
134 
             
Total income
1,267 
1,212 
1,242 
  
3,670 
3,739 
             
Analysis of impairments by sector
            
Mortgages
18 
15 
29 
  
43 
87 
Personal
34 
50 
77 
  
119 
243 
Cards
30 
24 
35 
  
89 
106 
             
Total impairment losses
82 
89 
141 
  
251 
436 
             
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%
0.1%
Personal
1.7%
2.4%
3.5%
  
2.0%
3.6%
Cards
2.1%
1.7%
2.5%
  
2.1%
2.5%
             
Total
0.3%
0.3%
0.5%
  
0.3%
0.5%


 
 
UK Retail
 
Key metrics
            
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratios
            
Return on equity (1)
28.0%
26.1%
23.8%
  
26.5%
23.5%
Net interest margin
3.62%
3.56%
3.53%
  
3.56%
3.57%
Cost:income ratio
53%
53%
51%
  
53%
51%
 
 
 
 
30 September
30 June
    
31 December
  
2013
2013
  
2012
 
£bn
£bn
Change
  
£bn
Change
             
Capital and balance sheet
            
Loans and advances to customers (gross)
            
  - mortgages
98.9 
98.3 
1%
  
99.1 
- 
  - personal
8.1 
8.3 
(2%)
  
8.8 
(8%)
  - cards
5.7 
5.6 
2%
  
5.7 
- 
             
 
112.7 
112.2 
- 
  
113.6 
(1%)
Loan impairment provisions
(2.2)
(2.5)
(12%)
  
(2.6)
(15%)
             
Net loans and advances to customers
110.5 
109.7 
1%
  
111.0 
- 
             
Risk elements in lending
3.8 
4.3 
(12%)
  
4.6 
(17%)
Provision coverage (2)
59%
58%
100bp
  
58%
100bp
             
Customer deposits
            
  - Current accounts
31.5 
31.2 
1%
  
28.9 
9%
  - Savings
81.9 
80.4 
2%
  
78.7 
4%
             
Total customer deposits
113.4 
111.6 
2%
  
107.6 
5%
Assets under management (excluding deposits)
5.9 
5.8 
2%
  
6.0 
(2%)
Loan:deposit ratio (excluding repos)
97%
98%
(100bp)
  
103%
(600bp)
             
Risk-weighted assets (3)
            
  - Credit risk (non-counterparty)
37.0 
36.3 
2%
  
37.9 
(2%)
  - Operational risk
7.8 
7.8 
- 
  
7.8 
- 
             
Total risk-weighted assets
44.8 
44.1 
2%
  
45.7 
(2%)
 
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 work towards being the best retail bank in the UK. In August 2013, it was announced that the division's then CEO, Ross McEwan, would take up the position of RBS Group CEO and a comprehensive internal and external search for his successor commenced. Les Matheson (previously Managing Director of Products and Marketing) has been appointed as interim CEO of UK Retail to lead the business in achieving its goals.
 
The division's newly retrained mortgage advisors continued to make good progress with new mortgage lending, growing application values by a further 14% in Q3 2013 following a 72% rebound in Q2 2013. Completion values increased by 64% following the high volume of applications in Q2 2013. RBS was the first bank to be ready to deliver the second phase of the Government's Help to Buy scheme, launched in early October 2013, and the very strong early response from customers has further reinforced UK Retail's determination to help young people and families across Britain buy their next home. 


 
UK Retail
Key points (continued)
During Q3 2013, the division also continued to focus on making banking simple and easy for customers. The pricing on Cash/Instant Access ISAs was simplified, with fewer interest rate tiers and improved entry level interest rates.
 
Cashback Plus rewarding customers with a cash rebate for using their debit card in selected stores was launched for current account holders in the quarter. This is the first free debit card cashback scheme to launch in the UK, offering something innovative to RBS and NatWest customers. Over 400,000 customers had signed up for Cashback Plus by the end of Q3 2013. In addition, more than one million credit card customers were using the Your Points loyalty scheme by the quarter end, receiving a variety of benefits for transacting on their card. 
 
Q3 2013 compared with Q2 2013
 
·
Operating profit increased by £40 million, or 8%, reflecting good income performance and stable, low levels of impairments.
   
·
Loans and advances to customers increased as mortgage completions rebounded following advisor  retraining during H1 2013. Credit card balances increased slightly, offset by a small decline in personal advances.
   
·
Customer deposit balances increased by 2%, with strong balance growth of 5% in instant access savings products. The volume of new instant access accounts increased by 3% to 7.6 million during the quarter.
   
·
Net interest income was 3% higher.
   
 
○
Savings margins improved slightly as fixed rate products rolled off and strong growth in instant access products continued. This was offset by current account margin decline.
 
○
Mortgage new business margins continued to fall in line with market conditions; however, mortgage volumes increased and overall mortgage book margins remained stable.
·
Non-interest income increased by £29 million as minimal regulatory provisions were taken compared with Q2 2013. Strong transactional income from both debit and credit cards, supported by Cashback Plus and Your Points loyalty schemes respectively also contributed to this increase.
   
·
Direct costs were 6% higher as continued lower staff costs were more than offset by increased non-staff charges.
   
 
○
Direct staff costs declined further as headcount was reduced by 1,400.
 
○
Direct other costs increased due to a higher FSCS levy and other regulatory charges.
 
○
Indirect costs increased due to higher technology investment costs.
·
Impairments were 8% lower, driven by lower customer defaults. Recoveries remained strong across the portfolio of impaired debt.
   
·
Risk elements in lending reduced by £0.5 billion primarily reflecting the write down of unsecured assets and the reclassification of certain mortgage loans.
   
·
Risk-weighted assets increased as a result of volume growth and minor model recalibrations, primarily in mortgages.
 
Q3 2013 compared with Q3 2012
 
·
Operating profit increased by 11% with lower impairment losses and higher income, partly offset by increased costs. 
   
·
Net interest income increased, reflecting higher mortgage balances. Current account balances have grown strongly, however, this has been more than offset by lower rates on hedges.


 
UK Retail
Key points (continued)
 
Q3 2013 compared with Q3 2012 (continued)
 
·
Non-interest income remained broadly flat. Strong transactional income from debit and credit cards, with volumes 10% higher, was offset by lower investment and advice income following the Retail Distribution Review.
   
·
Direct staff costs decreased, reflecting a 3,200 headcount reduction. Other direct costs increased principally due to higher FSCS levies, regulatory charges and increased marketing activity. Indirect costs reflected higher technology investment expenditure.
   
·
Impairments were 42% lower as a result of improved asset quality and significantly lower default volumes.
 
 
 
UK Corporate
      
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Income statement
            
Net interest income
725 
715 
729 
  
2,146 
2,257 
             
Net fees and commissions
328 
335 
334 
  
984 
1,016 
Other non-interest income
59 
92 
75 
  
208 
277 
             
Non-interest income
387 
427 
409 
  
1,192 
1,293 
             
Total income
1,112 
1,142 
1,138 
  
3,338 
3,550 
             
Direct expenses
            
  - staff
(229)
(226)
(229)
  
(683)
(714)
  - other
(90)
(113)
(91)
  
(308)
(265)
Indirect expenses
(221)
(214)
(203)
  
(643)
(595)
             
 
(540)
(553)
(523)
  
(1,634)
(1,574)
             
Operating profit before impairment losses
572 
589 
615 
  
1,704 
1,976 
Impairment losses
(150)
(194)
(247)
  
(529)
(604)
             
Operating profit
422 
395 
368 
  
1,175 
1,372 
             
Analysis of income by business
            
Corporate and commercial lending
631 
665 
613 
  
1,918 
1,964 
Asset and invoice finance
169 
170 
176 
  
503 
509 
Corporate deposits
88 
83 
141 
  
244 
481 
Other
224 
224 
208 
  
673 
596 
             
Total income
1,112 
1,142 
1,138 
  
3,338 
3,550 
             
Analysis of impairments by sector
            
Financial institutions
5 
(1)
8 
  
6 
12 
Hotels and restaurants
7 
12 
6 
  
37 
29 
Housebuilding and construction
9 
6 
14 
  
27 
118 
Manufacturing
17 
5 
20 
  
30 
39 
Private sector education, health, social work,
            
  recreational and community services
36 
44 
(8)
  
105 
35 
Property
41 
93 
117 
  
203 
181 
Wholesale and retail trade, repairs
20 
7 
16 
  
59 
65 
Asset and invoice finance
5 
5 
10 
  
11 
30 
Shipping
(1)
24 
29 
  
31 
40 
Other
11 
(1)
35 
  
20 
55 
             
Total impairment losses
150 
194 
247 
  
529 
604 


 
 
UK Corporate
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Loan impairment charge as % of gross
            
  customer loans and advances (excluding
      
  reverse repurchase agreements) by sector
      
Financial institutions
0.4%
(0.1%)
0.6%
  
0.2%
0.3%
Hotels and restaurants
0.5%
0.9%
0.4%
  
0.9%
0.7%
Housebuilding and construction
1.2%
0.8%
1.6%
  
1.2%
4.5%
Manufacturing
1.6%
0.5%
1.7%
  
0.9%
1.1%
Private sector education, health, social work,
1.7%
2.0%
(0.4%)
    
0.5%
  recreational and community services
  
1.6%
Property
0.7%
1.5%
1.8%
  
1.2%
0.9%
Wholesale and retail trade, repairs
1.0%
0.3%
0.7%
  
0.9%
1.0%
Asset and invoice finance
0.2%
0.2%
0.4%
  
0.1%
0.4%
Shipping
(0.1%)
1.3%
1.5%
  
0.6%
0.7%
Other
0.2%
- 
0.5%
  
0.1%
0.3%
             
Total
0.6%
0.7%
0.9%
  
0.7%
0.7%
             
             
Key metrics
            
 
Quarter ended
  
Nine months ended
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratios
            
Return on equity (1)
12.4%
11.8%
11.9%
  
11.7%
15.0%
Net interest margin
3.09%
3.05%
2.99%
  
3.05%
3.08%
Cost:income ratio
49%
48%
46%
  
49%
44%
 
 
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).
 


 
 
UK Corporate
 
 
30 September
30 June
  
31 December
  
2013
2013
2012
 
£bn
£bn
Change
£bn
Change
           
Capital and balance sheet
          
Loans and advances to customers (gross)
          
  - financial institutions
4.7 
4.6 
2%
5.8 
(19%)
  - hotels and restaurants
5.5 
5.5 
- 
5.6 
(2%)
  - housebuilding and construction
2.9 
2.9 
- 
3.4 
(15%)
  - manufacturing
4.3 
4.4 
(2%)
4.7 
(9%)
  - private sector education, health, social
          
    work, recreational and community services
8.6 
8.7 
(1%)
8.7 
(1%)
  - property
23.1 
24.1 
(4%)
24.8 
(7%)
  - wholesale and retail trade, repairs
8.4 
8.2 
2%
8.5 
(1%)
  - asset and invoice finance
11.6 
11.6 
- 
11.2 
4%
  - shipping
7.0 
7.3 
(4%)
7.6 
(8%)
  - other
27.7 
27.3 
1%
26.7 
4%
           
 
103.8 
104.6 
(1%)
107.0 
(3%)
Loan impairment provisions
(2.3)
(2.4)
(4%)
(2.4)
(4%)
           
Net loans and advances to customers
101.5 
102.2 
(1%)
104.6 
(3%)
           
Total third party assets
107.0 
107.6 
(1%)
110.2 
(3%)
Risk elements in lending
6.0 
6.2 
(3%)
5.5 
9%
Provision coverage (1)
39%
39%
-
45%
(600bp)
           
Customer deposits
124.9 
126.2 
(1%)
127.1 
(2%)
Loan:deposit ratio (excluding repos)
81%
81%
-
82%
(100bp)
           
Risk-weighted assets
          
  - Credit risk (non-counterparty)
78.8 
79.7 
(1%)
77.7 
1%
  - Operational risk
8.4 
8.4 
- 
8.6 
(2%)
           
 
87.2 
88.1 
(1%)
86.3 
1%
 
Note:
 
(1)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
 
Key points
UK Corporate continues to pursue new initiatives to deliver on its commitment to UK businesses and the communities it operates in.
 
As part of the division's concerted effort to support its SME customers, UK Corporate is proactively reviewing the business needs of SME customers to understand if they could benefit from the offer of additional facilities. By the end of September 2013, over 10,000 customers had been identified for additional funding under UK Corporate's 'Statements of Appetite' initiative with over £3.8 billion of funding offered to customers.
 
In Q3 2013 UK Corporate received more lending applications from SME customers than in any other period of 2013. For our larger customers UK Corporate has set aside £1.25 billion of funding for targeted support to housing associations, education sector clients and strategic infrastructure projects.
 
The division has continued to support the government-backed Funding for Lending Scheme (FLS). Surpassing its original FLS commitment, UK Corporate has now allocated in excess of £4.6 billion of new FLS-related lending to over 26,000 customers, £2.9 billion of which has been drawn. Mid-sized manufacturers are being offered targeted support, with interest rates reduced by more than 1% in some cases. SME customers have benefited from both lower interest rates and the removal of arrangement fees.
 


 
UK Corporate
Key points (continued)
In July 2013, RBS announced an independent review by Sir Andrew Large of the lending standards and practices used by RBS and NatWest. The detailed findings of Sir Andrew's report will be addressed in full in the Group's comprehensive business review. UK corporate is committed to adopting a revised strategy and capabilities to enhance support to SMEs and the wider UK economic recovery while maintaining safe and sound lending practices.
 
Over 8,000 members of the public have benefited from UK Corporate's Business Banking Enterprise Programme in 2013. Through its combination of nationwide start-up surgeries, mobile business schools and business academies, the programme offers support and advice to aspiring entrepreneurs, start-up businesses and established SMEs looking to grow.
 
Q3 2013 compared with Q2 2013
 
·
Following growth of 10% in Q2 2013, operating profit increased by a further 7% with a return on equity of 12.4%.
   
·
Net interest income increased by 1%, benefiting from deposit and asset repricing. The additional day in the quarter helped offset the continued impact of lower yields on current accounts.
   
·
Non-interest income declined by 9%, primarily from the non-repeat of an equity gain of £20 million recorded in Q2 2013.
   
·
Total expenses were 2% lower, with no additional customer remediation costs in the quarter.
   
·
Impairments improved by £44 million, or 23%, with fewer significant individual cases in the mid-to-large corporate business.
   
·
Risk-weighted assets were £1 billion lower as reduced asset volumes offset the increase resulting from the implementation of regulatory capital model change for shipping exposures.
 
Q3 2013 compared with Q3 2012
 
·
Operating profit improved by 15%, principally driven by lower impairment charges.
   
·
Net interest income declined by 1% with economic factors affecting deposit returns combined with a 4% reduction in lending volumes, partially offset by the repricing initiatives.
   
·
Non-interest income was down 5%, due to an £18 million reduction in operating lease income (offset by an associated reduction in operating lease depreciation in expenses), lower lending fees and higher derivative close-out costs on impaired assets. These were partially offset by a one-off fair value charge of £25 million recorded on investments in Q3 2012.
   
·
Total expenses were up 3%, reflecting a £15 million increased allocation of branch network costs. Direct costs remained flat with higher investment spend and costs of the lending review, offset by a £14 million reduction in operating lease depreciation.
   
·
Impairments improved by £97 million due to fewer significant individual cases.
   
·
The loan to deposit ratio moved to 81% from 84% in Q3 2012. Lending volumes were down 4% as business demand for credit remained weak, whilst deposits were down 1% reflecting the rebalancing of the Group's liquidity position.
   
·
Risk-weighted assets increased as a result of regulatory capital model changes, in part offset by  reduced asset volumes and movements into default.
 
 
 
Wealth
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Income statement
            
Net interest income
169 
162 
185 
  
500 
542 
             
Net fees and commissions
90 
91 
94 
  
270 
277 
Other non-interest income
12 
19 
13 
  
46 
66 
             
Non-interest income
102 
110 
107 
  
316 
343 
             
Total income
271 
272 
292 
  
816 
885 
             
Direct expenses
            
  - staff
(102)
(110)
(103)
  
(320)
(334)
  - other
(30)
(27)
(43)
  
(81)
(128)
Indirect expenses
(78)
(77)
(75)
  
(235)
(226)
             
 
(210)
(214)
(221)
  
(636)
(688)
             
Operating profit before impairment losses
61 
58 
71 
  
180 
197 
Impairment losses
(1)
(2)
(8)
  
(8)
(30)
             
Operating profit
60 
56 
63 
  
172 
167 
             
Analysis of income
            
Private banking
222 
223 
237 
  
669 
726 
Investments
49 
49 
55 
  
147 
159 
             
Total income
271 
272 
292 
  
816 
885 
             
             
Key metrics
Quarter ended
  
Nine months ended
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratios
            
Return on equity (1)
13.1%
12.1%
13.8%
  
12.4%
12.0%
Net interest margin
3.56%
3.41%
3.88%
  
3.51%
3.74%
Cost:income ratio
77%
79%
76%
  
78%
78%
 
 
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).
 


 
 
Wealth
 
 
30 September
30 June
  
31 December
  
2013
2013
2012
 
£bn
£bn
Change
£bn
Change
           
Capital and balance sheet
          
Loans and advances to customers (gross)
          
  - mortgages
8.7 
8.7 
- 
8.8 
(1%)
  - personal
5.6 
5.7 
(2%)
5.5 
2%
  - other
2.6 
2.7 
(4%)
2.8 
(7%)
           
 
16.9 
17.1 
(1%)
17.1 
(1%)
Loan impairment provisions
(0.1)
(0.1)
- 
(0.1)
- 
           
Net loans and advances to customers
16.8 
17.0 
(1%)
17.0 
(1%)
           
Risk elements in lending
0.3 
0.3 
- 
0.2 
50%
Provision coverage (1)
38%
39%
(100bp)
44%
(600bp)
Assets under management (excluding deposits)
30.5 
31.1 
(2%)
28.9 
6%
Customer deposits
38.1 
38.9 
(2%)
38.9 
(2%)
           
Loan:deposit ratio (excluding repos)
44%
44%
-
44%
-
           
Risk-weighted assets
          
  - Credit risk (non-counterparty)
10.1 
10.6 
(5%)
10.3 
(2%)
  - Market risk
0.1 
- 
100%
0.1 
- 
  - Operational risk
1.9 
1.9 
- 
1.9 
- 
           
 
12.1 
12.5 
(3%)
12.3 
(2%)
 
Note:
 
(1)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
 
Key points
In Q3 2013, Coutts made further progress in implementing its UK strategy. The new advice proposition, post the UK's Retail Distribution Review, has delivered over £2 billion of assets under advice year to date.
 
Coutts continues to streamline client-facing processes and drive greater benefits from its global technology platform. It recently announced a reduction in the London property footprint from 11 buildings to 2 in order to drive further synergies. Good progress continues with the restructuring and investment in the international trust business including the closure of the Berne office in Q3 2013.
 
Q3 2013 compared with Q2 2013
 
·
Operating profit was up £4 million primarily due to lower expenses reflecting the continued focus on cost reduction.
   
·
Income was down £1 million, with a 7% decrease in non-interest income partially offset by a 4% increase in net interest income. The increase in net interest income is a result of Wealth's repricing initiatives on deposits. This follows a reduction in the spread earned on a number of deposit products, reflecting lower Group funding requirements. Lower non-interest income was largely due to lower transactional activity in the international businesses.
   
·
Expenses decreased by 2% reflecting reduced headcount, from efficiency gains following investment in the global platform infrastructure, and a continued focus on discretionary costs.
   
·
Client assets and liabilities managed by the division declined by 2% with a reduction in deposits, following repricing initiatives in the UK, and a reduction in assets under management, due to movements in exchange rates. Lending remained broadly stable.
   
·
Impairments were £1 million lower, as the credit quality of the loan book remained strong.
 


 
Wealth
Key points (continued)
 
Q3 2013 compared with Q3 2012
 
·
Operating profit was down 5% with lower income only partially offset by reduced expenses and impairment losses.
   
·
Net interest income declined by 9%, reflecting lower spreads on a number of deposit products. Non-interest income was 5% lower as market volatility led to a decrease in investment income.
   
·
Expenses fell by 5% due to reduced headcount and continued management of the cost base.
   
·
Client assets and liabilities managed by the division were flat. Lending was stable while deposits declined by 2% as a result of repricing activity in Q3 2013. Assets under management increased by 3% due to net inflows of £1 billion primarily in the international business.
   
·
Impairments were £7 million lower.
 

 
 
International Banking

 
       
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Income statement
            
Net interest income
166 
177 
227 
  
540 
721 
Non-interest income
288 
291 
308 
  
864 
917 
             
Total income
454 
468 
535 
  
1,404 
1,638 
             
Direct expenses
            
  - staff
(137)
(136)
(134)
  
(407)
(477)
  - other
(41)
(34)
(48)
  
(113)
(144)
Indirect expenses
(165)
(157)
(166)
  
(483)
(504)
             
 
(343)
(327)
(348)
  
(1,003)
(1,125)
             
Operating profit before impairment losses
111 
141 
187 
  
401 
513 
Impairment losses
(28)
(99)
(12)
  
(182)
(74)
             
Operating profit
83 
42 
175 
  
219 
439 
             
Of which:
            
Ongoing businesses
83 
42 
171 
  
219 
452 
Run-off businesses
- 
- 
4 
  
- 
(13)
             
Analysis of income by product
            
Cash management
189 
177 
224 
  
553 
738 
Trade finance
77 
71 
76 
  
218 
221 
Loan portfolio
188 
220 
228 
  
632 
658 
             
Ongoing businesses
454 
468 
528 
  
1,403 
1,617 
Run-off businesses
- 
- 
7 
  
1 
21 
             
Total income
454 
468 
535 
  
1,404 
1,638 
             
Analysis of impairments by sector
            
Manufacturing and infrastructure
- 
87 
2 
  
127 
21 
Property and construction
20 
9 
- 
  
15 
7 
Transport and storage
8 
- 
- 
  
32 
(4)
Telecommunications, media and technology
- 
(7)
- 
  
(7)
9 
Banks and financial institutions
- 
- 
12 
  
- 
43 
Other
- 
10 
(2)
  
15 
(2)
             
Total impairment losses
28 
99 
12 
  
182 
74 
             
Loan impairment charge as % of gross
            
  customer loans and advances (excluding
            
  reverse repurchase agreements)
0.3%
1.0%
0.1%
  
0.6%
0.2%


 
 
International Banking
 
 
Key metrics
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratios (ongoing businesses)
            
Return on equity (1)
4.7%
2.3%
10.3%
  
4.1%
9.5%
Net interest margin
1.47%
1.62%
1.70%
  
1.61%
1.65%
Cost:income ratio
76%
70%
65%
  
71%
67%
 
 
 
30 September
30 June
    
31 December
  
2013
2013
  
2012
 
£bn
£bn
Change
  
£bn
Change
             
Capital and balance sheet
            
Loans and advances to customers (gross) (2)
            
  - manufacturing and infrastructure
15.0 
16.6 
(10%)
  
15.8 
(5%)
  - property and construction
2.2 
2.4 
(8%)
  
2.4 
(8%)
  - transport and storage
3.2 
3.5 
(9%)
  
2.5 
28%
  - telecommunications, media and technology
2.3 
1.7 
35%
  
2.2 
5%
  - banks and financial institutions
8.4 
7.7 
9%
  
9.1 
(8%)
  - other
10.8 
8.7 
24%
  
10.2 
6%
             
 
41.9 
40.6 
3%
  
42.2 
(1%)
Loan impairment provisions
(0.3)
(0.4)
(25%)
  
(0.4)
(25%)
             
Net loans and advances to customers
41.6 
40.2 
3%
  
41.8 
- 
Loans and advances to banks
5.5 
5.6 
(2%)
  
4.8 
15%
Securities
2.4 
2.5 
(4%)
  
2.6 
(8%)
Cash and eligible bills
0.3 
0.2 
50%
  
0.5 
(40%)
Other
3.5 
3.4 
3%
  
3.3 
6%
             
Total third party assets (excluding derivatives
            
  mark-to-market)
53.3 
51.9 
3%
  
53.0 
1%
Risk elements in lending
0.5 
0.5 
- 
  
0.4 
25%
Provision coverage (3)
64%
75%
(1,100bp)
  
93%
(2,900bp)
             
Customer deposits (excluding repos)
47.6 
46.0 
3%
  
46.2 
3%
Bank deposits (excluding repos)
5.3 
6.1 
(13%)
  
5.6 
(5%)
Loan:deposit ratio (excluding repos)
87%
87%
-
  
91%
(400bp)
             
Risk-weighted assets
            
  - Credit risk (non-counterparty)
43.7 
45.0 
(3%)
  
46.7 
(6%)
  - Operational risk
4.7 
4.7 
- 
  
5.2 
(10%)
             
 
48.4 
49.7 
(3%)
  
51.9 
(7%)
 
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), for the ongoing businesses.
(2)
Excludes disposal groups.
(3)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
 
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Run-off businesses (1)
            
Total income
- 
- 
7 
  
1 
21 
Direct expenses
- 
- 
(3)
  
(1)
(34)
             
Operating profit/(loss)
- 
- 
4 
  
- 
(13)
 
Note:
 
(1)
Run-off businesses consist of the exited corporate finance business.
 


 
International Banking
 
Key points
International Banking remains focused on serving customers through its country network using its core strengths: debt financing, risk management and transaction services. Business conditions remained difficult during Q3 2013, with persistent low interest rates and broader margin compression. 
 
In Q3 2013, International Banking continued to strengthen its balance sheet. Despite an underlying increase from the ongoing roll out of credit models, the division's risk-weighted assets were down 3% year on year.
 
Q3 2013 compared with Q2 2013
 
·
Operating profit was up £41 million, driven by lower impairments.
   
·
Income decreased by £14 million, or 3%:
 
○
Loan portfolio income was down 15%, with lower net interest income from a smaller portfolio asset base (due to increased repayments by customers actively managing their debt profiles) partially offset by increased revenues from capital management and hedging activities.
 
○
Cash management income was up £12 million, reflecting strategic improvements in the deposit mix.
○
Trade finance was up 8%, driven by loan growth, particularly in Asia.
·
Total expenses increased by £16 million, due to a £6 million increase related to risk management activities and an £8 million increase in indirect costs.
   
·
Impairment losses were £71 million lower than in Q2 2013, which included two large single-name provisions.
   
·
Third party assets were up 3%, reflecting growth in Trade finance as the business continues to grow capital efficient lending. This was partially offset by a lower asset base in the loan portfolio due to increased levels of customer repayments.
   
·
Risk-weighted assets decreased by 3%, partly due to movements in exchange rates.
   
·
Return on equity was 5% compared with 2% in Q2 2013.
 
Q3 2013 compared with Q3 2012
 
·
Operating profit decreased by £92 million as a result of a decline in income and increased impairments, partially offset by lower costs.
   
·
Income was 15% lower:
 
○
Cash management income was down 16% reflecting a decline in three-month LIBOR as well as increased funding costs of liquidity buffer requirements.
 
○
Loan portfolio income was down 18% as a result of a lower asset base, resulting in decreased net interest income year on year.
·
Expenses declined by £5 million,
reflecting continued emphasis on cost control with timely run-off of discontinued business. Tighter management of technology and infrastructure support costs also delivered savings.
   
·
Impairments were £16 million higher primarily due to a single provision in Q3 2013.
   
·
Third party assets declined by 9% following increased levels of customer repayments as customers continued to manage down their debt profile. 
   
·
Risk-weighted assets were down 3%, as management action mitigated credit model increases.
 
 
 

 
Ulster Bank
       
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Income statement
            
Net interest income
154 
154 
163 
  
462 
488 
             
Net fees and commissions
35 
35 
36 
  
104 
109 
Other non-interest income
25 
53 
14 
  
98 
36 
             
Non-interest income
60 
88 
50 
  
202 
145 
             
Total income
214 
242 
213 
  
664 
633 
             
Direct expenses
            
  - staff
(64)
(67)
(54)
  
(188)
(161)
  - other
(15)
(12)
(13)
  
(42)
(35)
Indirect expenses
(63)
(65)
(59)
  
(188)
(188)
             
 
(142)
(144)
(126)
  
(418)
(384)
             
Operating profit before impairment losses
72 
98 
87 
  
246 
249 
Impairment losses
(204)
(263)
(329)
  
(707)
(1,046)
             
Operating loss
(132)
(165)
(242)
  
(461)
(797)
             
Analysis of income by business
            
Corporate
76 
88 
85 
  
246 
275 
Retail
101 
120 
93 
  
310 
267 
Other
37 
34 
35 
  
108 
91 
             
Total income
214 
242 
213 
  
664 
633 
             
Analysis of impairments by sector
            
Mortgages
30 
91 
155 
  
211 
511 
Commercial real estate
            
  - investment
104 
51 
78 
  
201 
169 
  - development
12 
12 
14 
  
38 
38 
Other corporate
51 
111 
75 
  
237 
292 
Other lending
7 
(2)
7 
  
20 
36 
             
Total impairment losses
204 
263 
329 
  
707 
1,046 
             
Loan impairment charge as % of gross
            
  customer loans and advances (excluding
      
  reverse repurchase agreements) by sector
      
Mortgages
0.6%
1.8%
3.3%
  
1.5%
3.6%
Commercial real estate
          
- 
  - investment
11.6%
5.7%
8.7%
  
7.4%
6.3%
  - development
6.9%
6.9%
8.0%
  
7.2%
7.2%
Other corporate
2.8%
5.9%
3.9%
  
4.4%
5.1%
Other lending
2.3%
(0.6%)
2.2%
  
2.2%
3.7%
             
Total
2.6%
3.2%
4.1%
  
3.0%
4.3%


 
 
Ulster Bank
 
Key metrics
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratios
            
Return on equity (1)
(12.0%)
(14.1%)
(20.4%)
  
(13.2%)
(22.0%)
Net interest margin
1.86%
1.85%
1.92%
  
1.85%
1.87%
Cost:income ratio
66%
60%
59%
  
63%
61%
 
 
 
 
30 September
30 June
    
31 December
  
2013
2013
  
2012
 
£bn
£bn
  
Change 
£bn
Change 
             
Capital and balance sheet
            
Loans and advances to customers (gross)
            
Mortgages
19.2 
19.8 
  
(3%)
19.2 
- 
Commercial real estate
            
  - investment
3.6 
3.6 
  
- 
3.6 
- 
  - development
0.7 
0.7 
  
- 
0.7 
- 
Other corporate
7.2 
7.5 
  
(4%)
7.8 
(8%)
Other lending
1.2 
1.3 
  
(8%)
1.3 
(8%)
             
 
31.9 
32.9 
  
(3%)
32.6 
(2%)
Loan impairment provisions
(4.5)
(4.4)
  
2%
(3.9)
15%
             
Net loans and advances to customers
27.4 
28.5 
  
(4%)
28.7 
(5%)
             
Risk elements in lending
            
Mortgages
3.3 
3.4 
  
(3%)
3.1 
6%
Commercial real estate
            
  - investment
2.1 
1.9 
  
11%
1.6 
31%
  - development
0.4 
0.5 
  
(20%)
0.4 
- 
Other corporate
2.5 
2.6 
  
(4%)
2.2 
14%
Other lending
0.2 
0.2 
  
- 
0.2 
- 
             
Total risk elements in lending
8.5 
8.6 
  
(1%)
7.5 
13%
Provision coverage (2)
52%
52%
  
-
52%
-
             
Customer deposits
22.2 
23.1 
  
(4%)
22.1 
- 
Loan:deposit ratio (excluding repos)
123%
123%
  
-
130%
(700bp)
             
Risk-weighted assets
            
  - Credit risk
            
    - non-counterparty
29.6 
31.3 
  
(5%)
33.6 
(12%)
    - counterparty
0.4 
0.6 
  
(33%)
0.6 
(33%)
  - Market risk
0.1 
0.3 
  
(67%)
0.2 
(50%)
  - Operational risk
1.7 
1.7 
  
- 
1.7 
- 
             
 
31.8 
33.9 
  
(6%)
36.1 
(12%)
             
Spot exchange rate - €/£
1.196 
1.169 
    
1.227 
  
 
Notes:
 
(1)
Divisional return on equity is based on divisional operating loss 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.
 


 
Ulster Bank
Key points
Operating results showed further improvement in Q3 2013 primarily due to lower impairment losses. Ulster Bank's investment in programmes to assist customers in financial difficulty has resulted in six consecutive months of declining mortgage arrears and this, coupled with stabilising economic conditions, has driven an improved impairment performance.
 
Ulster Bank is committed to supporting economic recovery across the island of Ireland. The bank continued to re-affirm its commitment to serving customers well, supporting business and giving back to the communities where it operates. A number of new initiatives were delivered in Q3 2013 that demonstrate Ulster Bank's core values.
 
Serving our customers well
 
●
In the quarter, Ulster Bank customers completed 46% of transactions through digital channels. This was supported by further enhancements to mobile services and smart phone apps that allow customers to withdraw money from an ATM without a debit card, make payments using only a mobile number and view up to seven years of transaction history.
   
●
Over 7,000 business customers have registered for the "Anytime for Business" online banking service since its launch in Q2 2013.
   
●
Customers now have access to a customer advisor in real time via Webchat 24 hours a day, 7 days a week.
 
Supporting Enterprise and Communities:
 
●
Working in partnership with others, Ulster Bank provides funding for a range of initiatives such as SmallBusinessCan and BusinessWomenCan to build long-term financial health and employability. During Q3 2013 this was recognised in the National Chambers Ireland Corporate Social Responsibility Awards where Ulster Bank won the Marketplace award for BusinessWomenCan.
   
●
Through the Bank of England and HM Treasury Funding for Lending Scheme Ulster Bank has committed over £100 million of new lending to Northern Ireland businesses.
   
●
The bank's "One Week in June" initiative raised £430,000 for a number of Irish charities through a series of fundraising events involving both staff and customers.
 
Helping customers in financial difficulty
 
●
Ulster Bank has invested strategically in people, systems and a suite of tailored solutions to make it easier for customers to enter into arrangements to stay in their homes and remain economically active. Customers in financial difficulty are continuously encouraged to engage with the bank.
 
Q3 2013 compared with Q2 2013
 
●
Operating results improved by £33 million, or 20%, primarily due to lower impairment losses on the mortgage portfolio reflecting investment in programmes to support customers in arrears.
   
●
Income fell by £28 million in the quarter reflecting a reduced mark-to-market benefit on derivative instruments executed to hedge interest rate basis risk in the mortgage portfolio. Net interest income remained stable at £154 million with net interest margin increasing by 1 basis point to 1.86%.
   
●
Total expenses were £2 million, or 1%, lower, driven by the benefits of cost saving initiatives and the non-recurrence of an impairment charge on own property assets in Q2 2013.
   
●
Impairment losses fell by £59 million, or 22%, with a significant reduction in losses on the mortgage portfolio as residential property prices stabilised. Impairment losses within the corporate portfolio remained elevated with a small number of significant charges on individual counterparty exposures.


 
Ulster Bank
Key points (continued)
 
Q3 2013 compared with Q2 2013 (continued)
 
●
The loan:deposit ratio remained steady at 123%. Loan balances fell by 1% on a constant currency basis reflecting limited new lending due to low levels of demand. Retail and SME deposit balances were stable during the quarter, although total deposit balances declined by 2% on a constant currency basis driven by a reduction in Corporate Term balances.
 
Q3 2013 compared with Q3 2012
 
●
Operating results improved significantly, by £110 million or 45%, driven by lower impairment losses.
   
●
Income was marginally higher at £214 million. Net interest income was down £9 million reflecting a lower return on the bank's capital base coupled with the cost of deposit raising. Net interest margin decreased by 6 basis points to 1.86%. Non-interest income increased by £10 million primarily due to a mark-to-market benefit on derivative instruments.
   
●
Expenses increased by £16 million, or 13%, reflecting further investment in programmes to support customers in financial difficulty, the cost of mandatory change programmes and higher pension charges.
   
●
Impairment losses decreased by £125 million, or 38%, reflecting a reduction in losses on the mortgage portfolio as residential property prices stabilised.
   
●
The progress made during 2012 to strengthen the balance sheet continued into 2013 with deposit balances 6% higher than Q3 2012 on a constant currency basis. As a result, the loan to deposit ratio improved to 123% from 141% at Q3 2012.
   
●
Risk-weighted assets decreased by 9% reflecting a smaller performing loan book and stabilising credit metrics.
 
 
 
 
US Retail & Commercial (£ Sterling)
      
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Income statement
            
Net interest income
493 
473 
488 
  
1,437 
1,467 
             
Net fees and commissions
197 
192 
197 
  
579 
594 
Other non-interest income
66 
86 
95 
  
254 
290 
             
Non-interest income
263 
278 
292 
  
833 
884 
             
Total income
756 
751 
780 
  
2,270 
2,351 
             
Direct expenses
            
  - staff
(264)
(278)
(254)
  
(821)
(786)
  - other
(249)
(231)
(247)
  
(726)
(751)
  - litigation settlement
- 
- 
- 
  
- 
(88)
Indirect expenses
(42)
(36)
(35)
  
(108)
(104)
             
 
(555)
(545)
(536)
  
(1,655)
(1,729)
             
Operating profit before impairment losses
201 
206 
244 
  
615 
622 
Impairment losses
(59)
(32)
(21)
  
(110)
(68)
             
Operating profit
142 
174 
223 
  
505 
554 
             
             
Average exchange rate - US$/£
1.551 
1.536 
1.581 
  
1.543 
1.578 
             
Analysis of income by product
            
Mortgages and home equity
109 
123 
139 
  
358 
406 
Personal lending and cards
106 
104 
101 
  
310 
300 
Retail deposits
197 
189 
213 
  
576 
653 
Commercial lending
175 
167 
144 
  
510 
455 
Commercial deposits
103 
98 
109 
  
303 
333 
Other
66 
70 
74 
  
213 
204 
             
Total income
756 
751 
780 
  
2,270 
2,351 
             
Analysis of impairments by sector
            
Residential mortgages
16 
10 
(5)
  
28 
(3)
Home equity
27 
18 
40 
  
64 
82 
Corporate and commercial
(13)
(11)
(35)
  
(48)
(57)
Other consumer
24 
15 
21 
  
61 
41 
Securities
5 
- 
- 
  
5 
5 
             
Total impairment losses
59 
32 
21 
  
110 
68 
             
Loan impairment charge as % of gross
            
  customer loans and advances (excluding
      
  reverse repurchase agreements) by sector
      
Residential mortgages
1.1%
0.7%
(0.3%)
  
0.6%
(0.1%)
Home equity
0.9%
0.5%
1.2%
  
0.7%
0.8%
Corporate and commercial
(0.2%)
(0.2%)
(0.6%)
  
(0.3%)
(0.3%)
Other consumer
1.1%
0.7%
1.0%
  
0.9%
0.7%
             
Total
0.4%
0.2%
0.2%
  
0.3%
0.2%


 
 
US Retail & Commercial (£ Sterling)
 
 
Key metrics
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratios
            
Return on equity (1)
6.3%
7.7%
9.7%
  
7.4%
8.1%
Adjusted return on equity (2)
6.3%
7.7%
9.7%
  
7.4%
8.8%
Net interest margin
2.99%
2.91%
2.96%
  
2.94%
3.00%
Cost:income ratio
73%
73%
69%
  
73%
74%
Adjusted cost:income ratio (2)
73%
73%
69%
  
73%
71%
 
 
 
 
30 September
30 June
    
31 December
  
2013
2013
  
2012
 
£bn
£bn
Change
  
£bn
Change
             
Capital and balance sheet
            
Loans and advances to customers (gross)
            
  - residential mortgages
5.6 
5.8 
(3%)
  
5.8 
(3%)
  - home equity
12.5 
13.5 
(7%)
  
13.3 
(6%)
  - corporate and commercial
24.1 
25.2 
(4%)
  
23.8 
1%
  - other consumer
8.6 
8.8 
(2%)
  
8.4 
2%
             
 
50.8 
53.3 
(5%)
  
51.3 
(1%)
Loan impairment provisions
(0.3)
(0.3)
- 
  
(0.3)
- 
             
Net loans and advances to customers
50.5 
53.0 
(5%)
  
51.0 
(1%)
             
Total third party assets
71.9 
74.6 
(4%)
  
72.8 
(1%)
Investment securities
12.9 
11.5 
12%
  
12.0 
8%
Risk elements in lending
            
  - retail
0.9 
0.9 
- 
  
0.8 
13%
  - commercial
0.2 
0.2 
- 
  
0.3 
(33%)
             
Total risk elements in lending
1.1 
1.1 
- 
  
1.1 
- 
Provision coverage (3)
25%
23%
200bp
  
25%
-
             
Customer deposits (excluding repos)
58.0 
60.1 
(3%)
  
59.2 
(2%)
Bank deposits (excluding repos)
0.7 
1.6 
(56%)
  
1.8 
(61%)
Loan:deposit ratio (excluding repos)
87%
88%
(100bp)
  
86%
100bp
             
Risk-weighted assets
            
  - Credit risk
            
    - non-counterparty
50.6 
52.7 
(4%)
  
50.8 
- 
    - counterparty
0.6 
0.6 
- 
  
0.8 
(25%)
  - Operational risk
4.9 
4.9 
- 
  
4.9 
- 
             
 
56.1 
58.2 
(4%)
  
56.5 
(1%)
             
Spot exchange rate - US$/£
1.618 
1.520 
    
1.616 
  
 
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)
Excludes the litigation settlement in Q1 2012 and net gain on sale of Visa B shares in Q2 2012.
(3)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
 
Key points
 
●
Performance is described in full in the US dollar-based financial statements set out on pages 50 to 53.
   
●
Sterling strengthened relative to the US dollar during Q3 2013, with the spot rate returning to the year end level.
 
 
 
US Retail & Commercial (US Dollar)
      
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
$m
$m
$m
  
$m
$m
             
Income statement
            
Net interest income
760 
726 
771 
  
2,217 
2,315 
             
Net fees and commissions
302 
295 
313 
  
892 
938 
Other non-interest income
101 
133 
150 
  
392 
457 
             
Non-interest income
403 
428 
463 
  
1,284 
1,395 
             
Total income
1,163 
1,154 
1,234 
  
3,501 
3,710 
             
Direct expenses
            
  - staff
(406)
(428)
(401)
  
(1,267)
(1,240)
  - other
(382)
(356)
(393)
  
(1,119)
(1,187)
  - litigation settlement
- 
- 
- 
  
- 
(138)
Indirect expenses
(65)
(54)
(56)
  
(167)
(164)
             
 
(853)
(838)
(850)
  
(2,553)
(2,729)
             
Operating profit before impairment losses
310 
316 
384 
  
948 
981 
Impairment losses
(91)
(48)
(33)
  
(169)
(107)
             
Operating profit
219 
268 
351 
  
779 
874 
             
Analysis of income by product
            
Mortgages and home equity
168 
189 
219 
  
552 
641 
Personal lending and cards
164 
159 
159 
  
478 
473 
Retail deposits
302 
291 
336 
  
888 
1,029 
Commercial lending
269 
257 
228 
  
787 
718 
Commercial deposits
159 
151 
173 
  
468 
526 
Other
101 
107 
119 
  
328 
323 
             
Total income
1,163 
1,154 
1,234 
  
3,501 
3,710 
             
Analysis of impairments by sector
            
Residential mortgages
24 
16 
(8)
  
43 
(5)
Home equity
43 
27 
64 
  
99 
129 
Corporate and commercial
(21)
(17)
(55)
  
(74)
(89)
Other consumer
38 
22 
32 
  
94 
65 
Securities
7 
- 
- 
  
7 
7 
             
Total impairment losses
91 
48 
33 
  
169 
107 
             
Loan impairment charge as % of gross
            
  customer loans and advances (excluding
      
  reverse repurchase agreements) by sector
      
Residential mortgages
1.1%
0.7%
(0.3%)
  
0.6%
(0.1%)
Home equity
0.9%
0.5%
1.2%
  
0.7%
0.8%
Corporate and commercial
(0.2%)
(0.2%)
(0.6%)
  
(0.3%)
(0.3%)
Other consumer
1.1%
0.7%
1.0%
  
0.9%
0.7%
             
Total
0.4%
0.2%
0.2%
  
0.3%
0.2%


 
 
US Retail & Commercial (US Dollar)
 
Key metrics
            
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratios
            
Return on equity (1)
6.3%
7.7%
9.7%
  
7.4%
8.1%
Adjusted return on equity (2)
6.3%
7.7%
9.7%
  
7.4%
8.8%
Net interest margin
2.99%
2.91%
2.96%
  
2.94%
3.00%
Cost:income ratio
73%
73%
69%
  
73%
74%
Adjusted cost:income ratio (2)
73%
73%
69%
  
73%
71%
 
 
 
 
30 September
30 June
    
31 December
  
 
2013
2013
    
2012
  
 
$bn
$bn
Change
  
$bn
Change
             
Capital and balance sheet
            
Loans and advances to customers (gross)
            
  - residential mortgages
9.1 
8.9 
2%
  
9.4 
(3%)
  - home equity
20.2 
20.4 
(1%)
  
21.5 
(6%)
  - corporate and commercial
39.0 
38.3 
2%
  
38.5 
1%
  - other consumer
13.9 
13.4 
4%
  
13.5 
3%
             
 
82.2 
81.0 
1%
  
82.9 
(1%)
Loan impairment provisions
(0.4)
(0.4)
- 
  
(0.5)
(20%)
             
Net loans and advances to customers
81.8 
80.6 
1%
  
82.4 
(1%)
             
Total third party assets
116.4 
113.3 
3%
  
117.7 
(1%)
Investment securities
20.9 
17.4 
20%
  
19.5 
7%
Risk elements in lending
            
  - retail
1.4 
1.3 
8%
  
1.3 
8%
  - commercial
0.3 
0.4 
(25%)
  
0.6 
(50%)
             
Total risk elements in lending
1.7 
1.7 
- 
  
1.9 
(11%)
Provision coverage (3)
25%
23%
200bp
  
25%
-
             
Customer deposits (excluding repos)
93.9 
91.4 
3%
  
95.6 
(2%)
Bank deposits (excluding repos)
1.1 
2.4 
(54%)
  
2.9 
(62%)
Loan:deposit ratio (excluding repos)
87%
88%
(100bp)
  
86%
100bp
             
Risk-weighted assets
            
  - Credit risk
            
    - non-counterparty
81.9 
79.9 
3%
  
82.0 
- 
    - counterparty
0.9 
1.0 
(10%)
  
1.4 
(36%)
  - Operational risk
8.0 
7.5 
7%
  
7.9 
1%
             
 
90.8 
88.4 
3%
  
91.3 
(1%)
 
Notes:
 
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Excludes the litigation settlement in Q1 2012 and net gain on sale of Visa B shares in Q2 2012.
(3)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
 


 
US Retail & Commercial (US Dollar)
Key points
In Q3 2013, US R&C continued to make progress in developing a differentiated customer proposition across both its consumer and commercial activities. We continue to make significant investments to deliver enhanced products and services to customers, to improve our operating platforms, and to increase efficiency. We have commenced our IPO preparation and are developing and implementing plans to improve operating performance and to prepare for public company readiness.
 
Consumer Banking continued to improve customer service with the installation of an additional 357 intelligent deposit machines in the quarter. Consumer Banking also continued to grow and deepen customer relationships, evidenced by the upward trends in online banking usage and online bill payments. Moreover, our mobile banking application was ranked the "highest customer rated" app on both Android and iOS platforms by Extreme Labs in July 2013.
 
Commercial Banking continued to see results from investments in its value proposition, which is based on thought leadership and product capabilities. Specifically, Q2 2013 Greenwich Middle Market Syndicated Study results versus Q1 2013 showed an increase for client satisfaction, increasing from 66% to 75%, an increase in Lead Relationships as a percentage of customers, increasing from 54% to 59% and an increase in Proactively Provides Advice & Solutions, increasing from 58% to 68%. Our US Middle Market Syndications Bookrunner most recent ranking also improved from #10 in Q1 2013 to #9.
 
Commercial Banking also launched several growth initiatives, including expanding the Mid-Corporate segment nationally as well as growing the Franchise Finance, Lender Finance, Commercial Real Estate and other key industry verticals. While initial efforts have been focused on securing approvals and on-boarding new talent, the initiatives have already led to incremental loan growth. 
 
Q3 2013 compared with Q2 2013
 
·
Operating profit of $219 million was down $49 million, or 18%, largely driven by an increase in impairment losses. A sluggish economic recovery, combined with significant market liquidity resulted in intensified competition in loan markets. Low short-term rates limited net interest margin expansion and the rise in long-term rates dramatically slowed mortgage refinance volumes.   
   
·
Higher rates led us to purchase incremental investment securities of $3.5 billion during the quarter, reversing first half run-off.
   
·
Net interest income was up $34 million, or 5%, due to the larger investment portfolio, commercial loan growth and favourable funding costs. Net interest margin increased by 8 basis points to 2.99%.
   
·
Loans and advances were up 1%. Commercial loans were up 2% despite competition for lending opportunities. Consumer loans were up 1% driven by a strategic initiative to purchase residential mortgages and hold more originations on balance sheet.
   
·
Non-interest income was down $25 million, or 6%, reflecting lower securities gains, down $17 million to $25 million, and mortgage banking fees, down $17 million to $30 million, as refinancing volumes slowed, partially offset by higher commercial banking fee income.


 
US Retail & Commercial (US Dollar)
Key points (continued)
 
Q3 2013 compared with Q2 2013 (continued)
 
·
Direct expenses were broadly in line with Q2 2013 reflecting the phasing of the annual incentive accruals and a seasonal decrease in payroll taxes, largely offset by a lower mortgage servicing rights impairment recapture.
   
·
Impairment losses remained relatively low at $91 million, or 0.4% of loans and advances to customers. The credit environment remained broadly stable in the quarter. The increase in impairment losses was driven by a moderate increase in consumer charge-offs and a lower level of reserve release.
 
Q3 2013 compared with Q3 2012
 
·
Operating profit of $219 million decreased by $132 million, or 38%, largely driven by lower income and an increase in impairment losses. The operating environment and market conditions remained challenging, with intense competition for loans and an extended period of low short-term rates.
   
·
Net interest income was down 1% due to consumer loan run-off and the effect of prevailing economic conditions on asset yields partially offset by commercial loan growth and the benefit of interest rate swaps.
   
·
Loans and advances were flat with strong commercial loan growth of 5% offset by run-off of long-term fixed-rate consumer products.
   
·
Customer deposits were down 3% due to planned run-off of high priced time deposits partially offset by growth achieved in checking balances. Consumer checking balances grew by 4% while small business checking balances grew by 6% over the year.
   
·
Non-interest income was down $60 million, or 13%, reflecting lower mortgage banking fees, down $41 million to $30 million, deposit fees, down $11 million to $130 million, and securities gains, down $27 million to $25 million, partially offset by higher commercial banking fee income.
   
·
Direct expenses were down $6 million, or 1%, reflecting a mortgage servicing rights recapture partially offset by the cost of regulatory compliance and new technology investments.
   
·
The credit environment remained broadly stable over the year. The increase in impairment losses was driven by lower levels of reserve release.
 
 
 

 
Markets
      
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Income statement
            
Net interest income from banking activities
41 
26 
11 
  
97 
67 
             
Net fees and commissions receivable
50 
49 
77 
  
176 
277 
Income from trading activities
730 
747 
933 
  
2,393 
3,398 
Other operating income (net of related funding costs)
13 
- 
21 
  
30 
100 
             
Non-interest income
793 
796 
1,031 
  
2,599 
3,775 
             
Total income
834 
822 
1,042 
  
2,696 
3,842 
             
Direct expenses
            
  - staff
(299)
(301)
(396)
  
(985)
(1,366)
  - other
(148)
(207)
(163)
  
(537)
(515)
Indirect expenses
(178)
(178)
(194)
  
(535)
(576)
             
 
(625)
(686)
(753)
  
(2,057)
(2,457)
             
Operating profit before impairment losses
209 
136 
289 
  
639 
1,385 
Impairment recoveries/(losses)
1 
(43)
6 
  
(58)
(15)
             
Operating profit
210 
93 
295 
  
581 
1,370 
             
Of which:
            
Ongoing businesses (1)
217 
92 
317 
  
563 
1,162 
Run-off and recovery businesses
(7)
1 
(22)
  
18 
208 
             
Analysis of income by product
            
Rates
390 
246 
384 
  
864 
1,599 
Currencies
257 
306 
202 
  
786 
568 
Asset backed products
125 
166 
394 
  
739 
1,153 
Credit markets
187 
152 
178 
  
556 
578 
             
Total income ongoing businesses
959 
870 
1,158 
  
2,945 
3,898 
Inter-divisional revenue share
(162)
(149)
(161)
  
(480)
(539)
Run-off and recovery businesses
37 
101 
45 
  
231 
483 
             
Total income
834 
822 
1,042 
  
2,696 
3,842 
             
Memo - Fixed income and currencies
            
Total income ongoing businesses
959 
870 
1,158 
  
2,945 
3,898 
Less: primary credit markets
(146)
(136)
(113)
  
(433)
(414)
             
Total fixed income and currencies
813 
734 
1,045 
  
2,512 
3,484 
 
Note:
 
(1)
The ongoing businesses include the Rates, Currencies, Asset backed products and Credit markets areas.
 


 
 
Markets
 
 
Key metrics
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratios
            
Return on equity (1)
7.0%
2.8%
7.6%
  
5.9%
11.5%
Cost:income ratio
75%
83%
72%
  
76%
64%
Compensation ratio (2)
36%
37%
38%
  
37%
36%
 
 
 
 
30 September
30 June
    
31 December
  
2013
2013
  
2012
 
£bn
£bn
Change
  
£bn
Change
             
Capital and balance sheet
            
Loans and advances to customers (gross)
24.4 
28.2 
(13%)
  
29.8 
(18%)
Loan impairment provisions
(0.2)
(0.2)
- 
  
(0.2)
- 
             
Net loans and advances to customers
24.2 
28.0 
(14%)
  
29.6 
(18%)
Net loans and advances to banks
15.5 
16.0 
(3%)
  
16.6 
(7%)
Reverse repos
95.6 
98.9 
(3%)
  
103.8 
(8%)
Securities
71.4 
84.9 
(16%)
  
92.4 
(23%)
Cash and eligible bills
19.6 
18.0 
9%
  
30.2 
(35%)
Other
21.9 
22.1 
(1%)
  
11.9 
84%
             
Total third party assets (excluding derivatives
            
  mark-to-market)
248.2 
267.9 
(7%)
  
284.5 
(13%)
Net derivative assets (after netting)
18.6 
21.0 
(11%)
  
21.9 
(15%)
             
Provision coverage (3)
77%
78%
(100bp)
  
77%
-
             
Customer deposits (excluding repos)
25.8 
26.4 
(2%)
  
26.3 
(2%)
Bank deposits (excluding repos)
29.3 
34.0 
(14%)
  
45.4 
(35%)
             
Risk-weighted assets
            
  - Credit risk
            
    - non-counterparty
10.5 
12.5 
(16%)
  
14.0 
(25%)
    - counterparty
26.5 
30.8 
(14%)
  
34.7 
(24%)
  - Market risk
26.4 
33.7 
(22%)
  
36.9 
(28%)
  - Operational risk
9.8 
9.8 
- 
  
15.7 
(38%)
             
 
73.2 
86.8 
(16%)
  
101.3 
(28%)
 
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)
Compensation ratio is based on staff costs as a percentage of total income.
(3)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
 


 
 
Markets
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
Income statement (ongoing business)
£m
£m
£m
  
£m
£m
             
Total income
800 
724 
1,004 
  
2,475 
3,385 
Direct expenses
(408)
(464)
(508)
  
(1,397)
(1,655)
Indirect expenses
(176)
(176)
(192)
  
(528)
(570)
Impairment recoveries
1 
8 
13 
  
13 
2 
             
Operating profit
217 
92 
317 
  
563 
1,162 
             
Performance ratios (ongoing business)
            
             
Return on equity (1)
9.3%
3.6%
10.2%
  
7.4%
12.3%
Cost:income ratio
73%
88%
70%
  
78%
66%
Compensation ratio (2)
34%
38%
36%
  
37%
36%
             
     
30 September
  
30 June
31 December
     
2013
  
2013
2012
Balance sheet (ongoing business)
    
£bn
  
£bn
£bn
           
Total third party assets (excluding derivatives mark-to-market)
  
231.4
  
247.5 
259.3 
Risk-weighted assets
    
56.9
  
68.6 
79.1 
 
 
 
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), for ongoing businesses.
(2)
Compensation ratio is based on staff costs as a percentage of total income.
 
Key points
Markets operating profit recovered in Q3 2013, compared with the prior quarter, despite subdued client activity remaining subdued. The trading performance in the Rates business improved and Credit benefitted from a strong performance in Corporate Debt Capital Markets. Costs were significantly lower than both Q2 2013 and Q3 2012, reflecting headcount reductions and tight control of discretionary expenditure. 
 
Markets continued to focus on reducing its balance sheet and managing risk. Third party assets were £36 billion lower than at 31 December 2012 and risk-weighted assets were down £28 billion, consistent with the previously announced objective of reaching £80 billion Basel III risk-weighted assets by the end of 2014.
 
Q3 2013 compared with Q2 2013
 
·
Operating profit increased by £117 million.  Income improved, despite the summer slowdown, weak recovery in the European economy and uncertainty surrounding the Federal Reserve's tapering of quantitative easing.  Costs fell by 9% and impairment losses were negligible.
   
·
Rates income rebounded following an improved trading performance.
   
·
Currencies continued to perform well.  Spot FX remained strong and FX Options continued to benefit from opportunities in a volatile market, albeit to a lesser extent than in Q2 2013. 
   
·
Asset Backed Products was affected by market expectations of a tapering of the Federal Reserve's programme of quantitative easing and subdued client activity. This, combined with the deliberate balance sheet reduction, resulted in lower income.
   
·
Credit Markets benefited from good levels of activity in Corporate Debt Capital Market income and gains in Flow Credit as credit spreads generally tightened.
   
·
Costs fell by 9%, driven by ongoing cost saving initiatives and a lower level of legal costs.
   
·
Markets continued to make significant progress in reducing the scale of its balance sheet and capital. Third party assets fell by a further £20 billion. Risk-weighted assets also fell, by £14 billion, driven by management action to reduce exposures and mitigate risk.
 


 
Markets
Key points (continued)
 
Q3 2013 compared with Q3 2012
 
·
The strategic repositioning of Markets drove a significant reduction in third party assets and risk-weighted assets.
   
·
Costs fell by 17%, driven by a reduction in headcount of 1,000 and a continued focus on discretionary expenditure.
   
·
Income was lower as Asset Backed Products, in particular, was down due an aggressive reduction in balance sheet deployed by the business coupled with limited demand as the market anticipated a tapering of quantitative easing by the Federal Reserve. This contrasted with Q3 2012, which benefited from a sustained rally as investors searched for yield.
   
·
Rates increased slightly despite the uncertainty surrounding the Federal Reserve's quantitative easing programme and the slow recovery of the European markets.
   
·
Currencies income was up, Spot FX continued to perform well and FX Options benefited from recent volatility in emerging markets currencies.
   
·
Credit Markets benefitted from a stronger performance in Corporate Debt Capital Markets. 
 
 
 
Central items
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Central items not allocated
(19)
140 
149 
  
85 
(34)
 
 
 
Note:
 
(1)
Costs/charges are denoted by brackets.
 
Funding and operating costs have been allocated to operating divisions based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one division.
 
Residual unallocated items relate to volatile corporate items that do not naturally reside within a division.
 
Key points
 
Q3 2013 compared with Q2 2013
 
·
Central items not allocated were a debit of £19 million compared with a credit of £140 million in Q2 2013.
   
·
The movement was primarily due to lower gains of £150 million on disposals of available-for-sale securities, down £205 million compared with Q2 2013, and a one-off impairment charge of £65 million in Q3 2013 in respect of a real estate loan. These reductions were partially offset by a £38 million increase in investment income to £55 million and a £50 million reduction in the charge for litigation and conduct matters to £45 million from £95 million in Q2 2013.
 
Q3 2013 compared with Q3 2012
 
·
Central items not allocated represented a debit of £19 million compared with a credit of £149 million in Q3 2012.
   
·
The movement was primarily due to lower gains of £150 million on disposals of available-for-sale securities, down £314 million compared with Q3 2012, and the one-off impairment charge of £65 million. These were partially offset by lower unallocated costs in Group Treasury, down £63 million, higher investment income, up £55 million, a £30 million reduction in the charge for litigation and conduct matters and the non-repeat of IT incident costs of £50 million in Q3 2012.
 
 

 
Non-Core
      
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Income statement
            
Net interest income
(33)
30 
86 
  
(31)
287 
             
Net fees and commissions
6 
18 
17 
  
44 
77 
(Loss)/income from trading activities
(109)
134 
(203)
  
70 
(604)
Other operating income
            
  - rental income
40 
33 
73 
  
121 
374 
  - other (1)
(23)
58 
77 
  
43 
186 
             
Non-interest income
(86)
243 
(36)
  
278 
33 
             
Total income
(119)
273 
50 
  
247 
320 
             
Direct expenses
            
  - staff
(50)
(55)
(71)
  
(166)
(226)
  - operating lease depreciation
(17)
(14)
(43)
  
(58)
(195)
  - other
(30)
(36)
(30)
  
(94)
(117)
Indirect expenses
(48)
(51)
(68)
  
(148)
(199)
             
 
(145)
(156)
(212)
  
(466)
(737)
             
Operating (loss)/profit before impairment losses
(264)
117 
(162)
  
(219)
(417)
Impairment losses
(581)
(398)
(424)
  
(1,412)
(1,520)
             
Operating loss
(845)
(281)
(586)
  
(1,631)
(1,937)
 
Note:
 
(1)
Includes (losses)/gains on disposals (Q3 2013 - £73 million loss; Q2 2013 - £11 million loss; Q3 2012 - £42 million loss; nine months ended 30 September 2013 - £141 million loss; nine months ended 30 September 2012 - £101 million gain).
 


 
 
Non-Core
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
             
Analysis of (loss)/income by business
            
Banking and portfolios
(84)
152 
91 
  
60 
151 
International businesses
(31)
27 
60 
  
41 
221 
Markets
(4)
94 
(101)
  
146 
(52)
             
Total (loss)/income
(119)
273 
50 
  
247 
320 
             
(Loss)/income from trading activities
            
Monoline exposures
(21)
25 
21 
  
(3)
(170)
Credit derivative product companies
(9)
6 
(199)
  
- 
(206)
Asset-backed products
7 
16 
17 
  
43 
85 
Other credit exotics
13 
- 
16 
  
28 
(33)
Equities
1 
1 
1 
  
2 
3 
Banking book hedges
- 
- 
(14)
  
3 
(36)
Other
(100)
86 
(45)
  
(3)
(247)
             
 
(109)
134 
(203)
  
70 
(604)
             
Impairment losses
            
Banking and portfolios (1)
589 
415 
433 
  
1,445 
1,623 
International businesses
4 
4 
16 
  
10 
41 
Markets
(12)
(21)
(25)
  
(43)
(144)
             
Total impairment losses
581 
398 
424 
  
1,412 
1,520 
             
Loan impairment charge as % of gross
            
  customer loans and advances (excluding
      
  reverse repurchase agreements) (2)
      
Banking and portfolios (3)
5.2%
4.0%
2.8%
  
4.7%
3.6%
International businesses
4.0%
2.0%
4.5%
  
3.3%
3.9%
Markets
- 
- 
0.4%
  
- 
(1.6%)
             
Total
5.2%
4.0%
2.8%
  
4.7%
3.6%
 
 
 
 
Key metrics
            
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
             
Performance ratio
            
Net interest margin
(0.35%)
0.15%
0.41%
  
(0.15%)
0.32%
 
Notes:
 
(1)
Includes Ulster Bank impairment losses of £398 million (Q2 2013 - £189 million; Q3 2012 - £164 million; nine months ended 30 September 2013 - £829 million; nine months ended 30 September 2012 - £619 million).
(2)
Includes disposal groups.
(3)
Ulster Bank - 13.2% (Q2 2013 - 5.9%; Q3 2012 - 5.0%; nine months ended 30 September 2013 - 9.1%; nine months ended 30 September 2012 - 6.3%). Banking and portfolios excluding Ulster Bank - 1.9% (Q2 2013 - 3.3%; Q3 2012 - 2.1%; nine months ended 30 September 2013 - 2.8%; nine months ended 30 September 2012 - 2.8%).
 


 
 
Non-Core
 
 
30 September
30 June
  
31 December
  
2013
2013
2012
 
£bn
£bn
Change
£bn
Change
           
Capital and balance sheet
          
Loans and advances to customers (gross) (1)
40.4 
46.4 
(13%)
55.4 
(27%)
Loan impairment provisions
(11.3)
(11.4)
(1%)
(11.2)
1%
           
Net loans and advances to customers
29.1 
35.0 
(17%)
44.2 
(34%)
           
Total third party assets (excluding derivatives)
37.3 
45.4 
(18%)
57.4 
(35%)
Total third party assets (including derivatives)
41.1 
50.0 
(18%)
63.4 
(35%)
           
Risk elements in lending (1)
19.8 
20.9 
(5%)
21.4 
(7%)
Provision coverage (2)
57%
55%
200bp
52%
500bp
Customer deposits (1)
2.4 
2.7 
(11%)
2.7 
(11%)
           
Risk-weighted assets
          
  - Credit risk
          
    - non-counterparty
29.2 
33.0 
(12%)
45.1 
(35%)
    - counterparty
6.5 
7.8 
(17%)
11.5 
(43%)
  - Market risk
4.0 
4.3 
(7%)
5.4 
(26%)
  - Operational risk
1.2 
1.2 
- 
(1.6)
175%
           
 
40.9 
46.3 
(12%)
60.4 
(32%)
 
Notes:
 
(1)
Excludes disposal groups.
(2)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
 
 
 
 
30 September
30 June
31 December
2013
2013
2012
 
£bn
£bn
£bn
       
Gross customer loans and advances
      
Banking and portfolios
40.0 
45.6 
54.5 
International businesses
0.4 
0.8 
0.9 
       
 
40.4 
46.4 
55.4 
       
Risk-weighted assets
      
Banking and portfolios
36.7 
41.4 
53.3 
International businesses
1.0 
1.4 
2.4 
Markets
3.2 
3.5 
4.7 
       
 
40.9 
46.3 
60.4 
       
Third party assets (excluding derivatives)
      
Banking and portfolios
34.8 
41.1 
51.1 
International businesses
0.4 
0.8 
1.2 
Markets
2.1 
3.5 
5.1 
       
 
37.3 
45.4 
57.4 


 
 
Non-Core
 
Third party assets (excluding derivatives)
          
               
 
30 June
Run-off 
Disposals/ 
Drawings/ 
Impairments 
FX 
30 September
2013
restructuring 
roll overs 
2013
Quarter ended 30 September 2013
£bn
£bn 
£bn 
£bn 
£bn 
£bn 
£bn
               
Commercial real estate
18.3 
(1.1)
(0.5)
- 
(0.5)
(0.2)
16.0 
Corporate
19.9 
(2.0)
(1.0)
0.2 
- 
(0.6)
16.5 
SME
0.5 
(0.1)
- 
- 
- 
- 
0.4 
Retail
3.0 
(0.1)
(0.6)
- 
(0.1)
(0.1)
2.1 
Other
0.2 
- 
- 
- 
- 
- 
0.2 
Markets
3.5 
(0.1)
(1.1)
- 
- 
(0.2)
2.1 
               
Total (excluding derivatives)
45.4 
(3.4)
(3.2)
0.2 
(0.6)
(1.1)
37.3 
               
 
31 March
Run-off 
Disposals/ 
Drawings/ 
Impairments 
FX 
30 June
2013
restructuring 
roll overs 
2013
Quarter ended 30 June 2013
£bn
£bn 
£bn 
£bn 
£bn 
£bn 
£bn
               
Commercial real estate
20.1 
(0.7)
(0.8)
- 
(0.4)
0.1 
18.3 
Corporate
23.9 
(3.1)
(0.9)
0.2 
- 
(0.2)
19.9 
SME
0.8 
(0.1)
(0.2)
- 
- 
- 
0.5 
Retail
3.2 
(0.2)
- 
- 
- 
- 
3.0 
Other
0.3 
(0.1)
- 
- 
- 
- 
0.2 
Markets
4.6 
- 
(1.1)
- 
- 
- 
3.5 
               
Total (excluding derivatives)
52.9 
(4.2)
(3.0)
0.2 
(0.4)
(0.1)
45.4 
               
 
30 June
Run-off 
Disposals/ 
Drawings/ 
Impairments 
FX 
30 September
2012
restructuring 
roll overs 
2012
Quarter ended 30 September 2012
£bn
£bn 
£bn 
£bn 
£bn 
£bn 
£bn
               
Commercial real estate
26.9 
(0.9)
(0.4)
- 
(0.4)
(0.2)
25.0 
Corporate
32.8 
(2.7)
(1.1)
0.4 
- 
(0.4)
29.0 
SME
1.6 
(0.2)
(0.1)
- 
- 
- 
1.3 
Retail
4.0 
(0.1)
- 
- 
- 
(0.1)
3.8 
Other
0.4 
- 
- 
- 
- 
- 
0.4 
Markets
6.4 
(0.2)
(0.6)
0.1 
- 
(0.1)
5.6 
               
Total (excluding derivatives)
72.1 
(4.1)
(2.2)
0.5 
(0.4)
(0.8)
65.1 
 
Note:
 
(1)
Disposals of £0.2 billion have been signed as at 30 September 2013 but are pending completion (30 June 2013 - £0.4 billion; 30 September 2012 - £0.2 billion).
 
 
 
 
30 September
30 June
31 December
2013
2013
2012
Commercial real estate third party assets
£bn
£bn
£bn
       
UK (excluding NI)
5.6 
6.5 
8.9 
Ireland (ROI and NI)
4.7 
5.3 
5.8 
Spain
1.2 
1.4 
1.4 
Rest of Europe
4.0 
4.4 
4.9 
USA
0.5 
0.7 
0.9 
RoW
- 
- 
0.2 
       
Total (excluding derivatives)
16.0 
18.3 
22.1 


 
 
Non-Core
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m
  
£m
£m
Impairment losses by donating division
            
  and sector (1)
            
             
UK Retail
            
Personal
- 
- 
1 
  
(1)
4 
             
Total UK Retail
- 
- 
1 
  
(1)
4 
             
UK Corporate
            
Manufacturing and infrastructure
(3)
(5)
4 
  
(6)
18 
Property and construction
16 
63 
2 
  
139 
80 
Transport
2 
25 
- 
  
36 
14 
Financial institutions
- 
(7)
(13)
  
(8)
(15)
Lombard
2 
2 
11 
  
4 
33 
Other
9 
6 
37 
  
17 
54 
             
Total UK Corporate
26 
84 
41 
  
182 
184 
             
Ulster Bank
            
Commercial real estate
            
  - investment
29 
82 
61 
  
158 
197 
  - development
356 
88 
93 
  
599 
355 
Other corporate
12 
16 
10 
  
66 
61 
Other EMEA
1 
3 
- 
  
6 
6 
             
Total Ulster Bank
398 
189 
164 
  
829 
619 
             
US Retail & Commercial
            
Auto and consumer
15 
15 
10 
  
43 
30 
Cards
- 
- 
(1)
  
- 
3 
SBO/home equity
14 
19 
46 
  
60 
108 
Residential mortgages
5 
1 
10 
  
8 
17 
Commercial real estate
4 
7 
(9)
  
10 
(10)
Commercial and other
1 
- 
(8)
  
(1)
(15)
             
Total US Retail & Commercial
39 
42 
48 
  
120 
133 
             
International Banking
            
Manufacturing and infrastructure
9 
(49)
(5)
  
(43)
- 
Property and construction
92 
124 
205 
  
301 
527 
Transport
(1)
(1)
1 
  
5 
148 
Telecoms, media and technology
1 
1 
- 
  
5 
27 
Financial institutions
(17)
(20)
(19)
  
(47)
(133)
Other
33 
30 
(13)
  
61 
10 
             
Total International Banking
117 
85 
169 
  
282 
579 
             
Other
            
Wealth
- 
(1)
1 
  
- 
1 
Central items
1 
(1)
- 
  
- 
- 
             
Total Other
1 
(2)
1 
  
- 
1 
             
Total impairment losses
581 
398 
424 
  
1,412 
1,520 
 
Note:
 
(1)
Impairment losses include those relating to AFS securities; sector analyses above include allocation of latent impairment charges.
 


 
 
Non-Core
 
 
30 September
30 June
31 December
2013
2013
2012
 
£bn
£bn
£bn
       
Gross loans and advances to customers (excluding reverse
      
  repurchase agreements) by donating division and sector
       
UK Corporate
      
Manufacturing and infrastructure
- 
- 
0.1 
Property and construction
2.2 
2.4 
3.6 
Transport
3.5 
3.7 
3.8 
Financial institutions
- 
0.1 
0.2 
Lombard
0.2 
0.3 
0.4 
Other
0.9 
1.4 
4.2 
       
Total UK Corporate
6.8 
7.9 
12.3 
       
Ulster Bank
      
Commercial real estate
      
  - investment
3.4 
3.4 
3.4 
  - development
7.2 
7.4 
7.6 
Other corporate
1.5 
1.6 
1.6 
Other EMEA
- 
0.3 
0.3 
       
Total Ulster Bank
12.1 
12.7 
12.9 
       
US Retail & Commercial
      
Auto and consumer
0.2 
0.6 
0.6 
SBO/home equity
1.7 
1.9 
2.0 
Residential mortgages
0.3 
0.4 
0.4 
Commercial real estate
0.2 
0.3 
0.4 
Commercial and other
0.1 
0.1 
0.1 
       
Total US Retail & Commercial
2.5 
3.3 
3.5 
       
International Banking
      
Manufacturing and infrastructure
1.6 
2.1 
3.9 
Property and construction
9.2 
10.5 
12.3 
Transport
1.6 
1.4 
1.7 
Telecoms, media and technology
0.7 
0.8 
0.4 
Financial institutions
3.4 
4.3 
4.7 
Other
2.4 
3.2 
3.7 
       
Total International Banking
18.9 
22.3 
26.7 
       
Other
      
Wealth
0.1 
0.1 
- 
Central items
- 
0.1 
- 
       
Total Other
0.1 
0.2 
- 
       
Gross loans and advances to customers (excluding reverse
      
  repurchase agreements)
40.4 
46.4 
55.4 
 
 

 
Non-Core
Key points
Non-Core third party assets fell to £37 billion, a reduction of £8 billion, or 18%, during the quarter and an overall reduction to date of £221 billion, or 86%, since the division was set up. This has been achieved through a mixture of disposals, run-off and impairments. As at 30 September 2013, the Non-Core funded balance sheet was c.5% of the Group's funded balance sheet compared with 21% when the division was created.
 
Q3 2013 compared with Q2 2013
 
·
Third party assets of £37 billion were £8 billion lower, largely reflecting disposals of £3 billion and run-off of £3 billion.
   
·
Risk-weighted assets decreased by £5 billion, driven by disposals and run-off.
   
·
Operating loss of £845 million was £564 million higher, driven by adverse income from trading activities, an increase in impairment losses, a fall in net interest income and higher disposal losses (Q3 2013 - £73 million; Q2 - £11 million).
   
·
Income from trading activities was a loss of £109 million in Q3 2013 compared with a £134 million gain in Q2 2013, reflecting the costs of transactions in Q3 2013.
   
·
Net interest income decreased by £63 million compared with Q2 2013, which included a one-off interest in suspense recovery of interest of £54 million. In addition, Q3 2013 saw a reduction in net interest income of £28 million resulting from a one-off impact on finance leases following the change in the rate of UK corporation tax.
   
·
Headcount declined by 14% to 1,900 reflecting divestment activity and run-off across the business.
   
·
Impairment losses were up £183 million to £581 million. The increase related to Ulster Bank CRE development properties.
 
Q3 2013 compared with Q3 2012
 
·
Third party assets fell by £28 billion, or 43%, largely reflecting run-off of £16 billion and disposals of £12 billion, which also led to a reduction in risk-weighted assets, down £31 billion.
   
·
Operating loss was £259 million higher, with a reduction in income of £169 million and a £157 million increase in impairment losses, partially offset by a reduction in operating expenses of £67 million.
   
·
Total income decreased by £169 million, principally driven by a fall in net interest income of £119 million. Disposal losses were £31 million higher, other operating income was £69 million lower (as Q3 2012 included positive fair value adjustments) and rental income was £33 million lower (driven by rundown of Lombard Vehicle Management). These factors were partially offset by a £94 million decrease in trading losses.
   
·
Net interest income was down £119 million predominantly due to a 32% reduction in interest earning assets as a result of disposals and run-off.
   
·
Trading losses were £94 million lower, principally as a result of restructuring and de-risking activities within the Markets portfolio affecting Q3 2012.
   
·
Since Q3 2012, headcount has been reduced by approximately 1,400, or 42%, reflecting divestment activity and run-off across the business. Expenses have fallen by £67 million, driven by a £21 million reduction in staff costs and £26 million reduction in operating lease depreciation, principally due to the rundown of Lombard Vehicle Management.
   
·
Impairment losses were up £157 million to £581 million primarily in the Ulster Bank CRE portfolio, partly offset by reductions in the International Banking portfolio.
 
 
 
 
Condensed consolidated income statement
for the period ended 30 September 2013
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
 
£m
£m
£m
  
£m
£m
             
Interest receivable
4,207 
4,281 
4,456 
  
12,767 
14,091 
Interest payable
(1,427)
(1,514)
(1,647)
  
(4,550)
(5,462)
             
Net interest income
2,780 
2,767 
2,809 
  
8,217 
8,629 
             
Fees and commissions receivable
1,382 
1,392 
1,400 
  
4,090 
4,335 
Fees and commissions payable
(238)
(250)
(209)
  
(698)
(589)
Income from trading activities
444 
949 
334 
  
2,508 
1,201 
Gain/(loss) on redemption of own debt
13 
242 
(123)
  
204 
454 
Other operating income/(loss)
35 
720 
(252)
  
1,367 
(692)
             
Non-interest income
1,636 
3,053 
1,150 
  
7,471 
4,709 
             
Total income
4,416 
5,820 
3,959 
  
15,688 
13,338 
             
Staff costs
(1,895)
(1,840)
(1,987)
  
(5,622)
(6,532)
Premises and equipment
(544)
(548)
(550)
  
(1,648)
(1,640)
Other administrative expenses
(1,103)
(1,418)
(1,193)
  
(3,284)
(3,087)
Depreciation and amortisation
(338)
(349)
(421)
  
(1,074)
(1,304)
             
Operating expenses
(3,880)
(4,155)
(4,151)
  
(11,628)
(12,563)
             
Profit/(loss) before impairment losses
536 
1,665 
(192)
  
4,060 
775 
Impairment losses
(1,170)
(1,117)
(1,176)
  
(3,320)
(3,825)
             
Operating (loss)/profit before tax
(634)
548 
(1,368)
  
740 
(3,050)
Tax charge
(81)
(328)
(3)
  
(759)
(402)
             
(Loss)/profit from continuing operations
(715)
220 
(1,371)
  
(19)
(3,452)
             
(Loss)/profit from discontinued operations, net of tax
            
  - Direct Line Group
- 
- 
62 
  
127 
167 
  - Other
(5)
9 
5 
  
6 
6 
             
(Loss)/profit from discontinued operations,
            
  net of tax
(5)
9 
67 
  
133 
173 
             
(Loss)/profit for the period
(720)
229 
(1,304)
  
114 
(3,279)
Non-controlling interests
(6)
14 
3 
  
(123)
28 
Preference share and other dividends
(102)
(101)
(104)
  
(284)
(186)
             
(Loss)/profit attributable to ordinary and
            
  B shareholders
(828)
142 
(1,405)
  
(293)
(3,437)
             
Basic and diluted (loss)/earnings per ordinary and B
            
  share from continuing operations
(7.4p)
1.2p
(13.3p)
  
(3.6p)
(32.8p)
             
Basic and diluted (loss)/earnings per ordinary and B
            
  share from continuing and discontinued operations
(7.4p)
1.2p
(12.7p)
  
(2.6p)
(31.3p)
 
 
 
* Restated - see page 75.
 
Note:
 
(1)
In the income statement above, one-off and other items as shown on page 23 are included in the appropriate captions. A reconciliation between the income statement above and the managed view income statement on page 16 is given in Appendix 2 to this announcement.
 
 
 
 
 
Condensed consolidated statement of comprehensive income
for the period ended 30 September 2013
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
 
£m
£m
£m
  
£m
£m
             
(Loss)/profit for the period
 (720)
229 
 (1,304)
  
114 
 (3,279)
             
Items that do not qualify for reclassification
            
Income tax on items that do not qualify for
            
  reclassification
 (163)
- 
 (39)
  
 (163)
 (77)
             
Items that do qualify for reclassification
            
Available-for-sale financial assets
430 
 (1,009)
124 
  
 (303)
715 
Cash flow hedges
 (88)
 (1,502)
437 
  
 (1,624)
1,132 
Currency translation
 (1,211)
113 
 (573)
  
99 
 (1,069)
Income tax on items that do qualify for reclassification
85 
678 
 (52)
  
811 
 (270)
             
 
 (784)
 (1,720)
 (64)
  
 (1,017)
508 
             
Other comprehensive (loss)/income after tax
 (947)
 (1,720)
 (103)
  
 (1,180)
431 
             
Total comprehensive loss for the period
 (1,667)
 (1,491)
 (1,407)
  
 (1,066)
 (2,848)
             
Total comprehensive loss is attributable to:
            
Non-controlling interests
 (13)
 (15)
 (6)
  
121 
 (25)
Preference shareholders
98 
81 
98 
  
250 
174 
Paid-in equity holders
4 
20 
6 
  
34 
12 
Ordinary and B shareholders
 (1,756)
 (1,577)
 (1,505)
  
 (1,471)
 (3,009)
             
 
 (1,667)
 (1,491)
 (1,407)
  
 (1,066)
 (2,848)
 
 
* Restated - see page 75.
 
Key points
 
·
The net gain relating to available-for-sale financial assets during Q3 2013 consisted of unrealised gains on bank and other financial institution securities. In the nine months ended 30 September 2013, the unrealised gains were more than offset by realised gains on the sale of high quality UK, US, German and Dutch sovereign bonds.
   
·
Cash flow hedging movements during the nine months ended 30 September 2013 reflect the impact of increases in fixed/floating swap rates in the second quarter following statements by central banks indicating future monetary tightening.
   
·
Currency translation losses during Q3 2013 were principally due to the strengthening of Sterling relative to the US Dollar and Euro by 6.5% and 2.3% respectively. In the nine months ended 30 September 2013, the net currency translation gains reflect the weakening of Sterling against the Euro by 2.5%.
   
·
Income tax on items that do not qualify for reclassification relates to accumulated actuarial losses and reflected the reduction in the rate of UK Corporation Tax from 23% to 20%.
 

 
 
Condensed consolidated balance sheet
at 30 September 2013
 
 
30 September
30 June
31 December
2013
2013
2012*
 
£m
£m
£m
       
Assets
      
Cash and balances at central banks
87,066 
89,613 
79,290 
Net loans and advances to banks
28,206 
30,241 
29,168 
Reverse repurchase agreements and stock borrowing
33,757 
37,540 
34,783 
Loans and advances to banks
61,963 
67,781 
63,951 
Net loans and advances to customers
406,927 
418,792 
430,088 
Reverse repurchase agreements and stock borrowing
62,214 
61,743 
70,047 
Loans and advances to customers
469,141 
480,535 
500,135 
Debt securities
122,886 
138,202 
157,438 
Equity shares
10,363 
11,423 
15,232 
Settlement balances
18,099 
17,966 
5,741 
Derivatives
323,657 
373,692 
441,903 
Intangible assets
13,742 
13,997 
13,545 
Property, plant and equipment
8,476 
9,300 
9,784 
Deferred tax
3,022 
3,344 
3,443 
Interests in associated undertakings
1,852 
2,500 
776 
Prepayments, accrued income and other assets
6,734 
6,563 
7,044 
Assets of disposal groups
2,435 
1,313 
14,013 
       
Total assets
1,129,436 
1,216,229 
1,312,295 
       
Liabilities
      
Bank deposits
38,601 
45,287 
57,073 
Repurchase agreements and stock lending
32,748 
34,419 
44,332 
Deposits by banks
71,349 
79,706 
101,405 
Customer deposits
434,305 
437,097 
433,239 
Repurchase agreements and stock lending
72,636 
89,321 
88,040 
Customer accounts
506,941 
526,418 
521,279 
Debt securities in issue
71,781 
79,721 
94,592 
Settlement balances
18,514 
17,207 
5,878 
Short positions
31,020 
27,979 
27,591 
Derivatives
319,464 
370,047 
434,333 
Accruals, deferred income and other liabilities
14,157 
14,376 
14,801 
Retirement benefit liabilities
3,597 
3,579 
3,884 
Deferred tax
514 
694 
1,141 
Subordinated liabilities
23,720 
26,538 
26,773 
Liabilities of disposal groups
249 
306 
10,170 
       
Total liabilities
1,061,306 
1,146,571 
1,241,847 
       
Equity
      
Non-controlling interests
462 
475 
1,770 
Owners' equity*
      
  Called up share capital
6,697 
6,632 
6,582 
  Reserves
60,971 
62,551 
62,096 
       
Total equity
68,130 
69,658 
70,448 
       
Total liabilities and equity
1,129,436 
1,216,229 
1,312,295 
       
* Owners' equity attributable to:
      
Ordinary and B shareholders
62,376 
63,891 
63,386 
Other equity owners
5,292 
5,292 
5,292 
       
 
67,668 
69,183 
68,678 
 
 
 
* Restated - see page 75.
 
 
 
Average balance sheet
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
  
30 September
30 September
2013
2013
  
2013
2012*
 
%
%
  
%
%
           
Average yields, spreads and margins of the
          
  banking business
          
Gross yield on interest-earning assets of banking business
3.07 
3.11 
  
3.09 
3.12 
Cost of interest-bearing liabilities of banking business
(1.38)
(1.44)
  
(1.43)
(1.49)
           
Interest spread of banking business
1.69 
1.67 
  
1.66 
1.63 
Benefit from interest-free funds
0.32 
0.33 
  
0.32 
0.28 
           
Net interest margin of banking business
2.01 
2.00 
  
1.98 
1.91 
           
Average interest rates
          
The Group's base rate
0.50 
0.50 
  
0.50 
0.50 
           
London inter-bank three month offered rates
          
  - Sterling
0.51 
0.51 
  
0.51 
0.92 
  - Eurodollar
0.26 
0.28 
  
0.28 
0.47 
  - Euro
0.22 
0.21 
  
0.21 
0.65 
 
 
* Restated - see page 75.


 
 
Average balance sheet
 
 
Quarter ended
  
Quarter ended
 
30 September 2013
  
30 June 2013
 
Average
      
Average
    
 
balance
Interest
Rate
  
balance
Interest
Rate
 
£m
£m
%
  
£m
£m
%
               
Assets
              
Loans and advances to banks
74,222 
106 
0.57 
  
78,277 
114 
0.58 
Loans and advances to customers
397,184 
3,791 
3.79 
  
402,679 
3,809 
3.79 
Debt securities
67,990 
273 
1.59 
  
71,116 
359 
2.02 
               
Interest-earning assets
              
  - banking business (1,3,5)
539,396 
4,170 
3.07 
  
552,072 
4,282 
3.11 
  - trading business (4)
209,517 
      
227,401 
    
               
Non-interest earning assets
434,797 
      
512,610 
    
               
Total assets
1,183,710 
      
1,292,083 
    
               
Memo: Funded assets
836,564 
      
865,621 
    
               
Liabilities
              
Deposits by banks
21,413 
92 
1.70 
  
24,233 
104 
1.72 
Customer accounts
336,285 
692 
0.82 
  
339,095 
740 
0.88 
Debt securities in issue
52,216 
334 
2.54 
  
60,424 
368 
2.44 
Subordinated liabilities
23,906 
224 
3.72 
  
25,712 
225 
3.51 
Internal funding of trading business
(17,216)
102 
(2.35)
  
(21,078)
97 
(1.85)
               
Interest-bearing liabilities
              
  - banking business (1,2)
416,604 
1,444 
1.38 
  
428,386 
1,534 
1.44 
  - trading business (4)
220,871 
      
232,873 
    
               
Non-interest-bearing liabilities
              
  - demand deposits
78,912 
      
77,593 
    
  - other liabilities
398,516 
      
483,310 
    
Owners' equity
68,807 
      
69,921 
    
               
Total liabilities and owners' equity
1,183,710 
      
1,292,083 
    
 
 
 
 
Notes:
 
(1)
Interest receivable has been increased by £1 million (Q2 2013 - £1 million) and interest payable has been increased by £20 million (Q2 2013 - £23 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)
Interest payable has been decreased by £3 million (Q2 2013 - £3 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)
Interest receivable has been decreased by £38 million (Q2 2013 - nil) in respect of non-recurring adjustments.
(4)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(5)
Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.
 


 
 
Average balance sheet
 
 
Nine months ended
  
Nine months ended
 
30 September 2013
  
30 September 2012*
 
Average
      
Average
    
 
balance
Interest
Rate
  
balance
Interest
Rate
 
£m
£m
%
  
£m
£m
%
               
Assets
              
Loans and advances to banks
74,493 
328 
0.59 
  
75,283 
379 
0.67 
Loans and advances to customers
403,383 
11,431 
3.79 
  
433,877 
12,249 
3.77 
Debt securities
72,723 
973 
1.79 
  
94,080 
1,474 
2.09 
               
Interest-earning assets
              
  - banking business (1,3,5)
550,599 
12,732 
3.09 
  
603,240 
14,102 
3.12 
  - trading business (4)
224,936 
      
243,159 
    
               
Non-interest earning assets
492,094 
      
613,302 
    
               
Total assets
1,267,629 
      
1,459,701 
    
               
Memo: Funded assets
863,696 
      
959,817 
    
               
Liabilities
              
Deposits by banks
24,616 
310 
1.68 
  
40,938 
461 
1.50 
Customer accounts
338,044 
2,269 
0.90 
  
334,177 
2,650 
1.06 
Debt securities in issue
58,130 
1,072 
2.47 
  
100,043 
1,737 
2.32 
Subordinated liabilities
24,591 
640 
3.48 
  
21,865 
504 
3.08 
Internal funding of trading business
(17,912)
280 
(2.09)
  
(7,986)
109 
(1.82)
               
Interest-bearing liabilities
              
  - banking business (1,2,3)
427,469 
4,571 
1.43 
  
489,037 
5,461 
1.49 
  - trading business (4)
231,349 
      
253,299 
    
               
Non-interest-bearing liabilities
              
  - demand deposits
77,525 
      
74,106 
    
  - other liabilities
461,781 
      
568,833 
    
Owners' equity
69,505 
      
74,426 
    
               
Total liabilities and owners' equity
1,267,629 
      
1,459,701 
    
 
* Restated - see page 75.
 
 
Notes:
 
(1)
Interest receivable has been increased by £3 million (nine months ended 30 September 2012 - £11 million) and interest payable has been increased by £60 million (nine months ended 30 September 2012 - £120 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)
Interest payable has been decreased by £8 million (nine months ended 30 September 2012 - £12 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)
Interest receivable has been decreased by £38 million (nine months ended 30 September 2012 - nil) and interest payable has been decreased by £31 million (nine months ended 30 September 2012 - £109 million) in respect of non-recurring adjustments.
(4)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(5)
Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.
 
 
 
Condensed consolidated statement of changes in equity
for the period ended 30 September 2013
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
£m
£m
£m
  
£m
£m
             
Called-up share capital
            
At beginning of period
6,632 
6,619 
6,528 
  
6,582 
15,318 
Ordinary shares issued
65 
13 
53 
  
115 
196 
Share capital sub-division and consolidation
- 
- 
- 
  
- 
(8,933)
             
At end of period
6,697 
6,632 
6,581 
  
6,697 
6,581 
             
Paid-in equity
            
At beginning and end of period
979 
979 
979 
  
979 
979 
             
Share premium account
            
At beginning of period
24,483 
24,455 
24,198 
  
24,361 
24,001 
Ordinary shares issued
145 
28 
70 
  
267 
267 
             
At end of period
24,628 
24,483 
24,268 
  
24,628 
24,268 
             
Merger reserve
            
At beginning and end of period
13,222 
13,222 
13,222 
  
13,222 
13,222 
             
Available-for-sale reserve (1)
            
At beginning of period
(714)
(10)
(450)
  
(346)
(957)
Unrealised gains/(losses)
592 
(568)
651 
  
606 
1,803 
Realised gains
(164)
(441)
(528)
  
(769)
(1,110)
Tax
34 
305 
36 
  
367 
(27)
Recycled to profit or loss on disposal of businesses (2)
- 
- 
- 
  
(110)
- 
             
At end of period
(252)
(714)
(291)
  
(252)
(291)
             
Cash flow hedging reserve
            
At beginning of period
491 
1,635 
1,399 
  
1,666 
879 
Amount recognised in equity
163 
(1,118)
713 
  
(696)
1,931 
Amount transferred from equity to earnings
(251)
(384)
(276)
  
(928)
(799)
Tax
44 
358 
(90)
  
405 
(265)
             
At end of period
447 
491 
1,746 
  
447 
1,746 
               
Foreign exchange reserve
            
At beginning of period
5,201 
5,072 
4,314 
  
3,908 
4,775 
Retranslation of net assets
(1,338)
44 
(637)
  
92 
(1,203)
Foreign currency gains on hedges of net assets
148 
70 
68 
  
17 
156 
Tax
7 
15 
2 
  
4 
22 
Recycled to profit or loss on disposal of businesses
- 
- 
- 
  
(3)
(3)
             
At end of period
4,018 
5,201 
3,747 
  
4,018 
3,747 
               
Capital redemption reserve
            
At beginning of period
9,131 
9,131 
9,131 
  
9,131 
198 
Share capital sub-division and consolidation
- 
- 
- 
  
- 
8,933 
               
At end of period
9,131 
9,131 
9,131 
  
9,131 
9,131 
               
Contingent capital reserve
            
At beginning and end of period
(1,208)
(1,208)
(1,208)
  
(1,208)
(1,208)
 
 
* Restated - see page 75.
 
Notes:
 
(1)
Analysis provided on page 85.
(2)
Net of tax - £35 million charge.
(3)
Net of tax - £1 million charge.
 
 
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
2013
2012*
 
£m
£m
£m
  
£m
£m
             
Retained earnings
            
At beginning of period
11,105 
10,949 
16,615 
  
10,596 
18,929 
(Loss)/profit attributable to ordinary and B 
            
   shareholders and other equity owners
            
  - continuing operations
(723)
241 
(1,364)
  
(116)
(3,416)
  - discontinued operations
(3)
2 
63 
  
107 
165 
Equity preference dividends paid
(98)
(81)
(98)
  
(250)
(174)
Paid-in equity dividends paid, net of tax
(4)
(20)
(6)
  
(34)
(12)
Actuarial losses recognised in retirement benefit schemes
            
  - tax
(163)
- 
(39)
  
(163)
(77)
Loss on disposal of own shares held
- 
(18)
- 
  
(18)
(196)
Shares released for employee benefits
- 
(1)
(1)
  
(1)
(130)
Share-based payments
            
  - gross
26 
33 
44 
  
22 
136 
  - tax
4 
- 
2 
  
1 
(9)
             
At end of period
10,144 
11,105 
15,216 
  
10,144 
15,216 
             
Own shares held
            
At beginning of period
(139)
(211)
(206)
  
(213)
(769)
Disposal/(purchase) of own shares
1 
71 
(2)
  
74 
447 
Shares released for employee benefits
- 
1 
1 
  
1 
115 
             
At end of period
(138)
(139)
(207)
  
(138)
(207)
             
Owners' equity at end of period
67,668 
69,183 
73,184 
  
67,668 
73,184 
             
Non-controlling interests
            
At beginning of period
475 
532 
652 
  
1,770 
686 
Currency translation adjustments and other movements
(21)
(1)
(4)
  
(7)
(19)
Profit/(loss) attributable to non-controlling interests
            
  - continuing operations
8 
(21)
(7)
  
97 
(36)
  - discontinued operations
(2)
7 
4 
  
26 
8 
Movements in available-for-sale securities
            
  - unrealised gains
2 
- 
3 
  
11 
4 
  - realised (gains)/losses
- 
- 
(2)
  
- 
18 
  - tax
- 
- 
- 
  
(1)
- 
  - recycled to profit or loss on disposal of business (3)
- 
- 
- 
  
(5)
- 
Equity raised
- 
- 
- 
  
- 
1 
Equity withdrawn and disposals
- 
(42)
- 
  
(1,429)
(16)
             
At end of period
462 
475 
646 
  
462 
646 
             
Total equity at end of period
68,130 
69,658 
73,830 
  
68,130 
73,830 
             
Total comprehensive income/(loss) recognised
            
   in the statement of changes in equity is
            
   attributable to:
            
Non-controlling interests
(13)
(15)
(6)
  
121 
(25)
Preference shareholders
98 
81 
98 
  
250 
174 
Paid-in equity holders
4 
20 
6 
  
34 
12 
Ordinary and B shareholders
(1,756)
(1,577)
(1,505)
  
(1,471)
(3,009)
             
 
(1,667)
(1,491)
(1,407)
  
(1,066)
(2,848)
 
* Restated - see page 75.
 
For the notes to this table refer to page 72.
 
 
 
 
Notes
1. Basis of preparation
The Group's condensed consolidated financial statements should be read in conjunction with the 2012 annual accounts which were 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 (EU) (together IFRS).
 
In accordance with IFRS 5, Direct Line Group was classified as a discontinued operation in 2012, and prior periods represented.
 
Going concern
Having reviewed the Group's forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group will continue in operational existence for the foreseeable future. Accordingly, the Interim Management Statement for the period ended 30 September 2013 has been prepared on a going concern basis.
 
2. Accounting policies
There have been no significant changes to the Group's principal accounting policies as set out on pages 360 to 371 of the 2012 Annual Report and Accounts apart from the adoption of a number of new and revised IFRSs that are effective from 1 January 2013 as described below.
 
IFRS 11 'Joint Arrangements', which supersedes IAS 31 'Interests in Joint Ventures', distinguishes between joint operations and joint ventures. Joint operations are accounted for by the investor recognising its assets and liabilities including its share of any assets held and liabilities incurred jointly and its share of revenues and costs. Joint ventures are accounted for in the investor's consolidated accounts using the equity method. IFRS 11 requires retrospective application.
 
IAS 27 'Separate Financial Statements' comprises those parts of the existing IAS 27 that deal with separate financial statements. IAS 28 'Investments in Associates and Joint Ventures' covers joint ventures as well as associates; both must be accounted for using the equity method. The mechanics of the equity method are unchanged.
 
IFRS 12 'Disclosure of Interests in Other Entities' mandates the disclosures in annual financial statements in respect of investments in subsidiaries, joint arrangements, associates and structured entities that are not controlled by the Group.
 
IFRS 13 'Fair Value Measurement' sets out a single IFRS framework for defining and measuring fair value. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also requires disclosures about fair value measurements.
 
'Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)' amended IFRS 7 to require disclosures about the effects and potential effects on an entity's financial position of offsetting financial assets and financial liabilities and related arrangements.
 
Amendments to IAS 1 'Presentation of Items of Other Comprehensive Income' require items that will never be recognised in profit or loss to be presented separately in other comprehensive income from those items that are subject to subsequent reclassification.
 
'Annual Improvements 2009-2011 Cycle' also made a number of minor changes to IFRSs.
 
2. Accounting policies (continued)
Implementation of the standards above has not had a material effect on the Group's results.
 
IAS 19 'Employee Benefits' (revised) 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 £21 million for the quarter ended 30 September 2012 and £63 million for the nine months ended 30 September 2012. Prior periods have been restated accordingly.
 
IFRS 10 'Consolidated Financial Statements' replaces SIC-12 'Consolidation - Special Purpose Entities' and the consolidation elements of the existing IAS 27 'Consolidated and Separate Financial Statements'. 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 was a reduction in Non-controlling interests of £0.5 billion with a corresponding increase in Owners' equity (Paid-in equity) as at 30 September 2012. This resulted in an increase in the loss attributable to non-controlling interests of £6 million for the quarter ended 30 September 2012 and £12 million for the nine months ended 30 September 2012, with corresponding increases in the profit attributable to paid-in equity holders. There was no impact on the profit/(loss) attributable to ordinary and B shareholders. Prior periods have been restated accordingly.
 
Critical accounting policies and key sources of estimation uncertainty
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions that are considered to be the most important to the portrayal of the Group's financial condition are those relating to pensions; goodwill; provisions for liabilities; deferred tax; loan impairment provisions and financial instrument fair values. These critical accounting policies and judgments are described on pages 368 to 371 of the Group's 2012 Annual Report and Accounts.
 
Recent developments in IFRS
The IASB published:
 
●
in May 2013 IFRIC 21 'Levies'. This interpretation provides guidance on accounting for the liability to pay a government imposed levy. IFRIC 21 is effective for annual periods beginning on or after 1 January 2014.
   
●
in May 2013 'Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36)'. These amendments align IAS 36's disclosure requirements about recoverable amounts with IASB's original intentions. They are effective for annual periods beginning on or after 1 January 2014.
   
●
in June 2013 'Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)'. These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. They are effective for annual periods beginning on or after 1 January 2014.
 
The Group is reviewing these requirements to determine their effect, if any, on its financial reporting.
 
3. Analysis of income, expenses and impairment losses
        
             
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
 
£m
£m 
£m
  
£m
£m
             
Loans and advances to customers
3,829 
3,809 
3,938 
  
11,469 
12,249 
Loans and advances to banks
106 
114 
106 
  
328 
379 
Debt securities
272 
358 
412 
  
970 
1,463 
             
Interest receivable
4,207 
4,281 
4,456 
  
12,767 
14,091 
             
Customer accounts
692 
740 
859 
  
2,269 
2,645 
Deposits by banks
95 
107 
131 
  
318 
478 
Debt securities in issue
315 
345 
410 
  
1,013 
1,619 
Subordinated liabilities
223 
225 
204 
  
670 
611 
Internal funding of trading businesses
102 
97 
43 
  
280 
109 
             
Interest payable
1,427 
1,514 
1,647 
  
4,550 
5,462 
             
Net interest income
2,780 
2,767 
2,809 
  
8,217 
8,629 
             
Fees and commissions receivable
            
  - payment services
375 
355 
335 
  
1,064 
1,051 
  - credit and debit card fees
284 
275 
273 
  
813 
808 
  - lending (credit facilities)
335 
345 
397 
  
1,033 
1,112 
  - brokerage
117 
143 
145 
  
369 
431 
  - investment management
109 
97 
130 
  
319 
365 
  - trade finance
73 
75 
79 
  
226 
250 
  - other
89 
102 
41 
  
266 
318 
             
 
1,382 
1,392 
1,400 
  
4,090 
4,335 
Fees and commissions payable - banking
(238)
(250)
(209)
  
(698)
(589)
             
Net fees and commissions
1,144 
1,142 
1,191 
  
3,392 
3,746 
             
Foreign exchange
198 
255 
133 
  
648 
568 
Interest rate
248 
203 
378 
  
650 
1,476 
Credit
116 
328 
232 
  
996 
619 
Own credit adjustments
(155)
76 
(435)
  
20 
(1,715)
Other
37 
87 
26 
  
194 
253 
             
Income from trading activities
444 
949 
334 
  
2,508 
1,201 
             
Gain/(loss) on redemption of own debt
13 
242 
(123)
  
204 
454 
             
Operating lease and other rental income
125 
118 
163 
  
381 
725 
Own credit adjustments
(341)
51 
(1,020)
  
(140)
(2,714)
Changes in the fair value of:
            
  - securities and other financial assets and liabilities
36 
17 
72 
  
65 
127 
  - investment properties
(7)
(7)
(20)
  
(23)
(76)
Profit on sale of securities
167 
419 
492 
  
739 
909 
Profit/(loss) on sale of:
            
  - property, plant and equipment
10 
5 
(1)
  
33 
36 
  - subsidiaries and associated undertakings
(21)
24 
(27)
  
(3)
116 
Dividend income
6 
21 
12 
  
41 
42 
Share of profits less losses of associated undertakings
73 
27 
7 
  
277 
8 
Other income
(13)
45 
70 
  
(3)
135 
             
Other operating income
35 
720 
(252)
  
1,367 
(692)
 
* Restated - see page 75.
 
3. Analysis of income, expenses and impairment losses (continued)
             
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
 
£m
£m
£m
  
£m
£m
             
Total non-interest income
1,636 
3,053 
1,150 
  
7,471 
4,709 
             
Total income
4,416 
5,820 
3,959 
  
15,688 
13,338 
             
Staff costs
1,895 
1,840 
1,987 
  
5,622 
6,532 
Premises and equipment
544 
548 
550 
  
1,648 
1,640 
Other (1)
1,103 
1,418 
1,193 
  
3,284 
3,087 
             
Administrative expenses
3,542 
3,806 
3,730 
  
10,554 
11,259 
Depreciation and amortisation
338 
349 
421 
  
1,074 
1,304 
             
Operating expenses
3,880 
4,155 
4,151 
  
11,628 
12,563 
             
Loan impairment losses
1,120 
1,125 
1,183 
  
3,281 
3,913 
Securities
50 
(8)
(7)
  
39 
(88)
             
Impairment losses
1,170 
1,117 
1,176 
  
3,320 
3,825 
 
* Restated - see page 75.
 
Note:
 
(1)
Includes Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs and regulatory and legal action costs. See below for further details.
 
Refer to Appendix 2 for a reconciliation between the managed and statutory bases for key line items.
 
Payment Protection Insurance (PPI)
The Group increased its provision for PPI in Q3 2013 by £250 million (Q2 2013 - £185 million; Q3 2012 - £400 million). The cumulative charge in respect of PPI is £2.6 billion, of which £1.9 billion (73%) in redress and expenses had been paid by 30 September 2013. Of the £2.6 billion cumulative charge, £2.3 billion relates to redress and £0.3 billion to administrative expenses.
 
             
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m 
  
£m
£m
             
At beginning of period
704 
705 
588 
  
895 
745 
Charge to income statement
250 
185 
400 
  
435 
660 
Utilisations
(217)
(186)
(304)
  
(593)
(721)
             
At end of period
737 
704 
684 
  
737 
684 
 
The remaining provision provides coverage for approximately ten months for redress and administrative expenses, based on the current average monthly utilisation.
 
The principal assumptions underlying the Group's provision in respect of PPI sales relate to: assessment of the total number of complaints that the Group will receive; the proportion of these that will result in redress; and the average cost of such redress. The number of complaints has been estimated from an analysis of the Group's portfolio of PPI policies sold by vintage and by product. Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be upheld (the uphold rate) have been established based on recent experience, guidance in the FSA policy statements and expected rate of responses from proactive customer contact. The average redress assumption is based on recent experience, the calculation rules in the FSA statement and the expected mix of claims.
 
3. Analysis of income, expenses and impairment losses (continued)
 
Payment Protection Insurance (PPI) (continued)
The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same).
 
     
Sensitivity
 
Actual to date 
Current 
 assumption 
Change in 
assumption 
Consequential 
change in 
provision 
Assumption
% 
£m 
         
Past business review take up rate
34% 
38% 
+/-5 
+/-45 
Uphold rate
68% 
69% 
+/-5 
+/-20 
Average redress
£1,736 
£1,674 
+/-5 
+/-21 
 
Interest that will be payable on successful complaints has been included in the provision as has the estimated cost to the Group of administering the redress process. The Group expects the majority of the cash outflows associated with this provision to have occurred by the end of Q2 2014. There are uncertainties as to the eventual cost of redress which will depend on actual complaint volumes, take up and uphold rates and average redress costs. Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different than the amount provided. The Group will continue to monitor the position closely and refresh its assumptions.
 
Interest Rate Hedging Products (IRHP) redress and related costs
Following an industry-wide review conducted in conjunction with the Financial Services Authority (now being dealt with by the Financial Conduct Authority (FCA)), a charge of £700 million was booked in Q4 2012 for redress in relation to certain interest rate hedging products sold to small and medium-sized businesses classified as retail clients under FSA rules. £575 million was earmarked for client redress and £125 million for administrative expenses. The estimate for administrative costs was increased by £50 million in Q1 2013 following development of the plan for administering this process in accordance with FSA guidelines. Customers may also be entitled to be compensated for any consequential losses they may have suffered. The Group is not able to measure reliably any liability it may have and has accordingly not made any provision.
 
The Group is now making steady progress after a challenging start with its review of sales of IRHP and expects to complete this and provide basic redress to all customers who are entitled to it by the end of May 2014. On 23 October 2013, the Group announced that it would split redress payments for all customers who may have been mis-sold IRHP. Customers will receive redress monies without having to wait for the assessment of any additional consequential loss claims which are outside the allowance for such claims included in the 8% interest on redress due.
 
The Group continues to monitor the level of provision given the uncertainties over the number of transactions that will qualify for redress and the nature and cost of that redress.
 
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
 
£m
£m
£m 
  
£m
£m
             
At beginning of period
670 
702 
- 
  
676 
- 
Charge to income statement
- 
- 
- 
  
50 
- 
Utilisations
(39)
(32)
- 
  
(95)
- 
             
At end of period
631 
670 
- 
  
631 
- 


3. Analysis of income, expenses and impairment losses (continued)
 
Regulatory and legal actions
The Group is party to certain legal proceedings and regulatory investigations and continues to co-operate with a number of regulators. All such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of the Group incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made. An additional charge of £385 million was booked in Q2 2013 and £99 million in Q3 2013 in respect of these matters.
 
4. Loan impairment provisions
Operating (loss)/profit is stated after charging loan impairment losses of £1,120 million (Q2 2013 - £1,125 million; Q3 2012 - £1,183 million). The balance sheet loan impairment provisions decreased in the quarter ended 30 September 2013 from £21,753 million to £21,421 million and the movements thereon were:
 
 
 
Quarter ended
 
30 September 2013
  
30 June 2013
  
30 September 2012
   
Non-
      
Non-
      
Non-
  
Core
Core
Total
Core
Core
Total
Core
Core
Total
 
£m
£m
£m
  
£m
£m
£m
  
£m
£m
£m
                       
At beginning of period
10,358 
11,395 
21,753 
  
10,266 
11,228 
21,494 
  
8,944 
11,353 
20,297 
Currency translation and other adjustments
(98)
(211)
(309)
  
71 
75 
146 
  
(5)
(186)
(191)
Disposals
- 
(77)
(77)
  
- 
- 
- 
  
- 
- 
- 
Amounts written-off
(728)
(302)
(1,030)
  
(626)
(341)
(967)
  
(466)
(454)
(920)
Recoveries of amounts previously written-off
40 
30 
70 
  
41 
15 
56 
  
34 
31 
65 
Charge to income statement
                      
  - continuing operations
584 
536 
1,120 
  
659 
466 
1,125 
  
751 
432 
1,183 
Unwind of discount
                      
  (recognised in interest income)
(55)
(51)
(106)
(53)
(48)
(101)
  
(55)
(61)
(116)
                       
At end of period
10,101 
11,320 
21,421 
  
10,358 
11,395 
21,753 
  
9,203 
11,115 
20,318 
 
 
 
 
Nine months ended
 
30 September 2013
  
30 September 2012
   
Non-
      
Non-
  
Core
Core
Total
Core
Core
Total
 
£m
£m
£m
  
£m
£m
£m
               
At beginning of period
10,062 
11,188 
21,250 
  
8,414 
11,469 
19,883 
Currency translation and other adjustments
109 
130 
239 
  
(4)
(502)
(506)
Disposals
- 
(77)
(77)
  
- 
- 
- 
Amounts written-off
(1,883)
(1,270)
(3,153)
  
(1,457)
(1,388)
(2,845)
Recoveries of amounts previously written-off
130 
61 
191 
  
161 
84 
245 
Charge to income statement
              
  - continuing operations
1,842 
1,439 
3,281 
  
2,266 
1,647 
3,913 
Unwind of discount (recognised in interest income)
(159)
(151)
(310)
  
(177)
(195)
(372)
               
At end of period
10,101 
11,320 
21,421 
  
9,203 
11,115 
20,318 
 
Provisions at 30 September 2013 include £69 million in respect of loans and advances to banks (30 June 2013 - £83 million; 30 September 2012 - £117 million). The tables above exclude impairments relating to securities.
 
5. Tax
The actual tax charge differs from the expected tax credit/(charge) computed by applying the standard UK corporation tax rate of 23.25% (2012 - 24.5%).
 
 
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
 
£m
£m
£m
  
£m
£m
             
(Loss)/profit before tax
(634)
548 
(1,368)
  
740 
(3,050)
             
Expected tax credit/(charge)
147 
(127)
335 
  
(172)
747 
Losses in period where no deferred tax
            
  asset recognised
(75)
(44)
(129)
  
(191)
(382)
Foreign profits taxed at other rates
(32)
(32)
(95)
  
(152)
(306)
UK tax rate change impact
(197)
- 
(89)
  
(197)
(135)
Unrecognised timing differences
10 
(15)
3 
  
(2)
17 
Items not allowed for tax
            
  - losses on disposals and write-downs
(5)
- 
(8)
  
(5)
(8)
  - UK bank levy
(12)
(9)
(16)
  
(41)
(53)
  - regulatory and legal actions
- 
(90)
- 
  
(90)
- 
  - employee share schemes
(7)
(7)
(15)
  
(21)
(44)
  - other disallowable items
(21)
(45)
(37)
  
(103)
(113)
Non-taxable items
            
  - gain on sale of RBS Aviation Capital
- 
- 
- 
  
- 
27 
  - other non-taxable items
29 
31 
18 
  
115 
44 
Taxable foreign exchange movements
(12)
(4)
1 
  
(14)
(1)
Losses brought forward and utilised
(4)
22 
1 
  
23 
12 
Reduction in carrying value of deferred tax asset in
            
  respect of losses in Australia
- 
- 
- 
  
- 
(182)
Adjustments in respect of prior periods
98 
(8)
28 
  
91 
(25)
             
Actual tax charge
(81)
(328)
(3)
  
(759)
(402)
 
* Restated - see page 75.
 
The high tax charge for the period ended 30 September 2013 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 effect of the reduction of 3% in the rate of UK corporation tax enacted in July 2013.
 
The Group has recognised a deferred tax asset at 30 September 2013 of £3,022 million (30 June 2013 - £3,344 million; 31 December 2012 - £3,443 million) and a deferred tax liability at 30 September 2013 of £514 million (30 June 2013 - £694 million; 31 December 2012 - £1,141 million). These include amounts recognised in respect of UK trading losses of £2,578 million (30 June 2013 - £2,900 million; 31 December 2012 - £3,072 million). Under UK tax legislation, these UK losses can be carried forward indefinitely to be utilised against profits arising in the future. The Group has considered the carrying value of this asset as at 30 September 2013 and concluded that it is recoverable based on future profit projections.
 
6 Profit/(loss) attributable to non-controlling interests
        
             
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
 
£m
£m
£m
  
£m
£m
             
RBS Sempra Commodities JV
1 
- 
(2)
  
(1)
2 
RFS Holdings BV Consortium Members
5 
- 
4 
  
118 
(31)
Direct Line Group
- 
- 
- 
  
19 
- 
Other
- 
(14)
(5)
  
(13)
1 
             
Profit/(loss) attributable to non-controlling interests
6 
(14)
(3)
  
123 
(28)
 
* Restated - see page 75.
 
7. Dividends
            
Dividends paid to preference shareholders and paid-in equity holders are as follows:
             
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
 
£m
£m
£m
  
£m
£m
             
Preference shareholders
            
Non-cumulative preference shares of US$0.01
69 
45 
67 
  
185 
110 
Non-cumulative preference shares of €0.01
29 
35 
27 
  
64 
60 
Non-cumulative preference shares of £1
- 
1 
4 
  
1 
4 
             
Paid-in equity holders
            
Interest on securities classified as equity, net of tax
4 
20 
6 
  
34 
12 
             
 
102 
101 
104 
  
284 
186 
 
* Restated - see page 75.
 
The Group has now resumed payments on all discretionary non-equity capital instruments following the end of the European Commission ban in 2012 for RBSG and 2013 for RBS N.V. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
 
In the context of prior macro-prudential policy discussions, the Board of RBSG has decided to partially neutralise any impact on Core Tier 1 capital of coupon and dividend payments in respect of RBSG hybrid capital instruments and the RBS N.V. Trust Preferred Securities through an equity issuance of c.£300 million. Of this, approximately £205 million has been raised through the issue of new ordinary shares which has been completed by 30 September 2013. A further £44 million has been raised through the sale of surplus shares held by the Group's Employee Benefit Trust during Q2 2013. RBSG expects to issue a further c.£50 million of new ordinary shares over the remainder of the year.
 
8. Earnings per ordinary and B share
            
Earnings per ordinary and B share have been calculated based on the following:
      
             
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012*
  
2013
2012*
             
Earnings
            
(Loss)/profit from continuing operations attributable
            
   to ordinary and B shareholders (£m)
(825)
140 
(1,468)
  
(400)
(3,602)
             
(Loss)/profit from discontinued operations
            
  attributable to ordinary and B shareholders (£m)
(3)
2 
63 
  
107 
165 
             
Ordinary shares outstanding during the period (millions)
6,123 
6,073 
5,975 
  
6,076 
5,867 
Effect of convertible B shares in issue during
            
  the period (millions)
5,100 
5,100 
5,100 
  
5,100 
5,100 
             
Weighted average number of ordinary
            
  shares and effect of convertible B shares
            
  outstanding during the period (millions)
11,223 
11,173 
11,075 
  
11,176 
10,967 
Effect of dilutive share options and convertible
            
  securities (millions)
- 
114 
- 
  
- 
- 
             
Diluted weighted average number of ordinary and
            
  B shares outstanding during the period (millions)
11,223 
11,287 
11,075 
  
11,176 
10,967 
             
Basic (loss)/earnings per ordinary and B
            
  share from continuing operations
(7.4p)
1.2p
(13.3p)
  
(3.6p)
(32.8p)
Own credit adjustments
3.8p.
(0.8p)
10.1p
  
1.2p.
31.5p
Payment Protection Insurance costs
1.7p.
1.3p
2.8p
  
3.0p.
4.6p
Interest Rate Hedging Products redress and related
            
  costs
- 
- 
- 
  
0.3p.
- 
Regulatory fines
0.5p.
3.4p
- 
  
3.9p.
- 
Integration and restructuring costs
1.4p.
1.1p
1.6p
  
3.4p.
6.0p
(Gain)/loss on redemption of own debt
- 
(2.1p)
0.8p
  
(1.7p)
(3.2p)
Asset Protection Scheme
- 
- 
- 
  
- 
0.3p
Amortisation of purchased intangible assets
0.3p.
0.2p
0.3p
  
0.8p.
1.0p
Strategic disposals
0.1p.
(0.1p)
0.2p
  
0.1p.
(1.1p)
             
Adjusted earnings per ordinary and
            
  B share from continuing operations
0.4p.
4.2p
2.5p
  
7.4p.
6.3p
Loss from Non-Core division attributable to
            
  ordinary shareholders
3.6p.
1.4p
2.6p
  
7.5p.
7.4p
             
Core adjusted earnings per ordinary and 
            
  B share
4.0p.
5.6p
5.1p
  
14.9p.
13.7p
             
Memo: Core adjusted earnings per
            
  ordinary and B share assuming normalised
      
  tax rate of 23.25% (2012 - 24.5%)
7.9p.
7.4p
9.3p
  
23.2p.
29.0p
             
Diluted (loss)/earnings per ordinary and B
            
  share from continuing operations
(7.4p)
1.2p
(13.3p)
  
(3.6p)
(32.8p)
 
* Restated - see page 75.
 
9. Trading valuation reserves and own credit adjustments
For a description of the Group's valuation methodologies refer to the Group's 2012 Annual Report and Accounts.
 
Valuation reserves
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. The following table shows credit valuation adjustments and other valuation reserves. Valuation adjustments represent an estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in derivative exposures.
 
 
 
30 September
30 June
31 December
2013 
2013
2012
 
£m 
£m
£m
       
Credit valuation adjustments (CVA)
      
  - monoline insurers and credit derivative product companies (CDPC)
199 
288 
506 
  - other counterparties
1,790 
1,969 
2,308 
       
 
1,989 
2,257 
2,814 
       
Other valuation reserves
      
  - bid-offer
464 
535 
625 
  - funding valuation adjustment (FVA)
355 
472 
475 
  - product and deal specific
759 
790 
763 
  - other
26 
75 
134 
       
 
1,604 
1,872 
1,997 
       
Valuation reserves
3,593 
4,129 
4,811 
 
Key points
 
·
Monoline and CDPC: reduced exposures during the nine months ended 30 September 2013, tighter credit spreads and exchange rate movements contributed to the decrease in CVA.
   
·
Other counterparties: the decrease in CVA during the nine months ended 30 September 2013 was driven by tighter credit spreads, reduction in exposure due to market movements together with realised default losses and reserve releases on certain exposures following restructuring. Updates to counterparty ratings and recovery rate assumptions also contributed to the decrease.
   
·
The decrease in FVA during Q3 2013 was driven by methodology refinement to reflect interactions with other valuation adjustments applied to uncollateralised derivative exposures.
   
·
The decrease in bid-offer reserves reflects risk reduction and spread tightening.
 


9. Trading valuation reserves and own credit adjustment (continued)
 
Own credit
The cumulative own credit adjustment (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss (DFV) debt securities issued and derivative liabilities are set out below.
 
 
Cumulative OCA DR/(CR) (1)
              
Debt securities in issue (2)
Subordinated
liabilities
      
HFT
DFV
Total
DFV
Total
Derivatives
Total (3)
£m
£m
£m
£m
£m
£m
£m
               
30 September 2013
(548)
(42)
(590)
295 
(295)
95 
(200)
30 June 2013
(488)
244 
(244)
380 
136 
309 
445 
31 December 2012
(648)
56 
(592)
362 
(230)
259 
29 
               
Carrying values of underlying liabilities
£bn
£bn
£bn
£bn
£bn
    
               
30 September 2013
9.4 
17.4 
26.8 
0.9 
27.7 
    
30 June 2013
9.3 
20.7 
30.0 
0.9 
30.9 
    
31 December 2012
10.9 
23.6 
34.5 
1.1 
35.6 
    
 
Notes:
 
(1)
The OCA does not alter cash flows and is not used for performance management. It is disregarded for regulatory capital reporting purposes and will reverse over time as the liabilities mature.
(2)
Includes wholesale and retail note issuances.
(3)
The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserve is stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.
 
 
Key points
 
·
The cumulative OCA decreased during the nine months ended 30 September 2013 due to tightening of RBS credit spreads, principally in the third quarter.
   
·
Senior issued debt OCA is determined by reference to secondary debt issuance spreads. The five year spread tightened to 83 basis points (30 June 2013 - 140 basis points; 31 December 2012 - 102 basis points). As senior debt classified as DFV includes a greater proportion of longer term debt, the impact of spread tightening and discounting is more significant, resulting in a credit balance at 30 September 2013.
   
·
The cumulative OCA relating to derivatives decreased during Q3 2013 due to tightening of RBS credit  spreads and a methodology refinement reflecting interactions with other valuation adjustments.
 
 
10. Available-for-sale reserve
            
             
 
Quarter ended
  
Nine months ended
 
30 September
30 June
30 September
  
30 September
30 September
2013
2013
2012
  
2013
2012
Available-for-sale reserve
£m
£m
£m
  
£m
£m
             
At beginning of period
(714)
(10)
(450)
  
(346)
(957)
Unrealised gains/(losses)
592 
(568)
651 
  
606 
1,803 
Realised gains
(164)
(441)
(528)
  
(769)
(1,110)
Tax
34 
305 
36 
  
367 
(27)
Reclassified to profit or loss on disposal of businesses
- 
- 
- 
  
(110)
- 
             
At end of period
(252)
(714)
(291)
  
(252)
(291)
 
Key points
 
·
In the nine months ended 30 September 2013, unrealised gains were more than offset by realised gains on the sale of high quality UK, US, German and Dutch sovereign bonds. Realised gains of £769 million were principally in Group Treasury, £610 million and US Retail & Commercial, £72 million.
   
·
The unrealised gains of £592 million in Q3 primarily relate to bank and other financial institution securities and unrealised losses of £568 million in Q2 primarily relate to government bonds in Group Treasury. Sales of high quality UK, US and German sovereign bonds also contributed significantly to realised gains during the quarter.
 
 
11. Contingent liabilities and commitments
                
                       
 
30 September 2013
  
30 June 2013
  
31 December 2012
 
Core
Non-Core
Total
  
Core
Non-Core
Total
  
Core
Non-Core
Total
 
£m
£m
£m
  
£m
£m
£m
  
£m
£m
£m
                       
Contingent liabilities
                      
Guarantees and assets pledged
                      
   as collateral security
20,650 
727 
21,377 
  
19,099 
885 
19,984 
  
18,251 
913 
19,164 
Other
6,699 
96 
6,795 
  
9,980 
73 
10,053 
  
10,628 
69 
10,697 
                       
 
27,349 
823 
28,172 
  
29,079 
958 
30,037 
  
28,879 
982 
29,861 
                       
Commitments
                      
Undrawn formal standby facilities,
                      
  credit lines and other commitments
                      
  to lend
209,138 
2,640 
211,778 
  
213,909 
2,983 
216,892 
  
209,892 
5,916 
215,808 
Other
2,577 
1 
2,578 
  
1,368 
2 
1,370 
  
1,971 
5 
1,976 
                       
 
211,715 
2,641 
214,356 
  
215,277 
2,985 
218,262 
  
211,863 
5,921 
217,784 
                       
Contingent liabilities and
                      
  commitments
239,064 
3,464 
242,528 
  
244,356 
3,943 
248,299 
  
240,742 
6,903 
247,645 
 
Additional contingent liabilities arise in the normal course of the Group's business. It is not anticipated that any material loss will arise from these transactions.
 
12. Litigation, investigations and reviews
Except for the developments noted below, there have been no material changes to litigation, investigations and reviews as disclosed in the Interim Results for the six months ended 30 June 2013.
 
Litigation
 
Shareholder litigation
As previously disclosed, RBS and certain of its subsidiaries, together with certain current and former officers and directors were named as defendants in purported class actions filed in the United States District Court for the Southern District of New York involving holders of RBS preferred shares (the Preferred Shares litigation) and holders of American Depositary Receipts (the ADR claims). 
 
In September 2012, the Court dismissed the Preferred Shares litigation with prejudice. The plaintiffs appealed.  On 25 September 2013, the United States Court of Appeals for the Second Circuit affirmed the lower Court's dismissal of the litigation.
 
In September 2012, the Court dismissed the ADR claims with prejudice. On 5 August 2013, the court denied the plaintiffs' motions for reconsideration and for leave to re-plead their case.  The plaintiffs have initiated an appeal to the United States Court of Appeals for the Second Circuit.
 
Other securitisation and securities related litigation in the United States
As previously disclosed, Group companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the United States that relate to the securitisation and securities underwriting businesses.  Among these lawsuits are six cases filed in September 2011 by the US Federal Housing Finance Agency (FHFA) as conservator for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The primary FHFA lawsuit remains pending in the United States District Court for the District of Connecticut, and it relates to approximately US$32 billion of mortgage-backed securities (MBS) for which Group entities acted as sponsor/depositor and/or lead underwriter or co-lead underwriter. Of these approximately US$10.7 billion were outstanding at 30 September 2013 with cumulative losses of approximately US$0.9 billion (being the loss of principal value suffered by security holders). On 30 September 2013, the Court denied the defendants' motion to dismiss FHFA's amended complaint in this case.  Discovery, which the Court had permitted to proceed before ruling on the motion to dismiss, is ongoing.
 
Investigations and reviews
 
LIBOR, other trading rates and foreign exchange rates
As previously disclosed, in June 2013, RBS was listed amongst the 20 banks found by the Monetary Authority of Singapore (MAS) to have deficiencies in the governance, risk management, internal controls and surveillance systems relating to benchmark submissions following a finding by the MAS that certain traders made inappropriate attempts to influence benchmarks in the period 2007 - 2011.  RBS was ordered at that time to set aside additional statutory reserves with the MAS of SGD1-1.2 billion and to formulate a remediation plan.  RBS has now submitted a remediation plan to the MAS.
 
12. Litigation, investigations and reviews (continued)
 
Investigations and reviews (continued)
The Group is co-operating with investigations and new and ongoing requests for information by various other governmental and regulatory authorities, including in the UK, US and Asia into its submissions, communications and procedures relating to a number of trading rates, including LIBOR and other interest rate settings, ISDAFIX and non-deliverable forwards.
 
In addition, various governmental and regulatory authorities have commenced investigations into foreign exchange trading activities apparently involving multiple financial institutions. The Group has received enquiries from certain of these authorities including the FCA. The Group is reviewing communications and procedures relating to certain currency exchange benchmark rates as well as foreign exchange trading activity and is cooperating with these investigations. At this stage, the Group cannot estimate reliably what effect, if any, the outcome of the investigation may have on the Group.
 
Card Protection Plan Limited
On 22 August 2013, the 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.  CPP has now written to affected policyholders to confirm the details of the proposed scheme, which requires approval by a policyholder vote and by the High Court of England and Wales.  A creditors' meeting has been scheduled for 7 January 2014. The ultimate level of redress that the Group may be required to pay under the scheme cannot be estimated.
 
SME banking market study
As previously disclosed, the OFT announced its market study on competition in banking for SMEs in England and Wales, Scotland and Northern Ireland on 19 June 2013. The OFT has been seeking views on the scope of the market study and on 27 September 2013 published an update paper setting out its proposed scope. The OFT expects to report on the market study in early 2014. 
 
13. Other developments
 
Rating agencies
Moody's Investors Service
On 5 July 2013, the rating agency, Moody's Investors Service (Moody's) placed on review for possible downgrade the long term ratings of the Group and its subsidiaries The Royal Bank of Scotland plc, National Westminster Bank Plc and RBS N.V. Short term ratings were affirmed as unchanged and are not subject to Moody's' review. The rating action was prompted by the UK Government's announcement that it would examine the merit of splitting up the Group by placing its bad assets in a separate legal entity under a 'Good Bank/Bad Bank' split. Moody's expect to conclude their rating review on the Group in the autumn following publication of the Government's conclusion to its 'Good Bank/Bad Bank' assessment. Ulster Bank Limited and Ulster Bank Ireland Limited's long and short term ratings were also placed on review for possible downgrade.
 
On the same date Moody's upgraded, by three notches, three series of the Group's Trust Preferred Securities (RBS Capital Funding Trust V, RBS Capital Funding Trust VI and RBS Capital Funding Trust VII) to 'Ba3' from 'B3' upon the announcement that the Group would resume coupon payments on these securities following expiration of the European Commission payments ban.
 
13. Other developments (continued)
 
Rating agencies (continued)
 
Moody's Investors Service (continued)
As a result of its rating action on the Group, on 8 July 2013, Moody's also placed on review for possible downgrade the long term ratings of RBS Citizens N.A. and Citizens Bank of Pennsylvania. Short term ratings were affirmed as unchanged.
 
Standard & Poor's
On 16 July 2013, the rating outlooks of Ulster Bank Limited and Ulster Bank Ireland Limited were revised to Negative from Stable by the rating agency, Standard & Poor's (S&P). The rating actions were prompted by the announcement of the 'Good Bank/Bad Bank' review.
 
On 19 September 2013, Fitch Ratings ('Fitch') affirmed its ratings on the Group and key subsidiaries as unchanged.
 
Current Group and subsidiary ratings are shown in the table below:
 
 
 
Moody's
  
S&P
  
Fitch
 
Long-term 
Short-term 
  
Long-term 
Short-term 
  
Long-term 
Short-term 
                 
RBS Group plc
Baa1 
P-2 
  
A- 
A-2 
  
A 
F1 
                 
The Royal Bank of Scotland plc
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
National Westminster Bank Plc
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
RBS N.V.
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
RBS Citizens, N.A/Citizens
  Bank of Pennsylvania
A3 
P-2 
  
A 
A-1 
  
A- 
F1 
                 
Ulster Bank Ltd/Ulster Bank
  Ireland Ltd
Baa2 
P-2 
  
BBB+ 
A-2 
  
A- 
F1 
 
14. Date of approval
This announcement was approved by the Board of directors on 31 October 2013.
 
15. Post balance sheet events
Save as detailed below, there have been no significant events between 30 September 2013 and the date of approval of this announcement which would require a change to or additional disclosure in the announcement.
 
The Group today has announced the establishment of an internal 'bad bank' to run down a pool of assets totalling £38 billion over the next three years. We have also announced our intention to accelerate the IPO of Citizens to 2014 with full divestment intended by the end of 2016.  
 
Risk and balance sheet management
Presentation of information
In the balance sheet, the assets and liabilities of disposal groups are presented as a single line as required by IFRS. In the risk and balance sheet management section, balances and exposures relating to disposal groups are included within risk measures for all periods presented as permitted by IFRS.
 
Capital management
 
Capital and leverage ratios
The Group's capital, risk-weighted assets (RWAs) and risk asset ratios, calculated in accordance with Prudential Regulation Authority (PRA) definitions, are set out below.
 
 
Current rules
30 September
30 June
31 December
2013
2013
2012
Capital
£bn
£bn
£bn
       
Core Tier 1
47.5 
48.4 
47.3 
Tier 1
56.6 
57.8 
57.1 
Total
66.6 
68.8 
66.8 
       
RWAs by risk
      
       
Credit risk
      
  - non-counterparty
303.1 
315.7 
323.2 
  - counterparty
34.5 
40.2 
48.0 
Market risk
30.6 
38.3 
42.6 
Operational risk
41.8 
41.8 
45.8 
       
 
410.0 
436.0 
459.6 
       
Risk asset ratios
%
%
%
       
Core Tier 1
11.6 
11.1 
10.3 
Tier 1
13.8 
13.3 
12.4 
Total
16.2 
15.8 
14.5 
       
 
30 September
30 June
31 December
Fully loaded Capital Requirements Regulations (CRR) estimates (1)
2013 
2013 
2012 
       
Common Equity Tier 1 capital
£41.1bn
£41.2bn
£38.1bn
RWAs
£452.5bn
£471.5bn
£494.6bn
Fully loaded Basel III basis Core Tier 1 ratio
9.1%
8.7%
7.7%
Leverage ratio
3.6%
3.4%
3.1%
 
Note:
 
(1)
Calculated on the same basis as disclosed on page 136 of the Group's 2012 Annual Report and Accounts.
 
Key points
 
·
Core Tier 1 ratio improved by 130 basis points since 31 December 2012 and 50 basis points in Q3, primarily due to RWA reduction.
   
·
RWAs fell by £49.6 billion, of which £26.0 billion was in the third quarter, as both Markets and Non- Core implemented risk reduction strategies resulting in decreases of £28.1 billion (Q3 - £13.6 billion) and £19.5 billion (Q3 - £5.4 billion) respectively.
   
·
Fully loaded Basel III basis Core Tier 1 ratio also improved by 140 basis points, 40 basis points in Q3 to 9.1%, primarily reflecting current basis factors discussed above being partially offset by higher prudential valuation requirement.
   
·
The CRR leverage ratio improved by 50 basis points to date; 20 basis points in Q3, primarily reflecting balance sheet reduction.
 
 
Capital management (continued)
 
Capital resources
 
Components of capital (Basel 2.5)
The Group's regulatory capital resources in accordance with PRA definitions were as follows:
 
 
 
30 September
30 June
31 December
2013
2013
2012
 
£m
£m
£m
       
Shareholders' equity (excluding non-controlling interests)
      
 Shareholders' equity
67,668 
69,183 
68,678 
 Preference shares - equity
(4,313)
(4,313)
(4,313)
 Other equity instruments
(979)
(979)
(979)
 
62,376 
63,891 
63,386 
       
Non-controlling interests
      
 Non-controlling interests
462 
475 
1,770 
Adjustments to non-controlling interests for regulatory purposes
- 
- 
(1,367)
 
462 
475 
403 
       
Regulatory adjustments and deductions
      
 Own credit
762 
447 
691 
 Defined benefit pension fund adjustment
667 
628 
913 
 Unrealised losses on available-for-sale (AFS) debt securities
358 
800 
410 
 Unrealised gains on AFS equity shares
(106)
(86)
(63)
 Cash flow hedging reserve
(447)
(491)
(1,666)
 Other adjustments for regulatory purposes
(115)
(140)
(198)
 Goodwill and other intangible assets
(13,742)
(13,997)
(13,545)
 50% excess of expected losses over impairment provisions (net of tax)
(1,801)
(2,032)
(1,904)
 50% of securitisation positions
(889)
(1,051)
(1,107)
 
(15,313)
(15,922)
(16,469)
       
Core Tier 1 capital
47,525 
48,444 
47,320 
       
Other Tier 1 capital
      
 Preference shares - equity
4,313 
4,313 
4,313 
 Preference shares - debt
919 
1,112 
1,054 
 Innovative/hybrid Tier 1 securities
4,330 
4,427 
4,125 
 
9,562 
9,852 
9,492 
       
Tier 1 deductions
      
 50% of material holdings (1)
(1,003)
(1,124)
(295)
 Tax on excess of expected losses over impairment provisions
546 
616 
618 
 
(457)
(508)
323 
       
Total Tier 1 capital
56,630 
57,788 
57,135 
       
For the note to this table refer to the following page.
      
 
 
 
Capital management: Capital resources (continued)
      
       
Components of capital (Basel 2.5)
      
 
30 September
30 June
31 December
 
2013
2013
2012
 
£m
£m
£m
       
Qualifying Tier 2 capital
      
 Undated subordinated debt
2,103 
2,136 
2,194 
 Dated subordinated debt - net of amortisation
11,896 
13,530 
13,420 
 Unrealised gains on AFS equity shares
106 
86 
63 
 Collectively assessed impairment provisions
386 
415 
399 
 
14,491 
16,167 
16,076 
       
Tier 2 deductions
      
 50% of securitisation positions
(889)
(1,051)
(1,107)
 50% excess of expected losses over impairment provisions
(2,347)
(2,648)
(2,522)
 50% of material holdings (1)
(1,003)
(1,124)
(295)
 
(4,239)
(4,823)
(3,924)
       
Total Tier 2 capital
10,252 
11,344 
12,152 
       
Supervisory deductions
      
 Unconsolidated investments
      
  - Direct Line Group (1)
- 
- 
(2,081)
  - Other investments
(39)
(39)
(162)
 Other deductions
(209)
(271)
(244)
       
 
(248)
(310)
(2,487)
       
Total regulatory capital
66,634 
68,822 
66,800 
 
Flow statement (Basel 2.5)
The table below analyses the movement in Core Tier 1, Other Tier 1 and Tier 2 capital during the nine months ended 30 September 2013.
 
 
       
Supervisory
  
 
Core Tier 1
Other Tier 1
Tier 2
deductions
Total
 
£m
£m
£m
£m
£m
           
At 1 January 2013
47,320 
9,815 
12,152 
(2,487)
66,800 
Attributable loss net of movements in fair value of own credit
(222)
- 
- 
- 
(222)
Share capital and reserve movements in respect of employee
          
  share schemes
256 
- 
- 
- 
256 
Ordinary shares issued
205 
- 
- 
- 
205 
Foreign exchange reserve
110 
- 
- 
- 
110 
Foreign exchange movements
- 
(4)
243 
- 
239 
Increase in non-controlling interests
59 
- 
- 
- 
59 
Decrease/(increase) in capital deductions (1)
321 
(780)
(315)
2,239 
1,465 
Increase in goodwill and intangibles
(197)
- 
- 
- 
(197)
Defined benefit pension fund
(246)
- 
- 
- 
(246)
Dated subordinated debt issues
- 
- 
652 
- 
652 
Dated subordinated debt maturities, redemptions and amortisation
- 
- 
(2,293)
- 
(2,293)
Other movements
(81)
74 
(187)
- 
(194)
           
At 30 September 2013
47,525 
9,105 
10,252 
(248)
66,634 
 
Note:
 
(1)
From 1 January 2013 material holdings in insurance companies are deducted 50% from Tier 1 and 50% from Tier 2.
 
 
Capital management (continued)
 
Risk-weighted assets flow statement
The table below analyses the movement in credit risk, market risk and operational risk RWAs by key drivers during the nine months ended 30 September 2013.
 
 
 
Credit risk
Market
Operational
Gross
 
Non-counterparty
Counterparty
risk
risk
RWAs
 
£bn
£bn
£bn
£bn
£bn
           
At 1 January 2013
323.2 
48.0 
42.6 
45.8 
459.6 
Business and market movements (1)
(27.3)
(13.5)
(11.8)
(4.0)
(56.6)
Disposals
(5.6)
- 
- 
- 
(5.6)
Model changes (2)
12.8 
- 
(0.2)
- 
12.6 
           
At 30 September 2013
303.1 
34.5 
30.6 
41.8 
410.0 
 
Notes:
 
(1)
Represents changes in book size, composition, position changes and market movements including foreign exchange impacts.
(2)
Refers to implementation of a new model or modification of an existing model after approval from the PRA and changes in model scope.
 
Liquidity, funding and related risks
Liquidity risk depends on factors such as the maturity profile and composition of the Group's assets and liabilities, the quality and market value of its liquidity buffer and broader market factors, such as wholesale market circumstances alongside depositor and investor behaviour.
 
Overview
 
●
Short-term wholesale funding excluding derivative collateral (STWF) at 30 September 2013 was £34.6 billion, a decrease of £7.0 billion year-to-date, representing 4% of the funded balance sheet and 31% of total wholesale funding.
   
●
The Group liquidity portfolio continued to exceed the medium-term target of 1.5 times STWF and was £150.9 billion at 30 September 2013 with the proportion of primary and secondary liquidity comparable to 31 December 2012 at 62%:38%.
   
●
The Group's loan:deposit ratio strengthened in the nine months to 30 September 2013 to 94% (30 June 2013 - 96%; 31 December 2012 - 100%) with strong deposit growth of £5.8 billion in UK Retail and Non-Core loan run-off of £14.8 billion being the main drivers.
   
●
The Group repaid €8.5 billion of European Central Bank Long Term Refinancing Operation funding in 2013, including €3.5 billion in Q3 2013. The residual €1.4 billion is being used to help support Ulster Bank's standalone funding profile. The Group will continue to evaluate its utilisation of this facility.
   
●
As part of ongoing balance sheet management the Group has completed a number of public liability management exercises in 2013 buying back £2.0 billion of senior unsecured debt in Q1, €1.5 billion of secured debt in Q2 and $2.5 billion of Lower Tier 2 capital debt in Q3. The Group also issued $1.0 billion Tier 2 capital debt in Q2 2013. The Group will continue to assess market conditions with a view to issuing further subordinated debt in due course.
   
●
Liquidity metrics improved year-to-date reflecting on-going balance sheet improvements. Stressed outflow coverage improved to 147% from 136% at the half year. The liquidity coverage ratio, based on the Group's interpretation of draft guidance, was maintained at above 100%; while the net stable funding ratio improved from year end to 119% but declined marginally in Q3.
 
 
Liquidity, funding and related risks (continued)
                
                       
Funding sources
                      
The table below shows the Group's principal funding sources excluding repurchase agreements.
                       
 
30 September 2013
  
30 June 2013
  
31 December 2012
 
Less than
More than
    
Less than
More than
    
Less than
More than
  
 
1 year
1 year
Total
  
1 year
1 year
Total
  
1 year
1 year
Total
 
£m
£m
£m
  
£m
£m
£m
  
£m
£m
£m
                       
Deposits by banks
                      
 derivative cash collateral
20,548 
- 
20,548 
  
22,176 
- 
22,176 
  
28,585 
- 
28,585 
 other deposits
16,203 
1,850 
18,053 
  
18,084 
5,027 
23,111 
  
18,938 
9,551 
28,489 
                       
 
36,751 
1,850 
38,601 
  
40,260 
5,027 
45,287 
  
47,523 
9,551 
57,074 
                       
Debt securities in issue
                      
 commercial paper
2,690 
- 
2,690 
  
2,526 
- 
2,526 
  
2,873 
- 
2,873 
 certificates of deposit
2,120 
84 
2,204 
  
2,264 
336 
2,600 
  
2,605 
391 
2,996 
 medium-term notes
11,014 
38,438 
49,452 
  
12,013 
43,129 
55,142 
  
13,019 
53,584 
66,603 
 covered bonds
1,871 
7,249 
9,120 
  
185 
9,140 
9,325 
  
1,038 
9,101 
10,139 
 securitisations
10 
8,305 
8,315 
  
807 
9,321 
10,128 
  
761 
11,220 
11,981 
                       
 
17,705 
54,076 
71,781 
  
17,795 
61,926 
79,721 
  
20,296 
74,296 
94,592 
Subordinated liabilities
667 
23,053 
23,720 
  
857 
25,681 
26,538 
  
2,351 
24,951 
27,302 
                       
Notes issued
18,372 
77,129 
95,501 
  
18,652 
87,607 
106,259 
  
22,647 
99,247 
121,894 
                       
Wholesale funding
55,123 
78,979 
134,102 
  
58,912 
92,634 
151,546 
  
70,170 
108,798 
178,968 
                       
Customer deposits
                      
 derivative cash collateral
7,671 
- 
7,671 
  
8,179 
- 
8,179 
  
7,949 
- 
7,949 
 other deposits
409,661 
17,076 
426,737 
  
409,521 
19,506 
429,027 
  
400,012 
26,031 
426,043 
                       
Total customer deposits
417,332 
17,076 
434,408 
  
417,700 
19,506 
437,206 
  
407,961 
26,031 
433,992 
                       
Total funding
472,455 
96,055 
568,510 
  
476,612 
112,140 
588,752 
  
478,131 
134,829 
612,960 
 
 
 
The table below shows the Group's wholesale funding by source.
                   
 
Short-term wholesale
  
Total wholesale
  
Net inter-bank
funding (1)
funding
funding (2)
 
Excluding
Including
  
Excluding
Including
  
Deposits
Loans (3)
Net
 derivative
 derivative
 derivative
 derivative
 inter-bank
collateral
 collateral
collateral
 collateral
 funding
 
£bn
£bn
  
£bn
£bn
  
£bn
£bn
£bn
                   
30 September 2013
34.6 
55.1 
  
113.6 
134.1 
  
18.1 
(16.6)
1.5 
30 June 2013
36.7 
58.9 
  
129.4 
151.5 
  
23.1 
(17.1)
6.0 
31 March 2013
43.0 
70.9 
  
147.2 
175.1 
  
26.6 
(18.7)
7.9 
31 December 2012
41.6 
70.2 
  
150.4 
179.0 
  
28.5 
(18.6)
9.9 
30 September 2012
48.5 
77.2 
  
158.9 
187.6 
  
29.4 
(20.2)
9.2 
 
Notes:
 
(1)
Short-term wholesale balances denote those with a residual maturity of less than one year and include longer-term issuances.
(2)
Excludes derivative cash collateral.
(3)
Primarily short-term balances.
 
 
Liquidity, funding and related risks (continued)
 
Liquidity portfolio
The table below analyses the Group's liquidity portfolio by product and by liquidity value. Liquidity value is lower than carrying value principally as it is stated after the discounts applied by the Bank of England and other central banks to instruments, within the secondary liquidity portfolio, eligible for discounting.
 
 
 
Liquidity value
 
Period end
  
Average
 
30 September
30 June
31 December
  
Q3
Q2 
Full year
2013
2013
2012
2013
2013
2012
 
£m
£m
£m
  
£m
£m
£m
               
Cash and balances at central banks
78,855 
81,737 
70,109 
  
82,237 
85,751 
81,768 
Central and local government bonds
14,550 
18,385 
20,691 
  
16,851 
19,250 
30,972 
Treasury bills
11 
650 
750 
  
214 
665 
202 
               
Primary liquidity
93,416 
100,772 
91,550 
  
99,302 
105,666 
112,942 
Secondary liquidity (1)
57,434 
56,841 
55,619 
  
56,753 
56,486 
41,978 
               
Total liquidity value
150,850 
157,613 
147,169 
  
156,055 
162,152 
154,920 
               
               
Total carrying value
188,102 
198,217 
187,942 
        
 
Note:
 
(1)
Includes assets eligible for discounting at the Bank of England and other central banks.
 
 
Basel III liquidity ratios and other metrics
      
 
30 September
30 June
31 December
2013
2013
2012
 
%
%
%
       
Stressed outflow coverage (1)
147 
136 
128 
Liquidity coverage ratio (LCR) (2)
>100.
>100
>100
Net stable funding ratio (NSFR) (2)
119 
120 
117 
 
Notes:
 
(1)
The Group's liquidity risk appetite is measured by reference to the liquidity buffer as a percentage of stressed contractual and behavioural outflows under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in the Group's Individual Liquidity Adequacy Assessment. Liquidity risk adequacy is determined by surplus of liquid assets over three months stressed outflows under the worst case stresses. This assessment is performed in accordance with PRA guidance.
(2)
The Group monitors the LCR and the NSFR in its internal reporting framework based on its current interpretation of the final rules. At present there is a broad range of interpretations on how to calculate these ratios due to the lack of a commonly agreed market standard and the ratios are subject to future issuances of technical standards from the European Banking Authority. This makes meaningful comparisons of the LCR and NSFR between institutions difficult.
 
Credit risk
Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts.
 
Loans and related credit metrics
The tables below analyse gross loans and advances (excluding reverse repos) and the related credit metrics by division. For a description of the Group's early problem debt identification and problem debt management refer to pages 172 to 180 of the Group's 2012 Annual Report and Accounts.
 
       
Credit metrics
    Year-to-date
 
Gross loans to
REIL
Provisions
REIL as a %
  
of gross
Provisions
loans to
as a %
Impairment
Amounts
Banks
Customers
customers
of REIL
charge
written-off
30 September 2013
£m
£m
£m
£m
%
%
£m
£m
                 
UK Retail
1,043 
112,739 
3,800 
2,247 
3.4 
59 
251 
609 
UK Corporate
925 
103,847 
6,019 
2,348 
5.8 
39 
529 
603 
Wealth
1,320 
16,895 
261 
100 
1.5 
38 
8 
15 
International Banking
5,550 
41,996 
520 
332 
1.2 
64 
182 
239 
Ulster Bank
634 
31,894 
8,535 
4,479 
26.8 
52 
707 
154 
US Retail & Commercial
67 
50,783 
1,074 
266 
2.1 
25 
105 
217 
                 
Retail & Commercial
9,539 
358,154 
20,209 
9,772 
5.6 
48 
1,782 
1,837 
Markets
15,644 
24,443 
341 
263 
1.4 
77 
(4)
46 
Other
2,739 
5,287 
1 
66 
- 
nm
64 
- 
                 
Core
27,922 
387,884 
20,551 
10,101 
5.3 
49 
1,842 
1,883 
Non-Core
427 
41,522 
19,815 
11,320 
47.7 
57 
1,439 
1,270 
                 
Group
28,349 
429,406 
40,366 
21,421 
9.4 
53 
3,281 
3,153 
                 
31 December 2012
                
                 
UK Retail
695 
113,599 
4,569 
2,629 
4.0 
58 
529 
599 
UK Corporate
746 
107,025 
5,452 
2,432 
5.1 
45 
836 
514 
Wealth
1,545 
17,074 
248 
109 
1.5 
44 
46 
15 
International Banking
4,827 
42,342 
422 
391 
1.0 
93 
111 
445 
Ulster Bank
632 
32,652 
7,533 
3,910 
23.1 
52 
1,364 
72 
US Retail & Commercial
435 
51,271 
1,146 
285 
2.2 
25 
83 
391 
                 
Retail & Commercial
8,880 
363,963 
19,370 
9,756 
5.3 
50 
2,969 
2,036 
Markets
16,805 
29,787 
396 
305 
1.3 
77 
25 
109 
Other
3,196 
2,125 
- 
1 
- 
- 
1 
- 
                 
Core
28,881 
395,875 
19,766 
10,062 
5.0 
51 
2,995 
2,145 
Non-Core
477 
56,343 
21,374 
11,200 
37.9 
52 
2,320 
2,121 
Direct Line Group
2,036 
881 
- 
- 
- 
- 
- 
- 
                 
Group
31,394 
453,099 
41,140 
21,262 
9.1 
52 
5,315 
4,266 
 
nm = not meaningful


Credit risk: Loans and related credit metrics (continued)
 
Key points
 
Gross loans and advances to customers excluding reverse repos
 
·
Loans decreased by £23.7 billion since the year end to £429.4 billion of which £14.8 billion was in Non-Core, reflecting disposals and amortisations.
   
·
Core lending decreased by £8.0 billion reflecting a decrease of £3.3 billion in personal lending, mainly unsecured lending in UK Retail and Wealth, with a further £4.7 billion decrease in corporate lending with £2.0 billion in relation to commercial real estate (see below).
 
 
Mortgage lending
·
Mortgage lending decreased by £1.1 billion to £148.6 billion.
 
 
The table below analyses the major mortgage portfolios and includes both Core and Non-Core.
  
     
 
30 September
31 December
2013
2012
 
£m
£m
     
UK Retail
98,903 
99,062 
Ulster Bank
19,227 
19,162 
RBS Citizens
19,943 
21,538 
Wealth
8,665 
8,786 
 
 
 
●
The UK Retail mortgage portfolio totalled £98.9 billion at 30 September 2013, broadly flat compared with 31 December 2012. Gross new mortgage lending was £4.3 billion in Q3 2013, compared with £5.5 billion in H1 2013, reflecting a continuation of the progress seen at half year as newly retrained mortgage advisors returned to customer facing roles.
   
●
Of the Ulster Bank residential mortgage portfolio totalling £19.2 billion at 30 September 2013, 88% was in the Republic of Ireland and 12% in Northern Ireland. At constant exchange rates, the portfolio decreased by 2% from 31 December 2012 as a result of natural amortisation and low market demand.
   
●
RBS Citizens residential real estate portfolio totalled £19.9 billion at 30 September 2013 (31 December 2012 - £21.5 billion). The decrease was due to market conditions and the continued reduction of the Non-Core portfolio (10% of total portfolio). In the Non-Core portfolio of £1.9 billion, the Serviced By Others portfolio decreased from £1.8 billion at year end to £1.5 billion at 30 September 2013. The arrears rate improved from 1.9% to 1.6% reflecting liquidations as well as more effective account servicing and collections. The charge-off rate also continued to decrease.
 


Credit risk: Loans and related credit metrics (continued)
 
Key points (continued)
 
Commercial real estate gross lending
 
 
30 September 2013
  
31 December 2012
 
Investment 
Development 
Total 
  
Investment 
Development 
Total 
By division (1)
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Core
              
UK Corporate
21,566 
3,530 
25,096 
  
22,504 
4,091 
26,595 
Ulster Bank
3,577 
716 
4,293 
  
3,575 
729 
4,304 
US Retail & Commercial
3,996 
1 
3,997 
  
3,857 
3 
3,860 
International Banking
879 
196 
1,075 
  
849 
315 
1,164 
Markets
150 
6 
156 
  
630 
57 
687 
               
 
30,168 
4,449 
34,617 
  
31,415 
5,195 
36,610 
               
Non-Core
              
UK Corporate
1,561 
878 
2,439 
  
2,651 
983 
3,634 
Ulster Bank
3,378 
7,191 
10,569 
  
3,383 
7,607 
10,990 
US Retail & Commercial
282 
- 
282 
  
392 
- 
392 
International Banking
8,114 
14 
8,128 
  
11,260 
154 
11,414 
               
 
13,335 
8,083 
21,418 
  
17,686 
8,744 
26,430 
               
Total
43,503 
12,532 
56,035 
  
49,101 
13,939 
63,040 
 
Note:
 
(1)
Excludes commercial real estate lending in Wealth as these loans are generally supported by personal guarantees in addition to collateral. This portfolio, which totalled £1.4 billion at 30 September 2013 (31 December 2012 - £1.4 billion), continued to perform in line with expectations and required minimal provision.
 
 
 
Total
  
Non-Core
 
30 September
31 December
  
30 September
31 December
2013
2012
2013
2012
           
Lending (gross)
£56.0bn
£63.0bn
  
£21.4bn
£26.4bn
Of which REIL
£21.9bn
£22.1bn
  
£16.0bn
£17.1bn
Provisions
£10.6bn
£10.1bn
  
£8.6bn
£8.3bn
REIL as a % of gross loans to customers
39.1%
35.1%
  
74.8%
64.8%
Provisions as a % of REIL
48%
46%
  
54%
49%
 
Note:
 
(1)
Excludes property related lending to customers in other sectors managed by Real Estate Finance.
 
 
·
Commercial real estate lending declined by 11% to £56.0 billion from £63.0 billion at 31 December 2012 mainly in Non-Core resulting from repayments, asset sales and write-offs.
   
·
Ulster Bank is a significant contributor to Non-Core commercial real estate lending. For further information refer to the section on Ulster Bank Group (Core and Non-Core) in Appendix 1.


Credit risk: Loans and related credit metrics: Key points (continued)
 
REIL and provisions
 
·
REIL decreased by £0.8 billon to £40.4 billion during the nine months ended 30 September 2013, reflecting decreases in Non-Core (£1.6 billion) and UK Retail (£0.8 billion), partially offset by increases in UK Corporate (£0.6 billion) and Ulster Bank (£1.0 billion).
   
·
The overall provision remained broadly stable in the nine months to 30 September 2013 at £21.4 billion, with an increase of £0.6 billion in Ulster Bank being offset by write-offs in UK Corporate and in UK Retail in Q3.
   
·
The annualised provision charge in the period was 18% lower than 2012, with Core falling 18% and Non-Core 17%.
   
·
REIL reductions in Non-Core, primarily related to repayments and write-offs in International Banking (£1.1 billion) and in UK Corporate (£0.4 billion) portfolios. Provision coverage increased to 57% (31 December 2012 - 52%), primarily due to the increased coverage on the Ulster Bank commercial real estate portfolio.
   
·
In UK Retail, REIL continued to decrease due to write-off of aged debt and the transfer of up-to-date mortgages to potential problem loans. Provision coverage remained broadly stable at 59%.
   
·
The 10% increase in UK Corporate REIL was mainly driven by individual cases in the commercial real estate and shipping portfolios as credit conditions remained difficult in these sectors.
   
·
Key economic indicators have stabilised in Ireland. However, Core Ulster Bank credit metrics remain elevated with REIL of £8.5 billion, a 13% increase from 31 December 2012 with provision coverage stable at 52%. The increase in REIL was largely due to a technical adjustment relating to corporate loans which is expected partly to reverse once loan documentation is brought up to date.
 
 
Credit risk (continued)
 
Debt securities: IFRS measurement classification by issuer
The table below analyses debt securities by issuer and IFRS measurement classifications. US central and local government includes US federal agencies; financial institutions include US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS).
 
                   
 
Central and local government
Banks
Other
Corporate
Total
    
financial
  
Of which
UK
US
Other
institutions
  
ABS
30 September 2013
£m
£m
£m
£m
£m
£m
£m
  
£m
                   
Held-for-trading (HFT)
6,871 
9,614 
23,788 
1,650 
15,320 
1,925 
59,168 
  
11,895 
Designated as at fair value
- 
- 
106 
6 
57 
1 
170 
  
56 
Available-for-sale (AFS)
6,819 
15,066 
11,864 
6,162 
19,955 
180 
60,046 
  
27,213 
Loans and receivables
10 
- 
- 
180 
3,159 
179 
3,528 
  
3,059 
                   
Long positions
13,700 
24,680 
35,758 
7,998 
38,491 
2,285 
122,912 
  
42,223 
                   
Of which US agencies
- 
5,526 
- 
- 
15,104 
- 
20,630 
  
19,253 
                   
Short positions (HFT)
(2,856)
(9,317)
(14,104)
(1,124)
(1,497)
(821)
(29,719)
  
(50)
                   
Available-for-sale
                  
Gross unrealised gains
339 
538 
562 
73 
519 
7 
2,038 
  
611 
Gross unrealised losses
- 
(88)
(15)
(254)
(665)
(1)
(1,023)
  
(1,005)
                   
31 December 2012
                  
                   
Held-for-trading
7,692 
17,349 
27,195 
2,243 
21,876 
2,015 
78,370 
  
18,619 
Designated as at fair value
- 
- 
123 
86 
610 
54 
873 
  
516 
Available-for-sale
9,774 
19,046 
16,155 
8,861 
23,890 
3,167 
80,893 
  
30,743 
Loans and receivables
5 
- 
- 
365 
3,728 
390 
4,488 
  
3,707 
                   
Long positions
17,471 
36,395 
43,473 
11,555 
50,104 
5,626 
164,624 
  
53,585 
                   
Of which US agencies
- 
5,380 
- 
- 
21,566 
- 
26,946 
  
24,828 
                   
Short positions (HFT)
(1,538)
(10,658)
(11,355)
(1,036)
(1,595)
(798)
(26,980)
  
(17)
                   
Available-for-sale
                  
Gross unrealised gains
1,007 
1,092 
1,187 
110 
660 
120 
4,176 
  
764 
Gross unrealised losses
- 
(1)
(14)
(509)
(1,319)
(4)
(1,847)
  
(1,817)
 
Key points
 
·
HFT: UK and US government bonds, and US agency ABS decreased reflecting sales following an increase in yields, continued focus on balance sheet reduction and capital management in Markets. The decrease in other government bonds primarily comprises reductions in Japanese, French, Belgian and Canadian bonds, partially offset by an increase in German bonds. Short positions in German and Japanese government bonds increased reflecting focus on reduction in net exposure.
·
AFS: Government securities, primarily US, UK and German, decreased by £11.2 billion reflecting Group Treasury's liquidity portfolio management. Holdings in bank issuances fell by £2.7 billion due to maturities and amortisations. The decrease in financial institution securities, of £3.9 billion, primarily related to ABS (£1.4 billion CLO in Non-Core and £1.6 billion Dutch RMBS), due to disposals, maturities and buy backs. This was partially offset by build up of securities (£0.9 billion), primarily US agency securities in US Retail and Commercial. The reduction includes £7.2 billion related to Direct Line Group, not included at 30 September 2013 as it is an associate.
·
AFS gross unrealised gains and losses: UK Government decrease of £0.7 billion reflects exposure reduction and impact of rating downgrade. A US Government decrease of £0.6 billion also reflects exposure reduction as well as the impact of expectations of tapering of the liquidity programme by the US Federal Reserve. The reduction in bank and other financial institutions securities reflected maturities, disposals and market movements.
 
Credit risk (continued)
 
Derivatives
The table below analyses the fair value of the Group's derivatives by type of contract. Master netting arrangements in respect of mark-to-market (mtm) positions and collateral shown below do not result in a net presentation in the Group's balance sheet under IFRS.
 
 
 
30 September 2013
  
31 December 2012
 
Notional (1)
Assets
Liabilities
  
Notional (1)
Assets
Liabilities
 
£bn
£m
£m
  
£bn
£m
£m
               
Interest rate (2)
37,411 
248,609 
237,127 
  
33,483 
363,454 
345,565 
Exchange rate
5,117 
63,852 
67,944 
  
4,698 
63,067 
70,481 
Credit
357 
7,793 
7,678 
  
553 
11,005 
10,353 
Equity and commodity
87 
3,404 
6,716 
  
111 
4,392 
7,941 
               
   
323,658 
319,465 
    
441,918 
434,340 
Counterparty mtm netting
  
(271,828)
(271,828)
    
(373,906)
(373,906)
               
   
51,830 
47,637 
    
68,012 
60,434 
Cash collateral
  
(26,240)
(21,171)
    
(34,099)
(24,633)
Securities collateral
  
(5,564)
(5,082)
    
(5,616)
(8,264)
               
   
20,026 
21,384 
    
28,297 
27,537 
 
Notes:
 
(1)
Includes exchange traded contracts of £2,399 billion (31 December 2012 - £2,497 billion), principally interest rate. Trades are margined daily hence carrying values were insignificant: assets - £75 million (31 December 2012 - £41 million) and liabilities - £293 million (31 December 2012 - £255 million).
(2)
Interest rate notional includes £22,580 billion (31 December 2012 - £15,864 billion) in respect of contracts with central clearing counterparties to the extent related assets and liabilities are offset.
 
Key points
 
·
Net exposure after taking into account mtm and collateral netting arrangements, decreased by 29% (liabilities decreased by 22%) due to lower derivative fair values, driven by upward shifts in interest rate yields and continued use of trade compression cycles. This was partially offset by increased trade volumes, primarily during the first half of the year and weakening of sterling against the euro year-to-date.
   
·
Interest rate contracts fair value decreased due to significant upward shifts in major yield curves, as expectations of US Federal Reserve tapering of quantitative easing heightened during the first half of 2013 and continued in the third quarter. Continued participation in trade compression cycles contributed to a further reduction in exposures. This was partially offset by an increase in trade volumes, which also resulted in an increase in notional balances.
   
·
The increase in notional and asset fair values of exchange rate contracts reflected increased trade volumes and exchange rate movements. The decrease in liabilities was due to the impact of foreign exchange movements.
   
·
The decrease in credit derivative notional and fair values was driven by increased use of trade compression cycles and novation of certain trades in Markets in line with the Group's risk reduction strategy, primarily in the first half of the year. Tightening of credit spreads also contributed to the decrease in fair value.
   
·
Exchange rate movements, sales and reduction in trade volumes contributed to the decrease in equity contracts.
 
 
Market risk
                            
                             
Value-at-risk(VaR)
                            
For a description of the Group's basis of measurement and methodologies, refer to pages 243 to 247 of the Group's 2012 Annual Report and Accounts.
                             
 
Nine months ended
  
Year ended
 
30 September 2013
  
30 September 2012
  
31 December 2012
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
Trading VaR
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                             
Interest rate
38.8 
32.8 
78.2 
24.6 
  
63.7 
44.8 
95.7 
43.6 
  
62.6 
75.6 
95.7 
40.8 
Credit spread
66.5 
44.9 
86.8 
44.9 
  
69.4 
67.2 
94.9 
44.9 
  
69.2 
74.1 
94.9 
44.9 
Currency
9.5 
7.6 
20.6 
4.3 
  
11.4 
8.9 
21.3 
5.3 
  
10.3 
7.6 
21.3 
2.6 
Equity
6.3 
4.5 
12.8 
4.2 
  
6.3 
8.2 
12.5 
3.3 
  
6.0 
3.9 
12.5 
1.7 
Commodity
1.0 
0.6 
3.7 
0.3 
  
1.9 
2.7 
6.0 
0.9 
  
2.0 
1.5 
6.0 
0.9 
Diversification (1)
  
(31.3)
        
(40.8)
        
(55.4)
    
                             
Total
86.1 
59.1 
118.8 
54.5 
  
99.0 
91.0 
137.0 
66.5 
  
97.3 
107.3 
137.0 
66.5 
                             
Core
70.7 
46.3 
104.6 
44.2 
  
74.2 
69.4 
118.0 
47.4 
  
74.6 
88.1 
118.0 
47.4 
Non-Core
20.5 
17.6 
24.9 
17.5 
  
32.3 
26.5 
41.9 
22.1 
  
30.1 
22.8 
41.9 
22.0 
                             
CEM (2)
62.7 
42.8 
85.4 
40.1 
  
77.7 
74.3 
84.2 
73.3 
  
78.5 
84.9 
86.0 
71.7 
                             
Total (excluding CEM)
41.2 
26.7 
60.4 
25.4 
  
46.4 
46.6 
76.4 
32.2 
  
47.1 
57.6 
76.4 
32.2 
 
Notes:
 
(1)
The Group benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time.
(2)
For a description of counterparty exposure management (CEM) activities, refer to page 248 of the Group's 2012 Annual Report and Accounts.
 
Market risk (continued)
 
Key points
 
·
The Group's interest rate VaR was lower in the first nine months of 2013 than in the comparative period in 2012. VaR fell during H1 2013 reflecting de-risking by a number of Markets businesses and an extension to the scope of valuation adjustments captured in VaR in March 2013 by counterparty exposure management. VaR increased during July and August as a number of Markets businesses repositioned their exposures, although this was partially offset by hedging against certain valuation adjustments. In mid-September, VaR increased further with some significant client transactions and fell again once hedging was complete.
   
·
The period end and average credit spread VaR were lower in the first nine months of 2013 than in the same period in 2012. Towards the end of Q2 2013 the credit spread VaR fell as a number of Markets businesses reduced and repositioned their exposures after the US Federal Reserve indicated the possibility of tapering of its bond-buying programme in 2013. The credit spread VaR fell throughout Q3 2013 as Markets gradually reduced its asset-backed securities inventory.
 
Non-trading VaR
The average VaR for the Group's non-trading portfolio, predominantly comprising available-for-sale portfolios in Markets and Non-Core was £10.0 million for the first nine months of 2013 compared with £12.6 million in the same period in 2012. Changes to the call assumptions on some Dutch residential mortgage-backed securities implemented in March 2013 extended their weighted average life and as a result the period end VaR at 30 June 2013 increased to £12.3 million. During Q3, as the issuer bought back some of these securities, the period end VaR at 30 September 2013 fell to £7.1 million (31 December 2012 - £9.5 million).
 
Other portfolios
The structured credit portfolio in Non-Core is measured on a notional and fair value basis because of its illiquid nature. Notional and fair value decreased to £1.0 billion and £0.8 billion respectively (Q4 2012 - £2.0 billion and £1.5 billion), reflecting the sale of underlying assets from collateralised debt obligations and legacy multi-seller conduits.
 
Country risk
Country risk is the risk of material losses arising from significant country-specific events such as sovereign events (defaults or restructurings); economic events (contagion of sovereign default to other parts of the economy, cyclical economic shock); political events (transfer or convertibility restrictions, expropriation or nationalisation); and conflict.
 
Overview
Comments below relate to trends over the nine months to 30 September 2013, unless stated otherwise.
 
 
·
Balance sheet and off-balance sheet exposure to most countries shown in the summary tables declined across all broad product categories despite the appreciation of the euro by 2.6%, as the Group maintained a cautious stance and many clients reduced debt levels. Non-Core lending declined further, reflecting prepayments, amortisation and the Group's risk reduction strategy.
   
·
Total eurozone balance sheet exposure declined by £33.7 billion or 20% to £132.2 billion, caused mostly by significant reductions in liquidity held with the Bundesbank and bank derivative exposures. Most of the latter reductions related to counterparties in the Netherlands, France and Germany. The Group nearly halved its European credit default swaps positions to reduce risks and capital requirements in line with strategic plans through participation in trade compression cycles, novations and maturities.
   
·
Eurozone periphery balance sheet exposure decreased by £3.8 billion to £55.3 billion.
 
○
Ireland - repo and derivatives exposures, largely to banks and other financial institutions, decreased by £0.4 billion and £0.3 billion respectively. Gross derivatives exposure declined significantly as a major counterparty novated trades to a UK subsidiary.
 
○
Spain - the fair value of Group Treasury's AFS securities, mainly covered bonds, increased by £0.5 billion due to narrowing of credit spreads and higher prices. Lending decreased by £1.0 billion, half of which was in Non-Core and primarily in the commercial real estate and construction sectors. Bank derivatives declined by £0.5 billion due to reduced customer demand.
 
○
Italy - the £2.0 billion decrease in exposures reflected reductions in off-balance sheet exposure to the electricity and insurance sectors, derivatives with corporates and banks, and debt securities.
 
○
Portugal - there were further reductions in lending to the telecommunications and transport sectors and in derivatives exposure to banks.
 
○
Greece - exposure decreased by £0.2 billion, caused by reductions in lending and derivatives. The remaining exposure mostly comprised collateralised derivatives exposure to banks and corporate lending, including exposure to local subsidiaries of international companies.
   
·
Germany - exposure decreased principally owing to a reduction in the significant liquidity held with the central bank, as part of the Group's asset and liability management.
   
·
Japan - exposure decreased by £6.2 billion. Net HFT and AFS government bonds reduced by £3.5 billion and £0.6 billion respectively, and derivatives exposure, largely to banks, decreased by £1.7 billion. This reflected depreciation of the yen, lower trading flows and a reduction in derivatives bond collateral.
   
·
China - lending and off-balance sheet exposure to banks increased by £1.5 billion and £0.5 billion respectively, as customer demand grew. Derivatives exposure to public sector entities decreased by £0.6 billion, owing to fluctuations in short-term hedging by clients.
   
·
Funding mismatches - material estimated funding mismatches at risk of redenomination at 30 September 2013 were: Ireland £8.5 billion (31 December 2012 - £9.0 billion) and Spain £4.0 billion (31 December 2012 - £4.5 billion). The net positions for Italy (31 December 2012 - £1.0 billion), Portugal, Greece and Cyprus were all minimal.
 
 
Country risk: Summary tables
                                          
 
30 September 2013
 
Lending
                                
Debt securities
          
Govt
                
AFS
  
Net
          
Gross
Central
banks
Other
banks
Other
FI
Corporate
Personal
Total
lending
Of  which
Non-Core
and LAR
HFT
(net)
Derivatives
Repos
Balance sheet
Off- balance sheet
Total
exposure
  
CDS notional
less fair value
Derivatives
Repos
 
£m
£m
£m
£m
£m
£m
£m
  
£m
  
£m
£m
  
£m
£m
  
£m
  
£m
  
£m
  
£m
  
£m
£m
                                                     
Eurozone
                                                    
Ireland
40 
78 
83 
999 
17,614 
17,871 
36,685 
  
9,845 
  
271 
304 
  
1,440 
175 
  
38,875 
  
2,982 
  
41,857 
  
(161)
  
3,475 
7,907 
Spain
- 
- 
1 
10 
3,348 
327 
3,686 
  
2,256 
  
5,385 
141 
  
1,273 
- 
  
10,485 
  
1,610 
  
12,095 
  
(394)
  
4,320 
3,203 
Italy
- 
22 
17 
232 
1,242 
25 
1,538 
  
792 
  
539 
388 
  
1,963 
- 
  
4,428 
  
1,986 
  
6,414 
  
(647)
  
7,862 
- 
Portugal
- 
- 
1 
- 
213 
6 
220 
  
208 
  
192 
35 
  
420 
- 
  
867 
  
241 
  
1,108 
  
(102)
  
496 
26 
Greece
- 
3 
1 
1 
115 
14 
134 
  
59 
  
- 
- 
  
267 
- 
  
401 
  
26 
  
427 
  
1 
  
495 
- 
Cyprus
- 
- 
- 
- 
223 
12 
235 
  
112 
  
- 
3 
  
29 
- 
  
267 
  
31 
  
298 
  
- 
  
45 
51 
Germany
- 
8,448 
500 
157 
3,056 
87 
12,248 
  
2,388 
  
5,877 
3,093 
  
8,178 
469 
  
29,865 
  
6,804 
  
36,669 
  
(790)
  
40,009 
8,759 
Netherlands
13 
1,083 
531 
1,188 
3,919 
23 
6,757 
  
1,403 
  
5,614 
713 
  
7,071 
73 
  
20,228 
  
10,638 
  
30,866 
  
(679)
  
17,219 
2,901 
France
418 
- 
1,910 
131 
1,938 
77 
4,474 
  
982 
  
1,768 
3,050 
  
5,826 
506 
  
15,624 
  
9,255 
  
24,879 
  
(1,459)
  
33,301 
15,955 
Luxembourg
- 
16 
47 
995 
1,915 
4 
2,977 
  
749 
  
57 
48 
  
1,319 
147 
  
4,548 
  
2,538 
  
7,086 
  
(56)
  
2,554 
5,386 
Belgium
- 
- 
86 
157 
382 
20 
645 
  
241 
  
438 
(76)
  
2,525 
31 
  
3,563 
  
1,427 
  
4,990 
  
(135)
  
3,593 
1,367 
Other
92 
- 
12 
45 
682 
15 
846 
  
84 
  
502 
489 
  
1,151 
15 
  
3,003 
  
1,165 
  
4,168 
  
(169)
  
3,952 
1,073 
                                                     
Other countries
                                                  
Japan
- 
610 
331 
136 
625 
17 
1,719 
  
60 
  
753 
1,417 
  
1,152 
198 
  
5,239 
  
348 
  
5,587 
  
(51)
  
8,412 
16,298 
India
- 
60 
1,150 
14 
1,942 
72 
3,238 
  
78 
  
580 
216 
  
110 
- 
  
4,144 
  
771 
  
4,915 
  
(53)
  
232 
91 
China
- 
144 
2,292 
171 
547 
34 
3,188 
  
27 
  
128 
15 
  
267 
64 
  
3,662 
  
1,239 
  
4,901 
  
2 
  
267 
3,796 
South Korea
- 
6 
695 
62 
634 
1 
1,398 
  
- 
  
131 
144 
  
245 
31 
  
1,949 
  
699 
  
2,648 
  
166 
  
522 
1,098 
Brazil
- 
- 
1,107 
- 
112 
3 
1,222 
  
57 
  
- 
313 
  
43 
- 
  
1,578 
  
160 
  
1,738 
  
33 
  
74 
- 
Russia
- 
42 
646 
2 
507 
48 
1,245 
  
45 
  
154 
7 
  
21 
- 
  
1,427 
  
232 
  
1,659 
  
(144)
  
21 
2 
Turkey
72 
119 
89 
41 
869 
15 
1,205 
  
134 
  
76 
22 
  
108 
- 
  
1,411 
  
342 
  
1,753 
  
(31)
  
153 
510 
 
Note:
 
(1)
These tables show the Group's exposure, by country of incorporation of the counterparty, at 30 September 2013, except exposures to individuals and governments which are shown by country of residence. Countries shown are those where the Group's balance sheet exposure (as defined in this section) to counterparties incorporated (or individuals residing) within them exceeded £1 billion and countries had ratings of A+ or below from Standard and Poor's, Moody's or Fitch at 30 September 2013, as well as selected eurozone countries. The exposures are stated before taking into account risk mitigants, such as guarantees, insurance or collateral (with the exception of reverse repos) which may have been put in place to reduce or eliminate exposure to country risk events. Exposures relating to ocean-going vessels are not included as they cannot be meaningfully assigned to specific countries from a country risk perspective. For a description of the governance, monitoring and management of the Group's country risk framework and definitions, refer to pages 254 and 255 of the Group's 2012 Annual Report and Accounts.
 
 
Country risk: Summary tables (continued)
                                          
 
31 December 2012
 
Lending
                                
Debt securities
          
Govt
      
Corporate
Personal
          
Net
        
CDS notional
Gross
Central
banks
Other
banks
Other
FI
Total
lending
Of which
Non-Core
AFS
and LAR
HFT(net)
Derivatives
Repos
Balance sheet
Off-balance sheet
Total exposure
  
less
fair value
Derivatives
Repos
 
£m
£m
£m
£m
£m
£m
£m
  
£m
  
£m
£m
  
£m
£m
  
£m
  
£m
  
£m
  
£m
  
£m
£m
                                                     
Eurozone
                                                    
Ireland
42 
73 
98 
532 
17,921 
17,893 
36,559 
  
9,506 
  
424 
363 
  
1,692 
579 
  
39,617 
  
2,958 
  
42,575 
  
(137)
  
17,066 
7,994 
Spain
- 
6 
1 
59 
4,260 
340 
4,666 
  
2,759 
  
4,871 
503 
  
1,754 
- 
  
11,794 
  
1,624 
  
13,418 
  
(375)
  
5,694 
610 
Italy
9 
21 
200 
218 
1,392 
23 
1,863 
  
900 
  
977 
630 
  
2,297 
- 
  
5,767 
  
2,616 
  
8,383 
  
(492)
  
9,597 
3 
Portugal
- 
- 
- 
- 
336 
7 
343 
  
251 
  
180 
35 
  
514 
- 
  
1,072 
  
258 
  
1,330 
  
(94)
  
618 
26 
Greece
- 
7 
- 
1 
179 
14 
201 
  
68 
  
- 
1 
  
360 
- 
  
562 
  
27 
  
589 
  
(4)
  
623 
- 
Cyprus
- 
- 
- 
2 
274 
15 
291 
  
121 
  
- 
4 
  
35 
- 
  
330 
  
47 
  
377 
  
- 
  
54 
15 
Germany
- 
20,018 
660 
460 
3,756 
83 
24,977 
  
2,817 
  
9,263 
3,500 
  
9,476 
323 
  
47,539 
  
7,294 
  
54,833 
  
(1,333)
  
57,202 
8,407 
Netherlands
7 
1,822 
496 
1,785 
3,720 
26 
7,856 
  
2,002 
  
7,800 
647 
  
9,089 
354 
  
25,746 
  
11,473 
  
37,219 
  
(1,470)
  
23,957 
10,057 
France
494 
9 
2,498 
124 
2,426 
71 
5,622 
  
1,621 
  
2,242 
3,581 
  
7,422 
450 
  
19,317 
  
9,460 
  
28,777 
  
(2,197)
  
44,920 
14,324 
Luxembourg
- 
13 
99 
717 
1,817 
4 
2,650 
  
973 
  
59 
192 
  
1,462 
145 
  
4,508 
  
2,190 
  
6,698 
  
(306)
  
3,157 
5,166 
Belgium
- 
- 
186 
249 
414 
22 
871 
  
368 
  
844 
564 
  
3,140 
50 
  
5,469 
  
1,308 
  
6,777 
  
(233)
  
4,961 
1,256 
Other
126 
- 
19 
90 
856 
14 
1,105 
  
88 
  
576 
666 
  
1,737 
11 
  
4,095 
  
1,269 
  
5,364 
  
(194)
  
6,029 
2,325 
                                                     
Other countries
                                                  
Japan
- 
832 
315 
193 
319 
15 
1,674 
  
123 
  
1,548 
4,890 
  
2,883 
199 
  
11,194 
  
622 
  
11,816 
  
(70)
  
13,269 
16,350 
India
- 
100 
1,021 
48 
2,628 
106 
3,903 
  
170 
  
683 
391 
  
64 
- 
  
5,041 
  
914 
  
5,955 
  
(43)
  
167 
108 
China
2 
183 
829 
48 
585 
29 
1,676 
  
33 
  
201 
61 
  
903 
94 
  
2,935 
  
739 
  
3,674 
  
50 
  
903 
3,833 
South Korea
- 
22 
771 
71 
289 
2 
1,155 
  
2 
  
144 
163 
  
221 
30 
  
1,713 
  
704 
  
2,417 
  
(60)
  
616 
449 
Brazil
- 
- 
950 
- 
125 
3 
1,078 
  
60 
  
14 
582 
  
73 
- 
  
1,747 
  
189 
  
1,936 
  
393 
  
85 
- 
Russia
- 
53 
848 
14 
494 
55 
1,464 
  
56 
  
160 
249 
  
23 
- 
  
1,896 
  
391 
  
2,287 
  
(254)
  
23 
- 
Turkey
115 
163 
82 
94 
928 
12 
1,394 
  
258 
  
56 
125 
  
93 
- 
  
1,668 
  
481 
  
2,149 
  
(36)
  
114 
449 
 
Risk factors
The principal risks and uncertainties facing the Group are unchanged from those disclosed on pages 503 to 515 of the 2012 Annual Report & Accounts (the 2012 R&A), however the operational, legal and regulatory landscape in which the Group operates has continued to evolve since the 2012 R&A was approved and since the 2013 Interim Results were approved in August. Set out in further detail below is the Summary of our Principal Risks and Uncertainties. The Group is amending the risk factor relating to the execution of its strategic plan (see below) as a result of the actions being announced today.
 
Summary of our Principal Risks and Uncertainties
Set out below is a summary of certain risks which could adversely affect the Group. These should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. The summary should be read in conjunction with the Risk and balance sheet management section on pages 107 to 293 of the 2012 R&A, which also includes a fuller description of these and other risk factors.
 
 
●
The Group's businesses, earnings and financial condition have been and will continue to be negatively affected by global economic conditions, the instability in the global financial markets and increased competition and political risks including proposed referenda on Scottish independence and UK membership of the EU. 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 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 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 Group is subject to a number of regulatory initiatives which may adversely affect its business, including the UK Government's implementation of the final recommendations of the Independent Commission on Banking's final report on competition and structural reforms in the UK banking industry the US Federal Reserve's proposal for applying US capital, liquidity and enhanced prudential standards to certain of the Group's US operations.
   
●
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.

Summary of our Principal Risks and Uncertainties (continued)
 
●
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.
   
●
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 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.
   
●
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.
   
●
Operational and reputational risks are inherent in the Group's businesses.
   
●
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.
   
●
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 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.
 


The Group is amending the risk factor relating to its ability to execute its strategic plan as a result of the new actions being announced today.
 
The Group's ability to implement its new strategic plan and achieve its capital goals depends on the success of the Group's refocus on its core strengths and its plans to further strengthen its balance sheet and capital position
Since the global economic and financial crisis that began in 2008 and the changed global economic outlook, the Group has been engaged in a financial and core business restructuring which focused on achieving appropriate risk-adjusted returns under these changed circumstances, reducing reliance on wholesale funding and lowering exposure to capital-intensive businesses. A key part of the restructuring programme announced in February 2009 was to run-down and sell the Group's non-core assets and businesses and the continued review of the Group's portfolio to identify further disposals of certain non-core assets and businesses. Assets identified for this purpose and allocated to the Group's Non-Core division totalled £258 billion, excluding derivatives, at 31 December 2008. By 30 September 2013, this total had reduced to £37.3 billion (31 December 2012 - £57.4 billion), excluding derivatives, as further progress was made in business disposals and portfolio sales during the course of 2013. This balance sheet reduction programme continues alongside the disposals under the State Aid restructuring plan approved by the European Commission. During 2012 the Group implemented changes to its wholesale banking operations, including the reorganisation of its wholesale businesses and the exit and downsizing of selected existing activities (including cash equities, corporate banking, equity capital markets, and mergers and acquisitions).
 
During Q3 2013, the Group has worked with HM Treasury as part of its assessment of the merits of creating an external "bad bank" to hold certain assets of the Group. Although the review concluded that the establishment of an external "bad bank" was not in the best interests of all stakeholders, the Group has committed to take a series of actions to further de-risk its business and strengthen its capital position. These actions include:
 
●
The creation of an internal "bad bank" to manage the run-down of problem assets projected to be £38 billion by the end of 2013, with the goal of removing  55-70% of these assets over the next two years with a clear aspiration to remove all these assets from the balance sheet in three years; and
   
●
Lifting our capital targets including by:
 
○
accelerating the divestment of Citizens, the Group's US banking subsidiary, with a partial initial public offering now planned for 2014, and full divestment of the business intended by the end of 2016;
 
○
intensifying management actions to reduce risk weighted assets.
 
In addition to the actions above, the Group has also announced today that it is undertaking a full review of the Group's Customer-facing businesses, IT and operations and its organisational and decision-making structures to develop detailed plans on how the Group can realign its cost base with a target of reducing our cost:income percentage into the mid 50s, down from 65% currently. The outcome of this review will be announced at the time of the Group's 2013 year-end results in February 2014 The outcome of such review could result in additional actions to those identified above, including asset sales, restructuring of businesses and other similar actions.
 
Because the ability to dispose of businesses and assets and the price achieved for such disposals will be dependent on prevailing economic and market conditions, which remain volatile, there is no assurance that the Group will be able to sell or run-down (as applicable) the businesses it has planned to sell or exit or asset portfolios it is seeking to sell either on favourable economic terms to the Group or at all. Material tax or other contingent liabilities could arise on the disposal or run-down of assets or businesses and there is no assurance that any conditions precedent agreed will be satisfied, or consents and approvals required will be obtained in a timely manner, or at all. There is consequently a risk that the Group may fail to complete such disposals within time frames envisaged by the Group.
 
The Group may be exposed to deteriorations in businesses or portfolios being sold between the announcement of the disposal and its completion, which period may be lengthy and may span many months. In addition, the Group may be exposed to certain risks, including risks arising out of ongoing liabilities and obligations, breaches of covenants, representations and warranties, indemnity claims, transitional services arrangements and redundancy or other transaction related costs.
 
The occurrence of any of the risks described above could negatively affect the Group's ability to implement its new strategic plan and achieve its capital targets and could have a material adverse effect on the Group's business, results of operations, financial condition and cash flows.
 
 
Additional information
Share information
 
 
30 September 
2013 
30 June
2013 
31 December 
2012 
       
Ordinary share price
359.9p 
273.5p 
324.5p 
       
Number of ordinary shares in issue
6,186m 
6,121m 
6,071m 
 
 
Statutory results
Financial information contained in this document does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 ('the Act'). The statutory accounts for the year ended 31 December 2012 have been filed with the Registrar of Companies. The report of the auditor on those statutory accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Act.
 
The Q3 2013 results have not been audited or reviewed by the auditors.
 
Financial calendar
 
   
2013 annual results
27 February 2014
 
 
 

 
 
 

 
 
 

 
 
 

 
 
Signatures


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







 
 
Date: 1 November 2013
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary