Royal Bk Scot.Grp. RBS Interim Management Statement - Part 2 of 7

  Royal Bk Scot.Grp. (RBS) - Interim Management Statement - Part 2 of 7

RNS Number : 1667Q
Royal Bank of Scotland Group PLC
02 November 2012




























                          Third quarter 2012 results

                                      

































Contents



                                                              Page
                                                                  
Forward-looking statements                                        3
Presentation of information                                       4
Results summary                                                   6
Results summary - statutory                                       9
Summary consolidated income statement                            10
Summary consolidated balance sheet                               12
Analysis of results                                              13
Net interest income                                            13
Non-interest income                                            14
Operating expenses                                             15
Impairment losses                                              16
One-off and other items                                        17
Capital resources and ratios                                   18
Balance sheet                                                  19
Divisional performance                                           20
                                                                  
UK Retail                                                        23
UK Corporate                                                     26
Wealth                                                           29
International Banking                                            31
Ulster Bank                                                      35
US Retail & Commercial                                           38
Markets                                                          44
Direct Line Group                                                48
Central items                                                    54
Non-Core                                                         56
Statutory results                                                63
                                                                  
Condensed consolidated income statement                          63
Condensed consolidated statement of comprehensive income         64
Condensed consolidated balance sheet                             65
Commentary on condensed consolidated balance sheet               66
Average balance sheet                                            68
Condensed consolidated statement of changes in equity            71
Notes                                                            74
                                                                  
1. Basis of preparation                                      74
2. Accounting policies                                       74
3. Analysis of income, expenses and impairment losses        75
4. Loan impairment provisions                                77
5. Tax                                                       78
6. Profit/(loss) attributable to non-controlling interests   79
7. Dividends                                                 80
8. Share consolidation                                       80
9. Earnings per ordinary and B share                         81



Contents (continued)



Notes (continued)                                                        Page
                                                                            
10. Discontinued  operations and  assets and  liabilities of  disposal 
groups                                                                     82
11. Financial instruments                                                84
12. Available-for-sale reserve                                           86
13. Contingent liabilities and commitments                               86
14. Litigation, investigations and reviews                               87
15. Other developments                                                   89
16. Date of approval                                                     90
17. Post balance sheet events                                            91
Risk and balance sheet management                                          92
                                                                            
Balance sheet management                                                   92
Capital                                                                    92
Liquidity and funding risk                                                 97
Overview                                                                 97
Funding sources                                                          98
Liquidity portfolio                                                     103
Net stable funding ratio                                                104
Credit risk                                                               105
Financial assets                                                        105
Problem debt management                                                 112
Risk elements in lending                                                114
Impairment provisions                                                   115
Ulster Bank Group (Core and Non-Core)                                   116
Market risk                                                               122
Country risk                                                              127
Introduction                                                            127
Summary                                                                 130
Total eurozone                                                          135
Ireland                                                                 137
Spain                                                                   140
Italy                                                                   143
Portugal                                                                146
Greece                                                                  149
Additional information                                                    152
                                                                            
Share information                                                         152
Statutory results                                                         152
Financial calendar                                                        152
                                                                            
Appendix 1 Income statement reconciliations and Segmental analysis           
Appendix 2 Businesses outlined for disposal                                  
Index                                                                        



Forward-looking statements



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

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

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



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



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



Presentation of information



The financial  information  on pages  6  to  62, 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 on this basis excludes:



· own credit adjustments;
 
· Asset Protection Scheme (APS);
 
· Payment Protection Insurance (PPI) costs;
 
· sovereign debt impairment;
 
  interest rate  hedge adjustments  on impaired  available-for-sale  sovereign 
· debt;
 
· amortisation of purchased intangible assets;
 
· integration and restructuring costs;
 
· (loss)/gain on redemption of own debt;
 
· strategic disposals;
 
· bonus tax; and
 
· RFS Holdings minority interest (RFS MI).



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 63 to 91 inclusive are on a statutory basis. Reconciliations between the
managed basis and statutory basis are included in Appendix 1.



Disposal groups

In accordance with IFRS 5 'Non-current  Assets Held for Sale and  Discontinued 
Operations', in  Q42011  the Group  transferred  the assets  and  liabilities 
relating to the  planned disposal  of its RBS  England and  Wales and  NatWest 
Scotland  branch-based  businesses,  along  with  certain  SME  and  corporate 
activities across  the  UK  ('UK  branch-based  businesses'),  to  assets  and 
liabilities of disposal groups.



Presentation of information (continued)



Restatements



Organisational change

In January  2012,  the  Group  announced  changes  to  its  wholesale  banking 
operations in  light  of a  changed  market and  regulatory  environment.  The 
changes have seen the reorganisation of the Group's wholesale businesses  into 
'Markets' and 'International Banking' and the proposed exit and/or  downsizing 
of selected  activities.  The changes  will  ensure the  wholesale  businesses 
continue to deliver against the Group's strategy.



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



Revised allocation of Group Treasury costs

In the first quarter of 2012, the Group revised its allocation of funding  and 
liquidity costs and capital for the new divisional structure as well as for  a 
new methodology. The new methodology is designed to ensure that the  allocated 
funding and  liquidity  costs  more  fully  reflect  each  division's  funding 
requirement.



Revised divisional return on equity ratios

For the purposes of  divisional return on equity  ratios, notional equity  has 
been  calculated  as  a  percentage  of  the  monthly  average  of  divisional 
risk-weighted assets (RWAs),  adjusted for  capital deductions.  Historically, 
notional equity  was allocated  at 9%  of  RWAs for  the Retail  &  Commercial 
divisions and 10% of RWAs for Global Banking & Markets. This was revised in Q1
2012 and  10% of  RWAs is  now applied  to both  the Retail  & Commercial  and 
Markets divisions.



Fair value of own debt and derivative liabilities

The Group had previously excluded changes in the fair value of own debt (FVOD)
in presenting the underlying performance of the Group on a managed basis given
it is  a  volatile  non-cash  item.  To  better  align  our  managed  view  of 
performance, movements in the fair value of own derivative liabilities (FVDL),
previously incorporated within Markets operating performance, are now combined
with movements in FVOD  in a single measure,  'Own Credit Adjustments'  (OCA). 
This took effect in Q1 2012 and Group and Markets operating results have  been 
adjusted to reflect this change which does not affect profit/(loss) before and
after tax.



Comparatives for all of  the items discussed above  were restated in Q1  2012. 
For further information on the restatements refer to the announcement dated  1 
May 2012, available on www.rbs.com/ir



Share consolidation

Following approval at the Group's Annual  General Meeting on 30 May 2012,  the 
sub-division and consolidation of the Group's ordinary shares on a one-for-ten
basis took effect on 6 June 2012. Consequently, disclosures for 2011  relating 
to or  affected  by  numbers of  ordinary  shares  or share  price  have  been 
restated.



Results summary



                               Quarter ended             Nine months ended
                                30                  30          30         30
                        September 30 June September   September September

                            2012    2012      2011        2012      2011
                              £m      £m        £m         £m        £m
                                                                       
Core                                                                    
Total income (1)            6,408   6,437     6,028     19,707    20,522
Operating expenses (2)     (3,427)  (3,615)    (3,498)    (10,763)   (10,853)
Insurance net claims         (596)    (576)      (696)     (1,821)    (2,183)
Operating profit before
impairment losses (3)       2,385   2,246     1,834      7,123     7,486
Impairment losses (4)        (752)    (728)      (854)     (2,305)    (2,579)
Operating profit (3)        1,633   1,518       980      4,818     4,907
                                                                       
Non-Core                                                                
Total income (1)               50       1        65        320     1,466
Operating expenses (2)       (212)    (262)      (323)       (737)      (981)
Insurance net claims            -       -       (38)          -      (256)
Operating (loss)/profit
before impairment

 losses (3)                 (162)    (261)      (296)       (417)       229
Impairment losses (4)        (424)    (607)      (682)     (1,520)    (3,168)
Operating loss (3)           (586)    (868)      (978)     (1,937)    (2,939)
                                                                       
Total                                                                   
Total income (1)            6,458   6,438     6,093     20,027    21,988
Operating expenses (2)     (3,639)  (3,877)    (3,821)    (11,500)   (11,834)
Insurance net claims         (596)    (576)      (734)     (1,821)    (2,439)
Operating profit before
impairment losses (3)       2,223   1,985     1,538      6,706     7,715
Impairment losses (4)      (1,176)  (1,335)    (1,536)     (3,825)    (5,747)
Operating profit (3)        1,047     650         2      2,881     1,968
Own credit adjustments     (1,455)    (518)     2,622     (4,429)     2,386
Asset Protection Scheme         1      (2)       (60)        (44)      (697)
Payment Protection
Insurance costs              (400)    (135)         -       (660)      (850)
Sovereign debt
impairment                      -       -      (142)          -      (875)
Other items                  (451)     (96)      (418)       (511)      (722)
(Loss)/profit before
tax                        (1,258)    (101)     2,004     (2,763)     1,210



For definitions of the notes refer to page 8.



Results summary (continued)



                                Quarter ended            Nine months ended
                                  30     30         30           30         30
                          September  June September   September September

Key metrics                    2012  2012      2011       2012      2011
                                                                       
Performance ratios                                                      
Core                                                                    
 - Net interest margin       2.15% 2.20%     2.09%      2.16%     2.19%
 - Cost:income ratio (5)       59%   62%       66%        60%       59%
 - Return on equity           9.7%  9.3%      6.6%      10.0%     11.4%
 - Adjusted
earnings/(loss) per
ordinary and

 B share from
continuing operations (6)      6.1p  4.4p     (2.7p)      16.5p     11.3p
 - Adjusted earnings per
ordinary and

 B share from
continuing operations

 assuming a normalised
tax rate of 24.5%

 (2011 - 26.5%) (6)        10.3p  9.7p      6.7p      31.5p     33.4p
Non-Core                                                                
 - Net interest margin       0.41% 0.24%     0.50%      0.32%     0.69%
 - Cost:income ratio (5)        nm    nm        nm         nm       81%
Group                                                                   
 - Net interest margin       1.94% 1.95%     1.84%      1.93%     1.94%
 - Cost:income ratio (5)       62%   66%       71%        63%       61%
Continuing operations                                                   
 - Basic (loss)/earnings
per ordinary and

 B share (6,7)            (12.5p) (4.2p)     11.3p     (30.7p)     (1.9p)



nm = not meaningful



For definitions of the notes refer to the following page.



Results summary (continued)



                          30 September  30 June         31 December

                                 2012     2012 Change        2011 Change
                                                                        
Capital and balance sheet                                                
Funded balance sheet (8)        £909bn   £929bn    (2%)      £977bn    (7%)
Total assets                  £1,377bn £1,415bn    (3%)    £1,507bn    (9%)
Loan:deposit ratio - Core
(9)                                91%      92% (100bp)         94% (300bp)
Loan:deposit ratio -
Group (9)                         102%     104% (200bp)        108% (600bp)
Risk-weighted assets -
gross                           £481bn   £488bn    (1%)      £508bn    (5%)
Benefit of Asset
Protection Scheme (APS)         (£48bn)   (£53bn)    (9%)      (£69bn)   (30%)
Risk-weighted assets -
net of APS                      £433bn   £435bn      -      £439bn    (1%)
Total equity                     £74bn    £75bn    (1%)       £76bn    (3%)
Core Tier 1 ratio*               11.1%    11.1%      -       10.6%   50bp
Tier 1 ratio                     13.4%    13.4%      -       13.0%   40bp
Risk elements in lending
(REIL) (10)                      £40bn    £40bn      -       £41bn    (2%)
REIL as a % of gross
loans and advances (11)           9.0%     8.6%   40bp        8.6%   40bp
Tier 1 leverage ratio
(12)                             15.4x    15.6x    (1%)       16.9x    (9%)
Tangible equity leverage
ratio (13)                        5.9%     6.0%  (10bp)        5.7%   20bp
Tangible net asset value
per ordinary and

 B share (6,14)                  476p     489p    (3%)        501p    (5%)



* The benefit  of APS  in the  Core Tier 1  ratio was  71 basis  points at  30 
September 2012 (30 June 2012  - 77 basis points; 31  December 2011 - 90  basis 
points).



Notes:

(1)  Excluding own credit adjustments, Asset Protection Scheme, (loss)/gain on
     redemption of own  debt, strategic  disposals and  RFS Holdings  minority 
     interest.
(2)  Excluding Payment Protection Insurance  costs, amortisation of  purchased 
     intangible assets, integration and restructuring costs, bonus tax and RFS
     Holdings minority interest.
(3)  Operating  profit/(loss)  before  tax,  own  credit  adjustments,   Asset 
     Protection Scheme,  Payment Protection  Insurance costs,  sovereign  debt 
     impairment and related interest  rate hedge adjustments, amortisation  of 
     purchased  intangible  assets,   integration  and  restructuring   costs, 
     (loss)/gain on redemption of own debt, strategic disposals, bonus tax and
     RFS Holdings minority interest.
(4)  Excluding sovereign  debt  impairment  and related  interest  rate  hedge 
     adjustments.
(5)  Cost:income ratio  is based  on total  income and  operating expenses  as 
     defined in (1) and (2) above  and after netting insurance claims  against 
     income.
(6)  Data for 2011  have been  adjusted for the  sub-division and  one-for-ten 
     consolidation of ordinary shares, which took effect in June 2012.
(7)  Loss  from  continuing   operations  attributable  to   ordinary  and   B 
     shareholders divided  by  the weighted  average  number of  ordinary  and 
     effect of convertible B shares in issue.
(8)  Funded balance sheet represents total assets less derivatives.
(9)  Net of  provisions, including  disposal groups  and excluding  repurchase 
     agreements.
(10) Excludes disposal groups.
(11) Includes disposal groups and excludes reverse repurchase agreements.
(12) Tier  1  leverage   ratio  is  total   tangible  assets  (after   netting 
     derivatives) divided by Tier 1 capital.
(13) Tangible equity leverage ratio is total tangible equity divided by  total 
     tangible assets (after netting derivatives).
(14) 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.



Results summary - statutory



                               Quarter ended             Nine months ended
                                30                  30          30         30
                        September 30 June September   September September

                            2012    2012      2011        2012      2011
                              £m      £m        £m         £m        £m
                                                                       
Summary income
statement                                                               
Total income                4,859   6,087     8,603     16,122    23,899
Operating expenses         (4,345)  (4,277)    (4,127)    (13,239)   (13,459)
Operating (loss)/profit
before impairment

losses                      (82)   1,234     3,742      1,062     8,001
Impairment losses          (1,176)  (1,335)    (1,738)     (3,825)    (6,791)
Operating (loss)/profit
before tax                 (1,258)    (101)     2,004     (2,763)     1,210
(Loss)/profit
attributable to
ordinary and B

 shareholders             (1,384)    (466)     1,226     (3,374)      (199)



A reconciliation between statutory and managed view income statements is shown
in Appendix 1 to this announcement.



Key points

· Income of £4,859 million for the quarter ended 30 September 2012.
· Operating loss before tax of £1,258 million for the quarter ended 30
  September 2012.



Summary consolidated income statement

for the period ended 30 September 2012



In  the  income  statement  set  out  below,  own  credit  adjustments,  Asset 
Protection  Scheme,  Payment  Protection   Insurance  costs,  sovereign   debt 
impairment, amortisation  of  purchased  intangible  assets,  integration  and 
restructuring  costs,  (loss)/gain  on  redemption  of  own  debt,   strategic 
disposals,  and  other  items  (including  bonus  tax,  interest  rate   hedge 
adjustments on  impaired available-for-sale  sovereign debt  and RFS  Holdings 
minority  interest)  are   shown  separately.  In   the  statutory   condensed 
consolidated income statement on page 63, these items are included in  income, 
operating expenses and impairment losses as appropriate.



                               Quarter ended             Nine months ended
                                30                  30          30         30
                        September 30 June September   September September

                            2012    2012      2011        2012      2011
Core                           £m      £m        £m         £m        £m
                                                                       
Net interest income         2,794   2,925     2,949      8,662     9,064
                                                                       
Non-interest income
(excluding insurance

 net premium income)       2,682   2,583     2,087      8,246     8,460
Insurance net premium
income                        932     929       992      2,799     2,998
                                                                       
Non-interest income         3,614   3,512     3,079     11,045    11,458
                                                                       
Total income (1)            6,408   6,437     6,028     19,707    20,522
Operating expenses (2)     (3,427)  (3,615)    (3,498)    (10,763)   (10,853)
                                                                       
Profit before insurance
net claims and

 impairment losses         2,981   2,822     2,530      8,944     9,669
Insurance net claims         (596)    (576)      (696)     (1,821)    (2,183)
                                                                       
Operating profit before
impairment

 losses (3)                2,385   2,246     1,834      7,123     7,486
Impairment losses (4)        (752)    (728)      (854)     (2,305)    (2,579)
                                                                       
Operating profit (3)        1,633   1,518       980      4,818     4,907
                                                                       
Non-Core                                                                
                                                                       
Net interest income            79      48       129        191       549
                                                                       
Non-interest income
(excluding insurance

 net premium income)         (29)     (47)      (108)        129       640
Insurance net premium
income                          -       -        44          -       277
                                                                       
Non-interest income           (29)     (47)       (64)        129       917
                                                                       
Total income (1)               50       1        65        320     1,466
Operating expenses (2)       (212)    (262)      (323)       (737)      (981)
                                                                       
(Loss)/profit before
insurance net

 claims and impairment
losses                       (162)    (261)      (258)       (417)       485
Insurance net claims            -       -       (38)          -      (256)
                                                                       
Operating (loss)/profit
before

 impairment losses (3)      (162)    (261)      (296)       (417)       229
Impairment losses (4)        (424)    (607)      (682)     (1,520)    (3,168)
                                                                       
Operating loss (3)           (586)    (868)      (978)     (1,937)    (2,939)



For definitions of the notes refer to page 8.

Summary consolidated income statement

for the period ended 30 September 2012 (continued)



                               Quarter ended             Nine months ended
                                30                  30          30         30
                        September 30 June September   September September

                            2012    2012      2011        2012      2011
Total                          £m      £m        £m         £m        £m
                                                                       
Net interest income         2,873   2,973     3,078      8,853     9,613
                                                                       
Non-interest income
(excluding insurance

 net premium income)       2,653   2,536     1,979      8,375     9,100
Insurance net premium
income                        932     929     1,036      2,799     3,275
                                                                       
Non-interest income         3,585   3,465     3,015     11,174    12,375
                                                                       
Total income (1)            6,458   6,438     6,093     20,027    21,988
Operating expenses (2)     (3,639)  (3,877)    (3,821)    (11,500)   (11,834)
                                                                       
Profit before insurance
net claims

 and impairment losses     2,819   2,561     2,272      8,527    10,154
Insurance net claims         (596)    (576)      (734)     (1,821)    (2,439)
                                                                       
Operating profit before
impairment

 losses (3)                2,223   1,985     1,538      6,706     7,715
Impairment losses (4)      (1,176)  (1,335)    (1,536)     (3,825)    (5,747)
                                                                       
Operating profit (3)        1,047     650         2      2,881     1,968
Own credit adjustments     (1,455)    (518)     2,622     (4,429)     2,386
Asset Protection Scheme         1      (2)       (60)        (44)      (697)
Payment Protection
Insurance costs              (400)    (135)         -       (660)      (850)
Sovereign debt
impairment                      -       -      (142)          -      (875)
Amortisation of
purchased intangible
assets                        (47)     (51)       (69)       (146)      (169)
Integration and
restructuring costs          (257)    (213)      (233)       (930)      (586)
(Loss)/gain on
redemption of own debt       (123)       -         1        454       256
Strategic disposals           (23)     160       (49)        129       (22)
Other items                    (1)       8       (68)        (18)      (201)
                                                                       
(Loss)/profit before
tax                        (1,258)    (101)     2,004     (2,763)     1,210
Tax charge                    (30)    (290)      (791)       (459)    (1,436)
                                                                       
(Loss)/profit from
continuing operations      (1,288)    (391)     1,213     (3,222)      (226)
Profit/(loss) from
discontinued
operations,

 net of tax                    5      (4)         6          6        37
                                                                       
(Loss)/profit for the
period                     (1,283)    (395)     1,219     (3,216)      (189)
Non-controlling
interests                      (3)       5         7         16       (10)
Preference share
dividends                     (98)     (76)         -       (174)         -
                                                                       
(Loss)/profit
attributable to
ordinary

 and B shareholders       (1,384)    (466)     1,226     (3,374)      (199)



For definitions of the notes refer to page 8.

Summary consolidated balance sheet

at 30 September 2012



                                         30 September   30 June 31 December

                                                2012      2012        2011
                                                   £m        £m          £m
                                                                          
Net loans and advances to banks (1,2)          38,347    39,436      43,870
Net loans and advances to customers
(1,2)                                         423,155   434,965     454,112
Reverse repurchase agreements and stock
borrowing                                      97,935    97,901     100,934
Debt securities and equity shares             193,249   200,717     224,263
Other assets (3)                              156,037   155,738     154,070
                                                                          
Funded assets                                 908,723   928,757     977,249
Derivatives                                   468,171   486,432     529,618
                                                                          
Total assets                                1,376,894 1,415,189   1,506,867
                                                                          
Bank deposits (2,4)                            58,127    67,619      69,113
Customer deposits (2,4)                       412,712   412,769     414,143
Repurchase agreements and stock lending       142,565   128,075     128,503
Debt securities in issue                      104,157   119,855     162,621
Settlement balances and short positions        46,989    53,502      48,516
Subordinated liabilities                       25,309    25,596      26,319
Other liabilities (3)                          50,842    51,812      57,616
                                                                          
Liabilities excluding derivatives             840,701   859,228     906,831
Derivatives                                   462,300   480,745     523,983
                                                                          
Total liabilities                           1,303,001 1,339,973   1,430,814
Owners' equity                                 72,699    74,016      74,819
Non-controlling interests                       1,194     1,200       1,234
                                                                          
Total liabilities and equity                1,376,894 1,415,189   1,506,867
                                                                          
Memo: Tangible equity (5)                      53,157    54,384      55,217



Notes:

(1) Excluding reverse repurchase agreements and stock borrowing.
(2) Excludes disposal groups (see page 82).
(3) Includes disposal groups (see page 82).
(4) Excluding repurchase agreements and stock lending.
(5) Tangible equity is equity attributable to ordinary and B shareholders less
    intangible assets.



Analysis of results



                               Quarter ended             Nine months ended
                                30                  30          30         30
                        September 30 June September   September September

                            2012    2012      2011        2012      2011
Net interest income            £m      £m        £m         £m        £m
                                                                       
Net interest income (1)     2,866   2,979     3,074      8,853     9,608
                                                                       
Average                                                
interest-earning assets   587,291 612,995   663,956     613,788   661,416
                                                                       
Net interest margin                                                     
 - Group                   1.94%   1.95%     1.84%      1.93%     1.94%
 - Retail & Commercial                                
(2)                         2.92%   2.94%     2.94%       2.92%     2.99%
 - Non-Core                0.41%   0.24%     0.50%      0.32%     0.69%



Notes:

(1) For further analysis and details of adjustments refer to pages 69 and 70.
(2) Retail & Commercial (R&C) comprises  the UK Retail, UK Corporate,  Wealth, 
    International Banking, Ulster Bank and US R&C divisions.



Key points



Q3 2012 compared with Q2 2012

· Group NIM  declined marginally  to 1.94%  from 1.95%  with continued  margin 
  pressure in Retail & Commercial more than offsetting decreases in  liquidity 
  and  funding  costs   across  the  Group   following  further  run-down   of 
  low-yielding assets.
 
· Retail & Commercial NIM fell by  2 basis points to 2.92% largely  reflecting 
  downward pressure on  deposit margins  in UK  Retail and  UK Corporate,  and 
  lower investment income in US Retail & Commercial.



Q3 2012 compared with Q3 2011

· Group net interest income decreased by £208 million, 7%, largely driven by a
  decline in  interest  earning  assets of  12%.  A  5% decline  in  Retail  & 
  Commercial interest earning  assets and continued  balance sheet run-off  in 
  Non-Core drove the reduction.
 
· The decline in Retail & Commercial net interest income was primarily due  to 
  a targeted decrease in loans and  advances in International Banking and  the 
  impact of  lower  long-term interest  hedge  income  and the  high  cost  of 
  deposits in UK Retail.
 
· Group NIM increased  by 10 basis  points to  1.94% driven by  a decrease  in 
  liquidity and funding  costs managed at  the Group level  and the  continued 
  run-off of low margin Non-Core balances.



Analysis of results (continued)



                                Quarter ended            Nine months ended
                                  30     30         30          30         30
                          September  June September   September September

                              2012  2012      2011        2012      2011
Non-interest income              £m    £m        £m         £m        £m
                                                                       
Net fees and commissions      1,062 1,136     1,148      3,395     3,907
Income from trading
activities                      769   931       282      2,964     3,071
Other operating income          822   469       549      2,016     2,122
                                                                       
Non-interest income
(excluding

 insurance net premium
income)                       2,653 2,536     1,979      8,375     9,100
Insurance net premium
income                          932   929     1,036      2,799     3,275
                                                                       
Total non-interest income     3,585 3,465     3,015     11,174    12,375



Key points



Q3 2012 compared with Q2 2012

· Non-interest income  increased by  £120  million, 3%,  primarily due  to  an 
  increase of £325 million  in realised bond gains  as the Group  repositioned 
  its liquidity  portfolio,  partially  offset  by  a  decrease  in  Retail  & 
  Commercial.
 
· Retail & Commercial non-interest income  fell by 6%, largely reflecting  the 
  non-recurrence of a £47 million Q2 2012 gain on the sale of Visa B shares in
  US Retail & Commercial and a decline in the fair value of a property-related
  investment in UK Corporate of £25 million.
 
· Income from trading  activities fell by  £162 million, primarily  due to  an 
  increase in  trading losses  in  Non-Core of  £72  million as  the  business 
  continued to de-risk its markets exposures.
 
· Insurance net  premium  income  remained flat,  reflecting  stable  in-force 
  policies in a competitive market place.



Q3 2012 compared with Q3 2011

· Non-interest income was 19% higher primarily  as a result of a £652  million 
  increase  in  income  from  trading  activities  in  Markets,  reflecting  a 
  significant improvement in the credit environment. This was partially offset
  by a decrease in Retail & Commercial.
 
· Retail & Commercial  non-interest income was  £146 million lower,  primarily 
  reflecting negative movements on credit hedging activity within the  lending 
  portfolio in International  Banking and  a decline in  the fair  value of  a 
  property-related investment in UK  Corporate. Changes in customer  behaviour 
  and sluggish transaction volumes also drove a decrease in UK Retail.
 
· Insurance net premium income  fell by £104 million,  10%, largely driven  by 
  actions to improve the quality of the motor book resulting in lower  written 
  premiums.



Analysis of results (continued)



                               Quarter ended             Nine months ended
                                30                  30          30         30
                        September 30 June September   September September

                            2012    2012      2011        2012      2011
Operating expenses             £m      £m        £m         £m        £m
                                                                       
Staff expenses              1,943   2,036     1,963      6,200     6,382
Premises and equipment        552     523       584      1,625     1,703
Other                         770     936       858      2,525     2,557
                                                                       
Administrative expenses     3,265   3,495     3,405     10,350    10,642
Depreciation and                                       
amortisation                  374     382       416       1,150     1,192
                                                                       
Operating expenses          3,639   3,877     3,821     11,500    11,834
                                                                       
Insurance net claims          596     576       734      1,821     2,439
                                                                       
Staff costs as a % of                                  
total income                  30%     32%       32%         31%       29%



Key points



Q3 2012 compared with Q2 2012

· Group operating  expenses  fell  by  6%, largely  driven  by  the  continued 
  run-down of Non-Core and lower  staff expenses in Markets and  International 
  Banking. An additional charge  of £50million was taken  in relation to  the 
  June technology incident, compared with a charge of £125 million in Q2 2012.
 
· Core cost:income ratio improved from 62% in Q2 2012 to 59%, largely due to a
  strict focus on cost-management in all of the Group's businesses. The Retail
  & Commercial cost:income ratio remained at 57%, with UK Retail improving  to 
  51%.
 
· Insurance net claims increased by 3%  primarily due to a smaller release  of 
  reserves compared with Q2 2012.



Q3 2012 compared with Q3 2011

· Group operating  expenses  were 5%  lower,  predominantly driven  by  a  34% 
  decrease in  Non-Core  expenses as  the  division continued  to  shrink.  An 
  additional driver was the  15% fall in International  Banking costs, due  to 
  planned  headcount  reduction  and   tight  management  of  technology   and 
  discretionary costs following the restructuring of the business announced in
  January 2012.
 
· Core cost:income ratio improved by 7 percentage points to 59% from 66% in Q3
  2011. This was  driven by  a Group-wide focus  on managing  expenses and  an 
  improved  business  performance  and  market  environment  for  the  Markets 
  businesses.



Analysis of results (continued)



                               Quarter ended             Nine months ended
                                30                  30          30         30
                        September 30 June September   September September

                            2012    2012      2011        2012      2011
Impairment losses              £m      £m        £m         £m        £m
                                                                       
Loan impairment losses      1,183   1,435     1,452      3,913     5,587
Securities impairment                                  
losses                         (7)    (100)        84         (88)       160
                                                                       
Group impairment losses     1,176   1,335     1,536      3,825     5,747
                                                                       
Loan impairment losses                                                  
 - individually                                       
assessed                      661     945       823       2,351     3,942
 - collectively                                       
assessed                      562     534       689       1,691     2,000
 - latent                    (40)     (56)       (60)       (153)      (355)
                                                                       
Customer loans              1,183   1,423     1,452      3,889     5,587
Bank loans                      -      12         -         24         -
                                                                       
Loan impairment losses      1,183   1,435     1,452      3,913     5,587
                                                                       
Core                          751     719       817      2,266     2,479
Non-Core                      432     716       635      1,647     3,108
                                                                       
Group                       1,183   1,435     1,452      3,913     5,587
                                                                       
Customer loan                                          
impairment charge as

 a % of gross loans
and advances (1)                                                         
Group                        1.0%    1.2%      1.1%       1.1%      1.5%
Core                         0.7%    0.7%      0.8%       0.8%      0.8%
Non-Core                     2.8%    4.2%      2.8%       3.6%      4.6%



Note:

(1) Customer loan impairment charge  as a percentage  of gross customer  loans 
    and  advances  excluding  reverse  repurchase  agreements  and   including 
    disposal groups.



Key points



Q3 2012 compared with Q2 2012

· Loan impairment  losses  were down  18%.  In the  Non-Core  portfolio,  loan 
  impairments fell by 40%, with the non-repeat of a large provision in Project
  Finance in Q2 2012. This was partially offset by a 4% increase in Core  loan 
  impairments, largely  reflecting a  small number  of significant  individual 
  cases in UK Corporate.
 
· Credit losses improved in  International Banking, with  the non-repeat of  a 
  single name  impairment in  Q2 2012.  Lower specific  impairments were  also 
  recorded in Wealth.
 
· Core and Non-Core Ulster Bank loan impairments improved by £21 million, 4%.



Q3 2012 compared with Q3 2011

· Loan impairment  losses  fell  by  19%,  largely  driven  by  a  significant 
  reduction in Non-Core impairments, particularly in exposures originating  in 
  UK Corporate and Ulster Bank.
 
· Retail was  the main  driver of  the  8% decrease  in Core  loan  impairment 
  losses, as credit metrics  and book quality continued  to improve. This  was 
  partly offset by the increase in UKCorporate loan impairments in Q3 2012.



Analysis of results (continued)



                                  Quarter ended           Nine months ended
                                   30    30         30          30         30
                           September June September   September September

                                2012 2012      2011        2012      2011
One-off and other items           £m   £m        £m         £m        £m
                                                                        
Own credit adjustments*       (1,455) (518)     2,622     (4,429)     2,386
Asset Protection Scheme            1   (2)       (60)        (44)      (697)
Payment         Protection                             
Insurance costs                 (400) (135)         -        (660)      (850)
Sovereign debt  impairment                             
(1)                                -    -      (142)           -      (875)
Amortisation of  purchased                             
intangible assets                (47)  (51)       (69)        (146)      (169)
Integration            and                             
restructuring costs             (257) (213)      (233)        (930)      (586)
(Loss)/gain on  redemption                             
of own debt                     (123)    -         1         454       256
Strategic disposals**            (23)  160       (49)        129       (22)
Other                                                                   
 - Bonus tax                      -    -        (5)          -       (27)
 - RFS Holdings  minority                             
interest                          (1)    8        (3)         (18)        (5)
 - Interest rate hedge                                
adjustments on

 impaired
available-for-sale
sovereign debt                     -    -       (60)           -      (169)
                                                                        
                              (2,305) (751)     2,002     (5,644)      (758)
                                                                        
* Own  credit  adjustments                             
impact:                                                                  
Income    from     trading                             
activities                      (435) (271)       735      (1,715)       565
Other operating income        (1,020) (247)     1,887     (2,714)     1,821
                                                                        
Own credit adjustments        (1,455) (518)     2,622     (4,429)     2,386
                                                                        
**Strategic disposals                                                   
(Loss)/gain  on  sale  and                             
provision for loss on

 disposal of  investments 
in:                                                                      
 - RBS Aviation Capital           -  197         -        197         -
   -   Global    Merchant                             
Services                           -    -         -           -        47
 - Other                        (23)  (37)       (49)        (68)       (69)
                                                                        
                                 (23)  160       (49)        129       (22)



Note:

(1) In the second quarter  of 2011, the Group  recorded an impairment loss  of 
    £733 million in respect of its AFS portfolio of Greek government debt as a
    result of Greece's continuing fiscal difficulties. In Q1 2012, as part  of 
    Private Sector  Involvement in  the Greek  government bail-out,  the  vast 
    majority of  this portfolio  was exchanged  for Greek  sovereign debt  and 
    European Financial  Stability Facility  notes;  the Greek  sovereign  debt 
    received in the exchange was sold.



Key points



Q3 2012 compared with Q2 2012

· The own credit  adjustment charge in  Q3 2012 was  £1,455 million,  compared 
  with a smaller  charge of £518  million in  Q2 2012, as  the Group's  credit 
  spreads tightened by a further 57 basis points in the quarter.
 
· An  additional  £400  million  provision  relating  to  Payment   Protection 
  Insurance was  taken, bringing  the cumulative  charge to  £1.7 billion,  of 
  which £1.0 billion in redress had been paid by 30 September 2012.
 
· Integration and  restructuring  costs  increased by  21%  to  £257  million, 
  largely driven  by  preparations  for  the  divestment  of  UK  branch-based 
  businesses.



Q3 2012 compared with Q3 2011

· The movement in  one-off and  other items  in the  period was  predominantly 
  driven by the significant tightening of the Group's credit spreads  compared 
  with a large widening in Q3 2011.



Analysis of results (continued)



                                       30 September 30 June 31 December

Capital resources and ratios                   2012    2012        2011
                                                                      
Core Tier 1 capital                           £48bn   £48bn       £46bn
Tier 1 capital                                £58bn   £58bn       £57bn
Total capital                                 £63bn   £63bn       £61bn
Risk-weighted assets                                                   
 - gross                                    £481bn  £488bn      £508bn
 - benefit of Asset Protection Scheme       (£48bn)  (£53bn)      (£69bn)
Risk-weighted assets                         £433bn  £435bn      £439bn
Core Tier 1 ratio (1)                         11.1%   11.1%       10.6%
Tier 1 ratio                                  13.4%   13.4%       13.0%
Total capital ratio                           14.6%   14.6%       13.8%



Note:

(1) The benefit of  APS in the  Core Tier 1  ratio was 71  basis points at  30 
    September 2012 (30  June 2012 -  77 basis  points; 31 December  2011 -  90 
    basis points).



Key points



30 September 2012 compared with 30 June 2012

· The Group's Core Tier 1 ratio remained strong at 11.1%. Gross  risk-weighted 
  assets (RWAs)  fell by  £7 billion  reflecting a  reduction in  market  risk 
  coupled with balance sheet contraction.
 
· The impact of the  Asset Protection Scheme  (APS) on the  Core Tier 1  ratio 
  continued to decline from 77 basis points at 30 June 2012 to 71 basis points
  at 30 September 2012.



30 September 2012 compared with 31 December 2011

· The Core Tier 1 ratio increased by 50 basis points compared with 31 December
  2011, driven  by a  5% reduction  in gross  RWAs, lower  regulatory  capital 
  deductions and the issuance of new shares.
 
· Gross RWAs fell by £27  billion, excluding the effect  of the APS. Post  APS 
  RWAs decreased by £6 billion.



Analysis of results (continued)



                                    30 September  30 June 31 December

Balance sheet                               2012     2012        2011
                                                                    
Funded balance sheet (1)                  £909bn   £929bn      £977bn
Total assets                            £1,377bn £1,415bn    £1,507bn
Loans and advances to customers (2)       £443bn   £455bn      £474bn
Customer deposits (3)                     £435bn   £435bn      £437bn
Loan:deposit ratio - Core (4)                91%      92%         94%
Loan:deposit ratio - Group (4)              102%     104%        108%
Short-term wholesale funding (5)           £49bn    £62bn      £102bn
Wholesale funding (5)                     £159bn   £181bn      £226bn
Liquidity portfolio                       £147bn   £156bn      £155bn



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 2012 were 91% and 103% respectively (30 June 2012  - 
    92% and 105% respectively; 31 December 2011 - 94% and 110% respectively).
(5) Excluding derivative collateral.



Key points



30 September 2012 compared with 30 June 2012

· The Group's funded balance sheet contracted by a further £20 billion to £909
  billion, driven by  a £7  billion reduction  in Non-Core  funded assets  and 
  lower International Banking and Ulster Bank balances.
 
· Loans and advances to customers fell by 3%, largely due to Non-Core run-down
  and targeted  reductions in  the International  Banking portfolio.  Customer 
  deposits were flat  as growth  in US  Retail &  Commercial was  offset by  a 
  marginal decline in UK Corporate.
 
· The Group loan:deposit ratio improved from 104% to 102%, while the Core  and 
  Retail & Commercial loan:deposit ratios improved to 91% in the quarter.



30 September 2012 compared with 31 December 2011

· Significant falls  in Non-Core  (£29  billion), International  Banking  (£12 
  billion) and Markets (£10billion) were the  main elements in a £68  billion 
  decrease in  the Group's  funded  balance sheet  in the  period.  Non-Core's 
  focused asset  disposal  programme,  including  the  sale  of  RBS  Aviation 
  Capital, planned  loan portfolio  reductions  in International  Banking  and 
  initiatives to reduce balance sheet usage in Markets drove these movements.
 
· Customer deposits were flat as strong deposit growth in UK Retail was offset
  by lower deposit balances in International Banking as a result of  difficult 
  market conditions and  strong competition. Loans  and advances to  customers 
  fell by 7%, largely as a result of sales and run-off in Non-Core.
 
· The Group loan:deposit  ratio strengthened  by 600 basis  points from  108%, 
  with Core and Retail & Commercial  ratios improving by 300 basis points  and 
  400 basis points, respectively.



Further analysis of the Group's liquidity and funding position is included  on 
pages 97 to 104.

                     This information is provided by RNS
           The company news service from the London Stock Exchange

END


IMSBBBJTMBBMTPT -0- Nov/02/2012 07:00 GMT