Royal Bk Scot.Grp. RBS Interim Management Statement - Part 1 of 7

  Royal Bk Scot.Grp. (RBS) - Interim Management Statement - Part 1 of 7

RNS Number : 1665Q
Royal Bank of Scotland Group PLC
02 November 2012






Highlights



         RBS reports a Q3 2012 operating profit^(1) of £1,047 million

               Core RBS Q3 2012 operating profit £1,633 million

               Year-to-date Core return on tangible equity 10%

    Q3 2012 net attributable loss of £1,384 million, after £1,455 million

              pre-tax accounting charge for improved own credit

Core Tier 1 ratio 11.1%, loan:deposit ratio 102%, Non-Core assets down to £65
                                   billion



"The RBS restructuring programme  continues to make  excellent progress as  we 
take the action needed to  make the bank safer  and stronger. Our funding  and 
capital position has been transformed, we have repaid all emergency loans from
the Government and central banks, and we recently exited the Asset  Protection 
Scheme without ever making a claim.



At the same time, we are working to  make sure the needs of our customers  are 
central in our  decision making. Economic  pressures are restraining  customer 
activity levels and as a result banks are running hard to stand still in  this 
environment. Nevertheless,  resilient Core  bank performance  at RBS  provides 
resources for customers  and for our  cleanup, whilst signposting  shareholder 
value in the future."



Stephen Hester, Group Chief Executive



Highlights



Continued progress in the RBS recovery plan

· Continued momentum in strengthening the Group's balance sheet:
 ○             Funded assets declined again to  £909 billion, a reduction  of 
                £68 billion from the start of 2012.
 ○             Core Tier 1  ratio remained strong  at 11.1% whilst  absorbing 
                uplifts from regulatory changes;  10.4% excluding the  capital 
                relief provided by the Asset Protection Scheme (APS).
 ○             The Group's loan:deposit ratio improved further to 102%.
 ○             Usage of  short-term wholesale  funding has  more than  halved 
                since the start of 2012 to £49billion.
· RBS's credit profile has  strengthened markedly in  the traded debt  markets 
  reflecting the success of RBS restructuring efforts. CDS spreads have halved
  since their 2011 peak, and secondary bond spreads on five year maturity have
  narrowed from c.450  basis points to  c.100 basis points  on a  year-to-date 
  basis. This strengthening has resulted in an accounting charge for  improved 
  own credit of £4,429 million year-to-date, including £1,455 million in Q3.



Delivering against major milestones

· Direct Line Group  was successfully  floated in October  2012, raising  £911 
  million from the sale of a 34.7% stake in the company.
· The exit from the UK Government's APS on 18 October 2012 provides a  further 
  demonstration of  the Group's  progress in  rebuilding a  strong and  stable 
  balance sheet.  The exit  also marks  a major  UK fiscal  benefit, with  the 
  Government's original £200 billion contingent exposure now extinguished.
· While Santander's decision to pull out of its agreed purchase of certain  of 
  the Group's UK branch-based businesses  was disappointing, much of the  work 
  to separate  this  profitable  and well-funded  business  has  already  been 
  completed, and RBS has recommenced its efforts to divest the business, which
  utilises some 2% of the Group's capital resources.



Highlights (continued)



Operating performance stable in Q3 2012

· Q3 2012 Group operating profit improved to £1,047 million from £650  million 
  in Q2 and £2million in  Q3 2011, with Core operating  profit up 8% from  Q2 
  and 67% from Q3 2011. There was a further reduction in operating losses from
  Non-Core.
· Core operating  profit  was £1,633  million,  with a  solid  performance  in 
  Markets offset by lower income and a small number of single name impairments
  in UK Corporate.
· Core return on tangible equity (ROTE) for the first nine months of 2012  was 
  10%. Markets' return on equity (ROE) over this period was 12.0%.
· Group net interest margin was stable at 1.94%, with Core Retail & Commercial
  NIM also steady at 2.92%.
· Group expenses were reduced  by 6% versus prior  quarter to £3,639  million, 
  with Core R&C down 3% to £2,389 million and Markets down 5% to £753 million.
  The Core cost:income ratio improved to 59%, with UK Retail now at 51%.
· Staff costs were 5% lower than in Q2 at £1,943 million, with headcount  down 
  by 9,900, 7%, from a year earlier.
· Group impairment  losses  totalled £1,176  million  in Q3  2012,  down  £159 
  million from the prior quarter. Non-Core impairments, mostly in real  estate 
  finance, were  £183 million  lower. Total  Ulster Bank  (Core and  Non-Core) 
  impairments were £493 million, compared with £514 million in Q2 2012.



Continuing commitment to customers in difficult times

· Maintaining support for the Group's core UK retail and commercial  customers 
  is a key priority. RBS has supported over 350,000 SMEs with £28.6 billion of
  lending, including overdrafts, so  far this year. RBS  has also helped  more 
  than 43,000 customers buy  their home, including  14,000 first time  buyers, 
  with £11 billion of gross new mortgage  lending in the first nine months  of 
  2012.
· RBS continues  to work  hard to  remedy a  number of  past issues.  Q3  2012 
  results include an additional £400 million provision in relation to  Payment 
  Protection Insurance, bringing the cumulative charge to £1.7 billion.
· The Group is determined to continue to strengthen its management disciplines
  and culture in  order to  ensure that  serving customers  well becomes  more 
  deeply embedded as the Bank's core purpose. Key points of focus are:
 ○               Better performance against Customer Charter targets.
 ○               Widening the  scope of  training programmes  for  front-line 
                  staff.
 ○               Overhauling service offerings to align them more closely  to 
                  customers' needs.
 ○               Realigning incentive structures to  ensure they take  proper 
                  account of customer interest.











Note:

(1) Operating profit  before tax,  own  credit adjustments,  Asset  Protection 
    Scheme, Payment  Protection  Insurance costs,  amortisation  of  purchased 
    intangible assets, integration and restructuring costs, loss on redemption
    of own  debt,  strategic  disposals and  RFS  Holdings  minority  interest 
    ('operating profit').  Statutory  operating  loss before  tax  was  £2,763 
    million for the nine months ended 30 September 2012.



Key financial data



                               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)
Core operating profit                                  
(3)                         1,633   1,518       980       4,818     4,907
                                                                       
Non-Core operating loss                                
(3)                          (586)    (868)      (978)      (1,937)    (2,939)
                                                                       
Group 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 (5)              (451)     (96)      (418)       (511)      (722)
                                                                       
(Loss)/profit before                                   
tax                        (1,258)    (101)     2,004      (2,763)     1,210
                                                                       
Preference share                                       
dividends                     (98)     (76)         -        (174)         -
                                                                       
(Loss)/profit                                          
attributable to
ordinary and B
shareholders               (1,384)    (466)     1,226      (3,374)      (199)



                                           30 September 30 June 31 December

                                                  2012    2012        2011
                                                                          
Capital and balance sheet                                                  
Funded balance sheet (6)                         £909bn  £929bn      £977bn
Loan:deposit ratio (Group) (7)                     102%    104%        108%
Loan:deposit ratio (Core) (7)                       91%     92%         94%
Core Tier 1 ratio                                 11.1%   11.1%       10.6%
Tangible net asset value per ordinary and
B share (8)                                        476p    489p        501p



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  before tax,  own  credit adjustments,  Asset  Protection 
    Scheme, Payment Protection Insurance costs, sovereign debt impairment  and 
    other items (see note 5 below).
(4) Excluding sovereign  debt  impairment  and  related  interest  rate  hedge 
    adjustments.
(5) Other  items  comprise  amortisation   of  purchased  intangible   assets, 
    integration and  restructuring costs,  (loss)/gain  on redemption  of  own 
    debt, strategic disposals, bonus tax,  interest rate hedge adjustments  on 
    impaired available-for-sale  sovereign  debt  and  RFS  Holdings  minority 
    interest. Refer to page 17 of the main announcement for further details.
(6) Funded balance sheet is total assets less derivatives.
(7) Net of  provisions, including  disposal  groups and  excluding  repurchase 
    agreements.
(8) 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.  Data  for   2011  have  been  adjusted  for   the 
    sub-division and one-for-ten consolidation of ordinary shares, which  took 
    effect in June 2012.



Comment



Stephen Hester, Group Chief Executive, commented:

The extraordinary challenges  which RBS faced  following the financial  crisis 
are being worked through successfully. The five year restructuring Plan is now
in its later stages with important work still to do, including an emphasis  on 
dealing with reputational issues now that the Bank's safety and soundness  has 
advanced so well. We passed two other important milestones in October with our
exit from the APS and  a very encouraging flotation  of Direct Line Group  and 
are within touching  distance of matching  every £1  of lending with  a £1  of 
customer deposits.



Beneath these headlines our  people have been working  hard at supporting  our 
customers and rebuilding the capabilities of the core business, the future RBS
that is emerging from our work. In doing this we face the same strong economic
and regulatory challenges as other banks and  are having to work very hard  to 
stand still in the  face of these challenges.  But underlying performance  has 
already improved enough  to be  generally comparable  to peers.  We aspire  to 
achieve much more; in short, to be running a really good RBS.



At the heart of any truly successful company is the DNA that clearly sets  the 
company's purpose  as  to  serve  customers well  and  understands  that  good 
performance  for  shareholders  and  career  prospects  for  staff  come  from 
achieving that purpose. The banking industry, including RBS, too often came to
be seen  as  reversing  that  sequence, with  short-term  gain  put  ahead  of 
long-term excellence for  customers. Getting  this balance right  is not  done 
through  splashy  announcements   or  sweeping   actions.  Rather   it  is   a 
multi-faceted journey  involving  all our  people,  the tools  and  management 
direction they work with  every day. We are  unambiguously clear at RBS  about 
the importance of  making this journey.  We have already  made much  progress, 
though clearly not  enough, and  our reputation will  take time  and facts  to 
recover from past events  which are still  being accounted for.  Nevertheless, 
this work is going with the grain  at RBS. Our people want to serve  customers 
well. Most  of  the time  we  succeed in  doing  precisely that.  And  we  all 
understand the need to  reject failings and keep  improving for customers  and 
for the institution's future success.



In tough economic times  there is understandable  debate about what  economies 
need in  order  to  achieve  growth.  In this  debate  we  can  be  clear  and 
unambiguous: RBS has the funding, capital  and human resources to support  our 
customers and meet their  needs as the  economy starts to  grow again; and  we 
have repaid the liquidity and credit  support that was needed from  government 
at the start of our restructuring  journey. We have many challenges left,  and 
much to improve. And the world  still has uncertainties and risks of  setback. 
The need  to avoid  repeating past  credit mistakes  and to  make  sustainable 
returns on a more conservative business model are also crucial aspects we need
to balance in the face of many pressures.



So the goals that have been our abiding focus since 2009 are unchanged, though
they will continue to be  applied pragmatically as external realities  evolve. 
They are  founded in  a solid  and coherent  strategy and  a track  record  of 
focused implementation. Through these tools we seek:

- to serve customers well, and better

- to operate with safety and soundness for all who rely on us

- to  rebuild  sustainable value  for  all shareholders,  and  thereby  to 
facilitate the sale of taxpayers' shareholding in the Bank.



Highlights



Third quarter results summary

The Royal Bank of  Scotland Group (RBS) reported  a Group operating profit  of 
£1,047 million for the third quarter of 2012, up £397 million from Q2 2012 and
up £1,045  million  compared with  Q3  2011.  The result  reflected  a  steady 
improvement in  the Core  bank's operating  results, combined  with a  further 
reduction in operating losses from the Non-Core division.



Core operating profit totalled £1,633 million, up 8% from Q2 2012 and 67% from
Q3 2011. For  the first  nine months of  2012 Core  operating profit  totalled 
£4,818 million, in line with the same  period of 2011, delivering a return  on 
tangible equity of  10.0%. Core  income in  Q3 was  flat versus  Q2 at  £6,408 
million, with expenses down 5% at £3,427 million and impairments 3% higher  at 
£752 million.



· Retail & Commercial (R&C) operating profits were  down 10% from Q2 due to  a 
  deterioration in UK Corporate, largely  reflecting lower income and a  small 
  number of single name impairments, partially offset by good performances  in 
  UK Retail and International Banking driven primarily by sound cost  control. 
  R&C return on equity  in the first  nine months of 2012  was 9.6%, or  14.0% 
  excluding Ulster Bank.
· Markets saw  a  2% decline  in  revenues relative  to  Q2 due  to  continued 
  uncertainty in the Eurozone along with subdued client activity. However, the
 ongoing focus on costs generated an 18% increase in operating profit to £295
  million. Year to date ROE is 12.0%.

· Direct Line Group  Q3 2012  operating profit of  £109 million  was down  £26 
  million, 19% from Q2, as a stable  technical result was more than offset  by 
  lower investment returns. Year to date ROTE is 10.3%.



Non-Core operating loss decreased by £282 million versus Q2 to £586 million as
favourable  market  conditions  led  to  improvements  in  asset  prices   and 
tightening of credit spreads over the quarter. Non-Core impairment losses fell
by £183 million during the quarter reflecting the non-repeat of a  significant 
provision in the Project Finance portfolio in Q2 2012.



Non-operating items and statutory results

A further  provision  of £400  million  was recorded  for  Payment  Protection 
Insurance claims, reflecting the Group's  current experience. This brings  the 
cumulative charge  taken to  £1.7 billion,  of which  £1.0billion (c.60%)  in 
redress had  been paid  by 30  September 2012.  Integration and  restructuring 
costs totalled £257 million in Q3, compared with £213 million in Q2. A loss of
£123  million  was  recorded  on  the  redemption  of  £4.4  billion  of  debt 
securities.



RBS's credit spreads continued to narrow  in debt markets, with its five  year 
credit default swap  spread tightening over  the quarter by  57 basis  points, 
reflecting  improved  investor  perceptions  of  the  Group's  strength.  This 
resulted in  a Q3  own credit  charge of  £1,455 million,  compared with  £518 
million in the prior quarter. Excluding own credit adjustments, Group Q3  2012 
pre-tax profit was £197 million and attributable loss £268 million.



Statutory pre-tax loss  in Q3  was £1,258 million  and statutory  attributable 
loss was £1,384 million. Tangible net asset value per share fell by 3% to  476 
pence reflecting the own credit adjustment.



Highlights (continued)



Income

Core income in Q3 2012 totalled £6,408 million, in line with Q2 2012 and up 6%
from the prior year period. Core R&C net interest income was 1% lower than  Q2 
2012 at £2,786  million, with continuing  pressure on deposit  margins in  the 
core UK Retail and  Corporate franchises and  in International Banking's  Cash 
Management business. Non-interest income in R&C was down 6% at £1,414 million,
partly reflecting the non-recurrence of a  £47 million gain recorded in Q2  on 
the sale  of Visa  B shares  as well  as  a decline  in the  fair value  of  a 
property-related  investment  in   UK  Corporate  of   £25  million.   Markets 
non-interest income  totalled £1,031  million, in  line with  Q2 and  up  128% 
compared with Q3 2011. Realised bond gains increased by £325 million  compared 
with Q2 as the Group re-positioned  its liquidity portfolio, offset by  higher 
unallocated volatility costs in Group Treasury of £95 million.



Efficiency

Core expenses were down 5% in the quarter to £3,427 million, with R&C reducing
expenses by 3% to £2,389 million and Markets delivering a 5% reduction to £753
million. Provisions totalling £125 million  recorded in Group Centre  included 
an  additional  £50  million  to  cover  customer  redress  arising  from  the 
technology incident that affected the Group's systems in June.



Core staff expenses were  4% lower at £1,874  million, with headcount down  by 
7,900 over  the  past  12  months  to  137,000,  principally  in  Markets  and 
International Banking.  The  Core  compensation ratio  year-to-date  was  30%, 
compared with 31% in the prior year, with the Markets compensation ratio  34%, 
compared with 41% in the prior year.



Core cost:income ratio  in Q3 improved  to 59% from  62% in Q2  and 66% in  Q3 
2011. R&C cost:income  ratio was stable  at 57%, with  UK Retail improving  to 
51%.



Risk

Group impairment losses totalled £1,176 million in Q3 2012, down 12% from  the 
prior quarter and 23% from Q3 2011.



Core impairments totalled £752 million, up 3% from Q2 2012 but 12% lower  than 
Q3 2011, with UK Retail and US R&C losses stable but UK Corporate  impairments 
up £66  million,  largely reflecting  a  handful of  single  corporate  cases. 
Non-Core impairments, mostly in real  estate finance, were £183 million  lower 
than in Q2 2012. Total Ulster  Bank (Core and Non-Core) impairments were  £493 
million, compared with £514 million in Q2 2012.



Core annualised loan  impairments represented  0.7% of loans  and advances  to 
customers, in line  with Q2.  Group risk  elements in  lending totalled  £40.1 
billion at 30 September 2012, compared with £39.7 billion at 30 June 2012  and 
£40.8 billion at 31 December 2011, with provision coverage stable at 51%.



Highlights (continued)



Balance sheet

RBS maintained good momentum in the restructuring and reduction of its balance
sheet, with  Group funded  assets down  £20  billion in  the quarter  to  £909 
billion. Non-Core funded assets fell to £65 billion, a reduction of £7 billion
during the quarter and  an overall reduction of  75% since its  establishment. 
Non-Core remains on target to exit approximately 85% of its original portfolio
by the end of 2013.



Since the end of 2008 the Group  has reduced its funded balance sheet by  £318 
billion, with total assets reduced by £841 billion.



Liquidity and funding

RBS  has  achieved  a  largely  deposit-funded  balance  sheet,  with  further 
reductions in the use of short-term wholesale funding and the maintenance of a
very strong liquidity buffer. With  substantial excess liquidity available  to 
it during the quarter, the Group took advantage of improved market  conditions 
to repurchase  £4.4 billion  of more  expensive outstanding  senior  unsecured 
wholesale debt.



RBS's credit profile has strengthened  markedly in traded markets,  reflecting 
the significant improvement in  the robustness and  resilience of its  balance 
sheet, as well as the substantial  reduction in the Group's wholesale  funding 
requirements and a  more general improvement  in financial market  conditions. 
The Group's credit default swap spreads  tightened by 121 basis points in  the 
first nine months of 2012, with 57  basis points of the improvement coming  in 
Q3. Secondary market prices  for RBS bonds have  tightened even further,  with 
spreads on a benchmark five  year issue coming in  from c.450 basis points  at 
the start to 2012 to c.100 basis points at the end of Q3.



The Group loan:deposit  ratio strengthened  further to 102%,  compared with  a 
worst point of 154% in October 2008. The Core loan:deposit ratio was 91%, with
customer deposits stable at £431 billion.



The Group continued to reduce its usage of short-term wholesale funding, which
fell by £13.8 billion during the quarter to £49 billion at 30 September  2012, 
enabling the Group to reduce the costs associated with its substantial  liquid 
asset portfolio. Short-term wholesale funding  was covered three times by  the 
Group's liquidity buffer, which totalled £147 billion.



Capital

The Group's Core Tier 1 ratio remained strong at 11.1%, or 10.4% excluding the
capital relief provided by the UK Government's Asset Protection Scheme,  which 
the Group exited with effect from 18 October 2012. APS capital benefit,  which 
amounted to 160 basis points at the  end of 2009, had diminished in line  with 
the reduction in the portfolio of  covered assets, which had fallen from  £282 
billion at inception to £104 billion at the point of exit.



Risk-weighted assets  (before APS  relief) declined  by £6.6  billion, with  a 
substantial reduction in Non-Core offsetting the effect of regulatory  uplifts 
in International  Banking  and  in  UK  Corporate.  Non-Core's  RWAs  fell  by 
£11billion to £72 billion, benefiting from  lower market risk and the  active 
reduction and restructuring of derivative exposures.



The Group's Tier 1 leverage ratio was 15.4x.



Highlights (continued)



Disposals

RBS completed the successful initial public  offering of Direct Line Group  in 
October 2012, representing another important milestone in RBS's  restructuring 
plan.



RBS  Group  sold  520.8  million   ordinary  shares  in  Direct  Line   Group, 
representing 34.7% of the  total share capital,  generating gross proceeds  of 
£911million. This was  consistent with  the previously  communicated plan  to 
divest control of Direct Line Group in stages with control ceded by the end of
2013, and complete  disposal by the  end of  2014, in line  with the  European 
Commission's state aid requirements. The disposals of Global Merchant Services
and RBS Sempra Commodities JV businesses have already been completed.



On 12  October  2012  RBS  announced that  it  had  received  notification  of 
Santander's decision to  pull out  of its agreed  purchase of  certain of  the 
Group's UK branch-based businesses. While the decision was disappointing, much
of the work to separate this  profitable and well-funded business has  already 
been completed, and RBS has recommenced its effort to divest the business  and 
fulfil its obligations to the European Commission.



Core UK franchise

Banks cannot serve customers well without operating from a position of balance
sheet safety and soundness, and  that has been a key  priority for RBS in  the 
first three and a  half years of its  2009-13 restructuring plan. The  Group's 
significant achievements in this area mean that even more attention can now be
focused on those elements  that will make RBS  a healthy and competitive  bank 
over the long term, rather than  merely ensuring survival. These elements  are 
based on ensuring that the bank  is built, first and foremost, around  serving 
customers well and sustainably.



This focus on serving customers better  has been an integral component of  the 
Group's  restructuring  plan,  and  some  major  changes  have  already   been 
implemented, notwithstanding the worsening economic environment:



· The Retail Customer  Charter was  launched in  2010 and  has been  refreshed 
  annually since then. The focus  of "Helpful Banking" has remained  integral, 
  with intentionally  demanding  and  stretching  targets  derived  from  what 
  customers said they valued the most.
· New principles for incentives within UK Retail have been designed to promote
  superior customer service and ensure customer requirements explicitly  drive 
  the product sales and  offerings. This is a  move away from the  sales-based 
  approach of the past.
· To reach  the  standards of  professionalism  and expertise  that  customers 
  expect, RBS has piloted an  internal retraining and accreditation  programme 
  for relationship managers in Business & Commercial Banking.



Highlights (continued)



Core UK franchise (continued)

These actions represent only a starting point, and while the changes will have
increasing visibility as they bed in over the coming months and years there is
a lot more still to do to persuade customers that the organisation has changed
and that it puts  their interests first.  A few of  the main areas  management 
will be focusing on next are:



· Better performance against Customer Charter  targets. Since launch, the  bar 
  has been raised  on some of  the Retail targets  but performance has  fallen 
  short on some. The use of charters will be extended into other divisions and
  they will be made even more demanding.
· Widening the scope of internal  training programmes for front-line staff.  A 
  programme similar to the Business & Commercial course is now running in  the 
  Wealth business  and this  area will  continue to  attract a  great deal  of 
  focus.
· An overhaul of service  offerings across the  Group's retail, corporate  and 
  markets divisions to ensure they are explicitly customer-driven and based on
  the  needs  and  priorities  of  the  retail,  corporate  and  institutional 
  customers that RBS serves.



RBS has maintained its lending support to UK businesses and homebuyers through
difficult economic times. RBS  has supported government  schemes, such as  the 
Funding for Lending  Scheme (FLS),  with internal initiatives  to ensure  that 
credit remained appropriately available to its customers.



RBS's performance in the mortgage market remains strong and well in excess  of 
its historic market share. Gross  new mortgage lending totalled £11.4  billion 
year-to-date, with £3.7 billion in Q3 2012, holding flat from Q2. Of this, 16%
was to first-time buyers and Q3 gross new lending to these customers increased
by 5% on the previous quarter.



Business demand  for  credit has  remained  weak, with  investment  intentions 
constrained by uncertainty over future UK growth prospects. This led to a drop
of 25% in SME loan  applications in Q3, compared  with Q3 2011, with  activity 
further muted by  the effect of  the Olympic Games.  RBS continues to  approve 
over 90% of all  SME loan and overdraft  applications, with over 31,000  small 
businesses approved for credit during the quarter.



The overall flow of  business lending remained strong,  with £62.9 billion  of 
gross new lending to UK businesses in the first nine months of 2012, of  which 
£28.6 billion was to SME customers. In Q3 2012, gross new lending increased 3%
compared with Q2, which  was impacted by  relationship managers efforts  being 
diverted from lending due  to the Group  technology incident. Loan  repayments 
also remained strong, with many customers continuing to focus on deleveraging.
SME overdraft utilisation remained below 50%  in Q3, and SMEs chose to  retain 
strong cash balances, with Business & Commercial customer deposits  increasing 
by £500 million during Q3.



Highlights (continued)



Core UK franchise (continued)

Overall  SME  net   drawn  balances,  excluding   real  estate,  held   steady 
quarter-on-quarter, with the strongest growth  coming in asset finance,  where 
balances have  increased  each quarter  in  2012, up  6%  year-to-date.  Asset 
finance has proved  particularly attractive to  customers in current  economic 
circumstances because of its  cash flow benefits, with  products such as  hire 
purchase, asset-secured  debt and  leasing  providing flexible  and  committed 
lines of funding tailored  to each business's needs.  RBS Invoice Finance  has 
also seen good growth in its  asset-based lending business, with net  advances 
up 6%, compared with Q3 2011, to £3.2 billion.



The Funding for Lending Scheme (FLS) opened for drawings in August and RBS was
quick to launch FLS-related offerings to homebuyers and businesses. RBS's  own 
funding of  UK lending  is not  a  constraint. However,  FLS does  provide  an 
opportunity to offer  interest rate  benefits to customers.  Net figures  will 
also give insight to the price sensitivity of lending demand at these interest
rate levels relative to other business confidence issues. Over £500 million of
mortgages had been offered under the scheme by the end of September 2012,  and 
c.14% of applications received  by UK Retail in  September related to the  new 
products launched under  the scheme.  UK Corporate  reduced the  price of  SME 
loans and removed arrangement  fees on these  offerings. Over 4,300  customers 
benefited from this offer by the end  of Q3 2012, with around £600 million  of 
funds allocated.  Given  normal  lags between  approval  and  drawdown,  these 
advances are not expected to feed into drawn balances until later in the year.
Much of  the SME  lending to  date is  substituting for  existing higher  cost 
borrowings.



RBS has made further good progress in running down high risk and non-strategic
exposures in its Non-Core division and in reducing its excessive exposures  to 
the real  estate  and construction  sectors.  Non-Core balances  are  included 
within the scope of FLS, and  FLS-eligible Non-Core exposures were reduced  by 
£750 million  during  Q3. Within  the  Core UK  Corporate  division,  property 
exposures also continued their managed and necessary decline, falling by  £0.9 
billion during the quarter and by £2.2billion year-to-date. At a Group level,
excluding  Non-Core  and  commercial  real  estate  lending,  total  RBS  core 
FLS-eligible balances increased by around  £300 million to 30 September  2012, 
while  declining   when   these   risk  concentrations   are   included.   The 
faster-growing Lombard and  RBS Invoice Finance  businesses are excluded  from 
FLS statistics.



Highlights (continued)



Strategic Plan

                                         Worst                       Medium-

Key Measures                             point Q2 2012 Q3 2012 term target
                                                                         
Value drivers                                     Core    Core        Core
· Return on equity (1)              (31%)(2)    9.3%    9.7%        >12%
· Cost:income ratio (3)               97%(4)     62%     59%        <55%
                                                                         
Risk measures                                    Group   Group       Group
· Core Tier 1 ratio                    4%(5)   11.1%   11.1%        >10%
· Loan:deposit ratio                 154%(6)    104%    102%      c.100%
· Short-term wholesale funding
(STWF)                                £297bn(7)   £62bn   £49bn <10% TPAs(8)
· Liquidity portfolio (9)           £90bn(7)  £156bn  £147bn  >1.5x STWF
· Leverage ratio (10)              28.7x(11)   15.6x   15.4x        <18x



Notes:

(1) Based on indicative Core attributable  profit taxed at standard rates  and 
Core average tangible  equity per the  average balance sheet  (c.85% of  Group 
tangible equity  based on  RWAs at  30 September  2012); (2)  Group return  on 
tangible equity for 2008; (3) Cost:income  ratio net of insurance claims;  (4) 
Year ended 31 December 2008; (5) As at 1 January 2008; (6) As at October 2008;
(7) As at December  2008; (8) Third party  assets (TPAs); (9) Eligible  assets 
held for  contingent  liquidity  purposes including  cash,  Government  issued 
securities and  other  eligible securities  with  central banks;  (10)  Funded 
tangible assets divided by total Tier 1 capital; (11) As at June 2008.



Regulatory investigations and reviews

The  Group  continues  to  cooperate   fully  with  a  number  of   regulatory 
investigations  and  reviews   as  described  in   the  note  on   Litigation, 
investigations and reviews  on page 87  of the main  announcement. In some  of 
these investigations the  Group believes that  the likely outcome  is that  it 
will  incur  financial  penalties  or  provide  redress,  and  these  may   be 
significant.



Outlook

The external economic, market and regulatory challenges we face are likely  to 
continue for the rest of this year and into 2013. We will continue to focus on
maintaining a strong balance sheet and capital position, as well as  judicious 
management of our expense base.



We anticipate  trends  in  our  Core Retail  &  Commercial  businesses  to  be 
generally consistent with the third quarter, although our Markets business  is 
likely to exhibit normal seasonal variations  in Q4. The Group's net  interest 
margin over the second half is expected to be broadly stable compared with the
first half of the year.



Non-Core continues to  make good progress,  achieving asset reduction  targets 
with losses in line with our expectations. We expect to further reduce  assets 
in Q4, although the Q4 loss is likely to be higher than in Q3. The 'below  the 
line' itemised charges are likely to remain elevated during Q4, though the own
credit adjustment should be materially lower.



Having made strong  progress, RBS  targets most of  the restructuring  actions 
from its 2009 strategic plan to  be substantially completed in the next  15-18 
months, with  the  Group  thereby  positioned  to  be  a  cleaner  and  better 
performing bank in future years.



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



Results presentation

The Royal Bank of  Scotland Group plc  will be hosting  a conference call  and 
live audio webcast following the release of the results for the quarter  ended 
30 September 2012.



The details are as follows:



Date:             Friday 2 November 2012
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



Slides

Slides accompanying this document will be available on www.rbs.com/results



Financial supplement

A  financial  supplement  will   be  available  on  www.rbs.com/results   This 
supplement shows published income and  balance sheet financial information  by 
quarter for the last nine quarters to assist analysts for modelling purposes.

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

END


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