Interim Management Statement

RNS Number : 5057L

Royal Bank of Scotland Group PLC

07 May 2010

 

First Quarter 2010 Results

Contents

	Page
Forward-looking statements	4
Presentation of information	5
Results summary - pro forma	6
Results summary - statutory	8
Business and strategic update	9
Pro forma results	12
Summary consolidated income statement	12
Condensed consolidated statement of comprehensive income	14
Summary consolidated balance sheet	14
Key metrics	15
Results summary	17
Divisional performance	25
UK Retail	27
UK Corporate	30
Wealth	33
Global Banking & Markets	35
Global Transaction Services	38
Ulster Bank	40
US Retail & Commercial	43
RBS Insurance	48
Central items	51
Non-Core	52
Allocation methodology for indirect costs	58
Average balance sheet	60
Condensed consolidated balance sheet	62
Commentary on condensed consolidated balance sheet	63
Condensed consolidated statement of changes in equity	65
Notes	68

Contents (continued)

	Page
Risk and capital management	89
Presentation of information	89
Capital	89
Credit risk	91
Funding and liquidity risk	102
Market risk	105
Other risk exposures	108
Statutory results	122
Condensed consolidated income statement	123
Condensed consolidated statement of comprehensive income	124
Financial review	125
Condensed consolidated balance sheet	126
Commentary on condensed consolidated balance sheet	127
Condensed consolidated statement of changes in equity	129
Additional information	132
Appendix 1 Reconciliations of pro forma to statutory income statements and      balance sheets
Appendix 2 Analysis by quarter
Appendix 3 Asset Protection Scheme

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', '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, capitalisation, portfolios, capital ratios, liquidity, risk weighted assets, return on equity, cost:income ratios, leverage and loan:deposit ratios, funding and risk profile; the Group's future financial performance; the level and extent of future impairments and write-downs; the protection provided by the APS; and the Group's potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk.  These statements are based on current plans, estimates and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements.  For example, certain of the 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: general geopolitical and economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the global economy and instability in the global financial markets, and their impact on the financial industry in general and on the Group in particular; the full nationalisation of the Group or other resolution procedures under the Banking Act 2009; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, credit spreads, bond prices, commodity prices and equity prices; changes in UK and foreign laws, regulations, accounting standards and taxes, including changes in regulatory capital regulations and liquidity requirements; a change of UK Government or changes to UK Government policy; changes in the Group's credit ratings; the Group's participation in the Asset Protection Scheme (APS) and the effect of such Scheme on the Group's financial and capital position; the conversion of the B Shares in accordance with their terms; the ability to access the contingent capital arrangements with HM Treasury; limitations on, or additional requirements imposed on, the Group's activities as a result of HM Treasury's investment in the Group; the Group's ability to attract or retain senior management or other key employees; changes in competition and pricing environments; the financial stability of other financial institutions, and the Group's counterparties and borrowers; the value and effectiveness of any credit protection purchased by the Group; the extent of future write-downs and impairment charges caused by depressed asset valuations; the ability to achieve revenue benefits and cost savings from the integration of certain of RBS Holdings N.V.'s businesses and assets; general operational risks; the inability to hedge certain risks economically; the ability to access sufficient funding to meet liquidity needs; the ability to complete restructurings on a timely basis, or at all, including the disposal of certain non-core assets and assets and businesses required as part of the EC State Aid approval; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; 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

Acquisition of ABN AMRO

On 17 October 2007, RFS Holdings B.V. ("RFS Holdings"), which at the time was owned by The Royal Bank of Scotland Group plc (RBSG), Fortis N.V., Fortis S.A./N.V., Fortis Bank Nederland (Holding) N.V. ("Fortis") and Banco Santander, S.A. ("Santander"), completed the acquisition of ABN AMRO Holding N.V. (renamed RBS Holdings N.V. on 1 April 2010).

RFS Holdings, which is now jointly owned by RBSG, the Dutch State (following its acquisition of Fortis) and Santander (the "Consortium Members"), has substantially completed the process of implementing an orderly separation of the business units of RBS Holdings N.V. As part of this reorganisation, on 6 February 2010, the businesses of RBS Holdings N.V. acquired by the Dutch State were legally demerged from the RBS Holdings N.V. businesses acquired by the Group and were transferred into a newly established holding company, ABN AMRO Bank N.V. (save for certain assets and liabilities acquired by the Dutch State that were not part of the legal separation and which will be transferred to the Dutch State as soon as possible).

Legal separation of ABN AMRO Bank N.V. occurred on 1 April 2010, with the shares in that entity being transferred by RBS Holdings N.V. to a holding company called ABN AMRO Group N.V., which is owned by the Dutch State. Certain assets within RBS Holdings N.V. continue to be shared by the Consortium Members. RBS Holdings N.V. is a fully operational bank within the Group and is independently rated and licensed and regulated by the Dutch Central Bank.

Pro forma results

Pro forma results have been prepared to include only those business units of ABN AMRO that will be retained by RBS. The business and strategic update, divisional performance and discussion of risk and capital management in this announcement focus on the pro forma results. The basis of preparation of the pro forma results is detailed on page 68.

Statutory results

RFS Holdings is jointly owned by the Consortium Members. It is controlled by RBS and is therefore fully consolidated in its financial statements. Consequently, the statutory results of the Group include the results of ABN AMRO. The interests of Fortis, and its successor the State of the Netherlands, and Santander in RFS Holdings are included in minority interests. From 1 April 2010, RBS will cease to consolidate the Consortium Members' interests in ABN AMRO.

Results summary - pro forma

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Core
Total income (1)	8,020	7,432	10,446
Operating expenses (2)	(3,774)	(3,788)	(3,968)
Insurance net claims	(1,003)	(1,173)	(789)
Operating profit before impairment losses (3)	3,243	2,471	5,689
Impairment losses	(971)	(1,288)	(1,030)
Operating profit (3)	2,272	1,183	4,659
Non-Core
Total income (1)	934	108	(1,776)
Operating expenses (2)	(656)	(685)	(699)
Insurance net claims	(133)	(148)	(177)
Operating profit/(loss) before impairment losses (3)	145	(725)	(2,652)
Impairment losses	(1,704)	(1,811)	(1,828)
Operating loss (3)	(1,559)	(2,536)	(4,480)
Total*
Total income (1)	8,954	7,540	8,670
Operating expenses (2)	(4,430)	(4,473)	(4,667)
Insurance net claims	(1,136)	(1,321)	(966)
Operating profit before impairment losses (3)	3,388	1,746	3,037
Impairment losses	(2,675)	(3,099)	(2,858)
Operating profit/(loss) (3)	713	(1,353)	179
Integration and restructuring costs	(168)	(228)	(379)
Asset Protection Scheme credit default swap - fair value changes	(500)	-	-
Gains on pensions curtailment	-	2,148	-
Other	(66)	(433)	156
Operating (loss)/profit before tax (4)	(21)	134	(44)
* Includes fair value of own debt impact	(169)	270	1,031

For definitions of the notes see page 16.

Results summary - pro forma

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Core
- Net interest margin	2.11%	2.06%	2.21%
- Cost:income ratio (5)	47%	51%	38%
- Adjusted cost:income ratio (6)	54%	61%	41%
Non-Core
- Net interest margin	1.25%	1.17%	0.61%
- Cost:income ratio (5)	70%	634%	(39%)
- Adjusted cost:income ratio (6)	82%	(1,713%)	(36%)
Group
- Net interest margin	1.92%	1.83%	1.78%
- Cost:income ratio (5)	49%	59%	54%
- Adjusted cost:income ratio (6)	57%	72%	61%
Continuing operations:
Basic loss per ordinary and B share (7)	(0.2p)	(1.2p)	(2.2p)

	31 March  2010	31 December  2009
Capital and balance sheet
Total assets	£1,582.9bn	£1,522.5bn
Funded balance sheet (8)	£1,120.6bn	£1,084.3bn
Loan:deposit ratio (Core - net of provisions)	102%	104%
Loan:deposit ratio (Group - net of provisions)	131%	135%
Risk-weighted assets - gross	£585.5bn	£565.8bn
Benefit of Asset Protection Scheme	(£124.8bn)	(£127.6bn)
Risk-weighted assets	£460.7bn	£438.2bn
Total equity	£81.0bn	£80.0bn
Core Tier 1 ratio*	10.6%	11.0%
Tier 1 ratio	13.7%	14.4%
Tier 1 leverage ratio (9)	17.6x	17.0x
Tangible equity leverage ratio (10)	5.1%	5.2%
Net tangible equity per share	51.5p	51.3p

* Benefit of APS in Core Tier 1 ratio is 1.4% at 31 March 2010 and 1.6% at 31 December 2009.

For definitions of the notes see page 16.

Results summary - statutory 

Highlights

●	Income of £8,523 million for Q1 2010.
●	Pre-tax loss of £5 million for Q1 2010.
●	Core Tier 1 ratio 9.5%.

	Quarter ended
	31 March  2010	31 December  2009*	31 March  2009*
	£m	£m	£m
Total income	8,523	7,199	8,921
Operating expenses	(4,717)	(2,867)	(5,142)
Operating profit before impairment losses	2,670	3,011	2,813
Impairment losses	(2,675)	(3,099)	(2,858)
Operating loss before tax	(5)	(88)	(45)
Loss attributable to ordinary and B shareholders	(248)	(765)	(902)

* Restated for the reclassification of the results attributable to other Consortium Members as discontinued operations.

Business and strategic update

Customer franchises

The Group's customer franchises remained resilient. RBS sustained its position in its core retail and corporate markets, with customer numbers steady or growing across most of the Group's major businesses.

●	UK Retail maintained good growth in the current account market and now serves over 12.8 million current account customers. Almost 1 million savings accounts have been added since the first quarter of 2009. The division continues to make progress towards a more convenient operating model, with over 4 million active users of online banking and a record share of new sales achieved through direct channels.
●	UK Retail added 4,000 mortgage accounts during the first quarter, taking mortgage account numbers to 849,000, 10% up on 31 March 2009. RBS accounted for 10.6% of new mortgage lending in the quarter, compared with a 7% share of the mortgage stock.
●	UK Corporate and Commercial customer numbers held stable, with modest growth in business and commercial customers. The division serves over 1.1 million SMEs.
●	GBM maintained its market position in core franchise areas, with top tier market rankings in foreign exchange, options, rates, equities and debt capital markets.
●	Ulster Bank increased consumer, SME and corporate customer numbers during the quarter, with consumer accounts up 3%, compared with the first quarter of 2009. Current account numbers increased by 9,000 in the quarter, buoyed by a strong campaign focused on switching customers from competitors withdrawing from the Irish market.
●	US Retail and Commercial's consumer and commercial customer bases held steady in its core New England and Mid-Atlantic regions, with some erosion of customer numbers in the Midwest. Over 44,000 consumer checking accounts and 12,000 small business checking accounts have been added since the first quarter of 2009.
●	RBS Insurance saw a small decline in own-brand motor policy numbers during the first quarter, following increased pricing introduced during the period, offset by good growth in the international and commercial business. Compared with the first quarter of 2009, Churchill's motor policy numbers grew by 11% and its home policies by 27%, while Direct Line, which is not available on price comparison websites, held motor policy numbers stable and grew home policies by 2%.

Business and strategic update (continued)

Restructuring and divestments

The Group has made progress on its restructuring and divestment programme during the first quarter.

Agreement to sell RBS Sempra Commodities' metals, oil and European energy businesses to J.P.Morgan Chase for $1.7 billion was announced in February, and a sales process is under way for the remaining business lines. The sale of RBS Asset Management's investment strategies business to Aberdeen Asset Management was completed, and parts of the Non-Core Latin American businesses have also been successfully disposed of. The sale of RBS Factoring GmbH to GE Capital was agreed in March and is expected to complete by the third quarter. 

The divestment of a retail, business and corporate banking operation, whose principal components are the RBS branch network in England and Wales together with NatWest's Scottish branches, is currently on track, as is the disposal of Global Merchant Services, the Group's card payment acquiring business.

Business and strategic update (continued)

UK Lending

In February 2009, the Group agreed with the UK Government to a number of measures aimed at improving the availability of credit to UK homeowners and businesses. During the 12 month period commencing 1 March 2009:

●	Net mortgage lending exceeded the original target of £9 billion by £3.7 billion.
●	Whilst gross business lending remained relatively strong (£41 billion of new facilities were extended to businesses during the 12 months), net business lending fell by £6.2 billion, reflecting subdued demand, accelerating repayments, continued strong competition and buoyant capital markets.

In March 2010, the Group reached new agreements on lending availability for the period March 2010 to February 2011:

●	Residential lending: to make available an additional £8 billion of net mortgage lending.
●	Business lending: to make available £50 billion in gross new facilities, whether drawn or undrawn, for business customers.

In the first quarter of 2010, net mortgage lending increased by £2.0 billion, compared with an increase of £3.2 billion in the fourth quarter of 2009. The slower rate of growth was reflective of the competitive mortgage environment. In addition, many completions were brought forward to December 2009 to take advantage of the temporary increase in stamp duty thresholds, and this had a corresponding adverse effect in the early part of 2010.

However, notwithstanding the lower mortgage lending growth, activity levels improved during the quarter with over 54,000 applications, 22% higher than in the fourth quarter of 2009.   

Gross new facilities totalling £10.4 billion were extended to UK businesses, slightly lower than the corresponding figure of £11.1 billion during the fourth quarter of 2009. However, activity levels picked up after a seasonal lull in January and February, with over £4.3 billion of new facilities provided in March 2010.

Summary consolidated income statement

for the period ended 31 March 2010 - pro forma

In the income statements set out below, amortisation of purchased intangible assets, integration and restructuring costs, strategic disposals, bonus tax, Asset Protection Scheme credit default swap - fair value changes, gains on pensions curtailment and write-down of goodwill and other intangible assets are shown separately.  In the statutory condensed consolidated income statement on page 123, these items are included in income and operating expenses as appropriate.  

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Core*
Net interest income	3,035	2,935	3,216
Non-interest income (excluding insurance net premium income)	3,864	3,360	6,118
Insurance net premium income	1,121	1,137	1,112
Non-interest income	4,985	4,497	7,230
Total income (1)	8,020	7,432	10,446
Operating expenses (2)	(3,774)	(3,788)	(3,968)
Profit before other operating charges	4,246	3,644	6,478
Insurance net claims	(1,003)	(1,173)	(789)
Operating profit before impairment losses	3,243	2,471	5,689
Impairment losses	(971)	(1,288)	(1,030)
Operating profit (3)	2,272	1,183	4,659
* Includes fair value of own debt impact	(169)	270	1,031
Non-Core
Net interest income	499	511	322
Non-interest income (excluding insurance net premium income)	267	(574)	(2,342)
Insurance net premium income	168	171	244
Non-interest income	435	(403)	(2,098)
Total income (1)	934	108	(1,776)
Operating expenses (2)	(656)	(685)	(699)
Profit/(loss) before other operating charges	278	(577)	(2,475)
Insurance net claims	(133)	(148)	(177)
Operating profit/(loss) before impairment losses	145	(725)	(2,652)
Impairment losses	(1,704)	(1,811)	(1,828)
Operating loss (3)	(1,559)	(2,536)	(4,480)

For definitions of the notes see page 16.

Summary consolidated income statement

for the period ended 31 March 2010 - pro forma (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Total
Net interest income	3,534	3,446	3,538
Non-interest income (excluding insurance net premium income)	4,131	2,786	3,776
Insurance net premium income	1,289	1,308	1,356
Non-interest income	5,420	4,094	5,132
Total income (1)	8,954	7,540	8,670
Operating expenses (2)	(4,430)	(4,473)	(4,667)
Profit before other operating charges	4,524	3,067	4,003
Insurance net claims	(1,136)	(1,321)	(966)
Operating profit before impairment losses (3)	3,388	1,746	3,037
Impairment losses	(2,675)	(3,099)	(2,858)
Operating profit/(loss) (3)	713	(1,353)	179
Amortisation of purchased intangible assets	(65)	(59)	(85)
Integration and restructuring costs	(168)	(228)	(379)
Strategic disposals	53	(166)	241
Bonus tax	(54)	(208)	-
Asset Protection Scheme credit default swap - fair value changes	(500)	-	-
Gains on pensions curtailment	-	2,148	-
Operating (loss)/profit before tax (4)	(21)	134	(44)
Tax charge	(106)	(649)	(228)
Loss from continuing operations	(127)	(515)	(272)
Loss from discontinued operations, net of tax	(4)	(7)	(45)
Loss for the period	(131)	(522)	(317)
Minority interests	(12)	(47)	(471)
Preference share and other dividends	(105)	(144)	(114)
Loss attributable to ordinary and B shareholders before    write-down of goodwill and other intangible assets	(248)	(713)	(902)
Write-down of goodwill and other intangible assets, net of tax	-	(52)	-
Loss attributable to ordinary and B shareholders	(248)	(765)	(902)

For definitions of the notes see page 16.

Condensed consolidated statement of comprehensive income

for the period ended 31 March 2010 - pro forma

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Loss for the period	(131)	(574)	(317)
Other comprehensive income
Available-for-sale financial assets	381	619	(2,952)
Cash flow hedges	(1)	217	244
Currency translation	766	(230)	(185)
Actuarial losses on defined benefit plans	-	(3,756)	-
Tax on other comprehensive income	(160)	844	562
Other comprehensive income/(loss) for the period, net of tax	986	(2,306)	(2,331)
Total comprehensive income/(loss) for the period	855	(2,880)	(2,648)
Attributable to:
Minority interests	89	29	134
Preference shareholders	(105)	126	114
Paid-in equity holders	-	18	-
Ordinary and B shareholders	871	(3,053)	(2,896)
	855	(2,880)	(2,648)

Summary consolidated balance sheet

at 31 March 2010 - pro forma

	31 March  2010	31 December  2009
	£m	£m
Loans and advances to banks (1)	56,508	48,777
Loans and advances to customers (1)	553,872	554,654
Reverse repurchase agreements and stock borrowing	95,925	76,137
Debt securities and equity shares	273,170	265,055
Other assets	141,151	139,659
Funded assets	1,120,626	1,084,282
Derivatives	462,272	438,199
Total assets	1,582,898	1,522,481
Owners' equity	78,676	77,736
Minority interests	2,305	2,227
Subordinated liabilities	31,936	31,538
Deposits by banks (2)	100,168	115,642
Customer accounts (2)	425,102	414,251
Repurchase agreements and stock lending	129,227	106,359
Derivatives, settlement balances and short positions	514,855	472,409
Other liabilities	300,629	302,319
Total liabilities and equity	1,582,898	1,522,481

Notes:

(1)	Excluding reverse repurchase agreements and stock borrowing.
(2)	Excluding repurchase agreements and stock lending.

Key metrics - pro forma

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Core
- Net interest margin	2.11%	2.06%	2.21%
- Cost:income ratio (5)	47%	51%	38%
- Adjusted cost:income ratio (6)	54%	61%	41%
Non-Core
- Net interest margin	1.25%	1.17%	0.61%
- Cost:income ratio (5)	70%	634%	(39%)
- Adjusted cost:income ratio (6)	82%	(1,713%)	(36%)
Group
- Net interest margin	1.92%	1.83%	1.78%
- Cost:income ratio (5)	49%	59%	54%
- Adjusted Group cost:income ratio (6)	57%	72%	61%
Continuing operations:
Basic loss per ordinary and B share (7)	(0.2p)	(1.2p)	(2.2p)

For definitions of the notes see page 16.

Key metrics - pro forma (continued)

	31 March  2010	31 December  2009
Capital and balance sheet
Funded balance sheet (8)	£1,120.6bn	£1,084.3bn
Total assets	£1,582.9bn	£1,522.5bn
Risk-weighted assets - gross	£585.5bn	£565.8bn
Benefit of Asset Protection Scheme	(£124.8bn)	(£127.6bn)
Risk-weighted assets	£460.7bn	£438.2bn
Core Tier 1 ratio*	10.6%	11.0%
Tier 1 ratio	13.7%	14.4%
Risk elements in lending (REIL)	£36.5bn	£35.0bn
Risk elements in lending as a % of loans and advances	6.3%	6.1%
Provision balance as % of REIL/PPL	45%	42%
Loan:deposit ratio (Core - net of provisions)	102%	104%
Loan:deposit ratio (Group - net of provisions)	131%	135%
Tier 1 leverage ratio (9)	17.6x	17.0x
Tangible equity leverage ratio (10)	5.1%	5.2%
Net tangible equity per share	51.5p	51.3p

* Benefit of APS in Core Tier 1 ratio is 1.4% at 31 March 2010 and 1.6% at 31 December 2009.

Notes:

(1)	Excluding strategic disposals and Asset Protection Scheme credit default swap - fair value changes.
(2)	Excluding purchased intangibles amortisation, write-down of goodwill and other intangible assets, integration and restructuring costs, bonus tax and gains on pensions curtailment.
(3)	Operating profit before tax, purchased intangibles amortisation, integration and restructuring costs, strategic disposals, bonus tax, Asset Protection Scheme credit default swap - fair value changes, gains on pensions curtailment and write-down of goodwill and other intangible assets.
(4)	Excluding write-down of goodwill and other intangible assets.
(5)	The cost:income ratio for Core operations and Group is based on total income and operating expenses as defined in (1) and (2) above.
(6)	The adjusted 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.
(7)	(Loss)/profit from continuing operations attributable to ordinary and B shareholders divided by weighted average number of ordinary and B shares in issue.
(8)	Funded balance sheet is defined as total assets less derivatives.
(9)	The Tier 1 leverage ratio is based on total tangible assets (after netting derivatives) divided by Tier 1 capital.
(10)	The tangible equity leverage ratio is based on total tangible equity divided by total tangible assets (after netting derivatives).

Results summary

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Net interest income	£m	£m	£m
Net interest income (1)	3,447	3,340	3,470
Net interest margin
- Group	1.92%	1.83%	1.78%
- Global Banking & Markets	1.11%	0.89%	2.02%
- Rest of Core Group	2.43%	2.46%	2.29%
- Non-Core	1.25%	1.17%	0.61%
Selected average balances
Loans and advances to banks	47,254	51,076	43,906
Loans and advances to customers	529,914	543,373	618,547
Debt securities	140,732	136,315	118,928
Interest earning assets	717,900	730,764	781,381
Deposits by banks	86,048	121,887	154,823
Customer accounts	340,872	339,180	370,835
Subordinated liabilities	32,629	33,002	38,655
Interest bearing liabilities	627,192	647,690	688,114
Non-interest bearing deposits	43,946	37,164	36,538
Selected average yields (%)
Loans and advances to banks	1.19	1.20	2.07
Loans and advances to customers	3.48	3.53	3.86
Debt securities	2.43	3.05	4.44
Interest earning assets	3.13	3.28	3.85
Deposits by banks	1.38	1.66	2.72
Customer accounts	1.03	1.12	1.50
Subordinated liabilities	2.46	3.62	4.43
Interest bearing liabilities	1.38	1.63	2.35
Non-interest bearing deposits as a  percentage of interest earning assets	6.12	5.09	4.68

Note:

(1)	Refer to notes on page 60.

Key points

Q1 2010 compared with Q4 2009

●	Group net interest margin (NIM) widened by 9 basis points, largely reflecting improved money market income in GBM and the benefit of capital raising in December 2009.
●	Adjusting for the number of days in the quarter, net interest margin in the Core retail and commercial banking divisions remained stable in the first quarter. There has been some further widening of new business asset margins, which have largely been offset by changes in the mix of assets with a greater proportion of lower yielding secured lending, as well as by continued pressure on liability margins as higher yielding hedges roll off.

Q1 2010 compared with Q1 2009

●	Compared with the first quarter of 2009, Core retail and commercial NIM widened by 27 basis points, as assets were progressively repriced over the course of the year to offset the effect of tighter liability margins, with Group NIM increasing by 14 basis points.

Results summary(continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Non-interest income	£m	£m	£m
Net fees and commissions	1,479	1,459	1,585
Income from trading activities	2,266	711	1,660
Other operating income	386	616	531
Non-interest income (excluding insurance premiums)*	4,131	2,786	3,776
Insurance net premium income	1,289	1,308	1,356
Total non-interest income	5,420	4,094	5,132
* Includes fair value of own debt
Income/(loss) from trading activities	41	(79)	290
Other operating income	(210)	349	741
Fair value of own debt	(169)	270	1,031

Key points

Q1 2010 compared with Q4 2009

●	The strong increase in non-interest income was driven largely by buoyant income from trading activities, with a good performance from GBM trading businesses and significantly reduced  losses in Non-Core, both reflective of favourable market conditions. Non-Core non-interest income was £435 million, compared with losses of £403 million in Q4 2009.
●	Net fees and commissions increased modestly, with growth in GBM offsetting lower fee income in most retail and commercial businesses, reflecting generally low activity volumes, together with the adverse impact of repricing overdraft fees, which took effect in Q4 2009 in the UK retail businesses.

Q1 2010 compared with Q1 2009

●	Non-interest income was 6% higher than in the first quarter of 2009, during which GBM trading results benefited from exceptional market conditions while Non-Core recorded significant losses on monolines, credit default swaps and asset-backed securities.

Results summary (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Operating expenses	£m	£m	£m
Staff costs	2,553	2,246	2,510
Premises and equipment	528	618	644
Other	935	1,075	1,046
Administrative expenses	4,016	3,939	4,200
Depreciation and amortisation	414	534	467
Operating expenses	4,430	4,473	4,667
General insurance	1,107	1,304	970
Bancassurance	29	17	(4)
Insurance net claims	1,136	1,321	966
Staff costs as a percentage of total income	29%	30%	29%

Key points

Q1 2010 compared with Q4 2009

●	Group operating expenses fell by 1%, driven principally by Business Services, where costs declined by £129 million with reductions in property, technology and operations costs.
●	Staff costs increased by 14%, largely as a result of incentive compensation accruals in line with stronger business performance in GBM. The compensation ratio in GBM was 32%.
●	Other costs benefited from a one-off VAT recovery of £80 million included in Central items.
●	Insurance claims were lower than in Q4 2009, when reserves for bodily injury claims were built up significantly, but remained relatively high as a result of severe winter weather in the UK.

Q1 2010 compared with Q1 2009

●	Group operating expenses were £237 million, or 5%, lower than in the fourth quarter of 2009, with a small increase of 2% in staff costs more than offset by reduced premises and equipment and other expenses.
●	Insurance net claims were up £170 million, or 18% reflecting higher bodily injury claims and adverse winter weather.

Results summary (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Impairment losses	£m	£m	£m
Division
UK Retail	387	451	354
UK Corporate	186	190	100
Wealth	4	10	6
Global Banking & Markets	32	130	269
Global Transaction Services	-	4	9
Ulster Bank	218	348	67
US Retail & Commercial	143	153	223
RBS Insurance	-	-	5
Central items	1	2	(3)
Core	971	1,288	1,030
Non-Core	1,704	1,811	1,828
	2,675	3,099	2,858
Asset category
Loans and advances	2,602	3,032	2,276
Securities	73	67	582
	2,675	3,099	2,858
Loan impairment charge as % of gross loans and advances excluding reverse repurchase agreements	1.8%	2.1%	1.3%

Key points

Q1 2010 compared with Q4 2009

●	Impairment losses declined in the first quarter, led by improving trends in UK Retail. Loan performance in Ulster continued to deteriorate, though impairments were lower than in Q4 2009, which included a significant charge in respect of latent losses.
●	UK Corporate impairments held steady, while US Retail & Commercial is beginning to trend favourably. GBM recorded only a small loss in the absence of any large single name impairments.
●	Non-Core impairments continued the improving trend that began to emerge towards the end of 2009, though loss rates, in proportion to the division's diminishing portfolio, remain high.

Q1 2010 compared with Q1 2009

●	Reduced impairment losses in GBM were partly offset by higher levels of impairment in the Core retail and commercial businesses, particularly in UK Corporate and Ulster.

Results summary (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Credit and other market losses (1)	£m	£m	£m
Monoline exposures	-	734	1,645
CDPCs	32	111	198
Asset-backed products (2)	55	(102)	376
Other credit exotics	(11)	(30)	537
Equities	7	13	8
Banking book hedges	36	262	158
Other (3)	140	91	(83)
	259	1,079	2,839

Notes:

(1)	Included in 'Income from trading activities' on page 18.
(2)	Includes super senior asset-backed structures and other asset-backed products.
(3)	Reflects other net market losses in Non-Core.

Key points

Q1 2010 compared with Q4 2009

●	Credit and other market losses were significantly lower, down £820 million, 76%, predominantly in Non-Core, reflecting continuing improvement in underlying asset prices.
●	In Q1 2010, no losses were recorded on monoline exposures. Exposures to monolines were virtually unchanged. Higher prices for underlying assets were offset by the effect of foreign exchange movements. The CVA was also stable with moves in credit spreads and recovery rates largely offsetting each other.
●	The exposures to CDPCs have also remained stable. A small reduction in CVA was more than offset by realised losses arising from trade commutations. During the latter part of 2008 and in 2009, the Group put in place hedges to cap its exposure to certain CDPCs. As the exposure to these CDPCs decreased, losses were incurred on these hedges. These losses were the main contributor to the Q4 2009 losses on CDPCs.
●	Losses on asset-backed products primarily reflect movements in asset prices.
●	Rally in underlying prices as well as roll off of capital relief trades have resulted in lower losses on banking book hedges in Q1 2010 compared with Q4 2009.

Q1 2010 compared with Q1 2009

●

Credit and other market losses were significantly lower, down £2,580 million, 91%. Losses fell markedly across a range of asset classes including monolines, CDPCs, asset-backed and other exotic credit products as market parameters stabilised compared with Q1 2009, when asset-backed prices were still falling and monoline spreads rising.

Results summary (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Other non-operating items	£m	£m	£m
Amortisation of purchased intangible assets	(65)	(59)	(85)
Integration and restructuring costs	(168)	(228)	(379)
Strategic disposals	53	(166)	241
Bonus tax	(54)	(208)	-
Asset Protection Scheme credit default swap - fair value changes	(500)	-	-
Gains on pensions curtailment	-	2,148	-
	(734)	1,487	(223)

Key Points

Q1 2010 compared with Q4 2009

●	Integration costs have continued to decline as the process of integrating ABN AMRO is well advanced.
●	A £53 million gain on strategic disposals largely relates to the disposal of a segment of the Group's Asset Management business.
●	The Asset Protection Scheme is structured as a credit derivative, with movements in the fair value of the contract (including £1.4 billion in fees paid in 2009) amounting to £500 million charged against profit or loss in the first quarter, driven by the tightening of credit spreads across the portfolio of covered assets.

Q1 2010 compared with Q1 2009

●	Integration and restructuring costs declined compared with Q1 2009, when ABN AMRO integration activity was more substantial. A gain of £241 million was recorded in Q1 2009 on the sale of the Group's stake in Bank of China.

Results summary (continued)

Capital resources and ratios	31 March  2010	31 December  2009
Core Tier 1 capital	£48.7bn	£48.2bn
Tier 1 capital	£63.0bn	£62.9bn
Total capital	£72.1bn	£71.3bn
Risk-weighted assets  - Gross	£585.5bn	£565.8bn
Benefit of Asset Protection Scheme	(£124.8bn)	(£127.6bn)
Risk-weighted assets	£460.7bn	£438.2bn
Core Tier 1 ratio*	10.6%	11.0%
Tier 1 ratio	13.7%	14.4%
Total capital ratio	15.7%	16.3%

* Benefit of APS in Core Tier 1 ratio is 1.4% at 31 March 2010 and 1.6% at 31 December 2009.

Key points

Q1 2010 compared with Q4 2009

●	The Group's strong capital base includes the benefit of the issuance of B shares to the UK Government in December 2009.
●	Risk-weighted assets (gross) increased by 3% to £585 billion, principally as a result of the roll-off of ABN AMRO capital relief trades, as previously guided, along with the weakening of sterling. The reduction in the Core Tier 1 ratio is primarily driven by the increase in RWAs.
●	The Asset Protection Scheme provided £125 billion of RWA relief at 31 March 2010, £3 billion lower than at 31 December 2009. This decrease was due to a reduction in the pool size and improvements in risk parameters partially offset by exchange rate movements.
●	The recently completed liability management initiative will add approximately 30 bps to the Core Tier 1 ratio.

Results summary (continued)

	31 March  2010	31 December  2009
Balance sheet	£bn	£bn
Funded balance sheet	1,120.6	1,084.3
Total assets	1,582.9	1,522.5
Loans and advances to customers (excluding reverse repurchase agreements and stock   borrowing)	553.9	554.7
Customer accounts (excluding repurchase agreements and stock lending)	425.1	414.3
Loan:deposit ratio (Core - net of provisions)	102%	104%
Loan:deposit ratio (Group - net of provisions)	131%	135%

Key points

●	Third party assets increased by £36 billion, with around half of the movement accounted for by exchange rate movements.
●	Modest loan growth resumed in the Core bank, particularly in UK Corporate and UK Retail, but this has been outpaced by growth in customer deposits. Core deposits grew by £14 billion, or 3%, with strong inflows in UK Corporate and GTS.
●	The loan to deposit ratio in the Core bank fell to 102% from 104% at 31 December 2009.
●	Non-Core loans and advances declined by £7 billion in the quarter.

A further analysis of the Group's funding and liquidity positions is included on pages 102 to 104.

 

END

 

 

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