Interim Management Statement

RNS Number : 1370G
Royal Bank of Scotland Group PLC
02 May 2014
 



 

 

 

 

 

 

 

 

 

 

 

 

Interim Management Statement

 

Q1 2014


 

Contents

 

Page



Highlights

1

Contacts

5

Presentation of information

6

Summary consolidated results

7

Analysis of results

9

Divisional performance

17



Statutory results

53



Condensed consolidated income statement

53

Condensed consolidated statement of comprehensive income

54

Condensed consolidated balance sheet

55

Average balance sheet

56

Condensed consolidated statement of changes in equity

58

Notes

60



Additional information

76



Share information

76

Statutory results

76

Financial calendar

76



Appendix 1 Income statement reconciliations and segmental analysis


Appendix 2 Capital and risk management


Appendix 3 Inter-segmental transfers


 

 


 

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', 'believe', 'should', 'intend', 'plan', 'could', 'probability', 'risk', 'Value-at-Risk (VaR)', 'target', 'goal', 'objective', 'will', 'endeavour', 'outlook', 'optimistic', 'prospects' and similar expressions or variations on such expressions.


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


Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: global economic and financial market conditions and other geopolitical risks, and their impact on the financial industry in general and on the Group in particular; the ability to implement strategic plans on a timely basis, or at all, including the simplification of the Group's structure, the divestment of Citizens Financial Group and the exiting of assets in RBS Capital Resolution as well as the disposal of certain other assets and businesses as announced or required as part of the State Aid restructuring plan; the achievement of capital and costs reduction targets; ineffective management of capital or changes to capital adequacy or liquidity requirements; organisational restructuring in response to legislation and regulation in the United Kingdom (UK), the European Union (EU) and the United States (US); the implementation of key legislation and regulation including the UK Financial Services (Banking Reform Act) 2013 and the proposed EU Recovery and Resolution Directive; the ability to access sufficient sources of capital, liquidity and funding when required; deteriorations in borrower and counterparty credit quality; litigation, government and regulatory investigations including investigations relating to the setting of LIBOR and other interest rates and foreign exchange trading and rate setting activities; costs or exposures borne by the Group arising out of the origination or sale of mortgages or mortgage-backed securities in the US; the extent of future write-downs and impairment charges caused by depressed asset valuations; the value and effectiveness of any credit protection purchased by the Group; unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices and basis, volatility and correlation risks; changes in the credit ratings of the Group; changes to the valuation of financial instruments recorded at fair value; competition and consolidation in the banking sector; the ability of the Group to attract or retain senior management or other key employees; regulatory or legal changes (including those requiring any restructuring of the Group's operations) in the UK, the US and other countries in which the Group operates or a change in UK Government policy; changes to regulatory requirements relating to capital and liquidity; changes to the monetary and interest rate policies of central banks and other governmental and regulatory bodies; changes in UK and foreign laws, regulations, accounting standards and taxes, including changes in regulatory capital regulations and liquidity requirements; impairments of goodwill; pension fund shortfalls; general operational risks; HM Treasury exercising influence over the operations of the Group; reputational risk; the conversion of the B Shares in accordance with their terms; limitations on, or additional requirements imposed on, the Group's activities as a result of HM Treasury's investment in the Group; and the success of the Group in managing the risks involved in the foregoing.

 

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

 

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


 

Highlights

 

RBS reports a pre-tax profit of £1,642 million for Q1 2014, up from £826 million in Q1 2013

Operating profit(1) for the quarter was £1,501 million, up from £747 million in Q1 2013:

●

Operating profit in the retail and commercial banking businesses(2) was up 36% to £1,373 million, driven by good cost control and improving impairment trends, particularly in UK Corporate and Ulster Bank.



●

Markets operating profit was up 14% to £318 million, with costs down 15%.



●

RBS Capital Resolution (RCR) reduced RWA equivalents(3) by £14 billion during Q1 2014 to £51 billion, with lower than expected operating losses of £114 million.

 

RBS has made good progress towards the implementation of its new three segment business structure and will be reporting on this basis from Q2 2014 onwards.

 

With a Common Equity Tier 1 ratio of 9.4%(4) at 31 March 2014, RBS remains on track to achieve its capital targets.

 

"Just over two months ago, I set out our plan for making RBS the most trusted bank in the UK. Today's results show that in steady state, RBS will be a bank that does a great job for customers while delivering good returns for our shareholders. But we still have a lot of work to do and plenty of issues from the past to reckon with. Everyone at RBS is focused squarely on doing everything we can to earn the trust of our customers and in the process change the banking sector for the benefit of the UK."

 

Ross McEwan, Chief Executive

 

Key points

 

Q1 2014 operating performance

●

Income was down 2% compared with Q1 2013 at £5,053 million, with deposit repricing and a modest revival in lending volumes during the quarter leading to improvements in UK Retail and UK Corporate. Markets income was seasonally stronger than in Q4 2013 but lower than in Q1 2013, reflecting its smaller balance sheet and reduced risk levels.



●

Expenses were 6% lower than in Q1 2013 at £3,190 million, with Markets down 15% and other banking businesses down 3%. Incremental cost savings have been delivered principally from tactical cost control initiatives. The benefits from strategic cost reduction initiatives will feed through in later quarters. 



●

Impairments were down £671 million from Q1 2013, with significant improvements in Ulster Bank, down 80% and UK Corporate, down 66%. Impairments in RCR totalled £108 million in Q1 2014 whereas Non-Core totalled £433 million in Q1 2013. The quarter benefited from no meaningful single name impairments.



●

Risk elements in lending decreased by £2.0 billion to £37.4 billion, as a percentage of loans represented 9.0% (31 December 2013 - 9.4%).



●

Operating profit totalled £1,501 million, up from £747 million in Q1 2013, driven by stronger business performance in UK Retail and UK Corporate, together with the turnaround at Ulster Bank, which reported its first quarterly operating profit since 2009.



●

Q1 2014 benefited from c.£200 million of Treasury AFS gains and a £191 million profit on the sale of the remaining stake in DLG.



●

Profit attributable to shareholders was £1,195 million, compared with £393 million in Q1 2013 and a loss of £8,702 million in Q4 2013.



●

Tangible net asset value per ordinary and B share was 376p at 31 March 2014, compared with 363p at 31 December 2013.


 

Highlights

 

Balance sheet

●

Funded assets were £130 billion lower than in Q1 2013 at £746 billion, principally driven by the reshaping of the Markets balance sheet. Compared with Q4 2013, funded assets were up £7 billion, reflecting a limited pick-up in client driven trading activity in Markets and stronger lending volumes, particularly in UK mortgages.


○

Gross new mortgage lending in Q1 2014 was £4.4 billion in UK Retail, a market share of 9.5%, including more than 4,700 approvals assisting young people and families to buy their first home through the Government's Help to Buy scheme. Net new lending of £1.2 billion took the UK Retail mortgage portfolio to more than £100 billion for the first time.


○

Modest growth resumed in the UK Corporate loan book. SMEs drew down £2.4 billion of new term lending in Q1 2014, up 23% from Q1 2013, with net term lending to trading SMEs turning positive.


○

Total net lending flows reported within the scope of the Funding for Lending Scheme (FLS) were plus £63 million in Q1 2014. The FLS no longer includes household lending flows.

●

RWAs on an end-point CRR basis, were down £73 billion from Q1 2013, with approximately a third of the reduction in Markets, principally reflecting the strategic repositioning of this business.



●

The Common Equity Tier 1 (CET1) ratio was 9.4%(4) at 31 March 2014, compared with 8.6% at the end of 2013. RBS remains well on track to achieve its target CET1 ratio of 11% by the end of 2015 and 12% or above by the end of 2016. 



●

RCR reduced RWA equivalents by £14 billion during Q1 2014 to £51 billion, with operating losses lower than expected at £114 million.

 

Building the number one bank for trust and service in the UK

●

RBS has made good progress towards developing detailed implementation plans for its new structure, built around three businesses: Personal & Business Banking, Commercial & Private Banking, and Corporate & Institutional Banking.



●

Each business is focused on delivering the customer commitments announced on 27 February 2014. In March, RBS stopped offering deals to new customers that are not available to existing customers, including 0% credit card balance transfers and teaser rates on savings accounts.



●

After placing 325 business specialists in branches in 2013, a further 40 experienced relationship managers have been allocated to serve our commercial customers, with a central focus on lending.



●

By the end of March 2014, pro-active 'Statements of Appetite' had been sent to more than 270,000 SME customers, offering in excess of £10 billion of new or additional funding. 

 

Notes:

(1)

Operating profit before tax, own credit adjustments, Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, write-down of goodwill and other intangible assets, amortisation of purchased intangible assets, strategic disposals, bank levy and RFS Holdings minority interest ('operating profit'). Statutory operating profit before tax was £1,642 million for the quarter ended 31 March 2014.

(2)

Retail and commercial banking businesses comprise the UK Retail, UK Corporate, Wealth, International Banking, Ulster Bank and US Retail & Commercial divisions.

(3)

RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in divisions. RWAe converts both performing and non-performing exposures into a consistent capital measure, being the sum of the regulatory RWAs and the regulatory capital deductions, the latter converted to RWAe by applying a multiplier. The Group applies a CET1 ratio of 10%, consistent with that used for divisional return on equity measure; this results in a CRR RWAe conversion multiplier of 10.

(4)

The disclosed Common Equity Tier 1 (CET1) ratio as at 31 March 2014 is calculated using capital which is not the actual regulatory capital, as it does not allow for the initial Dividend Access Share ('DAS') dividend which the PRA regards as foreseeable under Article 26 of the Capital Requirements Regulation.  As set out on page 72, the Group will put a resolution to the independent shareholders at the Annual General Meeting on 25 June 2014 to approve the DAS Agreement; the initial dividend can only be paid if such approval is obtained. Adjusting for this contemplated dividend would reduce the disclosed CET1 ratio by 8 basis points; this remains at 9.4%.


 

Highlights

 

Building the number one bank for trust and service in the UK (continued)

●

Lending procedures have been changed to speed up the entire process and enable us to meet our commitment to make all but the most complex loan decisions within five days by the end of 2014. We also launched a new online loan application facility for smaller business customers in February 2014, which will be extended to larger SMEs over the course of 2014.



●

On 17 April 2014, Clifford Chance published its report into allegations concerning the Global Restructuring Group's treatment of SMEs. The report concluded that there was no evidence to support the principal allegation. Nevertheless, further steps have been taken to rebuild our customers' trust, including not charging default interest for the first 90 days when an SME customer defaults; improving transparency around fees charged to customers in our restructuring unit; and the wind-down of the West Register property unit.



●

Ulster Bank has maintained its investment in structures to support customers in financial difficulty, which has resulted in reductions in the number of mortgage customers more than 90 days in arrears in each of the last twelve months - a trend not seen elsewhere in the Irish market to date.



●

To improve the resilience of our IT systems, on 21 March 2014 we moved our existing single batch scheduler for NatWest, Ulster Bank Northern Ireland and Ulster Bank Republic of Ireland onto three dedicated and separate versions (RBS already runs in a separate scheduler environment). Separating the batch schedulers means that, if a problem occurs with transactions on one of these brands, it will not impact the activity taking place to support the other two, avoiding a repeat of the 2012 system outage. This forms part of a wider programme that will help us become a simpler organisation, including investment of around £750 million over a three-year period to improve the safety, security and resilience of our IT systems.

 

Delivering our capital plan

●

Plans for the divestment of Citizens Financial Group and Williams & Glyn continue to make progress.



●

In February 2014 RBS completed the sale of its remaining interest in Direct Line Insurance Group, raising gross proceeds of £1,113 million. A gain of £191 million was booked in Q1 2014. 



●

On 9 April 2014 RBS announced that it had reached agreement with HM Treasury (HMT) to provide for the future retirement of the Dividend Access Share (DAS). If the independent shareholders of RBS approve the DAS Retirement Agreement, RBS will pay HMT an initial dividend of £320 million in 2014, with a further £1.18 billion (subject to interest if not paid before 1 January 2016) payable at the Board's discretion, after which the DAS will lose its enhanced dividend rights and become a single B share.

 

Performance measures(1)

 

Measure

2013

Q1 2014

Medium term

Long term







Efficiency

Cost:income ratio(2)

73%

66%

~55%

~50%

Returns

Return on tangible equity(3)

Negative

12.2%

~9-11%

~12%+







Capital strength(4)

Common Equity Tier 1 ratio

8.6%

9.4%*

≥12%

≥12%


Leverage ratio

3.5%

3.7%

3.5-4%

≥4%

 

* Refer to footnote 4 on page 2 for further information.

 

Notes:

(1)

This table contains forecasts with significant contingencies. Please refer to 'Forward-looking Statements'.

(2)

Including bank levy, integration and restructuring charges and, from 2015, the EU resolution fund charge.

(3)

Calculated with tangible equity limited to a CET1 ratio of 12%.

(4)

End-point CRR basis.


 

Highlights

 

Outlook

The improvement in economic confidence has continued and modest asset growth is resuming in some segments. We expect a modest increase in the net interest margin for the remainder of the year. Markets income, in line with industry trends, is expected to be lower in the remaining quarters of the year than in Q1 2014.

 

RBS remains on track to deliver its target of £1 billion cost reductions in 2014. Incremental savings in the first quarter have been primarily tactical in nature, while the benefits of more strategic restructuring of the cost base will feed through later in the year. Restructuring costs are likely to be considerably higher for the remainder of the year than the rate implied by the first quarter.

 

While credit trends have been particularly favourable in the first quarter, for the remainder of the year impairment losses on UK and Irish portfolios, excluding RCR, are expected to continue to show some improvement over 2013.

 

RCR has made a good start benefiting from favourable market conditions in the first quarter. This is likely to result in RCR exceeding the 2014 target for reduction in funded assets and RWA equivalents; the overall operating loss for RCR, however, is expected to be in line with previous guidance.

 

The bank is making steady progress towards achieving its target CET1 ratio of 11% by the end of 2015 and 12% or above by the end of 2016. Subject to independent shareholder approval, the Group intends to pay the initial DAS dividend of £320 million to HMT in 2014; this payment was already included in the Group's capital plans.

 

The ongoing conduct and regulatory investigations and litigation continue to create challenges and uncertainties for RBS, as for other banks. The timing and amounts of any further settlements or redress remain uncertain. 


 

Contacts

 

For analyst enquiries:






Richard O'Connor

Head of Investor Relations

+44 (0) 20 7672 1758







For media enquiries:






Group Media Centre


+44 (0) 131 523 4205

 

 

Analysts and investors conference call

The Royal Bank of Scotland Group will be hosting a conference call for analysts and investors, also available via live webcast and audio call. The details are as follows:

 

Date:


Friday 2 May 2014

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

Background slides are available on www.rbs.com/results

 

Financial supplement

A financial supplement containing income statement and balance sheet information for the last nine quarters is available on www.rbs.com/results 


 

Presentation of information

 

The financial information on pages 7 to 52 prepared using the Group's accounting policies, shows the underlying performance of the Group on a managed basis which excludes certain one-off and other items. Information is provided in this form to give a better understanding of the results of the Group's operations. Group operating profit/(loss) on this basis excludes:

 

·

own credit adjustments;



·

Payment Protection Insurance (PPI) costs;



·

Interest Rate Hedging Products (IRHP) redress and related costs;



·

regulatory and legal actions;



·

integration and restructuring costs;



·

gain/(loss) on redemption of own debt;



·

write-down of goodwill and other intangible assets;



·

amortisation of purchased intangible assets;



·

strategic disposals;



·

bank levy; 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 53 to 75inclusive are on a statutory basis. Reconciliations between the managed basis and statutory basis are included in Appendix 1.

 

Revisions

Revised allocation of Business Services costs

In the first quarter of 2014, the Group reclassified certain costs between direct and indirect expenses for all divisions. Comparatives have been restated accordingly; the revision did not affect total expenses or operating profit.

 

Non-Core

Non-Core was dissolved on 31 December 2013.

 

RBS Capital Resolution

RBS Capital Resolution (RCR) was established on 1 January 2014 by the transfer of capital intensive and higher risk assets from existing divisions. No business lines moved to RCR and prior period segmental reporting has not been restated. The results of RCR have been reported separately for the first time in Q1 2014.


Summary consolidated income statement

for the quarter ended 31 March 2014

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Net interest income

2,698 

2,767 

2,672 

Non-interest income

2,355 

1,173 

2,489 





Total income (1)

5,053 

3,940 

5,161 

Operating expenses (2)

(3,190)

(3,247)

(3,381)





Operating profit before impairment losses (3)

1,863 

693 

1,780 

Impairment losses

(362)

(5,112)

(1,033)





Operating profit/(loss) (3)

1,501 

(4,419)

747 

Own credit adjustments

139 

- 

249 

Payment Protection Insurance costs

- 

(465)

- 

Interest Rate Hedging Products redress and related costs

- 

(500)

(50)

Regulatory and legal actions

- 

(1,910)

- 

Integration and restructuring costs

(129)

(180)

(122)

Gain/(loss) on redemption of own debt

20 

(29)

(51)

Write-down of goodwill

- 

(1,059)

- 

Other items

111 

(421)

53 





Operating profit/(loss) before tax

1,642 

(8,983)

826 

Tax (charge)/credit

(362)

377 

(350)





Profit/(loss) from continuing operations

1,280 

(8,606)

476 

Profit from discontinued operations, net of tax

9 

15 

129 





Profit/(loss) for the period

1,289 

(8,591)

605 

Non-controlling interests

(19)

3 

(131)

Other owners' dividends

(75)

(114)

(81)





Profit/(loss) attributable to ordinary and B shareholders

1,195 

(8,702)

393 

 

Notes:

(1)

Excluding own credit adjustments, gain/(loss) on redemption of own debt, strategic disposals and RFS Holdings minority interest.

(2)

Excluding PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, amortisation of purchased intangible assets, bank levy, write down of goodwill and other intangible assets and RFS Holdings minority interest.

(3)

Operating profit before tax, own credit adjustments, PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, write down of goodwill and other intangible assets, amortisation of purchased intangible assets, strategic disposals, bank levy and RFS Holdings minority interest.

 

Analysis of results is set out on pages 9 to 16.


Summary consolidated balance sheet

at 31 March 2014

 

31 March 

31 December 


2014 

2013 


£m 

£m 




Cash and balances at central banks

69,647 

82,659 

Net loans and advances to banks (1,2)

28,302 

27,555 

Net loans and advances to customers (1,2)

390,780 

390,825 

Reverse repurchase agreements and stock borrowing

78,213 

76,413 

Debt securities and equity shares

130,498 

122,410 

Settlement balances

16,900 

5,591 

Intangible assets

12,428 

12,368 

Other assets (3)

19,708 

22,018 




Funded assets

746,476 

739,839 

Derivatives

277,294 

288,039 




Total assets

1,023,770 

1,027,878 




Bank deposits (2,4)

35,371 

35,329 

Customer deposits (2,4)

401,276 

414,396 

Repurchase agreements and stock lending

88,776 

85,134 

Debt securities in issue

61,755 

67,819 

Settlement balances

17,175 

5,313 

Short positions

37,850 

28,022 

Subordinated liabilities

24,139 

24,012 

Other liabilities (3)

21,986 

23,112 




Liabilities excluding derivatives

688,328 

683,137 

Derivatives

274,506 

285,526 




Total liabilities

962,834 

968,663 

Non-controlling interests

612 

473 

Owners' equity

60,324 

58,742 




Total liabilities and equity

1,023,770 

1,027,878 




Memo: Tangible equity (5)

42,604 

41,082 

 

Notes:

(1)

Excludes reverse repurchase agreements and stock borrowing.

(2)

Excludes disposal groups.

(3)

Includes disposal groups.

(4)

Excludes repurchase agreements and stock lending.

(5)

Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.

 

Key points 

 

31 March 2014 compared with 31 December 2013

·

Funded assets increased by £6.6 billion to £746 billion as client driven trading activity returned from seasonal lows in Markets.


 

·

Net loans and advances to customers remained stable at £391 billion, with underlying lending growth across the retail and commercial banking businesses offset primarily by disposals and run-off of RCR loans.


 

·

Customer deposits decreased by £13 billion to £401 billion, mainly in International Banking and UK Corporate, driven by deposit repricing and changes in the Group's funding strategy.

 


 

Analysis of results

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 

Net interest income

£m 

£m 

£m 





Net interest income (1)

2,684 

2,745 

2,687 





Average interest-earning assets (1)

512,244 

523,946 

560,563 





Net interest margin




  - Group

2.12%

2.08%

1.94%

  - RCR

(0.08%)

n/a

n/a

  - Non-Core

n/a 

(0.36%)

(0.25%)

 

Note:

(1)

For further analysis and details refer to pages 56 and 57.

 

Key points

 

Q1 2014 compared with Q4 2013

·

Group net interest margin (NIM) increased by 4 basis points in the quarter to 2.12% due to repricing initiatives together with lower interest-earning assets.

 

 

·

Net interest income fell by £61 million reflecting the lower day count. Excluding this impact, performance was stable.

 

Q1 2014 compared with Q1 2013

·

Group NIM increased by 18 basis points, driven by repricing initiatives across a number of divisions.

 

 

·

Net interest income was flat with improved margins being offset by the reduced asset base.

 

 

Analysis of results

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 

Non-interest income

£m 

£m 

£m 





Net fees and commissions

1,055 

1,126 

1,106 

Income from trading activities

856 

162 

1,016 

Other operating income

444 

(115)

367 





Total non-interest income

2,355 

1,173 

2,489 

 

Key points

 

Q1 2014 compared with Q4 2013

·

Non-interest income increased by £1,182 million, or 101%, to £2,355 million. Income from trading activities increased by £694 million to £856 million driven by a limited pick-up in client driven trading activity in Rates and favourable market movements in Asset backed products within Markets.

 

 

·

Other operating income increased to £444 million as a result of gains on sales of available-for-sale securities of £213 million compared with £108 million in Q4 2013, and the non-repeat of the fair value adjustments of £333 million in Q4 2013 recognised in connection with the creation of RCR.

 

Q1 2014 compared with Q1 2013

·

Non-interest income declined by £134 million primarily driven by de-risking in Markets. In US Retail & Commercial, fee income was affected by slower mortgage refinancing activity and lower deposit fees. This was partly offset by increased non-interest income in UK Retail and UK Corporate.

 

 

Analysis of results

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 

Operating expenses

£m 

£m 

£m 





Staff expenses

1,647 

1,539 

1,821 

Premises and equipment

594 

614 

553 

Other

687 

785 

678 





Administrative expenses

2,928 

2,938 

3,052 

Depreciation and amortisation

262 

309 

329 





Operating expenses

3,190 

3,247 

3,381 





Staff costs as a % of total income

33%

39%

35%

Cost:income ratio

63%

82%

66%

 

Key points

 

Q1 2014 compared with Q4 2013

·

Operating expenses decreased by £57 million, 2%, to £3,190 million. The fall was consistent across most divisions, with notable declines in UK Retail (£74 million, 10%), UK Corporate (£36 million, 6%) and US Retail & Commercial (£31 million, 6%). The increase in Markets expenses (£84 million, 15%) was driven by higher staff costs, while Ulster Bank (£6 million, 4%) included the impact of the newly introduced Irish bank levy of £4 million.

 

 

·

Staff expenses were up by 7%, at £1,647 million, principally reflecting seasonal phasing of variable compensation accruals in Markets.

 

Q1 2014 compared with Q1 2013

·

Operating expenses were down by £191 million, or 6%, mostly reflecting tactical cost reduction initiatives in the retail & commercial banking businesses together with the re-sizing of Markets.

 

 

·

Staff expenses declined by £174 million, or 10%, driven by headcount reductions and lower variable compensation. Headcount was reduced by 6,300, of which 38% was in UK Retail and 21% in Markets.

 

 

Analysis of results

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 

Impairment losses

£m 

£m 

£m 





Loans

360 

5,131 

1,036 

Securities

2 

(19)

(3)





Total impairment losses

362 

5,112 

1,033 





Loan impairment losses




  - individually assessed

155 

4,867 

646 

  - collectively assessed

127 

443 

441 

  - latent

78 

(173)

(51)





Customer loans

360 

5,137 

1,036 

Bank loans

- 

(6)

-





Loan impairment losses

360 

5,131 

1,036 





Group excluding RCR/Non-Core

254 

1,924 

599 

RCR

106 

n/a 

n/a 

Non-Core

n/a 

3,207 

437 





Group (1)

360 

5,131 

1,036 





Customer loan impairment charge as a % of gross loans and advances (2)




Group

0.3%

4.9%

0.9%

RCR

1.2%

n/a

n/a

Non-Core

n/a

35.3%

3.3%

 

Notes:

(1)

Includes £4,290 million pertaining to the creation of RCR and related strategy in Q4 2013.

(2)

Customer loan impairment charge as a percentage of gross customer loans and advances excludes reverse repurchase agreements and includes disposals groups.

 

Key points

 

Q1 2014 compared with Q4 2013

·

Loan impairment losses totalled £360 million. Excluding the increased provisions recognised in Q4 2013 in association with the creation of RCR, impairments declined by £481 million, or 57%, driven by significant improvements in UK Corporate and Ulster Bank.

 

 

·

UK Corporate saw fewer significant individual cases, while Ulster Bank credit metrics continued to improve.

 

 

·

Loan impairment losses in RCR totalled £106 million, due to favourable market conditions and no significant individual losses.

 

Q1 2014 compared with Q1 2013

·

Loan impairment losses declined by £676 million, or 65%, reflecting improving trends across the whole book.

 

 

·

Ulster Bank showed significant improvements in mortgage arrears while UK Corporate and International Banking saw a reduction in the number of large single name impairments.

 

 

Analysis of results

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 

One-off and other items

£m 

£m 

£m 





Payment Protection Insurance costs

- 

(465)

- 

Interest Rate Hedging Products redress and related costs

- 

(500)

(50)

Regulatory and legal actions

- 

(1,910)

- 

Integration and restructuring costs

(129)

(180)

(122)

Gain/(loss) on redemption of own debt

20 

(29)

(51)

Write-down of goodwill

- 

(1,059)

- 

Other items




  - Amortisation of purchased intangible assets

(7)

(35)

(41)

  - Strategic disposals**

191 

168 

(6)

  - Bank levy

- 

(200)

- 

  - Write-down of other intangible assets

(82)

(344)

- 

  - RFS Holdings minority interest

9 

(10)

100 






2 

(4,564)

(170)

Own credit adjustments*

139 

- 

249 





One-off and other items

141 

(4,564)

79 





* Own credit adjustments impact:




Income from trading activities

95 

15 

99 

Other operating income

44 

(15)

150 





Own credit adjustments

139 

- 

249 





** Strategic disposals




Gain/(loss) on sale and provision for loss on disposal of investments in:




  - Direct Line Insurance Group

191 

- 

- 

  - WorldPay

- 

159 

- 

  - Other

- 

9 

(6)






191 

168 

(6)

 

Key points

 

Q1 2014 compared with Q4 2013

·

A gain of £191 million was recorded on the disposal of the Group's remaining interest in Direct Line Insurance Group. Q4 2013 included a gain of £159 million on the disposal of the Group's remaining interest in WorldPay.


 

·

No significant additional provisions for conduct-related matters were recorded during the quarter. Q4 2013 included £2,875 million of additional provisions for such matters.


 

·

Own credit adjustment represented a credit of £139 million as credit spreads widened modestly, compared with no movement in the prior quarter.


 

·

Q4 2013 included the write-down of goodwill of £1,059 million related to International Banking following an impairment review.


 

·

Lower integration and restructuring costs were driven by a reduction in Markets downsizing costs, offset by initial expenses related to the refreshed strategic plan.

 

 

Analysis of results

 

Capital and leverage ratios








31 March 2014


31 December 2013


Current basis

Estimated



Estimated



(transitional

end-point


Transitional

end-point

Basel 2.5


PRA basis)

(CRR basis)


PRA basis

(CRR basis)

 basis

Capital (1)

£bn

£bn


£bn

£bn

£bn








Common Equity Tier 1 capital (2)

39.1 

39.1 


36.8 

36.8 

42.2 

Tier 1

46.4 

39.1 


44.3 

36.8 

50.6 

Total

59.9 

47.3 


58.2 

45.5 

63.7 








RWAs by risk














Credit risk







  - non-counterparty

295.2 

295.2 


317.9 

317.9 

291.1 

  - counterparty

41.3 

41.3 


39.1 

39.1 

22.3 

Market risk

41.0 

41.0 


30.3 

30.3 

30.3 

Operational risk

36.8 

36.8 


41.8 

41.8 

41.8 









414.3 

414.3 


429.1 

429.1 

385.5 








Risk asset ratios

%

%


%

%

%








Common Equity Tier 1 capital (2)*

9.4 

9.4 


8.6 

8.6 

10.9 

Tier 1

11.2 

9.4 


10.3 

8.6 

13.1 

Total

14.5 

11.4 


13.6 

10.6 

16.5 

 


31 March 



31 December 




2014 



2013 


Leverage ratios (3)


% 



% 









CRR basis


3.7 



3.5 


Basel III basis


3.6 



3.4 


Basel Committee on Banking Supervision (BCBS) basis

3.6 



3.4 


 

* Refer to footnote 4 on page 2 for further information.

 

Notes:

(1)

Capital based on Capital Requirements Directive extant at 31 March 2014 (transitional PRA basis), end-point Capital Requirements Regulation (CRR) basis and 31 December 2013 on Basel 2.5 basis.

(2)

Core Tier 1 before 1 January 2014.

(3)

Refer to pages 7 and 8 of Appendix 2 for basis of preparation.

 

Key points

 

31 March 2014 compared with 31 December 2013

·

The Group's Common Equity Tier 1 ratio, on an end-point CRR basis improved to 9.4%* from 8.6%, principally driven by retained earnings and continuing reduction in RWAs.



·

RWAs declined from £429 billion to £414 billion, primarily reflecting risk reduction in Markets, and disposal and run-off activity in RCR. The total reduction in RCR was £14 billion RWA equivalent, including the effects of capital deductions.

 

 

Analysis of results

 



31 March 

31 December 

Balance sheet

2014 

2013 




Funded balance sheet (1)

£746bn

£740bn

Total assets

£1,024bn

£1,028bn

Net loans and advances to customers (2)

£392bn

£393bn

Customer deposits (3)

£404bn

£418bn

Loan:deposit ratio - Group excluding RCR/Non-Core (4)

93%

89%

Loan:deposit ratio - Group (4)

97%

94%

Tangible net asset value per ordinary and B share (5)

376p

363p

Tier 1 leverage (6)

15.8x

16.4x

Tangible equity leverage ratio (7)

5.8%

5.6%

 

Notes:

(1)

Funded balance sheet represents total assets less derivatives.

(2)

Excludes reverse repurchase agreements and stock borrowing, and includes disposal groups.

(3)

Excludes repurchase agreements and stock lending, and includes disposal groups.

(4)

Net of provisions, including disposal groups and excluding repurchase agreements. Excluding disposal groups, the loan:deposit ratios for Group at 31 March 2014 was 97% (31 December 2013 - 94% and 31 March 2013 - 99%).

(5)

Tangible net asset value per ordinary and B share represents total tangible equity divided by the number of ordinary shares in issue and the effect of convertible B shares.

(6)

Funded tangible assets divided by total Tier 1 capital.

(7)

Tangible equity leverage ratio represents tangible equity attributable to ordinary and B shareholders divided by funded tangible assets.

 

Key points

 

31 March 2014 compared with 31 December 2013

·

Funded assets were up £6.6 billion, driven by a limited pick up in client driven trading activity in Markets and increased loan balances in the retail and commercial banking businesses.

 

 

·

Net loans and advances to customers remained stable at £392 billion. Adjusting for transfers to RCR and from Non-Core, underlying loan growth improved, driven by strong mortgage lending in UK Retail and increased volumes in International Banking and US Retail & Commercial, with UK Corporate returning to modest net loan growth. This was offset primarily by disposals and run-off of RCR loans.

 

 

·

Customer deposits fell by £14 billion, or 3%, to £404 billion, as the Group managed down its surplus liquidity. The customer funding surplus declined to £12 billion, while the loan:deposit ratio increased by 3 percentage points to 97%.

 

 

·

Tangible net asset value per ordinary and B share increased from 363p to 376p, principally driven by retained earnings.

 

 

Analysis of results

 

31 March 

31 December 

Funding and liquidity metrics

2014 

2013 




Deposits (1)

£440bn

£453bn

Deposits as a percentage of funded balance sheet

59%

61%

Short-term wholesale funding (2)

£31bn

£32bn

Wholesale funding (2)

£102bn

£108bn

Short-term wholesale funding as a percentage of funded balance sheet

4%

4%

Short-term wholesale funding as a percentage of total wholesale funding

30%

30%




Liquidity portfolio

£131bn

£146bn

Liquidity portfolio as a percentage of funded balance sheet

18%

20%

Liquidity portfolio as a percentage of short-term wholesale funding

423%

456%

 

Notes:

(1)

Customer and bank deposits excluding repurchase agreements and stock lending and includes disposal groups.

(2)

Excludes derivative collateral.

 

Key points

 

31 March 2014 compared with 31 December 2013

·

The bank remains highly liquid with short-term wholesale funding covered 4.2 times by its liquidity portfolio as at 31 March 2014 compared with 4.5 times as at 31 December 2013.

 

 

·

The liquidity portfolio decreased by £15 billion, mainly driven by a targeted decrease in volatile financial institution deposits.

 


 

Divisional performance

 

The results of each division on a managed basis are set out below. The results are stated before movements in own credit adjustments, Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, write-down of goodwill and other intangible assets, amortisation of purchased intangible assets, strategic disposals, bank levy and RFS Holdings minority interest.

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Operating profit before impairment losses by division




UK Retail

592 

545 

557 

UK Corporate

554 

544 

543 

Wealth

77 

70 

61 

International Banking

120 

107 

149 

Ulster Bank

64 

71 

76 

US Retail & Commercial

217 

188 

208 

Markets

320 

73 

294 

Central items

(75)

(173)

(36)






1,869 

1,425 

1,852 

RCR

(6)

n/a 

n/a 

Non-Core

n/a 

(732)

(72)





Group operating profit before impairment losses

1,863 

693 

1,780 





Impairment losses/(recoveries) by division




UK Retail

59 

73 

80 

UK Corporate

63 

659 

185 

Wealth

(1)

21 

5 

International Banking

10 

47 

55 

Ulster Bank

47 

1,067 

240 

US Retail & Commercial

73 

46 

19 

Markets

2 

34 

16 

Central items

1 

1 

- 






254 

1,948 

600 

RCR

108 

n/a 

n/a 

Non-Core

n/a 

3,164 

433 





Group impairment losses (1)

362 

5,112 

1,033 

 

Note:

(1)

Includes £4,290 million pertaining to the creation of RCR and related strategy in Q4 2013.

 

 

Divisional performance

 

Quarter ended


31 March 

31 December 

31 March 


2014 

2013 

2013 


£m 

£m 

£m 





Operating profit/(loss) by division




UK Retail

533 

472 

477 

UK Corporate

491 

(115)

358 

Wealth

78 

49 

56 

International Banking

110 

60 

94 

Ulster Bank

17 

(996)

(164)

US Retail & Commercial

144 

142 

189 

Markets

318 

39 

278 

Central items

(76)

(174)

(36)






1,615 

(523)

1,252 

RCR

(114)

n/a 

n/a 

Non-Core

n/a 

(3,896)

(505)





Group operating profit/(loss)

1,501 

(4,419)

747 










Quarter ended


31 March 

31 December 

31 March 


2014 

2013 

2013 


% 

% 

% 





Net interest margin by division




UK Retail

3.59 

3.60 

3.49 

UK Corporate

3.13 

3.13 

3.01 

Wealth

3.72 

3.70 

3.55 

International Banking

1.55 

1.54 

1.74 

Ulster Bank

2.36 

2.10 

1.85 

US Retail & Commercial

2.94 

2.98 

2.93 

RCR

(0.08)

n/a 

n/a 

Non-Core

n/a 

(0.36)

(0.25)





Group net interest margin

2.12 

2.08 

1.94 

 

31 March 

31 December 

2014 

2013 


£bn 

£bn 




Total funded assets by division



UK Retail

118.4 

117.6 

UK Corporate

106.7 

105.0 

Wealth

21.1 

21.0 

International Banking

50.9 

48.5 

Ulster Bank

26.0 

28.0 

US Retail & Commercial

75.7 

71.3 

Markets

228.2 

212.8 

Central items

94.3 

106.7 





721.3 

710.9 

RCR

24.3 

n/a

Non-Core

n/a 

28.0 





745.6 

738.9 

RFS Holdings minority interest

0.9 

0.9 




Group

746.5 

739.8 


 

 

Divisional performance

 

31 March



31 March


2014

31 December 2013

2013

FLB3

FLB3

Basel 2.5

Basel 2.5


£bn

£bn

£bn

£bn






Risk-weighted assets by division





UK Retail

43.9 

43.9 

43.9 

44.5 

UK Corporate

80.4 

82.9 

86.1 

87.0 

Wealth

12.0 

12.0 

12.0 

12.5 

International Banking

47.1 

50.3 

49.0 

48.9 

Ulster Bank

28.7 

30.1 

30.7 

36.8 

US Retail & Commercial

61.3 

58.8 

56.1 

58.9 

Markets

87.4 

99.9 

64.5 

88.5 

Other (primarily Group Treasury)

8.9 

13.1 

10.1 

10.2 







369.7 

391.0 

352.4 

387.3 

RCR

40.5 

n/a 

n/a 

n/a 

Non-Core

n/a 

34.2 

29.2 

54.6 






Group before RFS Holdings minority interest

410.2 

425.2 

381.6 

441.9 

RFS Holdings minority interest

4.1 

3.9 

3.9 

3.9 






Group

414.3 

429.1 

385.5 

445.8 

 

 

 

Employee numbers by division

(full time equivalents rounded to the nearest hundred)

31 March

31 December

31 March

2014

2013

2013





UK Retail

23,000 

23,300 

25,400 

UK Corporate

12,800 

13,000 

12,900 

Wealth

4,500 

4,600 

4,900 

International Banking

4,300 

4,400 

4,500 

Ulster Bank

4,600 

4,700 

5,000 

US Retail & Commercial

18,500 

18,800 

18,800 

Markets

9,100 

9,400 

10,400 

Group Centre

10,100 

9,800 

9,400 






86,900 

88,000 

91,300 

RCR

1,100 

n/a 

n/a 

Non-Core

n/a 

1,400 

2,500 






88,000 

89,400 

93,800 

Business Services

28,600 

29,000 

28,900 

Integration and restructuring

100 

200 

300 





Group

116,700 

118,600 

123,000 


 

UK Retail

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Income statement




Net interest income

994 

1,014 

965 





Net fees and commissions

241 

249 

212 

Other non-interest income

5 

4 

14 





Non-interest income

246 

253 

226 





Total income

1,240 

1,267 

1,191 





Direct expenses




  - staff

(165)

(166)

(172)

  - other

(148)

(199)

(112)

Indirect expenses

(335)

(357)

(350)






(648)

(722)

(634)





Profit before impairment losses

592 

545 

557 

Impairment losses

(59)

(73)

(80)





Operating profit

533 

472 

477 





Analysis of income by product




Personal advances

235 

247 

223 

Personal deposits

142 

116 

103 

Mortgages

638 

665 

628 

Cards

198 

206 

209 

Other

27 

33 

28 





Total income

1,240 

1,267 

1,191 





Analysis of impairments by sector




Mortgages

1 

(13)

10 

Personal

38 

61 

35 

Cards

20 

25 

35 





Total impairment losses

59 

73 

80 





Loan impairment charge as % of gross customer loans and advances




  by sector




Mortgages

- 

(0.1%)

- 

Personal

1.9%

3.0%

1.6%

Cards

1.5%

1.7%

2.5%





Total

0.2%

0.3%

0.3%


 

 

UK Retail

 

Key metrics





Quarter ended


31 March

31 December

31 March

2014

2013

2013





Performance ratios




Return on equity (1)

26.2%

25.5%

25.5%

Net interest margin

3.59%

3.60%

3.49%

Cost:income ratio

52%

57%

53%

 

31 March

31 December



31 March


2014

2013


2013


£bn

£bn

Change


£bn

Change








Capital and balance sheet







Loans and advances to customers (gross)







  - mortgages

100.5 

99.3 

1%


99.1 

1%

  - personal

7.8 

8.1 

(4%)


8.6 

(9%)

  - cards

5.5 

5.8 

(5%)


5.5 

- 









113.8 

113.2 

1%


113.2 

1%

Loan impairment provisions

(1.9)

(2.1)

(10%)


(2.6)

(27%)








Net loans and advances to customers

111.9 

111.1 

1%


110.6 

1%








Risk elements in lending

3.3 

3.6 

(8%)


4.4 

(25%)

Provision coverage (2)

58%

59%

(100bp)


58%

-








Customer deposits







  - Current accounts

33.8 

32.6 

4%


31.1 

9%

  - Savings

81.0 

82.3 

(2%)


79.0 

3%








Total customer deposits

114.8 

114.9 

- 


110.1 

4%

Assets under management (excluding deposits)

5.5 

5.8 

(5%)


6.2 

(11%)

Loan:deposit ratio

98%

97%

100bp


100%

(200bp)








Risk-weighted assets (3)







  - Credit risk (non-counterparty)

36.2 

36.1 

- 


36.7 

(1%)

  - Operational risk

7.7 

7.8 

(1%)


7.8 

(1%)








Total risk-weighted assets

43.9 

43.9 

- 


44.5 

(1%)

 

Notes:

(1)

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

(2)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

(3)

Divisional RWAs are based on a long-term conservative average secured mortgage probability of default methodology rather than the current lower point in time basis required for regulatory reporting.

 

 

UK Retail

 

Key points

 

Q1 2014 compared with Q4 2013

·

Operating profit increased by 13%, £61 million, driven by lower costs and impairments, with income trends remaining subdued.



·

Loans and advances to customers increased due to a £1.2 billion rise in mortgage balances, partly offset by a seasonal decline in credit card balances and personal lending and the write-off of some older defaulted unsecured debt. This also reduced the level of loan impairment provisions required.



·

Customer deposit balances were flat. However, the mix between fixed rate bonds and instant access accounts changed due to customers retaining cash in easy access accounts while market rates are low.



·

Net interest income was 2% lower mainly due to fewer days in the quarter, an impact of £22 million. Net interest margin remained flat with improvement in savings margin in line with market pricing conditions offset by a small decline in mortgage margins as new business rates remain competitive and fixed rate funding costs increased.



·

Non-interest income decreased by £7 million, or 3%, due to lower net packaged account income and seasonal impacts on transactional card income.



·

Direct costs decreased by 14% due to:




○

Direct staff costs declined due to headcount reduction of 300.


○

Direct other costs decreased due to a lower FSCS levy charge of £19 million (Q4 2013 - £40 million) and a lower conduct related provision of £15 million (Q4 2013 - £50 million).



·

Indirect costs decreased by 6% due to lower technology spend and corporate recharges from central efficiencies.



·

Impairments were 19% lower, driven by a lower level of defaults and improvements in underlying asset quality.



·

Risk elements in lending declined by £0.3 billion, 8%, as the quality of the book continued to improve and some older defaulted unsecured debt was written off. Provision coverage remains strong at 58%.

 

Q1 2014 compared with Q1 2013

·

Operating profit increased by £56 million, 12%, reflecting higher income combined with lower impairment losses partially offset by a slight increase in costs.



·

Net interest income increased by 3%, driven by improved savings margins due to pricing changes in line with the market and improved deposit mix towards instant access and away from fixed rate bonds. Income from higher mortgage balances was offset by lower income from unsecured lending.



·

Non-interest income increased by 9% due to higher current account-related fee income.



·

Costs were 2% higher. Staff costs were lower driven by a 9% reduction in headcount. Other costs increased due to a £23 million charge for conduct and compensation and increased marketing spend of £8 million. Indirect costs were lower with continued efficiency measures and lower corporate recharges.



·

Impairments were £21 million lower due to improved asset quality and lower default volumes.

 


 

UK Corporate

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Income statement




Net interest income

706 

728 

706 





Net fees and commissions

312 

326 

321 

Other non-interest income

85 

75 

57 





Non-interest income

397 

401 

378 





Total income

1,103 

1,129 

1,084 





Direct expenses




  - staff

(221)

(217)

(217)

  - other

(93)

(134)

(103)

Indirect expenses

(235)

(234)

(221)






(549)

(585)

(541)





Profit before impairment losses

554 

544 

543 

Impairment losses

(63)

(659)

(185)





Operating profit

491 

(115)

358 





Analysis of income by business




Corporate and commercial lending

602 

639 

622 

Asset and invoice finance

180 

168 

164 

Corporate deposits

114 

106 

73 

Other

207 

216 

225 





Total income

1,103 

1,129 

1,084 





Analysis of impairments by sector




Financial institutions

3 

4 

2 

Hotels and restaurants

5 

16 

18 

Housebuilding and construction

10 

12 

12 

Manufacturing

10 

20 

8 

Private sector education, health, social work, recreational and community services

(3)

33 

25 

Property

5 

236 

69 

Wholesale and retail trade, repairs

20 

15 

32 

Asset and invoice finance

2 

21 

1 

Shipping

(3)

310 

8 

Other

14 

(8)

10 





Total impairment losses

63 

659 

185 





Of which RCR related (1)

- 

410 

- 

 

Note:

(1)

Attributable to the creation of RCR and related strategy in Q4 2013.

 

 

UK Corporate

 

Quarter ended


31 March

31 December

31 March

2014

2013

2013





Loan impairment charge as % of gross customer loans and advances




  by sector

Financial institutions

0.2%

0.3%

0.2%

Hotels and restaurants

0.4%

1.4%

1.3%

Housebuilding and construction

1.2%

1.7%

1.5%

Manufacturing

0.9%

1.9%

0.7%

Private sector education, health, social work, recreational and community services

(0.2%)

1.6%

1.1%

Property

0.1%

4.3%

1.1%

Wholesale and retail trade, repairs

1.0%

0.7%

1.5%

Asset and invoice finance

0.1%

0.7%

- 

Shipping

(0.2%)

19.1%

0.4%

Other

0.2%

(0.1%)

0.1%





Total

0.2%

2.6%

0.7%









Key metrics





Quarter ended

31 March

31 December

31 March

2014

2013

2013





Performance ratios




Return on equity (1)

14.9%

(3.4%)

10.7%

Net interest margin

3.13%

3.13%

3.01%

Cost:income ratio

50%

52%

50%

 

Note:

(1)

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

 

 

UK Corporate

 

31 March

31 December

 

31 March


2014

2013

2013


£bn

£bn

Change

£bn

Change







Capital and balance sheet






Loans and advances to customers (gross)






  - financial institutions

5.8 

5.5

5%

5.1 

14%

  - hotels and restaurants

4.8 

4.7

2%

5.6 

(14%)

  - housebuilding and construction

3.3 

2.9

14%

3.1 

6%

  - manufacturing

4.3 

4.2

2%

4.7 

(9%)

  - private sector education, health, social






    work, recreational and community services

7.9 

8.5

(7%)

8.8 

(10%)

  - property

21.3 

22.0

(3%)

24.4 

(13%)

  - wholesale and retail trade, repairs

8.0 

8.2

(2%)

8.6 

(7%)

  - asset and invoice finance

13.6 

11.7

16%

11.4 

19%

  - shipping

6.2 

6.5

(5%)

7.7 

(19%)

  - other

28.0 

28.3

(1%)

27.4 

2%








103.2 

102.5

1%

106.8 

(3%)

Loan impairment provisions

(2.3)

(2.8)

(18%)

(2.4)

(4%)







Net loans and advances to customers

100.9 

99.7

1%

104.4 

(3%)







Total third party assets

106.7 

105.0

2%

109.9 

(3%)

Risk elements in lending

4.6 

6.2

(26%)

5.3 

(13%)

Provision coverage (1)

49%

46%

300bp

45%

400bp







Customer deposits

121.2 

124.7

(3%)

123.9 

(2%)

Loan:deposit ratio

83%

80%

300bp

84%

(100bp)







Risk-weighted assets






  - Credit risk (non-counterparty)

72.0 

77.7

(7%)

78.6 

(8%)

  - Operational risk

8.4 

8.4

- 

8.4 

- 








80.4 

86.1(2)

(7%)

87.0 

(8%)

 

Notes:

(1)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

(2)

On an FLB3 basis risk-weighted assets were £82.9 billion at 31 December 2013.

 

Key points

 

Q1 2014 compared with Q4 2013

·

Operating profit was £491 million for the quarter, delivering a return on equity of 14.9%. Q4 2013 included £422 million of charges relating to the creation of RCR. Excluding these, underlying operating profit improved by £184 million, primarily from lower impairments and expenses partially offset by reduced income.



·

Net interest income was down 3% due to fewer days in the quarter (£15 million), along with a decline in asset margin from the transfer of loans relating to the establishment of RCR. This was partially offset by increased income from deposit repricing.



·

Non-interest income was down 1%, primarily from lower Markets revenue share and transaction services income.



·

Total expenses were 6% lower as a result of reduced customer remediation costs, down £27 million, and the initial impacts of cost saving initiatives.



·

Impairments declined by £596 million. Excluding the increased losses incurred in Q4 2013 (£410 million) relating to the creation of RCR, underlying impairments were £186 million lower, with fewer significant individual cases in the mid-to-large corporate business.


 

UK Corporate

 

Key points (continued)

 

Q1 2014 compared with Q4 2013 (continued)

·

Loans and advances increased by 1%, driven by improved lending activity, particularly in relation to large corporate clients. Deposit volumes declined by 3% reflecting seasonal outflows and the rebalancing of the Bank's liquidity position. Consequently, the loan:deposit ratio moved to 83% from 80%.



·

Risk-weighted assets on an FLB3 basis were £2.5 billion lower reflecting the net of the transfers to RCR and from Non-Core.

 

Q1 2014 compared with Q1 2013

·

Operating profit increased 37%, primarily reflecting lower impairment charges.



·

Net interest income was flat as repricing of both deposits and assets was offset by lower asset volumes, reduced yields on current accounts and the transfers relating to the establishment of RCR and the cessation of Non-Core.



·

Non-interest income increased by 5% due to lower derivative close-out charges and higher equity gains. These were partially offset by lower Markets revenue share and lending fees.



·

Total expenses increased by 1% as higher indirect costs were partially offset by lower customer remediation costs.



·

Impairments were down £122 million, primarily from improved trends in the SME business and fewer individual cases in the mid-to-large corporate business.



·

The loan:deposit ratio declined 100 basis points as the deposit base contracted during Q1 2014 whilst asset volumes declined 3% as repayments outpaced new lending growth during 2013.

 


 

Wealth

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Income statement




Net interest income

171 

174 

169 





Net fees and commissions

87 

85 

89 

Other non-interest income

16 

18 

15 





Non-interest income

103 

103 

104 





Total income

274 

277 

273 





Direct expenses




  - staff

(94)

(79)

(103)

  - other

(30)

(43)

(23)

Indirect expenses

(73)

(85)

(86)






(197)

(207)

(212)





Profit before impairment losses

77 

70 

61 

Impairment recoveries/(losses)

1 

(21)

(5)





Operating profit

78 

49 

56 





Analysis of income




Private banking

229 

225 

224 

Investments

45 

52 

49 





Total income

274 

277 

273 









Key metrics

Quarter ended

31 March 

31 December 

31 March 

2014 

2013 

2013 





Performance ratios




Return on equity (1)

16.9%

10.9%

12.1%

Net interest margin

3.72%

3.70%

3.55%

Cost:income ratio

72%

75%

78%

 

Note:

(1)

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

 

 

Wealth

 

31 March

31 December


31 March


2014

2013

2013


£bn

£bn

Change

£bn

Change







Capital and balance sheet






Loans and advances to customers (gross)






  - mortgages

8.7 

8.7 

- 

8.8 

(1%)

  - personal

5.6 

5.6 

- 

5.7 

(2%)

  - other

2.5 

2.5 

- 

2.7 

(7%)








16.8 

16.8 

- 

17.2 

(2%)

Loan impairment provisions

(0.1)

(0.1)

- 

(0.1)

- 







Net loans and advances to customers

16.7 

16.7 

- 

17.1 

(2%)







Risk elements in lending

0.3 

0.3 

- 

0.3 

- 

Provision coverage (1)

45%

43%

200bp

43%

200bp

Assets under management (excluding deposits)

28.5 

29.7 

(4%)

30.8 

(7%)

Customer deposits

36.6 

37.2 

(2%)

39.6 

(8%)







Loan:deposit ratio (excluding repos)

45%

45%

-

43%

200bp







Risk-weighted assets






  - Credit risk






     - non-counterparty

10.1 

10.0 

1%

10.4 

(3%)

  - Market risk

- 

0.1 

(100%)

0.2 

(100%)

  - Operational risk

1.9 

1.9 

- 

1.9 

- 








12.0 

12.0 

- 

12.5 

(4%)

 

Note:

(1)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

 

Key points

 

Q1 2014 compared with Q4 2013

·  

Operating profit was £29 million higher, driven by lower expenses and impairment losses.



·

Income was £3 million, 1%, lower, reflecting the impact of fewer days in the quarter.



·

Expenses were 5% lower at £197 million, primarily due to the non-recurrence of a one-off UK tax treaty charge in the International business in Q4 2013 and savings from the streamlining of the business's property footprint.



·

Impairments decreased by £22 million, reflecting the non-recurrence of a single specific impairment in Q4 2013.



·

Client assets and liabilities were 2% lower, with the decrease in assets under management mainly driven by low margin custody asset outflows and negative market movements. Deposits were £0.6 billion lower following cyclical outflows for tax payments and repricing action in the UK. Lending remained broadly flat.

 

Q1 2014 compared with Q1 2013

·

Operating profit increased by £22 million, as a result of lower expenses and impairments.



·

Net interest income increased by £2 million, primarily driven by higher deposit spreads. Non-interest income fell by £1 million as a result of lower transaction and investment volumes in the International business.



·

Expenses decreased by £15 million, 7%, reflecting savings from the streamlining of the business's property footprint, reduced headcount and the continued tight management of discretionary costs.



·

Impairments were £6 million lower.

 


 

International Banking

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Income statement




Net interest income

180 

173 

197 

Non-interest income

248 

271 

285 





Total income

428 

444 

482 





Direct expenses




  - staff

(109)

(114)

(125)

  - other

(35)

(57)

(38)

Indirect expenses

(164)

(166)

(170)






(308)

(337)

(333)





Profit before impairment losses

120 

107 

149 

Impairment losses

(10)

(47)

(55)





Operating profit

110 

60 

94 





Analysis of income by product




Cash management

173 

185 

187 

Trade finance

76 

77 

70 

Loan portfolio

179 

182 

224 





Ongoing businesses

428 

444 

481 

Run-off businesses

- 

- 

1 





Total income

428 

444 

482 





Analysis of impairments by sector




Manufacturing and infrastructure

- 

20 

40 

Property and construction

- 

- 

(14)

Transport and storage

- 

23 

24 

Telecommunications, media and technology

(1)

- 

- 

Banks and financial institutions

- 

(15)

- 

Other

11 

19 

5 





Total impairment losses

10 

47 

55 





Of which RCR related (1)

- 

52 

- 





Loan impairment charge as % of gross customer loans and advances

0.1%

0.5%

0.5%

 

Note:

(1)

Pertaining to the creation of RCR and related strategy in Q4 2013.

 

 

International Banking

 

Key metrics

Quarter ended


31 March

31 December

31 March

2014

2013

2013





Performance ratios




Return on equity (1)

6.5%

3.4%

5.2%

Net interest margin

1.55%

1.54%

1.74%

Cost:income ratio

72%

76%

69%

 

31 March

31 December

 

 

 

31 March


2014

2013

 

 

2013


£bn

£bn


Change


£bn

Change









Capital and balance sheet








Loans and advances to customers (gross) (2)








  - manufacturing and infrastructure

15.1 

13.6


11%


16.9 

(11%)

  - property and construction

2.4 

2.4


- 


2.5 

(4%)

  - transport and storage

2.9 

3.3


(12%)


2.8 

4%

  - telecommunications, media and technology

2.7 

2.8


(4%)


2.6 

4%

  - banks and financial institutions

6.9 

6.5


6%


7.9 

(13%)

  - other

8.6 

7.4


16%


9.8 

(12%)










38.6 

36.0


7%


42.5 

(9%)

Loan impairment provisions

(0.1)

(0.3)


(67%)


(0.4)

(75%)









Net loans and advances to customers

38.5 

35.7


8%


42.1 

(9%)

Loans and advances to banks

7.9 

8.0


(1%)


5.8 

36%

Securities

2.2 

2.4


(8%)


2.5 

(12%)

Cash and eligible bills

0.2 

0.3


(33%)


0.4 

(50%)

Other

2.1 

2.1


- 


3.6 

(42%)









Total third party assets (excluding derivatives








  mark-to-market)

50.9 

48.5


5%


54.4 

(6%)

Risk elements in lending

- 

0.5


(100%)


0.6 

(100%)

Provision coverage (3)

- 

69%


(6,900bp)


59%

(5,900bp)









Customer deposits

33.7 

39.3


(14%)


47.0 

(28%)

Bank deposits

5.1 

6.5


(22%)


4.7 

9%

Loan:deposit ratio

114%

91%


2,300bp


90%

2,400bp









Risk-weighted assets








  - Credit risk (non-counterparty)

43.0 

44.3


(3%)


44.2 

(3%)

  - Operational risk

4.1 

4.7


(13%)


4.7 

(13%)










47.1 

49.0

(4)

(4%)


48.9 

(4%)

 

Notes:

(1)

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

(2)

Excludes disposal groups.

(3)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

(4)

On an FLB3 basis risk-weighted assets were £50.3 billion at 31 December 2013.

 

 

 

International Banking

 

Key points

 

Q1 2014 compared with Q4 2013

·

Operating profit was £110 million for the quarter, delivering a return on equity of 6.5%. Q4 2013 included £52 million of impairment charges on assets now transferred to RCR. Excluding these charges, underlying operating profit was slightly down, with lower revenues offset by lower costs and impairments.



·

Income was down £16 million as low interest rates and the competitive environment continued to drive down margins in Cash management.



·

Impairments were £37 million lower, driven by increased provisions in Q4 2013 relating to the creation of RCR and its related strategy.



·

Third party assets were up 5%, driven by £0.9 billion of new business, primarily in Asia and the net of the transfers from Non-Core and to RCR.



·

Customer deposits were 14% lower, in line with a change in funding strategy.



·

Risk-weighted assets on an FLB3 basis decreased by 6%, primarily driven by the net of the transfers of assets to RCR and from Non-Core.

 

Q1 2014 compared with Q1 2013

·

Operating profit was up £16 million, driven by lower costs and impairments partially offset by lower income.



·

Income was £54 million lower:




○

Loan Portfolio income declined £45 million largely reflecting the reduced balance sheet.


○

Cash Management income was £14 million lower, as low interest rates and the competitive environment drove down margins.


○

Trade Finance income was up £6 million, driven by volume growth in Asia and EMEA.



·

Expenses decreased by £25 million, primarily driven by lower variable compensation.



·

Third party assets were down 6%, reflecting the netting of pooled accounts, partially offset by an increase in Trade and the net of the transfers of assets from Non-Core and to RCR.



·

Customer deposits were 28% lower in line with a change in funding strategy.


 

Ulster Bank

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Income statement




Net interest income

159 

169 

154 





Net fees and commissions

32 

37 

34 

Other non-interest income

15 

1 

20 





Non-interest income

47 

38 

54 





Total income

206 

207 

208 





Direct expenses




  - staff

(63)

(51)

(57)

  - other

(17)

(21)

(15)

Indirect expenses

(62)

(64)

(60)






(142)

(136)

(132)





Profit before impairment losses

64 

71 

76 

Impairment losses

(47)

(1,067)

(240)





Operating profit/(loss)

17 

(996)

(164)





Analysis of income by business




Corporate

69 

69 

82 

Retail

90 

98 

89 

Other

47 

40 

37 





Total income

206 

207 

208 





Analysis of impairments by sector




Mortgages

19 

24 

90 

Commercial real estate




  - investment

8 

392 

46 

  - development

(3)

115 

14 

Other corporate

17 

534 

75 

Other lending

6 

2 

15 





Total impairment losses

47 

1,067 

240 





Of which RCR related (1)

- 

892 

- 





Loan impairment charge as % of gross customer loans and advances




   (excluding reverse repurchase agreements) by sector

Mortgages

0.4%

0.5%

1.8%

Commercial real estate




  - investment

3.2%

46.1%

5.1%

  - development

(3.0%)

65.7%

8.0%

Other corporate

1.3%

30.1%

3.8%

Other lending

2.4%

0.7%

4.6%





Total

0.7%

13.6%

2.9%

 

Note:

(1)

Pertaining to the creation of RCR and related strategy in Q4 2013.

 

 

Ulster Bank

 

Key metrics

Quarter ended


31 March

31 December

31 March

2014

2013

2013





Performance ratios




Return on equity (1)

2.5%

(98.1%)

(13.5%)

Net interest margin

2.36%

2.10%

1.85%

Cost:income ratio

69%

66%

63%

 

31 March

31 December



31 March


2014

2013


2013


£bn

£bn


Change 

£bn

Change 








Capital and balance sheet







Loans and advances to customers (gross)







Mortgages

18.8 

19.0 


(1%)

19.7 

(5%)

Commercial real estate







  - investment

1.0 

3.4 


(71%)

3.6 

(72%)

  - development

0.4 

0.7 


(43%)

0.7 

(43%)

Other corporate

5.4 

7.1 


(24%)

7.8 

(31%)

Other lending

1.0 

1.2 


(17%)

1.3 

(23%)









26.6 

31.4 


(15%)

33.1 

(20%)

Loan impairment provisions

(3.4)

(5.4)


(37%)

(4.2)

(19%)








Net loans and advances to customers

23.2 

26.0 


(11%)

28.9 

(20%)








Risk elements in lending







  - Mortgages

3.1 

3.2 


(3%)

3.4 

(9%)

  - Commercial real estate







    - investment

0.3 

2.3 


(87%)

1.6 

(81%)

    - development

0.2 

0.5 


(60%)

0.4 

(50%)

  - Other corporate

0.9 

2.3 


(61%)

2.4 

(63%)

  - Other lending

0.2 

0.2 


- 

0.2 

- 








Total risk elements in lending

4.7 

8.5 


(45%)

8.0 

(41%)

Provision coverage (2)

72%

64%


800bp

53%

1,900bp








Customer deposits

21.1 

21.7 


(3%)

22.7 

(7%)

Loan:deposit ratio (excluding repos)

110%

120%


(1,000bp)

127%

(1,700bp)








Risk-weighted assets







  - Credit risk







    - non-counterparty

26.7 

28.2 


(5%)

34.3 

(22%)

    - counterparty

0.3 

0.3 


- 

0.6 

(50%)

  - Market risk

0.2 

0.5 


(60%)

0.2 

- 

  - Operational risk

1.5 

1.7 


(12%)

1.7 

(12%)









28.7 

30.7 


(7%)

36.8 

(22%)








Spot exchange rate - €/£

1.210 

1.201 



1.183 


 

Notes:

(1)

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

(2)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

 

 

Ulster Bank

 

Key points

The creation of RCR resulted in additional charges of £911 million in Ulster Bank's results in Q4 2013, and the transfer of £4.4 billion of gross assets to RCR at the start of Q1 2014. This has had a significant impact on the comparison of Q1 2014 financial performance with both Q4 2013 and Q1 2013.

 

Q1 2014 compared with Q4 2013

●

Ulster Bank posted an operating profit of £17 million for the quarter, compared with a loss of £996 million in Q4 2013, which included additional charges related to the creation of RCR. The return to profitability for the first time since Q1 2009 marked a key milestone for the bank reflecting improving trading conditions albeit volatility is still a feature of business performance.


 

●

Net interest margin increased by 26 basis points in the quarter to 2.36% reflecting the transfer of non-performing assets to RCR coupled with a continued improvement in deposit margins. Net interest income fell by £10 million due to a combination of fewer days in the quarter, the impact of assets transferred to RCR and a lower margin on the tracker mortgage book following a reduction in the European Central Bank refinancing interest rate during Q4 2013. This was partially offset by lower funding costs.


 

●

Non-interest income increased by £9 million to £47 million, primarily reflecting the impact of a number of one-off items totalling £10 million which depressed Q4 2013 income, including an increased provision on a counterparty swap exposure related to the creation of RCR.


 

●

Total expenses increased by £6 million in Q1 2014 to £142 million principally due to the charge of £4 million in respect of the new bank levy, introduced in the Republic of Ireland. Expenses in Q4 2013 were affected by a number of one-off items, including a pension service cost reduction and an accelerated depreciation charge.


 

●

Impairment losses fell significantly in Q1 2014 to 0.7% of gross customer loans and advances, reflecting improved credit metrics particularly within the corporate and SME portfolios. The Q4 2013 results included an increased charge of £892 million relating to the creation of RCR.


 

●

Ulster Bank's loan:deposit ratio of 110% in Q1 2014 reflects the impact of the transfer of loan balances to RCR. While Retail and SME deposit balances have remained stable in the quarter, total deposit balances declined by 3% attributable to a reduction in wholesale balances.

 

Q1 2014 compared with Q1 2013

●

Operating results improved by £181 million, primarily reflecting a reduction in impairment losses.


 

●

Income has remained stable despite a reduction in net loans following the transfer of assets to RCR. Net interest margin increased by 51 basis points to 2.36% driven by deposit repricing actions and the impact of the asset transfer to RCR. Non-interest income decreased by £7 million primarily reflecting mark-to-market movements on tracker mortgage hedging swaps.


 

●

Expenses increased by £10 million. Savings arising from a reduction in staff numbers were more than offset by the new bank levy in the Republic of Ireland and a realignment of costs following the creation of RCR.


 

Ulster Bank

 

Key points (continued)

 

Q1 2014 compared with Q1 2013 (continued)

●

Impairment losses decreased by 80% with significant reductions across the mortgage, SME and corporate portfolios. This improvement not only reflects the transfer of high risk assets to RCR but also reflects the progress made in addressing legacy issues, including the implementation of strategies to help customers normalise their payments.


 

●

The loan:deposit ratio of 110% reflects a 20% reduction in loan balances driven by the transfer of assets to RCR coupled with the impact of customer deleveraging. Customer deposits declined by 7% with growth in Retail and SME balances outweighed by a reduction in wholesale balances.


 

●

Risk-weighted assets decreased by 22%, reflecting a smaller performing loan book and stabilising credit metrics.

 


 

US Retail & Commercial (£ Sterling)

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Income statement




Net interest income

488 

479 

471 





Net fees and commissions

169 

182 

190 

Other non-interest income

60 

58 

102 





Non-interest income

229 

240 

292 





Total income

717 

719 

763 





Direct expenses




  - staff

(251)

(249)

(286)

  - other

(249)

(251)

(248)

Indirect expenses

- 

(31)

(21)






(500)

(531)

(555)





Profit before impairment losses

217 

188 

208 

Impairment losses

(73)

(46)

(19)





Operating profit

144 

142 

189 









Average exchange rate - US$/£

1.655 

1.619 

1.552 





Analysis of income by product




Mortgages and home equity

112 

100 

126 

Personal lending and cards

98 

101 

100 

Retail deposits

186 

187 

190 

Commercial lending

165 

169 

168 

Commercial deposits

107 

100 

102 

Other

49 

62 

77 





Total income

717 

719 

763 





Analysis of impairments by sector




Residential mortgages

(5)

- 

2 

Home equity

19 

1 

19 

SBO home equity

21 

- 

- 

Corporate and commercial

9 

25 

(24)

Other consumer

29 

20 

22 





Total impairment losses

73 

46 

19 





Loan impairment charge as % of gross customer loans and advances




   (excluding reverse repurchase agreements) by sector

Residential mortgages

(0.3%)

- 

0.1%

Home equity

0.6%

- 

0.6%

SBO home equity

6.5%

- 

- 

Corporate and commercial

0.1%

0.4%

(0.4%)

Other consumer

1.3%

0.9%

1.0%





Total

0.5%

0.4%

0.1%


 

US Retail & Commercial (£ Sterling)

 

Key metrics

Quarter ended


31 March

31 December

31 March

2014

2013

2013





Performance ratios




Return on equity (1)

6.1%

6.5%

8.2%

Net interest margin

2.94%

2.98%

2.93%

Cost:income ratio

70%

74%

73%

 

31 March

31 December



31 March


2014

2013


2013


£bn

£bn

Change


£bn

Change








Capital and balance sheet







Loans and advances to customers (gross)







  - residential mortgages

6.2 

5.8 

7%


6.0 

3%

  - home equity

12.0 

12.1 

(1%)


13.8 

(13%)

  - SBO home equity

1.3 

- 

- 


- 

- 

  - corporate and commercial

24.7 

24.1 

2%


25.1 

(2%)

  - other consumer

9.0 

8.6 

5%


8.9 

1%









53.2 

50.6 

5%


53.8 

(1%)

Loan impairment provisions

(0.5)

(0.3)

67%


(0.3)

67%








Net loans and advances to customers

52.7 

50.3 

5%


53.5 

(1%)








Total third party assets

76.1 

71.7 

6%


77.0 

(1%)

Investment securities

14.9 

12.9 

16%


11.9 

25%

Risk elements in lending







  - retail

1.1 

0.9 

22%


0.9 

22%

  - commercial

0.2 

0.1 

100%


0.4 

(50%)








Total risk elements in lending

1.3 

1.0 

30%


1.3 

- 

Provision coverage (2)

41%

26%

1,500bp


22%

1,900bp








Customer deposits (excluding repos)

54.9 

55.1 

- 


62.4 

(12%)

Bank deposits (excluding repos)

3.4 

2.0 

70%


1.7 

100%

Loan:deposit ratio (excluding repos)

96%

91%

500bp


86%

1,000bp








Risk-weighted assets







  - Credit risk







    - non-counterparty

55.4 

50.7 

9%


53.1 

4%

    - counterparty

0.8 

0.5 

60%


0.8 

- 

  - Operational risk

5.1 

4.9 

4%


5.0 

2%









61.3 

56.1 

9%


58.9 

4%








Spot exchange rate - US$/£

1.668 

1.654 



1.517 


 

Notes:

(1)

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

(2)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

 

Key points

●

Sterling strengthened against the US dollar, with the spot exchange rate at 31 March 2014 increasing 1% compared with 31 December 2013.



●

Performance is described in full in the US dollar-based financial statements set out on pages 38 to 41.

 


 

US Retail & Commercial (US dollar)

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


$m 

$m 

$m 





Income statement




Net interest income

809 

781 

731 





Net fees and commissions

279 

298 

295 

Other non-interest income

99 

97 

158 





Non-interest income

378 

395 

453 





Total income

1,187 

1,176 

1,184 





Direct expenses




  - staff

(416)

(409)

(444)

  - other

(412)

(409)

(384)

Indirect expenses

- 

(50)

(34)






(828)

(868)

(862)





Profit before impairment losses

359 

308 

322 

Impairment losses

(121)

(75)

(30)





Operating profit

238 

233 

292 





Analysis of income by product




Mortgages and home equity

185 

164 

195 

Personal lending and cards

162 

165 

155 

Retail deposits

308 

306 

295 

Commercial lending

273 

275 

261 

Commercial deposits

177 

163 

158 

Other

82 

103 

120 





Total income

1,187 

1,176 

1,184 





Analysis of impairments by sector




Residential mortgages

(9)

1 

3 

Home equity

32 

2 

29 

SBO home equity

34 

- 

- 

Corporate and commercial

15 

38 

(36)

Other consumer

49 

33 

34 

Securities

- 

1 

- 





Total impairment losses

121 

75 

30 





Loan impairment charge as % of gross customer loans and advances




   (excluding reverse repurchase agreements) by sector




Residential mortgages

(0.3%)

- 

0.1%

Home equity

0.6%

- 

0.6%

SBO home equity

6.5%

- 

- 

Corporate and commercial

0.1%

0.4%

(0.4%)

Other consumer

1.3%

0.9%

1.0%





Total

0.5%

0.4%

0.1%


 

 

US Retail & Commercial (US dollar)

 

Key metrics

Quarter ended


31 March

31 December

31 March

2014

2013

2013





Performance ratios




Return on equity (1)

6.1%

6.5%

8.2%

Net interest margin

2.94%

2.98%

2.93%

Cost:income ratio

70%

74%

73%

 

The legal entity results of RBS Citizens Financial Group under IFRS are set out below.

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


$m 

$m 

$m 

Total income

1,187 

1,183 

1,219 

Operating expenses

(828)

(828)

(840)

Impairment losses

(121)

(133)

(90)





Operating profit

238 

222 

289 





Return on equity (1)

6.1%

5.8%

7.5%

 

31 March

31 December



31 March



2014

2013



2013



$bn

$bn

Change


$bn

Change








Capital and balance sheet







Loans and advances to customers (gross)







  - residential mortgages

10.3 

9.6 

7%


9.1 

13%

  - home equity

20.0 

20.1 

- 


20.9 

(4%)

  - SBO home equity

2.1 

- 

- 


- 

- 

  - corporate and commercial

41.2 

39.8 

4%


38.1 

8%

  - other consumer

15.2 

14.1 

8%


13.5 

13%









88.8 

83.6 

6%


81.6 

9%

Loan impairment provisions

(0.9)

(0.4)

125%


(0.4)

125%








Net loans and advances to customers

87.9 

83.2 

6%


81.2 

8%








Total third party assets

126.8 

118.7 

7%


116.8 

9%

Investment securities

24.9 

21.3 

17%


18.1 

38%

Risk elements in lending







  - retail

1.9 

1.5 

27%


1.4 

36%

  - commercial

0.3 

0.2 

50%


0.5 

(40%)








Total risk elements in lending

2.2 

1.7 

29%


1.9 

16%

Provision coverage (2)

41%

26%

1,500bp


22%

1,900bp








Customer deposits (excluding repos)

91.6 

91.1 

1%


94.6 

(3%)

Bank deposits (excluding repos)

5.7 

3.3 

73%


2.6 

119%

Loan:deposit ratio (excluding repos)

96%

91%

500bp


86%

1,000bp








Risk-weighted assets







  - Credit risk







    - non-counterparty

92.4 

83.8 

10%


80.6 

15%

    - counterparty

1.3 

0.8 

63%


1.2 

8%

  - Operational risk

8.5 

8.2 

4%


7.5 

13%









102.2 

92.8 

10%


89.3 

14%

 

Notes:

(1)

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

(2)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.


 

US Retail & Commercial (US dollar)

 

Key points

Q1 2014 results are not directly comparable with prior periods; prior period results exclude Non-Core operations and include Group allocations. In the context of the planned disposal of RBS Citizens Financial Group, central Group costs are no longer allocated to the division.

 

Q1 2014 compared with Q4 2013

·

Operating profit increased by $5 million, or 2%, to $238 million, driven by higher income and lower expenses, partially offset by higher impairments. The Non-Core portfolio is now included on a prospective basis beginning 1 January 2014. On a comparable basis operating profit increased by $16 million, or 7%.



·

The operating environment and market conditions remained challenging, with intense competition for loans. The continuation of low short-term rates has limited net interest margin expansion and the rise in long-term rates reduced mortgage refinance volumes.



·

Net interest income was up 4% to $809 million due to a larger investment portfolio and loan growth, including the Non-Core loan transfer. Excluding Group allocations in Q4 2013, net interest income was up $46 million, or 6%.



·

Higher rates led to investment security purchases resulting in average portfolio growth of $2.5 billion in the quarter.



·

Average loans and advances were up 6%, driven by the $3.7 billion Non-Core transfer, higher commercial loans and auto loans and a strategic initiative to purchase residential mortgages.



·

Non-interest income was down $17 million, or 4% at $378 million reflecting lower consumer banking fees, primarily lower deposit fees. Commercial banking fee income was up, driven by strong leasing income.



·

Total expenses were down $40 million, or 5% at $828 million reflecting the removal of indirect costs in Q1 2014 and incentive reversals for prior year plans partially offset by a seasonal increase in payroll taxes.



·

Impairment losses increased $46 million to $121 million for the quarter due to the Non-Core transfer.

 

 

US Retail & Commercial (US dollar)

 

Key points (continued)

 

Q1 2014 compared with Q1 2013

·

Operating profit decreased by $54 million, or 18%, to $238 million, driven by higher impairments partially offset by lower expenses.  



·

Net interest income was up $78 million, or 11% at $809 million driven by a larger investment portfolio, loan growth including the Non-Core loan transfer, the benefit of interest rate swaps and deposit pricing discipline.



·

Higher rates led to investment security purchases resulting in average portfolio growth of $5.1 billion over the year.



·

Average loans and advances were up 7%, driven by the Non-Core transfer, commercial loan growth, auto loan growth and a strategic initiative to purchase residential mortgages and to hold more originations on the balance sheet. This was partially offset by home equity run-off.



·

Average customer deposits were down 3%, with planned run-off of high priced deposits and lower wholesale deposits partially offset by growth in checking balances. Consumer and small business checking balances both grew by 4% over the year.



·

Non-interest income was down $75 million, or 17%, at $378 million, reflecting lower mortgage banking fees as refinancing volumes have slowed, lower securities gains and lower deposit fees due to a change in the posting order of customer transactions. Mortgage origination activity is slowing as market rates have risen, leading to lower applications combined with lower levels of gains on sales of mortgage.



·

Total expenses were down $34 million, or 4%, at $828 million largely driven by the removal of indirect costs allocated by Group in Q1 2014.



·

Impairment losses increased by $91 million to $121 million for the quarter largely due to the Non-Core transfer.


 

Markets

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Income statement




Net interest income from banking activities

48 

62 

30 





Net fees and commissions receivable

35 

44 

77 

Income from trading activities

861 

517 

916 

Other operating income (net of related funding costs)

13 

3 

17 





Non-interest income

909 

564 

1,010 





Total income

957 

626 

1,040 





Direct expenses




  - staff

(305)

(171)

(362)

  - other

(153)

(181)

(181)

Indirect expenses

(179)

(201)

(203)






(637)

(553)

(746)





Profit before impairment losses

320 

73 

294 

Impairment losses (1)

(2)

(34)

(16)





Operating profit

318 

39 

278 





Of which:




Ongoing businesses (2)

306 

92 

254 

Run-off businesses

12 

(53)

24 





Analysis of income by product




Rates

368 

189 

228 

Currencies

213 

214 

223 

Asset backed products

324 

204 

448 

Credit markets

136 

143 

217 





Total income ongoing businesses

1,041 

750 

1,116 

Inter-divisional revenue share

(133)

(132)

(169)

Run-off businesses

49 

8 

93 





Total income

957 

626 

1,040 





Memo - Fixed income and currencies




Total income ongoing businesses

1,041 

750 

1,116 

Less: primary credit markets

(121)

(128)

(151)





Total fixed income and currencies

920 

622 

965 

 

Notes:

(1)

Includes £18 million in Q4 2013 pertaining to the creation of RCR and related strategy.

(2)

The ongoing businesses comprise the Rates, Currencies, Asset backed products and Credit markets areas.

 

 

Markets

 

Key metrics

Quarter ended


31 March

31 December

31 March

2014

2013

2013





Performance ratios




Return on equity (1)

9.4%

1.5%

7.9%

Cost:income ratio

67%

88%

72%

Compensation ratio (2)

32%

27%

35%

 

31 March

31 December

 

 

 

31 March


2014

2013

 

 

2013


£bn

£bn


Change


£bn

Change









Capital and balance sheet








Loans and advances to customers (gross)

24.9 

25.4


(2%)


32.0 

(22%)

Loan impairment provisions

(0.1)

(0.2)


(50%)


(0.2)

(50%)









Net loans and advances to customers

24.8 

25.2


(2%)


31.8 

(22%)

Net loans and advances to banks

12.1 

12.5


(3%)


20.1 

(40%)

Reverse repos

78.1 

76.2


2%


100.8 

(23%)

Securities

72.8 

69.8


4%


90.7 

(20%)

Cash and eligible bills

20.8 

20.3


2%


24.3 

(14%)

Other

19.6 

8.8


123%


20.3 

(3%)









Total third party assets (excluding derivatives








  mark-to-market)

228.2 

212.8


7%


288.0 

(21%)

Net derivative assets (after netting)

13.1 

15.5


(15%)


21.7 

(40%)









Provision coverage (3)

80%

85%


(500bp)


76%

400bp









Customer deposits (excluding repos)

19.6 

21.5


(9%)


25.7 

(24%)

Bank deposits (excluding repos)

24.4 

23.8


3%


43.7 

(44%)









Risk-weighted assets








  - Credit risk








    - non-counterparty

10.7 

10.8


(1%)


12.4 

(14%)

    - counterparty

34.0 

17.5


94%


32.7 

4%

  - Market risk

35.3 

26.4


34%


33.6 

5%

  - Operational risk

7.4 

9.8


(24%)


9.8 

(24%)










87.4 

64.5

(4)

36%


88.5 

(1%)

 

Notes:

(1)

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

(2)

Compensation ratio is based on staff costs as a percentage of total income.

(3)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

(4)

On an FLB3 basis risk-weighted assets were £99.9 billion at 31 December 2013.

 

 

Markets

 

Quarter ended


31 March

31 December

31 March


2014

2013

2013

Income statement (ongoing business)

£m

£m

£m





Total income

909 

619 

951 

Direct expenses

(428)

(327)

(501)

Indirect expenses

(172)

(180)

(200)

Impairment (losses)/recoveries

(3)

(20)

4 





Operating profit

306 

92 

254 





Performance ratios (ongoing business)








Return on equity (1)

10.5%

4.6%

9.4%

Cost:income ratio

66%

82%

74%

Compensation ratio (2)

31%

26%

35%






31 March

31 December

31 March


2014

2013

2013

Balance sheet (ongoing business)

£bn

£bn

£bn





Total third party assets (excluding derivatives mark-to-market)

214.9 

198.8 

264.7 

Risk-weighted assets

73.8 

52.1 

69.1 

 

Notes:

(1)

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

(2)

Compensation ratio is based on staff costs as a percentage of total income.

 

Key points

 

Q1 2014 compared with Q4 2013

·

Operating profit increased by £279 million, driven by higher trading income.



·

Rates benefited from a limited pick-up in client driven trading activity, and the gains predominantly associated with continued deleveraging and de-risking of the business.



·

Currencies performance remained steady, despite the highly competitive market environment.



·

Asset backed products benefited from positive sentiment and favourable market movements.



·

Credit markets income declined. Issuer volumes were subdued and the secondary market suffered from cautious investor sentiment.



·

Costs increased as a substantial reduction in non-staff costs, driven by the ongoing success of the division's cost reduction programme, was more than offset by higher staff costs, which reflected increased income.



·

The 7% increase in third party assets reflected a pick-up in activity in the first quarter as clients returned to the market.



·

Risk-weighted assets increased following the introduction of CRD IV on 1 January 2014. However, excluding this impact, risk-weighted assets fell significantly, driven by a range of mitigation actions. This included £9 billion of risk-weighted assets transferred to RCR.

 

 

Markets

 

Key points (continued)

 

Q1 2014 compared with Q1 2013

·

Operating profit increased by 14% compared with the same period last year. This reflected a significant reduction in costs as headcount was reduced and discretionary expenditure tightly controlled, offset by lower income as the division refocused on core fixed income and currencies product areas.



·

Rates increased substantially (up 61%) compared to a weak Q1 2013, and was helped by gains predominantly associated with continued deleveraging and de-risking of the business.



·

Currencies income decreased slightly, reflecting a steady performance given low overall volatility and the reduction in client volumes seen throughout 2013.



·

Asset backed products benefited from the general credit market rally in Q1 2013, which was not repeated in Q1 2014. This, combined with a reduced deployment of risk-weighted assets, resulted in lower income.



·

Lower Credit income primarily reflected the de-risking of the credit trading business that took place in 2013, compared to gains from the credit asset rally in Q1 2013.



·

Costs fell by 15%, driven by headcount reductions of 1,300 and a tightly controlled approach to discretionary expenditure.



·

The strategic decision to refocus the division on core fixed income and currencies products drove the substantial reduction in third party assets, down from £288 billion to £228 billion.



·

Risk-weighted assets were £1.1 billion lower compared with 31 March 2013, despite an increase following the introduction of Basel III on 1 January 2014. The overall reduction reflected the de-risking and strategic refocusing of the Markets business and, in Q1 2014, the creation of RCR.

 


 

Central items

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Central items not allocated

(76)

(174)

(36)

 

Note:

(1)

Costs/charges are denoted by brackets.

 

Funding and operating costs have been allocated to operating divisions based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one division.

 

Residual unallocated items relate to volatile corporate items that do not naturally reside within a division.

 

Key points

 

Q1 2014 compared with Q4 2013

·

Central items not allocated represented a debit of £76 million compared with a debit of £174 million in Q4 2013 principally driven by lower unallocated Treasury and funding costs, including volatile items under IFRS and increased gains on the disposal of available-for-sale securities in Treasury, which were up £89 million to £203 million for Q1 2014 compared with £114 million in Q4 2013.

 

Q1 2014 compared with Q1 2013

·

Central items not allocated represented a debit of £76 million compared with a debit of £36 million in Q1 2013. This was principally driven by a lower share of profit on the Group's stake in Saudi Hollandi, down from £65 million in Q1 2013 to £8 million in Q1 2014, and unallocated Treasury and funding costs which were £31 million lower compared with Q1 2013. The unallocated Treasury costs included increased gains on Treasury available-for-sale securities, which were up £97 million quarter on quarter offset by higher Treasury and funding costs, including volatile items under IFRS.


 

RCR

 

In line with its new strategic direction, RBS announced the creation of RBS Capital Resolution ('RCR') with effect from 1 January 2014 to separate and wind down RBS's high capital intensive assets. RCR brings assets under common management and was established with the following principles:

 

●

removing risk from the balance sheet in an efficient, expedient and economic manner;

●

reducing the volatile outcomes in stressed environments; and

●

accelerating the release of capital through management and exit of the portfolio.

 

RCR is managed and analysed by four business pillars - Ulster Bank, Real Estate Finance, Corporate and Markets. Real Estate Finance excludes commercial real estate lending in Ulster Bank.



Quarter ended 




31 March 



2014 




£m 





Income statement




Net interest expense



(5)





Net fees and commissions



14 

Income from trading activities (1)



16 

Other operating income (1)



48 





Non-interest income



78 





Total income



73 





Direct expenses




  - staff



(38)

  - other



(18)

Indirect expenses



(23)








(79)





Operating loss before impairment losses



(6)

Impairment losses (1)



(108)





Operating loss



(114)





Total income




Ulster Bank



(13)

Real Estate Finance



83 

Corporate



(2)

Markets



5 





Total income



73 





Impairment losses




Ulster Bank



(51)

Real Estate Finance



(89)

Corporate



34 

Markets



(2)





Total impairment losses



(108)





Loan impairment charge as % of gross customer loans and advances (2)




Ulster Bank



1.3%

Real Estate Finance



4.1%

Corporate



(1.5%)





Total



1.2%

 

Notes:

(1)

Net disposal gains of £56 million comprised £5 million losses in income from trading activities, £3 million losses in other operating income offset by £64 million gains in impairments.

(2)

Includes disposal groups.

 

 

RCR

 




31 March 




2014 





£bn 






Capital and balance sheet





Loans and advances to customers (gross) (1)




34.0 

Loan impairment provisions




(15.7)






Net loans and advances to customers




18.3 






Debt securities




2.2 

Total funded assets




24.3 

Total third party assets (including derivatives)




38.8 






Risk elements in lending




23.0 

Provision coverage (2)




68%

Risk-weighted assets





  - Credit risk





    - non-counterparty




29.6 

    - counterparty




5.7 

  - Market risk




5.2 










40.5 






Gross loans and advances to customers (1)





Ulster Bank




15.5 

Real Estate Finance




8.6 

Corporate




9.1 

Markets




0.8 










34.0 






Funded assets





Ulster Bank




4.4 

Real Estate Finance




7.7 

Corporate




8.6 

Markets




3.6 










24.3 






Risk weighted assets





Ulster Bank




2.8 

Real Estate Finance




11.5 

Corporate




14.7 

Markets




11.5 










40.5 






RWA equivalent (RWAe) (3)





Ulster Bank




6.7 

Real Estate Finance




13.4 

Corporate




17.0 

Markets




13.8 










50.9 

 

Notes:

(1)

Includes disposal groups.

(2)

Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

(3)

RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in divisions. RWAe converts both performing and non-performing exposures into a consistent capital measure, being the sum of the regulatory RWAs and the regulatory capital deductions, the latter converted to RWAe by applying a multiplier. The Group applies a CET 1 ratio of 10%, consistent with that used for divisional return on equity measure; this results in an end point CRR RWAe conversion multiplier of 10.

 


 

RCR

 

Funded assets and RWAe


















Non-performing (1)


Performing (1)


Total


Funded assets

RWAe 


Capital 


Funded assets

RWAe 


Capital 


Funded assets

RWAe 


Capital 

Gross 

Net 

RWA 

Deducts 

Gross 

Net 

RWA 

deducts (2)

Gross 

Net 

RWA 

deducts (3)

31 March 2014

£bn 

£bn 

£bn 

£bn 

£m 


£bn 

£bn 

£bn 

£bn 

£m 

£bn 

£bn 

£bn 

£bn 

£m 



















Ulster Bank

14.6 

3.6 

6.3 

0.1 

622 


1.1 

0.8 

0.4 

2.7 

(235)


15.7 

4.4 

6.7 

2.8 

387 

Real Estate Finance

5.4 

2.9 

2.9 

0.3 

260 


4.9 

4.8 

10.5 

11.2 

(76)


10.3 

7.7 

13.4 

11.5 

184 

Corporate

2.9 

1.2 

2.1 

0.1 

209 


7.5 

7.4 

14.9 

14.6 

28 


10.4 

8.6 

17.0 

14.7 

237 

Markets

0.2 

0.2 

0.3 

-

26 


3.4 

3.4 

13.5 

11.5 

205 


3.6 

3.6 

13.8 

11.5 

231 



















Total RCR

23.1 

7.9 

11.6 

0.5 

1,117 


16.9 

16.4 

39.3 

40.0 

(78)


40.0 

24.3 

50.9 

40.5 

1,039 



















1 January 2014




































Ulster Bank

14.8 

3.7 

7.6 

0.2 

738 


1.4 

1.1 

1.3 

3.1 

(179)


16.2 

4.8 

8.9 

3.3 

559 

Real Estate Finance

7.2 

4.2 

6.1 

0.3 

580 


5.8 

5.3 

12.5 

13.2 

(75)


13.0 

9.5 

18.6 

13.5 

505 

Corporate

3.3 

1.7 

2.9 

0.2 

269 


8.1 

8.1 

18.2 

16.2 

208 


11.4 

9.8 

21.1 

16.4 

477 

Markets

0.2 

0.1 

0.6 

-

58 


4.7 

4.7 

15.8 

13.5 

233 


4.9 

4.8 

16.4 

13.5 

291 



















Total RCR

25.5 

9.7 

17.2 

0.7 

1,645 


20.0 

19.2 

47.8 

46.0 

187 


45.5 

28.9 

65.0 

46.7 

1,832 



















 

Notes:

(1)

Performing assets are those with an internal asset quality band of AQ1 - 9; and non-performing assets are in AQ10 with a probability of default being 100%.

(2)

The negative capital deductions are a result of the latent loss provisions held in respect of the performing portfolio.

(3)

£960 million (31 December 2013 - £1,774 million) of capital deductions relates to expected loss less impairment provisions.

 


 

RCR

 

Roll forward for quarter ended 31 March 2014


















1 January 





31 March 



2014 

Net run-off 

Disposals (a)

Impairments 


2014 

Funded assets



£bn 

£bn 

£bn 

£bn 


£bn 










Ulster Bank



4.8 

(0.1)

(0.2)

(0.1)


4.4 

Real Estate Finance



9.5 

(1.2)

(0.5)

(0.1)


7.7 

Corporate



9.8 

(0.7)

(0.5)

-


8.6 

Markets



4.8 

(0.5)

(0.7)

-


3.6 










Total



28.9 

(2.5)

(1.9)

(0.2)


24.3 












1 January 



Risk 

Other (c)


31 March 


2014 

Net run-off 

Disposals (a)

parameters (b)


2014 

RWAs


£bn 

£bn 

£bn 

£bn 

£bn 


£bn 










Ulster Bank


3.3 

(0.5)

-

-

- 


2.8 

Real Estate Finance


13.5 

(1.6)

(0.1)

(0.3)

- 


11.5 

Corporate


16.4 

(0.3)

(0.5)

(0.8)

(0.1)


14.7 

Markets


13.5 

(0.2)

(0.6)

(1.2)

-


11.5 










Total


46.7 

(2.6)

(1.2)

(2.3)

(0.1)


40.5 











1 January 

Net run-off 


Risk 

Impairments 

Other (c)


31 March 

2014 

Disposals (a)

parameters (b)


2014 

Capital deductions

£m

£m

£m

£m

£m

£m


£m










Ulster Bank

559 

(2)

(14)

(135)

(17)

(4)


387 

Real Estate Finance

505 

(211)

(59)

31 

(78)

(4)


184 

Corporate

480 

(71)

17 

(159)

(27)

(3)


237 

Markets

288 

-

-

(56)

-

(1)


231 










Total

1,832 

(284)

(56)

(319)

(122)

(12)


1,039 











1 January 

Net run-off 


Risk 

Impairments 

Other (c)


31 March 

2014 

Disposals (a)

parameters (b)


2014 

RWA equivalent

£bn 

£bn 

£bn 

£bn 

£bn 

£bn 


£bn 










Ulster Bank

8.9 

(0.5)

(0.1)

(1.4)

(0.2)

- 


6.7 

Real Estate Finance

18.6 

(3.7)

(0.7)

- 

(0.8)

- 


13.4 

Corporate

21.1 

(1.0)

(0.3)

(2.4)

(0.3)

(0.1)


17.0 

Markets

16.4 

(0.2)

(0.6)

(1.7)

-

(0.1)


13.8 










Total

65.0 

(5.4)

(1.7)

(5.5)

(1.3)

(0.2)


50.9 










Notes:

(a)

Include all aspects relating to disposal including associated removal of deductions from regulatory capital.

(b)

Reflects credit migration, the implementation of methodology changes and lower operational and market risk RWAs.

(c)

Includes fair value adjustments, and foreign exchange movements.

 

 

RCR

 

Gross loans and advances to customers and related impairments








31 March 2014



Gross




loans and


Q1 2014

 advances to

Impairment

Impairment


customers (1)

provisions

 losses (2)


£bn

£bn

£m





By donating division and sector








Ulster Bank




Commercial real estate




 - investment

5.4 

3.1 

47 

 - development

7.1 

6.2 

(29)

Other corporate

3.0 

2.0 

33 





Total Ulster Bank

15.5 

11.3 

51 





UK Corporate




Commercial real estate




  - investment

2.4 

0.5 

52 

  - development

0.7 

0.3 

13 

Asset finance

2.5 

0.4 

2 

Other corporate

1.6 

0.5 

22 





Total UK Corporate

7.2 

1.7 

89 





International Banking




Commercial real estate




  - investment

5.1 

1.4 

34 

  - development

0.3 

0.1 

10 

Asset finance

0.1 

- 

- 

Other corporate

5.5 

1.2 

(47)

Other

0.2 

- 

(30)





Total International Banking

11.2 

2.7 

(33)





Other

0.1 

- 

1 





Total

34.0 

15.7 

108 

 

Notes:

(1)

Includes disposal groups.

(2)

Impairment losses include £2 million relating to other financial assets; sector analyses above include allocation of latent impairment charges.

 

 

 

RCR

 

Key points

 

Funded assets

·

RCR funded assets fell to £24 billion, a reduction of £5 billion, or 16%, during the quarter and an overall reduction to date of £23 billion, or 48%, since the perimeter of the division was agreed.



·

The reduction in the quarter has been achieved by a mixture of run-off, disposals and impairments and has benefited from a combination of strong liquidity in the market and asset demand.



·

The percentage mix of assets across each of the business pillars has remained broadly consistent.

 

Capital

·

RWA equivalent reduction of £14 billion in the quarter to £51 billion reflected disposals, run-off, methodology changes and lower operational and market risk RWAs.



·

The operating focus in the quarter was on large capital intensive positions to maximise the capital benefit. Reductions in these positions were achieved in an economic manner consistent with our asset management principles. There was disposal activity across all sectors with notable reductions in each of the RCR business pillars.

 

Operating performance

·

Operating loss for the quarter was £114 million. This benefited from a number of disposal gains and recoveries through good execution and pricing in the market.



·

The favourable market conditions have manifested in a higher than anticipated sale prices for assets disposed of in the quarter, resulting in disposal gains of £56 million in the quarter.



·

The net effect of the operating loss of £114 million and RWAe reduction of £14 billion(1) has resulted in net CET1 accretion of £1.3 billion in the quarter.

 

Funding employed

·

RCR is funded primarily by Treasury and has no material third party deposits.



 

·

A run off profile of 85% over three years has been assumed for RCR's asset base with the associated funding cost being calculated from Treasury issuance maturing in line with the run down of the RCR balance sheet.



 

·

The net effect is a funding charge at a spread of c.200 basis points above three month LIBOR.

 

 

 

 

 

 

 

 

 

 

 

Note

(1)

Capital equivalent: £1.4 billion at an internal CET1 ratio of 10% (see page 48).

 


Condensed consolidated income statement

for the quarter ended 31 March 2014

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Interest receivable

3,800 

3,973 

4,279 

Interest payable

(1,105)

(1,209)

(1,609)





Net interest income

2,695 

2,764 

2,670 





Fees and commissions receivable

1,291 

1,370 

1,316 

Fees and commissions payable

(236)

(244)

(210)

Income from trading activities

952 

177 

1,115 

Gain/(loss) on redemption of own debt

20 

(29)

(51)

Other operating income

691 

31 

612 





Non-interest income

2,718 

1,305 

2,782 





Total income

5,413 

4,069 

5,452 





Staff costs

(1,691)

(1,541)

(1,887)

Premises and equipment

(653)

(700)

(556)

Other administrative expenses

(711)

(3,960)

(763)

Depreciation and amortisation

(272)

(336)

(387)

Write-down of goodwill and other intangible assets

(82)

(1,403)

- 





Operating expenses

(3,409)

(7,940)

(3,593)





Profit/(loss) before impairment losses

2,004 

(3,871)

1,859 

Impairment losses

(362)

(5,112)

(1,033)





Operating profit/(loss) before tax

1,642 

(8,983)

826 

Tax (charge)/credit

(362)

377 

(350)





Profit/(loss) from continuing operations

1,280 

(8,606)

476 

Profit from discontinued operations, net of tax

9 

15 

129 





Profit/(loss) for the period

1,289 

(8,591)

605 

Non-controlling interests

(19)

3 

(131)

Preference share and other dividends

(75)

(114)

(81)





Profit/(loss) attributable to ordinary and B shareholders

1,195 

(8,702)

393 





Earnings per ordinary and equivalent B share (Note 8)




Loss per ordinary and equivalent B share from continuing operations




  - basic and diluted (2)

- 

(77.3p)

- 





Loss per ordinary and equivalent B share from continuing and discontinued operations




  - basic and diluted (2)

- 

(77.3p)

- 





Adjusted earnings/(loss) per ordinary and equivalent B share from continuing




  operations

9.4p

(45.2p)

2.8p

 

Notes:

(1)

In the income statement above, one-off and other items as shown on page 13 are included in the appropriate captions. A reconciliation between the income statement above and the managed view income statement on page 7 is given in Appendix 1 to this announcement.

(2)

Earnings per ordinary and equivalent B share for the quarter ending 31 March 2013 has been restated to reflect the terms of the dividend access share (see Note 8).

 


Condensed consolidated statement of comprehensive income

for the quarter ended 31 March 2014

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Profit/(loss) for the period

1,289 

(8,591)

605 





Items that do not qualify for reclassification




Actuarial losses on defined benefit plans

- 

446 

- 

Tax

- 

(83)

- 






- 

363 

- 





Items that do qualify for reclassification




Available-for-sale financial assets

264 

(103)

276 

Cash flow hedges

295 

(667)

(34)

Currency translation

(135)

(328)

1,197 

Tax

(88)

203 

48 






336 

(895)

1,487 





Other comprehensive income/(loss) after tax

336 

(532)

1,487 





Total comprehensive income/(loss) for the period

1,625 

(9,123)

2,092 





Total comprehensive income/(loss) is attributable to:




Non-controlling interests

24 

16 

149 

Preference shareholders

65 

99 

71 

Paid-in equity holders

10 

15 

10 

Ordinary and B shareholders

1,526 

(9,253)

1,862 






1,625 

(9,123)

2,092 

 

Key points

·

The movement in available-for-sale financial assets during the quarter reflects unrealised gains arising on Spanish, UK and US bonds, partially offset by realised gains on high quality UK, Dutch and German sovereign bonds.

 

 

·

Cash flow hedging gains in the quarter largely result from decreases in Sterling, Euro and US dollar swap rates in the main durations of the underlying portfolio.



·

Currency translation losses during the quarter are principally due to the strengthening of Sterling against the US dollar.

 


Condensed consolidated balance sheet

at 31 March 2014

 

31 March 

31 December 

2014 

2013 


£m 

£m 




Assets



Cash and balances at central banks

69,647 

82,659 

Net loans and advances to banks

28,302 

27,555 

Reverse repurchase agreements and stock borrowing

26,470 

26,516 

Loans and advances to banks

54,772 

54,071 

Net loans and advances to customers

390,780 

390,825 

Reverse repurchase agreements and stock borrowing

51,743 

49,897 

Loans and advances to customers

442,523 

440,722 

Debt securities

120,737 

113,599 

Equity shares

9,761 

8,811 

Settlement balances

16,900 

5,591 

Derivatives

277,294 

288,039 

Intangible assets

12,428 

12,368 

Property, plant and equipment

7,437 

7,909 

Deferred tax

3,289 

3,478 

Prepayments, accrued income and other assets

7,077 

7,614 

Assets of disposal groups

1,905 

3,017 




Total assets

1,023,770 

1,027,878 




Liabilities



Bank deposits

35,371 

35,329 

Repurchase agreements and stock lending

31,691 

28,650 

Deposits by banks

67,062 

63,979 

Customer deposits

401,276 

414,396 

Repurchase agreements and stock lending

57,085 

56,484 

Customer accounts

458,361 

470,880 

Debt securities in issue

61,755 

67,819 

Settlement balances

17,175 

5,313 

Short positions

37,850 

28,022 

Derivatives

274,506 

285,526 

Accruals, deferred income and other liabilities

15,336 

16,017 

Retirement benefit liabilities

2,829 

3,210 

Deferred tax

583 

507 

Subordinated liabilities

24,139 

24,012 

Liabilities of disposal groups

3,238 

3,378 




Total liabilities

962,834 

968,663 




Equity



Non-controlling interests

612 

473 

Owners' equity*



  Called up share capital

6,752 

6,714 

  Reserves

53,572 

52,028 




Total equity

60,936 

59,215 




Total liabilities and equity

1,023,770 

1,027,878 




* Owners' equity attributable to:



Ordinary and B shareholders

55,032 

53,450 

Other equity owners

5,292 

5,292 





60,324 

58,742 


 

Average balance sheet

 

Quarter ended


31 March 

31 December 

2014 

2013 


% 

% 




Average yields, spreads and margins of the banking business



Gross yield on interest-earning assets of banking business

3.01 

3.01 

Cost of interest-bearing liabilities of banking business

(1.21)

(1.22)




Interest spread of banking business

1.80 

1.79 

Benefit from interest-free funds

0.32 

0.29 




Net interest margin of banking business

2.12 

2.08 




Average interest rates



The Group's base rate

0.50 

0.50 




London inter-bank three month offered rates



  - Sterling

0.52 

0.52 

  - Eurodollar

0.23 

0.24 

  - Euro

0.30 

0.24 


 

 

Average balance sheet

 

Quarter ended


Quarter ended


31 March 2014


31 December 2013


Average




Average




balance

Interest

Rate


balance

Interest

Rate


£m

£m

%


£m

£m

%









Assets








Loans and advances to banks

72,181 

89 

0.50 


75,338 

102 

0.54 

Loans and advances to customers

383,898 

3,518 

3.72 


389,390 

3,656 

3.73 

Debt securities

56,165 

194 

1.40 


59,218 

216 

1.45 









Interest-earning assets








  - banking business (1,4)

512,244 

3,801 

3.01 


523,946 

3,974 

3.01 

  - trading business (3)

177,347 




190,320 











Non-interest earning assets

344,476 




393,624 











Total assets

1,034,067 




1,107,890 











Memo: funded assets

743,399 




791,529 











Liabilities








Deposits by banks

16,768 

51 

1.23 


20,086 

85 

1.68 

Customer accounts

306,189 

516 

0.68 


330,208 

562 

0.68 

Debt securities in issue

45,202 

302 

2.71 


49,374 

317 

2.55 

Subordinated liabilities

23,314 

212 

3.69 


22,992 

216 

3.73 

Internal funding of trading business

(18,262)

36 

(0.80)


(24,467)

49 

(0.79)









Interest-bearing liabilities








  - banking business (1,2)

373,211 

1,117 

1.21 


398,193 

1,229 

1.22 

  - trading business (3)

186,096 




199,273 











Non-interest-bearing liabilities








  - demand deposits

80,409 




73,883 



  - other liabilities

334,403 




370,829 



Owners' equity

59,948 




65,712 











Total liabilities and owners' equity

1,034,067 




1,107,890 



 

Notes:

(1)

Interest receivable has been increased by £1 million (Q4 2013 - £1 million) and interest payable has been increased by £15 million (Q4 2013 - £23 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.

(2)

Interest payable has been decreased by £3 million (Q4 2013 - £3 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.

(3)

Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.

(4)

Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.

 


Condensed consolidated statement of changes in equity

for the quarter ended 31 March 2014

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 

£m 

£m 

£m 





Called-up share capital




At beginning of period

6,714 

6,697 

6,582 

Ordinary shares issued

38 

17 

37 





At end of period

6,752 

6,714 

6,619 





Paid-in equity




At beginning and end of period

979 

979 

979 





Share premium account




At beginning of period

24,667 

24,628 

24,361 

Ordinary shares issued

93 

39 

94 





At end of period

24,760 

24,667 

24,455 





Merger reserve




At beginning and end of period

13,222 

13,222 

13,222 





Available-for-sale reserve




At beginning of period

(308)

(252)

(346)

Unrealised gains

433 

1 

582 

Realised gains

(218)

(122)

(164)

Tax

(5)

65 

28 

Recycled to profit or loss on disposal of businesses (1)

36 

- 

(110)





At end of period

(62)

(308)

(10)





Cash flow hedging reserve




At beginning of period

(84)

447 

1,666 

Amount recognised in equity

653 

(271)

259 

Amount transferred from equity to earnings

(358)

(396)

(293)

Tax

(70)

136 

3 





At end of period

141 

(84)

1,635 






Foreign exchange reserve




At beginning of period

3,691 

4,018 

3,908 

Retranslation of net assets

(170)

(417)

1,386 

Foreign currency gains/(losses) on hedges of net assets

32 

88 

(201)

Tax

(2)

2 

(18)

Recycled to profit or loss on disposal of businesses

- 

- 

(3)





At end of period

3,551 

3,691 

5,072 






Capital redemption reserve




At beginning and end of period

9,131 

9,131 

9,131 






Contingent capital reserve




At beginning of period

- 

(1,208)

(1,208)

Transfer to retained earnings

- 

1,208 

- 






At end of period

- 

- 

(1,208)

 

For the notes to this table refer the following page.

Condensed consolidated statement of changes in equity

for the quarter ended 31 March 2014

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Retained earnings




At beginning of period

867 

10,144 

10,596 

Profit/(loss) attributable to ordinary and B shareholders and other equity owners




  - continuing operations

1,268 

(8,592)

366 

  - discontinued operations

2 

4 

108 

Equity preference dividends paid

(65)

(99)

(71)

Paid-in equity dividends paid, net of tax

(10)

(15)

(10)

Transfer of contingent capital agreement

- 

(1,208)

- 

Termination of contingent capital agreement

- 

320 

- 

Actuarial losses recognised in retirement benefit schemes




  - gross

- 

446 

- 

  - tax

- 

(83)

- 

Shares released for employee benefits

(36)

(76)

- 

Share-based payments




  - gross

(39)

26 

(37)

  - tax

(1)

- 

(3)





At end of period

1,986 

867 

10,949 





Own shares held




At beginning of period

(137)

(138)

(213)

Disposal of own shares

1 

1 

2 





At end of period

(136)

(137)

(211)





Owners' equity at end of period

60,324 

58,742 

70,633 





Non-controlling interests




At beginning of period

473 

462 

1,770 

Currency translation adjustments and other movements

3 

1 

15 

Profit/(loss) attributable to non-controlling interests




  - continuing operations

12 

(14)

110 

  - discontinued operations

7 

11 

21 

Dividends paid

- 

(5)

- 

Movements in available-for-sale securities




  - unrealised (losses)/gains

(1)

(3)

9 

  - realised losses

3 

21 

- 

  - tax

- 

- 

(1)

  - recycled to profit or loss on disposal of businesses (2)

- 

- 

(5)

Equity withdrawn and disposals

- 

- 

(1,387)

Equity raised

115 

- 

- 





At end of period

612 

473 

532 





Total equity at end of period

60,936 

59,215 

71,165 





Total comprehensive income/(loss) recognised in the statement of




  changes in equity is attributable to:

Non-controlling interests

24 

16 

149 

Preference shareholders

65 

99 

71 

Paid-in equity holders

10 

15 

10 

Ordinary and B shareholders

1,526 

(9,253)

1,862 






1,625 

(9,123)

2,092 

 

Notes:

(1)

Net of tax - £11 million credit (Q1 2013 - £35 million charge).

(2)

Net of tax - Q1 2013 £1 million charge.

 

 

 

 

For an explanation of the movements in the available-for-sale, cash flow hedging and foreign exchange reserves refer to page 54.


 

Notes

 

1. Basis of preparation

The Group's condensed consolidated financial statements should be read in conjunction with the 2013 annual accounts which were prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (EU) (together IFRS).

 

From 13 March 2013, DLG was classified as an associated undertaking and at 31 December 2013 the Group's interest in DLG was transferred to disposal groups. The Group disposed of its remaining interest in DLG in February 2014.

 

Going concern

Having reviewed the Group's forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group will continue in operational existence for the foreseeable future. Accordingly, the Interim Management Statement for the quarter ended 31 March 2014 has been prepared on a going concern basis.


 

2. Accounting policies

There have been no significant changes to the Group's principal accounting policies as set out on pages 377 to 389 of the 2013 Annual Report and Accounts. The adoption of a number of amendments to IFRSs that are effective for 2014 has not had a material effect on the Group's results.

 

Critical accounting policies and key sources of estimation uncertainty

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions that are considered to be the most important to the portrayal of the Group's financial condition are those relating to pensions; goodwill; provisions for liabilities; deferred tax; loan impairment provisions and fair value of financial instruments. These critical accounting policies and judgments are described on pages 386 to 389 of the Group's 2013 Annual Report and Accounts.


 

Notes

 

3. Analysis of income, expenses and impairment losses





Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Loans and advances to customers

3,518 

3,656 

3,831 

Loans and advances to banks

89 

102 

108 

Debt securities

193 

215 

340 





Interest receivable

3,800 

3,973 

4,279 





Customer accounts

516 

562 

837 

Deposits by banks

54 

88 

116 

Debt securities in issue

287 

294 

353 

Subordinated liabilities

212 

216 

222 

Internal funding of trading businesses

36 

49 

81 





Interest payable

1,105 

1,209 

1,609 





Net interest income

2,695 

2,764 

2,670 





Fees and commissions receivable




  - payment services

322 

368 

333 

  - credit and debit card fees

255 

265 

254 

  - lending (credit facilities)

332 

344 

353 

  - brokerage

105 

110 

109 

  - investment management

106 

131 

113 

  - trade finance

67 

74 

78 

  - other

104 

78 

76 






1,291 

1,370 

1,316 

Fees and commissions payable

(236)

(244)

(210)





Net fees and commissions

1,055 

1,126 

1,106 





Foreign exchange

218 

206 

195 

Interest rate

248 

(54)

199 

Credit

356 

2 

552 

Own credit adjustments

95 

15 

99 

Other

35 

8 

70 





Income from trading activities

952 

177 

1,115 





Gain/(loss) on redemption of own debt

20 

(29)

(51)





Operating lease and other rental income

91 

103 

138 

Own credit adjustments

44 

(15)

150 

Other changes in the fair value of financial assets and liabilities designated as at fair




  value through profit or loss and related derivatives

20 

(91)

12 

Changes in fair value of investment properties

(12)

(258)

(9)

Profit on sale of securities

211 

91 

153 

Profit/(loss) on sale of:




  - property, plant and equipment

24 

11 

18 

  - subsidiaries and associated undertakings

192 

171 

(6)

Dividend income

13 

46 

14 

Share of profits less losses of associated undertakings

27 

43 

177 

Other income

81 

(70)

(35)





Other operating income

691 

31 

612 


 

 

Notes

 

3. Analysis of income, expenses and impairment losses (continued)




Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Total non-interest income

2,718 

1,305 

2,782 





Total income

5,413 

4,069 

5,452 





Staff costs

(1,691)

(1,541)

(1,887)

Premises and equipment

(653)

(700)

(556)

Other (1)

(711)

(3,960)

(763)





Administrative expenses

(3,055)

(6,201)

(3,206)

Depreciation and amortisation

(272)

(336)

(387)

Write-down of goodwill  

- 

(1,059)

- 

Write-down of other intangible assets

(82)

(344)

- 





Operating expenses

(3,409)

(7,940)

(3,593)





Loan impairment losses

360 

5,131 

1,036 

Securities impairment losses

2 

(19)

(3)





Impairment losses

362 

5,112 

1,033 

 

Note:

(1)

Q4 2013 includes bank levy of £200 million, Payment Protection Insurance costs of £465 million, Interest Rate Hedging Products redress and related costs of £500 million (Q1 2013 - £50 million) and regulatory and legal actions of £1,910 million.

 

Payment Protection Insurance (PPI)

No additional charge has been recognised for PPI in Q1 2014 (Q4 2013 - £465 million; Q1 2013 - nil). The cumulative charge in respect of PPI is £3.1 billion, of which £2.4 billion (77%) in redress and expenses had been utilised by 31 March 2014. Of the £3.1 billion cumulative charge, £2.8 billion relates to redress and £0.3 billion to administrative expenses.

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





At beginning of period

926 

737 

895 

Charge to income statement

- 

465 

- 

Utilisations

(218)

(276)

(190)





At end of period

708 

926 

705 

 

The remaining provision provides coverage for approximately ten months for redress and administrative expenses, based on the current average monthly utilisation.

 

Interest that will be payable on successful complaints has been included in the provision as has the estimated cost to the Group of administering the redress process. The Group expects the majority of the cash outflows associated with this provision to have occurred by the end of 2014. There are uncertainties as to the eventual cost of redress which will depend on actual complaint volumes, take up and uphold rates and average redress costs. Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different than the amount provided. The Group will continue to monitor the position closely and refresh its assumptions.

 

 

Notes

 

3. Analysis of income, expenses and impairment losses (continued)

 

Interest Rate Hedging Products (IRHP) redress and related costs

Following an industry-wide review conducted in conjunction with the Financial Services Authority (now being dealt with by the Financial Conduct Authority (FCA)), the Group agreed to provide redress to customers in relation to certain interest rate hedging products sold to small and medium-sized businesses classified as retail clients under FSA rules. A cumulative charge of £1.3 billion has been recognised for redress, of which £1.0 billion relates to redress and £0.3 billion relates to administrative expenses. No additional charge has been recognised in Q1 2014 (Q4 2013 - £500 million; Q1 2013 - £50 million).

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





At beginning of period

1,077 

631 

676 

Charge to income statement

-

500 

50 

Utilisations

(199)

(54)

(24)





At end of period

878 

1,077 

702 

 

The Group is progressing with its review of sales of IRHP and providing basic redress to all customers who are entitled to it. Customers may also be entitled to be compensated for any consequential losses they may have suffered. The Group is not able to measure reliably any liability it may have and has accordingly not made any provision. Customers will receive redress monies without having to wait for the assessment of any additional consequential loss claims which are outside the allowance for such claims included in the 8% interest on redress due.

 

The Group continues to monitor the level of provision given the uncertainties over the number of transactions that will qualify for redress and the nature and cost of that redress.

 

Regulatory and legal actions

The Group is party to certain legal proceedings and regulatory investigations and continues to co-operate with a number of regulators. All such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of the Group incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made. No additional charge was booked in Q1 2014 (Q4 2013 - £1,910 million; Q1 2013 - nil). The charge in Q4 2013 was primarily in respect of matters related to mortgage-backed securities and securities related litigation following recent third party litigation settlements and regulatory decisions.


 

Notes

 

4. Loan impairment provisions and REIL

 

Loan impairments

Operating profit/(loss) is stated after charging loan impairment losses of £360 million (Q4 2013 - £5,131 million; Q1 2013 - £1,036 million). The balance sheet loan impairment provisions decreased in the quarter ended 31 March 2014 from £25,216 million to £24,235 million and the movements thereon were:

 

Quarter ended


31 March 2014


31 December 2013


31 March 2013


Group




Group excl.

Non-



Group excl.

Non-


excl. RCR

RCR

Total

Non-Core

Core

Total

Non-Core

Core

Total


£m

£m

£m


£m

£m

£m


£m

£m

£m













At beginning of period (1)

8,716 

16,500 

25,216 


10,101 

11,320 

21,421 


10,062 

11,188 

21,250 

Transfers to disposal groups

- 

- 

- 


(9)

- 

(9)


- 

- 

- 

Currency translation and other












  adjustments

(43)

(62)

(105)


(28)

(90)

(118)


136 

266 

402 

Amounts written-off

(421)

(792)

(1,213)


(607)

(586)

(1,193)


(529)

(627)

(1,156)

Recoveries of amounts previously 












  written-off

41 

11 

52 


38 

27 

65 


49 

16 

65 

Charge to income statement












  - continuing operations

254 

106 

360 


1,924 

3,207 

5,131 


599 

437 

1,036 

Unwind of discount












  (recognised in interest income)

(31)

(44)

(75)

(42)

(39)

(81)


(51)

(52)

(103)













At end of period

8,516 

15,719 

24,235 


11,377 

13,839 

25,216 


10,266 

11,228 

21,494 

 

Note:

(1)

As a result of the creation of RCR on 1 January 2014, £855 million of provisions were transferred from Non-Core to the original donating divisions and £16,500 million of provisions were transferred to RCR, £12,984 million from Non-Core and £3,516 million from other divisions.

 

Provisions at 31 March 2014 include £62 million in respect of loans and advances to banks (31 December 2013 - £63 million; 31 March 2013 - £119 million).

 

Risk elements in lending

Risk elements in lending (REIL) comprises impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected and those awaiting individual assessment. A latent provision is established for the latter.

 

 

Notes

 

4. Loan impairment provisions and REIL (continued)

REIL decreased by £2,039 million in the quarter to £37,353 million and the movements thereon were:

 

Quarter ended


31 March 2014


31 December 2013


31 March 2013


Group




Group excl.

Non-



Group excl.

Non-


excl. RCR

RCR

Total

Non-Core

Core

Total

Non-Core

Core

Total


£m

£m

£m


£m

£m

£m


£m

£m

£m













At beginning of period (1)

15,276 

24,116 

39,392 


20,551 

19,815 

40,366 


19,766 

21,374 

41,140 

Currency translation and

(65)

(98)

(163)


(59)

(33)

(92)


376 

528 

904 

  other adjustments












Additions

1,463 

1,323 

2,786 


2,298 

959 

3,257 


2,097 

939 

3,036 

Transfers

(56)

16 

(40)


(28)

(1)

(29)


89 

31 

120 

Transfer to performing book

(103)

(3)

(106)


(106)

(27)

(133)


(41)

(33)

(74)

Repayments and disposals

(1,743)

(1,560)

(3,303)


(1,671)

(1,113)

(2,784)


(1,472)

(1,456)

(2,928)

Amounts written-off

(421)

(792)

(1,213)


(607)

(586)

(1,193)


(529)

(627)

(1,156)













At end of period

14,351 

23,002 

37,353 


20,378 

19,014 

39,392 


20,286 

20,756 

41,042 

 

Note:

(1)

As a result of the creation of RCR on 1 January 2014, £1,328 million of REIL were transferred from Non-Core to the original donating divisions and £24,116 million of REIL were transferred to RCR, £17,686 million from Non-Core and £6,430 million from other divisions.

 

Provision coverage of REIL was 65% at 31 March 2014 (31 December 2013 - 64%; 31 March 2013 - 52%).


 

Notes

 

5. Tax

The actual tax (charge)/credit differs from the expected tax (charge)/credit computed by applying the standard UK corporation tax rate of 21.5% (2013 - 23.25%).

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Profit/(loss) before tax

1,642 

(8,983)

826 





Expected tax (charge)/credit

(353)

2,088 

(192)

Losses in period where no deferred tax asset recognised

(13)

(688)

(72)

Foreign profits taxed at other rates

(57)

(44)

(88)

UK tax rate change impact

- 

(116)

- 

Unrecognised timing differences

4 

(6)

3 

Non-deductible goodwill impairment

- 

(247)

- 

Items not allowed for tax




  - losses on disposal and write-downs

- 

(15)

- 

  - UK bank levy

(19)

(6)

(20)

  - regulatory and legal actions

- 

(54)

- 

  - employee share schemes

(3)

10 

(7)

  - other disallowable items

(25)

(99)

(37)

Non-taxable items




  - gain on sale of Direct Line Insurance Group

41 

- 

- 

  - gain on sale of Global Merchant Services

- 

37 

- 

  - other non-taxable items

14 

56 

55 

Taxable foreign exchange movements

1 

(11)

2 

Losses brought forward and utilised

36 

13 

5 

Reduction in carrying value of deferred tax asset in respect of losses in UK

- 

(701)

- 

Adjustments in respect of prior periods

12 

160 

1 





Actual tax (charge)/credit

(362)

377 

(350)

 

At 31 March 2014 the Group has recognised a deferred tax asset of £3,289 million (31 December 2013 - £3,478 million) and a deferred tax liability of £583 million (31 December 2013 - £507 million). These include amounts recognised in respect of UK trading losses of £2,240 million (31 December 2013 - £2,411 million). Under UK tax legislation, these UK losses can be carried forward indefinitely to be utilised against profits arising in the future. The Group has considered the carrying value of this asset as at 31 March 2014 and concluded that it is recoverable based on future profit projections.


 

6.Profit/(loss) attributable to non-controlling interests





Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





RBS Sempra Commodities JV

- 

(2)

(2)

RFS Holdings BV Consortium Members

17 

(5)

113 

Direct Line Group

- 

- 

19 

Other

2 

4 

1 





Profit/(loss) attributable to non-controlling interests

19 

(3)

131 


 

Notes

 

7. Dividends




Dividends paid to preference shareholders and paid-in equity holders are as follows:






Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Preference shareholders




Non-cumulative preference shares of US$0.01

65 

41 

71 

Non-cumulative preference shares of €0.01

- 

57 

- 

Non-cumulative preference shares of £1

- 

1 

- 





Paid-in equity holders




Interest on securities classified as equity, net of tax

10 

15 

10 






75 

114 

81 

 

The Group has now resumed payments on all discretionary non-equity capital instruments following the end of the European Commission ban in 2012 for RBSG and 2013 for RBS N.V. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.

 

The Board has decided to continue partially neutralising the Common Equity Tier 1 impact of Group hybrid capital instruments. It is expected that £300 million of new equity will be issued during the course of 2014 to achieve this aim.


 

8. Earnings/(loss) per ordinary and equivalent B share



Quarter ended 


31 December 


2013 



Earnings


Loss from continuing operations attributable to ordinary and B shareholders (£m)

(8,706)

 


Profit from discontinued operations attributable to ordinary and B shareholders (£m)

4 



Loss attributable to ordinary and B shareholders (£m)

(8,702)



Ordinary shares outstanding during the period (millions)

6,156 

Equivalent B shares in issue during the period (millions)

5,100 



Weighted average number of ordinary shares and equivalent B shares outstanding during


   the period (millions)

11,256 



Basic loss per ordinary and equivalent B share from continuing operations

(77.3p)

 

When calculating earnings per share, IFRS requires profit or loss to be allocated to participating equity instruments as if all of the profit or loss for the period had been distributed. The Dividend Access Share is entitled to a dividend amounting to the greater of 7% of the aggregate issue price of B shares and 250% of the ordinary dividend rate multiplied by the number of B shares issued, less any dividends paid on the B shares and on ordinary shares issued on their conversion. Consequently, Q1 2014 and Q1 2013 earnings are allocated solely to the dividend access share and earnings per ordinary and equivalent B share are nil for these periods.

 

Notes

 

8. Earnings/(loss) per ordinary and equivalent B share (continued)

Adjusted earnings/(loss) per ordinary and equivalent B share excludes the rights of the dividend access share and has been calculated on the basis set out below:

 

Quarter ended


31 March 

31 December 

31 March 

2014 

2013 

2013 





Earnings




Profit/(loss) from continuing operations attributable to ordinary and 

1,193 

(8,706)

285 

  B shareholders (£m)

Profit from discontinued operations attributable to ordinary and B shareholders (£m)

2 

4 

108 





Profit/(loss) attributable to ordinary and B shareholders (£m)

1,195 

(8,702)

393 





Ordinary shares outstanding during the period (millions)

6,181 

6,156 

6,031 

Equivalent B shares in issue during the period (millions)

5,100 

5,100 

5,100 





Weighted average number of ordinary shares and equivalent




  B shares outstanding during the period (millions)

11,281 

11,256 

11,131 

Effect of dilutive share options and convertible securities (millions)

110 

- 

114 





Diluted weighted average number of ordinary shares and equivalent




  B shares outstanding during the period (millions)

11,391 

11,256 

11,245 





Earnings/(loss) per ordinary and equivalent B share from continuing




  operations (excluding the rights of the dividend access share)

10.6p

(77.3p)

2.6p

Own credit adjustments

(0.9p)

- 

(1.8p)

Payment Protection Insurance costs

- 

3.1p

- 

Interest Rate Hedging Products redress and related costs

- 

3.4p

0.3p

Regulatory and legal actions

- 

11.1p

- 

Integration and restructuring costs

0.9p

1.2p

0.9p

(Gain)/loss on redemption of own debt

(0.2p)

0.2p

0.4p

Write-down of goodwill

- 

9.4p

- 

Amortisation of purchased intangible assets

- 

0.3p

0.3p

Strategic disposals

(1.7p)

(1.5p)

0.1p

Bank levy

- 

1.8p

- 

Write-down of other intangible assets

0.7p

3.1p

- 





Adjusted earnings/(loss) per ordinary and equivalent B share from

9.4p

(45.2p)

2.8p

   continuing operations


 

Notes

 

9. Trading valuation reserves and own credit adjustments

There have been no significant changes in the valuation methodologies in relation to valuation reserve on traded instruments or own credit adjustment (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss (DFV) debt securities in issue and derivative liabilities from those discussed in the 2013 Annual Report and Accounts.

 

Valuation reserves

31 March 

31 December 

31 March 

2014 

2013 

2013 


£m 

£m 

£m 





Credit valuation adjustments (CVA)




  - monoline insurers and credit derivative product companies (CDPC)

75 

99 

387 

  - other counterparties

1,532 

1,667 

2,210 






1,607 

1,766 

2,597 





Other valuation reserves




  - bid-offer

476 

513 

581 

  - funding valuation adjustment (FVA)

497 

424 

523 

  - product and deal specific

744 

745 

748 

  - other

21 

8 

180 






1,738 

1,690 

2,032 





Valuation reserves

3,345 

3,456 

4,629 

 

Key points 

·

The decrease in CVA was primarily driven by credit spreads tightening, together with the impact of restructuring certain exposures.



·

The decrease in bid-offer reserves reflects risk reduction.



·

The increase in FVA was driven by additional funding related reserves and increased exposures due to market movements.

 

 

 

Notes

 

9. Trading valuation reserves and own credit adjustment (continued)

 

Own credit adjustment (OCA)

 

Cumulative OCA DR/(CR)




Subordinated




Debt securities in issue

liabilities




HFT

DFV

Total

DFV

Total

Derivatives

Total (3)

£m

£m

£m

£m

£m

£m

£m









31 March 2014

(368)

2 

(366)

261 

(105)

107 

2 

31 December 2013

(467)

(33)

(500)

256 

(244)

96 

(148)

31 March 2013

(597)

148 

(449)

433 

(16)

325 

309 









Carrying values of underlying liabilities

£bn

£bn

£bn

£bn

£bn











31 March 2014

8.1 

14.2 

22.3 

0.9 

23.2 



31 December 2013

8.6 

15.8 

24.4 

0.9 

25.3 



31 March 2013

10.8 

22.2 

33.0 

1.1 

34.1 



 

Key points 

·

The cumulative OCA increased during the quarter due to widening of spreads and time decay.

 


·

Senior issued debt OCA is determined by reference to secondary debt issuance spreads. The five year spread widened to 97 basis points (31 December 2013 - 92 basis points; 31 March 2013 - 103 basis points).

 


·

RBS CDS spreads remained broadly flat during the quarter.


 

10. Contingent liabilities and commitments

















31 March 2014


31 December 2013


Group excl.




Group excl. 




Non-RCR

RCR 

Total 


Non-Core 

Non-Core 

Total 


£m

£m 

£m 


£m 

£m 

£m 









Contingent liabilities








Guarantees and assets pledged as collateral security

19,634 

270 

19,904 


19,563 

616 

20,179 

Other

6,039 

236 

6,275 


5,893 

98 

5,991 










25,673 

506 

26,179 


25,456 

714 

26,170 









Commitments








Undrawn formal standby facilities, credit lines and other

208,550 

2,482 

211,032 


210,766 

2,280 

213,046 

Other

2,590 

13 

2,603 


2,793 

- 

2,793 










211,140 

2,495 

213,635 


213,559 

2,280 

215,839 









Contingent liabilities and commitments

236,813 

3,001 

239,814 


239,015 

2,994 

242,009 

 

Additional contingent liabilities arise in the normal course of the Group's business. It is not anticipated that any material loss will arise from these transactions.


 

Notes

 

11. Litigation, investigations and reviews

Except for the developments noted below, there have been no material changes to litigation, investigations and reviews as disclosed in the Annual Results for the year ended 31 December 2013.

 

Litigation

 

Shareholder litigation

As previously disclosed, claims were issued in the High Court of Justice of England and Wales in March and July 2013, against the Group (and in one of those claims, also against certain former individual officers and directors) alleging that untrue and misleading statements and/or improper omissions were made in connection with the rights issue announced by the Group on 22 April 2008 in breach of the Financial Services and Markets Act 2000. On 30 July 2013 these and other similar threatened claims were consolidated by the Court via a Group Litigation Order.  The Group's defence to the claims was filed on 13 December 2013.  On 28 April 2014 a further High Court claim was issued against the Group under the Group Litigation Order.

 

Investigations and reviews

 

Card Protection Plan Limited

As previously disclosed, the Financial Conduct Authority announced on 22 August 2013 that Card Protection Plan Limited (CPP) and 13 banks and credit card issuers, including the Group, had agreed to a compensation scheme in relation to the sale of card and/or identity protection insurance to certain retail customers. The compensation scheme has now been approved by the requisite number of customers and by the High Court of England and Wales. CPP has written to affected policyholders to ask those who believe they have been mis-sold to submit their claims. Claims that have been submitted to date are currently being processed.  Save for exceptional cases, all claims must be submitted before 31 August 2014. The Group has made appropriate levels of provision based on its estimate of ultimate exposure.

 

Tomlinson Report

As previously disclosed, on 25 November 2013, a report by Lawrence Tomlinson, entrepreneur in residence at the UK government's Department for Business Innovation and Skills, was published (Tomlinson Report). The Tomlinson Report was critical of the Group's Global Restructuring Group's treatment of SMEs. In response to the Tomlinson Report, the Bank instructed the law firm Clifford Chance to conduct an independent review of the principal allegation made in the Tomlinson Report: the Group's Global Restructuring Group was alleged to be culpable of systematic and institutional behaviour in artificially distressing otherwise viable businesses and through that putting businesses into insolvency. Clifford Chance published its report on 17 April 2014 and concluded that there was no evidence to support the principal allegation.

 

The Group continues to cooperate fully with the ongoing FCA investigation.

 

SME banking market study

As previously disclosed, the Office of Fair Trading (OFT) announced its market study on competition in banking for SMEs in England and Wales, Scotland and Northern Ireland on 19 June 2013. Following a consultation on the scope of the market study, the OFT published an update paper on 27 September 2013 setting out its proposed scope. On 11 March 2014, the OFT set out some competition concerns on SME banking but also announced that its successor body, the Competition and Markets Authority (CMA), would continue the review. On the same day, the CMA indicated that it expected to come to a provisional decision on whether or not to refer SME banking to a more detailed phase 2 investigation by Summer 2014. The OFT also announced on 11 March 2014 that the CMA would be undertaking an update of the OFT's 2013 review of personal current accounts. The preliminary findings of this update are expected by Summer 2014.


 

Notes

 

12. Other developments

 

Completion of sale of remaining interest in Direct Line Insurance Group (DLG)

The Group completed the sale of its remaining interest of 423.2 million ordinary shares in DLG on 27 February 2014 at a price of £2.63 pence per share, raising gross proceeds of £1,113 million and realising a gain of £191 million.

 

RBS has now sold all its ordinary shares in DLG except for 4.2 million shares held to satisfy long term incentive plan awards granted by RBS to DLG management. The sale marks the completion of RBS's EC-mandated disposal of its interest in DLG.

 

Dividend Access Share and revised State Aid terms

RBS announced on 9 April 2014 that it has entered into an agreement ('DAS Retirement Agreement') with Her Majesty's Treasury ('HMT') to provide for the future retirement of the Dividend Access Share ('DAS') subject to approval by the company's independent shareholders. The DAS Retirement Agreement sets out the process for removal of the DAS - a key element of the Government's 2009 capital injection into RBS and the associated European Commission approval of the State Aid package for the bank. Among other benefits, the retirement of the DAS will in future allow the Board to state more clearly a dividend policy to existing and potential investors.

 

The DAS was an important factor in the EC's assessment of the State aid RBS received and was part of the basis for its approval of that support in 2009. It was therefore necessary for the proposal for the eventual retirement of the DAS to be notified to the EC by HMT and this was done by HMT.

 

The EC concluded that the new arrangements for the eventual retirement of the DAS did not constitute new State aid and approved the changes to RBS's restructuring plan in its State Aid Amendment Decision of 9 April 2014. In addition, this decision included two further key commitments made by HMT to the EC as follows:

●

The deadline for RBS's divestment of the Williams & Glyn business (by Initial Public Offering (IPO), whole business sale or tendering procedure for its entire interest) has been extended. In the expected event of divestment by IPO, RBS must carry out this IPO before 31 December 2016 and complete the disposal of its entire interest in the Williams & Glyn business by 31 December 2017.



●

Citizens Financial Group, Inc. ('Citizens') will be disposed of by 31 December 2016, with an automatic 12 month extension if market metrics indicate that an IPO or subsequent tranches of disposal cannot be completed in an orderly fashion or at a fair value. On 1 November 2013, RBS announced that it would accelerate the divestment of Citizens with a partial IPO and that it planned to fully divest the business by the end of 2016. The obligation under the State Aid Amendment Decision to dispose of Citizens is therefore in line with RBS's planned and publicly stated divestment timetable and already reflected in its capital and strategic planning.

 

RBS has entered into a Revised State Aid Commitment Deed under which it undertakes to do all acts and things necessary to ensure that HMT is able to comply with the revised State aid commitments made by HMT to the EC. HMT's obligations to the EC and RBS's commitments under the Revised State Aid Commitment Deed will remain in effect even if the DAS Retirement Agreement is not approved by independent shareholders.

 

 

Notes

 

12. Other developments (continued)

 

Board changes

On 27 February 2014, RBS announced that Philip Scott, a non-executive director, will step down from the Board by 31 October 2014.

 

Morten Friis was appointed as a non-executive director with effect from 10 April 2014.

 

Anthony Di Iorio, a non-executive director, stepped down from the Board on 26 March 2014.

 

On 4 April 2014, RBS announced that Ewen Stevenson had been appointed as an executive director and RBS Chief Financial Officer with effect from 19 May 2014.

 

Cap on variable remuneration

The fourth EU Capital Requirements Directive (CRD IV), implemented for banks in the UK by the Prudential Regulation Authority, imposes a 1:1 cap on variable remuneration in relation to salary; however with shareholder approval it is possible to award variable remuneration up to 200% of fixed pay (i.e. a 2:1 cap).

 

All of our major competitors have indicated that they will seek approval from their shareholders to introduce a 2:1 cap and the Board believes the best commercial solution for RBS would be to have the flexibility on variable compensation which is now emerging as the sector norm. This would also allow RBS to maintain the maximum amount of compensation that could be subject to performance conditions including claw back for conduct issues that may emerge in future.

 

On 24 April UKFI informed the board that it would vote against any resolution which proposes a 2:1 ratio. In these circumstances, the Board expects that such a resolution would fail and will therefore not be brought to the Annual General Meeting.  HM Treasury has commented that it considers an increase to the cap on variable remuneration cannot be justified whilst RBS has yet to complete its restructuring and remains a majority publicly-owned bank, and notes that as a result of its pay policy RBS will remain a 'back-marker'  in its overall remuneration compared to other banks.

 

The Board acknowledges that this outcome creates a commercial and prudential risk which it must try to mitigate within the framework of a 1:1 fixed to variable compensation ratio.

 

EU financial transaction tax

On 30 April 2014, the European Court rejected a challenge from the UK Government of the initial proposal for the EU financial transaction tax on procedural grounds. A further challenge on substantive grounds may follow, depending on the nature of any subsequent Directive enacted in the future, an announcement on which may be forthcoming after the 6 May 2014 ECOFIN meeting. RBS continues to monitor developments.

 

Rating agencies

Moody's Investors Service

On 13 March 2014, Moody's Investors Service ('Moody's') lowered its credit ratings of RBS Group plc and certain subsidiaries by one notch. The long term ratings of RBS Group plc were lowered to 'Baa2' from 'Baa1' whilst the long term ratings of RBS plc and National Westminster Bank Plc were lowered to 'Baa1' from 'A3'.  Short term ratings were affirmed as unchanged. Post the review, a negative ratings outlook was assigned.

 

 

Notes

 

12. Other developments (continued)

The ratings of Ulster Bank Ltd and Ulster Bank Ireland Ltd were also impacted by the rating action on the RBS Group. The long term and short term ratings of these entities were lowered by one notch to 'Baa3' (long term)/'P-3' (short term) from 'Baa2'/'P-2'. A negative outlook was assigned to ratings, in line with the ratings outlook on the RBS Group.

 

Moody's rating actions were prompted by their concerns over the RBS Group's execution risks relating to the effective roll-out of the Group's strategic plans, their concerns over the impact of restructuring costs on the RBS Group's profitability and their concern that the RBS Group's capitalisation is vulnerable to short-term shocks. Despite these short to medium term concerns, Moody's expects the RBS Group's capitalisation to improve in the medium to long term as the RBS Group's recovery plan is progressed. The agency also considers that, if executed according to plan, the RBS Group's intended restructuring will ultimately be positive for creditors in the medium to long term as it will deliver a more efficient UK-focused bank with lower risk operations.

 

The long term ratings of subsidiaries, RBS Citizens National Association and Citizens Bank of Pennsylvania were not impacted by the rating action on the RBS Group and the long term ratings of these entities were affirmed as unchanged by Moody's. Ratings are on a negative outlook.

 

Fitch Ratings

On 26 March 2014 Fitch Ratings ('Fitch') affirmed as unchanged the long term ratings of RBS Group plc and subsidiaries, RBS plc and National Westminster Bank Plc, whilst revising the rating outlooks of these entities to negative from stable. The outlook change was driven by the conclusion of Fitch's global review of 'Sovereign Support' incorporated in Fitch's bank ratings.

 

On 27 March 2014 Fitch also revised the rating outlooks of certain RBS Group subsidiaries, including RBS NV, Ulster Bank Ltd and Ulster Bank Ireland Ltd, to negative from stable to align these with the revised ratings outlook of RBS Group plc. RBS Citizens National Association and Citizens Bank of Pennsylvania were not impacted by these rating actions and long term rating outlooks of these entities remain stable.

 

Standard & Poor's

On 23 April 2014, Standard & Poor's ('S&P') published a report setting out their views on potential risks for banks and key considerations for rating banks in an independent Scotland.

 

On 30 April 2014, S&P affirmed as unchanged its ratings on the Group and notable subsidiaries. Negative rating outlooks were maintained. 

 

Current RBS Group plc and subsidiary ratings are shown in the table below:

 

Moody's


S&P


Fitch


Long term 

Short term 


Long term 

Short term 


Long term 

Short term 










RBS Group plc

Baa2 

P-2 


BBB+ 

A-2 


A 

F1 










The Royal Bank of Scotland plc

Baa1 

P-2 


A- 

A-2 


A 

F1 










National Westminster Bank Plc

Baa1 

P-2 


A- 

A-2 


A 

F1 










RBS N.V.

Baa1 

P-2 


A- 

A-2 


A 

F1 










RBS Citizens, National Association/Citizens  Bank of Pennsylvania

A3 

P-2 


A- 

A-2 


BBB+ 

F2 










Ulster Bank Ltd/Ulster Bank

  Ireland Ltd

Baa3 

P-3 


BBB+ 

A-2 


A- 

F1 


 

Notes

 

13. Date of approval

This announcement was approved by the Board of directors on 1 May 2014.


 

14. Post balance sheet events

Other than matters referred to in Note 12, there have been no significant events between 31 March 2014 and the date of approval of this announcement which would require a change to or additional disclosure in the announcement.


 

Additional information

 

Share information

31 March 

2014 

31 December 

2013 




Ordinary share price

311.0p 

338.1p 




Number of ordinary shares in issue

6,241m 

6,203m 

 

 

Statutory results

Financial information contained in this document does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 ('the Act'). The statutory accounts for the year ended 31 December 2013 will be filed with the Registrar of Companies following the company's Annual General Meeting. The report of the auditor on those statutory accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Act.

 

The Q1 2014 results have not been audited or reviewed by the auditors.

 

Financial calendar


Annual General Meeting

25 June 2014



2014 interim results

1 August 2014



2014 third quarter interim management statement

31 October 2014


 

 

 

 

 

 

 

 

Appendix 1

 

Income statement reconciliations

and segmental analysis


 

Appendix 1 Income statement reconciliations and segmental analysis

 

Quarter ended


31 March 2014


31 December 2013


31 March 2013


Managed

One-off items

Statutory


Managed

One-off items

Statutory


Managed

One-off items

Statutory

reallocation


reallocation


reallocation

£m

£m

£m


£m

£m

£m


£m

£m

£m













Interest receivable

3,799 

1 

3,800 


3,973 

- 

3,973 


4,279 

- 

4,279 

Interest payable

(1,101)

(4)

(1,105)


(1,206)

(3)

(1,209)


(1,607)

(2)

(1,609)













Net interest income

2,698 

(3)

2,695 


2,767 

(3)

2,764 


2,672 

(2)

2,670 













Fees and commissions receivable

1,291 

- 

1,291 


1,370 

- 

1,370 


1,316 

- 

1,316 

Fees and commissions payable

(236)

- 

(236)


(244)

- 

(244)


(210)

- 

(210)

Income from trading activities

856 

96 

952 


162 

15 

177 


1,016 

99 

1,115 

Gain/(loss) on redemption of own debt

- 

20 

20 


- 

(29)

(29)


- 

(51)

(51)

Other operating income

444 

247 

691 


(115)

146 

31 


367 

245 

612 













Non-interest income

2,355 

363 

2,718 


1,173 

132 

1,305 


2,489 

293 

2,782 













Total income

5,053 

360 

5,413 


3,940 

129 

4,069 


5,161 

291 

5,452 













Staff costs

(1,647)

(44)

(1,691)


(1,539)

(2)

(1,541)


(1,821)

(66)

(1,887)

Premises and equipment

(594)

(59)

(653)


(614)

(86)

(700)


(553)

(3)

(556)

Other administrative expenses

(687)

(24)

(711)


(785)

(3,175)

(3,960)


(678)

(85)

(763)

Depreciation and amortisation

(262)

(10)

(272)


(309)

(27)

(336)


(329)

(58)

(387)

Write down of goodwill and other intangible assets

- 

(82)

(82)


- 

(1,403)

(1,403)


- 

- 

- 













Operating expenses

(3,190)

(219)

(3,409)


(3,247)

(4,693)

(7,940)


(3,381)

(212)

(3,593)













Profit/(loss) before impairment losses

1,863 

141 

2,004 


693 

(4,564)

(3,871)


1,780 

79 

1,859 

Impairment losses

(362)

- 

(362)


(5,112)

- 

(5,112)


(1,033)

- 

(1,033)













Operating profit/(loss)

1,501 

141 

1,642 


(4,419)

(4,564)

(8,983)


747 

79 

826 


 

 

Appendix 1 Income statement reconciliations and segmental analysis

 

Quarter ended


31 March 2014


31 December 2013


31 March 2013


Managed

One-off items

Statutory


Managed

One-off items

Statutory


Managed

One-off items

Statutory


reallocation


reallocation


reallocation


£m

£m

£m


£m

£m

£m


£m

£m

£m













Operating profit/(loss)

1,501 

141 

1,642 


(4,419)

(4,564)

(8,983)


747 

79 

826 

Own credit adjustments (1)

139 

(139)

- 


- 

- 

- 


249 

(249)

- 

Payment Protection Insurance costs

- 

- 

- 


(465)

465 

- 


- 

- 

- 

Interest Rate Hedging Products redress and related costs

- 

- 

- 


(500)

500 

- 


(50)

50 

- 

Regulatory and legal actions

- 

- 

- 


(1,910)

1,910 

- 


- 

- 

- 

Integration and restructuring costs

(129)

129 

- 


(180)

180 

- 


(122)

122 

- 

Gain/(loss) on redemption of own debt

20 

(20)

- 


(29)

29 

- 


(51)

51 

- 

Write-down of goodwill

- 

- 

- 


(1,059)

1,059 

- 


- 

- 

- 

Amortisation of purchased intangible assets

(7)

7 

- 


(35)

35 

- 


(41)

41 

- 

Strategic disposals

191 

(191)

- 


168 

(168)

- 


(6)

6 

- 

Bank levy

- 

- 

- 


(200)

200 

- 


- 

- 

- 

Write-down of other intangible assets

(82)

82 

- 


(344)

344 

- 


- 

- 

- 

RFS Holdings minority interest

9 

(9)

- 


(10)

10 

- 


100 

(100)

- 













Profit/(loss) before tax

1,642 

- 

1,642 


(8,983)

- 

(8,983)


826 

- 

826 

Tax (charge)/credit

(362)

- 

(362)


377 

- 

377 


(350)

- 

(350)













Profit/(loss) from continuing operations

1,280 

- 

1,280 


(8,606)

- 

(8,606)


476 

- 

476 

Profit from discontinued operations, net of tax

9 

- 

9 


15 

- 

15 


129 

- 

129 













Profit/(loss) for the period

1,289 

- 

1,289 


(8,591)

- 

(8,591)


605 

- 

605 

Non-controlling interests

(19)

- 

(19)


3 

- 

3 


(131)

- 

(131)

Preference share and other dividends

(75)

- 

(75)


(114)

- 

(114)


(81)

- 

(81)













Profit/(loss) attributable to ordinary and B shareholders

1,195 

- 

1,195 


(8,702)

- 

(8,702)


393 

- 

393 

 

Note:

(1)

Reallocation of £95 million gain (Q4 2013 - £15 million gain; Q1 2013 - £99 million gain) to income from trading activities and £44 million gain (Q4 2013 - £15 million loss; Q1 2013 - £150 million gain) to other operating income.


 

Appendix 1 Income statement reconciliations and segmental analysis

 

Segmental analysis

 

Analysis of divisional operating profit/(loss)

The following tables provide an analysis of divisional operating profit/(loss) by main income statement captions. The divisional income statements on pages 17 to 52reflect certain presentational reallocations as described in the notes below. These do not affect the overall operating profit/(loss).

 

RBS Capital Resolution was established on 1 January 2014 by the transfer of capital intensive and higher risk assets from existing divisions. Non-Core was dissolved on 31 December. No business lines moved to RCR and so comparative data has not been restated.

 

Net

Non-



Impairment


interest

interest

Total

Operating

(losses)/

Operating

income

income

income

expenses

recoveries

profit/(loss)

Quarter ended 31 March 2014

£m

£m

£m

£m

£m

£m








UK Retail

994 

246 

1,240 

(648)

(59)

533 

UK Corporate 

706 

397 

1,103 

(549)

(63)

491 

Wealth

171 

103 

274 

(197)

1 

78 

International Banking

180 

248 

428 

(308)

(10)

110 

Ulster Bank

159 

47 

206 

(142)

(47)

17 

US Retail & Commercial

488 

229 

717 

(500)

(73)

144 

Markets

48 

909 

957 

(637)

(2)

318 

Central items

(40)

95 

55 

(130)

(1)

(76)









2,706 

2,274 

4,980 

(3,111)

(254)

1,615 

RCR (1)

(8)

81 

73 

(79)

(108)

(114)








Managed basis

2,698 

2,355 

5,053 

(3,190)

(362)

1,501 

Reconciling items:







Own credit adjustments (2)

- 

139 

139 

- 

- 

139 

Integration and restructuring costs

- 

- 

- 

(129)

- 

(129)

Gain on redemption of own debt

- 

20 

20 

- 

- 

20 

Strategic disposals

- 

191 

191 

- 

- 

191 

Amortisation of purchased intangible assets

- 

- 

- 

(7)

- 

(7)

Write-down of intangible assets

- 

- 

- 

(82)

- 

(82)

RFS Holdings minority interest

(3)

13 

10 

(1)

- 

9 








Statutory basis

2,695 

2,718 

5,413 

(3,409)

(362)

1,642 

 

Notes:

(1)

Reallocation of £3 million between net interest income and non-interest income in respect of funding costs of rental assets.

(2)

Comprises £95 million gain included in Income from trading activities and £44 million gain included in Other operating income on a statutory basis.

 

 

Appendix 1 Income statement reconciliations and segmental analysis

 

Segmental analysis (continued)








Net

Non-





interest

interest

Total

Operating

Impairment

Operating

income

income

income

expenses

losses

profit/(loss)

Quarter ended 31 December 2013

£m

£m

£m

£m

£m

£m








UK Retail

1,014 

253 

1,267 

(722)

(73)

472 

UK Corporate 

728 

401 

1,129 

(585)

(659)

(115)

Wealth

174 

103 

277 

(207)

(21)

49 

International Banking

173 

271 

444 

(337)

(47)

60 

Ulster Bank

169 

38 

207 

(136)

(1,067)

(996)

US Retail & Commercial

479 

240 

719 

(531)

(46)

142 

Markets (1)

61 

565 

626 

(553)

(34)

39 

Central items

7 

(143)

(136)

(37)

(1)

(174)









2,805 

1,728 

4,533 

(3,108)

(1,948)

(523)

Non-Core (2)

(38)

(555)

(593)

(139)

(3,164)

(3,896)








Managed basis

2,767 

1,173 

3,940 

(3,247)

(5,112)

(4,419)

Reconciling items:







Payment Protection Insurance costs

- 

- 

- 

(465)

- 

(465)

Interest Rate Hedging Products redress and related costs

- 

- 

- 

(500)

- 

(500)

Regulatory and legal actions

- 

- 

- 

(1,910)

- 

(1,910)

Integration and restructuring costs

- 

- 

- 

(180)

- 

(180)

Loss on redemption of own debt

- 

(29)

(29)

- 

- 

(29)

Write-down of goodwill

- 

- 

- 

(1,059)

- 

(1,059)

Amortisation of purchased intangible assets

- 

- 

- 

(35)

- 

(35)

Strategic disposals

- 

168 

168 

- 

- 

168 

Bank levy

- 

- 

- 

(200)

- 

(200)

Write-down of other intangible assets

- 

- 

- 

(344)

- 

(344)

RFS Holdings minority interest

(3)

(7)

(10)

- 

- 

(10)








Statutory basis

2,764 

1,305 

4,069 

(7,940)

(5,112)

(8,983)

 

Notes:

(1)

Reallocation of £1 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.

(2)

Reallocation of £8 million between net interest income and non-interest income in respect of funding costs of rental assets, £7 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.

 

 

Appendix 1 Income statement reconciliations and segmental analysis

 

Segmental analysis (continued)








Net

Non-





interest

interest

Total

Operating

Impairment

Operating

income

income

income

expenses

losses

profit/(loss)

Quarter ended 31 March 2013

£m

£m

£m

£m

£m

£m








UK Retail

965 

226 

1,191 

(634)

(80)

477 

UK Corporate 

706 

378 

1,084 

(541)

(185)

358 

Wealth

169 

104 

273 

(212)

(5)

56 

International Banking

197 

285 

482 

(333)

(55)

94 

Ulster Bank

154 

54 

208 

(132)

(240)

(164)

US Retail & Commercial

471 

292 

763 

(555)

(19)

189 

Markets

30 

1,010 

1,040 

(746)

(16)

278 

Central items

17 

10 

27 

(63)

- 

(36)









2,709 

2,359 

5,068 

(3,216)

(600)

1,252 

Non-Core (1)

(37)

130 

93 

(165)

(433)

(505)








Managed basis

2,672 

2,489 

5,161 

(3,381)

(1,033)

747 

Reconciling items:







Own credit adjustments (2)

- 

249 

249 

- 

- 

249 

Interest Rate Hedging Products redress and related costs

- 

- 

- 

(50)

- 

(50)

Integration and restructuring costs

- 

- 

- 

(122)

- 

(122)

Loss on redemption of own debt

- 

(51)

(51)

- 

- 

(51)

Amortisation of purchased intangible assets

- 

- 

- 

(41)

- 

(41)

Strategic disposals

- 

(6)

(6)

- 

- 

(6)

RFS Holdings minority interest

(2)

101 

99 

1 

- 

100 








Statutory basis

2,670 

2,782 

5,452 

(3,593)

(1,033)

826 

 

Notes:

(1)

Reallocation of £9 million between net interest income and non-interest income in respect of funding costs of rental assets.

(2)

Comprises £99 million gain included in Income from trading activities and £150 million gain included in Other operating income on a statutory basis.

 


 

 

 

 

 

 

 

 

 

Appendix 2

 

Capital and risk management


 

Appendix 2 Capital and risk management

 

 

Page 



Capital management




Capital and leverage ratios

2 

Capital resources

3 

Leverage ratio

7 



Liquidity and funding risk




Overview

9 

Liquidity portfolio

9 

Funding metrics

10 

Funding sources

10 



Credit risk




Loans and related credit metrics

11 

Debt securities

15 

Derivatives

17 



Market risk




Trading VaR

18 

Capital charges

19 


 

 

Appendix 2 Capital and risk management

Capital management

 

Introduction

The Group aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements, and operates within an agreed risk appetite. The appropriate level of capital is determined based on the dual aims of: (i) meeting minimum regulatory capital requirements; and (ii) ensuring the Group maintains sufficient capital to uphold customer, investor and rating agency confidence in the organisation, thereby supporting the business franchise and funding capacity.

 

Capital and leverage ratios








31 March 2014


31 December 2013


Current basis

Estimated



Estimated



(transitional

end-point


Transitional

end-point

 Basel 2.5


PRA basis)

(CRR basis)


PRA basis

(CRR basis)

 basis

Capital

£bn

£bn


£bn

£bn

£bn








Common Equity Tier 1 capital (1)

39.1 

39.1 


36.8 

36.8 

42.2 

Tier 1

46.4 

39.1 


44.3 

36.8 

50.6 

Total

59.9 

47.3 


58.2 

45.5 

63.7 








RWAs by risk














Credit risk







  - non-counterparty

295.2 

295.2 


317.9 

317.9 

291.1 

  - counterparty

41.3 

41.3 


39.1 

39.1 

22.3 

Market risk

41.0 

41.0 


30.3 

30.3 

30.3 

Operational risk

36.8 

36.8 


41.8 

41.8 

41.8 









414.3 

414.3 


429.1 

429.1 

385.5 






















Risk asset ratios

%

%


%

%

%








Common Equity Tier 1 capital (1)*

9.4 

9.4 


8.6 

8.6 

10.9 

Tier 1

11.2 

9.4 


10.3 

8.6 

13.1 

Total

14.5 

11.4 


13.6 

10.6 

16.5 

 


31 March 



31 December 




2014 



2013 


Leverage ratios


% 



% 









CRR basis


3.7 



3.5 


Basel III basis


3.6 



3.4 


BCBS basis


3.6 



3.4 


 

* Refer to footnote 4 on page 2 of the main announcement for further information.

 

Notes:

(1)

Core Tier 1 before 1 January 2014.


 

Appendix 2 Capital and risk management

 

Key points

●

The Group's Core Tier 1 ratio on a CRR end-point basis improved from 8.6% to 9.4%* principally driven by retained earnings and continuing RWA reduction.



●

RWA decreases were primarily in RCR and Markets.



●

The improvement in the leverage ratio is predominantly attributable to the higher capital base and a more modest impact from off-balance sheet items, particularly trade finance-related undrawn commitments under the CRR basis.

 

 

Capital resources








31 March 2014


31 December 2013


Current







basis

Estimated



Estimated



(transitional

end-point


Transitional

end-point

Basel 2.5

PRA basis)

(CRR basis)


PRA basis

(CRR basis)

basis

£m

£m


£m

£m

£m








Shareholders' equity (excluding non-controlling interests)







Shareholders' equity

60,324 

60,324 


58,742 

58,742 

58,742 

Preference shares - equity

(4,313)

(4,313)


(4,313)

(4,313)

(4,313)

Other equity instruments

(979)

(979)


(979)

(979)

(979)


55,032 

55,032 


53,450 

53,450 

53,450 

Non-controlling interests

- 

- 


- 

- 

473 








Regulatory adjustments and deductions







Own credit 

492 

492 


601 

601 

726 

Defined benefit pension fund adjustment

(186)

(186)


(172)

(172)

362 

Net unrealised available-for-sale (AFS) losses

- 

- 


- 

- 

308 

Cash flow hedging reserve

(141)

(141)


84 

84 

84 

Other regulatory adjustments

(4)

(4)


(55)

(55)

(103)

Deferred tax assets

(1,829)

(1,829)


(2,260)

(2,260)

- 

Prudential valuation adjustments

(781)

(781)


(781)

(781)

- 

Goodwill and other intangible assets

(12,428)

(12,428)


(12,368)

(12,368)

(12,368)

50% of expected losses less impairment provisions

(1,092)

(1,092)


(1,731)

(1,731)

(19)

50% of securitisation positions

- 

- 


- 

- 

(748)


(15,969)

(15,969)


(16,682)

(16,682)

(11,758)








Core Tier 1 capital

39,063 

39,063 


36,768 

36,768 

42,165 

 

*Refer to footnote 4 on page 2 of the main announcement for further information.

 

Appendix 2 Capital and risk management

 

Capital resources (continued)








31 March 2014


31 December 2013


Current







basis

Estimated



Estimated



(transitional

end-point


Transitional

end-point

Basel 2.5


PRA basis)

(CRR basis)


PRA basis

(CRR basis)

basis


£m

£m


£m

£m

£m








Other Tier 1 capital







Preference shares - equity

- 

- 


- 

- 

4,313 

Preference shares - debt

- 

- 


- 

- 

911 

Innovative/hybrid Tier 1 securities

- 

- 


- 

- 

4,207 

Qualifying Tier 1 capital and related share premium subject







  to phase out from Additional Tier 1 (AT1) capital

5,662 

- 


5,831 

- 

- 

Qualifying Tier 1 capital included in consolidated AT1







  capital issued by subsidiaries and held by third parties

1,722 

- 


1,749 

- 

- 


7,384 

- 


7,580 

- 

9,431 

Tier 1 deductions







50% of material holdings

- 

- 


- 

- 

(976)

Tax on expected losses less impairment provisions

- 

- 


- 

- 

6 


- 

- 


- 

- 

(970)








Total Tier 1 capital

46,447 

39,063 


44,348 

36,768 

50,626 








Qualifying Tier 2 capital







Undated subordinated debt

- 

- 


- 

- 

2,109 

Dated subordinated debt - net of amortisation

- 

- 


- 

- 

12,436 

Qualifying items and related share premium

4,545 

3,951 


4,431 

3,582 

- 

Qualifying own funds instruments issued by subsidiaries







   and held by third parties

8,911 

4,249 


9,374 

5,151 

- 

Unrealised gains on AFS equity shares

- 

- 


- 

- 

114 

Collectively assessed impairment provisions

- 

- 


- 

- 

395 


13,456 

8,200 


13,805 

8,733 

15,054 








Tier 2 deductions







50% of securitisation positions

- 

- 


- 

- 

(748)

50% of standardised expected losses less impairment provisions

- 

- 


- 

- 

(25)

50% of material holdings

- 

- 


- 

- 

(976)


- 

- 


- 

- 

(1,749)

Total Tier 2 capital

13,456 

8,200 


13,805 

8,733 

13,305 








Supervisory deductions







Unconsolidated investments

- 

- 


- 

- 

(36)

Other deductions

- 

- 


- 

- 

(236)


- 

- 


- 

- 

(272)








Total regulatory capital

59,903 

47,263 


58,153 

45,501 

63,659 


 

 

Appendix 2 Capital and risk management

 

Capital resources (continued)

The table below analyses the movement in CET1 and Tier 2 capital on a CRR basis for the quarter ended 31 March 2014.

CET1

Tier 2

Total


£m

£m

£m





At 1 January 2014

36,768 

8,733 

45,501 

Attributable profit net of movements in fair value of own credit

1,086 

- 

1,086 

Share capital and reserve movements in respect of employee share schemes

(75)

- 

(75)

Ordinary shares issued

131 

- 

131 

Foreign exchange reserve

(140)

- 

(140)

AFS reserves

246 

- 

246 

Increase in goodwill and intangibles

(60)

- 

(60)

Deferred tax assets

431 

- 

431 

Excess of expected loss over impairment provisions

639 

- 

639 

Dated subordinated debt issues

- 

820 

820 

Net dated subordinated debt/grandfathered instrument

- 

(1,005)

(1,005)

Foreign exchange movement

- 

(348)

(348)

Other movements

37 

- 

37 





At 31 March 2014

39,063 

8,200 

47,263 


 

 

Appendix 2 Capital and risk management

 

Capital resources (continued)

 

Notes:

General:

In accordance with the PRA's Policy Statement PS7/2013 issued in December 2013 on the implementation of CRD IV, all regulatory adjustments and deductions to CET1 have been applied in full (i.e. no transition) with the exception of unrealised gains on AFS securities which will be included from 2015.


CRD IV and Basel III impose an additional minimum CET1 ratio of 4.5% of RWAs. Further, CET1 requirements are imposed through buffers in the CRD. There are three buffers which will affect the Group: the capital conservation buffer set at 2.5% of RWAs; the counter-cyclical capital buffer (up to 2.5% of RWAs) will be calculated as the weighted average of the countercyclical capital buffer rates applied in the countries where the Group has relevant credit exposures; and the highest of Global-Systemically Important Institution (G-SII), Other-Systemically Important Institution (O-SII) or Systemic Risk Buffers set by the supervisory authorities. The Group has been provisionally allocated a G-SII buffer of 1.5%. The regulatory target capital requirements will be phased in through CRR, and are expected to apply in full from 1 January 2019. In the meantime, using national discretion the PRA can apply a top-up. As set out in the PRA's Supervisory Statement SS3/13, the Group and other major UK banks and building societies are required to maintain a CET1 ratio of 7%, after taking into account certain adjustments set by the PRA.


PRA guidance indicates that from 1 January 2015, the Group must meet at least 56% of its Pillar 2A capital requirement with CET1 capital and the balance with Additional Tier 1 capital. The Pillar 2A capital requirement is the additional capital that the Group must hold, in addition to meeting its Pillar 1 requirements in order to comply with the PRA's overall financial adequacy rule.


Estimates in relation to full CRR basis, including RWAs, are based on the current interpretation, expectations, and understanding, of the CRR requirements, as well as further regulatory clarity and implementation guidance from the UK and EU authorities. The actual full basis CRR impact may differ from these estimates when the final technical standards are interpreted and adopted.

Capital base:

(1)

Own funds are based on shareholders' equity extracted from the unaudited condensed consolidated balance sheet disclosed on page 55 of this IMS.

(2)

Includes the nominal value of B shares (£0.5 billion) on the assumption that RBS will be privatised in the future and that they will count as permanent equity in some form by the end of 2017.

(3)

The prudential valuation adjustment (PVA), arising from the application of the prudent valuation requirements to all assets measured at fair value, has been included in full in line with the guidance from the PRA and uses methodology discussed with the PRA pending the issue of the final Regulatory Technical Standards (RTS) by the European Banking Authority. The PVA has been included in impairment provisions in the determination of the deduction from expected losses.

(4)

Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. The excess of AT1 deductions over AT1 capital in year one of transition is due to the application of the current rules to the transitional amounts.

(5)

Insignificant investments in equities of other financial entities (net): long cash equity positions are considered to have matched maturity with synthetic short positions if the long position is held for hedging purposes and sufficient liquidity exists in the relevant market. All the trades are managed and monitored together within the equities business.

(6)

Based on our current interpretations of the Commission Delegated Regulation issued in December 2013 on credit risk adjustments, the Group's standardised latent provision has been reclassified to specific provision and is not included in Tier 2 capital.

Risk-weighted assets:

(1)

Current securitisation positions are shown as risk-weighted at 1,250%.

(2)

RWA uplifts include the impact of credit valuation adjustments and asset valuation correlation on banks and central counterparties.

(3)

RWAs reflect implementation of the full internal model method suite, and include methodology changes that took effect immediately on CRR implementation.

(4)

Non-financial counterparties and sovereigns that meet the eligibility criteria under CRR are exempt from the credit valuation adjustments volatility charges.

(5)

The CRR final text includes a reduction in the risk-weight relating to small and medium-sized enterprises.

 

 

Appendix 2 Capital and risk management

 

Leverage ratio

The leverage ratios below are computed using Tier 1 capital per end-point CRR and exposure measure based on:

●

CRR basis: end-point CRR;



●

Basel III basis: The final CRR text as well as the December 2010 Basel III text; further specificity being sourced from the instructions in the July 2012 Quantitative Impact Study and the related Frequently Asked Questions; and



●

BCBS basis: Basel Committee on Banking Supervision (BCBS) proposal issued in January 2014.

 

 

31 March 2014


31 December 2013

Leverage ratio


Tier 1

Leverage




Tier 1

Leverage


Exposure

 capital

Leverage

Exposure

 capital

Leverage

£bn

£bn

%

£bn

£bn

%











CRR basis










Transitional measure

1,053.6 

46.4 

23x

4.4 


1,062.1 

44.3 

24x

4.2 

Full-end point measure

1,053.6 

39.1 

27x

3.7 


1,062.1 

36.8 

29x

3.5 











Basel III basis










Transitional measure

1,089.1 

46.4 

23x

4.3 


1,093.5 

44.3 

25x

4.1 

Full-end point measure

1,089.1 

39.1 

28x

3.6 


1,093.5 

36.8 

30x

3.4 











BCBS basis










Transitional measure

1,083.4 

46.4 

23x

4.3 


1,082.0 

44.3 

24x

4.1 

Full-end point measure

1,083.4 

39.1 

28x

3.6 


1,082.0 

36.8 

29x

3.4 


 

 

Appendix 2 Capital and risk management

 

Leverage ratio (continued)








31 March 2014


31 December 2013

Exposure measure

CRR

Basel III

BCBS


CRR

Basel III

BCBS

basis (1)

basis (2)

basis (3)

basis  (1)

basis (2)

basis (3)

£bn

£bn

£bn

£bn

£bn

£bn









Cash and balances at central banks

69.6 

69.6 

69.6 


82.7 

82.7 

82.7 

Debt securities

120.7 

120.7 

120.7 


113.6 

113.6 

113.6 

Equity shares

9.8 

9.8 

9.8 


8.8 

8.8 

8.8 

Derivatives

277.3 

277.3 

277.3 


288.0 

288.0 

288.0 

Loans and advances to banks and customers

419.1 

419.1 

419.1 


418.4 

418.4 

418.4 

Reverse repos

78.2 

78.2 

78.2 


76.4 

76.4 

76.4 

Goodwill and other intangible assets

12.4 

12.4 

12.4 


12.4 

12.4 

12.4 

Other assets

34.8 

34.8 

34.8 


24.6 

24.6 

24.6 

Assets of disposal groups

1.9 

1.9 

1.9 


3.0 

3.0 

3.0 









Total assets

1,023.8 

1,023.8 

1,023.8 


1,027.9 

1,027.9 

1,027.9 

Netting of derivatives (2)

(224.3)

(224.3)

(219.4)


(233.8)

(233.8)

(227.3)

SFTs (1)

(37.8)

(9.4)

70.1 


(41.5)

(12.0)

59.8 

Regulatory deductions and other adjustments (4)

(2.5)

(1.4)

(2.5)


(4.9)

(4.9)

(6.6)

Potential future exposure on derivatives (5)

118.0 

117.2 

114.3 


131.3 

130.4 

128.0 

Undrawn commitments (6)

176.4 

183.2 

97.1 


183.1 

185.9 

100.2 









Leverage exposure measure

1,053.6 

1,089.1 

1,083.4 


1,062.1 

1,093.5 

1,082.0 

 

Notes:

(1)

In the CRR calculation, the balance sheet value is replaced with the related regulatory exposure value which has netting of both cash positions and related collateral of securities financing transactions (SFTs).

(2)

Under the Basel III view, the balance sheet value is reduced for allowable netting under the Basel II framework (excluding cross-product netting) which mainly relates to cash positions under a master netting agreement. In the BCBS calculation.

(3)

The January 2014 BCBS proposal permits some limited netting for margin received against replacement cost for derivatives, more restrictive netting for SFT, but possible future benefit for trades against qualifying central counterparties. The notional of protection sold through credit derivatives are included in the exposure measure, offset by longer dated protection bought on the same contracts. Trade finance has benefited through alignment of exposure with credit conversion factors. 

(4)

Regulatory deductions: to ensure consistency between the leverage ratio numerator and the denominator, regulatory items that are deducted from capital are also deducted from the leverage exposure measure.

(5)

Potential future exposure (PFE) on derivatives: the regulatory add-on which is calculated by assigning percentages based on the type of instrument and the residual maturity of the contract to the nominal amounts or underlying values of derivative contracts. In the Basel III calculation, qualifying credit derivatives sold are capped to the unpaid premiums which is not applied under CRR. The element of PFE relating to credit derivatives sold is removed under BCBS and replaced with the credit derivative notionals on protection sold per note (1).

(6)

Undrawn commitments represent regulatory add-ons relating to off-balance sheet undrawn commitments based on a 10% credit conversion factor for unconditionally cancellable commitments and 100% of other commitments.

 


 

Appendix 2 Capital and risk management

 

Liquidity and funding risk

Liquidity and funding risk is the risk that the Group is unable to meet its financial obligations, including financing wholesale maturities or customer deposit withdrawals, as and when they fall due. The risk arises through the maturity transformation role that banks play. It is dependent on company specific factors such as maturity profile, composition of sources and uses of funding, the quality and size of the liquidity portfolio as well as broader factors, such as wholesale market conditions alongside depositor and investor behaviour. For a description of the liquidity and funding risk framework, governance and basis of preparation refer to the 2013 Annual Report and Accounts - Risk and balance sheet management section.

 

Overview

·

The liquidity position remains strong: the liquidity portfolio of £131 billion at 31 March 2014 continues to cover short-term wholesale funding (STWF) by more than four times.



·

Liquid assets declined by £15 billion reflecting repricing and the consequential outflow of deposits with low liquidity value. These deposits are typically from sophisticated financial institution counterparties which require a high level of liquid assets to be held to mitigate the high risk of outflows under a stress.



·

The loan:deposit ratio increased 300 basis points to 97% from 94% at 31 December 2013 reflecting the bank's continued focus on reducing excess funding.



·

The ratio of customer deposits to total funding improved slightly to 76% from 75% at 31 December 2013. Wholesale funding profile remained broadly stable with STWF excluding derivative collateral reducing marginally to £31 billion.

 

 

Liquidity portfolio

The table below analyses the Group's liquidity portfolio by product, liquidity value and carrying value. Liquidity value is lower than carrying value as it is stated after the discounts applied by the Bank of England and other central banks to instruments, within the secondary liquidity portfolio, eligible for discounting.

 

Liquidity value


Period end


Average


31 March

31 December


Q1

Q4

2014

2013

2014

2013


£m

£m


£m

£m







Cash and balances at central banks

62,847 

74,362 


65,472 

76,242 

Central and local government bonds

14,549 

15,607 


14,422 

16,495 

Treasury bills

- 

- 


- 

6 







Primary liquidity

77,396 

89,969 


79,894 

92,743 

Secondary liquidity (1)

53,418 

56,097 


54,551 

56,869 







Total liquidity value

130,814 

146,066 


134,445 

149,612 













Total carrying value

167,685 

184,233 




 

Note:

(1)

Includes assets eligible for discounting at the Bank of England and other central banks.

 


 

Appendix 2 Capital and risk management

 

Liquidity and funding risk (continued)

 

Funding metrics

The table below summarises the Group's funding metrics.

 

Short-term wholesale


Total wholesale


Net inter-bank

funding (1)

funding

funding (2)


Excluding

Including


Excluding

Including


Deposits

Loans (3)

Net

 derivative

 derivative

 derivative

 derivative

 inter-bank

collateral

 collateral

collateral

 collateral

 funding


£bn

£bn


£bn

£bn


£bn

£bn

£bn











31 March 2014

31.0 

50.8 


101.5 

121.3 


15.6 

(18.1)

(2.5)

31 December 2013

32.4 

51.5 


108.1 

127.2 


16.2 

(17.3)

(1.1)

30 September 2013

34.6 

55.1 


113.6 

134.1 


18.1 

(16.6)

1.5 

30 June 2013

36.7 

58.9 


129.4 

151.5 


23.1 

(17.1)

6.0 

31 March 2013

43.0 

70.9 


147.2 

175.1 


26.6 

(18.7)

7.9 

 

Notes:

(1)

Short-term wholesale funding is funding with a residual maturity of less than one year.

 

(2)

Excludes derivative cash collateral.

 

(3)

Principally short-term balances.

 









Funding sources








The table below shows the Group's principal funding sources excluding repurchase agreements.










31 March 2014


31 December 2013


Short-term 

Long-term 



Short-term 

Long-term 



less than 

more than 

Total 


less than 

more than 

Total 

1 year 

1 year 

1 year 

1 year 


£m 

£m 

£m 


£m 

£m 

£m 









Deposits by banks








 derivative cash collateral

19,757 

- 

19,757 


19,086 

- 

19,086 

 other deposits

14,055 

1,559 

15,614 


14,553 

1,690 

16,243 










33,812 

1,559 

35,371 


33,639 

1,690 

35,329 

Debt securities in issue








 commercial paper

1,104 

- 

1,104 


1,583 

- 

1,583 

 certificates of deposit

1,500 

52 

1,552 


2,212 

65 

2,277 

 medium-term notes

9,729 

33,137 

42,866 


10,385 

36,779 

47,164 

 covered bonds

1,762 

7,196 

8,958 


1,853 

7,188 

9,041 

 securitisations

512 

6,763 

7,275 


514 

7,240 

7,754 










14,607 

47,148 

61,755 


16,547 

51,272 

67,819 

Subordinated liabilities

2,346 

21,793 

24,139 


1,350 

22,662 

24,012 









Notes issued

16,953 

68,941 

85,894 


17,897 

73,934 

91,831 









Wholesale funding

50,765 

70,500 

121,265 


51,536 

75,624 

127,160 









Customer deposits








 derivative cash collateral (1)

6,747 

- 

6,747 


7,082 

- 

7,082 

 financial institution deposits

43,633 

1,870 

45,503 


44,621 

2,265 

46,886 

 personal deposits

183,427 

7,213 

190,640 


183,799 

8,115 

191,914 

 corporate deposits

157,177 

4,349 

161,526 


167,100 

4,687 

171,787 









Total customer deposits

390,984 

13,432 

404,416 


402,602 

15,067 

417,669 









Total funding

441,749 

83,932 

525,681 


454,138 

90,691 

544,829 

 

 

Note:

(1)

Cash collateral includes £6,094 million (31 December 2013 - £6,720 million) from financial institutions.

 


 

Appendix 2 Capital and risk management

 

Credit risk

Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts. The quantum and nature of credit risk assumed across the Group's different businesses vary considerably, while the overall credit risk outcome usually exhibits a high degree of correlation with the macroeconomic environment.

 

Loans and related credit metrics

The tables below analyse gross loans and advances (excluding reverse repos) and the related credit metrics by division. Refer to the Group's 2013 Annual Report and Accounts for a description of methodology relating to REIL and provisions.




Credit metrics




Gross loans to

REIL

Provisions

REIL as a %




of gross

Provisions


loans to

as a %

Impairment

Amounts

Banks

Customers

customers

of REIL

 charge

written-off

31 March 2014

£m

£m

£m

£m

%

%

£m

£m










UK Retail

1,014 

113,849 

3,336 

1,937 

2.9 

58 

59 

219 

UK Corporate

913 

103,189 

4,602 

2,272 

4.5 

49 

63 

109 

Wealth

1,566 

16,750 

260 

118 

1.6 

45 

(1)

1 

International Banking

7,869 

38,631 

10 

130 

- 

nm

11 

- 

Ulster Bank

1,715 

26,646 

4,728 

3,390 

17.7 

72 

47 

15 

US Retail & Commercial

225 

53,235 

1,317 

536 

2.5 

41 

73 

77 

Markets

12,132 

24,837 

97 

78 

0.4 

80 

2 

- 

Other

2,206 

5,394 

1 

64 

- 

nm

- 

- 











27,640 

382,531 

14,351 

8,525 

3.8 

59 

254 

421 

RCR

739 

34,043 

23,002 

15,719 

67.6 

68 

106 

792 










Group

28,379 

416,574 

37,353 

24,244 

9.0 

65 

360 

1,213 






Credit metrics









REIL as a %










of gross

Provisions

Quarter ended


Gross loans to



loans to

as a %

Impairment

Of which

Amounts


Banks

Customers

REIL

Provisions

customers

of REIL

charge

RCR (1)

written-off

31 December 2013

£m

£m

£m

£m

%

%

£m

£m

£m











UK Retail

760 

113,152 

3,566 

2,106 

3.2 

59 

68 

- 

206 

UK Corporate

701 

102,547 

6,226 

2,833 

6.1 

46 

659 

410 

169 

Wealth

1,531 

16,764 

277 

120 

1.7 

43 

21 

- 

- 

International Banking

7,971 

35,993 

470 

325 

1.3 

69 

37 

52 

42 

Ulster Bank

591 

31,446 

8,466 

5,378 

26.9 

64 

1,067 

692 

123 

US Retail & Commercial

406 

50,551 

1,034 

272 

2.0 

26 

46 

- 

67 

Markets

12,579 

25,455 

338 

286 

1.3 

85 

25 

18 

- 

Other

2,670 

5,126 

1 

66 

- 

nm

1 

- 

- 












27,209 

381,034 

20,378 

11,386 

5.3 

56 

1,924 

1,372 

607 

Non-Core

431 

36,718 

19,014 

13,839 

51.8 

73 

3,207 

3,118 

586 











Group

27,640 

417,752 

39,392 

25,225 

9.4 

64 

5,131 

4,290 

1,193 

 

Note:

(1)

Pertaining to the creation of RCR and the related change of strategy.

 

 

 

Appendix 2 Capital and risk management

 

Credit risk (continued)

 

Loans and related credit metrics (continued)

 

Key points 

·

Gross loans and advances to customers decreased by £1.2 billion to £416.6 billion. Adjusting for transfers to RCR and from Non-Core underlying loan growth improved, driven by strong mortgage lending in UK Retail, up £1.2 billion to £100.5 billion, and increased volumes in International Banking and US Retail & Commercial, with UK Corporate returning to modest net loan growth. This was offset primarily by disposals and run-off of RCR loans.

 


·

Commercial real estate (CRE) lending net of provisions decreased by £1.3 billion in the quarter to £38.1 billion. Provision coverage on CRE REIL was 65% compared with 66% at 31 December 2013.

 


·

The impairment charge of £360 million was significantly lower than the Q4 2013 charge of £841 million, excluding the RCR related impact, with improving trends in the UK retail and commercial businesses. The RCR charge of £106 million mainly related to CRE.

 


·

Write-offs in the quarter of £1.2 billion included £0.8 billion in RCR.

 


·

REIL decreased by £2.0 billion to £37.3 billion and represented 8.9% of loans as write-offs and repayments outpaced new defaulting balances, particularly within RCR (£1.1 billion). Excluding the impact of the RCR-creation related asset transfers, the decreases were in UK Corporate (£0.5 billion), UK Retail (£0.3 billion) and International Banking (£0.2 billion).

 


·

Provisions decreased by £1.0 billion mainly due to single name write-offs in RCR (£0.7 billion). Provision coverage increased slightly to 65% (31 December 2013 - 64%).


 

Appendix 2 Capital and risk management

 

Credit risk (continued)

 

Loans and related credit metrics: Loans, REIL, provisions and impairments 

The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography (by location of lending office) for the Group.




Credit metrics



31 March 2014




REIL as a

Provisions

Provisions



Gross



% of gross

as a %

as a % of

Impairment

Amounts

loans

REIL

Provisions

loans

of REIL

gross loans

charge

written-off

£m

£m

£m

%

%

%

£m

£m










Central and local government

8,588 

4 

2 

- 

50 

- 

- 

- 

Finance

35,636 

525 

287 

1.5 

55 

0.8 

(3)

- 

Personal

- mortgages

148,401 

5,955 

1,741 

4.0 

29 

1.2 

16 

59 


- unsecured

28,411 

2,231 

1,765 

7.9 

79 

6.2 

106 

255 

Property

59,957 

19,390 

12,570 

32.3 

65 

21.0 

78 

574 

Construction

6,501 

1,327 

787 

20.4 

59 

12.1 

36 

22 

Manufacturing

21,944 

678 

520 

3.1 

77 

2.4 

(21)

31 

Finance leases (1)

13,442 

248 

175 

1.8 

71 

1.3 

- 

15 

Retail, wholesale and repairs

20,012 

1,216 

781 

6.1 

64 

3.9 

31 

28 

Transport and storage

15,990 

1,362 

642 

8.5 

47 

4.0 

24 

11 

Health, education and leisure

15,678 

1,182 

685 

7.5 

58 

4.4 

16 

18 

Hotels and restaurants

6,963 

1,402 

832 

20.1 

59 

11.9 

33 

8 

Utilities

5,204 

124 

77 

2.4 

62 

1.5 

- 

- 

Other

29,847 

1,635 

1,234 

5.5 

75 

4.1 

(35)

192 

Latent

- 

- 

2,084 

- 

- 

- 

79 

- 











416,574 

37,279 

24,182 

8.9 

65 

5.8 

360 

1,213 










of which:









UK









  - residential mortgages

111,089 

1,823 

306 

1.6 

17 

0.3 

7 

13 

  - personal lending

17,228 

1,883 

1,568 

10.9 

83 

9.1 

67 

216 

  - property

42,181 

8,811 

4,840 

20.9 

55 

11.5 

58 

466 

  - construction

4,809 

939 

528 

19.5 

56 

11.0 

28 

17 

  - other

110,854 

4,130 

2,932 

3.7 

71 

2.6 

71 

252 

Europe









  - residential mortgages

17,264 

3,159 

1,269 

18.3 

40 

7.4 

(15)

5 

  - personal lending

1,091 

135 

125 

12.4 

93 

11.5 

3 

6 

  - property

12,579 

10,480 

7,687 

83.3 

73 

61.1 

24 

104 

  - construction

1,340 

346 

227 

25.8 

66 

16.9 

8 

5 

  - other

22,370 

3,766 

3,592 

16.8 

95 

16.1 

54 

48 

US









  - residential mortgages

19,688 

956 

162 

4.9 

17 

0.8 

24 

41 

  - personal lending

9,001 

196 

55 

2.2 

28 

0.6 

36 

33 

  - property

4,590 

74 

18 

1.6 

24 

0.4 

(4)

1 

  - construction

326 

34 

24 

10.4 

71 

7.4 

- 

- 

  - other

28,716 

191 

599 

0.7 

314 

2.1 

8 

2 

RoW









  - residential mortgages

360 

17 

4 

4.7 

24 

1.1 

- 

- 

  - personal lending

1,091 

17 

17 

1.6 

100 

1.6 

- 

- 

  - property

607 

25 

25 

4.1 

100 

4.1 

- 

3 

  - construction

26 

8 

8 

30.8 

100 

30.8 

- 

- 

  - other

11,364 

289 

196 

2.5 

68 

1.7 

(9)

1 











416,574 

37,279 

24,182 

8.9 

65 

5.8 

360 

1,213 










Banks

28,379 

74 

62 

0.3 

84 

0.2 

- 

- 

 

Note:

(1)

Includes instalment credit.


 

 

Appendix 2 Capital and risk management

 

Credit risk (continued)

 

Loans and related credit metrics: Loans, REIL, provisions and impairments (continued)

 




Credit metrics



31 December 2013




REIL as a

Provisions

Provisions

Quarter ended

Gross



% of gross

as a %

as a % of

Impairment

Amounts

loans

REIL

Provisions

loans

of REIL

gross loans

charge

written-off

£m

£m

£m

%

%

%

£m

£m










Central and local government

8,643 

2 

2 

- 

100 

- 

2 

- 

Finance

35,948 

593 

292 

1.6 

49 

0.8 

37 

60 

Personal

- mortgages

148,533 

6,025 

1,799 

4.1 

30 

1.2 

69 

122 


- unsecured

28,160 

2,417 

1,909 

8.6 

79 

6.8 

59 

195 

Property

62,292 

20,283 

13,189 

32.6 

65 

21.2 

3,590 

566 

Construction

6,331 

1,334 

774 

21.1 

58 

12.2 

151 

38 

Manufacturing

21,377 

742 

559 

3.5 

75 

2.6 

100 

20 

Finance leases (1)

13,587 

263 

190 

1.9 

72 

1.4 

14 

18 

Retail, wholesale and repairs

19,574 

1,187 

783 

6.1 

66 

4.0 

157 

23 

Transport and storage

16,697 

1,491 

635 

8.9 

43 

3.8 

392 

75 

Health, education and leisure

16,084 

1,324 

756 

8.2 

57 

4.7 

165 

46 

Hotels and restaurants

6,942 

1,427 

812 

20.6 

57 

11.7 

238 

86 

Utilities

4,960 

131 

80 

2.6 

61 

1.6 

(5)

22 

Other

28,624 

2,103 

1,370 

7.3 

65 

4.8 

341 

(78)

Latent

- 

- 

2,012 

- 

- 

- 

(173)

- 











417,752 

39,322 

25,162 

9.4 

64 

6.0 

5,137 

1,193 










of which:









UK









  - residential mortgages

110,515 

1,900 

319 

1.7 

17 

0.3 

(18)

67 

  - personal lending

17,098 

2,052 

1,718 

12.0 

84 

10.0 

18 

151 

  - property

44,252 

9,797 

5,190 

22.1 

53 

11.7 

1,221 

209 

  - construction

4,691 

941 

515 

20.1 

55 

11.0 

75 

38 

  - other

110,466 

4,684 

3,202 

4.2 

68 

2.9 

869 

104 

Europe









  - residential mortgages

17,540 

3,155 

1,303 

18.0 

41 

7.4 

18 

12 

  - personal lending

1,267 

141 

129 

11.1 

91 

10.2 

3 

6 

  - property

13,177 

10,372 

7,951 

78.7 

77 

60.3 

2,376 

343 

  - construction

979 

351 

227 

35.9 

65 

23.2 

58 

- 

  - other

22,620 

4,057 

3,498 

17.9 

86 

15.5 

379 

45 

US









  - residential mortgages

19,901 

951 

173 

4.8 

18 

0.9 

71 

42 

  - personal lending

8,722 

207 

45 

2.4 

22 

0.5 

21 

36 

  - property

4,279 

85 

19 

2.0 

22 

0.4 

(5)

6 

  - construction

313 

34 

24 

10.9 

71 

7.7 

18 

- 

  - other

27,887 

198 

589 

0.7 

297 

2.1 

(2)

67 

RoW









  - residential mortgages

577 

19 

4 

3.3 

21 

0.7 

(2)

1 

  - personal lending

1,073 

17 

17 

1.6 

100 

1.6 

17 

2 

  - property

584 

29 

29 

5.0 

100 

5.0 

(2)

8 

  - construction

348 

8 

8 

2.3 

100 

2.3 

- 

- 

  - other

11,463 

324 

202 

2.8 

62 

1.8 

22 

56 











417,752 

39,322 

25,162 

9.4 

64 

6.0 

5,137 

1,193 










Banks

27,640 

70 

63 

0.3 

90 

0.2 

(6)

- 

 

Note:

(1)

Includes instalment credit.

 


 

Appendix 2 Capital and risk management

 

Credit risk (continued) 

 

Debt securities

The table below analyses debt securities by issuer and IFRS measurement classifications. US central and local government includes US federal agencies. Financial institutions includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS).











Central and local government

Banks

Other

Corporate

Total



financial


Of which

UK

US

Other

institutions


ABS

31 March 2014

£m

£m

£m

£m

£m

£m

£m


£m











Held-for-trading (HFT)

6,289 

10,251 

31,297 

1,955 

11,017 

2,145 

62,954 


8,215 

Designated as at fair value

- 

- 

108 

1 

18 

- 

127 


15 

Available-for-sale (AFS)

3,806 

11,937 

10,502 

5,115 

18,024 

166 

49,550 


25,100 

Loans and receivables

- 

- 

- 

116 

3,302 

153 

3,571 


3,186 

Held-to-maturity (HTM)

4,535 

- 

- 

- 

- 

- 

4,535 


- 











Long positions

14,630 

22,188 

41,907 

7,187 

32,361 

2,464 

120,737 


36,516 











Of which US agencies

- 

5,892 

- 

- 

13,318 

- 

19,210 


18,399 











Short positions (HFT)

(3,663)

(11,115)

(19,160)

(823)

(1,240)

(1,213)

(37,214)


(6)











Available-for-sale










Gross unrealised gains

140 

357 

508 

76 

427 

12 

1,520 


502 

Gross unrealised losses

(15)

(137)

(7)

(156)

(356)

- 

(671)


(629)











31 December 2013




















Held-for-trading

6,764 

10,951 

22,818 

1,720 

12,406 

1,947 

56,606 


10,674 

Designated as at fair value

- 

- 

104 

- 

17 

1 

122 


15 

Available-for-sale

6,436 

12,880 

10,303 

5,974 

17,330 

184 

53,107 


24,174 

Loans and receivables

10 

1 

- 

175 

3,466 

136 

3,788 


3,423 











Long positions

13,210 

23,832 

33,225 

7,869 

33,219 

2,268 

113,623 


38,286 











Of which US agencies

- 

5,599 

- 

- 

13,132 

- 

18,731 


18,048 











Short positions (HFT)

(1,784)

(6,790)

(16,087)

(889)

(1,387)

(826)

(27,763)


(36)











Available-for-sale










Gross unrealised gains

201 

428 

445 

70 

386 

11 

1,541 


458 

Gross unrealised losses

(69)

(86)

(32)

(205)

(493)

(2)

(887)


(753)


 

 

Appendix 2 Capital and risk management

 

Credit risk (continued) 

 

Key points

·

HFT: Holdings of UK and US government bonds, and ABS decreased, reflecting sales and continued focus on balance sheet reduction and capital management in Markets. The increase in other government bonds primarily reflected higher seasonal market activity in bond auctions compared with the year end. The increase in short positions in UK and US government bonds was driven by market conditions and customer demand, while that in other government reflected hedging of higher long positions.



·

AFS: Government securities decreased by £3.4 billion. The decreases in UK and US government bonds reflected net disposals as gains were realised, as well as transfers of UK government bonds to HTM in Treasury. Holdings in bank issuances fell by £0.9 billion due to maturities and disposals. The increase in financial institution securities of £0.7 billion was primarily due to a build up of ABS in US Retail & Commercial, partially offset by disposals in Treasury as risk exposure was reduced.



·

HTM: UK Government bonds in Treasury liquidity portfolio increased by £4.5 billion following transfers from AFS and purchases.



·

AFS gross unrealised gains and losses: The UK and US government decreases in unrealised gains reflect exposure reductions. The increases in bank and other financial institutions reflect maturities, disposals and market movements.

 


 

Appendix 2 Capital and risk management

 

Credit risk(continued)

 

Derivatives

The table below analyses the Group's derivatives by type of contract. Master netting arrangements and collateral shown below do not result in a net presentation on the balance sheet under IFRS.

31 March 2014


31 December 2013


Notional (1)

Assets

Liabilities


Notional (1)

Assets

Liabilities


£bn

£m

£m


£bn

£m

£m









Interest rate (2)

32,950 

218,164 

208,837 


35,589 

218,041 

208,698 

Exchange rate

4,943 

52,236 

56,122 


4,555 

61,923 

65,749 

Credit

234 

4,425 

4,604 


253 

5,306 

5,388 

Equity and commodity

76 

2,469 

4,943 


81 

2,770 

5,692 











277,294 

274,506 



288,040 

285,527 

Counterparty mtm netting


(232,286)

(232,286)



(242,836)

(242,836)

Cash collateral


(24,292)

(18,730)



(24,288)

(20,429)

Securities collateral


(5,326)

(6,985)



(5,990)

(5,202)









Uncollateralised derivatives


15,390 

16,505 



14,926 

17,060 

 

Notes:

(1)

Includes exchange traded contracts of £2,736 billion (31 December 2013 - £2,298 billion) principally interest rate. Trades are margined daily hence carrying values were insignificant: assets - £16 million (31 December 2013 - £69 million) and liabilities - £216 million (31 December 2013 - £299 million).

(2)

Interest rate notional includes £19,667 billion (31 December 2013 - £22,563 billion) in respect of contracts with central clearing counterparties to the extent related assets and liabilities are offset.

 

Key points 

·

Uncollateralised derivatives remained broadly stable.



·

Interest rate contracts: fair value remained broadly stable as the decrease due to the impact of currency retranslation and trade compression cycles was offset by the downward shift in yields, as Markets is materially positioned to pay floating and receive fixed. The decrease in notionals reflected increased participation in trade compression cycles.



·

Exchange rate, and equity and commodity contracts: Fair value decreased primarily due to the strengthening of sterling against the US dollar and euro.



·

Credit derivatives: The impact of trade compression cycles resulted in a significant decrease in fair values and notionals.

 


 

Appendix 2 Capital and risk management

 

Market risk

Market risk is the risk of losses arising from fluctuations in interest rates, credit spreads, foreign currency rates, equity prices, commodity prices and other factors, such as market volatilities, that may lead to a reduction in earnings, economic value or both. For a description of the Group's basis of measurement, methodologies, value-at-risk (VaR) limitations and distinction between internal and regulatory VaR, refer to pages 318 to 340 of the Group's 2013 Annual Report and Accounts.

 

Trading VaR

The table below analyses the internal VaR for the Group's trading portfolios segregated by type of market risk exposure, and between Markets, RCR and Non-Core.


Quarter ended


31 March 2014


31 December 2013


31 March 2013


Average 

Period end 

Maximum 

Minimum 


Average 

Period end 

Maximum 

Minimum 


Average 

Period end 

Maximum 

Minimum 

Trading VaR (1-day 99%)

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 

Interest rate

19.1 

14.0 

39.8 

10.9 


32.3 

44.1 

44.1 

19.1 


47.7 

38.9 

78.2 

35.4 

Credit spread

31.4 

25.6 

42.8 

24.1 


40.5 

37.3 

48.4 

33.3 


76.3 

70.8 

86.8 

69.8 

Currency

6.4 

3.7 

8.5 

3.7 


5.9 

6.5 

9.6 

3.6 


10.5 

13.0 

20.6 

4.6 

Equity

3.8 

4.5 

6.0 

2.7 


4.3 

4.1 

12.6 

3.2 


6.8 

8.5 

11.6 

4.2 

Commodity

0.5 

0.4 

0.8 

0.3 


0.7 

0.5 

2.5 

0.4 


1.5 

2.6 

3.7 

0.9 

Diversification (1)


(21.1)





(23.7)





(40.1)


















Total

36.3 

27.1 

58.2 

25.8 


58.6 

68.8 

69.7 

42.1 


106.9 

93.7 

118.8 

88.4 
















Markets

32.4 

23.6 

48.8 

22.6 


44.1 

52.4 

54.4 

35.6 


89.8 

77.3 

104.6 

74.7 

RCR (2)

8.0 

7.5 

16.2 

3.5 


n/a 

n/a 

n/a 

n/a 


n/a 

n/a 

n/a 

n/a 

Non-Core

n/a 

n/a 

n/a 

n/a 


15.7 

15.2 

17.7 

14.9 


22.0 

20.3 

24.9 

18.1 

 

Notes:

(1)

The Group benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.

(2)

The detailed RCR perimeter was not finalised at the start of the year. As average, maximum and minimum VaR are measures that require daily data, they have been prepared on a best efforts basis.

 

Key points 

·

The period end and average total VaR were lower in Q1 2014 compared with Q4 2013, driven by reductions in both credit spread and interest rate VaR.

·

The reduction in credit spread VaR was driven by risk reduction as well as CVA and FVA coming into the scope of the internal VaR measure in early February 2014. Previously, only associated hedges were included. This approach reflects a more comprehensive economic view of the risk.

·

The reduction in interest rate VaR was driven by de-risking and repositioning in the Rates business in Markets during January 2014.

 


 

Appendix 2 Capital and risk management

 

Market risk (continued)

 

Capital charges

Following the implementation of CRD IV on 1 January 2014, credit hedges eligible for CVA are no longer included in the modelled market risk capital charges, namely VaR, stressed VaR and the incremental risk charge. Such hedges are now included in the CVA capital charge, which forms part of the capital calculation for counterparty credit risk.

 

Contributors of the Pillar 1 model based position risk requirements (PRR) are presented below.

 

CRR

Basel 2.5


31 March

31 December


2014

2013


£m

£m




Value-at-risk

367 

576 

Stressed VaR

856 

841 

Incremental risk charge

420 

443 

All price risk

5 

8 

Risk not in VaR (RNIV)

456 

218 




Total

2,104 

2,086 

 

Key points 

·

Overall, the Pillar 1 model based PRR was stable during the quarter at £2.1 billion as the decrease in the VaR-based capital charge was offset by an increase in the RNIV based charge.



·

The decrease in the VaR charge was primarily driven by the removal of the CVA eligible hedges as noted above.



·

The RNIV charge increased as, following an agreement with the PRA, the materiality threshold previously in place was removed and all RNIVs are now capitalised.

 


 

 

 

 

 

 

 

 

 

Appendix 3

 

Inter-segmental transfers


 

Appendix 3 Inter-segmental transfers

 

Inter-segmental transfers at 1 January 2014

The tables below summarise the inter-segmental transfers underlying the creation of RCR and the cessation of Non-Core by donating division. RWAs, capital deductions and RWAe are on an end point CRR basis.

 

Creation of RCR



Cessation of Non-Core


Transfers

Transfers





Transfers



 from

 from other

Total




 from other

Transfers


 Non-Core

businesses

RCR



Non-Core

businesses

 to RCR

Funded assets

£bn

£bn

£bn


Funded assets

£bn

£bn

£bn










Ulster Bank

2.3 

2.5 

4.8 


Ulster Bank

2.4 

(0.1)

(2.3)

UK Corporate

1.0 

5.3 

6.3 


UK Corporate

6.4 

(5.4)

(1.0)

International Banking

10.8 

2.2 

13.0 


International Banking

14.3 

(3.5)

(10.8)

Markets

2.1 

2.7 

4.8 


Markets

2.8 

(0.7)

(2.1)






US Retail & Commercial

2.1 

(2.1)

- 










Total

16.2 

12.7 

28.9 


Total

28.0 

(11.8)

(16.2)











Transfers

Transfers





Transfers



 from

 from other

Total




 from other

Transfers


 Non-Core

businesses

RCR



Non-Core

businesses

 to RCR

RWAs

£bn

£bn

£bn


RWAs

£bn

£bn

£bn










Ulster Bank

1.2 

2.1 

3.3 


Ulster Bank

1.4 

(0.2)

(1.2)

UK Corporate

1.6 

8.0 

9.6 


UK Corporate

7.0 

(5.4)

(1.6)

International Banking

16.0 

4.3 

20.3 


International Banking

17.5 

(1.5)

(16.0)

Markets

4.9 

8.6 

13.5 


Markets

6.3 

(1.4)

(4.9)






US Retail & Commercial

2.0 

(2.0)

- 










Total

23.7 

23.0 

46.7 


Total

34.2 

(10.5)

(23.7)




















Transfers

Transfers





Transfers



 from

 from other

Total




 from other

Transfers


 Non-Core

businesses

RCR



Non-Core

businesses

 to RCR

Capital deduction

£m

£m

£m


Capital deduction

£m

£m

£m










Ulster Bank

(54)

613 

559 


Ulster Bank

(54)

- 

54 

UK Corporate

16 

353 

369 


UK Corporate

16 

- 

(16)

International Banking

286 

201 

487 


International Banking

286 

- 

(286)

Markets

(5)

422 

417 


Markets

(5)

- 

5 










Total

243 

1,589 

1,832 


Total

243 

- 

(243)











Transfers

Transfers





Transfers



 from

 from other

Total




 from other

Transfers


 Non-Core

businesses

RCR



Non-Core

businesses

 to RCR

RWAe

£bn

£bn

£bn


RWAe

£bn

£bn

£bn










Ulster Bank

0.7 

8.2 

8.9 


Ulster Bank

0.8 

(0.1)

(0.7)

UK Corporate

1.8 

11.5 

13.3 


UK Corporate

7.2 

(5.4)

(1.8)

International Banking

18.9 

6.3 

25.2 


International Banking

20.4 

(1.5)

(18.9)

Markets

4.8 

12.8 

17.6 


Markets

6.2 

(1.4)

(4.8)






US Retail & Commercial

2.0 

(2.0)

- 










Total

26.2 

38.8 

65.0 


Total

36.6 

(10.4)

(26.2)

 


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