Interim Management Statement

RNS Number : 5058L

Royal Bank of Scotland Group PLC

07 May 2010

 

Divisional performance

The operating profit/(loss) of each division before amortisation of purchased intangible assets, integration and restructuring costs, strategic disposals, bonus tax, Asset Protection Scheme credit default swap - fair value changes, gains on pensions curtailments and write-down of goodwill and other intangible assets is shown below.

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Operating profit/(loss) before impairment losses by division
UK Retail	527	579	371
UK Corporate	504	530	421
Wealth	66	99	100
Global Banking & Markets	1,498	1,001	3,737
Global Transaction Services	233	228	240
Ulster Bank	81	73	71
US Retail & Commercial	183	134	182
RBS Insurance	(50)	(170)	81
Central items	201	(3)	486
Core	3,243	2,471	5,689
Non-Core	145	(725)	(2,652)
Group operating profit before impairment losses	3,388	1,746	3,037
Included in the above are movements in fair value of own debt:
Global Banking & Markets	(32)	106	647
Central items	(137)	164	384
	(169)	270	1,031
Impairment losses by division
UK Retail	387	451	354
UK Corporate	186	190	100
Wealth	4	10	6
Global Banking & Markets	32	130	269
Global Transaction Services	-	4	9
Ulster Bank	218	348	67
US Retail & Commercial	143	153	223
RBS Insurance	-	-	5
Central items	1	2	(3)
Core	971	1,288	1,030
Non-Core	1,704	1,811	1,828
Group impairment losses	2,675	3,099	2,858

Key points

·	Operating profit before impairment losses, adjusted for the movement in fair value of own debt was £3,557 million compared with £1,476 million in Q4 2009. A strong performance from GBM and a positive contribution from Non-Core (operating profit of £145 million versus a loss of £725 million) were the main contributors to the improvement.
·	Compared with Q1 2009 operating profit before impairment losses, adjusted for fair value of own debt was up £1,551 million or 77%. An improvement of £2,797 million in Non-Core more than offset a reduction in GBM which benefited from very favourable market conditions in Q1 2009.

Divisional performance (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Operating profit/(loss) by division
UK Retail	140	128	17
UK Corporate	318	340	321
Wealth	62	89	94
Global Banking & Markets	1,466	871	3,468
Global Transaction Services	233	224	231
Ulster Bank	(137)	(275)	4
US Retail & Commercial	40	(19)	(41)
RBS Insurance	(50)	(170)	76
Central items	200	(5)	489
Core	2,272	1,183	4,659
Non-Core	(1,559)	(2,536)	(4,480)
Group operating profit/(loss)	713	(1,353)	179

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	%	%	%
Net interest margin by division
UK Retail	3.66	3.74	3.46
UK Corporate	2.38	2.47	1.88
Wealth	3.38	3.94	4.47
Global Banking & Markets	1.11	0.89	2.02
Global Transaction Services	7.97	9.81	8.29
Ulster Bank	1.77	1.83	1.87
US Retail & Commercial	2.69	2.45	2.33
Non-Core	1.25	1.17	0.61
Group	1.92	1.83	1.78

	31 March  2010	31 December  2009
	£bn	£bn
Risk-weighted assets by division
UK Retail	49.8	51.3
UK Corporate	91.3	90.2
Wealth	11.7	11.2
Global Banking & Markets	141.8	123.7
Global Transaction Services	20.4	19.1
Ulster Bank	32.8	29.9
US Retail & Commercial	63.8	59.7
Other	9.6	9.4
Core	421.2	394.5
Non-Core	164.3	171.3
	585.5	565.8
Benefit of Asset Protection Scheme	(124.8)	(127.6)
Total	460.7	438.2

UK Retail

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Net interest income	933	939	797
Net fees and commissions - banking	259	283	337
Other non-interest income (net of insurance claims)	56	60	53
Non-interest income	315	343	390
Total income	1,248	1,282	1,187
Direct expenses
- staff	(198)	(211)	(214)
- other	(105)	(105)	(115)
Indirect expenses	(418)	(387)	(487)
	(721)	(703)	(816)
Operating profit before impairment losses	527	579	371
Impairment losses	(387)	(451)	(354)
Operating profit	140	128	17
Analysis of income by product
Personal advances	234	273	305
Personal deposits	277	279	397
Mortgages	422	415	207
Bancassurance	59	56	52
Cards	229	228	204
Other	27	31	22
Total income	1,248	1,282	1,187
Analysis of impairment by sector
Mortgages	48	35	22
Personal	233	282	195
Cards	106	134	137
Total impairment	387	451	354
Loan impairment charge as % of gross customer loans and advances by   sector
Mortgages	0.2%	0.2%	0.1%
Personal	7.1%	8.3%	5.2%
Cards	7.1%	8.6%	9.1%
	1.5%	1.8%	1.5%

UK Retail (continued)

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Return on equity (1)	10.6%	9.3%	1.2%
Net interest margin	3.66%	3.74%	3.46%
Cost:income ratio	56%	54%	69%

	31 March  2010	31 December  2009
	£bn	£bn
Capital and balance sheet
Loans and advances to customers - gross
- mortgages	84.8	83.2
- personal	13.2	13.6
- cards	6.0	6.2
Customer deposits (excluding bancassurance)	89.4	87.2
Assets under management - excluding deposits	5.3	5.3
Risk elements in lending	4.7	4.6
Loan:deposit ratio (excluding repos)	113%	115%
Risk-weighted assets	49.8	51.3

Note:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of divisional risk-weighted assets, adjusted for capital deductions).

Key points 

Q1 2010 compared with Q4 2009

·	Operating profit of £140 million in Q1 2010 was £12 million higher than in the previous quarter. Impairment losses fell £64 million to £387 million, but this was partly offset by lower income and increased costs.
·	UK Retail's focus in 2010 continues to be the growth of profitable mortgage lending, which will help achieve the Group's lending commitments, whilst at the same time building customer deposits to fund the balance sheet growth and reduce the Group's reliance on wholesale funding. o  Mortgage balances were up 2%, with continued good retention of existing customers and new business sourced predominantly from the existing customer base. Gross lending was lower, due to the impact of seasonality and the removal of stamp duty relief, but market share of new mortgage lending, at 10.6%, remained above the 7% share of stock.  o  Unsecured lending fell 3% in the quarter, as repayments continued to exceed sales volumes, which remained subdued in line with a continued focus on lower risk secured lending. o  Deposit growth remained strong, with growth in both savings and current account balances. The strength in savings balance growth in the first quarter enabled the division to reduce its customer funding gap by £1.2 billion.

UK Retail (continued)

Key points (continued)

Q1 2010 compared with Q4 2009 (continued)

·	Net interest income fell by 1%, reflecting the fewer number of days, with underlying net interest income up 1%. Lending product margins continued to widen, although the total asset margin was stable as the mix continued to shift to lower margin secured lending. Deposit margins were stable as savings margins widened slightly, mitigating the impact of low interest rates on current account balances.
·	Non-interest income fell by 8% from the prior quarter, reflecting a full quarter's impact of the repricing of overdraft administration fees, which commenced in Q4 2009. Other fees remained stable, with the current economic climate making growth challenging.
·	Adjusting for the benefit of lower Financial Services Compensation Scheme ('FSCS') levy accruals in Q4 2009, underlying costs fell by 2% as the benefits of process re-engineering and technology investment continued, with headcount down 2% in the quarter.
·	RBS continues to progress towards a more convenient, lower cost operating model, with significant process re-engineering within the branch network and operational centres, leading to an increased level of automated transactions.
·	Impairment losses peaked in Q4 2009, reducing by 14% in Q1 2010. Impairments are expected to continue on a downward trend during 2010 although they will remain sensitive to the external economic environment. o  Mortgage impairments were £48 million on a total book of £85 billion, compared with a charge of £35 million in Q4 2009. The increase in the quarter is due to higher arrears volumes together with increased provision for lower cash recoveries. Arrears rates were stable and remained below the Council of Mortgage Lenders industry average. Unsecured impairment charges amounted to £339 million in the quarter, on a book of £19 billion. This compares with a charge of £416 million in Q4 2009. Industry benchmarks for cards arrears remain stable, with RBS continuing to perform better than the market.
·	Risk-weighted assets reduced in the quarter as the impacts of mortgage volume growth and a retiring cards securitisation were more than offset by lower unsecured balances and improving portfolio credit metrics.

Q1 2010 compared with Q1 2009

·	Net interest margin was 20 basis points higher than in Q1 2009, with widening asset margins across all products and an increasing number of customers choosing to remain on standard variable rate mortgages. Liability margins came under pressure during 2009, with savings margin sacrificed to support balance growth.
·	Savings balances were up 12% on Q1 2009, significantly outperforming the market which remains intensely competitive. Personal current account balances were up 10% over the same period, with a 3% growth in accounts.
·	Costs were down by 12% over the year, with process re-engineering helping to lower staff costs.

UK Corporate

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Net interest income	610	626	499
Net fees and commissions	224	222	194
Other non-interest income	105	100	117
Non-interest income	329	322	311
Total income	939	948	810
Direct expenses
- staff	(205)	(212)	(185)
- other	(100)	(77)	(74)
Indirect expenses	(130)	(129)	(130)
	(435)	(418)	(389)
Operating profit before impairment losses	504	530	421
Impairment losses	(186)	(190)	(100)
Operating profit	318	340	321
Analysis of income by business*
Corporate and commercial lending	630	589	476
Asset and invoice finance	134	140	109
Corporate deposits	176	191	290
Other	(1)	28	(65)
Total income	939	948	810
Analysis of impairment by sector
Banks and financial institutions	2	6	2
Hotels and restaurants	16	40	15
Housebuilding and construction	14	(13)	6
Manufacturing	6	28	4
Other	37	12	19
Private sector education, health, social work, recreational and community   services	8	23	8
Property	66	30	11
Wholesale and retail trade, repairs	18	23	14
Asset and invoice finance	19	41	21
Total impairment	186	190	100

* Revised to reflect a change in allocation between 'Corporate and commercial lending' and 'Asset and invoice finance'. 

UK Corporate (continued)

	Quarter ended
	31 March  2010	31 December  2009*	31 March  2009*
Loan impairment charge as % of gross customer loans and advances   (excluding reverse repurchase agreements) by sector
Banks and financial institutions	0.1%	0.4%	0.2%
Hotels and restaurants	1.0%	2.5%	0.9%
Housebuilding and construction	1.2%	(1.1%)	0.5%
Manufacturing	0.4%	2.0%	0.3%
Other	0.5%	0.2%	0.2%
Private sector education, health, social work, recreational and community   services	0.4%	1.5%	0.5%
Property	0.8%	0.4%	0.1%
Wholesale and retail trade, repairs	0.7%	0.9%	0.5%
Asset and invoice finance	0.9%	1.9%	1.0%
	0.7%	0.7%	0.3%

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Return on equity (1)	11.6%	12.4%	12.7%
Net interest margin	2.38%	2.47%	1.88%
Cost:income ratio	46%	44%	48%

	31 March  2010	31 December  2009*
	£bn	£bn
Capital and balance sheet
Total third party assets	117.4	114.9
Loans and advances to customers - gross
- Banks and financial institutions	6.5	6.3
- Hotels and restaurants	6.4	6.4
- Housebuilding and construction	4.7	4.6
- Manufacturing	5.8	5.7
- Other	30.0	29.9
- Private sector education, health, social work, recreational and community services	8.2	6.2
- Property	33.8	34.2
- Wholesale and retail trade, repairs	10.1	9.8
- Asset and invoice finance	8.8	8.5
Customer deposits	91.4	87.8
Risk elements in lending	2.5	2.3
Loan:deposit ratio (excluding repos)	124%	126%
Risk-weighted assets	91.3	90.2

* Revised to reflect reallocations of the category 'Other' and other minor changes.

Note:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 8% of divisional risk-weighted assets, adjusted for capital deductions).

UK Corporate (continued)

Key points

Q1 2010 compared with Q4 2009

·	Operating profit of £318 million was 6% lower as a result of increased expenses from a £29 million Office of Fair Trading (OFT) penalty arising from a breach of competition law, with income and impairments broadly stable.
·	Net interest income declined by 3% with increased asset income offset by reduced deposit income. Loans and advances to customers increased by 2%, with some early signs of recovery in lending activity and new business asset margins still relatively strong. Customer deposits grew by 4%, with initiatives aimed at increasing customer deposits continuing through the quarter, but deposit margins remained tight. Net interest margin narrowed by 9 basis points, mainly as a result of the lower number of days in the quarter.
·	Non-interest income increased by 2%, with strong cross sales of GBM products partially offset by reduced operating lease activity.
·	Staff costs were £7 million lower, but other expenses increased as a result of a £29 million OFT penalty arising from a breach of competition law.
·	Impairments remained broadly in line with the previous quarter, though the financial condition of many clients remains delicate.
·	Risk-weighted assets grew by 1%, broadly in line with loan growth.

Q1 2010 compared with Q1 2009

·	Operating profit was 1% lower than Q1 2009, with strong income performance offset by higher impairments and direct expenses.
·	Net interest income increased by £111 million and margins increased by 50 basis points reflecting repricing of the loan portfolio and lower funding costs offset by adverse deposit floor impacts. Specific campaigns aimed at generating deposit growth continued to yield benefits, with deposits up 10% and the loan to deposit ratio improving to 124% compared with 139% in Q1 2009.
·	Strong fee and commission income from refinancing contributed to a 6% increase in non-interest income.
·	Apart from the OFT penalty and changes to compensation structures, expenses were in line with Q1 2009.
·	Impairments were £86 million higher, as both specific provisions and charges taken to reflect potential losses in the portfolio not yet specifically identified increased over the course of the year.
·	Risk-weighted assets increased by 6%, largely due to increased risk weightings (mainly in the first half of 2009) reflecting the economic cycle.

Wealth

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Net interest income	143	161	158
Net fees and commissions	95	91	90
Other non-interest income	17	22	21
Non-interest income	112	113	111
Total income	255	274	269
Direct expenses
- staff	(99)	(107)	(90)
- other	(30)	(37)	(33)
Indirect expenses	(60)	(31)	(46)
	(189)	(175)	(169)
Operating profit before impairment losses	66	99	100
Impairment losses	(4)	(10)	(6)
Operating profit	62	89	94
Analysis of income
Private Banking	204	223	219
Investments	51	51	50
Total income	255	274	269

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Net interest margin	3.38%	3.94%	4.47%
Cost:income ratio	74%	64%	63%

	31 March  2010	31 December  2009
	£bn	£bn
Capital and balance sheet
Loans and advances to customers - gross
- mortgages	6.8	6.5
- personal	6.2	4.9
- other	1.5	2.3
Customer deposits	36.4	35.7
Assets under management - excluding deposits	31.7	30.7
Risk elements in lending	0.2	0.2
Loan:deposit ratio (excluding repos)	40%	38%
Risk-weighted assets	11.7	11.2

Wealth (continued)

Key points 

Q1 2010 compared with Q4 2009

·	Operating profit fell 30% to £62 million reflecting lower income and an increase in indirect expenses.
·	Net interest income was down £18 million due to lower spreads on the deposit base and changes to Group Treasury cost allocations.
·	Competition in the deposit market remains intense. However, balances grew by 2%, particularly in the UK businesses, driven by the introduction of new notice products and an expanding client base.
·	Loans and advances grew robustly in response to strong client demand, increasing 6%. Growing volumes and widening lending margins provided some offset to margin pressures within the deposit book. Overall net interest margin tightened significantly.
·	Assets under management benefited from continuing strong equity markets, with balances growing 3%. Some accounts have, however, been lost in the International businesses where competition for private bankers has resulted in client attrition.
·	Total expenses increased 8% compared with Q4 2009, when expenses benefited from lower FSCS levy accruals.

Q1 2010 compared with Q1 2009

·	Operating profit decreased by 34% reflecting significant margin pressure, particularly on the deposit book. Net interest income fell 9%, with a marked reduction in net interest margin partly offset by growth in client deposit and loan balances.
·	Client deposits grew 4% with increases most evident in the UK as new products attracted funds. Assets under management increased modestly.
·	Lending margins widened and loans and advances grew by 18%, reflecting the strong client demand evident during 2009.
·	Expenses rose 12% reflecting changes to compensation approach, partially offset by lower headcount.

Global Banking & Markets

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Net interest income from banking activities	379	324	812
Net fees and commissions receivable	345	286	297
Income from trading activities	1,995	1,522	4,081
Other operating income (net of related funding costs)	73	(63)	(98)
Non-interest income	2,413	1,745	4,280
Total income	2,792	2,069	5,092
Direct expenses
-  staff	(891)	(641)	(888)
-  other	(229)	(247)	(274)
Indirect expenses	(174)	(180)	(193)
	(1,294)	(1,068)	(1,355)
Operating profit before impairment losses	1,498	1,001	3,737
Impairment losses	(32)	(130)	(269)
Operating profit	1,466	871	3,468
Analysis of income by product
Rates - money markets	88	108	853
Rates - flow	699	615	1,297
Currencies & Commodities	295	175	539
Equities	314	457	371
Credit markets	959	232	858
Portfolio management and origination	469	376	527
Fair value of own debt	(32)	106	647
Total income	2,792	2,069	5,092
Analysis of impairment by sector
Manufacturing and infrastructure	(7)	19	16
Property and construction	8	(1)	46
Banks and financial institutions	16	68	4
Other	15	44	203
Total impairment	32	130	269
Loan impairment charge as % of gross customer loans and advances   (excluding reverse repurchase agreements)	0.1%	0.6%	0.7%

Global Banking & Markets (continued)

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Return on equity (1)	28.4%	18.7%	68.8%
Net interest margin	1.11%	0.89%	2.02%
Cost:income ratio	46%	52%	27%

	31 March  2010	31 December  2009
	£bn	£bn
Capital and balance sheet
Loans and advances (including banks)	133.5	127.8
Reverse repos	93.1	73.3
Securities	116.6	106.0
Cash and eligible bills	61.9	74.0
Other	38.6	31.1
Total third party assets (excluding derivatives mark to market)	443.7	412.2
Net derivative assets (after netting)	66.9	68.0
Customer deposits (excluding repos)	47.0	46.9
Risk elements in lending	1.2	1.8
Loan:deposit ratio (excluding repos)	195%	194%
Risk-weighted assets	141.8	123.7

Note:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 10% of divisional risk-weighted assets, adjusted for capital deductions).

Key points 

Q1 2010 compared with Q4 2009

●	Operating profit grew by 68% in the quarter, with solid performances throughout the core franchises and a low impairment charge.
●	Income was 44% higher, excluding fair value of own debt, with notable increases in credit markets and currencies. The credit markets businesses achieved a particularly strong performance in the first quarter of 2010, benefiting from a buoyant market and strong customer demand, particularly in the US mortgage trading business. Aggregate fixed income and currencies revenues were up 81% to £2,041 million.
●	Currencies and rates flow income reflected good levels of market volatility and customer activity.  Equities revenue fell compared with Q4 2009, which had benefited from strong issuance in equity-linked retail notes and a recovery on Lehman-related provisions.

Global Banking & Markets (continued)

Key points (continued)

Q1 2010 compared with Q4 2009 (continued)

●	Portfolio management and origination benefited from stronger debt capital market activity after a slow start. Margins remained firm albeit gross revenues reflected smaller portfolio balances.
●	Total expenses increased 21% as a result of incentive compensation accruals and the impact of adverse exchange rate movements, partly offset by restructuring and efficiency benefits. The compensation ratio for the quarter was 32%.
●	Impairments were low, reflecting the absence of any large single name provisions.
●	Total third party assets, excluding derivatives, were up 8% from the end of December, or 5% at constant exchange rates, reflecting seasonal movements including increased settlement balances. Assets remain within the division's targeted range.
●	The increase in risk-weighted assets was mostly driven by the roll-off of capital relief trades (£16 billion) and the adverse impact of exchange rate movements.

Q1 2010 compared with Q1 2009

●	Operating profit benefited from favourable market conditions, though less buoyant than the exceptional environment experienced in the first quarter of 2009 following the market dislocation at the end of 2008. Revenue levels in the rates flow and money markets businesses were more normal than in Q1 2009 (during which short-term interest rates fell rapidly) and bid/offer spreads, volumes and volatility all reduced to reasonable and expected levels.
●	The Group's credit spreads tightened materially over the 12 months to 31 March 2010 resulting in a slight increase in the carrying value of own debt, compared with a £647 million gain on own debt in the first quarter of 2009 when spreads had widened significantly.
●	Total expenses decreased 5%, reflecting lower performance-related costs and continued restructuring and efficiency benefits.

Global Transaction Services

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Net interest income	217	233	220
Non-interest income	390	404	385
Total income	607	637	605
Direct expenses
- staff	(104)	(102)	(95)
- other	(33)	(51)	(35)
Indirect expenses	(237)	(256)	(235)
	(374)	(409)	(365)
Operating profit before impairment losses	233	228	240
Impairment losses	-	(4)	(9)
Operating profit	233	224	231
Analysis of income by product
Domestic cash management	194	197	202
International cash management	185	203	169
Trade finance	71	67	75
Merchant acquiring	115	134	129
Commercial cards	42	36	30
Total income	607	637	605

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Net interest margin	7.97%	9.81%	8.29%
Cost:income ratio	62%	64%	60%

	31 March  2010	31 December  2009
	£bn	£bn
Capital and balance sheet
Total third party assets	25.6	18.4
Loans and advances	14.3	12.7
Customer deposits	64.6	61.8
Risk elements in lending	0.2	0.2
Loan:deposit ratio (excluding repos)	22%	21%
Risk-weighted assets	20.4	19.1

Global Transaction Services (continued)

Key points

Q1 2010 compared with Q4 2009

·	Operating profit increased 4%, benefiting from foreign exchange movements. A decrease in income was offset by reductions in expenses and impairments.
·	Income decreased by 5%, reflecting margin compression in trade finance and cash management as well as seasonal variations caused by lower spending than in the Christmas period.
·	Expenses decreased 9%, or 5% at constant foreign exchange rates. Allowing for expenses related to a number of large projects and staff compensation adjustments in Q4 2009, expenses still decreased.
·	There were no impairment losses in the quarter.
·	Customer deposit balances at £64.6 billion were up £2.8 billion, with growth in the international business, whilst the US business remained flat.
·	Third party assets increased by £7.2 billion, driven in part by the addition of securities supporting yen clearing activities, as well as by some customer loan growth.

Q1 2010 compared with Q1 2009

·	Operating profit increased by 1% or 5% at constant foreign exchange rates. Income increased by 2% in constant currency terms, with increased international payments activity but declining deposit margins.
·	Customer deposit balances increased 11% driven by higher deposits in the international cash management business.

Ulster Bank

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Net interest income	188	194	202
Net fees and commissions	35	98	46
Other non-interest income	18	(7)	11
Non-interest income	53	91	57
Total income	241	285	259
Direct expenses
- staff	(66)	(76)	(89)
- other	(18)	(18)	(22)
Indirect expenses	(76)	(118)	(77)
	(160)	(212)	(188)
Operating profit before impairment losses	81	73	71
Impairment losses	(218)	(348)	(67)
Operating (loss)/profit	(137)	(275)	4
Analysis of income by business
Corporate	145	146	162
Retail	112	114	93
Other	(16)	25	4
Total income	241	285	259
Analysis of impairment by sector
Mortgages	33	20	14
Corporate
- Property	82	233	12
- Other	91	83	28
Other	12	12	13
Total impairment	218	348	67
Loan impairment charge as % of gross customer loans and advances   (excluding reverse repurchase agreements) by sector
Mortgages	0.8%	0.5%	0.3%
Corporate
- Property	3.3%	9.2%	0.5%
- Other	3.5%	3.0%	0.9%
Other	2.0%	2.0%	2.6%
	2.3%	3.5%	0.6%

Ulster Bank (continued) 

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Return on equity (1)	(18.1%)	(39.8%)	0.7%
Net interest margin	1.77%	1.83%	1.87%
Cost:income ratio	66%	74%	73%

	31 March  2010	31 December  2009
	£bn	£bn
Capital and balance sheet
Loans and advances to customers - gross
- mortgages	16.1	16.2
- corporate
- property	9.9	10.1
- other	10.4	11.0
- other	2.4	2.4
Customer deposits	23.7	21.9
Risk elements in lending
- mortgages	0.7	0.6
- corporate
- property	1.0	0.7
- other	1.1	0.8
- other	0.2	0.2
Loan:deposit ratio (excluding repos)	159%	177%
Risk-weighted assets	32.8	29.9

Note:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of divisional risk-weighted assets, adjusted for capital deductions).

Key points 

Q1 2010 compared with Q4 2009

·	Operating loss for the quarter was £137 million, an improvement of £138 million compared with the previous quarter. The key driver was a lower impairment charge of £218 million, compared with £348 million in Q4 2009, described further below.
·	Net interest income declined by 2% in constant currency terms. Actions to improve lending margins were more than offset by higher funding costs in both the wholesale and deposit markets. Net interest margin for the quarter tightened by 6 basis points, reflecting the higher term funding costs and an increase in the stock of liquid assets.
·	Non-interest income fell by 40% at constant exchange rates due to a non-recurring gain in the Q4 2009 results. Adjusting for this gain, non-interest income was in line with the previous quarter.

Ulster Bank (continued) 

Key points (continued)

Q1 2010 compared with Q4 2009 (continued)

·	Focus continued on building the core retail and commercial deposit base to reduce reliance on the wholesale funding market, increasing customer deposits by 8% at constant exchange rates despite strong competition.
·	Loans to customers fell by 2% at constant exchange rates as repayments continued to exceed new business lending. Mortgage lending continued to target first time buyers through innovative products such as Momentum, Co-Ownership and Secure Step.
·	Total expenses declined by 22% at constant exchange rates, driven by a continued focus on the management of direct costs across the business and the ongoing impact of the  restructuring programme which commenced in 2009, as well as by the non-recurrence of a Q4 2009 provision relating to own property. Ulster Bank successfully completed the merger of its First Active and Ulster Bank businesses in February 2010, which increases efficiency and creates a single brand presence across the island of Ireland.
·	Impairment losses were £130 million lower, primarily as a result of a latent provision charge in Q4 2009 not recurring. Underlying economic conditions remained challenging with continued deterioration in loan performance across the retail and corporate portfolios. Mortgage impairments continued to rise as the impact of budgetary cuts and higher unemployment increased pressure on customers' ability to repay. The Irish property market remains subdued, with continued uncertainty around the impact on property valuations of the Irish Government's National Asset Management Agency.
·	The business continues to develop new product lines and entered the car insurance market during the quarter.

Q1 2010 compared with Q1 2009

·	Income fell, reflecting lower activity levels across all business lines and tighter margins as well as the reduction of overdraft fees in Northern Ireland in the second half of 2009. Expenses have been cut sharply to offset this, with staff costs down 24% at constant exchange rates.
·	Although loans and advances to customers at 31 March 2010 were 5% lower than a year earlier at constant exchange rates, risk-weighted assets increased by 29%, reflecting deteriorating portfolio metrics.

US Retail & Commercial (£ Sterling)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Net interest income	468	423	494
Net fees and commissions	177	148	198
Other non-interest income	75	73	52
Non-interest income	252	221	250
Total income	720	644	744
Direct expenses
- staff	(215)	(200)	(218)
- other	(134)	(130)	(143)
Indirect expenses	(188)	(180)	(201)
	(537)	(510)	(562)
Operating profit before impairment losses	183	134	182
Impairment losses	(143)	(153)	(223)
Operating profit/(loss)	40	(19)	(41)
Analysis of income by product
Mortgages and home equity	115	115	142
Personal lending and cards	114	115	107
Retail deposits	226	195	231
Commercial lending	142	134	141
Commercial deposits	81	108	104
Other	42	(23)	19
Total income	720	644	744
Average exchange rate -  US$/£	1.560	1.633	1.436
Analysis of impairment by sector
Residential mortgages	19	8	23
Home equity	6	13	29
Corporate & Commercial	49	92	108
Other consumer	56	40	63
Securities impairment losses	13	-	-
Total impairment	143	153	223
Loan impairment charge as % of gross customer loans and advances   (excluding reverse repurchase agreements) by sector
Residential mortgages	1.1%	0.5%	1.0%
Home equity	0.1%	0.3%	0.6%
Corporate and Commercial	1.0%	1.9%	1.8%
Other consumer	2.8%	2.1%	2.6%
	1.0%	1.3%	1.4%

US Retail & Commercial (£ Sterling) (continued)

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Return on equity (1)	2.3%	(1.2%)	(2.4%)
Net interest margin	2.69%	2.45%	2.33%
Cost:income ratio	74%	79%	75%

	31 March  2010	31 December  2009
	£bn	£bn
Capital and balance sheet
Total assets	78.2	74.8
Loans and advances to customers (gross):
- residential mortgages	6.7	6.5
- home equity	16.2	15.4
- corporate and commercial	20.5	19.5
- other consumer	8.0	7.5
Customer deposits (excluding repos)	62.5	60.1
Risk elements in lending
- retail	0.4	0.4
- commercial	0.3	0.2
Loan:deposit ratio (excluding repos)	81%	80%
Risk-weighted assets	63.8	59.7
Spot exchange rate - US$/£	1.517	1.622

Note:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of divisional risk-weighted assets, adjusted for capital deductions).

Key points 

·	Sterling weakened over the course of the first quarter, and the average exchange rate also declined.
·	Variances are described in full in the US dollar-based financials set out on pages 45 and 46.

US Retail & Commercial (US Dollar)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	$m	$m	$m
Income statement
Net interest income	730	690	711
Net fees and commissions	276	245	284
Other non-interest income	116	120	75
Non-interest income	392	365	359
Total income	1,122	1,055	1,070
Direct expenses
- staff	(335)	(325)	(313)
- other	(207)	(215)	(206)
Indirect expenses	(293)	(294)	(288)
	(835)	(834)	(807)
Operating profit before impairment losses	287	221	263
Impairment losses	(224)	(252)	(320)
Operating profit/(loss)	63	(31)	(57)
Analysis of income by product
Mortgages and home equity	180	188	204
Personal lending and cards	178	188	154
Retail deposits	351	320	332
Commercial lending	222	219	202
Commercial deposits	126	176	150
Other	65	(36)	28
Total income	1,122	1,055	1,070
Analysis of impairment by sector
Residential mortgages	30	14	33
Home equity	10	23	42
Corporate & Commercial	77	150	154
Other consumer	87	65	91
Securities impairment losses	20	-	-
Total impairment	224	252	320
Loan impairment charge as % of gross customer loans and advances   (excluding reverse repurchase agreements) by sector
Residential mortgages	1.2%	0.5%	1.0%
Home equity	0.2%	0.4%	0.6%
Corporate & Commercial	1.0%	1.9%	1.8%
Other consumer	2.9%	2.1%	2.6%
	1.1%	1.3%	1.4%

US Retail & Commercial (US Dollar) (continued)

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
Performance ratios
Return on equity (1)	2.4%	(1.2%)	(2.3%)
Net interest margin	2.69%	2.45%	2.33%
Cost:income ratio	74%	79%	75%

	31 March  2010	31 December  2009
	$bn	$bn
Capital and balance sheet
Total assets	118.6	121.3
Loans and advances to customers (gross):
- residential mortgages	10.1	10.6
- home equity	24.6	25.0
- corporate and commercial	31.1	31.6
- other consumer	12.1	12.1
Customer deposits (excluding repos)	94.8	97.4
Risk elements in lending
- retail	0.6	0.6
- commercial	0.5	0.4
Loan:deposit ratio (excluding repos)	81%	80%
Risk-weighted assets	96.8	96.9

Note:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of divisional risk-weighted assets, adjusted for capital deductions).

Key points 

Q1 2010 compared with Q4 2009

·	US Retail & Commercial returned to profit in the first quarter, with an operating profit of $63 million compared with an operating loss of $31 million in the previous quarter, driven by higher income and an improving impairments trend. However, economic conditions in the division's core regions remain difficult.
·	Net interest income was up 6%, with loans and advances down 2%, reflecting a lack of credit demand, but net interest margin improved by 24bps to 2.69%. Deposit mix also improved, with continued migration from lower margin time deposits to more favourably priced demand deposit accounts.
·	Non-interest income was up 7%, with higher gains on securities realisations more than offsetting a seasonal reduction in mortgage and deposit fees.
·	Expenses were flat reflecting the timing of payroll taxes offset by lower loan workout and collection costs.
·	Impairment losses were down as loan delinquencies stabilised and net charge-offs declined by 20%. Impairments fell to 1.1% of loans and advances, compared with 1.3% in the previous quarter.

US Retail & Commercial (US Dollar) (continued)

Key points (continued)

Q1 2010 compared with Q1 2009

·	Operating profit increased to $63 million from an operating loss of $57 million primarily reflecting reduced impairment losses.
·	Net interest income was up 3%, with net interest margin improving by 36bps, driven by changes to deposit pricing and mix, offset by lower loan volume.
·	Non-interest income was up 9% reflecting higher gains and debit card income, but mortgage banking fee income moderated from the very high levels reached in the first quarter of 2009.
·	Expenses increased 3% reflecting the finalisation of compensation structures, higher medical costs, and increased deposit insurance levies offset by lower loan workout and collection costs.
·	Impairments declined, following significant loan reserve building in 2009. Net charge-offs were down 15%, with the key areas of improvement being in commercial and auto loans.
·	Customer deposits were down 2%, reflecting pricing strategies on low margin time products, but strong growth was achieved in checking balances.  Over 44,000 consumer checking accounts and more than 12,000 small business checking accounts were added over the year. Consumer checking balances grew by 8% and small business balances by 5%.

RBS Insurance

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Earned premiums	1,130	1,149	1,106
Reinsurers' share	(34)	(37)	(45)
Insurance net premium income	1,096	1,112	1,061
Net fees and commissions	(89)	(84)	(92)
Other income	92	148	108
Total income	1,099	1,176	1,077
Direct expenses
- staff	(63)	(61)	(70)
- other	(47)	(54)	(67)
Indirect expenses	(65)	(75)	(66)
	(175)	(190)	(203)
Gross claims	(982)	(1,175)	(798)
Reinsurers' share	8	19	5
Net claims	(974)	(1,156)	(793)
Operating (loss)/profit before impairment losses	(50)	(170)	81
Impairment losses	-	-	(5)
Operating (loss)/profit	(50)	(170)	76
Analysis of income by product
Own-brand
-  Motor	521	516	477
-  Household and life	224	221	204
Partnerships and broker
-  Motor	136	146	145
-  Household and life	81	88	83
Other (international, commercial and central)	137	205	168
Total income	1,099	1,176	1,077

RBS Insurance (continued)

Key metrics

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
In-force policies (thousands)
- Motor own-brand	4,715	4,858	4,601
- Own-brand non-motor (home, pet, rescue, HR24)	6,367	6,307	5,643
- Partnerships & broker (motor, home, pet, rescue, HR24)	5,185	5,328	5,750
- Other (international, commercial and central)	1,411	1,217	1,211
Gross written premium (£m)	1,090	1,024	1,123
Performance ratios
Return on equity (1)	(5.4%)	(19.1%)	9.5%
Cost:income ratio	16%	16%	19%
Balance sheet
General insurance reserves - total (£m)	7,101	7,030	6,630

Notes:

(1)	Based on divisional operating profit after tax, divided by divisional notional equity (based on regulatory capital).

Key points 

Q1 2010 compared with Q4 2009

●	RBS Insurance's performance improved in the first quarter, with income, as adjusted for the portfolio gains realised in the fourth quarter of 2009, flat but reduced costs and claims.
●	Total in-force policies remained stable, but repricing led to a decline in motor own-brand policies. Action was taken to exit less profitable partnership and broker business, but this was offset by growth in the international, commercial and home policies.
●	Total income declined by 7%, mainly due to lower investment income reflecting the gains realised on the disposal of equity investments in the previous quarter. Losses of £21 million were recorded in relation to an impairment charge in the fixed income portfolio.  Premium income was slightly lower, reflecting reduced business volumes as less profitable lines were exited. Motor policy pricing continued to be increased in response to the development in claims experience.
●	Expenses were down by 8% in the quarter, driven by lower professional fees and indirect costs.
●	Net claims were significantly lower than Q4 2009, which saw increased claims reserving in response to increased bodily injury claims. However, extreme weather conditions resulted in higher than projected claims, preventing a return to profitability in the quarter.
●	Performance is expected to improve over the course of 2010 as initiatives are under way to enhance efficiency and to strengthen pricing models and claims management.

RBS Insurance (continued)

Key points (continued)

Q1 2010 compared with Q1 2009

●	In-force policies grew by 3%, driven by own brands, which increased by 8%. Direct Line motor policies were stable while home policies grew by 2%. Churchill continued to benefit from deployment on selected price comparison websites, with home policies up 27% and motor policies up 11%. The partnerships and broker segment declined by 10% in line with business strategy.
●	Expenses were down 14%, with salary inflation more than offset by a reduction in headcount and lower marketing expenditure.
●	Net claims were 23% higher, principally driven by adverse weather conditions and the higher level of bodily injury claims. Significant price increases were implemented in Q4 2009 and Q1 2010 to mitigate the impact of rising claims costs.
●	The combined operating ratio, including business services costs, was 113.3% compared with 101.5% in Q1 2009, with the impact of increased reserving for adverse weather conditions and bodily injury claims only partially mitigated by expense ratio improvement.

Central items 

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Fair value of own debt	(137)	164	384
Other	337	(169)	105
Central items not allocated	200	(5)	489

Key points 

·	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.

Q1 2010 compared with Q4 2009

·	Items not allocated during the quarter amounted to a net credit of £200 million, an improvement of £205 million on Q4 2009.
·	Fair value of own debt was a net debit of £137 million in the quarter. The Group's credit spreads narrowed over the quarter, resulting in an increase in the carrying value of own debt.
·	Other central items not allocated represented a net credit in the quarter of £337 million versus a debit of £169 million in the previous quarter. This movement was primarily driven by unallocated Group Treasury items, including the impact of economic hedges that do not qualify for IFRS hedge accounting. In addition, a one-off VAT recovery reduced expenses by £80 million and improved net interest income by £90 million in the first quarter.

Q1 2010 compared with Q1 2009

·	Items not allocated during the quarter amounted to a net credit of £200 million, a decline of £289 million on Q1 2009.
·	The charge for change in the fair value of own debt of £137 million compares with a credit of £384 million in the first quarter of 2009, when spreads widened markedly.

Non-Core

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Income statement
Net interest income from banking activities	568	578	395
Net fees and commissions receivable	104	129	172
Loss from trading activities	(131)	(781)	(2,617)
Insurance net premium income	168	171	244
Other operating income	225	11	30
Non-interest income	366	(470)	(2,171)
Total income	934	108	(1,776)
Direct expenses
- staff	(252)	(247)	(301)
- other	(282)	(297)	(256)
Indirect expenses	(122)	(141)	(142)
	(656)	(685)	(699)
Operating profit/(loss) before other operating charges and impairment losses	278	(577)	(2,475)
Insurance net claims	(133)	(148)	(177)
Impairment losses	(1,704)	(1,811)	(1,828)
Operating loss	(1,559)	(2,536)	(4,480)
Analysis of income
Banking & Portfolio	271	37	(131)
International Businesses & Portfolios	632	493	662
Markets	31	(422)	(2,307)
	934	108	(1,776)
Key metrics
Performance ratios
Net interest margin	1.25%	1.17%	0.61%
Cost:income ratio	70%	634%	(39%)

	31 March  2010	31 December  2009
	£bn	£bn
Capital and balance sheet (1)
Total third party assets (including derivatives)  (2)	212.6	220.9
Loans and advances to customers - gross	141.2	149.5
Customer deposits	10.2	12.6
Risk elements in lending	24.0	22.9
Loan:deposit ratio (excluding repos)	1,356%	1,121%
Risk-weighted assets (3)	164.3	171.3

Notes:

(1)	Includes disposal groups.
(2)	Derivatives were £19.1 billion at 31 March 2010 (31 December 2009 - £19.9 billion).
(3)	Includes Sempra: 31 March 2010 Third Party Assets (TPAs) £14.0 billion, RWAs £11.1 billion; (31 December 2009 TPAs £14.2 billion, RWAs £10.2 billion).

Non-Core (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Loss from trading activities
Monoline exposures	-	679	1,645
CDPCs	31	101	198
Asset backed products (1)	55	(105)	376
Other credit exotics	(11)	(16)	537
Equities	7	9	8
Banking book hedges	36	231	183
Other (3)	13	(118)	(330)
	131	781	2,617
Impairment losses
Banking & Portfolio	697	895	818
International Businesses & Portfolios	951	902	720
Markets	56	14	290
	1,704	1,811	1,828
Loan impairment charge as % of gross customer loans and advances (2)
Banking & Portfolio	3.3%	4.1%	3.2%
International Businesses & Portfolios	5.7%	5.3%	3.7%
Markets	33.6%	0.4%	(61.6%)
Total	4.6%	4.6%	2.8%
	£bn	£bn	£bn
Gross customer loans and advances
Banking & Portfolio	78.6	82.0	103.3
International Businesses & Portfolios	62.3	65.6	78.6
Markets	0.3	1.9	1.8
	141.2	149.5	183.7
Risk-weighted assets
Banking & Portfolio	57.2	58.2	70.9
International Businesses & Portfolios	45.4	43.8	51.4
Markets	61.7	69.3	52.1
	164.3	171.3	174.4

Notes:

(1)	Asset backed products include super senior asset backed structures and other asset backed products.
(2)	Includes disposal groups.
(3)	Includes profits in Sempra of £127 million (Q4 2009 - £161 million; Q1 2009 - £248 million).

Non-Core (continued)

Third party assets (excluding derivatives)
	31 December  2009	Run  off (1)	Asset  sales	Roll overs	Impairments	FX	31 March  2010
	£m	£m	£m	£m	£m	£m	£m
Commercial Real Estate	51,328	(1,491)	(54)	226	(1,055)	570	49,524
Corporate	82,616	(4,551)	(1,202)	386	(339)	2,040	78,950
SME	3,942	47	-	-	(31)	63	4,021
Retail	19,882	(429)	(204)	127	(221)	577	19,732
Other	4,610	(1,598)	-	114	(2)	4	3,128
Markets	24,422	(1,244)	(254)	23	(4)	1,202	24,145
Total (excluding derivatives)	186,800	(9,266)	(1,714)	876	(1,652)	4,456	179,500
Markets - Sempra	14,200	(1,200)	-	-	-	1,000	14,000
Total	201,000	(10,466)	(1,714)	876	(1,652)	5,456	193,500

Note:

(1)	Including other items.

Non-Core (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Loan impairment losses by donating division and sector
UK Retail
Mortgages	3	2	1
Personal	2	5	14
Other	-	-	-
Total UK Retail	5	7	15
UK Corporate
Manufacturing and infrastructure	(5)	41	19
Property and construction	54	163	97
Transport	-	2	1
Banks and financials	-	-	2
Lombard	25	13	55
Invoice finance	-	1	-
Other	81	120	32
Total UK Corporate	155	340	206
Global Banking & Markets
Manufacturing and infrastructure	29	84	302
Property and construction	472	683	21
Transport	1	5	151
Telecoms, media and technology	(11)	2	-
Banks and financials	161	97	136
Other	101	38	498
Total Global Banking & Markets	753	909	1,108
Ulster Bank
Mortgages	20	16	8
Commercial investment and development	110	256	8
Residential investment and development	351	(33)	103
Other	51	33	11
Other EMEA	20	20	25
Total Ulster Bank	552	292	155
US Retail & Commercial
Auto and consumer	15	27	28
Cards	14	26	26
SBO/home equity	102	85	156
Residential mortgages	12	13	3
Commercial real estate	63	51	23
Commercial and other	2	8	17
Total US Retail & Commercial	208	210	253
Other
Wealth	28	38	89
Global Transaction Services	3	14	2
Central items	-	1	-
Total Other	31	53	91
Total impairment losses	1,704	1,811	1,828

Non-Core (continued)

	31 March  2010	31 December  2009
	£bn	£bn
Gross loans and advances to customers by donating division and sector (excluding   reverse repurchase agreements)
UK Retail
Mortgages	1.8	1.9
Personal	0.6	0.7
Other	-	-
Total UK Retail	2.4	2.6
UK Corporate
Manufacturing and infrastructure	0.4	0.3
Property and construction	10.2	10.8
Lombard	2.7	2.7
Invoice finance	0.4	0.4
Other	19.0	20.7
Total UK Corporate	32.7	34.9
Global Banking & Markets
Manufacturing and Infrastructure	17.2	17.5
Property and construction	23.4	25.7
Transport	6.0	5.8
Telecoms, media and technology	3.4	3.2
Banks and financials	16.1	16.0
Other	11.7	13.5
Total Global Banking & Markets	77.8	81.7
Ulster Bank
Mortgages	6.1	6.0
Commercial investment and development	4.4	3.0
Residential investment and development	4.1	5.6
Other	1.3	1.1
Other EMEA	1.1	1.0
Total Ulster Bank	17.0	16.7
US Retail & Commercial
Auto and consumer	3.2	3.2
Cards	0.2	0.5
SBO/home equity	3.7	3.7
Residential mortgages	1.2	0.8
Commercial real estate	2.0	1.9
Commercial and other	0.8	0.9
Total US Retail & Commercial	11.1	11.0
Other
Wealth	2.4	2.6
Global Transaction Services	0.8	0.8
RBS Insurance	0.2	0.2
Central items	(4.3)	(3.2)
Total Other	(0.9)	0.4
Total loans and advances to customers (excluding reverse repurchase agreements)	140.1	147.3

Non-Core (continued)

Key points 

Q1 2010 compared with Q4 2009

·	Non-Core results before impairment losses improved from a loss of £725 million to a profit of £145 million.  Losses from trading activities were £650 million lower than in Q4 2009, which included losses on re-designated structured credit assets (£328 million) and the restructuring of some positions with monolines. Underlying asset prices continued to rally, reducing monoline exposures and therefore reserving requirements.
·	Impairment losses decreased by 6%, continuing the improving trend that began to emerge towards the end of 2009, particularly in the corporate sector.
·	Third party assets fell by £7.5 billion as a result of a combination of portfolio asset run-off, disposals and impairments partially offset by £5.5 billion of sterling depreciation.  The disposals of parts of the Asian business, announced in 2009, are on track to complete in the coming months and good progress continues to be made within our wider international businesses with a number of transactions close to completion.
·	RWAs decreased by 4% with adverse currency movements of £2.3 billion, offset by reductions in market risk of £1.1 billion, credit grade changes of £3.1 billion, defaults of £4.2 billion and other decreases of £0.9 billion.
·	Expenses were £29 million lower primarily due to reduced indirect cost allocations.  Underlying direct costs were flat and as planned. Headcount reduced from 15,156 to 14,915 and this trend will continue as whole business disposals previously announced complete.

Q1 2010 compared with Q1 2009

·	Mark to market losses fell markedly by £2.5 billion across a range of asset classes including monolines, CDPCs, asset backed and other exotic credit products as market parameters have stabilised compared with Q1 2009 when asset-backed securities prices were still falling and monoline spreads were rising.
·	Impairments of £1,704 million were 7% lower than in Q1 2009, but remain elevated, representing 4.6% of loans and advances.
·	Third party assets (excluding derivatives) have reduced by 19% largely through a combination of portfolio run off (£22 billion), net disposals (£10 billion) and impairments (£9 billion).
·	RWAs have fallen by 6%, with monoline downgrades and deteriorating credit metrics for leverage and real estate finance assets cancelling out underlying portfolio reductions.

Allocation methodology for indirect costs 

For the purposes of managing the operations of the Group, Business Services and Group Centre directly attributable costs have been allocated to the operating divisions, based on their service usage.  Where services span more than one division, an appropriate measure is used to allocate the costs on a basis which management considers reasonable.  Business Services costs are fully allocated and there are no residual unallocated costs. The residual unallocated costs remaining in the Group centre relate to volatile corporate items that do not naturally reside within a division. 

Business Services costs were 9% lower than in the fourth quarter of 2009, on a constant currency basis, with reductions in property, technology and operational costs.

Treasury costs are allocated to operating divisions as follows: term funding costs are allocated or rewarded based on long-term funding gap or surplus; liquidity buffer funding costs are allocated based on share of overall liquidity buffer derived from divisional stresses; and capital cost or benefit is allocated based on share of divisional risk-adjusted RWAs.

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Business Services costs
Property	442	474	468
Operations	344	366	378
Technology services and support functions	435	510	455
	1,221	1,350	1,301
Allocated to divisions:
UK Retail	(347)	(401)	(400)
UK Corporate	(103)	(111)	(110)
Wealth	(45)	(31)	(30)
Global Banking & Markets	(120)	(121)	(125)
Global Transaction Services	(221)	(238)	(216)
Ulster Bank	(64)	(111)	(66)
US Retail & Commercial	(168)	(158)	(181)
RBS Insurance	(49)	(60)	(56)
Non-Core	(104)	(119)	(117)
	-	-	-
Group centre costs	249	147	276
Allocated to divisions:
UK Retail	(71)	14	(87)
UK Corporate	(27)	(18)	(20)
Wealth	(15)	-	(16)
Global Banking & Markets	(54)	(59)	(68)
Global Transaction Services	(16)	(18)	(19)
Ulster Bank	(12)	(7)	(11)
US Retail & Commercial	(20)	(22)	(20)
RBS Insurance	(16)	(15)	(10)
Non-Core	(18)	(22)	(25)
	-	-	-

Allocation methodology for indirect costs (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Treasury funding costs	97	123	240
Allocated to divisions:
UK Retail	(6)	(21)	(22)
UK Corporate	9	33	(32)
Wealth	13	30	9
Global Banking & Markets	-	71	198
Global Transaction Services	54	47	21
Ulster Bank	(32)	(23)	(8)
US Retail & Commercial	(15)	(47)	(23)
RBS Insurance	-	(12)	(11)
Non-Core	(120)	(201)	(372)
	-	-	-

Average balance sheet - pro forma

	Quarter ended			Year ended
	31 March 2010			31 December 2009
	Average			Average
	Balance	Interest	Rate	Balance	Interest	Rate
	£m	£m	%	£m	£m	%
Assets
Loans and advances to banks	47,254	140	1.19	51,757	831	1.61
Loans and advances to   customers	529,914	4,613	3.48	575,473	21,357	3.71
Debt securities	140,732	856	2.43	125,806	4,202	3.34
Interest-earning assets -   banking business	717,900	5,609	3.13	753,036	26,390	3.50
Trading business	272,773			291,092
Non-interest earning assets	625,932			815,468
Total assets	1,616,605			1,859,596
Liabilities
Deposits by banks	86,048	297	1.38	131,190	2,852	2.17
Customer accounts	340,872	879	1.03	354,963	4,637	1.31
Debt securities in issue	212,133	854	1.61	226,077	4,816	2.13
Subordinated liabilities	32,629	201	2.46	35,348	1,310	3.71
Internal funding of trading   business	(44,490)	(69)	0.62	(75,129)	(508)	0.68
Interest-bearing liabilities -   banking business	627,192	2,162	1.38	672,449	13,107	1.95
Trading business	297,344			331,380
Non-interest-bearing liabilities
- demand deposits	43,946			36,489
- other liabilities	575,751			761,975
Shareholders' equity	72,372			57,303
Total liabilities and   shareholders' equity	1,616,605			1,859,596

Notes:

(1)	Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(2)	Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance long-term assets and liabilities, attributable to policyholders, in view of their distinct nature. As a result, interest income has been increased by £1 million (2009 - £20 million).
(3)	Changes in the fair value of interest-bearing financial instruments designated as at fair value through profit or loss are recorded in other operating income in the consolidated income statement.  In the average balance sheet shown above, interest includes increased interest income and interest expense related to these instruments of £2 million (2009 - £46 million) and £nil million (2009 - £350 million) respectively and the average balances have been adjusted accordingly.
(4)	Interest receivable has been reduced by £90 million in respect of a non recurring receivable

Average balance sheet - pro forma (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	%	%	%
Average yields, spreads and margins of the banking business
Gross yield on interest-earning assets of banking business	3.13	3.28	3.85
Cost of interest-bearing liabilities of banking business	(1.38)	(1.63)	(2.35)
Interest spread of banking business	1.75	1.65	1.50
Benefit from interest-free funds	0.17	0.18	0.28
Net interest margin of banking business	1.92	1.83	1.78
Average interest rates
The Group's base rate	0.50	0.50	1.08
London inter-bank three month offered rates
- Sterling	0.63	0.59	2.09
- Eurodollar	0.26	0.27	1.24
- Euro	0.61	0.68	2.02

 

END

 

 

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