Interim Management Statement

RNS Number : 5059L
Royal Bank of Scotland Group PLC
07 May 2010
 

Condensed consolidated balance sheet

at 31 March 2010 - pro forma

 


31 March 

2010 

31 December 

2009 


£m 

£m 




Assets



Cash and balances at central banks

42,008 

51,548 

Net loans and advances to banks

56,508 

48,777 

Reverse repurchase agreements and stock borrowing

43,019 

35,097 

Loans and advances to banks

99,527 

83,874 

Net loans and advances to customers

553,872 

554,654 

Reverse repurchase agreements and stock borrowing

52,906 

41,040 

Loans and advances to customers

606,778 

595,694 

Debt securities

252,116 

249,095 

Equity shares

21,054 

15,960 

Settlement balances

24,369 

12,024 

Derivatives

462,272 

438,199 

Intangible assets

14,683 

14,786 

Property, plant and equipment

18,248 

17,773 

Deferred taxation

6,540 

6,492 

Prepayments, accrued income and other assets

13,909 

18,604 

Assets of disposal groups

21,394 

18,432 




Total assets

1,582,898 

1,522,481 




Liabilities



Bank deposits

100,168 

115,642 

Repurchase agreements and stock lending

48,083 

38,006 

Deposits by banks

148,251 

153,648 

Customer deposits

425,102 

414,251 

Repurchase agreements and stock lending

81,144 

68,353 

Customer accounts

506,246 

482,604 

Debt securities in issue

239,212 

246,329 

Settlement balances and short positions

70,632 

50,875 

Derivatives

444,223 

421,534 

Accruals, deferred income and other liabilities

28,247 

24,624 

Retirement benefit liabilities

2,670 

2,715 

Deferred taxation

2,226 

2,161 

Insurance liabilities

7,711 

7,633 

Subordinated liabilities

31,936 

31,538 

Liabilities of disposal groups

20,563 

18,857 




Total liabilities

1,501,917 

1,442,518 




Equity



Minority interests

2,305 

2,227 

Owners' equity*

78,676 

77,736 




Total equity

80,981 

79,963 




Total liabilities and equity

1,582,898 

1,522,481 







* Owners' equity attributable to:



Ordinary and B shareholders

70,830 

69,890 

Other equity owners

7,846 

7,846 





78,676 

77,736 



 

Commentary on condensed consolidated balance sheet - pro forma 

 

Total assets of £1,582.9 billion at 31 March 2010 were up £60.4 billion, 4%, compared with 31 December 2009.

 

Cash and balances at central banks were down £9.5 billion, 19% to £42.0 billion due to reduced placings of short-term cash surpluses.

 

Loans and advances to banks increased by £15.7 billion, 19%, to £99.5 billion with reverse repurchase agreements and stock borrowing ('reverse repos') up £7.9 billion, 23% to £43.0 billion and higher bank placings, up £7.8 billion, 16%, to £56.5 billion, largely as a result of increased wholesale funding activity in Global Banking & Markets and Ulster Bank.

 

Loans and advances to customers were up £11.1 billion, 2%, at £606.8 billion reflecting increased reverse repos, up 29%, £11.9 billion to £52.9 billion. Excluding reverse repos, lending decreased by £0.8 billion to £553.9 billion but grew by £0.9 billion before impairment provisions. This reflected growth in UK Corporate & Commercial, £2.7 billion, Global Transaction Services, £1.4 billion, UK Retail, £0.9 billion and Wealth, £0.8 billion and the effect of exchange rate movements, £8.8 billion, following the weakening of sterling against the US dollar since the year end. These were partially offset by planned reductions in Non-Core of £10.0 billion, together with declines in Ulster Bank, £1.1 billion, US Retail & Commercial, £0.9 billion and Global Banking & Markets, £1.8 billion.   

 

Equity shares were up £5.1 billion, 32%, to £21.1 billion, principally due to increased holdings in Global Banking & Markets.

 

Settlement balances rose £12.3 billion to £24.4 billion as a result of increased customer activity from seasonal year end lows.

 

Movements in the value of derivative assets, up £24.1 billion, 5%, to £462.3 billion, and liabilities, up £22.7 billion, 5%, to £444.2 billion, primarily reflect changes in interest rates, the weakening of sterling against the US dollar and growth in trading volumes.

 

Growth in assets and liabilities of disposal groups principally reflects the inclusion of the Global Merchant Services business and increases in respect of the Group's retail and commercial activities in Asia and Latin America.

 

Deposits by banks declined by £5.4 billion, 4%, to £148.3 billion. Reduced inter-bank deposits, down £15.5 billion, 13%, to £100.2 billion, principally in Group Treasury, were offset in part by increased repurchase agreements and stock lending ('repos'), up £10.1 billion, 27%, to £48.1 billion.

 

Customer accounts rose £23.6 billion, 5%, to £506.2 billion. Within this, repos increased £12.8 billion, 19%, to £81.1 billion.  Excluding repos, customer deposits were up £10.8 billion, 3%, to £425.1 billion, reflecting growth in UK Corporate & Commercial, £3.6 billion, UK Retail, £2.3 billion, Global Transaction Services, £2.1 billion, Ulster Bank, £1.7 billion and Wealth, £0.8 billion, together with exchange rate movements of £6.3 billion. This was partially offset by reductions in Non-Core, £3.0 billion, US Retail & Commercial, £1.7 billion and Global Banking & Markets, £1.1 billion.

 

 

 

Commentary on condensed consolidated balance sheet - pro forma (continued) 

 

Debt securities in issue were down £7.1 billion, 3% to £239.2 billion, mainly as a result of reductions in Global Banking & Markets.

 

Subordinated liabilities increased £0.4 billion, 1% to £31.9 billion. The conversion of £0.6 billion non-cumulative US dollar preference shares and the redemption of £0.5 billion dated loan capital were more than offset by the effect of exchange rate movements and other adjustments of £1.5 billion.

 

Owners' equity increased by £0.9 billion, 1% to £78.7 billion. The issue of £0.6 billion ordinary shares on conversion of the US dollar non-cumulative preference shares classified as debt and exchange rate movements, £0.7 billion, were partially offset by an increase in own shares held of £0.4 billion.

 



Condensed consolidated statement of changes in equity

for the period ended 31 March 2010 - pro forma

 


31 March 

2010 

31 December 

2009 


£m 

£m 




Called-up share capital



At beginning of period

14,630 

9,898 

Ordinary shares issued in respect of placing and open offers

4,227 

B shares issued

510 

Other shares issued during the period

401 

Preference shares redeemed during the period

(5)




At end of period

15,031 

14,630 




Paid-in equity



At beginning of period

565 

1,073 

Securities redeemed during the period

(308)

Transfer to retained earnings

(200)




At end of period

565 

565 




Share premium account



At beginning of period

23,523 

27,471 

Ordinary shares issued in respect of placing and open offer, net of £95 million expenses

1,047 

Other shares issued during the period

217 

Preference shares redeemed during the period

(4,995)




At end of period

23,740 

23,523 




Merger reserve



At beginning of period

25,522 

10,881 

Issue of B shares, net of £399 million expenses

24,591 

Transfer to retained earnings

(12,250)

(9,950)




At end of period

13,272 

25,522 




Available-for-sale reserves



At beginning of period

(1,755)

(3,561)

Unrealised gains in the period

528 

1,202 

Realised (gains)/losses in the period

(147)

981 

Taxation

(153)

(377)




At end of period

(1,527)

(1,755)




Cash flow hedging reserve



At beginning of period

(252)

(876)

Amount recognised in equity during the period

(11)

380 

Amount transferred from equity to earnings in the period

10 

513 

Taxation

(19)

(269)




At end of period

(272)

(252)

 



Condensed consolidated statement of changes in equity

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

 


31 March 

2010 

31 December 

2009 


£m 

£m 




Foreign exchange reserve



At beginning of period

4,528 

6,385 

Retranslation of net assets

1,109 

(2,322)

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

(420)

456 

Taxation

12 




At end of period

5,229 

4,528 




Capital redemption reserve



At beginning and end of period

170 

170 




Contingent capital reserve



At beginning of period

(1,208)

Contingent capital agreement  - consideration payable

(1,208)




At end of period

(1,208)

(1,208)




Retained earnings



At beginning of period

12,134 

7,542 

Loss attributable to ordinary and B shareholders and other equity owners

(143)

(2,672)

Equity preference dividends paid

(105)

(878)

Paid-in equity dividends paid, net of tax

(57)

Transfer from paid-in equity

200 

Equity owners gain on withdrawal of minority interest



- gross

629 

- taxation

(176)

Transfer from merger reserve

12,250 

9,950 

Actuarial losses recognised in retirement benefit schemes



- gross

(3,756)

- taxation

1,043 

Net cost of shares bought and used to satisfy share-based payments 

(7)

(16)

Share-based payments



- gross

35 

325 

- taxation




At end of period

24,164 

12,134 




Own shares held



At beginning of period

(121)

(104)

Shares purchased during the period

(374)

(33)

Shares issued under employee share schemes

16 




At end of period

(488)

(121)




Owners' equity at end of period

78,676 

77,736 

                                                                                                                                          

 

 

 

 

 



Condensed consolidated statement of changes in equity

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

 


31 March 

2010 

31 December 

2009 


£m 

£m 




Minority interests



At beginning of period

2,227 

5,436 

Currency translation adjustments and other movements

77 

(152)

Profit attributable to minority interests

12 

648 

Dividends paid

(11)

(313)

Movements in available-for-sale securities



- unrealised gains in the period

23 

- realised gains in the period

(359)

Equity raised

Equity withdrawn and disposals

(2,436)

Transfer to retained earnings

(629)




At end of period

2,305 

2,227 




Total equity at end of period

80,981 

79,963 




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

  attributable as follows:



Minority interests

89 

160 

Preference shareholders

(105)

878 

Paid-in equity holders

57 

Ordinary and B shareholders

871 

(5,747)





855 

(4,652)

 

 



 

Notes to pro forma results 

 

1. Basis of preparation

The pro forma financial information shows the underlying performance of the Group including the results of the ABN AMRO businesses to be retained by the Group.  This information is prepared using the Group's accounting policies and is being provided to give a better understanding of the results of the RBS operations excluding the results attributable to the other Consortium Members.

 

Group operating profit on a pro forma basis excludes:

 

·

amortisation of purchased intangible assets;



·

integration and restructuring costs;



·

strategic disposals;



·

bonus tax;



·

Asset Protection Scheme credit default swap - fair value changes;



·

gains on pensions curtailment; and



·

write-down of goodwill and other intangible assets.

 

2. Loan impairment provisions  

Operating profit/(loss) is stated after charging loan impairment losses of £2,602 million (year ended 31 December 2009 - £13,090 million). The balance sheet loan impairment provisions increased in the quarter ended 31 March 2010 from £15,173 million to £16,827 million and the movements thereon were:

 


31 March 2010




Core 

Non-Core 

Total 

 

 

31 December 

 2009 


£m 

£m 

£m 


£m 







At beginning of period

6,921 

8,252 

15,173 


9,451 

Transfers to disposal groups

(29)

(29)


(321)

Currency translation and other adjustments

30 

185 

215 


(428)

Disposals


(65)

Amounts written-off

(501)

(596)

(1,097)


(6,478)

Recoveries of amounts previously written-off

45 

25 

70 


325 

Charge to income statement

950 

1,652 

2,602 


13,090 

Unwind of discount

(48)

(59)

(107)


(401)








7,397 

9,430 

16,827 


15,173 

 

Provisions at 31 March 2010 include £158 million (31 December 2009 - £157 million) in respect of loans and advances to banks. The table above excludes impairment charges relating to securities.

 



 

Notes to pro forma results (continued)

 

3. Available-for-sale financial assets

Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs and are subsequently measured at fair value with changes in fair value reported in shareholders' equity until disposal, at which stage the cumulative gain or loss is recognised in the income statement.  When there is objective evidence that an available-for-sale financial asset is impaired, any decline in its fair value below original cost is removed from equity and recognised in the income statement.

 

Impairment losses are recognised when there is objective evidence of impairment. The Group reviews its portfolios of available-for-sale financial assets for such evidence which includes: default or delinquency in interest or principal payments; significant financial difficulty of the issuer or obligor; and it becoming probable that the issuer will enter bankruptcy or other financial reorganisation. However, the disappearance of an active market because an entity's financial instruments are no longer publicly traded is not evidence of impairment. Furthermore, a downgrade of an entity's credit rating is not, of itself, evidence of impairment, although it may be evidence of impairment when considered with other available information.  A decline in the fair value of a financial asset below its cost or amortised cost is not necessarily evidence of impairment.  Determining whether objective evidence of impairment exists requires the exercise of management judgment. The unrecognised losses on the Group's available- for-sale debt securities are concentrated in its portfolios of mortgage-backed securities. The losses reflect the widening of credit spreads as a result of the reduced market liquidity in these securities and the current uncertain macroeconomic outlook in the US and Europe. The underlying securities remain unimpaired.

 

During the first quarter of 2010 impairment losses of £28 million (quarter ended 31 December 2009 - £67 million) were charged to the income statement and net unrealised gains of £528 million (year ended 31 December 2009 - £1,202 million) were recognised directly in equity on available-for-sale financial assets. Available-for-sale reserves at 31 March 2010 amounted to net losses of £1,527 million (31 December 2009 - net losses £1,755 million), and the movements were as follows: 

 

 


31 March 

2010 

31 December 

2009 

Available-for-sale reserves

£m 

£m 




At beginning of period

(1,755)

(3,561)

Unrealised gains in the period

528 

1,202 

Realised (gains)/losses in the period

(147)

981 

Taxation

(153)

(377)




At end of period

(1,527)

(1,755)

 

The above excludes movements attributable to minority interests of £336 million in the year ended 31 December 2009 (quarter ended 31 March 2010 - nil).

 

Notes to pro forma results (continued)

 

4. Strategic disposals

 


Quarter ended


31 March 

2010 

31 December 

 2009 

31 March 

 2009 


£m 

£m 

£m 





Gain on sale of investments in:




-  RBS Asset Management's investment strategies business

80 

-  Bank of China (1)

241 

-  Linea Directa

Provision for loss on disposal of:




- Latin American businesses

(22)

(159)

- Asian branches and businesses

(9)

- Other

(10)






53 

(166)

241 

 

Note:

(1)

Including £359 million attributable to minority interests.

 

5. Goodwill

 


Quarter ended


31 March 

2010 

31 December 

 2009 

31 March 

 2009 


£m 

£m 

£m 





Write-down of goodwill and other intangible assets

52 

 

 

 

 



 

Notes to pro forma results (continued)

 

6. Taxation

 

The credit for taxation differs from the tax credit computed by applying the standard UK corporation tax rate of 28% as follows:

 


Quarter ended


31 March 

2010 

31 December 

 2009 

31 March 

 2009 


£m 

£m 

£m 





(Loss)/profit before tax

(21)

134 

(44)





Expected tax (credit)/charge at 28%

(6)

38 

(12)

Unrecognised timing differences

52 

(67)

89 

Non-deductible items

31 

400 

35 

Non-taxable items

(2)

(208)

(83)

Taxable foreign exchange movements

13 

Foreign profits taxed at other rates

128 

159 

65 

Losses in year not recognised

83 

448 

Losses brought forward and utilised

(8)

(65)

Adjustments in respect of prior periods

(172)

(69)

129 





Actual tax charge

106 

649 

228 

 

The Group has recognised a deferred tax asset at 31 March 2010 of £6,540 million (31 December 2009 - £6,492 million), of which £4,496 million (31 December 2009 - £4,803 million) relates to carried forward trading losses in the UK.  Under UK tax legislation, these 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 at 31 March 2010 and concluded that it is recoverable based on base case future profit projections.

 



 

Notes to pro forma results (continued)

 

7. Profit attributable to minority interests

 


Quarter ended


31 March 

2010 

31 December 

 2009 

31 March 

 2009 


£m 

£m 

£m 





Trust preferred securities

10 

(8)

30 

Investment in Bank of China

359 

Sempra

55 

79 

ABN AMRO

Other





Profit attributable to minority interests

12 

47 

471 

 

8. Other owners' dividends

 


Quarter ended


31 March 

2010 

31 December 

 2009 

31 March 

 2009 


£m 

£m 

£m 





Preference shareholders:




Non-cumulative preference shares of US$0.01

105 

63 

114 

Non-cumulative preference shares of €0.01

63 




Paid-in equity holders:




Interest on securities classified as equity, net of tax

18 






105 

144 

114 

 



 

Notes to pro forma results (continued)

 

9. Earnings per ordinary and B share

 

Earnings per ordinary and B share have been calculated based on the following:

 


Quarter ended


31 March 

2010 

31 December 

 2009 

31 March 

 2009 


£m 

£m 

£m 





Earnings




Loss from continuing operations attributable to ordinary and B shareholders

(244)

(758)

(857)





Loss from discontinued operations attributable to ordinary and B shareholders

(4)

(7)

(45)





Ordinary shares in issue during the period (millions)

56,238 

56,227 

39,397 

B shares in issue during the period (millions)

51,000 

5,543 





Weighted average number of ordinary and B shares in issue during the

  period (millions)

107,238 

61,770 

39,397 





Basic loss per ordinary and B share from continuing operations

(0.2p)

(1.2p)

(2.2p)

Amortisation of purchased intangible assets

0.1p 

0.1p 

Integration and restructuring costs

0.1p 

0.3p 

0.7p 

Strategic disposals

0.3p 

(0.6p)

Bonus tax

0.1p 

0.3p 

Asset Protection Scheme credit default swap - fair value changes

0.3p 

Gains on pensions curtailment

(2.6p)

Write-down of goodwill and other intangible assets

0.1p 





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

  operations

0.3p 

(2.7p)

(2.0p)

Loss from Non-Core division attributable to ordinary and B shareholders

0.8p 

4.9p 

11.1p 





Core adjusted earnings per ordinary and B share from continuing

  operations

1.1p 

2.2p 

9.1p 

Core impairment losses

0.5p 

2.2p 

2.2p 





Pre-impairment Core adjusted earnings per ordinary and B share

1.6p 

4.4p 

11.3p 





Basic loss per ordinary and B share from discontinued operations

(0.1p)

 



 

Notes to pro forma results (continued)

 

10. Segmental analysis

 

Analysis of divisional operating profit/(loss)

The following tables provide an analysis of the divisional profit/(loss) for the quarters ended 31 March 2010, 31 December 2009 and 31 March 2009, by main income statement captions. The pro forma divisional income statements on pages 27 to 57 reflect certain presentational reallocations as described in the notes below.  These do not affect the overall operating profit/(loss).

 


Net 

interest 

 income 

Non- 

interest 

 income 

 

Total 

 income 

 

Operating 

 expenses 

 Insurance 

net 

 claims 

 

Impairment 

 losses 

 

Operating profit/(loss)

Quarter ended 31 March 2010

£m 

£m 

£m 

£m 

£m 

£m 

£m 









UK Retail (1)

933 

344 

1,277 

(721)

(29)

(387)

140 

UK Corporate

610 

329 

939 

(435)

(186)

318 

Wealth

143 

112 

255 

(189)

(4)

62 

Global Banking & Markets (2)

373 

2,419 

2,792 

(1,294)

(32)

1,466 

Global Transaction Services

217 

390 

607 

(374)

233 

Ulster Bank

188 

53 

241 

(160)

(218)

(137)

US Retail & Commercial

468 

252 

720 

(537)

(143)

40 

RBS Insurance

89 

1,010 

1,099 

(175)

(974)

(50)

Central items

14 

76 

90 

111 

(1)

200 









Core

3,035 

4,985 

8,020 

(3,774)

(1,003)

(971)

2,272 

Non-Core (3)

499 

435 

934 

(656)

(133)

(1,704)

(1,559)

Amortisation of purchased intangible assets

(65)

(65)

Integration and restructuring costs

(168)

(168)

Strategic disposals

53 

53 

53 

Bonus tax

(54)

(54)

Asset Protection Scheme credit

  default swap - fair value changes

(500)

(500)

(500)










3,534 

4,973 

8,507 

(4,717)

(1,136)

(2,675)

(21)

RFS Holdings minority interest

16 

16 









Total statutory

3,542 

4,981 

8,523 

(4,717)

(1,136)

(2,675)

(5)

 

Notes:

(1)

Reallocation of netting of bancassurance claims of £29 million from non-interest income.

(2)

Reallocation of £6 million between net interest income and non-interest income in respect of funding costs of rental assets, £9 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £3 million.

(3)

Reallocation of £69 million between net interest income and non-interest income in respect of funding costs of rental assets.

 

 

 



 

Notes to pro forma results (continued)

 

10. Segmental analysis (continued)

 

Analysis of divisional operating profit/(loss) (continued)

 


Net 

interest 

 income 

Non- 

interest 

 income 

 

Total 

 income 

 

Operating 

 expenses 

Insurance 

net 

 claims 

 

Impairment 

 losses 

 

Operating 

 profit/(loss)

Quarter ended 31 December 2009

£m 

£m 

£m 

£m 

£m 

£m 

£m 









UK Retail (1)

939 

360 

1,299 

(703)

(17)

(451)

128 

UK Corporate

626 

322 

948 

(418)

(190)

340 

Wealth

161 

113 

274 

(175)

(10)

89 

Global Banking & Markets (2)

406 

1,663 

2,069 

(1,068)

(130)

871 

Global Transaction Services

233 

404 

637 

(409)

(4)

224 

Ulster Bank

194 

91 

285 

(212)

(348)

(275)

US Retail & Commercial

423 

221 

644 

(510)

(153)

(19)

RBS Insurance

86 

1,090 

1,176 

(190)

(1,156)

(170)

Central items

(133)

233 

100 

(103)

(2)

(5)









Core

2,935 

4,497 

7,432 

(3,788)

(1,173)

(1,288)

1,183 

Non-Core (3)

511 

(403)

108 

(685)

(148)

(1,811)

(2,536)

Amortisation of purchased   

  intangible assets

(59)

(59)

Integration and restructuring costs

(228)

(228)

Strategic disposals

(166)

(166)

(166)

Bonus tax

(208)

(208)

Gains on pensions curtailment

2,148 

2,148 

Write-down of goodwill and other

  intangible assets

(52)

(52)










3,446 

3,928 

7,374 

(2,872)

(1,321)

(3,099)

82

RFS Holdings minority interest

(27)

(148)

(175) 

(170)









Total statutory

3,419 

3,780 

7,199 

(2,867)

(1,321)

(3,099)

(88)

 

Notes:

(1)

Reallocation of netting of bancassurance claims of £17 million from non-interest income.

(2)

Reallocation of £82 million between net interest income and non-interest income in respect of funding costs of rental assets, £10 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £92 million.

(3)

Reallocation of £67 million between net interest income and non-interest income in respect of funding costs of rental assets, £64 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £3 million.

 

 

 

 

 

 

 



 

Notes to pro forma results (continued)

 

10. Segmental analysis (continued)

 

Analysis of divisional operating profit/(loss) (continued)

 


Net 

interest 

 income 

Non- 

interest 

 income 

 

Total 

 income 

 

Operating 

 expenses 

Insurance 

net 

 claims 

 

Impairment 

 losses 

 

Operating 

 profit/(loss)

Quarter ended 31 March 2009

£m 

£m 

£m 

£m 

£m 

£m 

£m 









UK Retail (1)

797 

386 

1,183 

(816)

(354)

17 

UK Corporate

499 

311 

810 

(389)

(100)

321 

Wealth

158 

111 

269 

(169)

(6)

94 

Global Banking & Markets (2)

804 

4,288 

5,092 

(1,355)

(269)

3,468 

Global Transaction Services

220 

385 

605 

(365)

(9)

231 

Ulster Bank

202 

57 

259 

(188)

(67)

US Retail & Commercial

494 

250 

744 

(562)

(223)

(41)

RBS Insurance

93 

984 

1,077 

(203)

(793)

(5)

76 

Central items

(51)

458 

407 

79 

489 









Core

3,216 

7,230 

10,446 

(3,968)

(789)

(1,030)

4,659 

Non-Core (3)

322 

(2,098)

(1,776)

(699)

(177)

(1,828)

(4,480)

Amortisation of purchased   

  intangible assets

(85)

(85)

Integration and restructuring costs




(379)

(379)

Strategic disposals

241 

241 

241 










3,538 

5,373 

8,911 

(5,131)

(966)

(2,858)

(44)

RFS Holdings minority interest

26 

(16)

10 

(11)

(1)









Total statutory

3,564 

5,357 

8,921 

(5,142)

(966)

(2,858)

(45)

 

Notes:

(1)

Reallocation of netting of bancassurance claims of £4 million from non-interest income.

(2)

Reallocation of £8 million between net interest income and non-interest income in respect of funding costs of rental assets, £15 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £7 million.

(3)

Reallocation of £73 million between net interest income and non-interest income in respect of funding costs of rental assets.



 

Notes to pro forma results (continued) 

 

11. Financial instruments

 

Classification

The following tables analyse the Group's financial assets and liabilities in accordance with the categories of financial instruments in IAS 39 'Financial Instruments: Recognition and Measurement'.  Assets and liabilities outside the scope of IAS 39 are shown separately.


Held-for- 

trading 

Designated 

as at fair value 

 through 

profit or loss 

Available- 

for-sale 

Loans and 

receivables 

Other 

 financial 

instruments 

(amortised 

 cost) 

Finance 

 leases 

Other 

 assets/ 

liabilities 

Total 

31 March 2010

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 










Cash and balances at

  central banks

42,008 

42,008 

Loans and advances to

  banks

56,718 

42,809 

99,527 

Loans and advances to

  customers 

53,907 

2,045 

537,598 

13,228 

606,778 

Debt securities

113,576 

2,440 

126,592 

9,508 

252,116 

Equity shares

16,085 

2,212 

2,757 

21,054 

Settlement balances

24,369 

24,369 

Derivatives (1)

462,272 

462,272 

Intangible assets

14,683 

14,683 

Property, plant and

  equipment

18,248 

18,248 

Deferred taxation

6,540 

6,540 

Prepayments, accrued

  income and other assets

 

1,501 

12,408 

13,909 

Assets of disposal groups

21,394 

21,394 










Total assets 

702,558 

6,697 

129,349 

657,793 

13,228 

73,273 

1,582,898 










Deposits by banks

62,531 

85,720 

148,251 

Customer accounts

65,878 

5,927 

434,441 

506,246 

Debt securities in issue

4,688 

43,484 

191,040 

239,212 

Settlement balances and

  short positions

47,657 

22,975 

70,632 

Derivatives (1)

444,223 

444,223 

Accruals, deferred income

  and other liabilities

1,865 

492 

25,890 

28,247 

Retirement benefit

  liabilities

2,670 

2,670 

Deferred taxation

2,226 

2,226 

Insurance liabilities

7,711 

7,711 

Subordinated liabilities

1,411 

30,525 

31,936 

Liabilities of disposal

  groups

20,563 

20,563 










Total liabilities

624,977 

50,822 

766,566 

492 

59,060 

1,501,917 










Equity








80,981 


















1,582,898 

 

Note:

(1)

Held-for-trading derivatives include hedging derivatives.



 

Notes to pro forma results(continued)

 

11. Financial instruments (continued)

 

Classification (continued)

 


Held-for- 

trading 

Designated 

as at fair value through 

 profit or loss 

Available- 

for-sale 

Loans and 

 receivables 

 

Other 

financial 

instruments   

(amortised 

 cost) 

Finance 

 leases 

Other 

 assets/ 

liabilities 

Total 

31 December 2009

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 










Cash and balances at

  central banks

51,548 

51,548 

Loans and advances to

  banks

45,449 

38,425 

83,874 

Loans and advances to

  customers

41,684 

1,981 

538,669 

13,360 

595,694 

Debt securities

111,413 

2,429 

125,382 

9,871 

249,095 

Equity shares

11,318 

2,083 

2,559 

15,960 

Settlement balances

12,024 

12,024 

Derivatives (1)

438,199 

438,199 

Intangible assets

14,786 

14,786 

Property, plant and

  equipment

17,773 

17,773 

Deferred taxation

6,492 

6,492 

Prepayments, accrued

  income and other assets

1,421 

17,183 

18,604 

Assets of disposal groups

18,432 

18,432 










Total assets

648,063 

6,493 

127,941 

651,958 

13,360 

74,666 

1,522,481 










Deposits by banks

53,609 

-

100,039 

153,648 

Customer accounts

52,737 

5,256 

424,611 

482,604 

Debt securities in issue

3,925 

41,444 

200,960 

246,329 

Settlement balances and

  short positions

40,463 

10,412 

50,875 

Derivatives (1)

421,534 

421,534 

Accruals, deferred income

  and other liabilities

1,888 

467 

22,269 

24,624 

Retirement benefit liabilities

2,715 

2,715 

Deferred taxation

2,161 

2,161 

Insurance liabilities

7,633 

7,633 

Subordinated liabilities

1,277 

30,261 

31,538 

Liabilities of disposal  

  groups

18,857 

18,857 










Total liabilities

572,268 

47,977 

768,171 

467 

53,635 

1,442,518 










Equity








79,963 


















1,522,481 

 

Note:

(1)

Held-for-trading derivatives include hedging derivatives.

 

 

 



 

Notes to pro forma results (continued)

 

11. Financial instruments (continued)

 

Financial instruments carried at fair value

Refer to Note 11 Financial instruments of the 2009 Annual Report and Accounts for valuation techniques. Certain aspects relating to the valuation of financial instruments carried at fair value are discussed below.

 

Valuation reserves

When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity, credit risk and future administrative costs.

 

Valuation reserves and adjustments comprise:

 


31 March 

2010 

31 December 

2009 


£m 

£m 




Credit valuation adjustments:



Monoline insurers

3,870 

3,796 

Credit derivative product companies

465 

499 

Other counterparties

1,737 

1,588 





6,072 

5,883 




Bid-offer and liquidity reserves

2,965 

2,814 





9,037 

8,697 




Debit valuation adjustments:



Debt securities in issue

(2,151)

(2,331)

Derivatives

(475)

(467)




Total debit valuation adjustments

(2,626)

(2,798)




Total reserves

6,411 

5,899 

 

Credit valuation adjustments (CVA) represent an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures. CVA is discussed in Risk and capital management - Other risk exposures: Credit valuation adjustments (page 112). Bid-offer and liquidity reserves and own credit (page 80) are discussed below.

 

Bid-offer and liquidity reserves

Fair value positions are adjusted to bid or offer levels, by marking individual cash based positions directly to bid or offer or by taking bid-offer reserves calculated on a portfolio basis for derivatives exposures.

 

 



 

Notes to pro forma results (continued) 

 

11. Financial instruments (continued)

 

Own credit

In accordance with IFRS, when valuing financial liabilities recorded at fair value, the Group takes into account the effect of its own credit standing.  The categories of financial liabilities on which own credit spread adjustments are made are issued debt, including structured notes, and derivatives. An own credit adjustment is applied to positions where it is believed that counterparties would consider the Group's creditworthiness when pricing trades. 

 

For issued debt and structured notes, this adjustment is based on independent quotes from market participants for the debt issuance spreads above average inter-bank rates (at a range of tenors), which the market would demand when purchasing new senior or subordinated debt issuances from the Group.  Where necessary, these quotes are interpolated using a curve shape derived from credit default swap prices. 

 

The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserves are stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.

 

The table below details the own credit spread adjustments on liabilities recorded during the period. 

 


Debt securities in issue





Held-for 

-trading (1) 

Designated as at 

 fair value through 

 profit and loss 

Total 


Derivatives (2) 

Total 

Cumulative own credit adjustment

£m 

£m 

£m 


£m 

£m 








At 31 March 2010

1,224 

927 

2,151 


475 

2,626 

At 31 December 2009

1,237 

1,094 

2,331 


467 

2,798 

 

Notes:

(1)

The held-for-trading portfolio consists of wholesale and retail note issuances.

(2)

The adjustment takes into account collateral posted by the Group and the effect of master netting arrangements.

 

 



 

Notes to pro forma results (continued)

 

11. Financial instruments (continued)

 

Valuation hierarchy

The table below analyses financial instruments carried at fair value by valuation method.

 


31 March 2010


31 December 2009


Total 

Level 1 

Level 2 

Level 3 


Total 

Level 1 

Level 2 

Level 3 


£bn 

£bn 

£bn 

£bn 


£bn 

£bn 

£bn 

£bn 











Assets










Loans and advances:










72.6 

72.6 


53.2 

53.2 

- other

40.1 

38.9 

1.2 


35.9 

34.8 

1.1 












112.7 

111.5 

1.2 


89.1 

88.0 

1.1 

Debt securities










139.7 

123.2 

16.5 


134.1 

118.2 

15.9 

52.6 

52.0 

0.6 


57.1 

56.6 

0.5 

4.5 

4.1 

0.4 


4.1 

4.0 

0.1 

3.8 

1.1 

2.7 


3.6 

2.6 

1.0 

9.6 

7.4 

2.2 


8.8 

8.0 

0.8 

6.2 

4.6 

1.6 


6.1 

5.2 

0.9 

10.9 

10.4 

0.5 


10.5 

9.9 

0.6 

- other (7)

15.3 

15.0 

0.3 


14.9 

14.7 

0.2 












242.6 

123.2 

111.1 

8.3 


239.2 

118.2 

116.9 

4.1 

Equity shares

21.0 

16.4 

2.8 

1.8 


16.0 

12.2 

2.5 

1.3 

Derivatives










75.4 

75.3 

0.1 


68.3 

68.1 

0.2 

343.1 

0.1 

341.3 

1.7 


321.5 

0.3 

319.7 

1.5 

6.5 

6.5 


6.7 

0.3 

6.1 

0.3 

0.9 

0.9 


1.4 

1.4 

- credit - other

36.4 

32.6 

3.8 


40.3 

0.1 

37.2 

3.0 












462.3 

0.1 

455.7 

6.5 


438.2 

0.7 

431.1 

6.4 











Total assets

838.6 

139.7 

681.1 

17.8 


782.5 

131.1 

638.5 

12.9 











Liabilities










Deposits:










- repos

82.0 

82.0 


62.5 

62.5 

- other

52.3 

52.2 

0.1 


49.1 

49.0 

0.1 












134.3 

134.2 

0.1 


111.6 

111.5 

0.1 

Debt securities in issue

48.2 

46.2 

2.0 


45.4 

43.1 

2.3 

Short positions

47.7 

34.0 

12.6 

1.1 


40.5 

27.1 

13.2 

0.2 

Derivatives










- foreign exchange

72.7 

72.6 

0.1 


63.6 

63.6 

- interest rate

330.4 

0.2 

329.4 

0.8 


309.3 

0.1 

308.4 

0.8 

- equities and commodities

9.3 

0.8 

8.4 

0.1 


9.5 

0.8 

8.5 

0.2 

- credit - other

31.8 

31.3 

0.5 


39.1 

38.2 

0.9 












444.2 

1.0 

441.7 

1.5 


421.5 

0.9 

418.7 

1.9 

Other financial liabilities (9)

1.4 

1.4 


1.3 

1.3 











Total liabilities

675.8 

35.0 

636.1 

4.7 


620.3 

28.0 

587.8 

4.5 

 

For notes to this table refer to page 82.

 

Notes to pro forma results (continued)

 

11. Financial instruments (continued)

 

Valuation hierarchy (continued)

Amounts classified as available-for-sale included in the table above comprise:

 


31 March 2010


31 December 2009


Total 

Level 1 

Level 2 

Level 3 


Total 

Level 1 

Level 2 

Level 3 


£bn 

£bn 

£bn 

£bn 


£bn 

£bn 

£bn 

£bn 











Debt securities










64.9 

57.8 

7.1 


64.9 

58.3 

6.6 

37.2 

37.0 

0.2 


37.2 

37.0 

0.2 

1.8 

1.7 

0.1 


1.6 

1.6 

1.9 

0.5 

1.4 


1.6 

1.2 

0.4 

5.8 

4.5 

1.3 


5.5 

5.4 

0.1 

4.7 

3.4 

1.3 


4.6 

4.0 

0.6 

2.4 

2.4 


2.5 

2.5 

- other (7)

7.9 

7.9 


7.5 

7.5 












126.6 

57.8 

64.5 

4.3 


125.4 

58.3 

65.8 

1.3 

Equity shares

2.8 

0.3 

1.8 

0.7 


2.6 

0.3 

1.6 

0.7 












129.4 

58.1 

66.3 

5.0 


128.0 

58.6 

67.4 

2.0 

 

Notes:

(1)

For details on levels 1, 2 and 3 refer to Note 11 - Financial instruments of the 2009 Annual Report and Accounts.

(2)

Residential mortgage-backed securities.

(3)

Commercial mortgage-backed securities.

(4)

Collateralised debt obligations.   

(5)

Collateralised loan obligation.

(6)

Asset-backed securities.

(7)

Primarily includes debt securities issued by banks and building societies.

(8)

Asset Protection Scheme.

(9)

Comprises subordinated liabilities.

 

Key points

·

Asset portfolios increased by £56.1 billion since 31 December 2009. This reflects increases in reverse repos (£19.4 billion), government debt securities (£5.6 billion), equity shares (£5.0 billion), other loans and advances (£4.2 billion) and a net decrease in ABS (£3.0 billion). Increases in derivative assets (£24.1 billion) are largely offset by a similar increase in derivative liabilities.



·

Total liabilities increased by £55.5 billion with increases in derivative liabilities (£22.7 billion) and repos (£19.5 billion) being the largest contributors. Short positions and other deposits increased by £7.2 billion and £3.2 billion over the quarter respectively.



·

Level 3 assets increased by £4.9 billion due primarily to transfers from level 2, reflecting the movement of some lower quality CDO and CLO positions in the Non-Core division, primarily available-for-sale, where recent price discovery indicates uncertainty in observability. In addition, the use of more conservative internal recovery rates for the calculation of CVA for certain monolines have resulted in these positions moving to level 3.



·

Level 3 liabilities remained broadly unchanged with increases in short positions reflecting transfers of lower quality ABS to level 3 as in assets above, largely being offset by decreases in other categories.

 

Notes to pro forma results (continued)

 

11.  Financial instruments (continued)

 

Reclassification of financial instruments

During 2008, as permitted by amended IAS 39, the Group reclassified certain financial assets from the held-for-trading and available-for-sale categories into loans and receivables and from the held-for-trading category into the available-for-sale category. There were further reclassifications from the held-for-trading to loans and receivables during 2009.  There were no reclassifications in the first quarter of 2010.  The following tables detail the effect of the reclassifications and the balance sheet values of the assets.

 


Reduction in profit 

 for the quarter 

 ended 31 March 

 2010 as a result of 

 reclassifications   


£m 



From held-for-trading to:


Available-for-sale

50 

Loans and receivables

157 




207 

 


31 March 2010

All reclassifications


31 December 2009

All reclassifications


Carrying value 

Fair value 


Carrying 

 value 

Fair value 


£m 

£m 


£m 

£m 







From held-for-trading to:






Available-for-sale

7,682 

7,682 


7,629 

7,629 

Loans and receivables

11,694 

9,775 


12,933 

10,644 








19,376 

17,457 


20,562 

18,273 

From available-for-sale to:






Loans and receivables

924 

774 


869 

745 








20,300 

18,231 


21,431 

19,018 

 

During the quarter ended 31 March 2010, the balance sheet value of reclassified assets decreased by £1.1 billion.  This was primarily due to disposals and repayments of £1.7 billion across a range of asset backed securities and loans.  Other movements include impairment charges of £0.1 billion offset by foreign exchange rate gains of £0.8 billion and gains taken to the available-for-sale reserve of £0.1 billion. 

 

For assets reclassified from held-for-trading to available-for-sale, net unrealised losses recorded in equity at 31 March 2010 were £0.5 billion (31 December 2009 - £0.6 billion).



 

Notes to pro forma results (continued)

 

12. Debt securities

 


UK central 

 and local 

government 

US central 

 and local 

government 

Other 

 central and 

 local 

government 

Bank and 

 building 

 society 

Asset 

 backed 

 securities 

Corporate 

Other 

Total 


£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 










31 March 2010









Held-for-trading

8,231 

18,058 

47,919 

6,308 

25,004 

7,376 

680 

113,576 

Designated at fair value

  through profit or loss

76 

490 

378 

397 

1,093 

2,440 

Available-for-sale

8,607 

16,189 

40,089 

7,884 

51,381 

2,421 

21 

126,592 

Loans and receivables

11 

14 

7,603 

1,877 

9,508 











16,925 

34,250 

88,498 

14,584 

84,385 

12,767 

707 

252,116 










31 December 2009









Held-for-trading

8,128 

10,427 

50,150 

6,103 

28,820 

6,892 

893 

111,413 

Designated at fair value

  through profit or loss

122 

385 

418 

394 

1,087 

20 

2,429 

Available-for-sale

18,350 

12,789 

33,727 

7,472 

50,464 

2,550 

30 

125,382 

Loans and receivables

7,924 

1,853 

93 

9,871 











26,601 

23,219 

84,262 

13,993 

87,602 

12,382 

1,036 

249,095 

 

Key points

·

55% (31 December 2009 - 54%) of the debt securities portfolios were issued by central and local governments.  Of those issued by governments other than the UK and US, 90% were issued by G10 governments.



·

Of the ABS portfolios, 70% (31 December 2009 - 74%) were AAA rated and 47% (31 December 2009 - 49%) were guaranteed or effectively guaranteed by G10 governments.



·

59% (31 December 2009 - 63%) of corporate debt securities are investment grade.



·

Excluding held-for-trading positions in GBM, the Group held debt securities issued by the Greek government with a carrying value of £1.3 billion in Group Treasury, which were accounted for as available-for-sale (AFS).  This balance is net of fair value losses of £247 million after tax.  Further fair value losses on these AFS securities of £183 million after tax were incurred in April 2010.

 

See Risk and capital management section for additional information on ratings. 



 

Notes to pro forma results (continued)

 

13. Derivatives

 


31 March 2010


31 December 2009


Assets 

Liabilities 


Assets 

Liabilities 


£m 

£m 


£m 

£m 







Exchange rate contracts






Spot, forwards and futures

34,054 

32,482 


26,559 

24,763 

Currency swaps

26,541 

26,594 


25,221 

23,337 

Options purchased

14,828 


16,572 

Options written

13,653 


15,499 







Interest rate contracts






Interest rate swaps

284,442 

273,766 


263,902 

251,829 

Options purchased

56,142 


55,471 

Options written

54,504 


55,462 

Futures and forwards

2,469 

2,146 


2,088 

2,033 







Credit derivatives

37,284 

31,818 


41,748 

39,127 







Equity and commodity contracts

6,512 

9,260 


6,638 

9,484 








462,272 

444,223 


438,199 

421,534 

 

The Group enters into master netting agreements in respect of its derivative activities. These arrangements give the Group a legal right to set-off derivative assets and liabilities with the same counterparty.  They do not result in a net presentation in the Group's balance sheet for which IFRS requires an intention to settle net or to realise the asset and settle the liability simultaneously, as well as a legally enforceable right to set-off.  These agreements are, however, effective in reducing the Group's credit exposure from derivative assets.  The Group has executed master netting agreements with the majority of its derivative counterparties resulting in a significant reduction in its net exposure to derivative assets.

 

Key point

·

Of the £462 billion (31 December 2009 - £438 billion) derivatives assets, £368 billion (31 December 2009 - £359 billion) were under netting agreements. Furthermore, the Group holds substantial collateral against this net derivative asset exposure.

 



 

Notes to pro forma results (continued)

 

14. Analysis of contingent liabilities and commitments

 


31 March 2010




Core 

Non-Core 

Total 


31 December 

 2009 


£m 

£m 

£m 


£m 







Contingent liabilities






Guarantees and assets pledged as collateral security

32,924 

3,123 

36,047 


36,579 

Other contingent liabilities

12,824 

679 

13,503 


13,410 








45,748 

3,802 

49,550 


49,989 







Commitments






Undrawn formal standby facilities, credit lines and other

  commitments to lend

251,625 

30,997 

282,622 


289,135 

Other commitments

1,233 

2,631 

3,864 


3,483 








252,858 

33,628 

286,486 


292,618 







Total contingent liabilities and commitments

298,606 

37,430 

336,036 


342,607 

 

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 to pro forma results (continued)

 

15. Analysis of non-interest income, expenses and impairment losses

 


Quarter ended


31 March 

2010 

31 December 

2009 

31 March 

2009 


£m 

£m 

£m 





Fees and commissions receivable

2,051 

2,353 

2,276 

Fees and commissions payable




- banking

(466)

(810)

(562)

- insurance related

(106)

(84)

(129)





Net fees and commissions

1,479 

1,459 

1,585 





Foreign exchange

452 

572 

852 

Interest rate

960 

(386)

1,720 

Credit

506 

109 

(1,446)

Other

348 

416 

534 





Income from trading activities

2,266 

711 

1,660 





Operating lease and other rental income

343 

341 

337 

Changes in the fair value of own debt

(210)

349 

741 

Changes in the fair value of securities and other financial assets

  and liabilities

14 

54 

(383)

Changes in the fair value of investment properties

(3)

36 

(4)

Profit/(loss) on sale of securities

147 

92 

(114)

Profit on sale of property, plant and equipment

13 

14 

(Loss)/profit on sale of subsidiaries and associates

(38)

Life business profits/(losses)

35 

24 

(24)

Dividend income

20 

17 

14 

Share of profits less losses of associated entities

14 

(83)

(7)

Other income

17 

(189)

(52)





Other operating income

386 

616 

531 





Non-interest income (excluding insurance premiums)

4,131 

2,786 

3,776 




Insurance net premium income

1,289 

1,308 

1,356 





Total non-interest income

5,420 

4,094 

5,132 





Staff costs




- wages, salaries and other staff costs

2,195 

1,957 

2,183 

- social security costs

192 

179 

160 

- pension costs

166 

110 

167 

Premises and equipment

528 

618 

644 

Other

935 

1,075 

1,046 





Administrative expenses

4,016 

3,939 

4,200 

Depreciation and amortisation

414 

534 

467 





Operating expenses

4,430 

4,473 

4,667 

 



 

Notes to pro forma results (continued)

 

15. Analysis of non-interest income, expenses and impairment losses (continued)

 


Quarter ended


31 March 

2010 

31 December 

2009 

31 March 

2009 


£m 

£m 

£m 




General insurance

1,107 

1,304 

970 

Bancassurance

29 

17 

(4)





Insurance net claims

1,136 

1,321 

966 









Loan impairment losses

2,602 

3,032 

2,276 

Securities impairment losses

73 

67 

582 





Impairment losses

2,675 

3,099 

2,858 

 

Note:

(1)

The data above exclude purchased intangibles amortisation, integration and restructuring costs, strategic disposals, write-down of goodwill and other intangible assets, gains on pensions curtailment, Asset Protection Scheme credit default swap and bonus tax.

 

 


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