SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 6-K


Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

14 May 2010
 
The Royal Bank of Scotland Group plc

Gogarburn
PO Box 1000
Edinburgh EH12 1HQ
Scotland
United Kingdom

(Address of principal executive offices)


Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F    X  
Form 40-F   ___

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):___

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):___

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes   ___
No       X   

If "Yes" is marked, indicate below the file number assigned to
the registrant in connection with Rule 12g3-2(b): 82-            

This report on Form 6-K shall be deemed incorporated by reference into the company's Registration Statement on Form F-3 (File No. 333-162219) and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.
 
 
 
 
 
Contents
   
 
Page
   
Forward-looking statements
3
   
Presentation of information
4
   
Comment
6
   
Condensed consolidated income statement
8
   
Highlights
9
   
Business and strategic update
13
   
Results
16
   
Condensed consolidated balance sheet
16
   
Commentary on condensed consolidated balance sheet
17
   
Key metrics
19
   
Results summary
20
   
Divisional performance
26
UK Retail
28
UK Corporate
31
Wealth
34
Global Banking & Markets
36
Global Transaction Services
39
Ulster Bank
41
US Retail & Commercial
44
RBS Insurance
49
Central items
52
Non-Core
53
   
Allocation methodology for indirect costs
59
   
Condensed consolidated income statement
61
   
Condensed consolidated statement of comprehensive income
62
   
Condensed consolidated balance sheet
63
   
Condensed consolidated statement of changes in equity
64
   
Notes
67

 
1
 

Contents (continued)
   
 
Page 
   
Risk and capital management
75
   
Presentation of information
75
   
Capital
75
   
Credit risk
77
   
Funding and liquidity risk
88
   
Market risk
91
   
Other risk exposures
94
   
   
Additional information
108
   
Selected financial data
108
   
Appendix 1 The Asset Protection Scheme
  
   
Signature page
  

 
2
 
 
Forward-looking statements

Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘believes’, ‘should’, ‘intend’, ‘plan’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on such expressions.

In particular, this document includes forward-looking statements relating, but not limited to: the Group’s restructuring plans, capitalisation, portfolios, capital ratios, liquidity, risk weighted assets, return on equity, cost:income ratios, leverage and loan:deposit ratios, funding and risk profile; the Group’s future financial performance; the level and extent of future impairments and write-downs; the protection provided by the APS; and the Group’s potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk.  These statements are based on current plans, estimates and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements.  For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations.  By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general geopolitical and economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the global economy and instability in the global financial markets, and their impact on the financial industry in general and on the Group in particular; the full nationalisation of the Group or other resolution procedures under the Banking Act 2009; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, credit spreads, bond prices, commodity prices and equity prices; changes in UK and foreign laws, regulations, accounting standards and taxes, including changes in regulatory capital regulations and liquidity requirements; a change of UK Government or changes to UK Government policy; changes in the Group’s credit ratings; the Group’s participation in the Asset Protection Scheme (APS) and the effect of such Scheme on the Group’s financial and capital position; the conversion of the B Shares in accordance with their terms; the ability to access the contingent capital arrangements with HM Treasury; limitations on, or additional requirements imposed on, the Group’s activities as a result of HM Treasury’s investment in the Group; the Group’s ability to attract or retain senior management or other key employees; changes in competition and pricing environments; the financial stability of other financial institutions, and the Group’s counterparties and borrowers; the value and effectiveness of any credit protection purchased by the Group; the extent of future write-downs and impairment charges caused by depressed asset valuations; the ability to achieve revenue benefits and cost savings from the integration of certain of RBS Holdings N.V.’s businesses and assets; general operational risks; the inability to hedge certain risks economically; the ability to access sufficient funding to meet liquidity needs; the ability to complete restructurings on a timely basis, or at all, including the disposal of certain non-core assets and assets and businesses required as part of the EC State Aid approval; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing.

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

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

 
3
 
 
Presentation of information

Acquisition of ABN AMRO

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

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

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

Statutory results

RFS Holdings is jointly owned by the Consortium Members. It is controlled by RBS and is therefore fully consolidated in its financial statements. Consequently, the statutory results of the Group include the results of ABN AMRO. The interests of Fortis, and its successor the State of the Netherlands, and Santander in RFS Holdings are included in minority interests. From 1 April 2010, RBS will cease to consolidate the Consortium Members’ interests in ABN AMRO.
 
Financial information contained in this document does not constitute complete financial statements prepared in accordance with International Financial Reporting Standards as issued by the IASB and adopted by the European Union.

Non-GAAP financial information

IFRS requires the Group to consolidate those entities that it controls, including RFS Holdings as described below. However, discussion of the Group’s performance focuses on performance measures that exclude the RFS Holdings minority interest as the Group believes that such measures allow a more meaningful analysis of the Group’s financial condition and the results of its operations. These measures are non-GAAP financial measures. A body of generally accepted accounting principles such as IFRS is commonly referred to as ‘GAAP’. A non-GAAP financial measure is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Reconciliations of these non-GAAP measures are presented throughout this document. These non-GAAP financial measures are not a substitute for GAAP measures, for which management has responsibility.

 
4
 
 
Presentation of information (continued)

Non-GAAP financial information (continued)

RBS has divided its operations into “Core” and “Non-Core” for internal reporting purposes. Certain measures disclosed in this document for Core operations and used by RBS management are a non-GAAP financial measure.

 
5
 
 
Comment

Stephen Hester, Group Chief Executive, commented:

“Last year we began implementing one of the most significant corporate restructurings ever undertaken.  We said the Plan would take five years to implement.  We set out transparently where the milestones would be along the way.  And we explained how, if implemented properly, the Plan would turn RBS from a problem into an opportunity for all our constituencies.

Today we show that we remain on track for the delivery of the Plan – we are doing what we said we would do.  We have made good progress but there is still significant work to be done.  I welcome the market's recognition of our progress to date, but the challenges we still face are real and should not be underestimated.

The year has begun for RBS broadly as we had expected. Economic recovery is benefiting our customers and thereby ourselves.  However, we remain conscious of the economic imbalances still to be tackled globally and of the risk of specific events (such as those affecting Greece), with the associated danger of contagion. Certain sectors, like real estate, also face a longer term work-out and there are ongoing losses for banks to absorb. At present, global recovery is helping impairments fall a little faster than we expected, though lumpy events may well interrupt that trend. Our medium-term targets already factor in a normalisation of credit conditions.

RBS’s Retail and Commercial businesses are beginning to recover and should drive our growth over the next few years.  While we have taken decisive management actions to improve these businesses, the pace of recovery will also be affected by the rate at which credit conditions change and when interest rates return to more normal levels, giving some relief to liability margins.

Global Banking & Markets, our investment bank, is on track with a seasonally strong first quarter, though significantly below the unusual conditions of a year previously.  GBM was radically restructured 15 months ago and is the area with greatest people retention challenges, so we are pleased with progress in this important Division.

RBS’s risk profile continues to recover. We made huge balance sheet, capital and liquidity improvements in 2009 and these are now being extended through steady progress, in-line with targets, in Non-Core run-off and disposals. We are substantially improving the internal fabric and machinery of risk management.  While not likely to be called upon, we also retain the valuable fallback protection of the Asset Protection Scheme and related contingent capital.

We aspire to be focused and purposeful in pursuit of RBS’s three principal goals:
o  
to serve Customers well;
o  
to restore the Bank to undoubted standalone strength; and
o  
to rebuild sustainable value for all Shareholders and in so doing to enable the UK Government to sell its shareholding profitably over time.

 
6
 

Comment (continued)

The first of these goals anchors all our efforts. We have renewed our focus on our Customers and how we serve them, and are investing in our businesses to improve service further. Our Customer franchises are solid and responding to these efforts though it will take time to raise customer service to the levels we aspire to.

We have already made significant progress in restoring the Bank to standalone strength through improvements in our risk profile and management culture. The job of rebuilding sustainable Shareholder value will take longer, and quarterly progress may not always be smooth. Volatility – of markets, of internal and external sentiment and outlook – is a fact of life.  We will continue to try to steer a measured and determined course, rebuilding a reputation for delivery and with it the support of our people which is needed to bring about that delivery.  Along the way, we are determined to support those who have supported us: to deliver for Customers, for the Communities we serve and for our Shareholders both public and private.

As covered more fully in my 2009 year-end statement, the regulatory landscape remains an area of focus, with a wide range of outcomes still under debate. The impact on economies as a whole, on banks in general and on RBS specifically is still uncertain. RBS welcomes and embraces change and reform and is actively participating to help governments and regulators calibrate measures, understand their consequences and consider timing.  Shareholders and all our stakeholders need to be cautious as these issues, along with new taxes and other measures, are debated and progressed.

So, as 2010 unfolds we remain optimistic for RBS and the prospects of achieving the Plans laid out and our vision to restore RBS to an admired and high performing institution.  Progress to date should give encouragement, but there is no complacency within RBS as we continue the work across our businesses.”

 
7
 

Condensed consolidated income statement
for the period ended 31 March 2010

 
Quarter ended
 
31 March 
2010 
31 December* 
 2009 
31 March* 
2009 
 
£m 
 £m 
£m 
       
Interest receivable
5,692 
5,977 
7,450 
Interest payable
(2,150)
(2,558)
(3,886)
       
Net interest income
3,542 
3,419 
3,564 
       
Fees and commissions receivable
2,051 
2,353 
2,276 
Fees and commissions payable
(572)
(894)
(691)
Income from trading activities
1,766 
709 
1,666 
Other operating income (excluding insurance premium income)
447 
304 
750 
Net insurance premium income
1,289 
1,308 
1,356 
       
Non-interest income
4,981 
3,780 
5,357 
       
Total income
8,523 
7,199 
8,921 
       
       
Staff costs – excluding curtailment gains
(2,689)
(2,494)
(2,761)
                  – pension schemes curtailment gains
- 
2,148 
- 
Premises and equipment
(535)
(685)
(661)
Other administrative expenses
(1,011)
(1,184)
(1,160)
Depreciation and amortisation
(482)
(600)
(560)
Write-down of goodwill and other intangible assets
- 
(52)
- 
       
Operating expenses
(4,717)
(2,867)
(5,142)
       
Profit before other operating charges and impairment losses
3,806 
4,332 
3,779 
Net insurance claims
(1,136)
(1,321)
(966)
Impairment losses
(2,675)
(3,099)
(2,858)
       
Operating loss before tax
(5)
(88)
(45)
Tax charge
(107)
(644)
(210)
       
Loss from continuing operations
(112)
(732)
(255)
Profit/(loss) from discontinued operations, net of tax
313 
(135)
(50)
       
Profit/(loss) for the period
201 
(867)
(305)
Minority interests
(344)
246 
(483)
Other owners' dividends
(105)
(144)
(114)
       
Loss attributable to ordinary shareholders
(248)
(765)
(902)
 
      
       
*Operating expenses include:
      
       
Integration and restructuring costs:
      
- administrative expenses
(165)
(221)
(374)
- depreciation and amortisation
(3)
(7)
(5)
       
 
(168)
(228)
(379)
Amortisation of purchased intangible assets
(65)
(59)
(85)
       
 
(233)
(287)
(464)

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

 
8
 
 
Highlights

First quarter results summary

Current trading
Operating performance in the first quarter of 2010 improved, with The Royal Bank of Scotland Group (‘RBS’ or the ‘Group’) recording a quarterly operating profit. Total income rose to £8,523 million, up 18% from the fourth quarter of 2009, while expenses, increased by 65% to £4,717 million and insurance claims were 14% lower at £1,136 million. Impairments fell 14% to £2,675 million, leaving a Group operating loss of £5 million, compared with a loss of £88 million in the fourth quarter. Cost savings programmes remain on track.

Net of tax, goodwill and intangible write-downs, minority interests and preference share dividends, the loss attributable to ordinary shareholders was £248 million, compared with a loss of £765 million in the fourth quarter of 2009.

In the Core bank, operating profit was £2,272 million, 92% higher than in the fourth quarter of 2009. The result was driven by a seasonally strong trading performance in Global Banking & Markets, where income rose 35%, benefiting from market conditions that, although less buoyant than the exceptional environment experienced in the first quarter of 2009, were still favourable; credit markets performance was particularly good.

In the Core retail and commercial businesses, income continued to be affected by generally low business volumes and by depressed liability margins, offsetting the repricing of new business asset margins. Adjusted for the number of days in the quarter, core retail and commercial net interest margin was stable.  Customer franchises remained resilient, with good progress particularly in UK mortgages and current accounts.

Core return on equity in the quarter was 15%, in line with the longer term targets and driven by seasonally strong GBM results. However, significant quarterly movement in returns is to be anticipated, and future capital and other regulatory requirements could materially affect future returns.

Non-Core operating losses were substantially lower at £1,559 million, with income rising to £934 million.

Good progress has been made on restructuring and divestments. The divestments of a UK retail and business banking operation and of the Group’s card payment acquiring business are currently on track.

Legal separation of ABN AMRO Bank NV took place on 1 April 2010. As a result RBS will no longer consolidate the interests in ABN AMRO of its consortium partners, the Dutch state and Banco Santander, in its results from the second quarter of 2010 onwards.

 
9
 

Highlights (continued)

First quarter results summary (continued)

Efficiency

Group operating expenses increased by £1,850 million due to pension schemes curtailment gains, £2,148 million in the fourth quarter of 2009, offset by savings driven principally by Business Services, where costs declined by £129 million with reductions in property, technology and operations costs.

The Group’s programme to reduce costs is already well advanced and we are beginning to see the necessary efficiency benefits of this. Over £2 billion in annualised cost savings have so far been achieved, compared with a commitment to deliver at least £2.5 billion in cost reductions by 2011.

Regrettably, but inevitably, this has resulted in job losses and while the most substantial reductions have been completed there are more to come. The Group will continue to work hard alongside staff and their representatives to minimise the human impact of this.

Impairments

Impairment losses declined in the first quarter to £2,675 million compared with £3,099 million in the fourth quarter of 2009. Impairment trends were favourable, particularly in the Core UK retail and US retail and commercial businesses, providing support for the view that impairments are likely to have peaked in 2009.

Non-Core impairments fell by 6% to £1,704 million. Improving credit trends continued in several segments of the division’s portfolio, although the overall impairment level remains elevated and volatility in impairment charges remains likely.

Balance sheet management

Third party assets increased by 4% during the first quarter to £1,303 billion, with around half of the increase accounted for by exchange rate movements, as the weakness of sterling increased the value of foreign currency-denominated assets. The increase also reflected seasonal movements in GBM assets, which rose after falling sharply in the fourth quarter but remain within the division’s targeted range, and a modest increase in retail and commercial lending, offset by Non-Core run-off.

 
10
 

Highlights (continued)

First quarter results summary (continued)

Balance sheet management (continued)

Liquidity reserves totalled £165 billion, down £6 billion from 31 December 2009 but still above the Group’s long term target band, including a central government bond portfolio of £59 billion.

Capital

Risk-weighted assets increased by £26 billion to £567 billion, more rapidly than nominal assets, primarily reflecting the roll-off of capital relief trades in the old ABN AMRO portfolios in line with guidance provided earlier this year. This increase in RWAs drove a reduction in the Group’s Core Tier 1 ratio to 9.5% at 31 March 2010, compared with 11.0% at 31 December 2009.
 
Good progress has been made on restructuring and divestments. The divestments of a UK retail and business banking operation and of the Group’s card payment acquiring business are currently on track.

Customers

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

UK Retail maintained good growth in the current account market and now serves over 12.8 million current account customers. Progress has also continued in the mortgage market, with the division achieving a 10.6% market share of new lending in the first quarter, compared with a 7% share of the mortgage stock. Net mortgage lending in the first quarter totalled £2.0 billion.

Good progress in the current account market was also achieved by other divisions, with Ulster Bank adding 9,000 current account customers during the quarter and the US retail and commercial division expanding its consumer checking account base by 44,000 since the first quarter of 2009.

The Group has kept up its efforts to make credit available to UK businesses. Over £10 billion of new facilities were extended to businesses and corporates during the first quarter, with activity picking up in March after a seasonal lull in January and February.

 
11
 

Highlights (continued)

First quarter results summary (continued)

Outlook

The economic outlook has stabilised and continues to improve steadily. However, substantial risks remain from the unwinding of structural imbalances globally and the impact of the withdrawal of fiscal and monetary support. The timing and make-up of regulatory and fiscal responses to the crisis also remains uncertain. However, the Group currently remains on track to deliver its five year plan.

Operating performance in the second quarter is expected to reflect GBM income returning to more normal levels from the seasonally strong first quarter performance, but steady progress in Core retail and commercial divisions.

Group net interest margin is expected to gradually improve over the remainder of 2010, with the recovery from the unsustainably low margins experienced in 2009 driven by the Core retail and commercial divisions. Impairment trends have turned more favourable in a number of areas, but levels of impairment are likely to remain high and there may be volatility in impairment losses, particularly in the Non-Core portfolio.

 
12
 
 
Business and strategic update

Customer franchises

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

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

 
13
 
 
Business and strategic update (continued)

Restructuring and divestments

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

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

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

 
14
 
 
Business and strategic update (continued)

UK Lending

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

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

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

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

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

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

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

 
15
 
 
Condensed consolidated balance sheet
at 31 March 2010

 
31 March 
2010 
 
31 December 
2009 
(audited) 
 
£m 
£m 
     
Assets
    
Cash and balances at central banks
42,008 
52,261 
Net loans and advances to banks
56,528 
56,656 
Reverse repurchase agreements and stock borrowing
43,019 
35,097 
Loans and advances to banks
99,547 
91,753 
Net loans and advances to customers
553,905 
687,353 
Reverse repurchase agreements and stock borrowing
52,906 
41,040 
Loans and advances to customers
606,811 
728,393 
Debt securities
252,116 
267,254 
Equity shares
21,054 
19,528 
Settlement balances
24,369 
12,033 
Derivatives
462,272 
441,454 
Intangible assets
14,683 
17,847 
Property, plant and equipment
18,248 
19,397 
Deferred taxation
6,540 
7,039 
Prepayments, accrued income and other assets
14,534 
20,985 
Assets of disposal groups
203,530 
18,542 
     
Total assets
1,765,712 
1,696,486 
     
Liabilities
    
Bank deposits
98,294 
104,138 
Repurchase agreements and stock lending
48,083 
38,006 
Deposits by banks
146,377 
142,144 
Customer deposits
425,102 
545,849 
Repurchase agreements and stock lending
81,144 
68,353 
Customer accounts
506,246 
614,202 
Debt securities in issue
239,212 
267,568 
Settlement balances and short positions
70,632 
50,876 
Derivatives
444,223 
424,141 
Accruals, deferred income and other liabilities
28,466 
30,327 
Retirement benefit liabilities
2,682 
2,963 
Deferred taxation
2,295 
2,811 
Insurance liabilities
7,711 
10,281 
Subordinated liabilities
31,936 
37,652 
Liabilities of disposal groups
196,892 
18,890 
     
Total liabilities
1,676,672 
1,601,855 
     
Equity
    
Minority interests
10,364 
16,895 
Owners’ equity*
    
  Called up share capital
15,031 
14,630 
  Reserves
63,645 
63,106 
     
Total equity
89,040 
94,631 
     
Total liabilities and equity
1,765,712 
1,696,486 
     
     
*Owners’ equity attributable to:
    
Ordinary shareholders
70,830 
69,890 
Other equity owners
7,846 
7,846 
     
 
78,676 
77,736 

 
16
 
 
Commentary on condensed consolidated balance sheet

Total assets of £1,765.7 billion at 31 March 2010 were up £69.2 billion, 4%, compared with 31 December 2009.

Cash and balances at central banks were down £10.3 billion, 20% to £42.0 billion primarily due to reduced placings of short-term cash surpluses.

Loans and advances to banks increased by £7.8 billion, 8%, to £99.5 billion but rose £15.7 billion excluding the transfer to disposal groups of the RFS Minority Interest.  Of the £15.7 billion, reverse repurchase agreements and stock borrowing (‘reverse repos’) were up £7.9 billion, 23% to £43.0 billion and bank placings rose £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 decreased by £121.6 billion, 17% to £606.8 billion.  Excluding the transfer of the RFS Minority Interest to disposal groups, lending was up £11.1 billion, 2%.  Within the £11.1 billion,  reverse repos increased £11.9 billion, 29% to £52.9 billion. Customer 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.

Debt securities declined by £15.1 billion, 6% to £252.1 billion largely reflecting the transfer of the RFS Minority Interest to disposal groups.

Equity shares were up £1.5 billion, 8% at £21.1 billion or £5.1 billion, 32% excluding transfers to disposal groups.  Growth was 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.

The value of derivative assets was up £20.8 billion, 5% to £462.3 billion, and liabilities, up £20.1 billion, 5%, to £444.2 billion.  Excluding the RFS Minority Interest transfer to disposal groups, assets were up £24.1 billion, 5%, to £462.3 billion, and liabilities, up £22.7 billion, 5%, to £444.2 billion, primarily reflecting 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 RFS Minority Interest, excluding those items which have shared ownership between the consortium members, together with 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 were up £4.2 billion, 3%, at £146.4 billion but declined by £5.4 billion, 4%, to £148.3 billion excluding the RFS Minority Interest. Of the £5.4 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.

 
17
 
 
Commentary on condensed consolidated balance sheet (continued)

Customer accounts were down £108.0 billion, 18%, at £506.2 billion but up £23.6 billion, 5% following the RFS Minority Interest transfer to disposal groups. Within the £23.6 billion, 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.

Debt securities in issue were down £28.4 billion, 11% to £239.2 billion. Excluding the transfer of the RFS minority interest, they declined £7.1 billion, 3%, mainly as a result of reductions in Global Banking & Markets.

Subordinated liabilities decreased £5.7 billion, 15% to £31.9 billion but increased £0.4 billion, 1% excluding transfers to disposal groups. 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.

Equity minority interests decreased by £6.5 billion, 39%, to £10.4 billion mainly due to net equity withdrawals of £4.2 billion and dividends of £2.7 billion paid to the RFS minority interests less attributable profits of £0.3 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.

 
18
 
 
Key metrics

 
31 March 
2010 
31 December 
2009 
     
Capital and balance sheet
    
Funded balance sheet (1)
£1,303.4bn 
£1,255.0bn 
Total assets
£1,765.7bn 
£1,696.5bn 
Risk-weighted assets - gross
£692.0bn
£668.6bn 
Benefit of Asset Protection Scheme
(£124.8bn)
(£127.6bn)
Risk-weighted assets
£567.2bn
£541.0bn 
Core Tier 1 ratio
9.5% 
11.0% 
Tier 1 ratio
12.5% 
14.1% 
Loan:deposit ratio (Core – net of provisions)
102%
104% 
 
Note:
(1)
Funded balance sheet is defined as total assets less derivatives.

 
19
 

Results summary

 
Quarter ended
 
31 March 
2010 
31 December 
2009 
31 March 
2009 
Non-interest income
£m 
£m 
£m 
       
Net fees and commissions
1,479 
1,459 
1,585 
       
Income from trading activities
1,766 
709 
1,666 
       
Other operating income
447 
304 
750 
       
Non-interest income (excluding insurance premiums)*
3,692 
2,472 
4,001 
       
Insurance net premium income
1,289 
1,308 
1,356 
       
Total non-interest income
4,981 
3,780 
5,357 
       
       
* Includes fair value of own debt
      
Income/(loss) from trading activities
41 
(79)
290 
Other operating income
(210)
349 
741 
       
Fair value of own debt
(169)
270 
1,031 

Key points

Q1 2010 compared with Q4 2009
●
The strong increase in non-interest income was driven largely by buoyant income from trading activities, with a good performance from GBM trading businesses and significantly reduced  losses in Non-Core, both reflective of favourable market conditions. Non-Core non-interest income was £435 million, compared with losses of £403 million in Q4 2009.
   
●
Net fees and commissions increased modestly, with growth in GBM offsetting lower fee income in most retail and commercial businesses, reflecting generally low activity volumes, together with the adverse impact of repricing overdraft fees, which took effect in Q4 2009 in the UK retail businesses.

Q1 2010 compared with Q1 2009
●
Non-interest income was 7% lower than in the first quarter of 2009, during which GBM trading results benefited from exceptional market conditions while Non-Core recorded significant losses on monolines, credit default swaps and asset-backed securities.

 
20
 
 
Results summary (continued)

 
Quarter ended
 
31 March 
2010 
31 December 
2009 
31 March 
2009 
Operating expenses
£m 
£m 
£m 
       
Staff costs – excluding curtailment gains
2,689 
2,494 
2,761 
Staff costs – pension scheme curtailment gains
- 
(2,148)
- 
Premises and equipment
535 
685 
661 
Other
1,011 
1,236 
1,160 
       
Administrative expenses
4,235 
2,267 
4,582 
Depreciation and amortisation
482 
600 
560 
       
Operating expenses
4,717 
2,867 
5,142 
       
General insurance
1,107 
1,304 
970 
Bancassurance
29 
17 
(4)
       
Insurance net claims
1,136 
1,321 
966 
       
Staff costs as a percentage of total income
32%
35%
31%

Key points

Q1 2010 compared with Q4 2009
●
Group operating expenses excluding pension scheme curtailment gains, fell by 4%, driven principally by Business Services, where costs declined by £129 million with reductions in property, technology and operations costs.  Integration costs have continued to decline as the process of integrating ABN AMRO is well advanced.
   
●
Staff costs increased by 8%, largely as a result of incentive compensation accruals in line with stronger business performance in GBM. The compensation ratio in GBM was 32%.
   
●
Other costs benefited from a one-off VAT recovery of £80 million included in Central items.
   
●
Insurance claims were lower than in Q4 2009, when reserves for bodily injury claims were built up significantly, but remained relatively high as a result of severe winter weather in the UK.

Q1 2010 compared with Q1 2009
●
Group operating expenses were £425 million, or 8%, lower than in the fourth quarter of 2009.  Integration and restructuring costs declined compared with Q1 2009, when ABN AMRO integration activity was more substantial.
   
●
Insurance net claims were up £170 million, or 18% reflecting higher bodily injury claims and adverse winter weather.

 
21
 
 
Results summary (continued)

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

Key points

Q1 2010 compared with Q4 2009
●
Impairment losses declined in the first quarter, led by improving trends in UK Retail. Loan performance in Ulster continued to deteriorate, though impairments were lower than in Q4 2009, which included a significant charge in respect of latent losses.
   
●
UK Corporate impairments held steady, while US Retail & Commercial is beginning to trend favourably. GBM recorded only a small loss in the absence of any large single name impairments.
   
●
Non-Core impairments continued the improving trend that began to emerge towards the end of 2009, though loss rates, in proportion to the division’s diminishing portfolio, remain high.

Q1 2010 compared with Q1 2009
●
Reduced impairment losses in GBM were partly offset by higher levels of impairment in the Core retail and commercial businesses, particularly in UK Corporate and Ulster.

 
22
 
 
Results summary (continued)

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

Notes:
(1)
Included in ‘Income from trading activities’ on page 20.
(2)
Includes super senior asset-backed structures and other asset-backed products.
(3)
Reflects other net market losses in Non-Core.

Key points

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

Q1 2010 compared with Q1 2009
●
Credit and other market losses were significantly lower, down £2,580 million, 91%. Losses fell markedly across a range of asset classes including monolines, CDPCs, asset-backed and other exotic credit products as market parameters stabilised compared with Q1 2009, when asset-backed prices were still falling and monoline spreads rising.

 
23
 

Results summary (continued)

Capital resources and ratios
31 March 
2010 
31 December 
2009 
     
Core Tier 1 capital
£53.6bn 
£59.5bn 
     
Tier 1 capital
£70.8bn 
£76.4bn 
     
Total capital
£82.2bn 
£87.2bn 
     
Risk-weighted assets  – Gross
£692.0bn 
£668.6bn 
     
Benefit of Asset Protection Scheme
(£124.8bn)
(£127.6bn)
     
Risk-weighted assets
£567.2bn 
£541.0bn 
     
Core Tier 1 ratio
9.5% 
11.0% 
     
Tier 1 ratio
12.5% 
14.1% 
     
Total capital ratio
14.5% 
16.1% 
 
Key points

Q1 2010 compared with Q4 2009
●
The Group’s strong capital base includes the benefit of the issuance of B shares to the UK Government in December 2009.
   
●
Risk-weighted assets (gross) increased by 3% to £692 billion, principally as a result of the roll-off of ABN AMRO capital relief trades, as previously guided, along with the weakening of sterling. The reduction in the Core Tier 1 ratio is primarily driven by the increase in RWAs.
   
●
The Asset Protection Scheme provided £125 billion of RWA relief at 31 March 2010, £3 billion lower than at 31 December 2009. This decrease was due to a reduction in the pool size and improvements in risk parameters partially offset by exchange rate movements.

 
24
 
 
Results summary (continued)

 
31 March 
2010 
31 December 
2009 
Balance sheet
£bn 
£bn 
     
Funded balance sheet
1,303.4 
1,255.0 
     
Total assets
1,765.7 
1,696.5 
     
Loans and advances to customers (excluding reverse repurchase agreements and stock
  borrowing)
553.9 
687.4 
     
Customer accounts (excluding repurchase agreements and stock lending)
425.1 
545.8 
     
Loan: deposit ratio (Core - net of provisions)
102% 
104% 

Key points
 
●
Third party assets increased by £48 billion, from £1,255 billion to £1,303 billion.
   
●
Modest loan growth resumed in the Core bank, particularly in UK Corporate and UK Retail, but this has been outpaced by growth in customer deposits. Core deposits grew by £14 billion, or 3%, with strong inflows in UK Corporate and GTS.
   
●
The loan to deposit ratio in the Core bank fell to 102% from 104% at 31 December 2009.
   
●
Non-Core loans and advances declined by £7 billion in the quarter.
 
 
25
 
Divisional performance

 
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)
       
 
713 
(1,353)
179 
Reconciling items
      
RFS Holdings minority interest
16 
(170)
(1)
Amortisation of purchased intangible assets
(65)
(59)
(85)
Write-down of goodwill
- 
(52)
- 
Integration and restructuring costs
(168)
(228)
(379)
Strategic disposals
53 
(166)
241 
Gains on pensions curtailment
- 
2,148 
- 
Bonus tax
(54)
(208)
- 
Asset Protection Scheme credit default swap – fair value changes
(500)
- 
- 
       
Group operating loss
(5)
(88)
(45)
       
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 

 
26
 
Divisional performance (continued)

 
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 


 
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)
     
 
460.7 
438.2 
RFS Holdings minority interest
106.5 
102.8 
     
Total
567.2 
541.0 


27
 
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
273 
299 
356 
Other non-interest income
71 
61 
30 
       
Non-interest income
344 
360 
386 
       
Total income
1,277 
1,299 
1,183 
       
Direct expenses
      
- staff
(198)
(211)
(214)
- other
(105)
(105)
(115)
Indirect expenses
(418)
(387)
(487)
       
 
(721)
(703)
(816)
       
Insurance net claims
(29)
(17)
4 
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
88 
73 
48 
Cards
229 
228 
204 
Other
27 
31 
22 
       
Total income
1,277 
1,299 
1,183 
       
       
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% 


28
 
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.


29

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 4% 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.


30
 
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)
       
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’.

31
 
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).
 
 
32
 
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.


33
 
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)
       
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 


34

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.


35
 
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
382 
416 
819 
Funding costs of rental assets
(9)
(10)
(15)
       
Net interest income
373 
406 
804 
       
Net fees and commissions receivable
286 
247 
239 
Income from trading activities
2,054 
1,561 
4,139 
Other operating income
79 
(145)
(90)
       
Non-interest income
2,419 
1,663 
4,288 
       
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)
       
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% 


36

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.
 

 
37
 
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.
 
 

 
38
 
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)
       
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 


39
 
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.


40
 
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)
       
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% 

 

 
41
 
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.


42
 
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.
 
 

 
43
 
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)
       
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% 


44

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 46 and 48.
 

 
45

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)
       
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% 

 
46
 
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 £40 million ($63 million) compared with an operating loss of £19 million ($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.
 
 

 
47
 
US Retail & Commercial (US Dollar) (continued)

Key points (continued)

Q1 2010 compared with Q1 2009
·
Operating profit increased to £40 million ($63 million) from an operating loss of £41 million ($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%.
 
 

 
48
 
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)
       
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 
 
 

 
49
 
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.


50
 
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.
   
 
 
51
 
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 
       
Operating profit/(loss) before tax
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.
   

 
52
 
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 
575 
395 
Funding costs of rental assets
(69)
(64)
(73)
       
Net interest income
499 
511 
322 
       
Net fees and commissions receivable
100 
127 
166 
Loss from trading activities
(127)
(779)
(2,611)
Insurance net premium income
168 
171 
244 
Other operating income
294 
78 
103 
       
Non-interest income
435 
(403)
(2,098)
       
Total income
934 
108 
(1,776)
       
Direct expenses
      
- staff
(252)
(247)
(301)
- other
(282)
(297)
(256)
Indirect expenses
(122)
(141)
(142)
       
 
(656)
(685)
(699)
       
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).
 
 

 
53
 
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)
9 
(120)
(336)
       
 
127 
779 
2,611 
       
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).


54
 
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.
 

 
55
 
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 
 
 

 
56
 
Non-Core (continued)

 
Quarter ended
 
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 


57
 
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 £652 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.
 
 
58

 
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)
       
 
- 
- 
- 


59
 
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)
       
 
- 
- 
- 


60


Condensed consolidated income statement
for the period ended 31 March 2010
 
 
Quarter ended
 
31 March 
2010 
31 December* 
 2009 
31 March* 
2009 
 
£m 
 £m 
£m 
       
Interest receivable
5,692 
5,977 
7,450 
Interest payable
(2,150)
(2,558)
(3,886)
       
Net interest income
3,542 
3,419 
3,564 
       
Fees and commissions receivable
2,051 
2,353 
2,276 
Fees and commissions payable
(572)
(894)
(691)
Income from trading activities
1,766 
709 
1,666 
Other operating income (excluding insurance premium income)
447 
304 
750 
Net insurance premium income
1,289 
1,308 
1,356 
       
Non-interest income
4,981 
3,780 
5,357 
       
Total income
8,523 
7,199 
8,921 
       
       
Staff costs – excluding curtailment gains
(2,689)
(2,494)
(2,761)
                  – pension schemes curtailment gains
- 
2,148 
- 
Premises and equipment
(535)
(685)
(661)
Other administrative expenses
(1,011)
(1,184)
(1,160)
Depreciation and amortisation
(482)
(600)
(560)
Write-down of goodwill and other intangible assets
- 
(52)
- 
       
Operating expenses
(4,717)
(2,867)
(5,142)
       
Profit before other operating charges and impairment losses
3,806 
4,332 
3,779 
Net insurance claims
(1,136)
(1,321)
(966)
Impairment losses
(2,675)
(3,099)
(2,858)
       
Operating loss before tax
(5)
(88)
(45)
Tax charge
(107)
(644)
(210)
       
Loss from continuing operations
(112)
(732)
(255)
Profit/(loss) from discontinued operations, net of tax
313 
(135)
(50)
       
Profit/(loss) for the period
201 
(867)
(305)
Minority interests
(344)
246 
(483)
Other owners' dividends
(105)
(144)
(114)
       
Loss attributable to ordinary shareholders
(248)
(765)
(902)
       
       
*Operating expenses include:
      
       
Integration and restructuring costs:
      
- administrative expenses
(165)
(221)
(374)
- depreciation and amortisation
(3)
(7)
(5)
       
 
(168)
(228)
(379)
Amortisation of purchased intangible assets
(65)
(59)
(85)
       
 
(233)
(287)
(464)

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

61
 
Condensed consolidated statement of comprehensive income
for the period ended 31 March 2010

 
Quarter ended
 
31 March 
2010 
31 December 
 2009 
31 March 
2009 
 
£m 
£m 
£m 
       
Profit/(loss) for the period
201 
(867)
(305)
       
Other comprehensive income:
      
Available-for-sale financial assets
415 
597 
(3,107)
Cash flow hedges
(195)
410 
(296)
Currency translation
785 
(796)
(555)
Actuarial losses on defined benefit plans
- 
(3,665)
- 
Tax on other comprehensive income
(115)
809 
738 
       
Other comprehensive income/(loss) for the period, net of tax
890 
(2,645)
(3,220)
       
Total comprehensive income/(loss) for the period
1,091 
(3,512)
(3,525)
       
Attributable to:
      
Minority interests
325 
(603)
(743)
Preference shareholders
(105)
126 
114 
Paid-in equity holders
- 
18 
- 
Ordinary and B shareholders
871 
(3,053)
(2,896)
       
 
1,091 
(3,512)
(3,525)

62
Condensed consolidated balance sheet
at 31 March 2010

 
31 March 
2010 
 
31 December 
2009 
(audited) 
 
£m 
£m 
     
Assets
    
Cash and balances at central banks
42,008 
52,261 
Net loans and advances to banks
56,528 
56,656 
Reverse repurchase agreements and stock borrowing
43,019 
35,097 
Loans and advances to banks
99,547 
91,753 
Net loans and advances to customers
553,905 
687,353 
Reverse repurchase agreements and stock borrowing
52,906 
41,040 
Loans and advances to customers
606,811 
728,393 
Debt securities
252,116 
267,254 
Equity shares
21,054 
19,528 
Settlement balances
24,369 
12,033 
Derivatives
462,272 
441,454 
Intangible assets
14,683 
17,847 
Property, plant and equipment
18,248 
19,397 
Deferred taxation
6,540 
7,039 
Prepayments, accrued income and other assets
14,534 
20,985 
Assets of disposal groups
203,530 
18,542 
     
Total assets
1,765,712 
1,696,486 
     
Liabilities
    
Bank deposits
98,294 
104,138 
Repurchase agreements and stock lending
48,083 
38,006 
Deposits by banks
146,377 
142,144 
Customer deposits
425,102 
545,849 
Repurchase agreements and stock lending
81,144 
68,353 
Customer accounts
506,246 
614,202 
Debt securities in issue
239,212 
267,568 
Settlement balances and short positions
70,632 
50,876 
Derivatives
444,223 
424,141 
Accruals, deferred income and other liabilities
28,466 
30,327 
Retirement benefit liabilities
2,682 
2,963 
Deferred taxation
2,295 
2,811 
Insurance liabilities
7,711 
10,281 
Subordinated liabilities
31,936 
37,652 
Liabilities of disposal groups
196,892 
18,890 
     
Total liabilities
1,676,672 
1,601,855 
     
Equity
    
Minority interests
10,364 
16,895 
Owners’ equity*
    
  Called up share capital
15,031 
14,630 
  Reserves
63,645 
63,106 
     
Total equity
89,040 
94,631 
     
Total liabilities and equity
1,765,712 
1,696,486 
     
     
*Owners’ equity attributable to:
    
Ordinary shareholders
70,830 
69,890 
Other equity owners
7,846 
7,846 
     
 
78,676 
77,736 
 

 
63
 
Condensed consolidated statement of changes in equity
for the period ended 31 March 2010

 
31 March 
2010 
 
31 December 
2009 
(audited) 
 
£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)
 
 

 
64
 
Condensed consolidated statement of changes in equity
for the period ended 31 March 2010 (continued)

 
31 March 
2010 
 
31 December 
2009 
(audited) 
 
£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 
9 
     
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
7 
16 
     
At end of period
(488)
(121)
     
Owners’ equity at end of period
78,676 
77,736 


65
 
Condensed consolidated statement of changes in equity
for the period ended 31 March 2010 (continued)

 
31 March 
2010 
 
31 December 
2009 
(audited) 
 
£m 
£m 
     
Minority interests
    
At beginning of period
16,895 
21,619 
Currency translation adjustments and other movements
96 
(1,434)
Profit attributable to minority interests
344 
349 
Dividends paid
(2,674)
(313)
Movements in available-for-sale securities
    
- unrealised gains in the period
25 
299 
- realised losses/(gains) in the period
9 
(466)
- taxation
(3)
(36)
Movements in cash flow hedging reserves
    
- amount recognised in equity during the period
(195)
(209)
- amount transferred from equity to earnings during the period
1 
- 
- taxation
48 
59 
Actuarial losses recognised in retirement benefit schemes
    
- gross
- 
91 
- taxation
- 
1 
Equity raised
511 
9 
Equity withdrawn and disposals
(4,693)
(2,445)
Transfer to retained earnings
- 
(629)
     
At end of period
10,364 
16,895 
     
Total equity at end of period
89,040 
94,631 
     
Total comprehensive income/(loss) recognised in the statement of changes in
  equity is attributable as follows:
    
Minority interests
325 
(1,346)
Preference shareholders
(105)
878 
Paid-in equity holders
- 
57 
Ordinary and B shareholders
871 
(5,747)
     
 
1,091 
(6,158)


66
 
Notes

1. Loan impairment provisions
Operating profit/(loss) is stated after charging loan impairment losses of £2,602 million (year ended 31 December 2009 - £14,134 million). The balance sheet loan impairment provisions increased in the quarter ended 31 March 2010 from £17,283 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 

The table above excludes a provision of £2,110 million relating to RFS Holdings minority interest at 31 December 2009 (31 March 2010 - nil).
 
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.

67

Notes (continued)

2. 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 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 £34 million (year ended 31 December 2009 - £(167) million).


68
 
Notes (continued)

3. 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
- 
2 
- 
Provision for loss on disposal of:
      
- Latin American businesses
(22)
(159)
- 
- Asian branches and businesses
5 
(9)
- 
- Other
(10)
- 
- 
       
 
53 
(166)
241 

Note:
(1)
Including £359 million attributable to minority interests.

4. Goodwill

 
Quarter ended
 
31 March 
2010 
31 December 
 2009 
31 March 
 2009 
 
£m 
£m 
£m 
       
Write-down of goodwill and other intangible assets
- 
52 
- 

5. 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 


69
 
Notes (continued)

6. 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.

 
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
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
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
499 
435 
934 
(656)
(133)
(1,704)
(1,559)
               
 
3,534 
5,420 
8,954 
(4,430)
(1,136)
(2,675)
713 
Reconciling items
              
RFS Holdings minority interest
8 
8 
16 
- 
- 
- 
16 
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)
               
Total statutory
3,542 
4,981 
8,523 
(4,717)
(1,136)
(2,675)
(5)


70

Notes (continued)

6. 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
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
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
511 
(403)
108 
(685)
(148)
(1,811)
(2,536)
               
 
3,446 
4,094 
7,540 
(4,473)
(1,321)
(3,099)
(1,353)
Reconciling items
              
RFS Holdings minority interest
(27)
(148)
(175) 
5 
- 
- 
(170)
Amortisation of purchased
  intangible assets
- 
- 
- 
(59)
- 
- 
(59)
Write-down of goodwill and other
  intangible assets
- 
- 
- 
(52)
- 
- 
(52)
Integration and restructuring costs
- 
- 
- 
(228)
- 
- 
(228)
Strategic disposals
- 
(166)
(166)
- 
- 
- 
(166)
Gains on pensions curtailment
- 
- 
- 
2,148 
- 
- 
2,148 
Bonus tax
- 
- 
- 
(208)
- 
- 
(208)
               
Total statutory
3,419 
3,780 
7,199 
(2,867)
(1,321)
(3,099)
(88)


71

Notes (continued)

6. 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
797 
386 
1,183 
(816)
4 
(354)
17 
UK Corporate
499 
311 
810 
(389)
- 
(100)
321 
Wealth
158 
111 
269 
(169)
- 
(6)
94 
Global Banking & Markets
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)
4 
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 
- 
3 
489 
               
Core
3,216 
7,230 
10,446 
(3,968)
(789)
(1,030)
4,659 
Non-Core
322 
(2,098)
(1,776)
(699)
(177)
(1,828)
(4,480)
               
 
3,538 
5,132 
8,670 
(4,667)
(966)
(2,858)
179 
Reconciling items
              
RFS Holdings minority interest
26 
(16)
10 
(11)
- 
- 
(1)
Amortisation of purchased
  intangible assets
- 
- 
- 
(85)
- 
- 
(85)
Integration and restructuring costs
      
(379)
- 
- 
(379)
Strategic disposals
- 
241 
241 
- 
- 
- 
241 
               
Total statutory
3,564 
5,357 
8,921 
(5,142)
(966)
(2,858)
(45)


72

Notes (continued)

7. 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 
3 
490 
378 
397 
1,093 
3 
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 
3 
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 
50,219 
6,103 
28,820 
6,892 
893 
111,482 
Designated at fair value
  through profit or loss
122 
3 
402 
483 
394 
1,178 
21 
2,603 
Available-for-sale
19,071 
12,972 
45,512 
11,210 
51,044 
3,365 
124 
143,298 
Loans and receivables
1 
- 
- 
- 
7,924 
1,853 
93 
9,871 
                 
 
27,322 
23,402 
96,133 
17,796 
88,182 
13,288 
1,131 
267,254 

Key points
·
55% 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% were AAA rated and 47% were guaranteed or effectively guaranteed by G10 governments.
   
·
59% 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.
 
 
73
 
Notes (continued)

8. 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 
  
26,744 
24,898 
Currency swaps
26,541 
26,594 
  
25,883 
23,466 
Options purchased
14,828 
- 
  
16,656 
- 
Options written
- 
13,653 
  
- 
15,555 
           
Interest rate contracts
          
Interest rate swaps
284,442 
273,766 
  
265,528 
253,793 
Options purchased
56,142 
- 
  
55,976 
- 
Options written
- 
54,504 
  
- 
55,589 
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 
  
6,831 
9,680 
           
 
462,272 
444,223 
  
441,454 
424,141 

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 - £441 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.

74
 
Risk and capital management


Presentation of information
The data in this section excludes RFS Holdings minority interest unless otherwise indicated.


Capital
The Group aims to maintain an appropriate level of capital to meet business needs and regulatory requirements.  Capital adequacy and risk management are closely aligned.


 
31 March
2010
31 December
2009
Risk asset ratios (proportional)
%
%
     
Core Tier 1
10.6
11.0
Tier 1
13.7
14.4
Total
15.7
16.3

The Group’s regulatory capital resources as calculated in accordance with FSA definitions are set out on the following page.
 
 
75

Risk and capital management (continued)

Capital (continued)

 
31 March 
 2010 
31 December 
 2009 
Composition of regulatory capital (proportional)
£m 
£m 
     
Tier 1
    
Ordinary shareholders' equity
70,830 
69,890 
Minority interests
2,305 
2,227 
Adjustments for:
    
- Goodwill and other intangible assets - continuing
(14,683)
(14,786)
- Goodwill and other intangible assets of discontinued businesses
(678)
(238)
- Unrealised losses on available-for-sale (AFS) debt securities
1,654 
1,888 
- Reserves: revaluation of property and unrealised gains on AFS equities
(209)
(207)
- Reallocation of preference shares and innovative securities
(656)
(656)
- Other regulatory adjustments
(833)
(950)
Less excess of expected losses over provisions net of tax
(2,197)
(2,558)
Less securitisation positions
(1,858)
(1,353)
Less APS first loss
(4,992)
(5,106)
     
Core Tier 1 capital
48,683 
48,151 
Preference shares
10,906 
11,265 
Innovative Tier 1 securities
2,857 
2,772 
Tax on the excess of expected losses over provisions
876 
1,020 
Less deductions from Tier 1 capital
(347)
(310)
     
Total Tier 1 capital
62,975 
62,898
     
Tier 2
    
Reserves: revaluation of property and unrealised gains on AFS equities
209 
207 
Collective impairment provisions
769 
796 
Perpetual subordinated debt
4,301 
4,200 
Term subordinated debt
18,742 
18,120 
Minority and other interests in Tier 2 capital
11 
11 
Less deductions from Tier 2 capital
(5,278)
(5,241)
Less APS first loss
(4,992)
(5,106)
     
Total Tier 2 capital
13,762 
12,987 
     
Supervisory deductions
    
Unconsolidated Investments
    
- RBS Insurance
(4,123)
(4,068)
- Other investments
(416)
(404)
Other
(73)
(93)
     
Deductions from total capital
(4,612)
(4,565)
     
Total regulatory capital
72,125 
71,320 
     
Risk-weighted assets
    
Credit risk
433,200 
410,400 
Counterparty risk
55,000 
56,500 
Market risk
62,000 
65,000 
Operational risk
35,300 
33,900 
     
 
585,500 
565,800 
APS relief
(124,800)
(127,600)
     
 
460,700 
438,200 
 
 

 
76
 
Risk and capital management (continued)

Credit risk

Credit risk is the risk arising from the possibility that the Group will incur losses owing to the failure of customers to meet their financial obligations.  The quantum and nature of credit risk assumed in the Group’s different businesses varies considerably, while the overall credit risk outcome usually exhibits a high degree of correlation to the macroeconomic environment.

Credit risk assets
Credit risk assets consist of loans and advances (including overdraft facilities), instalment credit, trade finance, finance lease receivables, trade-related instruments, financial guarantees and traded instruments across all customer types.  Reverse repurchase agreements and issuer risk (primarily debt securities - see page 83) are excluded.  Where relevant, and unless otherwise stated, data reflects the effect of credit mitigation techniques.  During the first quarter, the integration of RBS N.V. onto the Group’s risk management and reporting systems was substantially completed.  Prior period figures have been revised to reflect the alignment of RBS N.V. data definitions and specifications with Group standards.

Divisional analysis

 
31 March 
2010 
31 December 
2009 (1) 
 
£m 
£m 
     
UK Retail
102,978 
103,029 
UK Corporate
112,142 
110,009 
Wealth
17,010 
16,553 
Global Banking & Markets
204,397 
205,588 
Global Transaction Services
38,360 
32,428 
Ulster Bank
43,617 
42,042 
US Retail & Commercial
54,758 
52,104 
Other
3,520 
3,305 
     
Core
576,782 
565,058 
Non-Core
154,903 
158,499 
     
Group
731,685 
723,557 

Note:
(1)
Revised.

Key points
●
The total portfolio was relatively stable during the first quarter, with credit risk assets increasing by £8 billion, or 1%.  Sterling weakness (down 6% against US dollar and 3% against a trade-weighted basket) was a contributory factor; the portfolio contracted 1% on a constant currency basis.
   
●
Growth in the Core portfolio was offset partially by the continuing decline in Non-Core.  The largest increases were in short-term exposures to banks and other financial institutions.
 

 
77

Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Credit concentration risk (including country risk)

The country risk table below shows credit risk assets exceeding £1 billion by borrowers domiciled in countries with an external rating of A+ and below from either Standard & Poor’s or Moody’s, and is stated gross of mitigating action, which may have been taken to reduce or eliminate exposure to country risk events.

 
Personal 
Sovereign 
Banks and 
financial 
 institutions 
Corporate 
Total 
Core 
Non-Core 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
31 March 2010
              
Italy
25 
106 
2,269 
4,986 
7,386 
4,281 
3,105 
India
562 
23 
1,345 
3,007 
4,937 
3,978 
959 
China
35 
54 
1,994 
1,192 
3,275 
2,854 
421 
Turkey
10 
315 
722 
1,930 
2,977 
2,171 
806 
South Korea
1 
- 
1,492 
1,162 
2,655 
2,582 
73 
Russia
52 
- 
214 
2,306 
2,572 
2,041 
531 
Poland
6 
49 
73 
1,484 
1,612 
1,443 
169 
Mexico
1 
51 
138 
1,411 
1,601 
1,051 
550 
Romania
499 
94 
218 
770 
1,581 
41 
1,540 
Portugal
4 
35 
362 
1,059 
1,460 
987 
473 
Brazil
4 
- 
912 
332 
1,248 
1,094 
154 
Taiwan
641 
- 
207 
347 
1,195 
211 
984 
Kazakhstan
46 
- 
539 
598 
1,183 
501 
682 
Hungary
3 
- 
74 
962 
1,039 
567 
472 
Indonesia
411 
94 
157 
376 
1,038 
595 
443 
               
31 December 2009 (1)
              
Italy
27 
91 
1,704 
5,697 
7,519 
3,921 
3,598 
India
619 
305 
1,045 
3,144 
5,113 
4,308 
805 
China
51 
50 
1,336 
1,102 
2,539 
2,198 
341 
Turkey
11 
302 
628 
2,010 
2,951 
2,190 
761 
South Korea
1 
-
1,575 
1,448 
3,024 
2,916 
108 
Russia
41 
-
172 
2,045 
2,258 
1,782 
476 
Poland
6 
57 
85 
1,582 
1,730 
1,617 
113 
Mexico
1 
2 
276 
1,304 
1,583 
694 
889 
Romania
508 
102 
438 
753 
1,801 
66 
1,735 
Portugal
5 
42 
324 
1,007 
1,378 
952 
426 
Brazil
3 
-
902 
423 
1,328 
1,113 
215 
Taiwan
747 
-
164 
242 
1,153 
490 
663 
Kazakhstan
45 
-
400 
569 
1,014 
347 
667 
Hungary
3 
23 
60 
978 
1,064 
601 
463 
Indonesia
286 
102 
143 
452 
983 
582 
401 

Note:
(1)
Revised.

78

Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Credit concentration risk (including country risk) (continued)

Key points
●
Under the Group's country risk framework, country exposures continue to be closely managed; both those countries that represent a larger concentration and those that, under the country watch list process, have been identified as exhibiting signs of actual or potential stress. The latter includes countries in the Eurozone facing fiscal pressures and rising debt service costs.
   
●
The pace of global recovery has picked up somewhat with the US joining Asia as a main growth driver. Private sector demand remains fragile, performance is uneven and significant risks remain. Concerns over advanced sovereign debt levels have deepened, with Greece seeking official financial support and other vulnerable Eurozone sovereigns seeing contagion into bond spreads.  These risks are likely to remain a key medium term theme. Relatively healthier debt ratios and better growth prospects are driving large capital flows into emerging markets, which though positive, carry some risks. Asia remains the best performing region, due to limited public and private sector leverage, though continued export dependency could constrain growth potential.  Latin America is rebounding rapidly, consolidating earlier policy gains. Recovery in Eastern Europe has lagged in most cases, but sovereign vulnerability has eased. Middle Eastern sovereigns, meanwhile, remain generally strong.
   
●
Credit risk assets relating to Greece were less than £1 billion at 31 March 2010 and 31 December 2009.
 

 
79

Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Analysis by industry and geography
Industry analysis plays an important part in assessing potential concentration risk in the loan portfolio.  Particular attention is given to industry sectors where the Group believes there is a high degree of risk or potential for volatility in the future.

The table below analyses credit risk assets by industry sector and geography.

 
UK 
Western  Europe 
 (excl. 
 UK) 
North 
 America 
Asia 
 Pacific 
Latin 
 America 
Other (1) 
Total 
Core 
  
 
Non-Core 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
                     
31 March 2010
                    
Personal
117,991 
22,891 
39,371 
3,057 
78 
1,379 
184,767 
164,252 
  
20,515 
Banks and financial institutions
38,957 
76,341 
27,481 
17,306 
9,621 
5,335 
175,041 
153,428 
  
21,613 
Property
61,829 
27,374 
8,544 
2,162 
3,074 
664 
103,647 
59,356 
  
44,291 
Transport and storage
14,725 
8,419 
7,725 
5,728 
2,786 
7,473 
46,856 
31,460 
  
15,396 
Manufacturing
9,339 
14,515 
8,683 
3,099 
1,476 
3,898 
41,010 
30,069 
  
10,941 
Wholesale and retail trade
16,691 
7,633 
5,093 
1,557 
779 
1,038 
32,791 
24,981 
  
7,810 
Public sector
11,790 
4,111 
6,019 
1,373 
311 
928 
24,532 
21,237 
  
3,295 
TMT (2)
6,947 
7,789 
5,180 
2,314 
651 
1,467 
24,348 
15,220 
  
9,128 
Building
10,243 
7,799 
2,097 
1,059 
211 
964 
22,373 
17,632 
  
4,741 
Tourism and leisure
11,567 
2,808 
2,533 
832 
621 
448 
18,809 
15,318 
  
3,491 
Business services
10,196 
3,028 
2,678 
832 
1,287 
711 
18,732 
15,362 
  
3,370 
Power, water and waste
4,961 
4,871 
3,744 
1,250 
1,142 
999 
16,967 
10,936 
  
6,031 
Natural resources and nuclear
2,488 
2,840 
5,551 
1,353 
1,019 
3,074 
16,325 
12,514 
  
3,811 
Agriculture and fisheries
3,061 
925 
1,263 
92 
68 
78 
5,487 
5,017 
  
470 
                     
 
320,785 
191,344 
125,962 
42,014 
23,124 
28,456 
731,685 
576,782 
  
154,903 

For notes to this table refer to page 81.
 
80
 
Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Analysis by industry and geography (continued)

 
UK 
Western  Europe 
 (excl. 
 UK) 
North 
 America 
Asia 
 Pacific 
Latin 
 America 
Other (1) 
Total 
Core 
  
 
 Non-Core 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
                     
31 December 2009 (3)
                    
Personal
118,050 
23,596 
37,679 
3,072 
63 
1,368 
183,828 
163,549 
  
20,279 
Banks and financial institutions
40,415 
75,937 
24,273 
15,739 
10,004 
5,182 
171,550 
149,166 
  
22,384 
Property
62,507 
27,802 
8,323 
2,480 
2,902 
429 
104,443 
58,009 
  
46,434 
Transport and storage
14,887 
7,854 
7,265 
5,475 
2,592 
7,168 
45,241 
30,030 
  
15,211 
Manufacturing
9,283 
13,998 
7,690 
3,483 
1,559 
3,848 
39,861 
30,249 
  
9,612 
Wholesale and retail trade
15,712 
7,642 
5,573 
1,531 
843 
1,344 
32,645 
24,787 
  
7,858 
Public sector
11,171 
5,120 
5,899 
2,452 
300 
723 
25,665 
22,219 
  
3,446 
TMT (2)
7,716 
8,689 
5,039 
2,117 
697 
1,502 
25,760 
15,424 
  
10,336 
Building
10,520 
7,607 
1,882 
985 
203 
897 
22,094 
16,945 
  
5,149 
Tourism and leisure
11,581 
2,922 
2,626 
786 
632 
499 
19,046 
15,439 
  
3,607 
Business services
9,206 
2,337 
2,605 
790 
1,259 
533 
16,730 
13,980 
  
2,750 
Power, water and waste
4,810 
4,950 
3,470 
1,212 
1,625 
965 
17,032 
10,836 
  
6,196 
Natural resources and nuclear
2,592 
2,999 
5,447 
1,355 
1,442 
2,375 
16,210 
11,149 
  
5,061 
Agriculture and fisheries
937 
667 
1,615 
92 
59 
82 
3,452 
3,276 
  
176 
                     
 
319,387 
192,120 
119,386 
41,569 
24,180 
26,915 
723,557 
565,058 
  
158,499 

Notes:
(1)
‘Other’ comprises Central and Eastern Europe, Middle East, Central Asia and Africa.
(2)
Telecommunication, media and technology.
(3)
Revised.

Key point
●
The largest increases were in the Core portfolios in the UK and North America, the latter in part reflecting the weakening of sterling against the US dollar during the quarter.


81
 
Risk and capital management (continued)

Credit risk (continued)

Credit risk assets (continued)

Credit risk asset quality
Internal reporting and oversight of risk assets is principally differentiated by credit grades.  Customers are assigned credit grades based on various credit grading models that reflect the key drivers of default for the customer type.  All credit grades across the Group map to both a Group level asset quality scale used for external financial reporting and a master grading scale for wholesale exposures used for internal management reporting across portfolios.  Accordingly, the measurement of risk is easily aggregated and can be reported at increasing levels of granularity depending on audience and business need.
 
   
31 March 2010
  
31 December 2009 (1)
Asset quality band
Probability of default range
Core 
£m 
Non-Core 
£m 
Total 
£m 
% 
of total 
  
Core 
£m 
Non-Core 
£m 
Total 
£m 
% 
of total
                     
AQ1
0% - 0.03%
159,418 
21,430 
180,848 
24.7 
  
149,132 
23,226 
172,358 
23.8 
AQ2
0.03% - 0.05%
17,640 
3,269 
20,909 
2.9 
  
18,029 
3,187 
21,216 
2.9 
AQ3
0.05% - 0.10%
30,598 
5,865 
36,463 
5.0 
  
26,703 
7,613 
34,316 
4.7 
AQ4
0.10% - 0.38%
80,384 
14,983 
95,367 
13.0 
  
78,144 
18,154 
96,298 
13.3 
AQ5
0.38% - 1.08%
91,522 
23,493 
115,015 
15.7 
  
92,908 
24,977 
117,885 
16.3 
AQ6
1.08% - 2.15%
73,858 
18,684 
92,542 
12.7 
  
76,206 
18,072 
94,278 
13.0 
AQ7
2.15% - 6.09%
42,078 
15,059 
57,137 
7.8 
  
44,643 
15,732 
60,375 
8.3 
AQ8
6.09% - 17.22%
17,819 
4,226 
22,045 
3.0 
  
18,923 
4,834 
23,757 
3.4 
AQ9
17.22% - 100%
12,610 
8,693 
21,303 
2.9 
  
11,589 
8,074 
19,663 
2.7 
AQ10
100%
18,665 
24,960 
43,625 
6.0 
  
16,756 
22,666 
39,422 
5.5 
Other (2)
  
32,190 
14,241 
46,431 
6.3 
  
32,025 
11,964 
43,989 
6.1 
                     
   
576,782 
154,903 
731,685 
100.0 
  
565,058 
158,499 
723,557 
100.0 

 
Notes:
(1)
Revised.
(2)
‘Other’ largely comprises assets covered by the standardised approach for which a probability of default equivalent to those assigned to assets covered by the internal ratings based approach is not available.

Key points
●
The increase in AQ1, in part, reflects the growth in bank and financial institution exposures.
   
●
AQ10 exposures include non-performing loans and other defaulted credit exposures, including derivative receivables.
 

 
82

Risk and capital management (continued)

Credit risk (continued)

Debt securities

The table below analyses debt securities by external ratings.
 
UK and US 
 government 
 
 
Other 
 government 
 
Bank and 
 building 
 society 
 
 
Asset-backed 
 securities 
 
 
 
Corporate 
 
 
 
Other 
 
 
 
Total 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
31 March 2010
              
AAA
51,175 
54,031 
3,821 
59,172 
1,855 
- 
170,054 
AA and above
- 
16,821 
4,051 
9,579 
1,318 
- 
31,769 
A and above
- 
11,507 
5,137 
4,836 
1,967 
- 
23,447 
BBB- and above
- 
4,214 
982 
4,567 
2,338 
- 
12,101 
Non-investment grade
- 
357 
276 
3,934 
2,662 
- 
7,229 
Unrated
- 
1,568 
317 
2,297 
2,627 
707 
7,516 
               
 
51,175 
88,498 
14,584 
84,385 
12,767 
707 
252,116 
               
31 December 2009
              
AAA
49,820 
44,396 
4,012 
65,067 
2,263 
- 
165,558 
AA and above
- 
22,003 
4,930 
8,942 
1,429 
- 
37,304 
A and above
- 
13,159 
3,770 
3,886 
1,860 
- 
22,675 
BBB- and above
- 
3,847 
823 
4,243 
2,187 
- 
11,100 
Non-investment grade
- 
353 
169 
3,515 
2,042 
- 
6,079 
Unrated
- 
504 
289 
1,949 
2,601 
1,036 
6,379 
               
 
49,820 
84,262 
13,993 
87,602 
12,382 
1,036 
249,095 

Key points
●
67% (31 December 2009 - 66%) of the portfolio is AAA rated; 94% (31 December 2009 - 95%) is investment grade. Securities issued by central and local governments comprised 55% (31 December 2009 - 54%) of the portfolio.
●
See note 7 on page 73 for additional information.

83

Risk and capital management (continued)

Credit risk (continued)

Loans and advances to customers by geography and industry
The following table analyses the balance sheet carrying value of loans and advances to customers (excluding reverse repurchase agreements and stock borrowing) by industry and geography.
 
 
31 March 2010
31 December 
2009 
 
Core
Non-Core 
Total 
 
£m
£m 
£m 
£m 
         
UK Domestic
        
Central and local government
3,391 
95 
3,486 
3,174 
Finance
18,211 
2,557 
20,768 
17,023 
Individuals – home
92,302 
1,838 
94,140 
92,583 
Individuals – other
23,727 
1,005 
24,732 
25,245 
Other commercial and industrial comprising:
        
-  Manufacturing
8,091 
2,551 
10,642 
11,425 
-  Construction
4,703 
2,723 
7,426 
7,780 
-  Service industries and business activities
39,561 
11,421 
50,982 
51,660 
-  Agriculture, forestry and fishing
2,762 
127 
2,889 
2,913 
-  Property
20,958 
26,326 
47,284 
48,859 
Finance leases and instalment credit
5,326 
10,851 
16,177 
16,186 
Interest accruals
537 
146 
683 
893 
         
 
219,569 
59,640 
279,209 
277,741 
         
UK International
        
Central and local government
1,769 
127 
1,896 
1,455 
Finance
13,209 
4,059 
17,268 
18,255 
Individuals – home
69 
7 
76 
1 
Individuals – other
410 
- 
410 
505 
Other commercial and industrial comprising:
        
-  Manufacturing
5,547 
779 
6,326 
6,292 
-  Construction
2,443 
541 
2,984 
2,824 
-  Service industries and business activities
24,070 
4,196 
28,266 
26,951 
-  Agriculture, forestry and fishing
188 
10 
198 
171 
-  Property
16,924 
6,533 
23,457 
22,935 
Interest accruals
- 
- 
- 
2 
         
 
64,629 
16,252 
80,881 
79,391 
         
Europe
        
Central and local government
237 
1,150 
1,387 
1,498 
Finance
3,727 
1,538 
5,265 
4,877 
Individuals – home
12,111 
6,309 
18,420 
21,773 
Individuals – other
1,564 
1,461 
3,025 
2,886 
Other commercial and industrial comprising:
        
-  Manufacturing
7,432 
7,989 
15,421 
15,920 
-  Construction
1,953 
1,245 
3,198 
3,113 
-  Service industries and business activities
19,597 
9,160 
28,757 
28,971 
-  Agriculture, forestry and fishing
841 
377 
1,218 
1,093 
-  Property
12,753 
8,279 
21,032 
20,229 
Finance leases and instalment credit
409 
1,011 
1,420 
1,473 
Interest accruals
144 
198 
342 
411 
         
 
60,768 
38,717 
99,485 
102,244 

 
84

Risk and capital management (continued)

Credit risk (continued)

Loans and advances to customers by geography and industry (continued)

 
31 March 2010
31 December 
2009 
 
Core 
Non-Core 
Total 
 
£m 
£m 
£m 
£m 
         
US
        
Central and local government
206 
64 
270 
260 
Finance
9,453 
857 
10,310 
11,295 
Individuals – home
22,750 
4,390 
27,140 
26,159 
Individuals – other
7,780 
3,620 
11,400 
10,972 
Other commercial and industrial comprising:
        
-  Manufacturing
5,755 
1,316 
7,071 
7,095 
-  Construction
498 
134 
632 
622 
-  Service industries and business activities
15,095 
4,032 
19,127 
18,583 
-  Agriculture, forestry and fishing
32 
- 
32 
27 
-  Property
1,677 
3,906 
5,583 
5,286 
Finance leases and instalment credit
2,465 
- 
2,465 
2,417 
Interest accruals
215 
90 
305 
298 
         
 
65,926 
18,409 
84,335 
83,014 
         
Rest of the World
        
Central and local government
922 
30 
952 
1,273 
Finance
8,526 
598 
9,124 
8,936 
Individuals – home
399 
177 
576 
391 
Individuals – other
1,456 
460 
1,916 
2,063 
Other commercial and industrial comprising:
        
-  Manufacturing
2,859 
995 
3,854 
3,942 
-  Construction
81 
189 
270 
421 
-  Service industries and business activities
4,846 
2,728 
7,574 
7,911 
-  Agriculture, forestry and fishing
6 
- 
6 
75 
-  Property
334 
1,878 
2,212 
2,117 
Finance leases and instalment credit
9 
31 
40 
27 
Interest accruals
85 
22 
107 
124 
         
 
19,523 
7,108 
26,631 
27,280 
         
Total
        
Central and local government
6,525 
1,466 
7,991 
7,660 
Finance
53,126 
9,609 
62,735 
60,386 
Individuals – home
127,631 
12,721 
140,352 
140,907 
Individuals – other
34,937 
6,546 
41,483 
41,671 
Other commercial and industrial comprising:
        
-  Manufacturing
29,684 
13,630 
43,314 
44,674 
-  Construction
9,678 
4,832 
14,510 
14,760 
-  Service industries and business activities
103,169 
31,537 
134,706 
134,076 
-  Agriculture, forestry and fishing
3,829 
514 
4,343 
4,279 
-  Property
52,646 
46,922 
99,568 
99,426 
Finance leases and instalment credit
8,209 
11,893 
20,102 
20,103 
Interest accruals
981 
456 
1,437 
1,728 
         
Loans and advances to customers – gross
430,415 
140,126 
570,541 
569,670 
Loan impairment provisions
(7,259)
(9,410)
(16,669)
(15,016)
         
Total loans and advances to customers
423,156 
130,716 
553,872 
554,654 


85

Risk and capital management (continued)

Credit risk (continued)

Risk elements in lending (REIL) and potential problem loans (PPL)
The table below analyses the Group's loans that are classified as REIL and PPL.

 
31 March 2010
  
31 December 2009
 
Core 
Non-Core 
Total  
  
Core 
Non-Core 
Total  
 
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Loans accounted for on a non-accrual basis (2):
              
-  Domestic
6,535 
7,738 
14,273 
  
6,348 
7,221 
13,569 
-  Foreign
4,268 
14,534 
18,802 
  
4,383 
13,859 
18,242 
               
 
10,803 
22,272 
33,075 
  
10,731 
21,080 
31,811 
               
Accruing loans past due  90 days or more (3):
              
-  Domestic
1,315 
1,144 
2,459 
  
1,135 
1,089 
2,224 
-  Foreign
421 
581 
1,002 
  
223 
731 
954 
               
 
1,736 
1,725 
3,461 
  
1,358 
1,820 
3,178 
               
Total REIL
12,539 
23,997 
36,536 
  
12,089 
22,900 
34,989 
               
PPL (4):
              
-  Domestic
150 
140 
290 
  
137 
287 
424 
-  Foreign
188 
115 
303 
  
135 
365 
500 
               
Total PPL
338 
255 
593 
  
272 
652 
924 
               
Total REIL and PPL
12,877 
24,252 
37,129 
  
12,361 
23,552 
35,913 
               
REIL as a % of gross lending to customers
  excluding reverse repos (5)
2.9%
16.5%
6.3%
  
2.8%
15.1%
6.1%
               
REIL and PPL as a % of gross lending to
  customers excluding reverse repos (5)
3.0%
16.7%
6.4%
  
2.9%
15.5%
6.2%

Notes:
(1)
‘Domestic’ consists of the UK domestic transactions of the Group.  ‘Foreign’ comprises the Group’s transactions conducted through the offices outside the UK and those offices in the UK specifically organised to service international banking transactions.
(2)
All loans against which an impairment provision is held are reported in the non-accrual category.
(3)
Loans where an impairment event has taken place but no impairment recognised.  This category is used for fully collateralised non-revolving credit facilities.
(4)
Loans for which an impairment has occurred but no impairment provision is necessary.  This category is used for fully collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible.
(5)
Includes gross loans relating to disposal groups.

Key points
●
REIL increased by 4%, with rises in Non-Core and Ulster being partly offset by reductions in GBM.
   
●
REIL and PPL represent 6.4% of gross loans to customers, up from 6.2% at year-end.
 

 
86

Risk and capital management (continued)

Credit risk (continued)

Risk elements in lending (REIL) and potential problem loans (continued)

 
REIL 
PPL 
REIL & PPL 
Total 
 provision 
Total 
 provision as 
 % of REIL 
Total 
 provision 
 as % of 
 REIL & PPL 
 
£m 
£m 
£m 
£m 
% 
% 
             
31 March 2010
            
UK Retail
4,706 
- 
4,706 
2,810 
60 
60 
UK Corporate
2,496 
106 
2,602 
1,367 
55 
53 
Wealth
219 
45 
264 
58 
26 
22 
Global Banking & Markets
1,237 
177 
1,414 
1,298 
105 
92 
Global Transaction Services
184 
7 
191 
184 
100 
96 
Ulster Bank
2,987 
3 
2,990 
1,157 
39 
39 
US Retail & Commercial
710 
- 
710 
523 
74 
74 
             
Core
12,539 
338 
12,877 
7,397 
59 
57 
Non-Core
23,997 
255 
24,252 
9,430 
39 
39 
             
 
36,536 
593 
37,129 
16,827 
46 
45 
             
31 December 2009
            
UK Retail
4,641 
- 
4,641 
2,677 
58 
58 
UK Corporate
2,330 
97 
2,427 
1,271 
55 
52 
Wealth
218 
38 
256 
55 
25 
21 
Global Banking & Markets
1,800 
131 
1,931 
1,289 
72 
67 
Global Transaction Services
197 
4 
201 
189 
96 
94 
Ulster Bank
2,260 
2 
2,262 
962 
43 
43 
US Retail & Commercial
643 
- 
643 
478 
74 
74 
             
Core
12,089 
272 
12,361 
6,921 
57 
56 
Non-Core
22,900 
652 
23,552 
8,252 
36 
35 
             
 
34,989 
924 
35,913 
15,173 
43 
42 

Key points
●
Provision coverage increased during the first quarter from 43% and 42% to 46% and 45% on REIL and REIL & PPL respectively, with increases in both Core and Non-Core.
   
●
Coverage in Core improved across most divisions, with the exception of Ulster.

Analysis of loan impairment provisions on loans to customers

 
31 March 2010
  
31 December 2009
 
Core 
Non-Core 
Total 
  
Core 
Non-Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Latent loss
2,017 
809 
2,826 
  
2,005 
735 
2,740 
Collectively assessed
3,783 
1,164 
4,947 
  
3,509 
1,266 
4,775 
Individually assessed
1,459 
7,437 
8,896 
  
1,272 
6,229 
7,501 
               
Total (1)
7,259 
9,410 
16,669 
  
6,786 
8,230 
15,016 

Note:
(1)
Excludes £158 million relating to loans and advances to banks (31 December 2009 - £157 million).
 
 
87
 
Risk and capital management (continued)

Funding and liquidity risk

The Group’s liquidity policy is designed to ensure that at all times the Group can meet its obligations as they fall due.

Liquidity management within the Group addresses the overall balance sheet structure and the control, within prudent limits, of risk arising from the mismatch of maturities across the balance sheet and from the exposure to undrawn commitments and other contingent obligations.

Loan to deposit ratio (net of provisions): The Group monitors the loan to deposit ratio as a key metric.  This ratio has improved from 135% at 31 December 2009 to 131% at 31 March 2010 for the Group and from 104% at 31 December 2009 to 102% at 31 March 2010 for the Core business.  The Group has a target of 100% for 2013.  The gap between customer loans and customer deposits (excluding repos and bancassurance) narrowed by £11 billion from £142 billion at 31 December 2009 to £131 billion at 31 March 2010, due primarily to growth in deposits and a reduction in Non-Core assets.

Short-term wholesale funding: The overall reliance on wholesale funding with less than 1 year residual maturity has reduced from £249 billion (including £110 billion of deposits from banks) at 31 December 2009 to £222 billion (including £94 billion of deposits from banks) at 31 March 2010.

Undrawn commitments: The Group has been actively managing down the amount of undrawn commitments that it is exposed to.  Undrawn commitments have decreased from £289 billion at 31 December 2009 to £283 billion at 31 March 2010.

Liquidity reserves: The Group is targeting a liquidity pool of £150 billion by 2013.  The table below analyses the breakdown of these assets which comprise government securities, other liquid assets and a pool of unencumbered assets that are available for securitisation to raise funds if and when required.

 
31 March 
2010 
31 December 
2009 
Liquidity reserves
£m 
£m 
     
Central Group Treasury portfolio
25,212 
19,655 
Treasury bills
19,810 
27,547 
Other government securities
14,333 
10,205 
     
Government securities
59,355 
57,407 
     
Cash and central bank balances
42,008 
51,500 
Unencumbered collateral (1)
46,370 
42,055 
Other liquid assets
17,158 
19,699 
     
 
164,891 
170,661 

Note:
(1)
Includes secured assets which are eligible for discounting at central banks.


88
 
Risk and capital management (continued)

Funding and liquidity risk (continued)

Repo agreements: At 31 March 2010 the Group had £81 billion (31 December 2009 - £68 billion) of customer secured funding and £48 billion (31 December 2009 - £38 billion) of bank secured funding, which includes borrowing using central bank funding schemes.  With markets continuing to stabilise through the first quarter of 2010, the Group has reduced its reliance on secured funding from central bank liquidity schemes.

Wholesale funding breakdown
The tables below analyses the composition of the Group’s sources of wholesale funding and the maturity profile of the Group’s debt securities in issue and subordinated debt.

 
31 March 2010
  
31 December 2009
 
£m 
% 
  
£m 
% 
           
Deposits by banks (1)
100,168 
12.6 
  
115,642 
14.3 
           
Debt securities in issue:
          
-  Commercial paper
36,588 
4.6 
  
44,307 
5.5 
-  Certificates of deposits
57,369 
7.2 
  
58,195 
7.2 
-  Medium term notes and other bonds
126,610 
15.9 
  
125,800 
15.6 
-  Securitisations
18,645 
2.3 
  
18,027 
2.2 
           
 
239,212 
30.0 
  
246,329 
30.5 
           
Subordinated liabilities
31,936 
4.0 
  
31,538 
3.9 
           
Total wholesale funding
371,316 
46.6 
  
393,509 
48.7 
Customer deposits (1)
425,102 
53.4 
  
414,251 
51.3 
           
 
796,418 
100.0 
  
807,760 
100.0 

Note:
(1)
Excludes repurchase agreements and stock lending.

 
31 March 2010
  
31 December 2009
 
Debt 
securities 
 in issue 
Subordinated debt 
Total 
    
Debt 
securities 
in issue 
Subordinated 
debt 
Total 
  
 
£m 
£m
£m 
% 
  
£m 
£m 
£m 
% 
                   
Less than one year
126,102 
1,835 
127,937 
47.2 
  
136,901 
2,144 
139,045 
50.0 
1-5 years
73,842 
6,079 
79,921 
29.5 
  
70,437 
4,235 
74,672 
26.9 
More than 5 years
39,268 
24,022 
63,290 
23.3 
  
38,991 
25,159 
64,150 
23.1 
                   
 
239,212 
31,936 
271,148 
100.0 
  
246,329 
31,538 
277,867 
100.0 

 

 
89
 
Risk and capital management (continued)

Funding and liquidity risk (continued)

Wholesale funding breakdown (continued)

Key points
●
During the first quarter of 2010, the Group issued £8 billion of public, private and/or structured unguaranteed debt securities with a maturity greater than one year.
   
●
Debt securities with a remaining maturity of less than 1 year have decreased during the quarter by £11 billion to £126 billion at 31 March 2010, down from £137 billion at 31 December 2009 reflecting continued deleveraging within the Group.
   
●
As a result of the above, the proportion of debt instruments with a remaining maturity of greater than one year has increased from 50% at 31 December 2009 to 53% at 31 March 2010.
   
●
The Group has recently received approval from the UK Financial Services Authority for a €15 billion covered bond programme which is ready to launch.

Net stable funding ratio
The net stable funding ratio shows the proportion of structural term assets which are funded by stable funding including customer deposits, long-term wholesale funding, and equity. The measure has remained stable at 90%. The Group’s measurement basis will be reassessed as regulatory proposals are developed and industry standards implemented.

 
31 March 2010
  
31 December 2009
    
   
ASF(1) 
    
ASF(1) 
  
Weighting 
 
£bn 
£bn 
  
£bn 
£bn 
  
% 
               
Equity
81 
81 
  
80 
80 
  
100 
Wholesale lending > 1 year
149 
149 
  
144 
144 
  
100 
Wholesale lending < 1 year
222 
- 
  
249 
- 
  
- 
Derivatives
444 
- 
  
422 
- 
  
- 
Repos
129 
- 
  
106 
- 
  
- 
Customer deposits
425 
361 
  
415 
353 
  
85 
Other (deferred taxation, insurance liabilities, etc)
133 
- 
  
106 
- 
  
- 
               
Total liabilities and equity
1,583 
591 
  
 1,522 
577 
    
               
               
Cash
42 
- 
  
52 
- 
  
- 
Inter bank lending
57 
- 
  
49 
- 
  
- 
Debt securities
252 
50 
  
249 
50 
  
20 
Derivatives
462 
- 
  
438 
- 
  
- 
Reverse repos
96 
- 
  
76 
- 
  
- 
Advances < 1 year
138 
69 
  
139 
69 
  
50 
Advances >1 year
416 
416 
  
 416 
416 
  
100 
Other (prepayments, accrued income, deferred taxation)
120 
120 
  
103 
103 
  
100 
               
Total assets
1,583 
655 
  
 1,522 
638 
    
               
Net stable funding ratio
  
90% 
    
90% 
    

Note:
(1)
Available Stable Funding.


90
 
Risk and capital management (continued)

Market risk
Market risk arises from changes in interest rates, foreign currency, credit spread, equity prices and risk related factors such as market volatilities.  The Group manages market risk centrally within its trading and non-trading portfolios through a comprehensive market risk management framework.  This framework includes limits based on, but not limited, to VaR, scenario analysis, position and sensitivity analyses.

At the Group level, the risk appetite is expressed in the form of a combination of VaR, sensitivity and scenario limits.  VaR is a technique that produces estimates of the potential change in the market value of a portfolio over a specified time horizon at given confidence levels.  For internal risk management purposes, the Group’s VaR assumes a time horizon of one trading day and confidence level of 99%.  The Group's VaR model is based on a historical simulation model, utilising data from the previous two years trading results.

The VaR disclosure is broken down into trading and non-trading, where trading VaR relates to the main trading activities of the Group and non-trading reflects the VaR associated with reclassified assets, money market business and the management of internal funds flow within the Group’s businesses.

As part of the ongoing review and analysis of the suitability of the VaR model, a methodology enhancement to the US ABS VaR was approved and incorporated into the regulatory model in Q1 2010. The enhancement replaced the absolute spread-based approach with a relative price-based mapping scheme. The enhancement better reflects the risk in the context of position changes, downgrades and vintage as well as improving differentiation between prime, Alt-A and sub-prime exposures.

All VaR models have limitations, which include:

●
Historical simulation VaR may not provide the best estimate of future market movements.  It can only provide a prediction of the future based on events that occurred in the time series horizon.  Therefore, events more severe than those in the historical data series cannot be predicted;
   
●
VaR that uses a 99% confidence level does not reflect the extent of potential losses beyond that percentile;
   
●
VaR that uses a one-day time horizon will not fully capture the profit and loss implications of positions that cannot be liquidated or hedged within one day; and
   
●
The Group computes the VaR of trading portfolios at the close of business.  Positions may change substantially during the course of the trading day and intra-day profit and losses will be incurred.

These limitations mean that the Group cannot guarantee that profits or losses will not exceed the VaR.

91
 
Risk and capital management (continued)

Market risk (continued)

Traded portfolios
The table below analyses the VaR for the Group’s trading portfolios segregated by type of market risk exposure.
 
 
31 March 2010 (1)
  
31 December 2009 (1)
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
47.5 
54.4 
64.2 
32.5 
  
38.8 
50.5 
59.8 
28.1 
Credit spread
148.8 
163.3 
191.5 
113.0 
  
165.4 
174.8 
194.7 
146.7 
Currency
18.6 
22.2 
24.7 
13.9 
  
18.9 
20.7 
25.5 
14.6 
Equity
11.3 
8.2 
17.3 
6.6 
  
11.1 
13.1 
19.8 
2.7 
Commodity
10.6 
10.8 
14.0 
8.3 
  
14.9 
8.9 
32.1 
6.6 
Diversification
  
(126.4)
        
(86.1)
    
                   
Total
140.6 
132.5 
204.7 
103.0 
  
158.8 
181.9 
188.8 
128.7 
                   
Core
87.2 
82.4 
145.4 
58.9 
  
112.9 
127.3 
135.4 
92.8 
CEM (2)
37.5 
33.6 
41.2 
30.3 
  
38.5 
38.6 
41.0 
34.3 
Core excluding CEM
79.5 
73.5 
108.7 
53.6 
  
93.0 
97.4 
116.5 
70.6 
                   
Non-Core
84.6 
87.1 
98.8 
63.2 
  
78.0 
84.8 
100.3 
58.6 

Notes:
(1)
As of and for the quarter ended.
(2)
Counterparty Exposure Management.

Key points
●
Overall period end market exposure across the asset classes declined as we realigned positions in light of our perception of market opportunity and observed changes in market liquidity.
   
●
The credit spread and Core VaR have decreased significantly in Q1 2010 compared with Q4 2009 due to the implementation in January of the relative price-based mapping scheme described above.
   
●
The Non-Core VaR also decreased due to the implementation of the price mapping scheme, but this was more than offset by the weakening of sterling against the US dollar.
   
●
The diversification effect increased in Q1 2010 compared to the previous quarter, reducing the overall level of risk.  This was primarily due to underlying position changes in interest rate trading and counterparty exposure management.  There was also a small increase in diversification benefit following the implementation of the new ABS VaR model.


92
 
Risk and capital management (continued)

Market risk (continued)

Non-traded portfolios
The table below analyses the VaR for the Group’s non-trading portfolios segregated by type of market risk exposure.

 
31 March 2010 (1)
  
31 December 2009 (1)
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
12.2 
13.4 
15.8 
9.0 
  
13.2 
16.5 
17.2 
9.5 
Credit spread
175.9 
161.8 
226.9 
157.0 
  
226.5 
213.3 
240.1 
213.3 
Currency
1.4 
0.9 
4.9 
0.3 
  
1.6 
0.6 
7.0 
0.5 
Equity
1.6 
0.8 
7.3 
0.2 
  
2.8 
2.3 
3.4 
1.7 
Diversification
  
(27.1)
        
(26.0)
    
                   
Total
168.2 
149.8 
216.2 
147.6 
  
216.2 
206.7 
232.1 
201.5 
                   
Core
93.2 
76.2 
145.7 
76.2 
  
131.0 
129.4 
140.7 
115.7 
Non-Core
90.2 
101.2 
107.1 
79.6 
  
99.1 
87.6 
107.9 
80.3 

Note:
(1)
As of and for the quarter ended.

Key points
●
As for traded VaR, the non-traded credit spread and Core VaR have decreased significantly during the quarter due to the to the implementation of the relative price-based mapping scheme in the VaR methodology discussed above.
   
●
Available-for-sale asset sales also contributed to this VaR reduction.
   
●
The Q1 2010 period end Non-Core VaR increased due to the implementation in March of the US ABS VaR methodology for the European managed non-traded portfolios. The Non-Core banking book is dominated by positions booked in Europe, comprising both US and European ABS.  In this instance the VaR relating to the US ABS position increased as a result of greater volatility in the time series.


93

Risk and capital management (continued)

Other risk exposures

Explanatory note
These disclosures provide information on certain elements of the Group’s business activities affected by the unprecedented market events which began during the second half of 2007, the majority of which reside within Non-Core and, to a lesser extent, Global Banking & Markets (‘GBM’), US Retail & Commercial and Group Treasury. For certain disclosures the information presented has been analysed into the Group’s Core and Non-Core businesses.

Asset-backed securities (ABS)
The Group structures, originates, distributes and trades debt in the form of loan, bond and derivative instruments, in all major currencies and debt capital markets in North America, Western Europe, Asia and major emerging markets. The table below analyses the carrying value of the debt securities portfolio held by the Group.

 
31 March 
 2010 
31 December 
 2009 
 
£bn 
£bn 
     
Securities issued by central and local governments
139.7 
134.1 
Asset-backed securities
84.4 
87.6 
Securities issued by corporates, US federal agencies and other entities
13.4 
13.4 
Securities issued by banks and building societies
14.6 
14.0 
     
Total debt securities
252.1 
249.1 

ABS are securities with an interest in an underlying pool of referenced assets. The risks and rewards of the referenced pool are passed onto investors by the issue of securities with varying seniority, by a special purpose entity.

The Group has exposures to ABS which are predominantly debt securities but can also be held in derivative form. Debt securities include residential mortgage backed securities (RMBS), commercial mortgage backed securities (CMBS), ABS collateralised debt obligations (CDOs) and collateralised loan obligations (CLOs) and other ABS. In many cases the risk on these assets is hedged by way of credit derivative protection, purchased over the specific asset or relevant ABS indices. The counterparty to some of these hedge transactions are monoline insurers.

 
94
 

Risk and capital management (continued)

Other risk exposures: Asset-backed securities (continued)

Asset-backed securities by geography

The table below analyses the gross and net exposures and carrying values of these asset-backed securities by geography of the underlying assets.

 
31 March 2010
  
31 December 2009
 
US 
UK 
Other
Europe 
RoW(1) 
Total 
  
US 
UK 
Other 
Europe 
RoW(1) 
Total 
 
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
                       
Gross exposure:(2)
                      
RMBS: G10 governments (3)
 23,645 
 226 
 15,747 
 - 
 39,618 
  
26,693 
314 
16,035 
94 
43,136 
RMBS: prime
 2,076 
 5,244 
 3,683 
 236 
 11,239 
  
2,965 
5,276 
4,567 
222 
13,030 
RMBS: non-conforming
 1,332 
 2,222 
 127 
 - 
 3,681 
  
1,341 
2,138 
128 
- 
3,607 
RMBS: sub-prime
 1,785 
 438 
 193 
 423 
 2,839 
  
1,668 
724 
195 
561 
3,148 
CMBS
 3,974 
 1,667 
 1,594 
 65 
 7,300 
  
3,422 
1,781 
1,420 
75 
6,698 
CDOs
 15,042 
 328 
 510 
 - 
 15,880 
  
12,382 
329 
571 
27 
13,309 
CLOs
 9,967 
 114 
 1,770 
 86 
 11,937 
  
9,092 
166 
2,169 
1,173 
12,600 
Other ABS
 3,753 
 1,909 
 4,546 
 1,043 
 11,251 
  
3,587 
1,980 
5,031 
1,569 
12,167 
                       
 
 61,574 
 12,148 
 28,170 
 1,853 
 103,745 
  
61,150 
 12,708 
30,116 
3,721 
107,695 
                       
Carrying value:
                      
RMBS: G10 governments (3)
 24,117 
 225 
 15,236 
 - 
 39,578 
  
27,034 
305 
15,604 
33 
42,976 
RMBS: prime
 1,819 
 4,717 
 3,441 
 237 
 10,214 
  
2,696 
4,583 
4,009 
212 
11,500 
RMBS: non-conforming
 996 
 2,127 
 127 
 - 
 3,250 
  
958 
1,957 
128 
- 
3,043 
RMBS: sub-prime
 956 
 263 
 163 
 401 
 1,783 
  
977 
314 
146 
387 
1,824 
CMBS
 3,439 
 1,328 
 1,008 
 49 
 5,824 
  
3,237 
1,305 
924 
43 
5,509 
CDOs
 3,523 
 122 
 370 
 - 
 4,015 
  
3,275 
166 
400 
27 
3,868 
CLOs
 8,634 
 80 
 1,313 
 74 
 10,101 
  
6,736 
112 
1,469 
999 
9,316 
Other ABS
 3,250 
 1,210 
 4,316 
 844 
 9,620 
  
2,886 
1,124 
4,369 
1,187 
9,566 
                       
 
 46,734 
 10,072 
 25,974 
 1,605 
 84,385 
  
47,799 
9,866 
27,049 
2,888 
87,602 
                       
Net exposure:(2)
                      
RMBS: G10 governments (3)
 24,117 
 225 
 15,236 
 - 
 39,578 
  
27,034 
305 
15,604 
33 
42,976 
RMBS: prime
 1,752 
 3,782 
 2,615 
 198 
 8,347 
  
2,436 
3,747 
3,018 
172 
9,373 
RMBS: non-conforming
 981 
 2,127 
 127 
 - 
 3,235 
  
948 
1,957 
128 
- 
3,033 
RMBS: sub-prime
 327 
 253 
 154 
 362 
 1,096 
  
565 
305 
137 
290 
1,297 
CMBS
 3,073 
 1,245 
 676 
 40 
 5,034 
  
2,245 
1,228 
595 
399 
4,467 
CDOs
 1,012 
 75 
 345 
 - 
 1,432 
  
743 
124 
382 
26 
1,275 
CLOs
 1,782 
 67 
 1,047 
 36 
 2,932 
  
1,636 
86 
1,104 
39 
2,865 
Other ABS
 2,639 
 934 
 4,281 
 663 
 8,517 
  
2,117 
839 
4,331 
1,145 
8,432 
                       
 
 35,683 
 8,708 
 24,481 
 1,299 
 70,171 
  
37,724 
8,591 
25,299 
2,104 
73,718 

For notes to this table refer to page 96.

 
95
 
 
Risk and capital management (continued)

Other risk exposures: Asset-backed securities (continued)

Asset-backed securities by rating

The table below summarises the ratings (refer to note 5 below) of ABS carrying values.

 
AAA rated 
AA- rated 
 and above 
A- rated 
 and above 
BBB- rated 
 and above 
Sub- 
investment 
 grade 
Not 
 publicly 
 rated 
Total 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
31 March 2010
              
Carrying value:
              
RMBS: G10 governments (3)
37,116 
2,154 
217 
18 
- 
73 
 39,578 
RMBS: prime
7,951 
890 
357 
306 
689 
21 
 10,214 
RMBS: non-conforming
1,899 
191 
93 
386 
662 
19 
 3,250 
RMBS: sub-prime
561 
238 
263 
72 
636 
13 
 1,783 
CMBS
3,624 
352 
1,029 
380 
213 
226 
 5,824 
CDOs
778 
672 
351 
564 
1,366 
284 
 4,015 
CLOs
3,189 
3,879 
1,350 
666 
95 
922 
 10,101 
Other ABS
4,054 
1,203 
1,176 
2,175 
273 
739 
 9,620 
               
 
59,172 
9,579 
4,836 
4,567 
3,934 
2,297 
 84,385 
               
31 December 2009
              
Carrying value:
              
RMBS: G10 governments (3)
42,426 
483 
67 
- 
- 
- 
42,976 
RMBS: prime
9,211 
678 
507 
546 
558 
- 
11,500 
RMBS: non-conforming
1,980 
198 
109 
160 
594 
2 
3,043 
RMBS: sub-prime
578 
121 
306 
87 
579 
153 
1,824 
CMBS
3,440 
599 
1,022 
299 
147 
2 
5,509 
CDOs
616 
943 
254 
944 
849 
262 
3,868 
CLOs
2,718 
4,365 
607 
260 
636 
730 
9,316 
Other ABS
4,098 
1,555 
1,014 
1,947 
152 
800 
9,566 
               
 
65,067 
8,942 
3,886 
4,243 
3,515 
1,949 
87,602 

Notes:
(1)
Rest of the world.
(2)
Gross exposures represent the principal amounts relating to asset-backed securities.
(3)
RMBS: G10 government securities comprises securities that are:
 
(a)
Guaranteed or effectively guaranteed by the US government, by way of its support for US federal agencies and government sponsored enterprises;
 
(b)
Guaranteed by the Dutch government; and
 
(c)
Covered bonds, referencing primarily Dutch and Spanish government-backed loans.
(4)
Net exposures represent the carrying value after taking account of hedge protection purchased from monoline insurers and other counterparties, but exclude the effect of counterparty credit valuation adjustments.  The hedges provide credit protection of principal and interest cash flows in the event of default by the counterparty.  The value of this protection is based on the underlying instrument being protected.
(5)
Credit ratings are based on those from rating agency Standard & Poor’s.  Moody’s and Fitch have been mapped onto the Standard & Poor’s scale.

 
96
 

Risk and capital management (continued)

Other risk exposures: Asset-backed securities (continued)

Asset-backed securities by rating

Key points
·
The total carrying value of asset-backed securities decreased by 4% from £87.6 billion at 31 December 2009 to £84.4 billion at 31 March 2010, principally due to net sales and maturities of £21.5 billion, partially offset by additions of £13.9 billion, exchange rate movements of £3.6 billion and fair value increases.
   
·
Life-to-date net valuation losses on ABS held at 31 March 2010, including impairment provisions, were £19.4 billion (31 December 2009 - £20.1 billion) comprising:
   
 
·
RMBS: £2.6 billion (2009 - £3.6 billion), of which £0.8 billion (2009 - £0.7 billion) was in US sub-prime and £1.6 billion (31 December 2009 - £2.3 billion) relates to European assets;
 
·
CMBS: £1.5 billion (31 December 2009 - £1.2 billion), primarily European assets;
 
·
CDOs and CLOs of £11.9 billion (31 December 2009 - £9.4 billion) and £1.8 billion (31 December 2009 - £3.3 billion) significantly all relating to US assets in the Non-Core division.  Many of these assets have market hedges in place giving rise to a significant difference between the carrying value and the net exposure; and
 
·
Other ABS: £1.6 billion (31 December 2009 - £2.6 billion).
     
·
The majority of the Group’s exposure to ABS was through government-backed RMBS of £39.6 billion at 31 March 2010 (31 December 2009 - £43.0 billion):
   
 
·
US government-backed securities were £24.1 billion (31 December 2009 - £27.0 billion). Due to the US government backing, explicit or implicit, in these securities, the counterparty credit risk exposure is low.  This is comprised of:
   
·  Held-for-trading securities of £9.4 billion (31 December 2009 - £13.4 billion); increased activity in GBM Mortgage Trading allowed the opportunity to reposition and sell down US agency positions following market developments; and
   
·  Available-for-sale exposures of £14.7 billion (31 December 2009 - £13.6 billion) relate to liquidity portfolios held by US Retail & Commercial.
     
 
·
UK and other European government-backed exposures of £15.5 billion (31 December 2009 - £15.9 billion) primarily Dutch and Spanish government-backed loans and covered bonds.
     
·
CDOs remained broadly flat at £4.0 billion (31 December 2009 - £3.9 billion).
     
·
CLOs increased from £9.3 billion at 31 December 2009 to £10.1 billion at 31 March 2010, driven primarily by foreign exchange movements and improvements in prices.
     
·
AAA-rated assets decreased from £65.1 billion at 31 December 2009 to £59.2 billion at 31 March 2010 primarily as a result of the sell-down activity of prime and government backed securities.  The US government ended its main mortgage-backed securities purchase programme in Q1 due to improved economic conditions.  GBM Mortgage Trading anticipated downward pressure on prices and demand and sold off positions.

 
97
 

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments

Credit valuation adjustments (CVA)
CVA represents an estimate of the adjustment to arrive at fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures.  The Group records CVA against exposures it has to these counterparties.

 
31 March 
2010 
31 December 
 2009 
 
£m 
£m 
     
Monoline insurers
3,870 
3,796 
CDPCs
465 
499 
Other counterparties
1,737 
1,588 
     
Total CVA adjustments
6,072 
5,883 

Key points
·
Total CVA held against exposures to monoline insurers and CDPCs remained stable reflecting the net effect on exposures of higher prices of underlying reference instruments being offset by the weakening of sterling against the US and Canadian dollar. The overall credit quality of the counterparties was broadly unchanged.
   
·
The increase in CVA held against exposures to other counterparties was primarily driven by rating downgrades of a number of counterparties during the quarter.

Monoline insurers
The Group purchased protection from monolines, mainly against specific asset-backed securities. Monolines specialise in providing credit protection against the principal and interest cash flows due to the holders of debt instruments in the event of default by the debt instrument counterparty.  This protection is typically held in the form of derivatives such as credit default swaps referencing underlying exposures held directly or synthetically by the Group.

The table below summarises the Group’s exposure to monolines, all of which are in the Non-Core division.

 
31 March 
2010 
31 December 
 2009 
 
£m 
£m 
     
Gross exposure to monolines
6,189 
6,170 
Hedges with financial institutions
(548)
(531)
Credit valuation adjustment
(3,870)
(3,796)
     
Net exposure to monolines
1,771 
1,843 
     
CVA as a % of gross exposure
63% 
62% 

 
98
 
 
Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Monoline insurers (continued)

Key points
·
The exposures to monolines remained flat. Whilst the exposure in trade currency (mostly US dollar) decreased due to higher prices of underlying reference instruments, this was offset by the weakening of sterling against the US dollar.
   
·
The CVA also remained fairly stable on both a total and relative basis, with credit spread and recovery rate moves largely offsetting each other.
   
·
There have not been any changes to the methodology used to calculate the monoline CVA.  However following market events in the quarter, the CVA calculation was modified to reference more conservative internally assessed recovery levels, resulting in a higher CVA reserve.
   
·
Counterparty and credit RWAs relating to risk structures incorporating gross monoline exposures decreased from £13.7 billion to £8.6 billion over the quarter.  Regulatory intervention at certain monolines triggered credit events in the quarter. The exposure to these counterparties was excluded from the RWA calculations with capital deductions totalling £171 million taken instead.  This, combined with an improvement in the rating of an underlying bond portfolio held by the Group to investment grade status, were the main drivers of the reduction.

 
99
 

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Monoline insurers (continued)
The table below summarises monoline exposures by rating.  Credit ratings are based on those from rating agencies, Standard & Poor’s and Moody’s.  Where the ratings differ, the lower of the two is taken.

 
Notional: 
 protected 
  assets 
Fair value: 
protected 
assets 
Gross 
 exposure 
CVA 
Hedges 
Net 
exposure 
 
£m 
£m 
£m 
£m 
£m 
£m 
             
31 March 2010
            
AA rated
7,408 
6,209 
1,199 
379 
- 
820 
Sub-investment grade
13,092 
8,102 
4,990 
3,491 
548 
951 
             
 
20,500 
14,311 
6,189 
3,870 
548 
1,771 
             
Of which:
            
CDOs
2,259 
742 
1,517 
1,109 
    
RMBS
85 
72 
13 
1 
   
CMBS
4,450 
2,088 
2,362 
1,654 
    
CLOs
10,458 
9,193 
1,265 
584 
    
Other ABS
2,705 
1,897 
808 
401 
    
Other
543 
319 
224 
121 
    
             
 
20,500 
14,311 
6,189 
3,870 
    
             
31 December 2009
            
AA rated
7,143 
5,875 
1,268 
378 
- 
890 
Sub-investment grade
12,598 
7,696 
4,902 
3,418 
531 
953 
             
 
19,741 
13,571 
6,170 
3,796 
531 
1,843 
             
Of which:
            
CDOs
2,284 
797 
1,487 
1,059 
    
RMBS
82 
66 
16 
2 
    
CMBS
4,253 
2,034 
2,219 
1,562 
    
CLOs
10,007 
8,584 
1,423 
641 
    
Other ABS
2,606 
1,795 
811 
410 
    
Other
509 
295 
214 
122 
    
             
 
19,741 
13,571 
6,170 
3,796 
    

 
100
 

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Monoline insurers (continued)
The table below analyses the net income statement effect relating to monoline exposures.

 
£m 
   
Credit valuation adjustment at 1 January 2010
(3,796)
Credit valuation adjustment at 31 March 2010
(3,870)
   
Increase in credit valuation adjustment
(74)
Net credit relating to realisation, hedges, foreign exchange and other movements
214 
Net debit relating to reclassified debt securities
(90)
   
Net credit to income statement (1)
50 

Note:
(1)
Comprises £23 million of reversals of impairment losses and £27 million of other income relating to reclassified debt securities.  Income from trading activities was nil.  Net profits arose from a reduction in monoline CVA and associated foreign exchange hedges.  These profits were offset by net fair value losses arising on hedges with monolines relating to reclassified debt securities.

Key points
·
The impact of sterling weakening against the US dollar is the primary cause of the gain arising on foreign exchange, hedges, realisations and other movements.
   
·
The net loss arising from the effect of reclassifying debt securities is due to the difference between impairment losses on these available-for-sale securities and the gains that would have been reported in the income statement if these assets had continued to be classified as held-for-trading.
 
Cumulative net losses of £615 million relating to reclassified debt securities have not been recognised in the income statement.

Credit derivative product companies
A credit derivative product company (CDPC) is a company that sells protection against credit derivatives.  CDPCs are similar to monoline insurers; however they are not regulated as insurers.

The Group has purchased credit protection from CDPCs through tranched and single name credit derivatives.  The Group’s exposure to CDPCs is predominantly due to tranched credit derivatives.

The table below summarises the Group’s exposure to CDPCs.
 
31 March 
 2010 
31 December 
 2009 
 
£m 
£m 
     
Gross exposure to CDPCs
1,243 
1,275 
Credit valuation adjustment
(465)
(499)
     
Net exposure to CDPCs
778 
776 
     
CVA as a % of gross exposure
37%
39%

 
101
 
 
Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Credit derivative product companies (continued)

Key points
·
The exposure to CDPCs has remained stable. The exposure in trade currency (US and Canadian dollar) decreased due to a combination of trade commutations, tighter credit spreads of the underlying loans and bonds and a decrease in the relative value of senior tranches compared with the underlying reference portfolios. This decrease was offset by the weakening of sterling.
   
·
The CVA also remained fairly constant, on both a total and relative basis, reflecting general stability in the credit quality of CDPCs.
   
·
There have not been any changes to the methodology used to calculate the CDPC CVA.
   
·
Counterparty and credit RWAs relating to gross CDPC exposures increased from £7.5 billion to £7.9 billion during the quarter. Capital deductions at 31 March 2010 were £309 million (31 December 2009 - £347 million). Where the Group limits exposures to certain CDPCs with hedges, these exposures are excluded from the RWA calculations and capital deductions taken instead.
   
·
The vast majority of CDPC exposure is in Non-Core division.

The table below summarises CDPC exposures by rating.

 
Notional: 
reference assets 
Fair value: 
reference assets 
Gross 
exposure 
CVA 
Net 
exposure 
 
£m 
£m 
£m 
£m 
£m 
           
31 March 2010
          
AAA rated
1,773 
1,752 
21 
6 
15 
Sub-investment grade
20,411 
19,409 
1,002 
379 
623 
Rating withdrawn
3,916 
3,696 
220 
80 
140 
           
 
26,100 
24,857 
1,243 
465 
778 
           
31 December 2009
          
AAA rated
1,658 
1,637 
21 
5 
16 
BBB rated
1,070 
1,043 
27 
9 
18 
Sub-investment grade
17,696 
16,742 
954 
377 
577 
Rating withdrawn
3,926 
3,653 
273 
108 
165 
           
 
24,350 
23,075 
1,275 
499 
776 

 
102
 

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Credit derivative product companies (continued)

The table below analyses the net income statement effect arising from CDPC exposures.

 
£m 
   
Credit valuation adjustment  at 1 January 2010
(499)
Credit valuation adjustment at 31 March 2010
(465)
   
Decrease in credit valuation adjustment
34 
Net debit relating to hedges, foreign exchange and other movements
(66)
   
Net debit to income statement (income from trading activities)
(32)

Realised losses arising from trade commutations are the primary cause of the loss arising on foreign exchange, hedges, realisations and other movements.

CVA attributable to other counterparties
CVA for all other counterparties is calculated on a portfolio basis reflecting an estimate of the amount a third party would charge to assume the credit risk.

Expected losses are determined from market implied probability of defaults and internally assessed recovery levels. The probability of default is calculated with reference to observable credit spreads and observable recovery levels. For counterparties where observable data does not exist, the probability of default is determined from the average credit spreads and recovery levels of baskets of similarly rated entities. A weighting of 50% to 100% is applied to arrive at the expected loss. The weighting reflects portfolio churn and varies according to the counterparty credit quality.

Expected losses are applied to estimated potential future exposures which are modelled to reflect the volatility of the market factors which drive the exposures and the correlation between those factors. Potential future exposures arising from vanilla products (including interest rate and foreign exchange derivatives) are modelled jointly using the Group’s core counterparty risk systems. The exposures arising from all other product types are modelled and assessed individually. The potential future exposure to counterparties is the aggregate of the exposures arising on the underlying product types.

Correlation between exposure and counterparty risk is also incorporated within the CVA calculation where this risk is considered significant.  The risk primarily arises on trades with emerging market counterparties where the gross mark-to-market value of the trade, and therefore the counterparty exposure, increases as the strength of the local currency declines.

Collateral held under a credit support agreement is factored into the CVA calculation.  In such cases CVA is held to the extent that residual risk remains. CVA is not held against the credit default swap protection provided by the Asset Protection Scheme where the Group has purchased protection from HM Treasury, due to the unique features of the contract.

 
103
 

Risk and capital management (continued)

CVA attributable to other counterparties (continued)

The table below analyses the net income statement effect arising from the change in level of CVA for all other counterparties and related trades.

 
£m 
   
Credit valuation adjustment  at 1 January 2010
(1,588)
Credit valuation adjustment at 31 March 2010
(1,737)
   
Increase in credit valuation adjustment
(149)
Net credit relating to hedges, foreign exchange and other movements
12 
   
Net debit to income statement (income from trading activities)
(137)

Key point
·
The increase in CVA against other counterparties was primarily driven by rating downgrades of a number of counterparties over the quarter.

 
104
 

Risk and capital management (continued)

Other risk exposures: Leveraged finance

The table below analyses the Group’s global markets sponsor-led leveraged finance exposures by industry and geography. The gross exposure represents the total amount of leveraged finance committed by the Group (drawn and undrawn). The net exposure represents the balance sheet carrying values of drawn leveraged finance and the total undrawn amount. The difference between gross and net exposures is principally due to the cumulative effect of impairment provisions and historic write-downs on assets prior to reclassification.

 
31 March 2010
  
31 December 2009
 
Americas 
UK 
Other 
Europe 
RoW 
Total 
  
Americas 
UK 
Other 
Europe 
RoW 
Total 
 
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
                       
Gross exposure:
                      
TMT (2)
1,322 
1,651 
920 
630 
4,523 
  
1,781 
1,656 
1,081 
605 
5,123 
Industrial
1,625 
1,187 
1,615 
242 
4,669 
  
1,584 
1,523 
1,781 
207 
5,095 
Retail
24 
382 
1,161 
64 
1,631 
  
17 
476 
1,354 
71 
1,918 
Other
231 
1,372 
1,101 
225 
2,929 
  
244 
1,527 
1,168 
191 
3,130 
                       
 
3,202 
4,592 
4,797 
1,161 
13,752 
  
3,626 
5,182 
5,384 
1,074 
15,266 
                       
Net exposure:
                      
TMT (2)
1,122 
1,533 
911 
528 
4,094 
  
1,502 
1,532 
1,045 
590 
4,669 
Industrial
383 
1,079 
1,440 
233 
3,135 
  
524 
973 
1,594 
205 
3,296 
Retail
24 
348 
1,098 
61 
1,531 
  
17 
445 
1,282 
68 
1,812 
Other
228 
1,303 
1,092 
226 
2,849 
  
244 
1,461 
1,147 
191 
3,043 
                       
 
1,757 
4,263 
4,541 
1,048 
11,609 
  
2,287 
4,411 
5,068 
1,054 
12,820 
                       
Of which:
                      
Drawn
1,377 
3,735 
3,680 
895 
9,687 
  
1,944 
3,737 
3,909 
950 
10,540 
Undrawn
380 
528 
861 
153 
1,922 
  
343 
674 
1,159 
104 
2,280 
                       
 
1,757 
4,263 
4,541 
1,048 
11,609 
  
2,287 
4,411 
5,068 
1,054 
12,820 

Notes:
(1)
All the above exposures are in the Non-Core division.
(2)
Telecommunications, Media and Technology.

Key points
·
The Group’s sterling exposure has reduced as a result of sales and restructurings of £0.9 billion and £0.4 billion of repayments and re-financings. These reductions were partially offset by the strengthening of the US dollar and euro against sterling during the period.
   
·
Credit impairments and write-offs during the quarter were £198 million.

Not included in the table above are:
·
UK Corporate leveraged finance net exposures of £7.5 billion at 31 March 2010 (31 December 2009 - £7.1 billion), mainly to the retail and industrial sectors.
   
·
Ulster Bank leveraged finance net exposures of £0.6 billion at 31 March 2010 and 31 December 2009.

 
105
 
 
Risk and capital management (continued)

Other risk exposures: Special purpose entities

For background on the Group’s involvement with securitisations and special purpose entities, refer to the Business review section of the 2009 Annual Report and Accounts.

The table below analyses the asset categories together with the carrying amount of the assets and associated liabilities for those securitisations and other asset transfers, other than conduits (discussed below), where the assets continue to be recorded on the Group’s balance sheet.

 
31 March 2010
  
31 December 2009
 
Assets 
Liabilities 
  
Assets 
Liabilities 
 
£m 
£m 
  
£m 
£m 
           
Residential mortgages
68,820 
16,031 
  
69,927 
15,937 
Credit card receivables
2,666 
1,614 
  
2,975 
1,592 
Other loans
36,261 
1,000 
  
36,448 
1,010 
Finance lease receivables
613 
613 
  
597 
597 

Conduits
The total assets held by Group-sponsored conduits were £24.1 billion at 31 March 2010 (31 December 2009 - £27.4 billion).  Liquidity commitments from the Group to the conduit exceed the nominal amount of assets funded by the conduit as liquidity commitments are sized to cover the funding cost of the related assets.

The table below analyses the exposure to conduits which are consolidated by the Group.

 
31 March 2010
  
31 December 2009
 
Core 
Non-Core 
Total 
  
Core 
Non-Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Total assets held by the conduits
20,256 
3,862 
24,118 
  
23,409 
3,957 
27,366 
               
Commercial paper issued (1)
19,902 
2,830 
22,732 
  
22,644 
2,939 
25,583 
               
Liquidity and credit enhancements:
              
Deal specific liquidity:
              
-  drawn
319 
1,072 
1,391 
  
738 
1,059 
1,797 
-  undrawn
26,426 
3,573 
29,999 
  
28,628 
3,852 
32,480 
PWCE (2)
1,129 
359 
1,488 
  
1,167 
341 
1,508 
               
 
27,874 
5,004 
32,878 
  
30,533 
5,252 
35,785 
               
Maximum exposure to loss (3)
26,745 
4,645 
31,390 
  
29,365 
4,911 
34,276 

Notes:
(1)
Excludes own asset conduits established for contingent funding as it does not have any outstanding commercial paper.
(2)
Programme-wide credit enhancement.
(3)
Maximum exposure to loss is determined as the Group’s total liquidity commitments to the conduits and additionally programme-wide credit support which would absorb first loss on transactions where liquidity support is provided by a third party. Third party maximum exposure to loss is reduced by repo trades conducted with an external counterparty.

 
106
 

Risk and capital management (continued)

Other risk exposures: Special purpose entities (continued)

The Group also extends liquidity commitments to multi-seller conduits sponsored by other banks, but typically does not consolidate these entities as it does not retain the majority of risks and rewards.

The table below analyses the Group’s exposure from third-party conduits.

 
31 March 2010
  
31 December 2009
 
Core 
Non-Core 
Total 
  
Core 
Non-Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Liquidity and credit enhancements:
              
Deal specific liquidity:
              
-  drawn
232 
128 
360 
  
223 
120 
343 
-  undrawn
219 
38 
257 
  
206 
38 
244 
               
 
451 
166 
617 
  
429 
158 
587 
               
Maximum exposure to loss
451 
166 
617 
  
429 
158 
587 

Key points
·
During the quarter both multi-seller and own asset conduit assets have been reduced in line with the wider Group balance sheet management.
   
·
Multi-seller conduits account for 43% of total liquidity and credit enhancements committed by the Group, unchanged from the year end position.
   
·
The Group’s own asset conduit programme was established to diversify the Group’s funding sources, including access to the Bank of England’s open market operations, with committed liquidity of US$40.8 billion.

 
107
 


Additional information

Selected financial data

The dollar financial information included below has been translated for convenience at a rate of £1.00 to US$1.5186, being the Noon Buying Rate on 31 March 2010.

Summary consolidated income statement
 
Quarter ended
 
31 March 
2010 
31 March 
2010 
31 December* 
 2009 
31 March* 
2009 
 
$m 
£m 
 £m 
£m 
         
Net interest income
5,379 
3,542 
3,419 
3,564 
Non-interest income
7,564 
4,981 
3,780 
5,357 
         
Total income
12,943 
8,523 
7,199 
8,921 
         
Operating expenses
(7,163)
(4,717)
(2,867)
(5,142)
         
Profit before other operating charges and impairment losses
5,780 
3,806 
4,332 
3,779 
Net insurance claims
(1,725)
(1,136)
(1,321)
(966)
Impairment losses
(4,063)
(2,675)
(3,099)
(2,858)
         
Operating loss before tax
(8)
(5)
(88)
(45)
Tax charge
(162)
(107)
(644)
(210)
         
Loss from continuing operations
(170)
(112)
(732)
(255)
Profit/(loss) from discontinued operations, net of tax
475 
313 
(135)
(50)
         
Profit/(loss) for the period
305 
201 
(867)
(305)
         
Profit/(loss) attributable to:
        
Minority interests
522 
344 
(246)
483 
Other owners' dividends
160 
105 
144 
114 
Ordinary shareholders
(377)
(248)
(765)
(902)

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

Summary consolidated balance sheet
 
31 March 
2010 
 
31 March 
2010 
 
31 December 
2009 
(audited) 
 
$m 
£m 
£m 
       
Loans and advances
1,072,675 
706,358 
820,146 
Debt securities and equity shares
414,836 
273,170 
286,782 
Derivatives and settlement balances
739,013 
486,641 
453,487 
Other assets
454,886 
299,543 
136,071 
       
Total assets
2,681,410 
1,765,712 
1,696,486 
       
Owners’ equity
119,477 
78,676 
77,736 
Minority interests
15,739 
10,364 
16,895 
Subordinated liabilities
48,498 
31,936 
37,652 
Deposits
991,073 
652,623 
756,346 
Derivatives, settlement balances and short positions
781,859 
514,855 
475,017 
Other liabilities
724,764 
477,258 
332,840 
       
Total liabilities and equity
2,681,410 
1,765,712 
1,696,486 

 
108
 

Additional information (continued)

Selected financial data (continued)

Earnings per share
   Quarter Ended 
 
31 March 
2010 
31 December 
 2009 
31 March 
2009 
       
Basic loss from continuing operations
(0.2p)
(1.2p)
(2.2p)
Diluted loss from continuing operations
(0.2p)
(1.2p)
(2.2p)
Basic loss from discontinued operations
-
-
(0.1p)
Diluted loss from discontinued operations
-
-
(0.1p)

 
109
 

Appendix 1 The Asset Protection Scheme

Covered assets: roll forward to 31 March 2010

The table below details the movement in covered assets during the quarter.

 
£bn 
   
Covered assets at 31 December 2009
230.5 
Disposals
(1.7)
Maturities, repayments, amortisations and other movements
(2.6)
Effect of foreign currency movements
4.7 
   
Covered assets at 31 March 2010 (1)
230.9 

Note:
(1)
The covered amount at 31 March 2010 includes approximately £2.0 billion of assets in the derivatives and structured finance asset classes which, for technical reasons, do not currently satisfy, or are anticipated at some stage not to satisfy, the eligibility requirements of the Asset Protection Scheme (APS).  The Asset Protection Agency (APA) and the Group continue to negotiate in good faith whether (and, if so, to what extent) coverage should extend to these assets. Also, the APA and the Group are in discussion over the classifications of some structured credit assets and this may result in adjustments to amounts for some asset classes; however underlying risks will be unchanged.  Whilst good progress is being made, the final outcome is dependent on the Group and the APA reaching agreement by the due date on various areas of interpretation.  Should this not be achieved and the APA does not grant an extension to the Group, cover on these assets may be restricted.

Key point
·
The weakening of sterling against the US dollar accounts for the majority of the foreign exchange movement which has been substantially offset by customer repayments and a number of loan sales.

Credit impairments and write downs

The table below analyses the cumulative credit impairment losses (including available-for-sale reserves) and adjustments to par value relating to covered assets.

 
31 March 
2010 
31 December 
 2009 
 
£m 
£m 
     
Loans and advances
15,848 
14,240 
Debt securities
7,795 
7,816 
Derivatives
6,890 
6,834 
     
 
30,533 
28,890 
     
By division:
    
UK Retail
2,618 
2,431 
UK Corporate
1,231 
1,007 
Global Banking & Markets
1,473 
1,628 
Ulster Bank
683 
486 
Non-Core
24,528 
23,338 
     
 
30,533 
28,890 

Key point
·
Loan impairments in the Non-Core division accounted for the majority of the increase of £1,643 million in credit impairments and write-downs.

 
1
 
 
Appendix 1 The Asset Protection Scheme

First loss utilisation

For definitions of triggered amounts and other related aspects, refer to the Group’s 2009 Annual Report and Accounts - Business review - Asset Protection Scheme.

The table below details the total triggered amount by division at 31 March 2010.  These exclude cash recoveries.

 
31 March 
 2010 
31 December 
 2009 
 
£m 
£m 
     
UK Retail
3,517 
3,340 
UK Corporate
3,843 
3,570 
Global Banking & Markets
2,378 
1,748 
Ulster Bank
769 
704 
Non-Core
22,665 
18,905 
     
 
33,172 
28,267 

Notes:
(1)
The triggered amount on a covered asset is calculated when an asset is triggered (due to bankruptcy, failure to pay after a grace period, and restructuring with an impairment) and is the lower of the covered amount and the outstanding amount for each covered asset.  Given the grace period before assets trigger, the Group expects additional assets to trigger based on the current risk rating and level of impairments on covered assets.
(2)
There are a number of Scheme rule interpretation issues being discussed between the Group and the APA, the most significant of which is in relation to the interpretation of certain loss triggers.  The Group is using its understanding of the triggers in the above table.

Key points
·
The Group expects recoveries on triggered amounts to be approximately 47% over the life of the relevant assets.
   
·
On this basis, expected loss on triggered assets at 31 March 2010 is approximately £18 billion (31 December 2009 - £15 billion), or 30% of the £60 billion first loss threshold under the APS.

 
2
 

Appendix 1 The Asset Protection Scheme

Risk-weighted assets

The table below analyses risk-weighted assets by division.

 
31 March 2010
  
31 December 2009
 
APS
Non-APS 
Total 
  
APS 
Non-APS 
Total 
By division
£bn
£bn 
£bn 
  
£bn 
£bn 
£bn 
               
UK Retail
14.9
34.9 
49.8 
  
16.3 
35.0 
51.3 
UK Corporate
26.0
65.3 
91.3 
  
31.0 
59.2 
90.2 
Global Banking & Markets
19.2
122.6 
141.8 
  
19.9 
103.8 
123.7 
Ulster Bank
9.7
23.1 
32.8 
  
8.9 
21.0 
29.9 
Non-Core
55.0
109.3 
164.3 
  
51.5 
119.8 
171.3 
Other divisions
n/a
105.5 
105.5 
  
n/a 
99.4 
99.4 
               
Group before APS benefit
124.8
460.7 
585.5 
  
127.6 
438.2 
565.8 

Key point
·
Over the first quarter RWAs declined reflecting the reduction in pool size (including disposals) and improvements in risk parameters offset by foreign exchange movements.

 
 
3
 

 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorised.


 
The Royal Bank of Scotland Group plc
Registrant
 
 

 
/s/ Bruce Van Saun
  
Bruce Van Saun  
Group Finance Director  
14 May 2010