rbs201211026k3.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For November 2, 2012
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(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- ________

 
 
The following information was issued as a Company announcement in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

 
 
 
 
 
 


 
 

 
Divisional performance
 
The operating profit/(loss)(1) of each division is shown below.
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Operating profit/(loss) before impairment losses by division
            
UK Retail
605 
577 
705 
  
1,814 
2,160 
UK Corporate
615 
693 
659 
  
1,976 
2,075 
Wealth
73 
76 
49 
  
204 
187 
International Banking
187 
194 
242 
  
513 
715 
Ulster Bank
87 
78 
119 
  
249 
306 
US Retail & Commercial
244 
257 
208 
  
622 
621 
             
Retail & Commercial
1,811 
1,875 
1,982 
  
5,378 
6,064 
Markets
289 
270 
(353)
  
1,385 
989 
Direct Line Group
109 
135 
123 
  
328 
329 
Central items
176 
(34)
82 
  
32 
104 
             
Core
2,385 
2,246 
1,834 
  
7,123 
7,486 
Non-Core
(162)
(261)
(296)
  
(417)
229 
             
Group operating profit before impairment losses
2,223 
1,985 
1,538 
  
6,706 
7,715 
             
Impairment losses/(recoveries) by division
            
UK Retail
141 
140 
195 
  
436 
597 
UK Corporate
247 
181 
230 
  
604 
557 
Wealth
8 
12 
4 
  
30 
12 
International Banking
12 
27 
14 
  
74 
112 
Ulster Bank
329 
323 
327 
  
1,046 
1,057 
US Retail & Commercial
21 
28 
85 
  
68 
261 
             
Retail & Commercial
758 
711 
855 
  
2,258 
2,596 
Markets
(6)
19 
(5)
  
15 
(19)
Central items
- 
(2)
4 
  
32 
2 
             
Core
752 
728 
854 
  
2,305 
2,579 
Non-Core
424 
607 
682 
  
1,520 
3,168 
             
Group impairment losses
1,176 
1,335 
1,536 
  
3,825 
5,747 
 
Note:
(1)
Operating profit/(loss) before own credit adjustments, Asset Protection Scheme, Payment Protection Insurance costs, sovereign debt impairment, amortisation of purchased intangible assets, integration and restructuring costs, (loss)/gain on redemption of own debt, strategic disposals, bonus tax, interest rate hedge adjustments on impaired available-for-sale sovereign debt and RFS Holdings minority interest.

 
 
Divisional performance (continued)
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Operating profit/(loss) by division
            
UK Retail
464 
437 
510 
  
1,378 
1,563 
UK Corporate
368 
512 
429 
  
1,372 
1,518 
Wealth
65 
64 
45 
  
174 
175 
International Banking
175 
167 
228 
  
439 
603 
Ulster Bank
(242)
(245)
(208)
  
(797)
(751)
US Retail & Commercial
223 
229 
123 
  
554 
360 
             
Retail & Commercial
1,053 
1,164 
1,127 
  
3,120 
3,468 
Markets
295 
251 
(348)
  
1,370 
1,008 
Direct Line Group
109 
135 
123 
  
328 
329 
Central items
176 
(32)
78 
  
- 
102 
             
Core
1,633 
1,518 
980 
  
4,818 
4,907 
Non-Core
(586)
(868)
(978)
  
(1,937)
(2,939)
             
Group operating profit
1,047 
650 
2 
  
2,881 
1,968 
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
% 
% 
% 
  
% 
% 
             
Net interest margin by division
            
UK Retail
3.53 
3.57 
3.94 
  
3.57 
4.02 
UK Corporate
2.99 
3.17 
2.98 
  
3.08 
3.07 
Wealth
3.88 
3.69 
2.96 
  
3.74 
3.18 
International Banking
1.70 
1.65 
1.71 
  
1.65 
1.76 
Ulster Bank
1.92 
1.82 
1.96 
  
1.87 
1.87 
US Retail & Commercial
2.99 
3.02 
3.08 
  
3.02 
3.07 
             
Retail & Commercial
2.92 
2.94 
2.94 
  
2.92 
2.99 
Non-Core
0.41 
0.24 
0.50 
  
0.32 
0.69 
             
Group net interest margin
1.94 
1.95 
1.84 
  
1.93 
1.94 
 
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
 
£bn 
£bn 
£bn 
       
Total funded assets by division
      
UK Retail
116.7 
116.9 
114.5 
UK Corporate
111.8 
113.7 
114.2 
Wealth
21.4 
21.2 
21.6 
International Banking
58.4 
61.4 
69.9 
Ulster Bank
30.8 
33.1 
34.6 
US Retail & Commercial
74.2 
74.3 
74.9 
Markets
304.4 
302.4 
313.9 
Other (primarily Group Treasury)
125.1 
132.9 
139.1 
       
Core
842.8 
855.9 
882.7 
Non-Core
65.1 
72.1 
93.7 
       
 
907.9 
928.0 
976.4 
RFS Holdings minority interest
0.8 
0.8 
0.8 
       
Total
908.7 
928.8 
977.2 

 
 
Divisional performance (continued)
 
 
30 September 
2012 
30 June 
2012
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Risk-weighted assets by division
            
UK Retail
47.7 
47.4 
1% 
  
48.4 
(1%)
UK Corporate
82.1 
79.4 
3% 
  
79.3 
4% 
Wealth
12.3 
12.3 
- 
  
12.9 
(5%)
International Banking
49.7 
46.0 
8% 
  
43.2 
15% 
Ulster Bank
35.1 
37.4 
(6%)
  
36.3 
(3%)
US Retail & Commercial
56.7 
58.5 
(3%)
  
59.3 
(4%)
             
Retail & Commercial
283.6 
281.0 
1% 
  
279.4 
2% 
Markets
108.0 
107.9 
- 
  
120.3 
(10%)
Other
13.9 
12.7 
9% 
  
12.0 
16% 
             
Core
405.5 
401.6 
1% 
  
411.7 
(2%)
Non-Core
72.2 
82.7 
(13%)
  
93.3 
(23%)
             
Group before benefit of Asset Protection Scheme
477.7 
484.3 
(1%)
  
505.0 
(5%)
Benefit of Asset Protection Scheme
(48.1)
(52.9)
(9%)
  
(69.1)
(30%)
             
Group before RFS Holdings minority interest
429.6 
431.4 
- 
  
435.9 
(1%)
RFS Holdings minority interest
3.3 
3.3 
- 
  
3.1 
6% 
             
Group
432.9 
434.7 
- 
  
439.0 
(1%)
 
 
 
Employee numbers by division (full time equivalents in continuing operations rounded to the nearest hundred)
30 September 
2012 
30 June 
2012 
31 December 
2011 
       
UK Retail
27,100 
27,500 
27,700 
UK Corporate
13,100 
13,100 
13,600 
Wealth
5,400 
5,600 
5,700 
International Banking
4,600 
4,800 
5,400 
Ulster Bank
4,700 
4,500 
4,200 
US Retail & Commercial
14,600 
14,500 
15,400 
       
Retail & Commercial
69,500 
70,000 
72,000 
Markets
11,900 
12,500 
13,900 
Direct Line Group
14,700 
15,100 
14,900 
Group Centre
6,800 
6,900 
6,200 
       
Core
102,900 
104,500 
107,000 
Non-Core
3,300 
3,800 
4,700 
       
 
106,200 
108,300 
111,700 
Business Services
33,300 
33,500 
34,000 
Integration and restructuring
800 
1,000 
1,100 
       
Group
140,300 
142,800 
146,800 

 
 
UK Retail
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Net interest income
990 
988 
1,086 
  
2,979 
3,270 
             
Net fees and commissions
231 
214 
259 
  
682 
824 
Other non-interest income
21 
28 
33 
  
78 
105 
             
Non-interest income
252 
242 
292 
  
760 
929 
             
Total income
1,242 
1,230 
1,378 
  
3,739 
4,199 
             
Direct expenses
            
  - staff
(196)
(210)
(206)
  
(613)
(639)
  - other
(94)
(110)
(102)
  
(283)
(321)
Indirect expenses
(347)
(333)
(365)
  
(1,029)
(1,079)
             
 
(637)
(653)
(673)
  
(1,925)
(2,039)
             
Operating profit before impairment losses
605 
577 
705 
  
1,814 
2,160 
Impairment losses
(141)
(140)
(195)
  
(436)
(597)
             
Operating profit
464 
437 
510 
  
1,378 
1,563 
             
             
Analysis of income by product
            
Personal advances
230 
222 
260 
  
688 
813 
Personal deposits
158 
168 
236 
  
511 
747 
Mortgages
598 
596 
576 
  
1,757 
1,700 
Cards
218 
212 
231 
  
649 
712 
Other
38 
32 
75 
  
134 
227 
             
Total income
1,242 
1,230 
1,378 
  
3,739 
4,199 
             
             
Analysis of impairments by sector
            
Mortgages
29 
24 
34 
  
87 
150 
Personal
77 
84 
120 
  
243 
321 
Cards
35 
32 
41 
  
106 
126 
             
Total impairment losses
141 
140 
195 
  
436 
597 
             
             
             
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
            
Mortgages
0.1% 
0.1% 
0.1% 
  
0.1% 
0.2% 
Personal
3.5% 
3.7% 
4.7% 
  
3.6% 
4.2% 
Cards
2.5% 
2.3% 
2.9% 
  
2.5% 
3.0% 
             
Total
0.5% 
0.5% 
0.7% 
  
0.5% 
0.7% 

 
 
UK Retail (continued)
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios
            
Return on equity (1)
23.8% 
22.5% 
25.0% 
  
23.5% 
25.1% 
Net interest margin
3.53% 
3.57% 
3.94% 
  
3.57% 
4.02% 
Cost:income ratio
51% 
53% 
49% 
  
51% 
49% 
 
 
 
30 September 
2012 
30 June 
2012 
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Capital and balance sheet
            
Loans and advances to customers (gross) (2)
            
  - mortgages
98.4 
98.1 
- 
  
95.0 
4% 
  - personal
8.9 
9.2 
(3%)
  
10.1 
(12%)
  - cards
5.6 
5.7 
(2%)
  
5.7 
(2%)
             
 
112.9 
113.0 
- 
  
110.8 
2% 
Customer deposits (2)
105.9 
106.5 
(1%)
  
101.9 
4% 
Assets under management (excluding deposits)
6.1 
5.8 
5% 
  
5.5 
11% 
Risk elements in lending (2)
4.6 
4.6 
- 
  
4.6 
- 
Loan:deposit ratio (excluding repos)
104% 
104% 
- 
  
106% 
(200bp)
Risk-weighted assets
47.7 
47.4 
1% 
  
48.4 
(1%)
 
Notes:
 
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Includes disposal groups: gross loans and advances to customers £7.6 billion (30 June 2012 - £7.5 billion; 31 December 2011 - £7.3 billion), risk elements in lending £0.5 billion (30 June 2012 and 31 December 2011 - £0.5 billion) and customer deposits £8.5 billion (30 June 2012 - £8.6 billion; 31 December 2011 - £8.8 billion).
 
Key points
UK Retail operating profit increased £27 million or 6%, despite the prevailing weak macroeconomic environment. A strong performance on costs, which fell by £16 million in the quarter, continues to drive long-term benefits.
 
In Q3 2012, UK Retail welcomed a new chief executive, Ross McEwan, who has reiterated the need to make it 'simple and easy' for customers to bank with us, including ensuring staff have more time to spend with customers. One example of this is the simplification of UK Retail's savings offerings during the quarter, with the number of instant access savings accounts reduced from eleven to one simple product, and total savings products available falling to eight, making it easier for customers to identify the product they need.
 
The division has also continued to introduce and refresh innovative solutions to provide customers with access to the services and assistance they require as easily as possible. For example, the enhanced functionality of Webchat on the RBS and NatWest online banking platforms allows customers access to a customer advisor, in real-time and direct from their computer, who can answer queries and action basic account services, 24 hours a day.

 
 
UK Retail (continued)
 
Key points (continued)
As an early supporter of the Bank of England's Funding for Lending (FLS) scheme, which banks could draw from since August 2012, UK Retail has successfully launched new mortgages with lower rates, specifically aimed at cutting the cost for first time buyers and reducing rental prices on buy-to-let properties. By the end of September, these mortgages represented c.14% of UK Retail's total mortgage applications in the month and continue on a positive trend.
 
Q3 2012 compared with Q2 2012
 
·  
Operating profit of £464 million is up 6%, despite economic pressures and continued changes in consumer behaviours, largely driven by a 2% reduction in total costs.
   
·  
The loan to deposit ratio remained stable at 104%.
 
○
Customer deposits have fallen marginally, with a successful instant access savings campaign more than offset by a large bond maturity in the quarter.
 
○
Mortgage balances continued to grow in Q3 2012, although the market remained subdued.
   
·  
Income growth remains challenging in the current weak economic, and low interest rate, environment.
 
○
Net interest margin declined by 4 basis points as improved asset pricing only partially offset the impact of lower rates on current account hedges.
 
○
Non-interest income increased by £10 million in the quarter, partly reflecting a seasonal increase in transaction volumes. However, persistent changes in customer behaviour continue to put downward pressure on fee income.
   
·  
Costs have fallen by 2% primarily due to lower headcount and an ongoing continued simplification of processes across the business.
   
·  
Impairment losses were broadly flat in Q3 2012, reflecting the continued impact of tightened risk appetite.
   
·  
Risk-weighted assets were broadly flat as credit quality remained stable.
 
Q3 2012 compared with Q3 2011
 
·  
Operating profit fell by £46 million as a decrease in income of 10% more than offset decreases in costs and impairments.
   
·  
Strong deposit growth drove an improvement in the loan to deposit ratio from 109% to 104%.
   
·  
Net interest income was £96 million lower than Q3 2011, reflecting lower unsecured balances and continued pressure on current account margins partly offset by strong mortgage growth. These combined pressures drove a 41 basis points decline in net interest margin.
·  
Non-interest income fell by £40 million, 14%, reflecting lower transactional and overdraft fees, as continued weakness in the economy drives cautious customer behaviour.
   
·  
Costs were 5% lower due to ongoing efficiency savings in discretionary and staff costs.
   
·  
Tightened risk appetite, a shift in asset mix towards mortgage assets, and lower default rates drove a 28% decrease in impairment losses.

 
 
UK Corporate
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Net interest income
729 
772 
753 
  
2,257 
2,334 
             
Net fees and commissions
334 
346 
353 
  
1,016 
1,034 
Other non-interest income
75 
93 
100 
  
277 
318 
             
Non-interest income
409 
439 
453 
  
1,293 
1,352 
             
Total income
1,138 
1,211 
1,206 
  
3,550 
3,686 
             
Direct expenses
            
  - staff
(224)
(232)
(221)
  
(701)
(691)
  - other
(91)
(89)
(102)
  
(265)
(291)
Indirect expenses
(208)
(197)
(224)
  
(608)
(629)
             
 
(523)
(518)
(547)
  
(1,574)
(1,611)
             
Operating profit before impairment losses
615 
693 
659 
  
1,976 
2,075 
Impairment losses
(247)
(181)
(230)
  
(604)
(557)
             
Operating profit
368 
512 
429 
  
1,372 
1,518 
             
             
Analysis of income by business
            
Corporate and commercial lending
613 
664 
641 
  
1,964 
2,020 
Asset and invoice finance
176 
171 
176 
  
509 
491 
Corporate deposits
141 
174 
175 
  
481 
523 
Other
208 
202 
214 
  
596 
652 
             
Total income
1,138 
1,211 
1,206 
  
3,550 
3,686 
             
             
Analysis of impairments by sector
            
Financial institutions
8 
2 
6 
  
12 
22 
Hotels and restaurants
6 
8 
22 
  
29 
43 
Housebuilding and construction
14 
79 
29 
  
118 
76 
Manufacturing
20 
19 
9 
  
39 
21 
Private sector education, health, social work,
  recreational and community services
(8)
21 
20 
  
35 
32 
Property
117 
34 
82 
  
181 
151 
Wholesale and retail trade, repairs
16 
16 
24 
  
65 
56 
Asset and invoice finance
10 
11 
- 
  
30 
24 
Other
64 
(9)
38 
  
95 
132 
             
Total impairment losses
247 
181 
230 
  
604 
557 

 
 
UK Corporate (continued)
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
            
Financial institutions
0.6% 
0.1% 
0.4% 
  
0.3% 
0.5% 
Hotels and restaurants
0.4% 
0.5% 
1.4% 
  
0.7% 
0.9% 
Housebuilding and construction
1.6% 
9.0% 
2.9% 
  
4.5% 
2.5% 
Manufacturing
1.7% 
1.6% 
0.8% 
  
1.1% 
0.6% 
Private sector education, health, social work,
  recreational and community services
(0.4%)
0.9% 
0.9% 
  
0.5% 
0.5% 
Property
1.8% 
0.5% 
1.1% 
  
0.9% 
0.7% 
Wholesale and retail trade, repairs
0.7% 
0.7% 
1.0% 
  
1.0% 
0.8% 
Asset and invoice finance
0.4% 
0.4% 
- 
  
0.4% 
0.3% 
Other
0.7% 
(0.1%)
0.4% 
  
0.4% 
0.5% 
             
Total
0.9% 
0.7% 
0.8% 
  
0.7% 
0.7% 
 
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios
            
Return on equity (1)
11.9% 
16.8% 
13.7% 
  
15.0% 
15.8% 
Net interest margin
2.99% 
3.17% 
2.98% 
  
3.08% 
3.07% 
Cost:income ratio
46% 
43% 
45% 
  
44% 
44% 
 
 
 
30 September 
2012 
30 June 
2012 
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Capital and balance sheet
            
Total third party assets
111.8 
113.7 
(2%)
  
114.2 
(2%)
Loans and advances to customers (gross) (2)
            
  - financial institutions
5.1 
6.1 
(16%)
  
5.8 
(12%)
  - hotels and restaurants
5.9 
6.1 
(3%)
  
6.1 
(3%)
  - housebuilding and construction
3.5 
3.5 
- 
  
3.9 
(10%)
  - manufacturing
4.7 
4.9 
(4%)
  
4.7 
- 
  - private sector education, health, social
    work, recreational and community services
8.8 
8.9 
(1%)
  
8.7 
1%
  - property
26.0 
26.9 
(3%)
  
28.2 
(8%)
  - wholesale and retail trade, repairs
8.9 
8.9 
- 
  
8.7 
2%
  - asset and invoice finance
10.9 
10.7 
2% 
  
10.4 
5%
  - other
34.5 
34.1 
1% 
  
34.2 
1%
             
 
108.3 
110.1 
(2%)
  
110.7 
(2%)
             
Customer deposits (2)
126.8 
127.5 
(1%)
  
126.3 
- 
Risk elements in lending (2)
5.5 
4.9 
12% 
  
5.0 
10% 
Loan:deposit ratio (excluding repos)
84% 
85% 
(100bp)
  
86% 
(200bp)
Risk-weighted assets
82.1 
79.4 
3% 
  
79.3 
4% 
 
Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Includes disposal groups: loans and advances to customers £11.7 billion (30 June 2012 - £11.9 billion; 31 December 2011 - £12.2 billion), risk elements in lending £0.9 billion (30 June 2012 - £0.9 billion; 31 December 2011 - £1.0 billion) and customer deposits £12.9 billion (30 June 2012 - £13.1 billion; 31 December 2011- £13.0 billion).

 
 
UK Corporate (continued)
Key points
UK Corporate faced a challenging market environment in Q3 2012, with margin pressures, competition for deposits and a small number of single name impairments. The division continued its commitment to supporting the UK economy.
 
Through the Funding for Lending Scheme (FLS), which launched in Q3 2012, UK Corporate had, by 30 September 2012, supported over 4,300 SMEs with £597 million of allocated funds. Over the full lifetime of the scheme, UK Corporate's SME customers are expected to save £100 million through reduced interest rates and the removal of arrangement fees. Corporate and Institutional Banking is using the FLS to provide targeted support to mid-sized manufacturers where, in some cases, it is reducing interest rates by more than 1%.
 
Q3 2012 compared with Q2 2012
 
·  
Operating profit decreased by £144 million, 28%, predominantly due to lower income and increased impairments.
   
·  
Net interest income decreased by 6% due to an 18 basis point fall in the net interest margin. This was driven by the non-repeat of income deferral revisions in Q2 2012, deposit margin compression reflecting tightening Libor spreads and increased competition. Loans and advances to customers fell by 2% as a result of the repayment of a small number of specific large corporate loans at the end of the quarter, with SME lending broadly flat. Deposits fell marginally and the loan to deposit ratio was 84%.
   
·  
Non-interest income decreased 7% primarily due to a decline in the fair value of a property-related investment of £25 million.
   
·  
Impairments increased 36%, £66 million, primarily driven by a small number of significant individual corporate cases.
   
·  
Risk-weighted assets increased 3% mainly as a result of regulatory changes to capital models, primarily a slotting approach in the real estate portfolio.
 
Q3 2012 compared with Q3 2011
 
·  
Operating profit fell by £61 million, 14%, largely reflecting lower income (down £68 million) and increased impairments (up £17 million), partially offset by a £24 million decrease in costs.
   
·  
Net interest income decreased by 3%, primarily driven by deposit margin compression. A 4% fall in lending volumes was broadly offset by improved asset margins.
   
·  
Non-interest income declined by 10%, mainly due to lower Markets revenue share income as volumes remained subdued, as well as the decline in the fair value of a property-related investment.
   
·  
Total costs decreased by 4% due to continued tight control over discretionary spending.
   
·  
Impairments increased by 7% reflecting a small number of significant individual corporate cases in Q3 2012.
   
·  
The loan to deposit ratio improved by 500 basis points to 84%, due to a 2% growth in deposits and a 10% decline in property-related lending.

 
 
Wealth
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Net interest income
185 
178 
152 
  
542 
477 
             
Net fees and commissions
94 
90 
95 
  
277 
286 
Other non-interest income
13 
35 
23 
  
66 
61 
             
Non-interest income
107 
125 
118 
  
343 
347 
             
Total income
292 
303 
270 
  
885 
824 
             
Direct expenses
            
  - staff
(104)
(116)
(106)
  
(337)
(317)
  - other
(57)
(56)
(57)
  
(173)
(152)
Indirect expenses
(58)
(55)
(58)
  
(171)
(168)
             
 
(219)
(227)
(221)
  
(681)
(637)
             
Operating profit before impairment losses
73 
76 
49 
  
204 
187 
Impairment losses
(8)
(12)
(4)
  
(30)
(12)
             
Operating profit
65 
64 
45 
  
174 
175 
             
Analysis of income
            
Private banking
237 
252 
218 
  
726 
670 
Investments
55 
51 
52 
  
159 
154 
             
Total income
292 
303 
270 
  
885 
824 
 
Key metrics
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios
            
Return on equity (1)
14.3% 
13.8% 
9.4% 
  
12.5% 
12.4% 
Net interest margin
3.88% 
3.69% 
2.96% 
  
3.74% 
3.18% 
Cost:income ratio
75% 
75% 
82% 
  
77% 
77% 
 
 
 
30 September 
2012 
30 June 
2012
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Capital and balance sheet
            
Loans and advances to customers (gross)
            
  - mortgages
8.7 
8.6 
1% 
  
8.3 
5% 
  - personal
5.5 
5.6 
(2%)
  
6.9 
(20%)
  - other
2.8 
2.8 
- 
  
1.7 
65% 
             
 
17.0 
17.0 
- 
  
16.9 
1% 
Customer deposits
38.7 
38.5 
1% 
  
38.2 
1% 
Assets under management (excluding deposits)
29.5 
30.6 
(4%)
  
30.9 
(5%)
Risk elements in lending
0.2 
0.2 
- 
  
0.2 
- 
Loan:deposit ratio (excluding repos)
44% 
44% 
- 
  
44% 
- 
Risk-weighted assets
12.3 
12.3 
- 
  
12.9 
(5%)
 
Note:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).

 
 
Wealth (continued)
Key points
Q3 2012 saw a solid performance. Interest margins continued to improve, while costs and impairments fell.
 
The division made further progress in implementing the refreshed Coutts strategy across all jurisdictions. This included two new appointments to the Board of Coutts & Co Ltd Zurich, who will work closely with senior management on the development of the business and enhancements to the client franchise and product offering, in line with Coutts strategy of growth in the region.
 
In the UK, Coutts is finalising preparations for the implementation of the Financial Services Authority's Retail Distribution Review regulations by 31 December 2012. Significant work has been undertaken to ensure clients continue to receive the best service and advice based on their specific needs, including the introduction of revised private banker and wealth manager roles and the development of refreshed products to reflect the new advice proposition.
 
Q3 2012 compared with Q2 2012
 
·  
Operating profit increased by £1 million, 2%, to £65 million in the third quarter. Higher net interest income, lower impairments and the non-repeat of client redress costs in Q2 2012 were partly offset by the non-repeat of the Q2 2012 gain on sale of the Latin American and African business.
   
·  
Income declined by 4% due to a 14% decrease in non-interest income, primarily reflecting the gain of £15 million on sale of the Latin American and African business in Q2 2012. Excluding the gain, income grew by 1% as improved net interest income reflected increases in lending margins.
   
·  
Expenses fell by 4% principally due to the non-recurrence of the Q2 2012 client redress expense following a past business review into the sale of the ALICO Enhanced Variable Rate Fund, announced in November 2011.
   
·  
Client assets and liabilities managed by the division declined 1%. Assets under management declined by £1.1 billion, with £1.5 billion of net outflows of low margin custody assets in international markets only partially offset by favourable market movements of £0.4 billion. Lending and deposit volumes were broadly stable.
   
·  
Impairments were £8 million, down £4 million, reflecting a lower level of specific impairments.
 
Q3 2012 compared with Q3 2011
 
·  
Operating profit rose 44% principally reflecting strong growth in income.
   
·  
Income increased by 8% driven by strong growth in net interest income as a result of improved lending margins and growth in divisional treasury income. Deposit income increased with a £1.3 billion growth in volumes and a 10 basis points improvement in margins. Non-interest income declined 9% with continued volatile markets subduing client demand for transactions, leading to reduced brokerage and foreign exchange income.
   
·  
Expenses decreased by 1% largely reflecting favourable exchange rate movements, assisted by continued close management of discretionary costs.
   
·  
Client assets and liabilities managed by the division increased by 1%, driven by the increase in deposits. Assets under management declined by 1% as favourable market movements, accounting for £2 billion of the movement, were offset by net new business outflows of low margin custody assets.

 
 
International Banking
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Net interest income
227 
234 
302 
  
721 
906 
Non-interest income
308 
327 
348 
  
917 
1,056 
             
Total income
535 
561 
650 
  
1,638 
1,962 
             
Direct expenses
            
  - staff
(132)
(153)
(170)
  
(472)
(546)
  - other
(47)
(47)
(57)
  
(142)
(175)
Indirect expenses
(169)
(167)
(181)
  
(511)
(526)
             
 
(348)
(367)
(408)
  
(1,125)
(1,247)
             
Operating profit before impairment losses
187 
194 
242 
  
513 
715 
Impairment losses
(12)
(27)
(14)
  
(74)
(112)
             
Operating profit
175 
167 
228 
  
439 
603 
             
Of which:
            
Ongoing businesses
171 
168 
233 
  
452 
628 
Run-off businesses
4 
(1)
(5)
  
(13)
(25)
             
Analysis of income by product
            
Cash management
224 
246 
241 
  
738 
699 
Trade finance
76 
73 
77 
  
221 
208 
Loan portfolio
228 
233 
315 
  
658 
1,008 
             
Ongoing businesses
528 
552 
633 
  
1,617 
1,915 
Run-off businesses
7 
9 
17 
  
21 
47 
             
Total income
535 
561 
650 
  
1,638 
1,962 
             
Analysis of impairments by sector
            
Manufacturing and infrastructure
2 
2 
47 
  
21 
179 
Property and construction
- 
7 
11 
  
7 
17 
Transport and storage
- 
- 
2 
  
(4)
11 
Telecommunications, media and technology
- 
- 
- 
  
9 
- 
Banks and financial institutions
12 
19 
(43)
  
43 
(42)
Other
(2)
(1)
(3)
  
(2)
(53)
             
Total impairment losses
12 
27 
14 
  
74 
112 
             
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements)
0.1% 
0.2% 
0.1% 
  
0.2% 
0.2% 

 
 
International Banking (continued)
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios (ongoing businesses)
            
Return on equity (1)
10.3% 
10.5% 
14.0% 
  
9.5% 
12.3% 
Net interest margin
1.70% 
1.65% 
1.71% 
  
1.65% 
1.76% 
Cost:income ratio
65% 
65% 
61% 
  
67% 
61% 
 
 
 
30 September 
2012 
30 June 
2012 
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Capital and balance sheet
            
Loans and advances to customers
46.7 
49.5 
(6%)
  
56.9 
(18%)
Loans and advances to banks
5.1 
5.1 
- 
  
3.4 
50% 
Securities
2.3 
2.4 
(4%)
  
6.0 
(62%)
Cash and eligible bills
0.7 
0.7 
- 
  
0.3 
133% 
Other
3.6 
3.7 
(3%)
  
3.3 
9% 
             
Total third party assets (excluding derivatives mark-to-market)
58.4 
61.4 
(5%)
  
69.9 
(16%)
Customer deposits (excluding repos)
41.7 
42.2 
(1%)
  
45.1 
(8%)
Bank deposits (excluding repos)
6.5 
7.7 
(16%)
  
11.4 
(43%)
Risk elements in lending
0.7 
0.7 
- 
  
1.6 
(56%)
Loan:deposit ratio (excluding repos
  and conduits)
101% 
102% 
(100bp)
  
103% 
(200bp)
Risk-weighted assets
49.7 
46.0 
8% 
  
43.2 
15% 
 
Note:
(1)
Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions), for the ongoing businesses.
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Run-off businesses (1)
            
Total income
7 
9 
17 
  
21 
47 
Direct expenses
(3)
(10)
(22)
  
(34)
(72)
             
Operating profit/(loss)
4 
(1)
(5)
  
(13)
(25)
 
Note:
 
(1)
Run-off businesses consist of the exited corporate finance business.

 
 
International Banking (continued)
Key points
International Banking is an integrated, client-focused business, serving clients' financing, risk management, trade finance, payments and cash management needs internationally.
 
In Q3 2012, International Banking showed solid performance despite ongoing difficult market conditions.
 
Across the UK and Europe economic growth remained low. Income was negatively affected by margin compression in cash management and a continued deliberate reduction in lending portfolio exposure reflecting actions to improve capital efficiency.
 
International Banking maintained its focus on cost and capital management to ensure the most efficient use of resources in light of continued regulatory pressure across the industry. Furthermore, management continued to ensure the division's client base has access to the full Markets and International Banking proposition by implementing connectivity initiatives.
 
Q3 2012 compared with Q2 2012
 
·  
Operating profit was up £8 million, driven primarily by lower costs and lower impairments. Return on equity was 10.3%.
   
·  
Income was down £26 million to £535 million:
 
○
Cash management decreased by 9%, driven by margin compression as a result of lower rates in the UK and Europe, with Europe affected by the European Central Bank rate cut in July. Deposit levels remained resilient.
 
○
Trade finance increased 4% mainly due to loan growth in Europe, Middle East and Africa (EMEA) and Asia.
   
·  
Q3 2012 expenses declined by £19 million, reflecting planned headcount reduction following the formation of the International Banking division.
   
·  
Impairments fell by £15 million, largely due to the non-repeat of a single name provision in Q2 2012.
   
·  
Third party assets declined by 5%, with targeted reductions in the lending portfolio aimed at improving capital efficiency.
   
·  
Customer deposits declined marginally, but held up well despite economic pressures and the need to rebuild customer confidence following the Group technology incident in June 2012. The loan to deposit ratio remained solid, improving slightly to 101%.

 
 
International Banking (continued)
Key points (continued)
 
Q3 2012 compared with Q3 2011
 
·  
Operating profit decreased by £53 million as lower income was only partially offset by lower expenses and impairments.
   
·  
Income decreased by 18%:
 
○
Net interest income was down £75 million primarily as a result of the deliberate reduction in loan portfolio exposures designed to improve capital efficiency. Net interest income from customer deposits also fell due to margin erosion following three European Central Bank rate cuts since Q3 2011 and lower deposit levels.
 
○
Non-interest income was down £40 million mainly due to negative movements on credit hedging activity within the lending portfolio.
   
·  
Expenses fell by £60 million, largely reflecting planned headcount reduction, tight management of technology and support infrastructure costs and increased focus on the management of discretionary expenses.
   
·  
Third party assets fell by 23%, mainly due to planned loan portfolio reductions of £15 billion.
   
·  
Customer deposits decreased by 8%, reflecting sluggish market conditions and a highly competitive environment.

 
 
Ulster Bank
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Net interest income
163 
160 
196 
  
488 
559 
             
Net fees and commissions
36 
35 
41 
  
109 
114 
Other non-interest income
14 
11 
19 
  
36 
48 
             
Non-interest income
50 
46 
60 
  
145 
162 
             
Total income
213 
206 
256 
  
633 
721 
             
Direct expenses
            
  - staff
(53)
(52)
(55)
  
(157)
(168)
  - other
(12)
(11)
(17)
  
(35)
(52)
Indirect expenses
(61)
(65)
(65)
  
(192)
(195)
             
 
(126)
(128)
(137)
  
(384)
(415)
             
Operating profit before impairment losses
87 
78 
119 
  
249 
306 
Impairment losses
(329)
(323)
(327)
  
(1,046)
(1,057)
             
Operating loss
(242)
(245)
(208)
  
(797)
(751)
             
             
Analysis of income by business
            
Corporate
85 
88 
107 
  
275 
337 
Retail
93 
86 
116 
  
267 
327 
Other
35 
32 
33 
  
91 
57 
             
Total income
213 
206 
256 
  
633 
721 
             
             
Analysis of impairments by sector
            
Mortgages
155 
141 
126 
  
511 
437 
Corporate
            
  - property
92 
61 
78 
  
207 
241 
  - other corporate
75 
103 
111 
  
292 
334 
Other lending
7 
18 
12 
  
36 
45 
             
Total impairment losses
329 
323 
327 
  
1,046 
1,057 
             
             
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
            
Mortgages
3.3% 
2.9% 
2.4% 
  
3.6% 
2.8% 
Corporate
            
  - property
8.0% 
5.1% 
6.1% 
  
6.0% 
6.3% 
  - other corporate
4.1% 
5.4% 
5.4% 
  
5.3% 
5.4% 
Other lending
2.2% 
5.1% 
3.2% 
  
3.7% 
4.0% 
             
Total
4.1% 
3.9% 
3.7% 
  
4.3% 
4.0% 

 
 
Ulster Bank (continued)
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios
            
Return on equity (1)
(20.4%)
(19.8%)
(18.3%)
  
(22.0%)
(23.6%)
Net interest margin
1.92% 
1.82% 
1.96% 
  
1.87% 
1.87% 
Cost:income ratio
59% 
62% 
54% 
  
61% 
58% 
 
 
 
30 September 
2012 
30 June 
2012 
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Capital and balance sheet
            
Loans and advances to customers (gross)
            
  - mortgages
18.9 
19.2 
(2%)
  
20.0 
(6%)
  - corporate
            
     - property
4.6 
4.8 
(4%)
  
4.8 
(4%)
     - other corporate
7.4 
7.6 
(3%)
  
7.7 
(4%)
  - other lending
1.3 
1.4 
(7%)
  
1.6 
(19%)
             
 
32.2 
33.0 
(2%)
  
34.1 
(6%)
Customer deposits
20.3 
20.6 
(1%)
  
21.8 
(7%)
Risk elements in lending
            
  - mortgages
2.9 
2.6 
12% 
  
2.2 
32% 
  - corporate
            
     - property
1.8 
1.4 
29% 
  
1.3 
38% 
     - other corporate
2.1 
2.0 
5% 
  
1.8 
17% 
  - other lending
0.2 
0.2 
- 
  
0.2 
- 
             
Total risk elements in lending
7.0 
6.2 
13% 
  
5.5 
27% 
Loan:deposit ratio (excluding repos)
141% 
144% 
(300bp)
  
143% 
(200bp)
Risk-weighted assets
35.1 
37.4 
(6%)
  
36.3 
(3%)
             
Spot exchange rate - €/£
1.256 
1.238 
    
1.196 
  
 
Note:
 
(1)
Divisional return on equity is based on divisional operating loss after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
 
Key points
In a challenging macroeconomic environment, in which recovery from the Group technology incident was a primary focus, Ulster Bank delivered improved pre-impairment profit in the quarter.
 
The deposit market remained competitive and margins continued to be constrained. Customer deposits remained flat on a constant currency basis, with no significant outflows following the Group technology incident, while retail and SME balances increased marginally in the quarter. Ulster Bank remains focused on its deposit gathering and cost management strategy.

 
 
Ulster Bank (continued)
Key points (continued)
 
Q3 2012 compared with Q2 2012
 
·  
Operating profit before impairment losses increased by 12% to £87 million, reflecting higher income and lower expenses. The operating loss of £242 million was marginally lower than Q2 2012.
   
·  
Total income increased by £7 million reflecting a slight improvement in funding conditions coupled with a small uplift in non-interest income. The net interest margin increased by 10 basis points to 1.92%.
   
·  
Expenses decreased by £2 million as cost management remained a central priority.
   
·  
Impairment losses increased marginally, primarily in the residential mortgage portfolio. Mortgage arrears continued to rise as unemployment remained high and affordability issues persisted. This trend was exacerbated by a temporary disruption to collections activity during the Group technology incident in Q2 2012. Corporate risk elements in lending increased by £0.5 billion in the quarter due to a small number of large exposures which were in the course of being restructured in Q3 2012. However, this did not significantly impact impairment losses.
   
·  
Loans to customers fell further as repayments continued to outstrip new lending volumes.
   
·  
Customer deposits remained flat on a constant currency basis, with no significant outflows following the Group technology incident, while retail and SME balances increased marginally in the quarter. The loan to deposit ratio improved by 300 basis points to 141%.
 
Q3 2012 compared with Q3 2011
 
·  
The operating loss increased by £34 million, with lower income only partly offset by a fall in expenses.
   
·  
Income decreased by 11% on a constant currency basis, driven by lower interest-earning asset volumes and higher costs of funding as customer deposit rates remained elevated despite the falls in market interest rates.
   
·  
Costs decreased by £11 million, with a focus on cost management and a reduction of discretionary spending through a number of cost saving initiatives.
   
·  
Impairment losses remained broadly stable.
   
·  
Loans to customers decreased by 3% on a constant currency basis, reflecting weak customer demand.
   
·  
Customer deposits declined by 8% on a constant currency basis, due to outflows of wholesale balances driven by market volatility and the impact of a rating downgrade in H2 2011. Retail and SME balances remained stable over the period.

 
 
US Retail & Commercial (£ Sterling)
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Net interest income
492 
492 
482 
  
1,480 
1,404 
             
Net fees and commissions
195 
195 
223 
  
585 
642 
Other non-interest income
93 
128 
66 
  
286 
201 
             
Non-interest income
288 
323 
289 
  
871 
843 
             
Total income
780 
815 
771 
  
2,351 
2,247 
             
Direct expenses
            
  - staff
(207)
(217)
(210)
  
(647)
(622)
  - other
(128)
(144)
(156)
  
(388)
(420)
  - litigation settlement
- 
- 
- 
  
(88)
- 
Indirect expenses
(201)
(197)
(197)
  
(606)
(584)
             
 
(536)
(558)
(563)
  
(1,729)
(1,626)
             
Operating profit before impairment losses
244 
257 
208 
  
622 
621 
Impairment losses
(21)
(28)
(85)
  
(68)
(261)
             
Operating profit
223 
229 
123 
  
554 
360 
             
             
Average exchange rate -US$/£
1.581 
1.582 
1.611 
  
1.578 
1.614 
             
Analysis of income by product
            
Mortgages and home equity
139 
134 
119 
  
407 
335 
Personal lending and cards
101 
102 
117 
  
302 
342 
Retail deposits
215 
224 
238 
  
659 
690 
Commercial lending
144 
151 
150 
  
455 
436 
Commercial deposits
111 
113 
105 
  
338 
306 
Other
70 
91 
42 
  
190 
138 
             
Total income
780 
815 
771 
  
2,351 
2,247 
             
Analysis of impairments by sector
            
Residential mortgages
(5)
(4)
6 
  
(3)
24 
Home equity
40 
20 
32 
  
82 
83 
Corporate and commercial
(35)
(6)
5 
  
(57)
47 
Other consumer
21 
17 
12 
  
41 
40 
Securities
- 
1 
30 
  
5 
67 
             
Total impairment losses
21 
28 
85 
  
68 
261 
             
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
            
Residential mortgages
(0.3%)
(0.3%)
0.4% 
  
(0.1%)
0.6% 
Home equity
1.2% 
0.6% 
0.9% 
  
0.8% 
0.8% 
Corporate and commercial
(0.6%)
(0.1%)
0.1% 
  
(0.3%)
0.3% 
Other consumer
1.0% 
0.8% 
0.7% 
  
0.7% 
0.9% 
             
Total
0.2% 
0.2% 
0.4% 
  
0.2% 
0.5% 

 
 
US Retail & Commercial (£ Sterling) (continued)
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios
            
Return on equity (1)
9.7% 
10.0% 
5.8% 
  
8.1% 
5.7% 
Adjusted return on equity (2)
9.7% 
8.3% 
5.8% 
  
8.8% 
5.7% 
Net interest margin
2.99% 
3.02% 
3.08% 
  
3.02% 
3.07% 
Cost:income ratio
69% 
69% 
73% 
  
74% 
72% 
Adjusted cost:income ratio (2)
69% 
72% 
73% 
  
71% 
72% 
 
 
 
30 September 
2012 
30 June 
2012 
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Capital and balance sheet
            
Total third party assets
75.0 
75.1 
- 
  
75.8 
(1%)
Loans and advances to customers (gross)
            
  - residential mortgages
5.9 
6.1 
(3%)
  
6.1 
(3%)
  - home equity
13.6 
14.2 
(4%)
  
14.9 
(9%)
  - corporate and commercial
23.0 
23.6 
(3%)
  
22.9 
- 
  - other consumer
8.2 
8.3 
(1%)
  
7.7 
6% 
             
 
50.7 
52.2 
(3%)
  
51.6 
(2%)
Customer deposits (excluding repos)
59.8 
59.2 
1% 
  
60.0 
- 
Bank deposits (excluding repos)
3.8 
5.0 
(24%)
  
5.2 
(27%)
Risk elements in lending
            
  - retail
0.7 
0.6 
17% 
  
0.6 
17% 
  - commercial
0.3 
0.4 
(25%)
  
0.4 
(25%)
             
Total risk elements in lending
1.0 
1.0 
- 
  
1.0 
- 
Loan:deposit ratio (excluding repos)
84% 
87% 
(300bp)
  
85% 
(100bp)
Risk-weighted assets
56.7 
58.5 
(3%)
  
59.3 
(4%)
             
Spot exchange rate - US$/£
1.614 
1.569 
    
1.548 
  
 
Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Excludes the litigation settlement in Q1 2012 and net gain on sale of Visa B shares in Q2 2012. 
 
Key points
·  
Sterling strengthened relative to the US dollar during the first nine months of 2012, with the spot exchange rate increasing by 4.3% compared with 31 December 2011.
   
·  
Performance is described in full in the US dollar-based financial statements set out on pages 40 and 41.

 
 
US Retail & Commercial (US Dollar)
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
$m 
$m 
$m 
  
$m 
$m 
             
Income statement
            
Net interest income
778 
778 
776 
  
2,335 
2,267 
             
Net fees and commissions
306 
309 
358 
  
922 
1,036 
Other non-interest income
149 
202 
109 
  
453 
325 
             
Non-interest income
455 
511 
467 
  
1,375 
1,361 
             
Total income
1,233 
1,289 
1,243 
  
3,710 
3,628 
             
Direct expenses
            
  - staff
(327)
(344)
(340)
  
(1,021)
(1,005)
  - other
(204)
(228)
(250)
  
(614)
(677)
  - litigation settlement
- 
- 
- 
  
(138)
- 
Indirect expenses
(318)
(311)
(318)
  
(956)
(943)
             
 
(849)
(883)
(908)
  
(2,729)
(2,625)
             
Operating profit before impairment losses
384 
406 
335 
  
981 
1,003 
Impairment losses
(33)
(43)
(137)
  
(107)
(422)
             
Operating profit
351 
363 
198 
  
874 
581 
             
             
Analysis of income by product
            
Mortgages and home equity
219 
211 
192 
  
641 
542 
Personal lending and cards
160 
161 
188 
  
477 
552 
Retail deposits
340 
355 
384 
  
1,041 
1,114 
Commercial lending
228 
239 
241 
  
718 
703 
Commercial deposits
175 
179 
169 
  
533 
494 
Other
111 
144 
69 
  
300 
223 
             
Total income
1,233 
1,289 
1,243 
  
3,710 
3,628 
             
Analysis of impairments by sector
            
Residential mortgages
(8)
(6)
10 
  
(5)
38 
Home equity
64 
30 
52 
  
129 
134 
Corporate and commercial
(55)
(9)
8 
  
(89)
75 
Other consumer
32 
27 
19 
  
65 
68 
Securities
- 
1 
48 
  
7 
107 
             
Total impairment losses
33 
43 
137 
  
107 
422 
             
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
            
Residential mortgages
(0.3%)
(0.3%)
0.4% 
  
(0.1%)
0.6% 
Home equity
1.2% 
0.5% 
0.9% 
  
0.8% 
0.8% 
Corporate and commercial
(0.6%)
(0.1%)
0.1% 
  
(0.3%)
0.3% 
Other consumer
1.0% 
0.8% 
0.7% 
  
0.7% 
0.9% 
             
Total
0.2% 
0.2% 
0.5% 
  
0.2% 
0.5% 

 
 
US Retail & Commercial (US Dollar) (continued)
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios
            
Return on equity (1)
9.7% 
10.0% 
5.8% 
  
8.1% 
5.7% 
Adjusted return on equity (2)
9.7% 
8.3% 
5.8% 
  
8.8% 
5.7% 
Net interest margin
2.99% 
3.02% 
3.08% 
  
3.02% 
3.07% 
Cost:income ratio
69% 
69% 
73% 
  
74% 
72% 
Adjusted cost:income ratio (2)
69% 
72% 
73% 
  
71% 
72% 
 
 
 
30 September 
2012 
30 June 
2012 
    
31 December 
2011 
  
 
$bn 
$bn 
Change 
  
$bn 
Change 
             
Capital and balance sheet
            
Total third party assets
121.0 
117.8 
3% 
  
117.3 
3% 
Loans and advances to customers (gross)
            
  - residential mortgages
9.5 
9.6 
(1%)
  
9.4 
1% 
  - home equity
22.0 
22.3 
(1%)
  
23.1 
(5%)
  - corporate and commercial
37.2 
37.0 
1% 
  
35.3 
5% 
  - other consumer
13.1 
13.1 
- 
  
12.0 
9% 
             
 
81.8 
82.0 
- 
  
79.8 
3% 
Customer deposits (excluding repos)
96.6 
92.9 
4% 
  
92.8 
4% 
Bank deposits (excluding repos)
6.2 
7.8 
(21%)
  
8.0 
(23%)
Risk elements in lending
            
  - retail
1.2 
1.0 
20% 
  
1.0 
20% 
  - commercial
0.5 
0.6 
(17%)
  
0.6 
(17%)
             
Total risk elements in lending
1.7 
1.6 
6% 
  
1.6 
6% 
Loan:deposit ratio (excluding repos)
84% 
87% 
(300bp)
  
85% 
(100bp)
Risk-weighted assets
91.6 
91.7 
- 
  
91.8 
- 
 
Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Excludes the litigation settlement in Q1 2012 and net gain on sale of Visa B shares in Q2 2012. 
 
Key points
Q3 2012 was another solid quarter for US Retail & Commercial. Excluding the $62 million net gain on sale of Visa B shares in Q2 2012, operating profit increased a further 17% quarter-on-quarter, largely driven by a decrease in expenses and higher securities gains.
 
US Retail & Commercial's strategy to focus on core banking products and to compete on service and product capabilities rather than price continued to deliver results. Key customer retention indicators in Consumer Banking, such as penetration in online banking, online bill pay and direct deposits, continued to improve in Q3 2012, while customers continued to rate services such as mobile banking highly compared with peers.
 
Consumer Banking has also seen benefits from its focus on growing and deepening valued customer relationships, resulting in higher core deposit balances and greater penetration in lending products.

 
 
US Retail & Commercial (US Dollar) (continued)
Key points (continued)
Commercial Banking has successfully utilised the growing strength of customer relationships to develop innovative e-marketing campaigns, targeting specific clients and prospects in chosen industries, and providing customers with access to relevant webinars, customer events and economic newsletters based on the business's understanding of their needs.
 
Commercial Banking has also focused on expanding and improving its Capital Markets and Treasury Solutions businesses throughout 2012.
 
By the end of Q3, the Capital Markets business was on track to finish 2012 with more than 100 lead roles in syndicate debt underwriting transactions, an increase of over 15% from 2011. In Q3 2012, the Treasury Solutions business improved its customer experience through the launch of accessSETUP™, a secure web interface that will allow safe and efficient exchange of documents in the initiation and implementation phases of cash management services.
 
Q3 2012 compared with Q2 2012
 
·  
US Retail & Commercial posted an operating profit of $351 million compared with $363 million in the prior quarter. Excluding the $62 million net gain on sale of Visa B shares in Q2 2012, operating profit increased by $50 million, or 17%, largely reflecting higher securities gains of $26 million and lower expenses.
   
·  
Net interest income was in line with the prior quarter although net interest margin decreased by 3 basis points to 2.99% reflecting lower asset yields.
   
·  
Loans and advances were flat, reflecting continued run-off of consumer loan balances due to reduced credit demand and the unwillingness to hold long term fixed rate products, offset by growth in commercial loan volumes.
   
·  
Excluding a gross gain of $75 million on the sale of Visa B shares in Q2 2012, non-interest income was up $19 million, or 4%, largely reflecting higher securities gains.
   
·  
Excluding the $13 million litigation reserve associated with the sale of Visa B shares in Q2 2012, direct expenses were down $28 million, or 5%, driven by lower mortgage servicing rights impairments and the phasing of staff costs.
   
·  
Impairment losses were down $10 million, although the credit environment remained broadly stable in the quarter.
 
Q3 2012 compared with Q3 2011
 
·  
Operating profit increased to $351 million from $198 million, an increase of $153 million, or 77%, driven by lower impairment losses and expenses.
   
·  
Net interest income was in line with Q3 2011. Consumer loan run-off and lower asset yields reflected prevailing economic conditions, but were offset by targeted commercial loan growth, deposit pricing discipline and lower funding costs.
   
·  
Customer deposits were up 5% with strong growth achieved in checking and money market balances. Consumer checking balances grew by 3% while small business checking balances grew by 8% over the year.

 
 
US Retail & Commercial (US Dollar) (continued)
Key points (continued)
 
Q3 2012 compared with Q3 2011 (continued)
·  
Non-interest income was down $12 million, or 3%, reflecting lower debit card fees as a result of the Durbin Amendment legislation, and lower deposit fees, partially offset by higher securities gains and strong mortgage banking fees.
   
·  
Total expenses declined by $59 million, or 6%, reflecting a lower mortgage servicing rights impairment, a decline in loan collection costs and the elimination of the Everyday Points rewards programme for consumer debit card customers.
   
·  
Impairment losses declined by $104 million, or 76%, reflecting an improved credit environment as well as lower impairments related to securities.

 
 
Markets
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Net interest income from banking activities
11 
32 
(6)
  
67 
56 
             
Net fees and commissions receivable
77 
73 
153 
  
277 
541 
Income from trading activities
933 
917 
281 
  
3,398 
3,022 
Other operating income (net of related
  funding costs)
21 
44 
19 
  
100 
104 
             
Non-interest income
1,031 
1,034 
453 
  
3,775 
3,667 
             
Total income
1,042 
1,066 
447 
  
3,842 
3,723 
             
Direct expenses
            
  - staff
(393)
(423)
(406)
  
(1,360)
(1,609)
  - other
(162)
(185)
(195)
  
(513)
(549)
Indirect expenses
(198)
(188)
(199)
  
(584)
(576)
             
 
(753)
(796)
(800)
  
(2,457)
(2,734)
             
Operating profit/(loss) before impairment
  losses
289 
270 
(353)
  
1,385 
989 
Impairment recoveries/(losses)
6 
(19)
5 
  
(15)
19 
             
Operating profit/(loss)
295 
251 
(348)
  
1,370 
1,008 
             
Of which:
            
Ongoing businesses
300 
268 
(325)
  
1,429 
1,039 
Run-off businesses
(5)
(17)
(23)
  
(59)
(31)
             
Analysis of income by product
            
Rates
390 
416 
42 
  
1,607 
1,078 
Currencies
173 
175 
293 
  
594 
801 
Asset backed products (ABP)
374 
378 
241 
  
1,179 
1,225 
Credit markets
186 
184 
(58)
  
683 
580 
Investor products and equity derivatives
76 
91 
76 
  
290 
475 
             
Total income ongoing businesses
1,199 
1,244 
594 
  
4,353 
4,159 
Inter-divisional revenue share
(159)
(174)
(178)
  
(519)
(590)
Run-off businesses
2 
(4)
31 
  
8 
154 
             
Total income
1,042 
1,066 
447 
  
3,842 
3,723 
             
Memo - Fixed income and currencies
            
Rates/currencies/ABP/credit markets
1,123 
1,153 
518 
  
4,063 
3,684 
Less: primary credit markets
(114)
(132)
(137)
  
(417)
(554)
             
Total fixed income and currencies
1,009 
1,021 
381 
  
3,646 
3,130 

 
 
Markets (continued)
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios (ongoing businesses)
            
Return on equity (1)
7.8% 
6.8% 
(8.2%)
  
12.0% 
8.9% 
Cost:income ratio
72% 
73% 
179% 
  
62% 
71% 
Compensation ratio (2)
37% 
38% 
88% 
  
34% 
41% 
 
 
 
30 September 
2012 
30 June 
2012 
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Capital and balance sheet (ongoing businesses)
            
Loans and advances
51.7 
53.7 
(4%)
  
61.2 
(16%)
Reverse repos
97.5 
97.6 
- 
  
100.4 
(3%)
Securities
97.9 
101.7 
(4%)
  
108.1 
(9%)
Cash and eligible bills
34.7 
26.8 
29% 
  
28.1 
23% 
Other
22.4 
22.2 
1% 
  
14.8 
51% 
             
Total third party assets (excluding derivatives mark-to-market)
304.2 
302.0 
1% 
  
312.6 
(3%)
Customer deposits (excluding repos)
34.3 
34.3 
- 
  
36.8 
(7%)
Bank deposits (excluding repos)
42.9 
50.7 
(15%)
  
48.2 
(11%)
Net derivative assets (after netting)
21.3 
27.5 
(23%)
  
37.0 
(42%)
Risk-weighted assets
108.0 
107.9 
- 
  
120.3 
(10%)
 
Notes:
 
(1)
Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions), for the ongoing businesses.
(2)
Compensation ratio is based on staff costs as a percentage of total income.
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
Run-off businesses (1)
£m 
£m 
£m 
  
£m 
£m 
             
Total income
2 
(4)
31 
  
8 
154 
Direct expenses
(7)
(13)
(54)
  
(67)
(185)
             
Operating loss
(5)
(17)
(23)
  
(59)
(31)
 
 
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
Run-off businesses (1)
£bn 
£bn 
£bn 
       
Total third party assets (excluding derivatives mark-to-market)
0.2 
0.4 
1.3 
 
Note:
(1)
Run-off businesses consist of the exited cash equities, corporate broking and equity capital markets operations.

 
 
Markets (continued)
Key points
During Q3 2012, Markets performed creditably in a challenging environment. Client activity was subdued and investors remained cautious, despite market supportive actions by both the US Federal Reserve and the European Central Bank which resulted in a narrowing of credit spreads.
 
In response to the difficult environment, Markets has continued to focus on managing both risk and costs. The effectiveness of risk management processes were further improved and risk positions mitigated. Headcount fell and the division continued to pursue a rigorous programme of front to back cost reduction.
 
Q3 2012 compared with Q2 2012
 
·  
Revenues declined by 2% due to continued uncertainty in the Eurozone and subdued client activity. However, the ongoing focus on costs generated an 18% increase in operating profit.
   
·  
Rates' income fell 6% in a low volatility environment. A decline in counterparty exposure management, which had a particularly strong Q2 2012, was partly offset by a strong performance in non-linear trading, as RBS worked with clients to restructure or unwind a number of client positions.
   
·  
Currencies volumes remained weak. Investors were risk averse which limited opportunities in emerging markets. Conversely, the currency options activity had better trading results as a consequence of efficient risk management.
   
·  
Asset-backed products continued to benefit from investors' search for yield, especially in the United States, where the Federal Reserve's stance on quantitative easing sustained the markets.
   
·  
Credit markets continued to stabilise during Q3 2012. Issuance in the EMEA debt capital markets remained difficult and windows of opportunity were narrow. The US market, less affected by uncertainty in the Eurozone, saw some growth in corporate activity.
   
·  
The 5% reduction in total expenses was driven by lower staff costs and the division's continued focus on controlling discretionary expenditure.
   
·  
Third party assets increased slightly due to a higher level of cash held with central banks at the end of the quarter. Excluding cash and eligible bills, third party assets fell by £6 billion.
   
·  
Risk-weighted assets remained flat as continuing regulatory pressures were offset by ongoing mitigation actions.
   
·  
Q3 2012 performance helped drive a strong return on equity of 12% for the first nine months of 2012, largely due to the improved cost position.

 
 
Markets (continued)
Key points (continued)
 
Q3 2012 compared with Q3 2011
·  
Revenues increased by £595 million as business performance and the market environment improved. During Q3 2011 both credit spreads and investor confidence deteriorated sharply whereas Q3 2012 has been supported by the actions of the US Federal Reserve and European Central Bank.
   
 
○
Rates benefited from a more stable market environment and more effective risk management. Non-linear trading performed particularly well during Q3 2012.
 
○
Flow currencies weakened compared with Q3 2011 reflecting low volumes. The currency options business was lower, but this reflected a strong Q3 2011.
 
○
A stronger performance in asset backed products reflected a more sustained market rally than during 2011. Quantitative easing in the US and investors' search for yield supported asset prices.
 
○
Credit markets incurred significant losses in Q3 2011 on flow credit trading, reflecting the sharp deterioration in the credit environment. More benign credit conditions and a focus on risk management drove improved results in Q3 2012.
   
·  
Staff numbers have fallen significantly as a consequence of both the strategic decision to exit cash equities and origination and a more efficient use of resources in the ongoing business. The compensation ratio of 37% represents a significant improvement from Q3 2011. Lower headcount, combined with the focus on discretionary expenditure, has driven down the overall cost base.

 
 
Direct Line Group
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Earned premiums
1,013 
1,012 
1,057 
  
3,045 
3,178 
Reinsurers' share
(81)
(83)
(67)
  
(246)
(181)
             
Net premium income
932 
929 
990 
  
2,799 
2,997 
Fees and commissions
(129)
(113)
(83)
  
(351)
(239)
Instalment income
32 
31 
35 
  
94 
105 
Other income
16 
14 
19 
  
46 
81 
             
Total income
851 
861 
961 
  
2,588 
2,944 
Net claims
(596)
(576)
(695)
  
(1,821)
(2,183)
             
Underwriting profit
255 
285 
266 
  
767 
761 
             
Staff expenses
(88)
(81)
(67)
  
(248)
(213)
Other expenses
(106)
(81)
(88)
  
(278)
(254)
             
Total direct expenses
(194)
(162)
(155)
  
(526)
(467)
Indirect expenses
- 
(61)
(60)
  
(124)
(170)
             
 
(194)
(223)
(215)
  
(650)
(637)
             
Technical result
61 
62 
51 
  
117 
124 
Investment income
48 
73 
72 
  
211 
205 
             
Operating profit
109 
135 
123 
  
328 
329 
             
Analysis of income by product
            
Personal lines motor excluding broker
            
  - own brands
416 
409 
439 
  
1,236 
1,317 
  - partnerships
31 
31 
45 
  
93 
175 
Personal lines home excluding broker
            
  - own brands
116 
115 
117 
  
347 
352 
  - partnerships
88 
94 
94 
  
270 
282 
Personal lines rescue and other excluding broker
            
  - own brands
46 
46 
43 
  
137 
135 
  - partnerships
42 
47 
47 
  
131 
141 
Commercial
82 
79 
80 
  
240 
234 
International
79 
77 
91 
  
240 
251 
Other (1)
(49)
(37)
5 
  
(106)
57 
             
Total income
851 
861 
961 
  
2,588 
2,944 
 
For the notes to this table refer to page 50.

 
 
Direct Line Group (continued)
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
In-force policies (000s)
            
Personal lines motor excluding broker
            
  - own brands
3,762 
3,816 
3,832 
  
3,762 
3,832 
  - partnerships
332 
319 
388 
  
332 
388 
Personal lines home excluding broker
            
  - own brands
1,777 
1,795 
1,832 
  
1,777 
1,832 
  - partnerships
2,514 
2,509 
2,504 
  
2,514 
2,504 
Personal lines rescue and other excluding broker
            
  - own brands
1,816 
1,798 
1,886 
  
1,816 
1,886 
  - partnerships
7,955 
7,895 
7,714 
  
7,955 
7,714 
Commercial
466 
460 
410 
  
466 
410 
International
1,444 
1,441 
1,357 
  
1,444 
1,357 
Other (1)
52 
54 
44 
  
52 
44 
             
Total in-force policies (2)
20,118 
20,087 
19,967 
  
20,118 
19,967 
             
Gross written premium (£m)
            
Personal lines motor excluding broker
            
  - own brands
400 
378 
438 
  
1,176 
1,236 
  - partnerships
40 
32 
36 
  
109 
109 
Personal lines home excluding broker
            
  - own brands
128 
112 
133 
  
350 
362 
  - partnerships
139 
127 
144 
  
402 
417 
Personal lines rescue and other excluding broker
            
  - own brands
48 
45 
48 
  
136 
134 
  - partnerships
45 
45 
48 
  
131 
130 
Commercial
103 
123 
101 
  
333 
333 
International
113 
133 
125 
  
419 
428 
Other (1)
(1)
1 
4 
  
1 
(1)
             
Total gross written premium
1,015 
996 
1,077 
  
3,057 
3,148 
 
For the notes to this table refer to the following page.

 
 
Direct Line Group (continued)
Key metrics (continued)
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios
            
Return on tangible equity (3)
12.9% 
13.4% 
11.0% 
  
10.3% 
10.0% 
Loss ratio (4)
64% 
62% 
70% 
  
65% 
73% 
Commission ratio (5)
14% 
12% 
8% 
  
13% 
8% 
Expense ratio (6)
21% 
24% 
22% 
  
23% 
21% 
Combined operating ratio (7)
99% 
98% 
100% 
  
101% 
102% 
             
Balance sheet
            
Total insurance reserves - (£m) (8)
8,112 
8,184 
7,545 
  
8,112 
7,545 
 
Notes:
(1)
'Other' predominantly consists of the personal lines broker business and from Q1 2012 business previously reported in Non-Core.
(2)
Total in-force policies include travel and creditor policies sold through RBS Group. These comprise travel policies included in bank accounts e.g. Royalties Gold Account, and creditor policies sold with bank products including mortgage, loan and card payment protection.
(3)
Return on tangible equity is based on annualised operating profit after tax divided by average tangible equity adjusted for dividend payments.
(4)
Loss ratio is based on net claims divided by net premium income.
(5)
Commission ratio is based on fees and commissions divided by net premium income.
(6)
Expense ratio is based on expenses divided by net premium income.
(7)
Combined operating ratio is the sum of the loss, commission and expense ratios.
(8)
Consists of general and life insurance liabilities, unearned premium reserve and liability adequacy reserve.
 
Key points
In October 2012 RBS Group sold 520.8 million ordinary shares in Direct Line Group completing a successful initial public offering (IPO). This represented 34.7% of the total share capital, generating gross proceeds of £911 million.
 
Direct Line Group continues to hold a steady position in a competitive market with stable in-force policies and an operating profit of £328 million for the nine months ended 30 September 2012. Q3 2012 operating profit of £109 million was lower than Q3 2011 as a result of increased financing costs, following successful implementation of balance sheet restructuring, and lower investment returns. This was partially offset by an improved technical result.
 
The combined operating ratio of 99% in the quarter reflects normal weather and some improvement in expense ratio compared with Q2 2012, partially offset by lower releases from prior year reserves.
 
Following the renewal and expansion of partnership agreements with Nationwide Building Society and Sainsbury's Bank in H1 2012, Direct Line Group signed an arm's length, five year distribution agreement with RBS Group for the continued provision of general insurance products post divestment. In September, a new marketing campaign was launched for the Direct Line brand further differentiating its service led proposition. These activities reinforce Direct Line Group's multi-brand, multi-product and multi-channel personal lines business model in the UK.

 
 
Direct Line Group (continued)
Key points (continued)
During the quarter, Commercial continued to develop its new e-trading platform. This will enable NIG to provide a wider range of Small to Medium Enterprise (SME) products for brokers on an electronic trading platform and drive greater operational efficiency, whilst also significantly improving the broker and customer experience.
 
International continued to consolidate its position with 1.4 million in-force policies. Gross written premium for the year-to-date was up 5% in local currency on the same period last year. This followed a period of strong growth in 2010 and 2011. International continues to benefit from its multi-channel distribution model including partnerships.
 
During Q3 2012, agreement was reached on the final level of reserves to be retained by Direct Line Group in respect of the run-off of remaining claims under Tesco Personal Finance policies and finalised certain other matters arising out of the expiration of the distribution arrangements. Following this determination of the reserves, the risks and rewards of the run-off for this line of business was transferred to Direct Line Group.
 
Direct Line Group continues to focus on reducing operational costs, targeting the delivery of gross annual cost and claims savings of £100 million in 2014 through overall improvements in operational efficiency, continued efforts to simplify its internal organisational structure and better managing its customer acquisition costs.
 
Investment markets remained challenging with continued low yields. Direct Line Group continues to manage its investment portfolios conservatively, with portfolios composed primarily of investment grade corporate bonds, cash and gilts. At 30 September 2012, exposure to peripheral Eurozone debt was £52 million, less than 1% of the portfolio, comprising non-sovereign debt issued in Ireland, Italy and Spain. During the quarter, Direct Line Group continued to restructure its portfolio through a further purchase of £287 million in corporate bonds and £33 million in property.
 
Direct Line Group continues to optimise its capital structure with a further dividend of £200 million paid to RBS Group on 3 September 2012, taking the total dividend paid to £1 billion in 2012. Following the IPO, Direct Line Group plans to adopt a progressive dividend policy which will aim to increase dividends annually in real terms. For 2012, the dividend pay-out ratio is expected to be between 50-60% of post tax profits from ongoing operations and a final dividend of two thirds of this amount is expected to be paid in Q2 2013.
 
Over the last 18 months, a number of regulatory reviews and initiatives have been announced by the UK Government, the Ministry of Justice and the Competition Commission in relation to the motor insurance industry. Direct Line Group is actively engaged with major stakeholders and supports the introduction of a coherent set of reforms. This was reinforced by the recent reversal of an earlier Court of Appeal decision (Simmons v Castle) in relation to the 10% uplift in general damages.

 
 
Direct Line Group (continued)
Key points (continued)
 
Separation update
From 1 July 2012, Direct Line Group has operated on a substantially standalone basis with independent corporate functions and governance, following successful implementation of a comprehensive programme of separation initiatives. During the first nine months of the year these included launching a new corporate identity and the Direct Line Group Board becoming fully compliant with the UK Corporate Governance code following further non-executive director appointments. New contracts of employment have been agreed and issued to staff, independent HR systems have been implemented and an arm's length transitional services agreement has been reached with RBS Group for residual services.
 
RBS completed the successful initial public offering of Direct Line Group in October 2012, representing another important milestone in RBS's restructuring plan.
 
Q3 2012 compared with Q2 2012
 
·  
Operating profit of £109 million was £26 million, or 19% lower, as a stable technical result was more than offset by lower investment returns.
   
·  
Gross written premiums of £1,015 million were £19 million higher, driven by seasonality across the products.
   
·  
Total income of £851 million was £10 million, or 1% lower, predominantly due to increased commissions payable relating to business previously reported within Non-Core.
   
·  
Net claims of £596 million were £20 million, or 4% higher, reflecting lower releases of reserves from prior years compared with the prior quarter, partially offset by less severe weather.
   
·  
Total expenses of £194 million were £29 million, or 13% lower than Q2 2012, primarily due to being substantially operationally separate from RBS Group, and the cessation of a period of dual running costs.
   
·  
Investment income of £48 million was £25 million lower as realised gains arising from portfolio management initiatives during Q2 2012 were not repeated in the current quarter. In addition financing costs were higher following a full quarter of interest on the Tier 2 debt issued in Q2 2012.
 
Q3 2012 compared with Q3 2011
 
·  
Operating profit was £14 million, or 11% lower than Q3 2011 reflecting an improved technical result more than offset by lower investment income, which included £12 million of financing costs relating to the Tier 2 debt issued in Q2 2012.
   
·  
Gross written premiums of £1,015 million were £62 million, or 6% lower than Q3 2011. This was predominantly driven by Motor, due to the impact of de-risking actions taken in 2011 and the continued focus on disciplined underwriting in a competitive market. International was also down, reflecting adverse exchange rate movements.
   
·  
Total income decreased by £110 million as a result of the earn through of lower written premiums, together with significantly higher commissions payable relating to business previously reported in Non-Core.

 
 
Direct Line Group (continued)
Key points (continued)
 
Q3 2012 compared with Q3 2011 (continued)
·  
Net claims were £99 million, or 14% lower due to a reduction in volumes, reserve releases and favourable movements relating to business previously reported within Non-Core, which is almost entirely offset within fees and commissions.
   
·  
Expenses decreased by £21 million, or 9%, principally reflecting the move to substantial operational separation from RBS Group in Q3 2012.
   
·  
Investment income was £24 million, or 33% lower reflecting lower yields during 2012, lower realised gains on the portfolio, and the interest payable on the Tier 2 debt issued in Q2 2012. This was partially offset by gains relating to business previously reported in Non-Core.

 
 
Central items
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Central items not allocated
176 
(32)
78 
  
- 
102 
 
Note:
(1)
Costs/charges are denoted by brackets.
 
Funding and operating costs have been allocated to operating divisions based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one division.
 
Residual unallocated items relate to volatile corporate items that do not naturally reside within a division.
 
Key points
 
Q3 2012 compared with Q2 2012
 
·  
Central items not allocated represented a credit of £176 million, an improvement of £208 million compared with Q2 2012.
   
·  
The movement was predominantly driven by an increased profit from available-for-sale bond disposals of £325 million, as the Group repositioned its liquidity portfolio, offset by higher unallocated volatility costs in Group Treasury of £95 million. In addition, a further provision of £50 million in respect of the Group technology incident was recorded in Q3 2012 compared with £125 million in Q2 2012.
   
·  
Q3 2012 also included a £75 million reserve for various litigation and legacy conduct issues.
 
Q3 2012 compared with Q3 2011
 
·  
Central items not allocated represented a credit of £176 million, an improvement of £98 million compared with Q3 2011.
   
·  
The movement was due to increases in available-for-sale bond disposals, partially offset by an increase in unallocated volatility costs and the additional provisions noted above.

 
 
Central items (continued)
Technology incident - costs of redress
The following table provides an analysis by division of the estimated costs of redress following the technology incident in June 2012. These costs are included in Central items above and include waiver of interest and other charges together with other compensation payments all of which are reported in expenses.
 
 
Quarter ended
  
 
30 September 
2012 
30 June 
2012 
Total 
 
£m 
£m 
£m 
       
UK Retail
6 
35 
41 
UK Corporate
(12)
36 
24 
International Banking
(18)
21 
3 
Ulster Bank
54 
28 
82 
Group Centre
20 
5 
25 
       
 
50 
125 
175 
 
During Q3, the Group increased the provision by £50 million, primarily in relation to Ulster Bank (£54 million) partially offset by reductions in UK Corporate and International Banking.

 
 
Non-Core
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Income statement
            
Net interest income
86 
86 
183 
  
287 
708 
             
Net fees and commissions
17 
29 
(85)
  
77 
9 
Loss from trading activities
(203)
(131)
(246)
  
(604)
(314)
Insurance net premium income
- 
- 
44 
  
- 
277 
Other operating income
            
  - rental income
73 
133 
182 
  
374 
580 
  - other (1)
77 
(116)
(13)
  
186 
206 
             
Non-interest (loss)/income
(36)
(85)
(118)
  
33 
758 
             
Total income
50 
1 
65 
  
320 
1,466 
             
Direct expenses
            
  - staff
(69)
(80)
(93)
  
(220)
(293)
  - operating lease depreciation
(43)
(69)
(82)
  
(195)
(256)
  - other
(30)
(46)
(62)
  
(117)
(199)
Indirect expenses
(70)
(67)
(86)
  
(205)
(233)
             
 
(212)
(262)
(323)
  
(737)
(981)
             
Operating (loss)/profit before insurance net
  claims and impairment losses
(162)
(261)
(258)
  
(417)
485 
Insurance net claims
- 
- 
(38)
  
- 
(256)
Impairment losses
(424)
(607)
(682)
  
(1,520)
(3,168)
             
Operating loss
(586)
(868)
(978)
  
(1,937)
(2,939)
 
Note:
(1)
Includes (losses)/gains on disposals (Q3 2012 - £42 million loss; Q2 2012 - £39 million loss; Q3 2011 - £37 million loss; nine months ended 30 September 2012 - £101 million gain; nine months ended 30 September 2011 - £91 million loss).

 
 
Non-Core (continued)
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Analysis of income/(loss) by business
            
Banking and portfolios
91 
(117)
233 
  
151 
1,607 
International businesses
60 
76 
101 
  
221 
319 
Markets
(101)
42 
(269)
  
(52)
(460)
             
Total income
50 
1 
65 
  
320 
1,466 
             
Loss from trading activities
            
Monoline exposures
21 
(63)
(230)
  
(170)
(427)
Credit derivative product companies
(199)
31 
(5)
  
(206)
(66)
Asset-backed products (1)
17 
37 
(51)
  
85 
51 
Other credit exotics
16 
(69)
(7)
  
(33)
(167)
Equities
1 
3 
(11)
  
3 
(12)
Banking book hedges
(14)
(22)
73 
  
(36)
35 
Other
(45)
(48)
(15)
  
(247)
272 
             
 
(203)
(131)
(246)
  
(604)
(314)
             
Impairment losses
            
Banking and portfolios
433 
706 
656 
  
1,623 
3,119 
International businesses
16 
14 
17 
  
41 
52 
Markets
(25)
(113)
9 
  
(144)
(3)
             
Total impairment losses
424 
607 
682 
  
1,520 
3,168 
             
Loan impairment charge as % of gross customer loans and advances (excluding
reverse repurchase agreements) (2)
            
Banking and portfolios
2.8% 
4.2% 
2.8% 
  
3.6% 
4.8% 
International businesses
4.5% 
3.4% 
2.7% 
  
3.9% 
3.2% 
Markets
0.4% 
(4.4%)
(0.4%)
  
(1.6%)
(4.0%)
             
Total
2.9% 
4.2% 
2.8% 
  
3.6% 
4.8% 
 
Notes:
(1)
Asset-backed products include super senior asset-backed structures and other asset-backed products.
(2)
Includes disposal groups.

 
 
Non-Core (continued)
Key metrics
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Performance ratios
            
Net interest margin
0.41% 
0.24% 
0.50% 
  
0.32% 
0.69% 
Cost:income ratio
nm 
nm 
nm 
  
nm 
67% 
Adjusted cost:income ratio
nm 
nm 
nm 
  
nm 
81% 
 
 
 
30 September 
2012 
30 June 
2012
    
31 December 
2011 
  
 
£bn 
£bn 
Change 
  
£bn 
Change 
             
Capital and balance sheet
            
Total third party assets (excluding derivatives)
65.1 
72.1 
(10%)
  
93.7 
(31%)
Total third party assets (including derivatives)
72.2 
80.6 
(10%)
  
104.7 
(31%)
Loans and advances to customers (gross) (1)
61.6 
67.7 
(9%)
  
79.4 
(22%)
Customer deposits (1)
3.3 
2.9 
14% 
  
3.5 
(6%)
Risk elements in lending (1)
22.0 
23.1 
(5%)
  
24.0 
(8%)
Risk-weighted assets
72.2 
82.7 
(13%)
  
93.3 
(23%)
 
nm = not meaningful
 
Note:
(1)
Excludes disposal groups.
 
 
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
 
£bn 
£bn 
£bn 
       
Gross customer loans and advances
      
Banking and portfolios
60.4 
66.3 
77.3 
International businesses
1.2 
1.4 
2.0 
Markets
- 
- 
0.1 
       
 
61.6 
67.7 
79.4 
       
Risk-weighted assets
      
Banking and portfolios
60.5 
64.4 
64.8 
International businesses
2.7 
2.9 
4.1 
Markets
9.0 
15.4 
24.4 
       
 
72.2 
82.7 
93.3 
       
Third party assets (excluding derivatives)
      
Banking and portfolios
57.6 
63.5 
81.3 
International businesses
1.9 
2.2 
2.9 
Markets
5.6 
6.4 
9.5 
       
 
65.1 
72.1 
93.7 

 
 
Non-Core (continued)
Third party assets (excluding derivatives)
 
 
 
30 June 
2012 
Run-off 
Disposals/ 
restructuring 
Drawings/ 
roll overs 
Impairments 
FX 
30 September 
2012 
Quarter ended 30 September 2012
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
               
Commercial real estate
26.9 
(0.9)
(0.4)
- 
(0.4)
(0.2)
25.0 
Corporate
32.8 
(2.7)
(1.1)
0.4 
- 
(0.4)
29.0 
SME
1.6 
(0.2)
(0.1)
- 
- 
- 
1.3 
Retail
4.0 
(0.1)
- 
- 
- 
(0.1)
3.8 
Other
0.4 
- 
- 
- 
- 
- 
0.4 
Markets
6.4 
(0.2)
(0.6)
0.1 
- 
(0.1)
5.6 
               
Total (excluding derivatives)
72.1 
(4.1)
(2.2)
0.5 
(0.4)
(0.8)
65.1 
 
 
 
 
31 March 
2012 
Run-off 
Disposals/ 
restructuring 
Drawings/ 
roll overs 
Impairments 
FX 
30 June 
2012 
Quarter ended 30 June 2012
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
               
Commercial real estate
29.1 
(1.2)
(0.2)
- 
(0.4)
(0.4)
26.9 
Corporate
40.1 
(1.7)
(5.9)
0.5 
(0.2)
- 
32.8 
SME
1.9 
(0.3)
(0.1)
0.1 
- 
- 
1.6 
Retail
4.2 
(0.3)
- 
0.1 
(0.1)
0.1 
4.0 
Other
0.6 
(0.2)
- 
- 
- 
- 
0.4 
Markets
7.4 
(0.7)
(0.5)
- 
0.1 
0.1 
6.4 
               
Total (excluding derivatives)
83.3 
(4.4)
(6.7)
0.7 
(0.6)
(0.2)
72.1 
 
 
 
 
30 June 
2011 
Run-off 
Disposals/ 
restructuring 
Drawings/ 
roll overs 
Impairments 
FX 
30 September 
2011 
Quarter ended 30 September 2011
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
               
Commercial real estate
36.6 
0.3 
(0.6)
0.2 
(0.5)
(0.7)
35.3 
Corporate
50.4 
(2.4)
(1.3)
0.5 
- 
(0.3)
46.9 
SME
2.7 
(0.3)
- 
- 
- 
- 
2.4 
Retail
8.0 
(0.3)
(0.3)
- 
(0.1)
0.1 
7.4 
Other
2.3 
(0.4)
- 
- 
- 
- 
1.9 
Markets
11.5 
(0.9)
(0.4)
0.6 
- 
0.1 
10.9 
               
Total (excluding derivatives)
111.5 
(4.0)
(2.6)
1.3 
(0.6)
(0.8)
104.8 
Markets - RBS Sempra
  Commodities JV
1.1 
- 
(0.8)
- 
- 
- 
0.3 
               
Total (1)
112.6 
(4.0)
(3.4)
1.3 
(0.6)
(0.8)
105.1 
 
Note:
(1)
Disposals of £0.2 billion have been signed as at 30 September 2012 but are pending completion (30 June 2012 - nil; 30 September 2011 - £1 billion).

 
 
Non-Core (continued)
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Impairment losses by donating division and sector
            
             
UK Retail
            
Mortgages
- 
- 
1 
  
- 
5 
Personal
1 
1 
1 
  
4 
1 
             
Total UK Retail
1 
1 
2 
  
4 
6 
             
UK Corporate
            
Manufacturing and infrastructure
4 
7 
3 
  
18 
50 
Property and construction
2 
23 
92 
  
80 
141 
Transport
- 
16 
- 
  
14 
46 
Financial institutions
(13)
(3)
- 
  
(15)
4 
Lombard
11 
12 
12 
  
33 
55 
Other
37 
11 
18 
  
54 
75 
             
Total UK Corporate
41 
66 
125 
  
184 
371 
             
Ulster Bank
            
Commercial real estate
            
  - investment
61 
52 
74 
  
197 
458 
  - development
93 
120 
162 
  
355 
1,475 
Other corporate
10 
17 
45 
  
61 
158 
Other EMEA
- 
2 
2 
  
6 
13 
             
Total Ulster Bank
164 
191 
283 
  
619 
2,104 
             
US Retail & Commercial
            
Auto and consumer
10 
11 
14 
  
30 
51 
Cards
(1)
(1)
- 
  
3 
(10)
SBO/home equity
46 
44 
57 
  
108 
168 
Residential mortgages
10 
4 
4 
  
17 
14 
Commercial real estate
(9)
2 
(4)
  
(10)
26 
Commercial and other
(8)
(3)
(1)
  
(15)
(10)
             
Total US Retail & Commercial
48 
57 
70 
  
133 
239 
             
International Banking
            
Manufacturing and infrastructure
(5)
(1)
23 
  
- 
15 
Property and construction
205 
236 
189 
  
527 
511 
Transport
1 
134 
(6)
  
148 
(13)
Telecoms, media and technology
- 
11 
27 
  
27 
50 
Banks and financial institutions
(19)
(102)
(29)
  
(133)
(67)
Other
(13)
14 
(1)
  
10 
(48)
             
Total International Banking
169 
292 
203 
  
579 
448 
             
Other
            
Wealth
1 
1 
1 
  
1 
1 
Central items
- 
(1)
(2)
  
- 
(1)
             
Total Other
 1 
- 
(1)
  
1 
- 
             
Total impairment losses
424 
607 
682 
  
1,520 
3,168 

 
 
Non-Core (continued)
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
 
£bn 
£bn 
£bn 
       
Gross loans and advances to customers (excluding reverse repurchase agreements) by donating division and sector
      
       
UK Retail
      
Mortgages
- 
- 
1.4 
Personal
0.1 
0.1 
0.1 
       
Total UK Retail
0.1 
0.1 
1.5 
       
UK Corporate
      
Manufacturing and infrastructure
0.1 
0.1 
0.1 
Property and construction
3.9 
4.3 
5.9 
Transport
4.0 
4.1 
4.5 
Financial institutions
0.4 
0.6 
0.6 
Lombard
0.5 
0.7 
1.0 
Other
4.6 
6.9 
7.5 
       
Total UK Corporate
13.5 
16.7 
19.6 
       
Ulster Bank
      
Commercial real estate
      
  - investment
3.5 
3.7 
3.9 
  - development
7.6 
7.7 
8.5 
Other corporate
1.6 
1.6 
1.6 
Other EMEA
0.3 
0.4 
0.4 
       
Total Ulster Bank
13.0 
13.4 
14.4 
       
US Retail & Commercial
      
Auto and consumer
0.6 
0.6 
0.8 
Cards
0.1 
0.1 
0.1 
SBO/home equity
2.2 
2.3 
2.5 
Residential mortgages
0.5 
0.5 
0.6 
Commercial real estate
0.6 
0.7 
1.0 
Commercial and other
- 
0.2 
0.4 
       
Total US Retail & Commercial
4.0 
4.4 
5.4 
       
International Banking
      
Manufacturing and infrastructure
4.0 
5.4 
6.6 
Property and construction
13.2 
14.3 
15.3 
Transport
1.9 
2.0 
3.2 
Telecoms, media and technology
1.2 
0.7 
0.7 
Banks and financial institutions
5.3 
5.3 
5.6 
Other
5.4 
5.4 
7.0 
       
Total International Banking
31.0 
33.1 
38.4 
       
Other
      
Wealth
0.2 
0.2 
0.2 
Central items
(0.2)
(0.2)
(0.2)
       
Total Other
- 
- 
- 
       
Gross loans and advances to customers (excluding reverse repurchase agreements)
61.6 
67.7 
79.3 

 
 
Non-Core (continued)
Key points
Non-Core remains on target to reach its third party asset objective of c£40 billion, a reduction of approximately 85% of its original portfolio, by the end of 2013. Third party assets fell to £65 billion, a reduction of £7 billion during the quarter and an overall reduction of 75% from commencement.
 
Risk-weighted assets decreased by £11 billion during Q3 2012 due to sales, run-off and active reductions in derivative exposures.
 
Market conditions in the quarter were favourable, with resulting improvements in asset prices and tightening of credit spreads.
 
Q3 2012 compared with Q2 2012
·
Third party assets fell by £7 billion to £65 billion, driven by run-off of £4 billion and sales of £2 billion.
   
·
Risk-weighted assets fell by £11 billion to £72 billion. The main drivers were lower market risk, through active reductions in derivative exposures,
 
and assets moving into default. Further risk-weighted asset mitigation from sales and run-off was partly offset by credit model changes.
   
·
Non-Core operating losses decreased by £282 million to £586 million, due to lower impairments, fair value movements and reductions in costs, partially offset by lower rental income following the sale of RBS Aviation Capital in Q2 2012, and higher trading losses. Trading losses increased by £72 million to £203 million due to an increase in restructuring and de-risking activities within the Markets portfolio.
   
·
Impairment losses fell by £183 million during Q3 2012 largely due to the non-repeat of a significant provision in the Project Finance portfolio in Q2 2012.
   
·
Other income increased by £193 million in Q3 2012 principally due to positive fair value adjustments in Q3 2012 compared with negative fair value adjustments in Q2 2012.
   
·
Costs fell by £50 million as headcount continues to reduce in line with the rundown of the division, and significantly lower operating lease depreciation following the disposal of RBS Aviation Capital in Q2 2012.
 
Q3 2012 compared with Q3 2011
·
Third party assets declined by £40 billion, 38%, principally reflecting sales of £21 billion and run-off of £13 billion.
   
·
Risk-weighted assets have reduced by £46 billion to £72 billion. Continued sales and run-off including the sale of RBS Aviation Capital were the primary drivers of the reduction, combined with lower market risk through active reductions in derivative exposures
   
·
The Q3 2012 operating loss of £586 million was a £392 million improvement from Q3 2011 largely due to more favourable market conditions, lower impairments (£258 million improvement), and a reduction in costs. In line with ongoing disposal and run-off activity, net interest income continued to decline.
   
·
Since Q3 2011, headcount has reduced by approximately 2,000 (37%) reflecting business and country exits and run-down. Costs reduced by £111 million principally due to headcount attrition and reduced operating lease depreciation following the disposal of RBS Aviation Capital in Q2 2012.
 
 

 
 
 
 
 
 
 
 
Signatures


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







 
 
Date: 2 November 2012
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary