rbs201405026k.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 May 02, 2014
 
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:

 



Interim Management Statement

Q1 2014



Contents

 
Page
   
Highlights
1
Contacts
5
Presentation of information
6
Summary consolidated results
7
Analysis of results
9
Divisional performance
17
   
Statutory results
53
   
Condensed consolidated income statement
53
Condensed consolidated statement of comprehensive income
54
Condensed consolidated balance sheet
55
Average balance sheet
56
Condensed consolidated statement of changes in equity
58
Notes
60
   
Additional information
76
   
Share information
76
Statutory results
76
Financial calendar
76
   
Appendix 1 Income statement reconciliations and segmental analysis
  
Appendix 2 Capital and risk management
  
Appendix 3 Inter-segmental transfers
  



 
Forward-looking statements

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

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

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

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

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


Highlights

RBS reports a pre-tax profit of £1,642 million for Q1 2014, up from £826 million in Q1 2013
Operating profit(1) for the quarter was £1,501 million, up from £747 million in Q1 2013:
●
Operating profit in the retail and commercial banking businesses(2) was up 36% to £1,373 million, driven by good cost control and improving impairment trends, particularly in UK Corporate and Ulster Bank.
   
●
Markets operating profit was up 14% to £318 million, with costs down 15%.
   
●
RBS Capital Resolution (RCR) reduced RWA equivalents(3) by £14 billion during Q1 2014 to £51 billion, with lower than expected operating losses of £114 million.

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

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

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

Ross McEwan, Chief Executive

Key points

Q1 2014 operating performance
●
Income was down 2% compared with Q1 2013 at £5,053 million, with deposit repricing and a modest revival in lending volumes during the quarter leading to improvements in UK Retail and UK Corporate. Markets income was seasonally stronger than in Q4 2013 but lower than in Q1 2013, reflecting its smaller balance sheet and reduced risk levels.
   
●
Expenses were 6% lower than in Q1 2013 at £3,190 million, with Markets down 15% and other banking businesses down 3%. Incremental cost savings have been delivered principally from tactical cost control initiatives. The benefits from strategic cost reduction initiatives will feed through in later quarters.
   
●
Impairments were down £671 million from Q1 2013, with significant improvements in Ulster Bank, down 80% and UK Corporate, down 66%. Impairments in RCR totalled £108 million in Q1 2014 whereas Non-Core totalled £433 million in Q1 2013. The quarter benefited from no meaningful single name impairments.
   
●
Risk elements in lending decreased by £2.0 billion to £37.4 billion, as a percentage of loans represented 9.0% (31 December 2013 - 9.4%).
   
●
Operating profit totalled £1,501 million, up from £747 million in Q1 2013, driven by stronger business performance in UK Retail and UK Corporate, together with the turnaround at Ulster Bank, which reported its first quarterly operating profit since 2009.
   
●
Q1 2014 benefited from c.£200 million of Treasury AFS gains and a £191 million profit on the sale of the remaining stake in DLG.
   
●
Profit attributable to shareholders was £1,195 million, compared with £393 million in Q1 2013 and a loss of £8,702 million in Q4 2013.
   
●
Tangible net asset value per ordinary and B share was 376p at 31 March 2014, compared with 363p at 31 December 2013.



Highlights

Balance sheet
●
Funded assets were £130 billion lower than in Q1 2013 at £746 billion, principally driven by the reshaping of the Markets balance sheet. Compared with Q4 2013, funded assets were up £7 billion, reflecting a limited pick-up in client driven trading activity in Markets and stronger lending volumes, particularly in UK mortgages.
 
○
Gross new mortgage lending in Q1 2014 was £4.4 billion in UK Retail, a market share of 9.5%, including more than 4,700 approvals assisting young people and families to buy their first home through the Government’s Help to Buy scheme. Net new lending of £1.2 billion took the UK Retail mortgage portfolio to more than £100 billion for the first time.
 
○
Modest growth resumed in the UK Corporate loan book. SMEs drew down £2.4 billion of new term lending in Q1 2014, up 23% from Q1 2013, with net term lending to trading SMEs turning positive.
 
○
Total net lending flows reported within the scope of the Funding for Lending Scheme (FLS) were plus £63 million in Q1 2014. The FLS no longer includes household lending flows.
●
RWAs on an end-point CRR basis, were down £73 billion from Q1 2013, with approximately a third of the reduction in Markets, principally reflecting the strategic repositioning of this business.
   
●
The Common Equity Tier 1 (CET1) ratio was 9.4%(4) at 31 March 2014, compared with 8.6% at the end of 2013. RBS remains well on track to achieve its target CET1 ratio of 11% by the end of 2015 and 12% or above by the end of 2016.
   
●
RCR reduced RWA equivalents by £14 billion during Q1 2014 to £51 billion, with operating losses lower than expected at £114 million.

Building the number one bank for trust and service in the UK
●
RBS has made good progress towards developing detailed implementation plans for its new structure, built around three businesses: Personal & Business Banking, Commercial & Private Banking, and Corporate & Institutional Banking.
   
●
Each business is focused on delivering the customer commitments announced on 27 February 2014. In March, RBS stopped offering deals to new customers that are not available to existing customers, including 0% credit card balance transfers and teaser rates on savings accounts.
   
●
After placing 325 business specialists in branches in 2013, a further 40 experienced relationship managers have been allocated to serve our commercial customers, with a central focus on lending.
   
●
By the end of March 2014, pro-active ‘Statements of Appetite’ had been sent to more than 270,000 SME customers, offering in excess of £10 billion of new or additional funding.

Notes:
(1)
Operating profit before tax, own credit adjustments, Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, write-down of goodwill and other intangible assets, amortisation of purchased intangible assets, strategic disposals, bank levy and RFS Holdings minority interest (‘operating profit’). Statutory operating profit before tax was £1,642 million for the quarter ended 31 March 2014.
(2)
Retail and commercial banking businesses comprise the UK Retail, UK Corporate, Wealth, International Banking, Ulster Bank and US Retail & Commercial divisions.
(3)
RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in divisions. RWAe converts both performing and non-performing exposures into a consistent capital measure, being the sum of the regulatory RWAs and the regulatory capital deductions, the latter converted to RWAe by applying a multiplier. The Group applies a CET1 ratio of 10%, consistent with that used for divisional return on equity measure; this results in a CRR RWAe conversion multiplier of 10.
(4)
The disclosed Common Equity Tier 1 (CET1) ratio as at 31 March 2014 is calculated using capital which is not the actual regulatory capital, as it does not allow for the initial Dividend Access Share (‘DAS’) dividend which the PRA regards as foreseeable under Article 26 of the Capital Requirements Regulation.  As set out on page 72, the Group will put a resolution to the independent shareholders at the Annual General Meeting on 25 June 2014 to approve the DAS Agreement; the initial dividend can only be paid if such approval is obtained. Adjusting for this contemplated dividend would reduce the disclosed CET1 ratio by 8 basis points; this remains at 9.4%.


Highlights

Building the number one bank for trust and service in the UK (continued)
●
Lending procedures have been changed to speed up the entire process and enable us to meet our commitment to make all but the most complex loan decisions within five days by the end of 2014. We also launched a new online loan application facility for smaller business customers in February 2014, which will be extended to larger SMEs over the course of 2014.
   
●
On 17 April 2014, Clifford Chance published its report into allegations concerning the Global Restructuring Group’s treatment of SMEs. The report concluded that there was no evidence to support the principal allegation. Nevertheless, further steps have been taken to rebuild our customers’ trust, including not charging default interest for the first 90 days when an SME customer defaults; improving transparency around fees charged to customers in our restructuring unit; and the wind-down of the West Register property unit.
   
●
Ulster Bank has maintained its investment in structures to support customers in financial difficulty, which has resulted in reductions in the number of mortgage customers more than 90 days in arrears in each of the last twelve months - a trend not seen elsewhere in the Irish market to date.
   
●
To improve the resilience of our IT systems, on 21 March 2014 we moved our existing single batch scheduler for NatWest, Ulster Bank Northern Ireland and Ulster Bank Republic of Ireland onto three dedicated and separate versions (RBS already runs in a separate scheduler environment). Separating the batch schedulers means that, if a problem occurs with transactions on one of these brands, it will not impact the activity taking place to support the other two, avoiding a repeat of the 2012 system outage. This forms part of a wider programme that will help us become a simpler organisation, including investment of around £750 million over a three-year period to improve the safety, security and resilience of our IT systems.

Delivering our capital plan
●
Plans for the divestment of Citizens Financial Group and Williams & Glyn continue to make progress.
   
●
In February 2014 RBS completed the sale of its remaining interest in Direct Line Insurance Group, raising gross proceeds of £1,113 million. A gain of £191 million was booked in Q1 2014.
   
●
On 9 April 2014 RBS announced that it had reached agreement with HM Treasury (HMT) to provide for the future retirement of the Dividend Access Share (DAS). If the independent shareholders of RBS approve the DAS Retirement Agreement, RBS will pay HMT an initial dividend of £320 million in 2014, with a further £1.18 billion (subject to interest if not paid before 1 January 2016) payable at the Board’s discretion, after which the DAS will lose its enhanced dividend rights and become a single B share.

Performance measures(1)

 
Measure
2013
Q1 2014
Medium term
Long term
           
Efficiency
Cost:income ratio(2)
73%
66%
~55%
~50%
Returns
Return on tangible equity(3)
Negative
12.2%
~9-11%
~12%+
           
Capital strength(4)
Common Equity Tier 1 ratio
8.6%
9.4%*
≥12%
≥12%
 
Leverage ratio
3.5%
3.7%
3.5-4%
≥4%

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

Notes:
(1)
This table contains forecasts with significant contingencies. Please refer to ‘Forward-looking Statements’.
(2)
Including bank levy, integration and restructuring charges and, from 2015, the EU resolution fund charge.
(3)
Calculated with tangible equity limited to a CET1 ratio of 12%.
(4)
End-point CRR basis.


Highlights

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

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

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

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

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

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


Contacts

For analyst enquiries:
    
     
Richard O’Connor
Head of Investor Relations
+44 (0) 20 7672 1758
     
     
For media enquiries:
    
     
Group Media Centre
  
+44 (0) 131 523 4205


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

Date:
  
Friday 2 May 2014
Time:
  
9.00 am UK time
Webcast:
  
www.rbs.com/results
Dial in details:
  
International – +44 (0) 1452 568 172
UK Free Call – 0800 694 8082
US Toll Free – 1 866 966 8024

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

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



Presentation of information

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

·
own credit adjustments;
   
·
Payment Protection Insurance (PPI) costs;
   
·
Interest Rate Hedging Products (IRHP) redress and related costs;
   
·
regulatory and legal actions;
   
·
integration and restructuring costs;
   
·
gain/(loss) on redemption of own debt;
   
·
write-down of goodwill and other intangible assets;
   
·
amortisation of purchased intangible assets;
   
·
strategic disposals;
   
·
bank levy; and
   
·
RFS Holdings minority interest (RFS MI).


Statutory results
The condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity and related notes presented on pages 53 to 75 inclusive are on a statutory basis. Reconciliations between the managed basis and statutory basis are included in Appendix 1.

Revisions
Revised allocation of Business Services costs
In the first quarter of 2014, the Group reclassified certain costs between direct and indirect expenses for all divisions. Comparatives have been restated accordingly; the revision did not affect total expenses or operating profit.
 
 
Non-Core
Non-Core was dissolved on 31 December 2013.

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


Summary consolidated income statement
for the quarter ended 31 March 2014

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Net interest income
2,698 
2,767 
2,672 
Non-interest income
2,355 
1,173 
2,489 
 
 
 
 
Total income (1)
5,053 
3,940 
5,161 
Operating expenses (2)
(3,190)
(3,247)
(3,381)
 
 
 
 
Operating profit before impairment losses (3)
1,863 
693 
1,780 
Impairment losses
(362)
(5,112)
(1,033)
 
 
 
 
Operating profit/(loss) (3)
1,501 
(4,419)
747 
Own credit adjustments
139 
- 
249 
Payment Protection Insurance costs
- 
(465)
- 
Interest Rate Hedging Products redress and related costs
- 
(500)
(50)
Regulatory and legal actions
- 
(1,910)
- 
Integration and restructuring costs
(129)
(180)
(122)
Gain/(loss) on redemption of own debt
20 
(29)
(51)
Write-down of goodwill
- 
(1,059)
- 
Other items
111 
(421)
53 
 
 
 
 
Operating profit/(loss) before tax
1,642 
(8,983)
826 
Tax (charge)/credit
(362)
377 
(350)
 
 
 
 
Profit/(loss) from continuing operations
1,280 
(8,606)
476 
Profit from discontinued operations, net of tax
9 
15 
129 
 
 
 
 
Profit/(loss) for the period
1,289 
(8,591)
605 
Non-controlling interests
(19)
3 
(131)
Other owners’ dividends
(75)
(114)
(81)
 
 
 
 
Profit/(loss) attributable to ordinary and B shareholders
1,195 
(8,702)
393 

Notes:
(1)
Excluding own credit adjustments, gain/(loss) on redemption of own debt, strategic disposals and RFS Holdings minority interest.
(2)
Excluding PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, amortisation of purchased intangible assets, bank levy, write down of goodwill and other intangible assets and RFS Holdings minority interest.
(3)
Operating profit before tax, own credit adjustments, PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, write down of goodwill and other intangible assets, amortisation of purchased intangible assets, strategic disposals, bank levy and RFS Holdings minority interest.

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


Summary consolidated balance sheet
at 31 March 2014

 
31 March 
31 December 
 
2014 
2013 
 
£m 
£m 
 
 
 
Cash and balances at central banks
69,647 
82,659 
Net loans and advances to banks (1,2)
28,302 
27,555 
Net loans and advances to customers (1,2)
390,780 
390,825 
Reverse repurchase agreements and stock borrowing
78,213 
76,413 
Debt securities and equity shares
130,498 
122,410 
Settlement balances
16,900 
5,591 
Intangible assets
12,428 
12,368 
Other assets (3)
19,708 
22,018 
 
 
 
Funded assets
746,476 
739,839 
Derivatives
277,294 
288,039 
 
 
 
Total assets
1,023,770 
1,027,878 
 
 
 
Bank deposits (2,4)
35,371 
35,329 
Customer deposits (2,4)
401,276 
414,396 
Repurchase agreements and stock lending
88,776 
85,134 
Debt securities in issue
61,755 
67,819 
Settlement balances
17,175 
5,313 
Short positions
37,850 
28,022 
Subordinated liabilities
24,139 
24,012 
Other liabilities (3)
21,986 
23,112 
 
 
 
Liabilities excluding derivatives
688,328 
683,137 
Derivatives
274,506 
285,526 
 
 
 
Total liabilities
962,834 
968,663 
Non-controlling interests
612 
473 
Owners’ equity
60,324 
58,742 
 
 
 
Total liabilities and equity
1,023,770 
1,027,878 
 
 
 
Memo: Tangible equity (5)
42,604 
41,082 

Notes:
(1)
Excludes reverse repurchase agreements and stock borrowing.
(2)
Excludes disposal groups.
(3)
Includes disposal groups.
(4)
Excludes repurchase agreements and stock lending.
(5)
Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.

Key points

31 March 2014 compared with 31 December 2013
·
Funded assets increased by £6.6 billion to £746 billion as client driven trading activity returned from seasonal lows in Markets.
   
·
Net loans and advances to customers remained stable at £391 billion, with underlying lending growth across the retail and commercial banking businesses offset primarily by disposals and run-off of RCR loans.
   
·
Customer deposits decreased by £13 billion to £401 billion, mainly in International Banking and UK Corporate, driven by deposit repricing and changes in the Group’s funding strategy.
 
 



Analysis of results

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
Net interest income
£m 
£m 
£m 
 
 
 
 
Net interest income (1)
2,684 
2,745 
2,687 
 
 
 
 
Average interest-earning assets (1)
512,244 
523,946 
560,563 
 
 
 
 
Net interest margin
 
 
 
  - Group
2.12%
2.08%
1.94%
  - RCR
(0.08%)
n/a
n/a
  - Non-Core
n/a 
(0.36%)
(0.25%)

Note:
(1)
For further analysis and details refer to pages 56 and 57.

Key points

Q1 2014 compared with Q4 2013
·
Group net interest margin (NIM) increased by 4 basis points in the quarter to 2.12% due to repricing initiatives together with lower interest-earning assets.
   
·
Net interest income fell by £61 million reflecting the lower day count. Excluding this impact, performance was stable.

Q1 2014 compared with Q1 2013
·
Group NIM increased by 18 basis points, driven by repricing initiatives across a number of divisions.
   
·
Net interest income was flat with improved margins being offset by the reduced asset base.


 
Analysis of results

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
Non-interest income
£m 
£m 
£m 
 
 
 
 
Net fees and commissions
1,055 
1,126 
1,106 
Income from trading activities
856 
162 
1,016 
Other operating income
444 
(115)
367 
 
 
 
 
Total non-interest income
2,355 
1,173 
2,489 

Key points

Q1 2014 compared with Q4 2013
·
Non-interest income increased by £1,182 million, or 101%, to £2,355 million. Income from trading activities increased by £694 million to £856 million driven by a limited pick-up in client driven trading activity in Rates and favourable market movements in Asset backed products within Markets.
   
·
Other operating income increased to £444 million as a result of gains on sales of available-for-sale securities of £213 million compared with £108 million in Q4 2013, and the non-repeat of the fair value adjustments of £333 million in Q4 2013 recognised in connection with the creation of RCR.

Q1 2014 compared with Q1 2013
·
Non-interest income declined by £134 million primarily driven by de-risking in Markets. In US Retail & Commercial, fee income was affected by slower mortgage refinancing activity and lower deposit fees. This was partly offset by increased non-interest income in UK Retail and UK Corporate.



Analysis of results

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
Operating expenses
£m 
£m 
£m 
 
 
 
 
Staff expenses
1,647 
1,539 
1,821 
Premises and equipment
594 
614 
553 
Other
687 
785 
678 
 
 
 
 
Administrative expenses
2,928 
2,938 
3,052 
Depreciation and amortisation
262 
309 
329 
 
 
 
 
Operating expenses
3,190 
3,247 
3,381 
 
 
 
 
Staff costs as a % of total income
33%
39%
35%
Cost:income ratio
63%
82%
66%

Key points

Q1 2014 compared with Q4 2013
·
Operating expenses decreased by £57 million, 2%, to £3,190 million. The fall was consistent across most divisions, with notable declines in UK Retail (£74 million, 10%), UK Corporate (£36 million, 6%) and US Retail & Commercial (£31 million, 6%). The increase in Markets expenses (£84 million, 15%) was driven by higher staff costs, while Ulster Bank (£6 million, 4%) included the impact of the newly introduced Irish bank levy of £4 million.
   
·
Staff expenses were up by 7%, at £1,647 million, principally reflecting seasonal phasing of variable compensation accruals in Markets.

Q1 2014 compared with Q1 2013
·
Operating expenses were down by £191 million, or 6%, mostly reflecting tactical cost reduction initiatives in the retail & commercial banking businesses together with the re-sizing of Markets.
   
·
Staff expenses declined by £174 million, or 10%, driven by headcount reductions and lower variable compensation. Headcount was reduced by 6,300, of which 38% was in UK Retail and 21% in Markets.




Analysis of results

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
Impairment losses
£m 
£m 
£m 
 
 
 
 
Loans
360 
5,131 
1,036 
Securities
2 
(19)
(3)
 
 
 
 
Total impairment losses
362 
5,112 
1,033 
 
 
 
 
Loan impairment losses
 
 
 
  - individually assessed
155 
4,867 
646 
  - collectively assessed
127 
443 
441 
  - latent
78 
(173)
(51)
 
 
 
 
Customer loans
360 
5,137 
1,036 
Bank loans
- 
(6)
-
 
 
 
 
Loan impairment losses
360 
5,131 
1,036 
 
 
 
 
Group excluding RCR/Non-Core
254 
1,924 
599 
RCR
106 
n/a 
n/a 
Non-Core
n/a 
3,207 
437 
 
 
 
 
Group (1)
360 
5,131 
1,036 
 
 
 
 
Customer loan impairment charge as a % of gross loans and advances (2)
 
 
 
Group
0.3%
4.9%
0.9%
RCR
1.2%
n/a
n/a
Non-Core
n/a
35.3%
3.3%

Notes:
(1)
Includes £4,290 million pertaining to the creation of RCR and related strategy in Q4 2013.
(2)
Customer loan impairment charge as a percentage of gross customer loans and advances excludes reverse repurchase agreements and includes disposals groups.

Key points

Q1 2014 compared with Q4 2013
·
Loan impairment losses totalled £360 million. Excluding the increased provisions recognised in Q4 2013 in association with the creation of RCR, impairments declined by £481 million, or 57%, driven by significant improvements in UK Corporate and Ulster Bank.
   
·
UK Corporate saw fewer significant individual cases, while Ulster Bank credit metrics continued to improve.
   
·
Loan impairment losses in RCR totalled £106 million, due to favourable market conditions and no significant individual losses.

Q1 2014 compared with Q1 2013
·
Loan impairment losses declined by £676 million, or 65%, reflecting improving trends across the whole book.
   
·
Ulster Bank showed significant improvements in mortgage arrears while UK Corporate and International Banking saw a reduction in the number of large single name impairments.



Analysis of results

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
One-off and other items
£m 
£m 
£m 
 
 
 
 
Payment Protection Insurance costs
- 
(465)
- 
Interest Rate Hedging Products redress and related costs
- 
(500)
(50)
Regulatory and legal actions
- 
(1,910)
- 
Integration and restructuring costs
(129)
(180)
(122)
Gain/(loss) on redemption of own debt
20 
(29)
(51)
Write-down of goodwill
- 
(1,059)
- 
Other items
 
 
 
  - Amortisation of purchased intangible assets
(7)
(35)
(41)
  - Strategic disposals**
191 
168 
(6)
  - Bank levy
- 
(200)
- 
  - Write-down of other intangible assets
(82)
(344)
- 
  - RFS Holdings minority interest
9 
(10)
100 
 
 
 
 
 
2 
(4,564)
(170)
Own credit adjustments*
139 
- 
249 
 
 
 
 
One-off and other items
141 
(4,564)
79 
 
 
 
 
* Own credit adjustments impact:
 
 
 
Income from trading activities
95 
15 
99 
Other operating income
44 
(15)
150 
 
 
 
 
Own credit adjustments
139 
- 
249 
 
 
 
 
** Strategic disposals
 
 
 
Gain/(loss) on sale and provision for loss on disposal of investments in:
 
 
 
  - Direct Line Insurance Group
191 
- 
- 
  - WorldPay
- 
159 
- 
  - Other
- 
9 
(6)
 
 
 
 
 
191 
168 
(6)

Key points

Q1 2014 compared with Q4 2013
·
A gain of £191 million was recorded on the disposal of the Group’s remaining interest in Direct Line Insurance Group. Q4 2013 included a gain of £159 million on the disposal of the Group’s remaining interest in WorldPay.
   
·
No significant additional provisions for conduct-related matters were recorded during the quarter. Q4 2013 included £2,875 million of additional provisions for such matters.
   
·
Own credit adjustment represented a credit of £139 million as credit spreads widened modestly, compared with no movement in the prior quarter.
   
·
Q4 2013 included the write-down of goodwill of £1,059 million related to International Banking following an impairment review.
   
·
Lower integration and restructuring costs were driven by a reduction in Markets downsizing costs, offset by initial expenses related to the refreshed strategic plan.



Analysis of results

Capital and leverage ratios
 
 
 
 
 
 
 
31 March 2014
 
31 December 2013
 
Current basis
Estimated
 
 
Estimated
 
 
(transitional
end-point
 
Transitional
end-point
Basel 2.5
 
PRA basis)
(CRR basis)
 
PRA basis
(CRR basis)
 basis
Capital (1)
£bn
£bn
 
£bn
£bn
£bn
 
 
 
 
 
 
 
Common Equity Tier 1 capital (2)
39.1 
39.1 
 
36.8 
36.8 
42.2 
Tier 1
46.4 
39.1 
 
44.3 
36.8 
50.6 
Total
59.9 
47.3 
 
58.2 
45.5 
63.7 
 
 
 
 
 
 
 
RWAs by risk
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit risk
 
 
 
 
 
 
  - non-counterparty
295.2 
295.2 
 
317.9 
317.9 
291.1 
  - counterparty
41.3 
41.3 
 
39.1 
39.1 
22.3 
Market risk
41.0 
41.0 
 
30.3 
30.3 
30.3 
Operational risk
36.8 
36.8 
 
41.8 
41.8 
41.8 
 
 
 
 
 
 
 
 
414.3 
414.3 
 
429.1 
429.1 
385.5 
 
 
 
 
 
 
 
Risk asset ratios
%
%
 
%
%
%
 
 
 
 
 
 
 
Common Equity Tier 1 capital (2)*
9.4 
9.4 
 
8.6 
8.6 
10.9 
Tier 1
11.2 
9.4 
 
10.3 
8.6 
13.1 
Total
14.5 
11.4 
 
13.6 
10.6 
16.5 

 
 
31 March 
 
 
31 December 
 
 
 
2014 
 
 
2013 
 
Leverage ratios (3)
 
% 
 
 
% 
 
 
 
 
 
 
 
 
CRR basis
 
3.7 
 
 
3.5 
 
Basel III basis
 
3.6 
 
 
3.4 
 
Basel Committee on Banking Supervision (BCBS) basis
3.6 
 
 
3.4 
 

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

Notes:
(1)
Capital based on Capital Requirements Directive extant at 31 March 2014 (transitional PRA basis), end-point Capital Requirements Regulation (CRR) basis and 31 December 2013 on Basel 2.5 basis.
(2)
Core Tier 1 before 1 January 2014.
(3)
Refer to pages 7 and 8 of Appendix 2 for basis of preparation.

Key points

31 March 2014 compared with 31 December 2013
·
The Group’s Common Equity Tier 1 ratio, on an end-point CRR basis improved to 9.4%* from 8.6%, principally driven by retained earnings and continuing reduction in RWAs.
   
·
RWAs declined from £429 billion to £414 billion, primarily reflecting risk reduction in Markets, and disposal and run-off activity in RCR. The total reduction in RCR was £14 billion RWA equivalent, including the effects of capital deductions.




Analysis of results

 
 
 
31 March 
31 December 
Balance sheet
2014 
2013 
 
 
 
Funded balance sheet (1)
£746bn
£740bn
Total assets
£1,024bn
£1,028bn
Net loans and advances to customers (2)
£392bn
£393bn
Customer deposits (3)
£404bn
£418bn
Loan:deposit ratio - Group excluding RCR/Non-Core (4)
93%
89%
Loan:deposit ratio - Group (4)
97%
94%
Tangible net asset value per ordinary and B share (5)
376p
363p
Tier 1 leverage (6)
15.8x
16.4x
Tangible equity leverage ratio (7)
5.8%
5.6%

Notes:
(1)
Funded balance sheet represents total assets less derivatives.
(2)
Excludes reverse repurchase agreements and stock borrowing, and includes disposal groups.
(3)
Excludes repurchase agreements and stock lending, and includes disposal groups.
(4)
Net of provisions, including disposal groups and excluding repurchase agreements. Excluding disposal groups, the loan:deposit ratios for Group at 31 March 2014 was 97% (31 December 2013 - 94% and 31 March 2013 - 99%).
(5)
Tangible net asset value per ordinary and B share represents total tangible equity divided by the number of ordinary shares in issue and the effect of convertible B shares.
(6)
Funded tangible assets divided by total Tier 1 capital.
(7)
Tangible equity leverage ratio represents tangible equity attributable to ordinary and B shareholders divided by funded tangible assets.

Key points

31 March 2014 compared with 31 December 2013
·
Funded assets were up £6.6 billion, driven by a limited pick up in client driven trading activity in Markets and increased loan balances in the retail and commercial banking businesses.
   
·
Net loans and advances to customers remained stable at £392 billion. Adjusting for transfers to RCR and from Non-Core, underlying loan growth improved, driven by strong mortgage lending in UK Retail and increased volumes in International Banking and US Retail & Commercial, with UK Corporate returning to modest net loan growth. This was offset primarily by disposals and run-off of RCR loans.
   
·
Customer deposits fell by £14 billion, or 3%, to £404 billion, as the Group managed down its surplus liquidity. The customer funding surplus declined to £12 billion, while the loan:deposit ratio increased by 3 percentage points to 97%.
   
·
Tangible net asset value per ordinary and B share increased from 363p to 376p, principally driven by retained earnings.



Analysis of results

 
31 March 
31 December 
Funding and liquidity metrics
2014 
2013 
 
 
 
Deposits (1)
£440bn
£453bn
Deposits as a percentage of funded balance sheet
59%
61%
Short-term wholesale funding (2)
£31bn
£32bn
Wholesale funding (2)
£102bn
£108bn
Short-term wholesale funding as a percentage of funded balance sheet
4%
4%
Short-term wholesale funding as a percentage of total wholesale funding
30%
30%
 
 
 
Liquidity portfolio
£131bn
£146bn
Liquidity portfolio as a percentage of funded balance sheet
18%
20%
Liquidity portfolio as a percentage of short-term wholesale funding
423%
456%

Notes:
(1)
Customer and bank deposits excluding repurchase agreements and stock lending and includes disposal groups.
(2)
Excludes derivative collateral.

Key points

31 March 2014 compared with 31 December 2013
·
The bank remains highly liquid with short-term wholesale funding covered 4.2 times by its liquidity portfolio as at 31 March 2014 compared with 4.5 times as at 31 December 2013.
   
·
The liquidity portfolio decreased by £15 billion, mainly driven by a targeted decrease in volatile financial institution deposits.



Divisional performance

The results of each division on a managed basis are set out below. The results are stated before movements in own credit adjustments, Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, write-down of goodwill and other intangible assets, amortisation of purchased intangible assets, strategic disposals, bank levy and RFS Holdings minority interest.
 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Operating profit before impairment losses by division
 
 
 
UK Retail
592 
545 
557 
UK Corporate
554 
544 
543 
Wealth
77 
70 
61 
International Banking
120 
107 
149 
Ulster Bank
64 
71 
76 
US Retail & Commercial
217 
188 
208 
Markets
320 
73 
294 
Central items
(75)
(173)
(36)
 
 
 
 
 
1,869 
1,425 
1,852 
RCR
(6)
n/a 
n/a 
Non-Core
n/a 
(732)
(72)
 
 
 
 
Group operating profit before impairment losses
1,863 
693 
1,780 
 
 
 
 
Impairment losses/(recoveries) by division
 
 
 
UK Retail
59 
73 
80 
UK Corporate
63 
659 
185 
Wealth
(1)
21 
5 
International Banking
10 
47 
55 
Ulster Bank
47 
1,067 
240 
US Retail & Commercial
73 
46 
19 
Markets
2 
34 
16 
Central items
1 
1 
- 
 
 
 
 
 
254 
1,948 
600 
RCR
108 
n/a 
n/a 
Non-Core
n/a 
3,164 
433 
 
 
 
 
Group impairment losses (1)
362 
5,112 
1,033 

Note:
(1)
Includes £4,290 million pertaining to the creation of RCR and related strategy in Q4 2013.



Divisional performance

 
Quarter ended
 
31 March 
31 December 
31 March 
 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Operating profit/(loss) by division
 
 
 
UK Retail
533 
472 
477 
UK Corporate
491 
(115)
358 
Wealth
78 
49 
56 
International Banking
110 
60 
94 
Ulster Bank
17 
(996)
(164)
US Retail & Commercial
144 
142 
189 
Markets
318 
39 
278 
Central items
(76)
(174)
(36)
 
 
 
 
 
1,615 
(523)
1,252 
RCR
(114)
n/a 
n/a 
Non-Core
n/a 
(3,896)
(505)
 
 
 
 
Group operating profit/(loss)
1,501 
(4,419)
747 
 
 
 
 
 
 
 
 
 
Quarter ended
 
31 March 
31 December 
31 March 
 
2014 
2013 
2013 
 
% 
% 
% 
 
 
 
 
Net interest margin by division
 
 
 
UK Retail
3.59 
3.60 
3.49 
UK Corporate
3.13 
3.13 
3.01 
Wealth
3.72 
3.70 
3.55 
International Banking
1.55 
1.54 
1.74 
Ulster Bank
2.36 
2.10 
1.85 
US Retail & Commercial
2.94 
2.98 
2.93 
RCR
(0.08)
n/a 
n/a 
Non-Core
n/a 
(0.36)
(0.25)
 
 
 
 
Group net interest margin
2.12 
2.08 
1.94 

 
31 March 
31 December 
2014 
2013 
 
£bn 
£bn 
 
 
 
Total funded assets by division
 
 
UK Retail
118.4 
117.6 
UK Corporate
106.7 
105.0 
Wealth
21.1 
21.0 
International Banking
50.9 
48.5 
Ulster Bank
26.0 
28.0 
US Retail & Commercial
75.7 
71.3 
Markets
228.2 
212.8 
Central items
94.3 
106.7 
 
 
 
 
721.3 
710.9 
RCR
24.3 
n/a
Non-Core
n/a 
28.0 
 
 
 
 
745.6 
738.9 
RFS Holdings minority interest
0.9 
0.9 
 
 
 
Group
746.5 
739.8 



Divisional performance

 
31 March
 
 
31 March
 
2014
31 December 2013
2013
FLB3
FLB3
Basel 2.5
Basel 2.5
 
£bn
£bn
£bn
£bn
 
 
 
 
 
Risk-weighted assets by division
 
 
 
 
UK Retail
43.9 
43.9 
43.9 
44.5 
UK Corporate
80.4 
82.9 
86.1 
87.0 
Wealth
12.0 
12.0 
12.0 
12.5 
International Banking
47.1 
50.3 
49.0 
48.9 
Ulster Bank
28.7 
30.1 
30.7 
36.8 
US Retail & Commercial
61.3 
58.8 
56.1 
58.9 
Markets
87.4 
99.9 
64.5 
88.5 
Other (primarily Group Treasury)
8.9 
13.1 
10.1 
10.2 
 
 
 
 
 
 
369.7 
391.0 
352.4 
387.3 
RCR
40.5 
n/a 
n/a 
n/a 
Non-Core
n/a 
34.2 
29.2 
54.6 
 
 
 
 
 
Group before RFS Holdings minority interest
410.2 
425.2 
381.6 
441.9 
RFS Holdings minority interest
4.1 
3.9 
3.9 
3.9 
 
 
 
 
 
Group
414.3 
429.1 
385.5 
445.8 



Employee numbers by division
(full time equivalents rounded to the nearest hundred)
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
UK Retail
23,000 
23,300 
25,400 
UK Corporate
12,800 
13,000 
12,900 
Wealth
4,500 
4,600 
4,900 
International Banking
4,300 
4,400 
4,500 
Ulster Bank
4,600 
4,700 
5,000 
US Retail & Commercial
18,500 
18,800 
18,800 
Markets
9,100 
9,400 
10,400 
Group Centre
10,100 
9,800 
9,400 
 
 
 
 
 
86,900 
88,000 
91,300 
RCR
1,100 
n/a 
n/a 
Non-Core
n/a 
1,400 
2,500 
 
 
 
 
 
88,000 
89,400 
93,800 
Business Services
28,600 
29,000 
28,900 
Integration and restructuring
100 
200 
300 
 
 
 
 
Group
116,700 
118,600 
123,000 



UK Retail

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Income statement
 
 
 
Net interest income
994 
1,014 
965 
 
 
 
 
Net fees and commissions
241 
249 
212 
Other non-interest income
5 
4 
14 
 
 
 
 
Non-interest income
246 
253 
226 
 
 
 
 
Total income
1,240 
1,267 
1,191 
 
 
 
 
Direct expenses
 
 
 
  - staff
(165)
(166)
(172)
  - other
(148)
(199)
(112)
Indirect expenses
(335)
(357)
(350)
 
 
 
 
 
(648)
(722)
(634)
 
 
 
 
Profit before impairment losses
592 
545 
557 
Impairment losses
(59)
(73)
(80)
 
 
 
 
Operating profit
533 
472 
477 
 
 
 
 
Analysis of income by product
 
 
 
Personal advances
235 
247 
223 
Personal deposits
142 
116 
103 
Mortgages
638 
665 
628 
Cards
198 
206 
209 
Other
27 
33 
28 
 
 
 
 
Total income
1,240 
1,267 
1,191 
 
 
 
 
Analysis of impairments by sector
 
 
 
Mortgages
1 
(13)
10 
Personal
38 
61 
35 
Cards
20 
25 
35 
 
 
 
 
Total impairment losses
59 
73 
80 
 
 
 
 
Loan impairment charge as % of gross customer loans and advances
 
 
 
  by sector
 
 
 
Mortgages
- 
(0.1%)
- 
Personal
1.9%
3.0%
1.6%
Cards
1.5%
1.7%
2.5%
 
 
 
 
Total
0.2%
0.3%
0.3%




UK Retail

Key metrics
 
 
 
 
Quarter ended
 
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
Performance ratios
 
 
 
Return on equity (1)
26.2%
25.5%
25.5%
Net interest margin
3.59%
3.60%
3.49%
Cost:income ratio
52%
57%
53%

 
31 March
31 December
 
 
31 March
 
2014
2013
 
2013
 
£bn
£bn
Change
 
£bn
Change
 
 
 
 
 
 
 
Capital and balance sheet
 
 
 
 
 
 
Loans and advances to customers (gross)
 
 
 
 
 
 
  - mortgages
100.5 
99.3 
1%
 
99.1 
1%
  - personal
7.8 
8.1 
(4%)
 
8.6 
(9%)
  - cards
5.5 
5.8 
(5%)
 
5.5 
- 
 
 
 
 
 
 
 
 
113.8 
113.2 
1%
 
113.2 
1%
Loan impairment provisions
(1.9)
(2.1)
(10%)
 
(2.6)
(27%)
 
 
 
 
 
 
 
Net loans and advances to customers
111.9 
111.1 
1%
 
110.6 
1%
 
 
 
 
 
 
 
Risk elements in lending
3.3 
3.6 
(8%)
 
4.4 
(25%)
Provision coverage (2)
58%
59%
(100bp)
 
58%
-
 
 
 
 
 
 
 
Customer deposits
 
 
 
 
 
 
  - Current accounts
33.8 
32.6 
4%
 
31.1 
9%
  - Savings
81.0 
82.3 
(2%)
 
79.0 
3%
 
 
 
 
 
 
 
Total customer deposits
114.8 
114.9 
- 
 
110.1 
4%
Assets under management (excluding deposits)
5.5 
5.8 
(5%)
 
6.2 
(11%)
Loan:deposit ratio
98%
97%
100bp
 
100%
(200bp)
 
 
 
 
 
 
 
Risk-weighted assets (3)
 
 
 
 
 
 
  - Credit risk (non-counterparty)
36.2 
36.1 
- 
 
36.7 
(1%)
  - Operational risk
7.7 
7.8 
(1%)
 
7.8 
(1%)
 
 
 
 
 
 
 
Total risk-weighted assets
43.9 
43.9 
- 
 
44.5 
(1%)

Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(3)
Divisional RWAs are based on a long-term conservative average secured mortgage probability of default methodology rather than the current lower point in time basis required for regulatory reporting.




UK Retail

Key points

Q1 2014 compared with Q4 2013
·
Operating profit increased by 13%, £61 million, driven by lower costs and impairments, with income trends remaining subdued.
   
·
Loans and advances to customers increased due to a £1.2 billion rise in mortgage balances, partly offset by a seasonal decline in credit card balances and personal lending and the write-off of some older defaulted unsecured debt. This also reduced the level of loan impairment provisions required.
   
·
Customer deposit balances were flat. However, the mix between fixed rate bonds and instant access accounts changed due to customers retaining cash in easy access accounts while market rates are low.
   
·
Net interest income was 2% lower mainly due to fewer days in the quarter, an impact of £22 million. Net interest margin remained flat with improvement in savings margin in line with market pricing conditions offset by a small decline in mortgage margins as new business rates remain competitive and fixed rate funding costs increased.
   
·
Non-interest income decreased by £7 million, or 3%, due to lower net packaged account income and seasonal impacts on transactional card income.
   
·
Direct costs decreased by 14% due to:
   
 
○
Direct staff costs declined due to headcount reduction of 300.
 
○
Direct other costs decreased due to a lower FSCS levy charge of £19 million (Q4 2013 - £40 million) and a lower conduct related provision of £15 million (Q4 2013 - £50 million).
   
·
Indirect costs decreased by 6% due to lower technology spend and corporate recharges from central efficiencies.
   
·
Impairments were 19% lower, driven by a lower level of defaults and improvements in underlying asset quality.
   
·
Risk elements in lending declined by £0.3 billion, 8%, as the quality of the book continued to improve and some older defaulted unsecured debt was written off. Provision coverage remains strong at 58%.

Q1 2014 compared with Q1 2013
·
Operating profit increased by £56 million, 12%, reflecting higher income combined with lower impairment losses partially offset by a slight increase in costs.
   
·
Net interest income increased by 3%, driven by improved savings margins due to pricing changes in line with the market and improved deposit mix towards instant access and away from fixed rate bonds. Income from higher mortgage balances was offset by lower income from unsecured lending.
   
·
Non-interest income increased by 9% due to higher current account-related fee income.
   
·
Costs were 2% higher. Staff costs were lower driven by a 9% reduction in headcount. Other costs increased due to a £23 million charge for conduct and compensation and increased marketing spend of £8 million. Indirect costs were lower with continued efficiency measures and lower corporate recharges.
   
·
Impairments were £21 million lower due to improved asset quality and lower default volumes.




UK Corporate

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Income statement
 
 
 
Net interest income
706 
728 
706 
 
 
 
 
Net fees and commissions
312 
326 
321 
Other non-interest income
85 
75 
57 
 
 
 
 
Non-interest income
397 
401 
378 
 
 
 
 
Total income
1,103 
1,129 
1,084 
 
 
 
 
Direct expenses
 
 
 
  - staff
(221)
(217)
(217)
  - other
(93)
(134)
(103)
Indirect expenses
(235)
(234)
(221)
 
 
 
 
 
(549)
(585)
(541)
 
 
 
 
Profit before impairment losses
554 
544 
543 
Impairment losses
(63)
(659)
(185)
 
 
 
 
Operating profit
491 
(115)
358 
 
 
 
 
Analysis of income by business
 
 
 
Corporate and commercial lending
602 
639 
622 
Asset and invoice finance
180 
168 
164 
Corporate deposits
114 
106 
73 
Other
207 
216 
225 
 
 
 
 
Total income
1,103 
1,129 
1,084 
 
 
 
 
Analysis of impairments by sector
 
 
 
Financial institutions
3 
4 
2 
Hotels and restaurants
5 
16 
18 
Housebuilding and construction
10 
12 
12 
Manufacturing
10 
20 
8 
Private sector education, health, social work, recreational and community services
(3)
33 
25 
Property
5 
236 
69 
Wholesale and retail trade, repairs
20 
15 
32 
Asset and invoice finance
2 
21 
1 
Shipping
(3)
310 
8 
Other
14 
(8)
10 
 
 
 
 
Total impairment losses
63 
659 
185 
 
 
 
 
Of which RCR related (1)
- 
410 
- 

Note:
(1)
Attributable to the creation of RCR and related strategy in Q4 2013.



UK Corporate

 
Quarter ended
 
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
Loan impairment charge as % of gross customer loans and advances
 
 
 
  by sector
Financial institutions
0.2%
0.3%
0.2%
Hotels and restaurants
0.4%
1.4%
1.3%
Housebuilding and construction
1.2%
1.7%
1.5%
Manufacturing
0.9%
1.9%
0.7%
Private sector education, health, social work, recreational and community services
(0.2%)
1.6%
1.1%
Property
0.1%
4.3%
1.1%
Wholesale and retail trade, repairs
1.0%
0.7%
1.5%
Asset and invoice finance
0.1%
0.7%
- 
Shipping
(0.2%)
19.1%
0.4%
Other
0.2%
(0.1%)
0.1%
 
 
 
 
Total
0.2%
2.6%
0.7%
 
 
 
 
 
 
 
 
Key metrics
 
 
 
 
Quarter ended
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
Performance ratios
 
 
 
Return on equity (1)
14.9%
(3.4%)
10.7%
Net interest margin
3.13%
3.13%
3.01%
Cost:income ratio
50%
52%
50%

Note:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).




UK Corporate

 
31 March
31 December
 
31 March
 
2014
2013
2013
 
£bn
£bn
Change
£bn
Change
 
 
 
 
 
 
Capital and balance sheet
 
 
 
 
 
Loans and advances to customers (gross)
 
 
 
 
 
  - financial institutions
5.8 
5.5
5%
5.1 
14%
  - hotels and restaurants
4.8 
4.7
2%
5.6 
(14%)
  - housebuilding and construction
3.3 
2.9
14%
3.1 
6%
  - manufacturing
4.3 
4.2
2%
4.7 
(9%)
  - private sector education, health, social
 
 
 
 
 
    work, recreational and community services
7.9 
8.5
(7%)
8.8 
(10%)
  - property
21.3 
22.0
(3%)
24.4 
(13%)
  - wholesale and retail trade, repairs
8.0 
8.2
(2%)
8.6 
(7%)
  - asset and invoice finance
13.6 
11.7
16%
11.4 
19%
  - shipping
6.2 
6.5
(5%)
7.7 
(19%)
  - other
28.0 
28.3
(1%)
27.4 
2%
 
 
 
 
 
 
 
103.2 
102.5
1%
106.8 
(3%)
Loan impairment provisions
(2.3)
(2.8)
(18%)
(2.4)
(4%)
 
 
 
 
 
 
Net loans and advances to customers
100.9 
99.7
1%
104.4 
(3%)
 
 
 
 
 
 
Total third party assets
106.7 
105.0
2%
109.9 
(3%)
Risk elements in lending
4.6 
6.2
(26%)
5.3 
(13%)
Provision coverage (1)
49%
46%.
300bp
45%
400bp
 
 
 
 
 
 
Customer deposits
121.2 
124.7
(3%)
123.9 
(2%)
Loan:deposit ratio
83%
80%.
300bp
84%
(100bp)
 
 
 
 
 
 
Risk-weighted assets
 
 
 
 
 
  - Credit risk (non-counterparty)
72.0 
77.7
(7%)
78.6 
(8%)
  - Operational risk
8.4 
8.4
- 
8.4 
- 
 
 
 
 
 
 
 
80.4 
86.1(2)
(7%)
87.0 
(8%)

Notes:
(1)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(2)
On an FLB3 basis risk-weighted assets were £82.9 billion at 31 December 2013.

Key points

Q1 2014 compared with Q4 2013
·
Operating profit was £491 million for the quarter, delivering a return on equity of 14.9%. Q4 2013 included £422 million of charges relating to the creation of RCR. Excluding these, underlying operating profit improved by £184 million, primarily from lower impairments and expenses partially offset by reduced income.
   
·
Net interest income was down 3% due to fewer days in the quarter (£15 million), along with a decline in asset margin from the transfer of loans relating to the establishment of RCR. This was partially offset by increased income from deposit repricing.
   
·
Non-interest income was down 1%, primarily from lower Markets revenue share and transaction services income.
   
·
Total expenses were 6% lower as a result of reduced customer remediation costs, down £27 million, and the initial impacts of cost saving initiatives.
   
·
Impairments declined by £596 million. Excluding the increased losses incurred in Q4 2013 (£410 million) relating to the creation of RCR, underlying impairments were £186 million lower, with fewer significant individual cases in the mid-to-large corporate business.



UK Corporate

Key points (continued)

Q1 2014 compared with Q4 2013 (continued)
·
Loans and advances increased by 1%, driven by improved lending activity, particularly in relation to large corporate clients. Deposit volumes declined by 3% reflecting seasonal outflows and the rebalancing of the Bank’s liquidity position. Consequently, the loan:deposit ratio moved to 83% from 80%.
   
·
Risk-weighted assets on an FLB3 basis were £2.5 billion lower reflecting the net of the transfers to RCR and from Non-Core.

Q1 2014 compared with Q1 2013
·
Operating profit increased 37%, primarily reflecting lower impairment charges.
   
·
Net interest income was flat as repricing of both deposits and assets was offset by lower asset volumes, reduced yields on current accounts and the transfers relating to the establishment of RCR and the cessation of Non-Core.
   
·
Non-interest income increased by 5% due to lower derivative close-out charges and higher equity gains. These were partially offset by lower Markets revenue share and lending fees.
   
·
Total expenses increased by 1% as higher indirect costs were partially offset by lower customer remediation costs.
   
·
Impairments were down £122 million, primarily from improved trends in the SME business and fewer individual cases in the mid-to-large corporate business.
   
·
The loan:deposit ratio declined 100 basis points as the deposit base contracted during Q1 2014 whilst asset volumes declined 3% as repayments outpaced new lending growth during 2013.




Wealth

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Income statement
 
 
 
Net interest income
171 
174 
169 
 
 
 
 
Net fees and commissions
87 
85 
89 
Other non-interest income
16 
18 
15 
 
 
 
 
Non-interest income
103 
103 
104 
 
 
 
 
Total income
274 
277 
273 
 
 
 
 
Direct expenses
 
 
 
  - staff
(94)
(79)
(103)
  - other
(30)
(43)
(23)
Indirect expenses
(73)
(85)
(86)
 
 
 
 
 
(197)
(207)
(212)
 
 
 
 
Profit before impairment losses
77 
70 
61 
Impairment recoveries/(losses)
1 
(21)
(5)
 
 
 
 
Operating profit
78 
49 
56 
 
 
 
 
Analysis of income
 
 
 
Private banking
229 
225 
224 
Investments
45 
52 
49 
 
 
 
 
Total income
274 
277 
273 
 
 
 
 
 
 
 
 
Key metrics
Quarter ended
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
 
 
 
Performance ratios
 
 
 
Return on equity (1)
16.9%
10.9%
12.1%
Net interest margin
3.72%
3.70%
3.55%
Cost:income ratio
72%
75%
78%

Note:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).



Wealth

 
31 March
31 December
 
31 March
 
2014
2013
2013
 
£bn
£bn
Change
£bn
Change
 
 
 
 
 
 
Capital and balance sheet
 
 
 
 
 
Loans and advances to customers (gross)
 
 
 
 
 
  - mortgages
8.7 
8.7 
- 
8.8 
(1%)
  - personal
5.6 
5.6 
- 
5.7 
(2%)
  - other
2.5 
2.5 
- 
2.7 
(7%)
 
 
 
 
 
 
 
16.8 
16.8 
- 
17.2 
(2%)
Loan impairment provisions
(0.1)
(0.1)
- 
(0.1)
- 
 
 
 
 
 
 
Net loans and advances to customers
16.7 
16.7 
- 
17.1 
(2%)
 
 
 
 
 
 
Risk elements in lending
0.3 
0.3 
- 
0.3 
- 
Provision coverage (1)
45%
43%
200bp
43%
200bp
Assets under management (excluding deposits)
28.5 
29.7 
(4%)
30.8 
(7%)
Customer deposits
36.6 
37.2 
(2%)
39.6 
(8%)
 
 
 
 
 
 
Loan:deposit ratio (excluding repos)
45%
45%
-
43%
200bp
 
 
 
 
 
 
Risk-weighted assets
 
 
 
 
 
  - Credit risk
 
 
 
 
 
     - non-counterparty
10.1 
10.0 
1%
10.4 
(3%)
  - Market risk
- 
0.1 
(100%)
0.2 
(100%)
  - Operational risk
1.9 
1.9 
- 
1.9 
- 
 
 
 
 
 
 
 
12.0 
12.0 
- 
12.5 
(4%)

Note:
(1)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

Key points

Q1 2014 compared with Q4 2013
·
Operating profit was £29 million higher, driven by lower expenses and impairment losses.
   
·
Income was £3 million, 1%, lower, reflecting the impact of fewer days in the quarter.
   
·
Expenses were 5% lower at £197 million, primarily due to the non-recurrence of a one-off UK tax treaty charge in the International business in Q4 2013 and savings from the streamlining of the business’s property footprint.
   
·
Impairments decreased by £22 million, reflecting the non-recurrence of a single specific impairment in Q4 2013.
   
·
Client assets and liabilities were 2% lower, with the decrease in assets under management mainly driven by low margin custody asset outflows and negative market movements. Deposits were £0.6 billion lower following cyclical outflows for tax payments and repricing action in the UK. Lending remained broadly flat.

Q1 2014 compared with Q1 2013
·
Operating profit increased by £22 million, as a result of lower expenses and impairments.
   
·
Net interest income increased by £2 million, primarily driven by higher deposit spreads. Non-interest income fell by £1 million as a result of lower transaction and investment volumes in the International business.
   
·
Expenses decreased by £15 million, 7%, reflecting savings from the streamlining of the business’s property footprint, reduced headcount and the continued tight management of discretionary costs.
   
·
Impairments were £6 million lower.




International Banking

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Income statement
 
 
 
Net interest income
180 
173 
197 
Non-interest income
248 
271 
285 
 
 
 
 
Total income
428 
444 
482 
 
 
 
 
Direct expenses
 
 
 
  - staff
(109)
(114)
(125)
  - other
(35)
(57)
(38)
Indirect expenses
(164)
(166)
(170)
 
 
 
 
 
(308)
(337)
(333)
 
 
 
 
Profit before impairment losses
120 
107 
149 
Impairment losses
(10)
(47)
(55)
 
 
 
 
Operating profit
110 
60 
94 
 
 
 
 
Analysis of income by product
 
 
 
Cash management
173 
185 
187 
Trade finance
76 
77 
70 
Loan portfolio
179 
182 
224 
 
 
 
 
Ongoing businesses
428 
444 
481 
Run-off businesses
- 
- 
1 
 
 
 
 
Total income
428 
444 
482 
 
 
 
 
Analysis of impairments by sector
 
 
 
Manufacturing and infrastructure
- 
20 
40 
Property and construction
- 
- 
(14)
Transport and storage
- 
23 
24 
Telecommunications, media and technology
(1)
- 
- 
Banks and financial institutions
- 
(15)
- 
Other
11 
19 
5 
 
 
 
 
Total impairment losses
10 
47 
55 
 
 
 
 
Of which RCR related (1)
- 
52 
- 
 
 
 
 
Loan impairment charge as % of gross customer loans and advances
0.1%
0.5%
0.5%

Note:
(1)
Pertaining to the creation of RCR and related strategy in Q4 2013.



International Banking

Key metrics
Quarter ended
 
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
Performance ratios
 
 
 
Return on equity (1)
6.5%
3.4%
5.2%
Net interest margin
1.55%
1.54%
1.74%
Cost:income ratio
72%
76%
69%

 
31 March
31 December
  
 
 
31 March
 
2014
2013
  
 
2013
 
£bn
£bn
  
Change
 
£bn
Change
 
 
 
  
 
 
 
 
Capital and balance sheet
 
 
  
 
 
 
 
Loans and advances to customers (gross) (2)
 
 
  
 
 
 
 
  - manufacturing and infrastructure
15.1 
13.6
  
11%
 
16.9 
(11%)
  - property and construction
2.4 
2.4
  
- 
 
2.5 
(4%)
  - transport and storage
2.9 
3.3
  
(12%)
 
2.8 
4%
  - telecommunications, media and technology
2.7 
2.8
  
(4%)
 
2.6 
4%
  - banks and financial institutions
6.9 
6.5
  
6%
 
7.9 
(13%)
  - other
8.6 
7.4
  
16%
 
9.8 
(12%)
 
 
 
  
 
 
 
 
 
38.6 
36.0
  
7%
 
42.5 
(9%)
Loan impairment provisions
(0.1)
(0.3)
  
(67%)
 
(0.4)
(75%)
 
 
 
  
 
 
 
 
Net loans and advances to customers
38.5 
35.7
  
8%
 
42.1 
(9%)
Loans and advances to banks
7.9 
8.0
  
(1%)
 
5.8 
36%
Securities
2.2 
2.4
  
(8%)
 
2.5 
(12%)
Cash and eligible bills
0.2 
0.3
  
(33%)
 
0.4 
(50%)
Other
2.1 
2.1
  
- 
 
3.6 
(42%)
 
 
 
  
 
 
 
 
Total third party assets (excluding derivatives
 
 
  
 
 
 
 
  mark-to-market)
50.9 
48.5
  
5%
 
54.4 
(6%)
Risk elements in lending
- 
0.5
  
(100%)
 
0.6 
(100%)
Provision coverage (3)
- 
69%
  
(6,900bp)
 
59%
(5,900bp)
 
 
 
  
 
 
 
 
Customer deposits
33.7 
39.3
  
(14%)
 
47.0 
(28%)
Bank deposits
5.1 
6.5
  
(22%)
 
4.7 
9%
Loan:deposit ratio
114%
91%
  
2,300bp
 
90%
2,400bp
 
 
 
  
 
 
 
 
Risk-weighted assets
 
 
  
 
 
 
 
  - Credit risk (non-counterparty)
43.0 
44.3
  
(3%)
 
44.2 
(3%)
  - Operational risk
4.1 
4.7
  
(13%)
 
4.7 
(13%)
 
 
 
  
 
 
 
 
 
47.1 
49.0
(4)
(4%)
 
48.9 
(4%)

Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions) for the ongoing businesses.
(2)
Excludes disposal groups.
(3)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(4)
On an FLB3 basis risk-weighted assets were £50.3 billion at 31 December 2013.


 

International Banking

Key points

Q1 2014 compared with Q4 2013
·
Operating profit was £110 million for the quarter, delivering a return on equity of 6.5%. Q4 2013 included £52 million of impairment charges on assets now transferred to RCR. Excluding these charges, underlying operating profit was slightly down, with lower revenues offset by lower costs and impairments.
   
·
Income was down £16 million as low interest rates and the competitive environment continued to drive down margins in Cash management.
   
·
Impairments were £37 million lower, driven by increased provisions in Q4 2013 relating to the creation of RCR and its related strategy.
   
·
Third party assets were up 5%, driven by £0.9 billion of new business, primarily in Asia and the net of the transfers from Non-Core and to RCR.
   
·
Customer deposits were 14% lower, in line with a change in funding strategy.
   
·
Risk-weighted assets on an FLB3 basis decreased by 6%, primarily driven by the net of the transfers of assets to RCR and from Non-Core.

Q1 2014 compared with Q1 2013
·
Operating profit was up £16 million, driven by lower costs and impairments partially offset by lower income.
   
·
Income was £54 million lower:
   
 
○
Loan Portfolio income declined £45 million largely reflecting the reduced balance sheet.
 
○
Cash Management income was £14 million lower, as low interest rates and the competitive environment drove down margins.
 
○
Trade Finance income was up £6 million, driven by volume growth in Asia and EMEA.
   
·
Expenses decreased by £25 million, primarily driven by lower variable compensation.
   
·
Third party assets were down 6%, reflecting the netting of pooled accounts, partially offset by an increase in Trade and the net of the transfers of assets from Non-Core and to RCR.
   
·
Customer deposits were 28% lower in line with a change in funding strategy.


Ulster Bank

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Income statement
 
 
 
Net interest income
159 
169 
154 
 
 
 
 
Net fees and commissions
32 
37 
34 
Other non-interest income
15 
1 
20 
 
 
 
 
Non-interest income
47 
38 
54 
 
 
 
 
Total income
206 
207 
208 
 
 
 
 
Direct expenses
 
 
 
  - staff
(63)
(51)
(57)
  - other
(17)
(21)
(15)
Indirect expenses
(62)
(64)
(60)
 
 
 
 
 
(142)
(136)
(132)
 
 
 
 
Profit before impairment losses
64 
71 
76 
Impairment losses
(47)
(1,067)
(240)
 
 
 
 
Operating profit/(loss)
17 
(996)
(164)
 
 
 
 
Analysis of income by business
 
 
 
Corporate
69 
69 
82 
Retail
90 
98 
89 
Other
47 
40 
37 
 
 
 
 
Total income
206 
207 
208 
 
 
 
 
Analysis of impairments by sector
 
 
 
Mortgages
19 
24 
90 
Commercial real estate
 
 
 
  - investment
8 
392 
46 
  - development
(3)
115 
14 
Other corporate
17 
534 
75 
Other lending
6 
2 
15 
 
 
 
 
Total impairment losses
47 
1,067 
240 
 
 
 
 
Of which RCR related (1)
- 
892 
- 
 
 
 
 
Loan impairment charge as % of gross customer loans and advances
 
 
 
   (excluding reverse repurchase agreements) by sector
Mortgages
0.4%
0.5%
1.8%
Commercial real estate
 
 
 
  - investment
3.2%
46.1%
5.1%
  - development
(3.0%)
65.7%
8.0%
Other corporate
1.3%
30.1%
3.8%
Other lending
2.4%
0.7%
4.6%
 
 
 
 
Total
0.7%
13.6%
2.9%

Note:
(1)
Pertaining to the creation of RCR and related strategy in Q4 2013.




Ulster Bank

Key metrics
Quarter ended
 
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
Performance ratios
 
 
 
Return on equity (1)
2.5%
(98.1%)
(13.5%)
Net interest margin
2.36%
2.10%
1.85%
Cost:income ratio
69%
66%
63%

 
31 March
31 December
 
 
31 March
 
2014
2013
 
2013
 
£bn
£bn
 
Change 
£bn
Change 
 
 
 
 
 
 
 
Capital and balance sheet
 
 
 
 
 
 
Loans and advances to customers (gross)
 
 
 
 
 
 
Mortgages
18.8 
19.0 
 
(1%)
19.7 
(5%)
Commercial real estate
 
 
 
 
 
 
  - investment
1.0 
3.4 
 
(71%)
3.6 
(72%)
  - development
0.4 
0.7 
 
(43%)
0.7 
(43%)
Other corporate
5.4 
7.1 
 
(24%)
7.8 
(31%)
Other lending
1.0 
1.2 
 
(17%)
1.3 
(23%)
 
 
 
 
 
 
 
 
26.6 
31.4 
 
(15%)
33.1 
(20%)
Loan impairment provisions
(3.4)
(5.4)
 
(37%)
(4.2)
(19%)
 
 
 
 
 
 
 
Net loans and advances to customers
23.2 
26.0 
 
(11%)
28.9 
(20%)
 
 
 
 
 
 
 
Risk elements in lending
 
 
 
 
 
 
  - Mortgages
3.1 
3.2 
 
(3%)
3.4 
(9%)
  - Commercial real estate
 
 
 
 
 
 
    - investment
0.3 
2.3 
 
(87%)
1.6 
(81%)
    - development
0.2 
0.5 
 
(60%)
0.4 
(50%)
  - Other corporate
0.9 
2.3 
 
(61%)
2.4 
(63%)
  - Other lending
0.2 
0.2 
 
- 
0.2 
- 
 
 
 
 
 
 
 
Total risk elements in lending
4.7 
8.5 
 
(45%)
8.0 
(41%)
Provision coverage (2)
72%
64%
 
800bp
53%
1,900bp
 
 
 
 
 
 
 
Customer deposits
21.1 
21.7 
 
(3%)
22.7 
(7%)
Loan:deposit ratio (excluding repos)
110%
120%
 
(1,000bp)
127%
(1,700bp)
 
 
 
 
 
 
 
Risk-weighted assets
 
 
 
 
 
 
  - Credit risk
 
 
 
 
 
 
    - non-counterparty
26.7 
28.2 
 
(5%)
34.3 
(22%)
    - counterparty
0.3 
0.3 
 
- 
0.6 
(50%)
  - Market risk
0.2 
0.5 
 
(60%)
0.2 
- 
  - Operational risk
1.5 
1.7 
 
(12%)
1.7 
(12%)
 
 
 
 
 
 
 
 
28.7 
30.7 
 
(7%)
36.8 
(22%)
 
 
 
 
 
 
 
Spot exchange rate - €/£
1.210 
1.201 
 
 
1.183 
 

Notes:
(1)
Divisional return on equity is based on divisional operating loss after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.




Ulster Bank

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

Q1 2014 compared with Q4 2013
●
Ulster Bank posted an operating profit of £17 million for the quarter, compared with a loss of £996 million in Q4 2013, which included additional charges related to the creation of RCR. The return to profitability for the first time since Q1 2009 marked a key milestone for the bank reflecting improving trading conditions albeit volatility is still a feature of business performance.
   
●
Net interest margin increased by 26 basis points in the quarter to 2.36% reflecting the transfer of non-performing assets to RCR coupled with a continued improvement in deposit margins. Net interest income fell by £10 million due to a combination of fewer days in the quarter, the impact of assets transferred to RCR and a lower margin on the tracker mortgage book following a reduction in the European Central Bank refinancing interest rate during Q4 2013. This was partially offset by lower funding costs.
   
●
Non-interest income increased by £9 million to £47 million, primarily reflecting the impact of a number of one-off items totalling £10 million which depressed Q4 2013 income, including an increased provision on a counterparty swap exposure related to the creation of RCR.
   
●
Total expenses increased by £6 million in Q1 2014 to £142 million principally due to the charge of £4 million in respect of the new bank levy, introduced in the Republic of Ireland. Expenses in Q4 2013 were affected by a number of one-off items, including a pension service cost reduction and an accelerated depreciation charge.
   
●
Impairment losses fell significantly in Q1 2014 to 0.7% of gross customer loans and advances, reflecting improved credit metrics particularly within the corporate and SME portfolios. The Q4 2013 results included an increased charge of £892 million relating to the creation of RCR.
   
●
Ulster Bank’s loan:deposit ratio of 110% in Q1 2014 reflects the impact of the transfer of loan balances to RCR. While Retail and SME deposit balances have remained stable in the quarter, total deposit balances declined by 3% attributable to a reduction in wholesale balances.

Q1 2014 compared with Q1 2013
●
Operating results improved by £181 million, primarily reflecting a reduction in impairment losses.
   
●
Income has remained stable despite a reduction in net loans following the transfer of assets to RCR. Net interest margin increased by 51 basis points to 2.36% driven by deposit repricing actions and the impact of the asset transfer to RCR. Non-interest income decreased by £7 million primarily reflecting mark-to-market movements on tracker mortgage hedging swaps.
   
●
Expenses increased by £10 million. Savings arising from a reduction in staff numbers were more than offset by the new bank levy in the Republic of Ireland and a realignment of costs following the creation of RCR.



Ulster Bank

Key points (continued)

Q1 2014 compared with Q1 2013 (continued)
●
Impairment losses decreased by 80% with significant reductions across the mortgage, SME and corporate portfolios. This improvement not only reflects the transfer of high risk assets to RCR but also reflects the progress made in addressing legacy issues, including the implementation of strategies to help customers normalise their payments.
   
●
The loan:deposit ratio of 110% reflects a 20% reduction in loan balances driven by the transfer of assets to RCR coupled with the impact of customer deleveraging. Customer deposits declined by 7% with growth in Retail and SME balances outweighed by a reduction in wholesale balances.
   
●
Risk-weighted assets decreased by 22%, reflecting a smaller performing loan book and stabilising credit metrics.




US Retail & Commercial (£ Sterling)

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Income statement
 
 
 
Net interest income
488 
479 
471 
 
 
 
 
Net fees and commissions
169 
182 
190 
Other non-interest income
60 
58 
102 
 
 
 
 
Non-interest income
229 
240 
292 
 
 
 
 
Total income
717 
719 
763 
 
 
 
 
Direct expenses
 
 
 
  - staff
(251)
(249)
(286)
  - other
(249)
(251)
(248)
Indirect expenses
- 
(31)
(21)
 
 
 
 
 
(500)
(531)
(555)
 
 
 
 
Profit before impairment losses
217 
188 
208 
Impairment losses
(73)
(46)
(19)
 
 
 
 
Operating profit
144 
142 
189 
 
 
 
 
 
 
 
 
Average exchange rate - US$/£
1.655 
1.619 
1.552 
 
 
 
 
Analysis of income by product
 
 
 
Mortgages and home equity
112 
100 
126 
Personal lending and cards
98 
101 
100 
Retail deposits
186 
187 
190 
Commercial lending
165 
169 
168 
Commercial deposits
107 
100 
102 
Other
49 
62 
77 
 
 
 
 
Total income
717 
719 
763 
 
 
 
 
Analysis of impairments by sector
 
 
 
Residential mortgages
(5)
- 
2 
Home equity
19 
1 
19 
SBO home equity
21 
- 
- 
Corporate and commercial
9 
25 
(24)
Other consumer
29 
20 
22 
 
 
 
 
Total impairment losses
73 
46 
19 
 
 
 
 
Loan impairment charge as % of gross customer loans and advances
 
 
 
   (excluding reverse repurchase agreements) by sector
Residential mortgages
(0.3%)
- 
0.1%
Home equity
0.6%
- 
0.6%
SBO home equity
6.5%
- 
- 
Corporate and commercial
0.1%
0.4%
(0.4%)
Other consumer
1.3%
0.9%
1.0%
 
 
 
 
Total
0.5%
0.4%
0.1%




US Retail & Commercial (£ Sterling)

Key metrics
Quarter ended
 
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
Performance ratios
 
 
 
Return on equity (1)
6.1%
6.5%
8.2%
Net interest margin
2.94%
2.98%
2.93%
Cost:income ratio
70%
74%
73%

 
31 March
31 December
 
 
31 March
 
2014
2013
 
2013
 
£bn
£bn
Change
 
£bn
Change
 
 
 
 
 
 
 
Capital and balance sheet
 
 
 
 
 
 
Loans and advances to customers (gross)
 
 
 
 
 
 
  - residential mortgages
6.2 
5.8 
7%
 
6.0 
3%
  - home equity
12.0 
12.1 
(1%)
 
13.8 
(13%)
  - SBO home equity
1.3 
- 
- 
 
- 
- 
  - corporate and commercial
24.7 
24.1 
2%
 
25.1 
(2%)
  - other consumer
9.0 
8.6 
5%
 
8.9 
1%
 
 
 
 
 
 
 
 
53.2 
50.6 
5%
 
53.8 
(1%)
Loan impairment provisions
(0.5)
(0.3)
67%
 
(0.3)
67%
 
 
 
 
 
 
 
Net loans and advances to customers
52.7 
50.3 
5%
 
53.5 
(1%)
 
 
 
 
 
 
 
Total third party assets
76.1 
71.7 
6%
 
77.0 
(1%)
Investment securities
14.9 
12.9 
16%
 
11.9 
25%
Risk elements in lending
 
 
 
 
 
 
  - retail
1.1 
0.9 
22%
 
0.9 
22%
  - commercial
0.2 
0.1 
100%
 
0.4 
(50%)
 
 
 
 
 
 
 
Total risk elements in lending
1.3 
1.0 
30%
 
1.3 
- 
Provision coverage (2)
41%
26%
1,500bp
 
22%
1,900bp
 
 
 
 
 
 
 
Customer deposits (excluding repos)
54.9 
55.1 
- 
 
62.4 
(12%)
Bank deposits (excluding repos)
3.4 
2.0 
70%
 
1.7 
100%
Loan:deposit ratio (excluding repos)
96%
91%
500bp
 
86%
1,000bp
 
 
 
 
 
 
 
Risk-weighted assets
 
 
 
 
 
 
  - Credit risk
 
 
 
 
 
 
    - non-counterparty
55.4 
50.7 
9%
 
53.1 
4%
    - counterparty
0.8 
0.5 
60%
 
0.8 
- 
  - Operational risk
5.1 
4.9 
4%
 
5.0 
2%
 
 
 
 
 
 
 
 
61.3 
56.1 
9%
 
58.9 
4%
 
 
 
 
 
 
 
Spot exchange rate - US$/£
1.668 
1.654 
 
 
1.517 
 

Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

Key points
●
Sterling strengthened against the US dollar, with the spot exchange rate at 31 March 2014 increasing 1% compared with 31 December 2013.
   
●
Performance is described in full in the US dollar-based financial statements set out on pages 38 to 41.




US Retail & Commercial (US dollar)
 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
$m 
$m 
$m 
 
 
 
 
Income statement
 
 
 
Net interest income
809 
781 
731 
 
 
 
 
Net fees and commissions
279 
298 
295 
Other non-interest income
99 
97 
158 
 
 
 
 
Non-interest income
378 
395 
453 
 
 
 
 
Total income
1,187 
1,176 
1,184 
 
 
 
 
Direct expenses
 
 
 
  - staff
(416)
(409)
(444)
  - other
(412)
(409)
(384)
Indirect expenses
- 
(50)
(34)
 
 
 
 
 
(828)
(868)
(862)
 
 
 
 
Profit before impairment losses
359 
308 
322 
Impairment losses
(121)
(75)
(30)
 
 
 
 
Operating profit
238 
233 
292 
 
 
 
 
Analysis of income by product
 
 
 
Mortgages and home equity
185 
164 
195 
Personal lending and cards
162 
165 
155 
Retail deposits
308 
306 
295 
Commercial lending
273 
275 
261 
Commercial deposits
177 
163 
158 
Other
82 
103 
120 
 
 
 
 
Total income
1,187 
1,176 
1,184 
 
 
 
 
Analysis of impairments by sector
 
 
 
Residential mortgages
(9)
1 
3 
Home equity
32 
2 
29 
SBO home equity
34 
- 
- 
Corporate and commercial
15 
38 
(36)
Other consumer
49 
33 
34 
Securities
- 
1 
- 
 
 
 
 
Total impairment losses
121 
75 
30 
 
 
 
 
Loan impairment charge as % of gross customer loans and advances
 
 
 
   (excluding reverse repurchase agreements) by sector
 
 
 
Residential mortgages
(0.3%)
- 
0.1%
Home equity
0.6%
- 
0.6%
SBO home equity
6.5%
- 
- 
Corporate and commercial
0.1%
0.4%
(0.4%)
Other consumer
1.3%
0.9%
1.0%
 
 
 
 
Total
0.5%
0.4%
0.1%




US Retail & Commercial (US dollar)

Key metrics
Quarter ended
 
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
Performance ratios
 
 
 
Return on equity (1)
6.1%
6.5%
8.2%
Net interest margin
2.94%
2.98%
2.93%
Cost:income ratio
70%
74%
73%

The legal entity results of RBS Citizens Financial Group under IFRS are set out below.
 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
$m 
$m 
$m 
Total income
1,187 
1,183 
1,219 
Operating expenses
(828)
(828)
(840)
Impairment losses
(121)
(133)
(90)
 
 
 
 
Operating profit
238 
222 
289 
 
 
 
 
Return on equity (1)
6.1%
5.8%
7.5%

 
31 March
31 December
 
 
31 March
 
 
2014
2013
 
 
2013
 
 
$bn
$bn
Change
 
$bn
Change
 
 
 
 
 
 
 
Capital and balance sheet
 
 
 
 
 
 
Loans and advances to customers (gross)
 
 
 
 
 
 
  - residential mortgages
10.3 
9.6 
7%
 
9.1 
13%
  - home equity
20.0 
20.1 
- 
 
20.9 
(4%)
  - SBO home equity
2.1 
- 
- 
 
- 
- 
  - corporate and commercial
41.2 
39.8 
4%
 
38.1 
8%
  - other consumer
15.2 
14.1 
8%
 
13.5 
13%
 
 
 
 
 
 
 
 
88.8 
83.6 
6%
 
81.6 
9%
Loan impairment provisions
(0.9)
(0.4)
125%
 
(0.4)
125%
 
 
 
 
 
 
 
Net loans and advances to customers
87.9 
83.2 
6%
 
81.2 
8%
 
 
 
 
 
 
 
Total third party assets
126.8 
118.7 
7%
 
116.8 
9%
Investment securities
24.9 
21.3 
17%
 
18.1 
38%
Risk elements in lending
 
 
 
 
 
 
  - retail
1.9 
1.5 
27%
 
1.4 
36%
  - commercial
0.3 
0.2 
50%
 
0.5 
(40%)
 
 
 
 
 
 
 
Total risk elements in lending
2.2 
1.7 
29%
 
1.9 
16%
Provision coverage (2)
41%
26%
1,500bp
 
22%
1,900bp
 
 
 
 
 
 
 
Customer deposits (excluding repos)
91.6 
91.1 
1%
 
94.6 
(3%)
Bank deposits (excluding repos)
5.7 
3.3 
73%
 
2.6 
119%
Loan:deposit ratio (excluding repos)
96%
91%
500bp
 
86%
1,000bp
 
 
 
 
 
 
 
Risk-weighted assets
 
 
 
 
 
 
  - Credit risk
 
 
 
 
 
 
    - non-counterparty
92.4 
83.8 
10%
 
80.6 
15%
    - counterparty
1.3 
0.8 
63%
 
1.2 
8%
  - Operational risk
8.5 
8.2 
4%
 
7.5 
13%
 
 
 
 
 
 
 
 
102.2 
92.8 
10%
 
89.3 
14%

Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.



US Retail & Commercial (US dollar)

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

Q1 2014 compared with Q4 2013
·
Operating profit increased by $5 million, or 2%, to $238 million, driven by higher income and lower expenses, partially offset by higher impairments. The Non-Core portfolio is now included on a prospective basis beginning 1 January 2014. On a comparable basis operating profit increased by $16 million, or 7%.
   
·
The operating environment and market conditions remained challenging, with intense competition for loans. The continuation of low short-term rates has limited net interest margin expansion and the rise in long-term rates reduced mortgage refinance volumes.
   
·
Net interest income was up 4% to $809 million due to a larger investment portfolio and loan growth, including the Non-Core loan transfer. Excluding Group allocations in Q4 2013, net interest income was up $46 million, or 6%.
   
·
Higher rates led to investment security purchases resulting in average portfolio growth of $2.5 billion in the quarter.
   
·
Average loans and advances were up 6%, driven by the $3.7 billion Non-Core transfer, higher commercial loans and auto loans and a strategic initiative to purchase residential mortgages.
   
·
Non-interest income was down $17 million, or 4% at $378 million reflecting lower consumer banking fees, primarily lower deposit fees. Commercial banking fee income was up, driven by strong leasing income.
   
·
Total expenses were down $40 million, or 5% at $828 million reflecting the removal of indirect costs in Q1 2014 and incentive reversals for prior year plans partially offset by a seasonal increase in payroll taxes.
   
·
Impairment losses increased $46 million to $121 million for the quarter due to the Non-Core transfer.



US Retail & Commercial (US dollar)

Key points (continued)

Q1 2014 compared with Q1 2013
·
Operating profit decreased by $54 million, or 18%, to $238 million, driven by higher impairments partially offset by lower expenses.
   
·
Net interest income was up $78 million, or 11% at $809 million driven by a larger investment portfolio, loan growth including the Non-Core loan transfer, the benefit of interest rate swaps and deposit pricing discipline.
   
·
Higher rates led to investment security purchases resulting in average portfolio growth of $5.1 billion over the year.
   
·
Average loans and advances were up 7%, driven by the Non-Core transfer, commercial loan growth, auto loan growth and a strategic initiative to purchase residential mortgages and to hold more originations on the balance sheet. This was partially offset by home equity run-off.
   
·
Average customer deposits were down 3%, with planned run-off of high priced deposits and lower wholesale deposits partially offset by growth in checking balances. Consumer and small business checking balances both grew by 4% over the year.
   
·
Non-interest income was down $75 million, or 17%, at $378 million, reflecting lower mortgage banking fees as refinancing volumes have slowed, lower securities gains and lower deposit fees due to a change in the posting order of customer transactions. Mortgage origination activity is slowing as market rates have risen, leading to lower applications combined with lower levels of gains on sales of mortgage.
   
·
Total expenses were down $34 million, or 4%, at $828 million largely driven by the removal of indirect costs allocated by Group in Q1 2014.
   
·
Impairment losses increased by $91 million to $121 million for the quarter largely due to the Non-Core transfer.



Markets

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Income statement
 
 
 
Net interest income from banking activities
48 
62 
30 
 
 
 
 
Net fees and commissions receivable
35 
44 
77 
Income from trading activities
861 
517 
916 
Other operating income (net of related funding costs)
13 
3 
17 
 
 
 
 
Non-interest income
909 
564 
1,010 
 
 
 
 
Total income
957 
626 
1,040 
 
 
 
 
Direct expenses
 
 
 
  - staff
(305)
(171)
(362)
  - other
(153)
(181)
(181)
Indirect expenses
(179)
(201)
(203)
 
 
 
 
 
(637)
(553)
(746)
 
 
 
 
Profit before impairment losses
320 
73 
294 
Impairment losses (1)
(2)
(34)
(16)
 
 
 
 
Operating profit
318 
39 
278 
 
 
 
 
Of which:
 
 
 
Ongoing businesses (2)
306 
92 
254 
Run-off businesses
12 
(53)
24 
 
 
 
 
Analysis of income by product
 
 
 
Rates
368 
189 
228 
Currencies
213 
214 
223 
Asset backed products
324 
204 
448 
Credit markets
136 
143 
217 
 
 
 
 
Total income ongoing businesses
1,041 
750 
1,116 
Inter-divisional revenue share
(133)
(132)
(169)
Run-off businesses
49 
8 
93 
 
 
 
 
Total income
957 
626 
1,040 
 
 
 
 
Memo - Fixed income and currencies
 
 
 
Total income ongoing businesses
1,041 
750 
1,116 
Less: primary credit markets
(121)
(128)
(151)
 
 
 
 
Total fixed income and currencies
920 
622 
965 

Notes:
(1)
Includes £18 million in Q4 2013 pertaining to the creation of RCR and related strategy.
(2)
The ongoing businesses comprise the Rates, Currencies, Asset backed products and Credit markets areas.




Markets

Key metrics
Quarter ended
 
31 March
31 December
31 March
2014
2013
2013
 
 
 
 
Performance ratios
 
 
 
Return on equity (1)
9.4%
1.5%
7.9%
Cost:income ratio
67%
88%
72%
Compensation ratio (2)
32%
27%
35%

 
31 March
31 December
 
31 March
 
2014
2013
2013
 
£bn
£bn
Change
£bn
Change
 
 
 
 
 
 
Capital and balance sheet
 
 
 
 
 
Loans and advances to customers (gross)
24.9 
25.4
(2%)
32.0 
(22%)
Loan impairment provisions
(0.1)
(0.2)
(50%)
(0.2)
(50%)
 
 
 
 
 
 
Net loans and advances to customers
24.8 
25.2
(2%)
31.8 
(22%)
Net loans and advances to banks
12.1 
12.5
(3%)
20.1 
(40%)
Reverse repos
78.1 
76.2
2%
100.8 
(23%)
Securities
72.8 
69.8
4%
90.7 
(20%)
Cash and eligible bills
20.8 
20.3
2%
24.3 
(14%)
Other
19.6 
8.8
123%
20.3 
(3%)
 
 
 
 
 
 
Total third party assets (excluding derivatives
 
 
 
 
 
  mark-to-market)
228.2 
212.8
7%
288.0 
(21%)
Net derivative assets (after netting)
13.1 
15.5
(15%)
21.7 
(40%)
 
 
 
 
 
 
Provision coverage (3)
80%
85%
(500bp)
76%
400bp
 
 
 
 
 
 
Customer deposits (excluding repos)
19.6 
21.5
(9%)
25.7 
(24%)
Bank deposits (excluding repos)
24.4 
23.8
3%
43.7 
(44%)
 
 
 
 
 
 
Risk-weighted assets
 
 
 
 
 
  - Credit risk
 
 
 
 
 
    - non-counterparty
10.7 
10.8
(1%)
12.4 
(14%)
    - counterparty
34.0 
17.5
94%
32.7 
4%
  - Market risk
35.3 
26.4
34%
33.6 
5%
  - Operational risk
7.4 
9.8
(24%)
9.8 
(24%)
 
 
 
 
 
 
 
87.4 
64.5
36%
88.5 
(1%)

Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)
Compensation ratio is based on staff costs as a percentage of total income.
(3)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(4)
On an FLB3 basis risk-weighted assets were £99.9 billion at 31 December 2013.



Markets

 
Quarter ended
 
31 March
31 December
31 March
 
2014
2013
2013
Income statement (ongoing business)
£m
£m
£m
 
 
 
 
Total income
909 
619 
951 
Direct expenses
(428)
(327)
(501)
Indirect expenses
(172)
(180)
(200)
Impairment (losses)/recoveries
(3)
(20)
4 
 
 
 
 
Operating profit
306 
92 
254 
 
 
 
 
Performance ratios (ongoing business)
 
 
 
 
 
 
 
Return on equity (1)
10.5%
4.6%
9.4%
Cost:income ratio
66%
82%
74%
Compensation ratio (2)
31%
26%
35%
 
 
 
 
 
31 March
31 December
31 March
 
2014
2013
2013
Balance sheet (ongoing business)
£bn
£bn
£bn
 
 
 
 
Total third party assets (excluding derivatives mark-to-market)
214.9 
198.8 
264.7 
Risk-weighted assets
73.8 
52.1 
69.1 

Notes:
(1)
Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions), for ongoing businesses.
(2)
Compensation ratio is based on staff costs as a percentage of total income.

Key points

Q1 2014 compared with Q4 2013
·
Operating profit increased by £279 million, driven by higher trading income.
   
·
Rates benefited from a limited pick-up in client driven trading activity, and the gains predominantly associated with continued deleveraging and de-risking of the business.
   
·
Currencies performance remained steady, despite the highly competitive market environment.
   
·
Asset backed products benefited from positive sentiment and favourable market movements.
   
·
Credit markets income declined. Issuer volumes were subdued and the secondary market suffered from cautious investor sentiment.
   
·
Costs increased as a substantial reduction in non-staff costs, driven by the ongoing success of the division’s cost reduction programme, was more than offset by higher staff costs, which reflected increased income.
   
·
The 7% increase in third party assets reflected a pick-up in activity in the first quarter as clients returned to the market.
   
·
Risk-weighted assets increased following the introduction of CRD IV on 1 January 2014. However, excluding this impact, risk-weighted assets fell significantly, driven by a range of mitigation actions. This included £9 billion of risk-weighted assets transferred to RCR.



Markets

Key points (continued)

Q1 2014 compared with Q1 2013
·
Operating profit increased by 14% compared with the same period last year. This reflected a significant reduction in costs as headcount was reduced and discretionary expenditure tightly controlled, offset by lower income as the division refocused on core fixed income and currencies product areas.
   
·
Rates increased substantially (up 61%) compared to a weak Q1 2013, and was helped by gains predominantly associated with continued deleveraging and de-risking of the business.
   
·
Currencies income decreased slightly, reflecting a steady performance given low overall volatility and the reduction in client volumes seen throughout 2013.
   
·
Asset backed products benefited from the general credit market rally in Q1 2013, which was not repeated in Q1 2014. This, combined with a reduced deployment of risk-weighted assets, resulted in lower income.
   
·
Lower Credit income primarily reflected the de-risking of the credit trading business that took place in 2013, compared to gains from the credit asset rally in Q1 2013.
   
·
Costs fell by 15%, driven by headcount reductions of 1,300 and a tightly controlled approach to discretionary expenditure.
   
·
The strategic decision to refocus the division on core fixed income and currencies products drove the substantial reduction in third party assets, down from £288 billion to £228 billion.
   
·
Risk-weighted assets were £1.1 billion lower compared with 31 March 2013, despite an increase following the introduction of Basel III on 1 January 2014. The overall reduction reflected the de-risking and strategic refocusing of the Markets business and, in Q1 2014, the creation of RCR.



Central items

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Central items not allocated
(76)
(174)
(36)

Note:
(1)
Costs/charges are denoted by brackets.

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

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

Key points

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

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



RCR

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

●
removing risk from the balance sheet in an efficient, expedient and economic manner;
●
reducing the volatile outcomes in stressed environments; and
●
accelerating the release of capital through management and exit of the portfolio.

RCR is managed and analysed by four business pillars - Ulster Bank, Real Estate Finance, Corporate and Markets. Real Estate Finance excludes commercial real estate lending in Ulster Bank.
 
 
 
Quarter ended 
 
 
 
31 March 
 
 
2014 
 
 
 
£m 
 
 
 
 
Income statement
 
 
 
Net interest expense
 
 
(5)
 
 
 
 
Net fees and commissions
 
 
14 
Income from trading activities (1)
 
 
16 
Other operating income (1)
 
 
48 
 
 
 
 
Non-interest income
 
 
78 
 
 
 
 
Total income
 
 
73 
 
 
 
 
Direct expenses
 
 
 
  - staff
 
 
(38)
  - other
 
 
(18)
Indirect expenses
 
 
(23)
 
 
 
 
 
 
 
(79)
 
 
 
 
Operating loss before impairment losses
 
 
(6)
Impairment losses (1)
 
 
(108)
 
 
 
 
Operating loss
 
 
(114)
 
 
 
 
Total income
 
 
 
Ulster Bank
 
 
(13)
Real Estate Finance
 
 
83 
Corporate
 
 
(2)
Markets
 
 
5 
 
 
 
 
Total income
 
 
73 
 
 
 
 
Impairment losses
 
 
 
Ulster Bank
 
 
(51)
Real Estate Finance
 
 
(89)
Corporate
 
 
34 
Markets
 
 
(2)
 
 
 
 
Total impairment losses
 
 
(108)
 
 
 
 
Loan impairment charge as % of gross customer loans and advances (2)
 
 
 
Ulster Bank
 
 
1.3%
Real Estate Finance
 
 
4.1%
Corporate
 
 
(1.5%)
 
 
 
 
Total
 
 
1.2%

Notes:
(1)
Net disposal gains of £56 million comprised £5 million losses in income from trading activities, £3 million losses in other operating income offset by £64 million gains in impairments.
(2)
Includes disposal groups.



RCR

 
 
 
 
31 March 
 
 
 
2014 
 
 
 
 
£bn 
 
 
 
 
 
Capital and balance sheet
 
 
 
 
Loans and advances to customers (gross) (1)
 
 
 
34.0 
Loan impairment provisions
 
 
 
(15.7)
 
 
 
 
 
Net loans and advances to customers
 
 
 
18.3 
 
 
 
 
 
Debt securities
 
 
 
2.2 
Total funded assets
 
 
 
24.3 
Total third party assets (including derivatives)
 
 
 
38.8 
 
 
 
 
 
Risk elements in lending
 
 
 
23.0 
Provision coverage (2)
 
 
 
68%
Risk-weighted assets
 
 
 
 
  - Credit risk
 
 
 
 
    - non-counterparty
 
 
 
29.6 
    - counterparty
 
 
 
5.7 
  - Market risk
 
 
 
5.2 
 
 
 
 
 
 
 
 
 
40.5 
 
 
 
 
 
Gross loans and advances to customers (1)
 
 
 
 
Ulster Bank
 
 
 
15.5 
Real Estate Finance
 
 
 
8.6 
Corporate
 
 
 
9.1 
Markets
 
 
 
0.8 
 
 
 
 
 
 
 
 
 
34.0 
 
 
 
 
 
Funded assets
 
 
 
 
Ulster Bank
 
 
 
4.4 
Real Estate Finance
 
 
 
7.7 
Corporate
 
 
 
8.6 
Markets
 
 
 
3.6 
 
 
 
 
 
 
 
 
 
24.3 
 
 
 
 
 
Risk weighted assets
 
 
 
 
Ulster Bank
 
 
 
2.8 
Real Estate Finance
 
 
 
11.5 
Corporate
 
 
 
14.7 
Markets
 
 
 
11.5 
 
 
 
 
 
 
 
 
 
40.5 
 
 
 
 
 
RWA equivalent (RWAe) (3)
 
 
 
 
Ulster Bank
 
 
 
6.7 
Real Estate Finance
 
 
 
13.4 
Corporate
 
 
 
17.0 
Markets
 
 
 
13.8 
 
 
 
 
 
 
 
 
 
50.9 

Notes:
(1)
Includes disposal groups.
(2)
Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(3)
RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in divisions. RWAe converts both performing and non-performing exposures into a consistent capital measure, being the sum of the regulatory RWAs and the regulatory capital deductions, the latter converted to RWAe by applying a multiplier. The Group applies a CET 1 ratio of 10%, consistent with that used for divisional return on equity measure; this results in an end point CRR RWAe conversion multiplier of 10.




RCR

Funded assets and RWAe
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing (1)
 
Performing (1)
 
Total
 
Funded assets
RWAe 
 
Capital 
 
Funded assets
RWAe 
 
Capital 
 
Funded assets
RWAe 
 
Capital 
Gross 
Net 
RWA 
Deducts 
Gross 
Net 
RWA 
deducts (2)
Gross 
Net 
RWA 
deducts (3)
31 March 2014
£bn 
£bn 
£bn 
£bn 
£m 
 
£bn 
£bn 
£bn 
£bn 
£m 
£bn 
£bn 
£bn 
£bn 
£m 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ulster Bank
14.6 
3.6 
6.3 
0.1 
622 
 
1.1 
0.8 
0.4 
2.7 
(235)
 
15.7 
4.4 
6.7 
2.8 
387 
Real Estate Finance
5.4 
2.9 
2.9 
0.3 
260 
 
4.9 
4.8 
10.5 
11.2 
(76)
 
10.3 
7.7 
13.4 
11.5 
184 
Corporate
2.9 
1.2 
2.1 
0.1 
209 
 
7.5 
7.4 
14.9 
14.6 
28 
 
10.4 
8.6 
17.0 
14.7 
237 
Markets
0.2 
0.2 
0.3 
-
26 
 
3.4 
3.4 
13.5 
11.5 
205 
 
3.6 
3.6 
13.8 
11.5 
231 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RCR
23.1 
7.9 
11.6 
0.5 
1,117 
 
16.9 
16.4 
39.3 
40.0 
(78)
 
40.0 
24.3 
50.9 
40.5 
1,039 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 January 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ulster Bank
14.8 
3.7 
7.6 
0.2 
738 
 
1.4 
1.1 
1.3 
3.1 
(179)
 
16.2 
4.8 
8.9 
3.3 
559 
Real Estate Finance
7.2 
4.2 
6.1 
0.3 
580 
 
5.8 
5.3 
12.5 
13.2 
(75)
 
13.0 
9.5 
18.6 
13.5 
505 
Corporate
3.3 
1.7 
2.9 
0.2 
269 
 
8.1 
8.1 
18.2 
16.2 
208 
 
11.4 
9.8 
21.1 
16.4 
477 
Markets
0.2 
0.1 
0.6 
-
58 
 
4.7 
4.7 
15.8 
13.5 
233 
 
4.9 
4.8 
16.4 
13.5 
291 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RCR
25.5 
9.7 
17.2 
0.7 
1,645 
 
20.0 
19.2 
47.8 
46.0 
187 
 
45.5 
28.9 
65.0 
46.7 
1,832 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Notes:
(1)
Performing assets are those with an internal asset quality band of AQ1 - 9; and non-performing assets are in AQ10 with a probability of default being 100%.
(2)
The negative capital deductions are a result of the latent loss provisions held in respect of the performing portfolio.
(3)
£960 million (31 December 2013 - £1,774 million) of capital deductions relates to expected loss less impairment provisions.




RCR

Roll forward for quarter ended 31 March 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 January 
 
 
 
 
31 March 
 
 
2014 
Net run-off 
Disposals (a)
Impairments 
 
2014 
Funded assets
 
 
£bn 
£bn 
£bn 
£bn 
 
£bn 
 
 
 
 
 
 
 
 
 
Ulster Bank
 
 
4.8 
(0.1)
(0.2)
(0.1)
 
4.4 
Real Estate Finance
 
 
9.5 
(1.2)
(0.5)
(0.1)
 
7.7 
Corporate
 
 
9.8 
(0.7)
(0.5)
-
 
8.6 
Markets
 
 
4.8 
(0.5)
(0.7)
-
 
3.6 
 
 
 
 
 
 
 
 
 
Total
 
 
28.9 
(2.5)
(1.9)
(0.2)
 
24.3 
 
 
 
 
 
 
 
 
 
 
 
1 January 
 
 
Risk 
Other (c)
 
31 March 
 
2014 
Net run-off 
Disposals (a)
parameters (b)
 
2014 
RWAs
 
£bn 
£bn 
£bn 
£bn 
£bn 
 
£bn 
 
 
 
 
 
 
 
 
 
Ulster Bank
 
3.3 
(0.5)
-
-
- 
 
2.8 
Real Estate Finance
 
13.5 
(1.6)
(0.1)
(0.3)
- 
 
11.5 
Corporate
 
16.4 
(0.3)
(0.5)
(0.8)
(0.1)
 
14.7 
Markets
 
13.5 
(0.2)
(0.6)
(1.2)
-
 
11.5 
 
 
 
 
 
 
 
 
 
Total
 
46.7 
(2.6)
(1.2)
(2.3)
(0.1)
 
40.5 
 
 
 
 
 
 
 
 
 
 
1 January 
Net run-off 
 
Risk 
Impairments 
Other (c)
 
31 March 
2014 
Disposals (a)
parameters (b)
 
2014 
Capital deductions
£m
£m
£m
£m
£m
£m
 
£m
 
 
 
 
 
 
 
 
 
Ulster Bank
559 
(2)
(14)
(135)
(17)
(4)
 
387 
Real Estate Finance
505 
(211)
(59)
31 
(78)
(4)
 
184 
Corporate
480 
(71)
17 
(159)
(27)
(3)
 
237 
Markets
288 
-
-
(56)
-
(1)
 
231 
 
 
 
 
 
 
 
 
 
Total
1,832 
(284)
(56)
(319)
(122)
(12)
 
1,039 
 
 
 
 
 
 
 
 
 
 
1 January 
Net run-off 
 
Risk 
Impairments 
Other (c)
 
31 March 
2014 
Disposals (a)
parameters (b)
 
2014 
RWA equivalent
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
 
£bn 
 
 
 
 
 
 
 
 
 
Ulster Bank
8.9 
(0.5)
(0.1)
(1.4)
(0.2)
- 
 
6.7 
Real Estate Finance
18.6 
(3.7)
(0.7)
- 
(0.8)
- 
 
13.4 
Corporate
21.1 
(1.0)
(0.3)
(2.4)
(0.3)
(0.1)
 
17.0 
Markets
16.4 
(0.2)
(0.6)
(1.7)
-
(0.1)
 
13.8 
 
 
 
 
 
 
 
 
 
Total
65.0 
(5.4)
(1.7)
(5.5)
(1.3)
(0.2)
 
50.9 
 
 
 
 
 
 
 
 
 
Notes:
(a)
Include all aspects relating to disposal including associated removal of deductions from regulatory capital.
(b)
Reflects credit migration, the implementation of methodology changes and lower operational and market risk RWAs.
(c)
Includes fair value adjustments, and foreign exchange movements.




RCR

Gross loans and advances to customers and related impairments
 
 
 
 
 
 
 
31 March 2014
 
 
Gross
 
 
 
loans and
 
Q1 2014
 advances to
Impairment
Impairment
 
customers (1)
provisions
 losses (2)
 
£bn
£bn
£m
 
 
 
 
By donating division and sector
 
 
 
 
 
 
 
Ulster Bank
 
 
 
Commercial real estate
 
 
 
 - investment
5.4 
3.1 
47 
 - development
7.1 
6.2 
(29)
Other corporate
3.0 
2.0 
33 
 
 
 
 
Total Ulster Bank
15.5 
11.3 
51 
 
 
 
 
UK Corporate
 
 
 
Commercial real estate
 
 
 
  - investment
2.4 
0.5 
52 
  - development
0.7 
0.3 
13 
Asset finance
2.5 
0.4 
2 
Other corporate
1.6 
0.5 
22 
 
 
 
 
Total UK Corporate
7.2 
1.7 
89 
 
 
 
 
International Banking
 
 
 
Commercial real estate
 
 
 
  - investment
5.1 
1.4 
34 
  - development
0.3 
0.1 
10 
Asset finance
0.1 
- 
- 
Other corporate
5.5 
1.2 
(47)
Other
0.2 
- 
(30)
 
 
 
 
Total International Banking
11.2 
2.7 
(33)
 
 
 
 
Other
0.1 
- 
1 
 
 
 
 
Total
34.0 
15.7 
108 

Notes:
(1)
Includes disposal groups.
(2)
Impairment losses include £2 million relating to other financial assets; sector analyses above include allocation of latent impairment charges.




RCR

Key points

Funded assets
·
RCR funded assets fell to £24 billion, a reduction of £5 billion, or 16%, during the quarter and an overall reduction to date of £23 billion, or 48%, since the perimeter of the division was agreed.
   
·
The reduction in the quarter has been achieved by a mixture of run-off, disposals and impairments and has benefited from a combination of strong liquidity in the market and asset demand.
   
·
The percentage mix of assets across each of the business pillars has remained broadly consistent.

Capital
·
RWA equivalent reduction of £14 billion in the quarter to £51 billion reflected disposals, run-off, methodology changes and lower operational and market risk RWAs.
   
·
The operating focus in the quarter was on large capital intensive positions to maximise the capital benefit. Reductions in these positions were achieved in an economic manner consistent with our asset management principles. There was disposal activity across all sectors with notable reductions in each of the RCR business pillars.

Operating performance
·
Operating loss for the quarter was £114 million. This benefited from a number of disposal gains and recoveries through good execution and pricing in the market.
   
·
The favourable market conditions have manifested in a higher than anticipated sale prices for assets disposed of in the quarter, resulting in disposal gains of £56 million in the quarter.
   
·
The net effect of the operating loss of £114 million and RWAe reduction of £14 billion(1) has resulted in net CET1 accretion of £1.3 billion in the quarter.

Funding employed
·
RCR is funded primarily by Treasury and has no material third party deposits.
     
·
A run off profile of 85% over three years has been assumed for RCR’s asset base with the associated funding cost being calculated from Treasury issuance maturing in line with the run down of the RCR balance sheet.
     
·
The net effect is a funding charge at a spread of c.200 basis points above three month LIBOR.


 
Note
(1)
Capital equivalent: £1.4 billion at an internal CET1 ratio of 10% (see page 48).



Condensed consolidated income statement
for the quarter ended 31 March 2014

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Interest receivable
3,800 
3,973 
4,279 
Interest payable
(1,105)
(1,209)
(1,609)
 
 
 
 
Net interest income
2,695 
2,764 
2,670 
 
 
 
 
Fees and commissions receivable
1,291 
1,370 
1,316 
Fees and commissions payable
(236)
(244)
(210)
Income from trading activities
952 
177 
1,115 
Gain/(loss) on redemption of own debt
20 
(29)
(51)
Other operating income
691 
31 
612 
 
 
 
 
Non-interest income
2,718 
1,305 
2,782 
 
 
 
 
Total income
5,413 
4,069 
5,452 
 
 
 
 
Staff costs
(1,691)
(1,541)
(1,887)
Premises and equipment
(653)
(700)
(556)
Other administrative expenses
(711)
(3,960)
(763)
Depreciation and amortisation
(272)
(336)
(387)
Write-down of goodwill and other intangible assets
(82)
(1,403)
- 
 
 
 
 
Operating expenses
(3,409)
(7,940)
(3,593)
 
 
 
 
Profit/(loss) before impairment losses
2,004 
(3,871)
1,859 
Impairment losses
(362)
(5,112)
(1,033)
 
 
 
 
Operating profit/(loss) before tax
1,642 
(8,983)
826 
Tax (charge)/credit
(362)
377 
(350)
 
 
 
 
Profit/(loss) from continuing operations
1,280 
(8,606)
476 
Profit from discontinued operations, net of tax
9 
15 
129 
 
 
 
 
Profit/(loss) for the period
1,289 
(8,591)
605 
Non-controlling interests
(19)
3 
(131)
Preference share and other dividends
(75)
(114)
(81)
 
 
 
 
Profit/(loss) attributable to ordinary and B shareholders
1,195 
(8,702)
393 
 
 
 
 
Earnings per ordinary and equivalent B share (Note 8)
 
 
 
Loss per ordinary and equivalent B share from continuing operations
 
 
 
  - basic and diluted (2)
- 
(77.3p)
- 
 
 
 
 
Loss per ordinary and equivalent B share from continuing and discontinued operations
 
 
 
  - basic and diluted (2)
- 
(77.3p)
- 
 
 
 
 
Adjusted earnings/(loss) per ordinary and equivalent B share from continuing
 
 
 
  operations
9.4p
(45.2p)
2.8p

Notes:
(1)
In the income statement above, one-off and other items as shown on page 13 are included in the appropriate captions. A reconciliation between the income statement above and the managed view income statement on page 7 is given in Appendix 1 to this announcement.
(2)
Earnings per ordinary and equivalent B share for the quarter ending 31 March 2013 has been restated to reflect the terms of the dividend access share (see Note 8).



Condensed consolidated statement of comprehensive income
for the quarter ended 31 March 2014

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Profit/(loss) for the period
1,289 
(8,591)
605 
 
 
 
 
Items that do not qualify for reclassification
 
 
 
Actuarial losses on defined benefit plans
- 
446 
- 
Tax
- 
(83)
- 
 
 
 
 
 
- 
363 
- 
 
 
 
 
Items that do qualify for reclassification
 
 
 
Available-for-sale financial assets
264 
(103)
276 
Cash flow hedges
295 
(667)
(34)
Currency translation
(135)
(328)
1,197 
Tax
(88)
203 
48 
 
 
 
 
 
336 
(895)
1,487 
 
 
 
 
Other comprehensive income/(loss) after tax
336 
(532)
1,487 
 
 
 
 
Total comprehensive income/(loss) for the period
1,625 
(9,123)
2,092 
 
 
 
 
Total comprehensive income/(loss) is attributable to:
 
 
 
Non-controlling interests
24 
16 
149 
Preference shareholders
65 
99 
71 
Paid-in equity holders
10 
15 
10 
Ordinary and B shareholders
1,526 
(9,253)
1,862 
 
 
 
 
 
1,625 
(9,123)
2,092 

Key points
·
The movement in available-for-sale financial assets during the quarter reflects unrealised gains arising on Spanish, UK and US bonds, partially offset by realised gains on high quality UK, Dutch and German sovereign bonds.
   
·
Cash flow hedging gains in the quarter largely result from decreases in Sterling, Euro and US dollar swap rates in the main durations of the underlying portfolio.
   
·
Currency translation losses during the quarter are principally due to the strengthening of Sterling against the US dollar.



Condensed consolidated balance sheet
at 31 March 2014

 
31 March 
31 December 
2014 
2013 
 
£m 
£m 
 
 
 
Assets
 
 
Cash and balances at central banks
69,647 
82,659 
Net loans and advances to banks
28,302 
27,555 
Reverse repurchase agreements and stock borrowing
26,470 
26,516 
Loans and advances to banks
54,772 
54,071 
Net loans and advances to customers
390,780 
390,825 
Reverse repurchase agreements and stock borrowing
51,743 
49,897 
Loans and advances to customers
442,523 
440,722 
Debt securities
120,737 
113,599 
Equity shares
9,761 
8,811 
Settlement balances
16,900 
5,591 
Derivatives
277,294 
288,039 
Intangible assets
12,428 
12,368 
Property, plant and equipment
7,437 
7,909 
Deferred tax
3,289 
3,478 
Prepayments, accrued income and other assets
7,077 
7,614 
Assets of disposal groups
1,905 
3,017 
 
 
 
Total assets
1,023,770 
1,027,878 
 
 
 
Liabilities
 
 
Bank deposits
35,371 
35,329 
Repurchase agreements and stock lending
31,691 
28,650 
Deposits by banks
67,062 
63,979 
Customer deposits
401,276 
414,396 
Repurchase agreements and stock lending
57,085 
56,484 
Customer accounts
458,361 
470,880 
Debt securities in issue
61,755 
67,819 
Settlement balances
17,175 
5,313 
Short positions
37,850 
28,022 
Derivatives
274,506 
285,526 
Accruals, deferred income and other liabilities
15,336 
16,017 
Retirement benefit liabilities
2,829 
3,210 
Deferred tax
583 
507 
Subordinated liabilities
24,139 
24,012 
Liabilities of disposal groups
3,238 
3,378 
 
 
 
Total liabilities
962,834 
968,663 
 
 
 
Equity
 
 
Non-controlling interests
612 
473 
Owners’ equity*
 
 
  Called up share capital
6,752 
6,714 
  Reserves
53,572 
52,028 
 
 
 
Total equity
60,936 
59,215 
 
 
 
Total liabilities and equity
1,023,770 
1,027,878 
 
 
 
* Owners’ equity attributable to:
 
 
Ordinary and B shareholders
55,032 
53,450 
Other equity owners
5,292 
5,292 
 
 
 
 
60,324 
58,742 



Average balance sheet

 
Quarter ended
 
31 March 
31 December 
2014 
2013 
 
% 
% 
 
 
 
Average yields, spreads and margins of the banking business
 
 
Gross yield on interest-earning assets of banking business
3.01 
3.01 
Cost of interest-bearing liabilities of banking business
(1.21)
(1.22)
 
 
 
Interest spread of banking business
1.80 
1.79 
Benefit from interest-free funds
0.32 
0.29 
 
 
 
Net interest margin of banking business
2.12 
2.08 
 
 
 
Average interest rates
 
 
The Group's base rate
0.50 
0.50 
 
 
 
London inter-bank three month offered rates
 
 
  - Sterling
0.52 
0.52 
  - Eurodollar
0.23 
0.24 
  - Euro
0.30 
0.24 




Average balance sheet

 
Quarter ended
 
Quarter ended
 
31 March 2014
 
31 December 2013
 
Average
 
 
 
Average
 
 
 
balance
Interest
Rate
 
balance
Interest
Rate
 
£m
£m
%
 
£m
£m
%
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Loans and advances to banks
72,181 
89 
0.50 
 
75,338 
102 
0.54 
Loans and advances to customers
383,898 
3,518 
3.72 
 
389,390 
3,656 
3.73 
Debt securities
56,165 
194 
1.40 
 
59,218 
216 
1.45 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
  - banking business (1,4)
512,244 
3,801 
3.01 
 
523,946 
3,974 
3.01 
  - trading business (3)
177,347 
 
 
 
190,320 
 
 
 
 
 
 
 
 
 
 
Non-interest earning assets
344,476 
 
 
 
393,624 
 
 
 
 
 
 
 
 
 
 
Total assets
1,034,067 
 
 
 
1,107,890 
 
 
 
 
 
 
 
 
 
 
Memo: funded assets
743,399 
 
 
 
791,529 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deposits by banks
16,768 
51 
1.23 
 
20,086 
85 
1.68 
Customer accounts
306,189 
516 
0.68 
 
330,208 
562 
0.68 
Debt securities in issue
45,202 
302 
2.71 
 
49,374 
317 
2.55 
Subordinated liabilities
23,314 
212 
3.69 
 
22,992 
216 
3.73 
Internal funding of trading business
(18,262)
36 
(0.80)
 
(24,467)
49 
(0.79)
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
  - banking business (1,2)
373,211 
1,117 
1.21 
 
398,193 
1,229 
1.22 
  - trading business (3)
186,096 
 
 
 
199,273 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing liabilities
 
 
 
 
 
 
 
  - demand deposits
80,409 
 
 
 
73,883 
 
 
  - other liabilities
334,403 
 
 
 
370,829 
 
 
Owners’ equity
59,948 
 
 
 
65,712 
 
 
 
 
 
 
 
 
 
 
Total liabilities and owners’ equity
1,034,067 
 
 
 
1,107,890 
 
 

Notes:
(1)
Interest receivable has been increased by £1 million (Q4 2013 - £1 million) and interest payable has been increased by £15 million (Q4 2013 - £23 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)
Interest payable has been decreased by £3 million (Q4 2013 - £3 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(4)
Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.



Condensed consolidated statement of changes in equity
for the quarter ended 31 March 2014

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
£m 
£m 
£m 
 
 
 
 
Called-up share capital
 
 
 
At beginning of period
6,714 
6,697 
6,582 
Ordinary shares issued
38 
17 
37 
 
 
 
 
At end of period
6,752 
6,714 
6,619 
 
 
 
 
Paid-in equity
 
 
 
At beginning and end of period
979 
979 
979 
 
 
 
 
Share premium account
 
 
 
At beginning of period
24,667 
24,628 
24,361 
Ordinary shares issued
93 
39 
94 
 
 
 
 
At end of period
24,760 
24,667 
24,455 
 
 
 
 
Merger reserve
 
 
 
At beginning and end of period
13,222 
13,222 
13,222 
 
 
 
 
Available-for-sale reserve
 
 
 
At beginning of period
(308)
(252)
(346)
Unrealised gains
433 
1 
582 
Realised gains
(218)
(122)
(164)
Tax
(5)
65 
28 
Recycled to profit or loss on disposal of businesses (1)
36 
- 
(110)
 
 
 
 
At end of period
(62)
(308)
(10)
 
 
 
 
Cash flow hedging reserve
 
 
 
At beginning of period
(84)
447 
1,666 
Amount recognised in equity
653 
(271)
259 
Amount transferred from equity to earnings
(358)
(396)
(293)
Tax
(70)
136 
3 
 
 
 
 
At end of period
141 
(84)
1,635 
 
 
 
 
 
Foreign exchange reserve
 
 
 
At beginning of period
3,691 
4,018 
3,908 
Retranslation of net assets
(170)
(417)
1,386 
Foreign currency gains/(losses) on hedges of net assets
32 
88 
(201)
Tax
(2)
2 
(18)
Recycled to profit or loss on disposal of businesses
- 
- 
(3)
 
 
 
 
At end of period
3,551 
3,691 
5,072 
 
 
 
 
 
Capital redemption reserve
 
 
 
At beginning and end of period
9,131 
9,131 
9,131 
 
 
 
 
 
Contingent capital reserve
 
 
 
At beginning of period
- 
(1,208)
(1,208)
Transfer to retained earnings
- 
1,208 
- 
 
 
 
 
 
At end of period
- 
- 
(1,208)

For the notes to this table refer the following page.


Condensed consolidated statement of changes in equity
for the quarter ended 31 March 2014

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Retained earnings
 
 
 
At beginning of period
867 
10,144 
10,596 
Profit/(loss) attributable to ordinary and B shareholders and other equity owners
 
 
 
  - continuing operations
1,268 
(8,592)
366 
  - discontinued operations
2 
4 
108 
Equity preference dividends paid
(65)
(99)
(71)
Paid-in equity dividends paid, net of tax
(10)
(15)
(10)
Transfer of contingent capital agreement
- 
(1,208)
- 
Termination of contingent capital agreement
- 
320 
- 
Actuarial losses recognised in retirement benefit schemes
 
 
 
  - gross
- 
446 
- 
  - tax
- 
(83)
- 
Shares released for employee benefits
(36)
(76)
- 
Share-based payments
 
 
 
  - gross
(39)
26 
(37)
  - tax
(1)
- 
(3)
 
 
 
 
At end of period
1,986 
867 
10,949 
 
 
 
 
Own shares held
 
 
 
At beginning of period
(137)
(138)
(213)
Disposal of own shares
1 
1 
2 
 
 
 
 
At end of period
(136)
(137)
(211)
 
 
 
 
Owners’ equity at end of period
60,324 
58,742 
70,633 
 
 
 
 
Non-controlling interests
 
 
 
At beginning of period
473 
462 
1,770 
Currency translation adjustments and other movements
3 
1 
15 
Profit/(loss) attributable to non-controlling interests
 
 
 
  - continuing operations
12 
(14)
110 
  - discontinued operations
7 
11 
21 
Dividends paid
- 
(5)
- 
Movements in available-for-sale securities
 
 
 
  - unrealised (losses)/gains
(1)
(3)
9 
  - realised losses
3 
21 
- 
  - tax
- 
- 
(1)
  - recycled to profit or loss on disposal of businesses (2)
- 
- 
(5)
Equity withdrawn and disposals
- 
- 
(1,387)
Equity raised
115 
- 
- 
 
 
 
 
At end of period
612 
473 
532 
 
 
 
 
Total equity at end of period
60,936 
59,215 
71,165 
 
 
 
 
Total comprehensive income/(loss) recognised in the statement of
 
 
 
  changes in equity is attributable to:
Non-controlling interests
24 
16 
149 
Preference shareholders
65 
99 
71 
Paid-in equity holders
10 
15 
10 
Ordinary and B shareholders
1,526 
(9,253)
1,862 
 
 
 
 
 
1,625 
(9,123)
2,092 

Notes:
(1)
Net of tax - £11 million credit (Q1 2013 - £35 million charge).
(2)
Net of tax - Q1 2013 £1 million charge.


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


Notes

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

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

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

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

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



Notes

3. Analysis of income, expenses and impairment losses
 
 
 
 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Loans and advances to customers
3,518 
3,656 
3,831 
Loans and advances to banks
89 
102 
108 
Debt securities
193 
215 
340 
 
 
 
 
Interest receivable
3,800 
3,973 
4,279 
 
 
 
 
Customer accounts
516 
562 
837 
Deposits by banks
54 
88 
116 
Debt securities in issue
287 
294 
353 
Subordinated liabilities
212 
216 
222 
Internal funding of trading businesses
36 
49 
81 
 
 
 
 
Interest payable
1,105 
1,209 
1,609 
 
 
 
 
Net interest income
2,695 
2,764 
2,670 
 
 
 
 
Fees and commissions receivable
 
 
 
  - payment services
322 
368 
333 
  - credit and debit card fees
255 
265 
254 
  - lending (credit facilities)
332 
344 
353 
  - brokerage
105 
110 
109 
  - investment management
106 
131 
113 
  - trade finance
67 
74 
78 
  - other
104 
78 
76 
 
 
 
 
 
1,291 
1,370 
1,316 
Fees and commissions payable
(236)
(244)
(210)
 
 
 
 
Net fees and commissions
1,055 
1,126 
1,106 
 
 
 
 
Foreign exchange
218 
206 
195 
Interest rate
248 
(54)
199 
Credit
356 
2 
552 
Own credit adjustments
95 
15 
99 
Other
35 
8 
70 
 
 
 
 
Income from trading activities
952 
177 
1,115 
 
 
 
 
Gain/(loss) on redemption of own debt
20 
(29)
(51)
 
 
 
 
Operating lease and other rental income
91 
103 
138 
Own credit adjustments
44 
(15)
150 
Other changes in the fair value of financial assets and liabilities designated as at fair
 
 
 
  value through profit or loss and related derivatives
20 
(91)
12 
Changes in fair value of investment properties
(12)
(258)
(9)
Profit on sale of securities
211 
91 
153 
Profit/(loss) on sale of:
 
 
 
  - property, plant and equipment
24 
11 
18 
  - subsidiaries and associated undertakings
192 
171 
(6)
Dividend income
13 
46 
14 
Share of profits less losses of associated undertakings
27 
43 
177 
Other income
81 
(70)
(35)
 
 
 
 
Other operating income
691 
31 
612 




Notes

3. Analysis of income, expenses and impairment losses (continued)
 
 
 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Total non-interest income
2,718 
1,305 
2,782 
 
 
 
 
Total income
5,413 
4,069 
5,452 
 
 
 
 
Staff costs
(1,691)
(1,541)
(1,887)
Premises and equipment
(653)
(700)
(556)
Other (1)
(711)
(3,960)
(763)
 
 
 
 
Administrative expenses
(3,055)
(6,201)
(3,206)
Depreciation and amortisation
(272)
(336)
(387)
Write-down of goodwill
- 
(1,059)
- 
Write-down of other intangible assets
(82)
(344)
- 
 
 
 
 
Operating expenses
(3,409)
(7,940)
(3,593)
 
 
 
 
Loan impairment losses
360 
5,131 
1,036 
Securities impairment losses
2 
(19)
(3)
 
 
 
 
Impairment losses
362 
5,112 
1,033 

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

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

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
At beginning of period
926 
737 
895 
Charge to income statement
- 
465 
- 
Utilisations
(218)
(276)
(190)
 
 
 
 
At end of period
708 
926 
705 

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

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



Notes

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

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

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
At beginning of period
1,077 
631 
676 
Charge to income statement
-
500 
50 
Utilisations
(199)
(54)
(24)
 
 
 
 
At end of period
878 
1,077 
702 

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

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

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



Notes

4. Loan impairment provisions and REIL

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

 
Quarter ended
 
31 March 2014
 
31 December 2013
 
31 March 2013
 
Group
 
 
 
Group excl.
Non-
 
 
Group excl.
Non-
 
excl. RCR
RCR
Total
Non-Core
Core
Total
Non-Core
Core
Total
 
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
At beginning of period (1)
8,716 
16,500 
25,216 
 
10,101 
11,320 
21,421 
 
10,062 
11,188 
21,250 
Transfers to disposal groups
- 
- 
- 
 
(9)
- 
(9)
 
- 
- 
- 
Currency translation and other
 
 
 
 
 
 
 
 
 
 
 
  adjustments
(43)
(62)
(105)
 
(28)
(90)
(118)
 
136 
266 
402 
Amounts written-off
(421)
(792)
(1,213)
 
(607)
(586)
(1,193)
 
(529)
(627)
(1,156)
Recoveries of amounts previously 
 
 
 
 
 
 
 
 
 
 
 
  written-off
41 
11 
52 
 
38 
27 
65 
 
49 
16 
65 
Charge to income statement
 
 
 
 
 
 
 
 
 
 
 
  - continuing operations
254 
106 
360 
 
1,924 
3,207 
5,131 
 
599 
437 
1,036 
Unwind of discount
 
 
 
 
 
 
 
 
 
 
 
  (recognised in interest income)
(31)
(44)
(75)
(42)
(39)
(81)
 
(51)
(52)
(103)
 
 
 
 
 
 
 
 
 
 
 
 
At end of period
8,516 
15,719 
24,235 
 
11,377 
13,839 
25,216 
 
10,266 
11,228 
21,494 

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

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

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



Notes

4. Loan impairment provisions and REIL (continued)
REIL decreased by £2,039 million in the quarter to £37,353 million and the movements thereon were:

 
Quarter ended
 
31 March 2014
 
31 December 2013
 
31 March 2013
 
Group
 
 
 
Group excl.
Non-
 
 
Group excl.
Non-
 
excl. RCR
RCR
Total
Non-Core
Core
Total
Non-Core
Core
Total
 
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
At beginning of period (1)
15,276 
24,116 
39,392 
 
20,551 
19,815 
40,366 
 
19,766 
21,374 
41,140 
Currency translation and
(65)
(98)
(163)
 
(59)
(33)
(92)
 
376 
528 
904 
  other adjustments
 
 
 
 
 
 
 
 
 
 
 
Additions
1,463 
1,323 
2,786 
 
2,298 
959 
3,257 
 
2,097 
939 
3,036 
Transfers
(56)
16 
(40)
 
(28)
(1)
(29)
 
89 
31 
120 
Transfer to performing book
(103)
(3)
(106)
 
(106)
(27)
(133)
 
(41)
(33)
(74)
Repayments and disposals
(1,743)
(1,560)
(3,303)
 
(1,671)
(1,113)
(2,784)
 
(1,472)
(1,456)
(2,928)
Amounts written-off
(421)
(792)
(1,213)
 
(607)
(586)
(1,193)
 
(529)
(627)
(1,156)
 
 
 
 
 
 
 
 
 
 
 
 
At end of period
14,351 
23,002 
37,353 
 
20,378 
19,014 
39,392 
 
20,286 
20,756 
41,042 

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

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



Notes

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

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Profit/(loss) before tax
1,642 
(8,983)
826 
 
 
 
 
Expected tax (charge)/credit
(353)
2,088 
(192)
Losses in period where no deferred tax asset recognised
(13)
(688)
(72)
Foreign profits taxed at other rates
(57)
(44)
(88)
UK tax rate change impact
- 
(116)
- 
Unrecognised timing differences
4 
(6)
3 
Non-deductible goodwill impairment
- 
(247)
- 
Items not allowed for tax
 
 
 
  - losses on disposal and write-downs
- 
(15)
- 
  - UK bank levy
(19)
(6)
(20)
  - regulatory and legal actions
- 
(54)
- 
  - employee share schemes
(3)
10 
(7)
  - other disallowable items
(25)
(99)
(37)
Non-taxable items
 
 
 
  - gain on sale of Direct Line Insurance Group
41 
- 
- 
  - gain on sale of Global Merchant Services
- 
37 
- 
  - other non-taxable items
14 
56 
55 
Taxable foreign exchange movements
1 
(11)
2 
Losses brought forward and utilised
36 
13 
5 
Reduction in carrying value of deferred tax asset in respect of losses in UK
- 
(701)
- 
Adjustments in respect of prior periods
12 
160 
1 
 
 
 
 
Actual tax (charge)/credit
(362)
377 
(350)

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

6.Profit/(loss) attributable to non-controlling interests
 
 
 
 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
RBS Sempra Commodities JV
- 
(2)
(2)
RFS Holdings BV Consortium Members
17 
(5)
113 
Direct Line Group
- 
- 
19 
Other
2 
4 
1 
 
 
 
 
Profit/(loss) attributable to non-controlling interests
19 
(3)
131 


Notes

7. Dividends
 
 
 
Dividends paid to preference shareholders and paid-in equity holders are as follows:
 
 
 
 
 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Preference shareholders
 
 
 
Non-cumulative preference shares of US$0.01
65 
41 
71 
Non-cumulative preference shares of €0.01
- 
57 
- 
Non-cumulative preference shares of £1
- 
1 
- 
 
 
 
 
Paid-in equity holders
 
 
 
Interest on securities classified as equity, net of tax
10 
15 
10 
 
 
 
 
 
75 
114 
81 

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

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

8. Earnings/(loss) per ordinary and equivalent B share
 
 
Quarter ended 
 
31 December 
 
2013 
 
 
Earnings
 
Loss from continuing operations attributable to ordinary and B shareholders (£m)
(8,706)
 
 
Profit from discontinued operations attributable to ordinary and B shareholders (£m)
4 
 
 
Loss attributable to ordinary and B shareholders (£m)
(8,702)
 
 
Ordinary shares outstanding during the period (millions)
6,156 
Equivalent B shares in issue during the period (millions)
5,100 
 
 
Weighted average number of ordinary shares and equivalent B shares outstanding during
 
   the period (millions)
11,256 
 
 
Basic loss per ordinary and equivalent B share from continuing operations
(77.3p)

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



Notes

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

 
Quarter ended
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
 
 
 
Earnings
 
 
 
Profit/(loss) from continuing operations attributable to ordinary and
1,193 
(8,706)
285 
  B shareholders (£m)
Profit from discontinued operations attributable to ordinary and B shareholders (£m)
2 
4 
108 
 
 
 
 
Profit/(loss) attributable to ordinary and B shareholders (£m)
1,195 
(8,702)
393 
 
 
 
 
Ordinary shares outstanding during the period (millions)
6,181 
6,156 
6,031 
Equivalent B shares in issue during the period (millions)
5,100 
5,100 
5,100 
 
 
 
 
Weighted average number of ordinary shares and equivalent
 
 
 
  B shares outstanding during the period (millions)
11,281 
11,256 
11,131 
Effect of dilutive share options and convertible securities (millions)
110 
- 
114 
 
 
 
 
Diluted weighted average number of ordinary shares and equivalent
 
 
 
  B shares outstanding during the period (millions)
11,391 
11,256 
11,245 
 
 
 
 
Earnings/(loss) per ordinary and equivalent B share from continuing
 
 
 
  operations (excluding the rights of the dividend access share)
10.6p
(77.3p)
2.6p
Own credit adjustments
(0.9p)
- 
(1.8p)
Payment Protection Insurance costs
- 
3.1p
- 
Interest Rate Hedging Products redress and related costs
- 
3.4p
0.3p
Regulatory and legal actions
- 
11.1p
- 
Integration and restructuring costs
0.9p
1.2p
0.9p
(Gain)/loss on redemption of own debt
(0.2p)
0.2p
0.4p
Write-down of goodwill
- 
9.4p
- 
Amortisation of purchased intangible assets
- 
0.3p
0.3p
Strategic disposals
(1.7p)
(1.5p)
0.1p
Bank levy
- 
1.8p
- 
Write-down of other intangible assets
0.7p
3.1p
- 
 
 
 
 
Adjusted earnings/(loss) per ordinary and equivalent B share from
9.4p
(45.2p)
2.8p
   continuing operations



Notes

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

Valuation reserves
 
31 March 
31 December 
31 March 
2014 
2013 
2013 
 
£m 
£m 
£m 
 
 
 
 
Credit valuation adjustments (CVA)
 
 
 
  - monoline insurers and credit derivative product companies (CDPC)
75 
99 
387 
  - other counterparties
1,532 
1,667 
2,210 
 
 
 
 
 
1,607 
1,766 
2,597 
 
 
 
 
Other valuation reserves
 
 
 
  - bid-offer
476 
513 
581 
  - funding valuation adjustment (FVA)
497 
424 
523 
  - product and deal specific
744 
745 
748 
  - other
21 
8 
180 
 
 
 
 
 
1,738 
1,690 
2,032 
 
 
 
 
Valuation reserves
3,345 
3,456 
4,629 

Key points
·
The decrease in CVA was primarily driven by credit spreads tightening, together with the impact of restructuring certain exposures.
   
·
The decrease in bid-offer reserves reflects risk reduction.
   
·
The increase in FVA was driven by additional funding related reserves and increased exposures due to market movements.


 
Notes

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

Own credit adjustment (OCA)

Cumulative OCA DR/(CR)
 
 
 
Subordinated
 
 
 
Debt securities in issue
liabilities
 
 
 
HFT
DFV
Total
DFV
Total
Derivatives
Total (3)
£m
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
 
31 March 2014
(368)
2 
(366)
261 
(105)
107 
2 
31 December 2013
(467)
(33)
(500)
256 
(244)
96 
(148)
31 March 2013
(597)
148 
(449)
433 
(16)
325 
309 
 
 
 
 
 
 
 
 
Carrying values of underlying liabilities
£bn
£bn
£bn
£bn
£bn
 
 
 
 
 
 
 
 
 
 
31 March 2014
8.1 
14.2 
22.3 
0.9 
23.2 
 
 
31 December 2013
8.6 
15.8 
24.4 
0.9 
25.3 
 
 
31 March 2013
10.8 
22.2 
33.0 
1.1 
34.1 
 
 

Key points
·
The cumulative OCA increased during the quarter due to widening of spreads and time decay.
   
·
Senior issued debt OCA is determined by reference to secondary debt issuance spreads. The five year spread widened to 97 basis points (31 December 2013 - 92 basis points; 31 March 2013 - 103 basis points).
   
·
RBS CDS spreads remained broadly flat during the quarter.

10. Contingent liabilities and commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31 March 2014
 
31 December 2013
 
Group excl.
 
 
 
Group excl. 
 
 
 
Non-RCR
RCR 
Total 
 
Non-Core 
Non-Core 
Total 
 
£m
£m 
£m 
 
£m 
£m 
£m 
 
 
 
 
 
 
 
 
Contingent liabilities
 
 
 
 
 
 
 
Guarantees and assets pledged as collateral security
19,634 
270 
19,904 
 
19,563 
616 
20,179 
Other
6,039 
236 
6,275 
 
5,893 
98 
5,991 
 
 
 
 
 
 
 
 
 
25,673 
506 
26,179 
 
25,456 
714 
26,170 
 
 
 
 
 
 
 
 
Commitments
 
 
 
 
 
 
 
Undrawn formal standby facilities, credit lines and other
208,550 
2,482 
211,032 
 
210,766 
2,280 
213,046 
Other
2,590 
13 
2,603 
 
2,793 
- 
2,793 
 
 
 
 
 
 
 
 
 
211,140 
2,495 
213,635 
 
213,559 
2,280 
215,839 
 
 
 
 
 
 
 
 
Contingent liabilities and commitments
236,813 
3,001 
239,814 
 
239,015 
2,994 
242,009 

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


Notes

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

Litigation

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

Investigations and reviews

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

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

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

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


Notes

12. Other developments

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

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

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

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

The EC concluded that the new arrangements for the eventual retirement of the DAS did not constitute new State aid and approved the changes to RBS's restructuring plan in its State Aid Amendment Decision of 9 April 2014. In addition, this decision included two further key commitments made by HMT to the EC as follows:
●
The deadline for RBS’s divestment of the Williams & Glyn business (by Initial Public Offering (IPO), whole business sale or tendering procedure for its entire interest) has been extended. In the expected event of divestment by IPO, RBS must carry out this IPO before 31 December 2016 and complete the disposal of its entire interest in the Williams & Glyn business by 31 December 2017.
   
●
Citizens Financial Group, Inc. (‘Citizens’) will be disposed of by 31 December 2016, with an automatic 12 month extension if market metrics indicate that an IPO or subsequent tranches of disposal cannot be completed in an orderly fashion or at a fair value. On 1 November 2013, RBS announced that it would accelerate the divestment of Citizens with a partial IPO and that it planned to fully divest the business by the end of 2016. The obligation under the State Aid Amendment Decision to dispose of Citizens is therefore in line with RBS’s planned and publicly stated divestment timetable and already reflected in its capital and strategic planning.

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



Notes

12. Other developments (continued)

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

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

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

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

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

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

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

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

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

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


Notes

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

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

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

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

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

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

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

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

 
Moody’s
  
S&P
  
Fitch
 
Long term 
Short term 
  
Long term 
Short term 
  
Long term 
Short term 
                 
RBS Group plc
Baa2 
P-2 
  
BBB+ 
A-2 
  
A 
F1 
                 
The Royal Bank of Scotland plc
Baa1 
P-2 
  
A- 
A-2 
  
A 
F1 
                 
National Westminster Bank Plc
Baa1 
P-2 
  
A- 
A-2 
  
A 
F1 
                 
RBS N.V.
Baa1 
P-2 
  
A- 
A-2 
  
A 
F1 
                 
RBS Citizens, National Association/Citizens  Bank of Pennsylvania
A3 
P-2 
  
A- 
A-2 
  
BBB+ 
F2 
                 
Ulster Bank Ltd/Ulster Bank
  Ireland Ltd
Baa3 
P-3 
  
BBB+ 
A-2 
  
A- 
F1 


Notes

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

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


Additional information

Share information
 
31 March 
2014 
31 December 
2013 
     
Ordinary share price
311.0p 
338.1p 
     
Number of ordinary shares in issue
6,241m 
6,203m 


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

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

Financial calendar
   
Annual General Meeting
25 June 2014
   
2014 interim results
1 August 2014
   
2014 third quarter interim management statement
31 October 2014



 




Appendix 1

Income statement reconciliations
and segmental analysis



Appendix 1 Income statement reconciliations and segmental analysis

 
Quarter ended
 
31 March 2014
 
31 December 2013
 
31 March 2013
 
Managed
One-off items
Statutory
 
Managed
One-off items
Statutory
 
Managed
One-off items
Statutory
reallocation
 
reallocation
 
reallocation
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
Interest receivable
3,799 
1 
3,800 
 
3,973 
- 
3,973 
 
4,279 
- 
4,279 
Interest payable
(1,101)
(4)
(1,105)
 
(1,206)
(3)
(1,209)
 
(1,607)
(2)
(1,609)
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
2,698 
(3)
2,695 
 
2,767 
(3)
2,764 
 
2,672 
(2)
2,670 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and commissions receivable
1,291 
- 
1,291 
 
1,370 
- 
1,370 
 
1,316 
- 
1,316 
Fees and commissions payable
(236)
- 
(236)
 
(244)
- 
(244)
 
(210)
- 
(210)
Income from trading activities
856 
96 
952 
 
162 
15 
177 
 
1,016 
99 
1,115 
Gain/(loss) on redemption of own debt
- 
20 
20 
 
- 
(29)
(29)
 
- 
(51)
(51)
Other operating income
444 
247 
691 
 
(115)
146 
31 
 
367 
245 
612 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income
2,355 
363 
2,718 
 
1,173 
132 
1,305 
 
2,489 
293 
2,782 
 
 
 
 
 
 
 
 
 
 
 
 
Total income
5,053 
360 
5,413 
 
3,940 
129 
4,069 
 
5,161 
291 
5,452 
 
 
 
 
 
 
 
 
 
 
 
 
Staff costs
(1,647)
(44)
(1,691)
 
(1,539)
(2)
(1,541)
 
(1,821)
(66)
(1,887)
Premises and equipment
(594)
(59)
(653)
 
(614)
(86)
(700)
 
(553)
(3)
(556)
Other administrative expenses
(687)
(24)
(711)
 
(785)
(3,175)
(3,960)
 
(678)
(85)
(763)
Depreciation and amortisation
(262)
(10)
(272)
 
(309)
(27)
(336)
 
(329)
(58)
(387)
Write down of goodwill and other intangible assets
- 
(82)
(82)
 
- 
(1,403)
(1,403)
 
- 
- 
- 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
(3,190)
(219)
(3,409)
 
(3,247)
(4,693)
(7,940)
 
(3,381)
(212)
(3,593)
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) before impairment losses
1,863 
141 
2,004 
 
693 
(4,564)
(3,871)
 
1,780 
79 
1,859 
Impairment losses
(362)
- 
(362)
 
(5,112)
- 
(5,112)
 
(1,033)
- 
(1,033)
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit/(loss)
1,501 
141 
1,642 
 
(4,419)
(4,564)
(8,983)
 
747 
79 
826 

 

Appendix 1 Income statement reconciliations and segmental analysis

 
Quarter ended
 
31 March 2014
 
31 December 2013
 
31 March 2013
 
Managed
One-off items
Statutory
 
Managed
One-off items
Statutory
 
Managed
One-off items
Statutory
 
reallocation
 
reallocation
 
reallocation
 
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit/(loss)
1,501 
141 
1,642 
 
(4,419)
(4,564)
(8,983)
 
747 
79 
826 
Own credit adjustments (1)
139 
(139)
- 
 
- 
- 
- 
 
249 
(249)
- 
Payment Protection Insurance costs
- 
- 
- 
 
(465)
465 
- 
 
- 
- 
- 
Interest Rate Hedging Products redress and related costs
- 
- 
- 
 
(500)
500 
- 
 
(50)
50 
- 
Regulatory and legal actions
- 
- 
- 
 
(1,910)
1,910 
- 
 
- 
- 
- 
Integration and restructuring costs
(129)
129 
- 
 
(180)
180 
- 
 
(122)
122 
- 
Gain/(loss) on redemption of own debt
20 
(20)
- 
 
(29)
29 
- 
 
(51)
51 
- 
Write-down of goodwill
- 
- 
- 
 
(1,059)
1,059 
- 
 
- 
- 
- 
Amortisation of purchased intangible assets
(7)
7 
- 
 
(35)
35 
- 
 
(41)
41 
- 
Strategic disposals
191 
(191)
- 
 
168 
(168)
- 
 
(6)
6 
- 
Bank levy
- 
- 
- 
 
(200)
200 
- 
 
- 
- 
- 
Write-down of other intangible assets
(82)
82 
- 
 
(344)
344 
- 
 
- 
- 
- 
RFS Holdings minority interest
9 
(9)
- 
 
(10)
10 
- 
 
100 
(100)
- 
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) before tax
1,642 
- 
1,642 
 
(8,983)
- 
(8,983)
 
826 
- 
826 
Tax (charge)/credit
(362)
- 
(362)
 
377 
- 
377 
 
(350)
- 
(350)
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) from continuing operations
1,280 
- 
1,280 
 
(8,606)
- 
(8,606)
 
476 
- 
476 
Profit from discontinued operations, net of tax
9 
- 
9 
 
15 
- 
15 
 
129 
- 
129 
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) for the period
1,289 
- 
1,289 
 
(8,591)
- 
(8,591)
 
605 
- 
605 
Non-controlling interests
(19)
- 
(19)
 
3 
- 
3 
 
(131)
- 
(131)
Preference share and other dividends
(75)
- 
(75)
 
(114)
- 
(114)
 
(81)
- 
(81)
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) attributable to ordinary and B shareholders
1,195 
- 
1,195 
 
(8,702)
- 
(8,702)
 
393 
- 
393 

Note:
(1)
Reallocation of £95 million gain (Q4 2013 - £15 million gain; Q1 2013 - £99 million gain) to income from trading activities and £44 million gain (Q4 2013 - £15 million loss; Q1 2013 - £150 million gain) to other operating income.



Appendix 1 Income statement reconciliations and segmental analysis

Segmental analysis

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

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

 
Net
Non-
 
 
Impairment
 
interest
interest
Total
Operating
(losses)/
Operating
income
income
income
expenses
recoveries
profit/(loss)
Quarter ended 31 March 2014
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
UK Retail
994 
246 
1,240 
(648)
(59)
533 
UK Corporate 
706 
397 
1,103 
(549)
(63)
491 
Wealth
171 
103 
274 
(197)
1 
78 
International Banking
180 
248 
428 
(308)
(10)
110 
Ulster Bank
159 
47 
206 
(142)
(47)
17 
US Retail & Commercial
488 
229 
717 
(500)
(73)
144 
Markets
48 
909 
957 
(637)
(2)
318 
Central items
(40)
95 
55 
(130)
(1)
(76)
 
 
 
 
 
 
 
 
2,706 
2,274 
4,980 
(3,111)
(254)
1,615 
RCR (1)
(8)
81 
73 
(79)
(108)
(114)
 
 
 
 
 
 
 
Managed basis
2,698 
2,355 
5,053 
(3,190)
(362)
1,501 
Reconciling items:
 
 
 
 
 
 
Own credit adjustments (2)
- 
139 
139 
- 
- 
139 
Integration and restructuring costs
- 
- 
- 
(129)
- 
(129)
Gain on redemption of own debt
- 
20 
20 
- 
- 
20 
Strategic disposals
- 
191 
191 
- 
- 
191 
Amortisation of purchased intangible assets
- 
- 
- 
(7)
- 
(7)
Write-down of intangible assets
- 
- 
- 
(82)
- 
(82)
RFS Holdings minority interest
(3)
13 
10 
(1)
- 
9 
 
 
 
 
 
 
 
Statutory basis
2,695 
2,718 
5,413 
(3,409)
(362)
1,642 

Notes:
(1)
Reallocation of £3 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Comprises £95 million gain included in Income from trading activities and £44 million gain included in Other operating income on a statutory basis.


Appendix 1 Income statement reconciliations and segmental analysis

Segmental analysis (continued)
 
 
 
 
 
 
 
Net
Non-
 
 
 
 
interest
interest
Total
Operating
Impairment
Operating
income
income
income
expenses
losses
profit/(loss)
Quarter ended 31 December 2013
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
UK Retail
1,014 
253 
1,267 
(722)
(73)
472 
UK Corporate 
728 
401 
1,129 
(585)
(659)
(115)
Wealth
174 
103 
277 
(207)
(21)
49 
International Banking
173 
271 
444 
(337)
(47)
60 
Ulster Bank
169 
38 
207 
(136)
(1,067)
(996)
US Retail & Commercial
479 
240 
719 
(531)
(46)
142 
Markets (1)
61 
565 
626 
(553)
(34)
39 
Central items
7 
(143)
(136)
(37)
(1)
(174)
 
 
 
 
 
 
 
 
2,805 
1,728 
4,533 
(3,108)
(1,948)
(523)
Non-Core (2)
(38)
(555)
(593)
(139)
(3,164)
(3,896)
 
 
 
 
 
 
 
Managed basis
2,767 
1,173 
3,940 
(3,247)
(5,112)
(4,419)
Reconciling items:
 
 
 
 
 
 
Payment Protection Insurance costs
- 
- 
- 
(465)
- 
(465)
Interest Rate Hedging Products redress and related costs
- 
- 
- 
(500)
- 
(500)
Regulatory and legal actions
- 
- 
- 
(1,910)
- 
(1,910)
Integration and restructuring costs
- 
- 
- 
(180)
- 
(180)
Loss on redemption of own debt
- 
(29)
(29)
- 
- 
(29)
Write-down of goodwill
- 
- 
- 
(1,059)
- 
(1,059)
Amortisation of purchased intangible assets
- 
- 
- 
(35)
- 
(35)
Strategic disposals
- 
168 
168 
- 
- 
168 
Bank levy
- 
- 
- 
(200)
- 
(200)
Write-down of other intangible assets
- 
- 
- 
(344)
- 
(344)
RFS Holdings minority interest
(3)
(7)
(10)
- 
- 
(10)
 
 
 
 
 
 
 
Statutory basis
2,764 
1,305 
4,069 
(7,940)
(5,112)
(8,983)

Notes:
(1)
Reallocation of £1 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(2)
Reallocation of £8 million between net interest income and non-interest income in respect of funding costs of rental assets, £7 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.




Appendix 1 Income statement reconciliations and segmental analysis

Segmental analysis (continued)
 
 
 
 
 
 
 
Net
Non-
 
 
 
 
interest
interest
Total
Operating
Impairment
Operating
income
income
income
expenses
losses
profit/(loss)
Quarter ended 31 March 2013
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
UK Retail
965 
226 
1,191 
(634)
(80)
477 
UK Corporate 
706 
378 
1,084 
(541)
(185)
358 
Wealth
169 
104 
273 
(212)
(5)
56 
International Banking
197 
285 
482 
(333)
(55)
94 
Ulster Bank
154 
54 
208 
(132)
(240)
(164)
US Retail & Commercial
471 
292 
763 
(555)
(19)
189 
Markets
30 
1,010 
1,040 
(746)
(16)
278 
Central items
17 
10 
27 
(63)
- 
(36)
 
 
 
 
 
 
 
 
2,709 
2,359 
5,068 
(3,216)
(600)
1,252 
Non-Core (1)
(37)
130 
93 
(165)
(433)
(505)
 
 
 
 
 
 
 
Managed basis
2,672 
2,489 
5,161 
(3,381)
(1,033)
747 
Reconciling items:
 
 
 
 
 
 
Own credit adjustments (2)
- 
249 
249 
- 
- 
249 
Interest Rate Hedging Products redress and related costs
- 
- 
- 
(50)
- 
(50)
Integration and restructuring costs
- 
- 
- 
(122)
- 
(122)
Loss on redemption of own debt
- 
(51)
(51)
- 
- 
(51)
Amortisation of purchased intangible assets
- 
- 
- 
(41)
- 
(41)
Strategic disposals
- 
(6)
(6)
- 
- 
(6)
RFS Holdings minority interest
(2)
101 
99 
1 
- 
100 
 
 
 
 
 
 
 
Statutory basis
2,670 
2,782 
5,452 
(3,593)
(1,033)
826 

Notes:
(1)
Reallocation of £9 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Comprises £99 million gain included in Income from trading activities and £150 million gain included in Other operating income on a statutory basis.



Appendix 2

Capital and risk management



Appendix 2 Capital and risk management


 
Page 
   
Capital management
  
   
Capital and leverage ratios
2 
Capital resources
3 
Leverage ratio
7 
   
Liquidity and funding risk
  
   
Overview
9 
Liquidity portfolio
9 
Funding metrics
10 
Funding sources
10 
   
Credit risk
  
   
Loans and related credit metrics
11 
Debt securities
15 
Derivatives
17 
   
Market risk
  
   
Trading VaR
18 
Capital charges
19 




Appendix 2 Capital and risk management

Capital management

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

Capital and leverage ratios
 
 
 
 
 
 
 
31 March 2014
 
31 December 2013
 
Current basis
Estimated
 
 
Estimated
 
 
(transitional
end-point
 
Transitional
end-point
 Basel 2.5
 
PRA basis)
(CRR basis)
 
PRA basis
(CRR basis)
 basis
Capital
£bn
£bn
 
£bn
£bn
£bn
 
 
 
 
 
 
 
Common Equity Tier 1 capital (1)
39.1 
39.1 
 
36.8 
36.8 
42.2 
Tier 1
46.4 
39.1 
 
44.3 
36.8 
50.6 
Total
59.9 
47.3 
 
58.2 
45.5 
63.7 
 
 
 
 
 
 
 
RWAs by risk
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit risk
 
 
 
 
 
 
  - non-counterparty
295.2 
295.2 
 
317.9 
317.9 
291.1 
  - counterparty
41.3 
41.3 
 
39.1 
39.1 
22.3 
Market risk
41.0 
41.0 
 
30.3 
30.3 
30.3 
Operational risk
36.8 
36.8 
 
41.8 
41.8 
41.8 
 
 
 
 
 
 
 
 
414.3 
414.3 
 
429.1 
429.1 
385.5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk asset ratios
%
%
 
%
%
%
 
 
 
 
 
 
 
Common Equity Tier 1 capital (1)*
9.4 
9.4 
 
8.6 
8.6 
10.9 
Tier 1
11.2 
9.4 
 
10.3 
8.6 
13.1 
Total
14.5 
11.4 
 
13.6 
10.6 
16.5 

 
 
31 March 
 
 
31 December 
 
 
 
2014 
 
 
2013 
 
Leverage ratios
 
% 
 
 
% 
 
 
 
 
 
 
 
 
CRR basis
 
3.7 
 
 
3.5 
 
Basel III basis
 
3.6 
 
 
3.4 
 
BCBS basis
 
3.6 
 
 
3.4 
 

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

Notes:
(1)
Core Tier 1 before 1 January 2014.


Appendix 2 Capital and risk management

Key points
●
The Group’s Core Tier 1 ratio on a CRR end-point basis improved from 8.6% to 9.4%* principally driven by retained earnings and continuing RWA reduction.
   
●
RWA decreases were primarily in RCR and Markets.
   
●
The improvement in the leverage ratio is predominantly attributable to the higher capital base and a more modest impact from off-balance sheet items, particularly trade finance-related undrawn commitments under the CRR basis.


Capital resources
 
 
 
 
 
 
 
31 March 2014
 
31 December 2013
 
Current
 
 
 
 
 
 
basis
Estimated
 
 
Estimated
 
 
(transitional
end-point
 
Transitional
end-point
Basel 2.5
PRA basis)
(CRR basis)
 
PRA basis
(CRR basis)
basis
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Shareholders' equity (excluding non-controlling interests)
 
 
 
 
 
 
Shareholders' equity
60,324 
60,324 
 
58,742 
58,742 
58,742 
Preference shares - equity
(4,313)
(4,313)
 
(4,313)
(4,313)
(4,313)
Other equity instruments
(979)
(979)
 
(979)
(979)
(979)
 
55,032 
55,032 
 
53,450 
53,450 
53,450 
Non-controlling interests
- 
- 
 
- 
- 
473 
 
 
 
 
 
 
 
Regulatory adjustments and deductions
 
 
 
 
 
 
Own credit
492 
492 
 
601 
601 
726 
Defined benefit pension fund adjustment
(186)
(186)
 
(172)
(172)
362 
Net unrealised available-for-sale (AFS) losses
- 
- 
 
- 
- 
308 
Cash flow hedging reserve
(141)
(141)
 
84 
84 
84 
Other regulatory adjustments
(4)
(4)
 
(55)
(55)
(103)
Deferred tax assets
(1,829)
(1,829)
 
(2,260)
(2,260)
- 
Prudential valuation adjustments
(781)
(781)
 
(781)
(781)
- 
Goodwill and other intangible assets
(12,428)
(12,428)
 
(12,368)
(12,368)
(12,368)
50% of expected losses less impairment provisions
(1,092)
(1,092)
 
(1,731)
(1,731)
(19)
50% of securitisation positions
- 
- 
 
- 
- 
(748)
 
(15,969)
(15,969)
 
(16,682)
(16,682)
(11,758)
 
 
 
 
 
 
 
Core Tier 1 capital
39,063 
39,063 
 
36,768 
36,768 
42,165 

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


Appendix 2 Capital and risk management

Capital resources (continued)
 
 
 
 
 
 
 
31 March 2014
 
31 December 2013
 
Current
 
 
 
 
 
 
basis
Estimated
 
 
Estimated
 
 
(transitional
end-point
 
Transitional
end-point
Basel 2.5
 
PRA basis)
(CRR basis)
 
PRA basis
(CRR basis)
basis
 
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Other Tier 1 capital
 
 
 
 
 
 
Preference shares - equity
- 
- 
 
- 
- 
4,313 
Preference shares - debt
- 
- 
 
- 
- 
911 
Innovative/hybrid Tier 1 securities
- 
- 
 
- 
- 
4,207 
Qualifying Tier 1 capital and related share premium subject
 
 
 
 
 
 
  to phase out from Additional Tier 1 (AT1) capital
5,662 
- 
 
5,831 
- 
- 
Qualifying Tier 1 capital included in consolidated AT1
 
 
 
 
 
 
  capital issued by subsidiaries and held by third parties
1,722 
- 
 
1,749 
- 
- 
 
7,384 
- 
 
7,580 
- 
9,431 
Tier 1 deductions
 
 
 
 
 
 
50% of material holdings
- 
- 
 
- 
- 
(976)
Tax on expected losses less impairment provisions
- 
- 
 
- 
- 
6 
 
- 
- 
 
- 
- 
(970)
 
 
 
 
 
 
 
Total Tier 1 capital
46,447 
39,063 
 
44,348 
36,768 
50,626 
 
 
 
 
 
 
 
Qualifying Tier 2 capital
 
 
 
 
 
 
Undated subordinated debt
- 
- 
 
- 
- 
2,109 
Dated subordinated debt - net of amortisation
- 
- 
 
- 
- 
12,436 
Qualifying items and related share premium
4,545 
3,951 
 
4,431 
3,582 
- 
Qualifying own funds instruments issued by subsidiaries
 
 
 
 
 
 
   and held by third parties
8,911 
4,249 
 
9,374 
5,151 
- 
Unrealised gains on AFS equity shares
- 
- 
 
- 
- 
114 
Collectively assessed impairment provisions
- 
- 
 
- 
- 
395 
 
13,456 
8,200 
 
13,805 
8,733 
15,054 
 
 
 
 
 
 
 
Tier 2 deductions
 
 
 
 
 
 
50% of securitisation positions
- 
- 
 
- 
- 
(748)
50% of standardised expected losses less impairment provisions
- 
- 
 
- 
- 
(25)
50% of material holdings
- 
- 
 
- 
- 
(976)
 
- 
- 
 
- 
- 
(1,749)
Total Tier 2 capital
13,456 
8,200 
 
13,805 
8,733 
13,305 
 
 
 
 
 
 
 
Supervisory deductions
 
 
 
 
 
 
Unconsolidated investments
- 
- 
 
- 
- 
(36)
Other deductions
- 
- 
 
- 
- 
(236)
 
- 
- 
 
- 
- 
(272)
 
 
 
 
 
 
 
Total regulatory capital
59,903 
47,263 
 
58,153 
45,501 
63,659 




Appendix 2 Capital and risk management

Capital resources (continued)
The table below analyses the movement in CET1 and Tier 2 capital on a CRR basis for the quarter ended 31 March 2014.
 
CET1
Tier 2
Total
 
£m
£m
£m
 
 
 
 
At 1 January 2014
36,768 
8,733 
45,501 
Attributable profit net of movements in fair value of own credit
1,086 
- 
1,086 
Share capital and reserve movements in respect of employee share schemes
(75)
- 
(75)
Ordinary shares issued
131 
- 
131 
Foreign exchange reserve
(140)
- 
(140)
AFS reserves
246 
- 
246 
Increase in goodwill and intangibles
(60)
- 
(60)
Deferred tax assets
431 
- 
431 
Excess of expected loss over impairment provisions
639 
- 
639 
Dated subordinated debt issues
- 
820 
820 
Net dated subordinated debt/grandfathered instrument
- 
(1,005)
(1,005)
Foreign exchange movement
- 
(348)
(348)
Other movements
37 
- 
37 
 
 
 
 
At 31 March 2014
39,063 
8,200 
47,263 




Appendix 2 Capital and risk management

Capital resources (continued)

Notes:
General:
In accordance with the PRA’s Policy Statement PS7/2013 issued in December 2013 on the implementation of CRD IV, all regulatory adjustments and deductions to CET1 have been applied in full (i.e. no transition) with the exception of unrealised gains on AFS securities which will be included from 2015.
 
CRD IV and Basel III impose an additional minimum CET1 ratio of 4.5% of RWAs. Further, CET1 requirements are imposed through buffers in the CRD. There are three buffers which will affect the Group: the capital conservation buffer set at 2.5% of RWAs; the counter-cyclical capital buffer (up to 2.5% of RWAs) will be calculated as the weighted average of the countercyclical capital buffer rates applied in the countries where the Group has relevant credit exposures; and the highest of Global-Systemically Important Institution (G-SII), Other-Systemically Important Institution (O-SII) or Systemic Risk Buffers set by the supervisory authorities. The Group has been provisionally allocated a G-SII buffer of 1.5%. The regulatory target capital requirements will be phased in through CRR, and are expected to apply in full from 1 January 2019. In the meantime, using national discretion the PRA can apply a top-up. As set out in the PRA’s Supervisory Statement SS3/13, the Group and other major UK banks and building societies are required to maintain a CET1 ratio of 7%, after taking into account certain adjustments set by the PRA.
 
PRA guidance indicates that from 1 January 2015, the Group must meet at least 56% of its Pillar 2A capital requirement with CET1 capital and the balance with Additional Tier 1 capital. The Pillar 2A capital requirement is the additional capital that the Group must hold, in addition to meeting its Pillar 1 requirements in order to comply with the PRA’s overall financial adequacy rule.
 
Estimates in relation to full CRR basis, including RWAs, are based on the current interpretation, expectations, and understanding, of the CRR requirements, as well as further regulatory clarity and implementation guidance from the UK and EU authorities. The actual full basis CRR impact may differ from these estimates when the final technical standards are interpreted and adopted.
Capital base:
(1)
Own funds are based on shareholders’ equity extracted from the unaudited condensed consolidated balance sheet disclosed on page 55 of this IMS.
(2)
Includes the nominal value of B shares (£0.5 billion) on the assumption that RBS will be privatised in the future and that they will count as permanent equity in some form by the end of 2017.
(3)
The prudential valuation adjustment (PVA), arising from the application of the prudent valuation requirements to all assets measured at fair value, has been included in full in line with the guidance from the PRA and uses methodology discussed with the PRA pending the issue of the final Regulatory Technical Standards (RTS) by the European Banking Authority. The PVA has been included in impairment provisions in the determination of the deduction from expected losses.
(4)
Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. The excess of AT1 deductions over AT1 capital in year one of transition is due to the application of the current rules to the transitional amounts.
(5)
Insignificant investments in equities of other financial entities (net): long cash equity positions are considered to have matched maturity with synthetic short positions if the long position is held for hedging purposes and sufficient liquidity exists in the relevant market. All the trades are managed and monitored together within the equities business.
(6)
Based on our current interpretations of the Commission Delegated Regulation issued in December 2013 on credit risk adjustments, the Group’s standardised latent provision has been reclassified to specific provision and is not included in Tier 2 capital.
Risk-weighted assets:
(1)
Current securitisation positions are shown as risk-weighted at 1,250%.
(2)
RWA uplifts include the impact of credit valuation adjustments and asset valuation correlation on banks and central counterparties.
(3)
RWAs reflect implementation of the full internal model method suite, and include methodology changes that took effect immediately on CRR implementation.
(4)
Non-financial counterparties and sovereigns that meet the eligibility criteria under CRR are exempt from the credit valuation adjustments volatility charges.
(5)
The CRR final text includes a reduction in the risk-weight relating to small and medium-sized enterprises.


 
Appendix 2 Capital and risk management

Leverage ratio
The leverage ratios below are computed using Tier 1 capital per end-point CRR and exposure measure based on:
●
CRR basis: end-point CRR;
   
●
Basel III basis: The final CRR text as well as the December 2010 Basel III text; further specificity being sourced from the instructions in the July 2012 Quantitative Impact Study and the related Frequently Asked Questions; and
   
●
BCBS basis: Basel Committee on Banking Supervision (BCBS) proposal issued in January 2014.


 
31 March 2014
 
31 December 2013
Leverage ratio
 
Tier 1
Leverage
 
 
 
Tier 1
Leverage
 
Exposure
 capital
Leverage
Exposure
 capital
Leverage
£bn
£bn
%
£bn
£bn
%
 
 
 
 
 
 
 
 
 
 
CRR basis
 
 
 
 
 
 
 
 
 
Transitional measure
1,053.6 
46.4 
23x
4.4 
 
1,062.1 
44.3 
24x
4.2 
Full-end point measure
1,053.6 
39.1 
27x
3.7 
 
1,062.1 
36.8 
29x
3.5 
 
 
 
 
 
 
 
 
 
 
Basel III basis
 
 
 
 
 
 
 
 
 
Transitional measure
1,089.1 
46.4 
23x
4.3 
 
1,093.5 
44.3 
25x
4.1 
Full-end point measure
1,089.1 
39.1 
28x
3.6 
 
1,093.5 
36.8 
30x
3.4 
 
 
 
 
 
 
 
 
 
 
BCBS basis
 
 
 
 
 
 
 
 
 
Transitional measure
1,083.4 
46.4 
23x
4.3 
 
1,082.0 
44.3 
24x
4.1 
Full-end point measure
1,083.4 
39.1 
28x
3.6 
 
1,082.0 
36.8 
29x
3.4 



Appendix 2 Capital and risk management

Leverage ratio (continued)
 
 
 
 
 
 
 
31 March 2014
 
31 December 2013
Exposure measure
CRR
Basel III
BCBS
 
CRR
Basel III
BCBS
basis (1)
basis (2)
basis (3)
basis  (1)
basis (2)
basis (3)
£bn
£bn
£bn
£bn
£bn
£bn
 
 
 
 
 
 
 
 
Cash and balances at central banks
69.6 
69.6 
69.6 
 
82.7 
82.7 
82.7 
Debt securities
120.7 
120.7 
120.7 
 
113.6 
113.6 
113.6 
Equity shares
9.8 
9.8 
9.8 
 
8.8 
8.8 
8.8 
Derivatives
277.3 
277.3 
277.3 
 
288.0 
288.0 
288.0 
Loans and advances to banks and customers
419.1 
419.1 
419.1 
 
418.4 
418.4 
418.4 
Reverse repos
78.2 
78.2 
78.2 
 
76.4 
76.4 
76.4 
Goodwill and other intangible assets
12.4 
12.4 
12.4 
 
12.4 
12.4 
12.4 
Other assets
34.8 
34.8 
34.8 
 
24.6 
24.6 
24.6 
Assets of disposal groups
1.9 
1.9 
1.9 
 
3.0 
3.0 
3.0 
 
 
 
 
 
 
 
 
Total assets
1,023.8 
1,023.8 
1,023.8 
 
1,027.9 
1,027.9 
1,027.9 
Netting of derivatives (2)
(224.3)
(224.3)
(219.4)
 
(233.8)
(233.8)
(227.3)
SFTs (1)
(37.8)
(9.4)
70.1 
 
(41.5)
(12.0)
59.8 
Regulatory deductions and other adjustments (4)
(2.5)
(1.4)
(2.5)
 
(4.9)
(4.9)
(6.6)
Potential future exposure on derivatives (5)
118.0 
117.2 
114.3 
 
131.3 
130.4 
128.0 
Undrawn commitments (6)
176.4 
183.2 
97.1 
 
183.1 
185.9 
100.2 
 
 
 
 
 
 
 
 
Leverage exposure measure
1,053.6 
1,089.1 
1,083.4 
 
1,062.1 
1,093.5 
1,082.0 

Notes:
(1)
In the CRR calculation, the balance sheet value is replaced with the related regulatory exposure value which has netting of both cash positions and related collateral of securities financing transactions (SFTs).
(2)
Under the Basel III view, the balance sheet value is reduced for allowable netting under the Basel II framework (excluding cross-product netting) which mainly relates to cash positions under a master netting agreement. In the BCBS calculation.
(3)
The January 2014 BCBS proposal permits some limited netting for margin received against replacement cost for derivatives, more restrictive netting for SFT, but possible future benefit for trades against qualifying central counterparties. The notional of protection sold through credit derivatives are included in the exposure measure, offset by longer dated protection bought on the same contracts. Trade finance has benefited through alignment of exposure with credit conversion factors.
(4)
Regulatory deductions: to ensure consistency between the leverage ratio numerator and the denominator, regulatory items that are deducted from capital are also deducted from the leverage exposure measure.
(5)
Potential future exposure (PFE) on derivatives: the regulatory add-on which is calculated by assigning percentages based on the type of instrument and the residual maturity of the contract to the nominal amounts or underlying values of derivative contracts. In the Basel III calculation, qualifying credit derivatives sold are capped to the unpaid premiums which is not applied under CRR. The element of PFE relating to credit derivatives sold is removed under BCBS and replaced with the credit derivative notionals on protection sold per note (1).
(6)
Undrawn commitments represent regulatory add-ons relating to off-balance sheet undrawn commitments based on a 10% credit conversion factor for unconditionally cancellable commitments and 100% of other commitments.



Appendix 2 Capital and risk management

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

Overview
·
The liquidity position remains strong: the liquidity portfolio of £131 billion at 31 March 2014 continues to cover short-term wholesale funding (STWF) by more than four times.
   
·
Liquid assets declined by £15 billion reflecting repricing and the consequential outflow of deposits with low liquidity value. These deposits are typically from sophisticated financial institution counterparties which require a high level of liquid assets to be held to mitigate the high risk of outflows under a stress.
   
·
The loan:deposit ratio increased 300 basis points to 97% from 94% at 31 December 2013 reflecting the bank’s continued focus on reducing excess funding.
   
·
The ratio of customer deposits to total funding improved slightly to 76% from 75% at 31 December 2013. Wholesale funding profile remained broadly stable with STWF excluding derivative collateral reducing marginally to £31 billion.


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

 
Liquidity value
 
Period end
 
Average
 
31 March
31 December
 
Q1
Q4
2014
2013
2014
2013
 
£m
£m
 
£m
£m
 
 
 
 
 
 
Cash and balances at central banks
62,847 
74,362 
 
65,472 
76,242 
Central and local government bonds
14,549 
15,607 
 
14,422 
16,495 
Treasury bills
- 
- 
 
- 
6 
 
 
 
 
 
 
Primary liquidity
77,396 
89,969 
 
79,894 
92,743 
Secondary liquidity (1)
53,418 
56,097 
 
54,551 
56,869 
 
 
 
 
 
 
Total liquidity value
130,814 
146,066 
 
134,445 
149,612 
 
 
 
 
 
 
 
 
 
 
 
 
Total carrying value
167,685 
184,233 
 
 
 

Note:
(1)
Includes assets eligible for discounting at the Bank of England and other central banks.




Appendix 2 Capital and risk management

Liquidity and funding risk (continued)

Funding metrics
The table below summarises the Group’s funding metrics.

 
Short-term wholesale
 
Total wholesale
 
Net inter-bank
funding (1)
funding
funding (2)
 
Excluding
Including
 
Excluding
Including
 
Deposits
Loans (3)
Net
 derivative
 derivative
 derivative
 derivative
 inter-bank
collateral
 collateral
collateral
 collateral
 funding
 
£bn
£bn
 
£bn
£bn
 
£bn
£bn
£bn
 
 
 
 
 
 
 
 
 
 
31 March 2014
31.0 
50.8 
 
101.5 
121.3 
 
15.6 
(18.1)
(2.5)
31 December 2013
32.4 
51.5 
 
108.1 
127.2 
 
16.2 
(17.3)
(1.1)
30 September 2013
34.6 
55.1 
 
113.6 
134.1 
 
18.1 
(16.6)
1.5 
30 June 2013
36.7 
58.9 
 
129.4 
151.5 
 
23.1 
(17.1)
6.0 
31 March 2013
43.0 
70.9 
 
147.2 
175.1 
 
26.6 
(18.7)
7.9 

Notes:
(1)
Short-term wholesale funding is funding with a residual maturity of less than one year.
  
(2)
Excludes derivative cash collateral.
  
(3)
Principally short-term balances.
  
 
 
 
 
 
 
 
 
Funding sources
 
 
 
 
 
 
 
The table below shows the Group’s principal funding sources excluding repurchase agreements.
 
 
 
 
 
 
 
 
 
 
31 March 2014
 
31 December 2013
 
Short-term 
Long-term 
 
 
Short-term 
Long-term 
 
 
less than 
more than 
Total 
 
less than 
more than 
Total 
1 year 
1 year 
1 year 
1 year 
 
£m 
£m 
£m 
 
£m 
£m 
£m 
 
 
 
 
 
 
 
 
Deposits by banks
 
 
 
 
 
 
 
 derivative cash collateral
19,757 
- 
19,757 
 
19,086 
- 
19,086 
 other deposits
14,055 
1,559 
15,614 
 
14,553 
1,690 
16,243 
 
 
 
 
 
 
 
 
 
33,812 
1,559 
35,371 
 
33,639 
1,690 
35,329 
Debt securities in issue
 
 
 
 
 
 
 
 commercial paper
1,104 
- 
1,104 
 
1,583 
- 
1,583 
 certificates of deposit
1,500 
52 
1,552 
 
2,212 
65 
2,277 
 medium-term notes
9,729 
33,137 
42,866 
 
10,385 
36,779 
47,164 
 covered bonds
1,762 
7,196 
8,958 
 
1,853 
7,188 
9,041 
 securitisations
512 
6,763 
7,275 
 
514 
7,240 
7,754 
 
 
 
 
 
 
 
 
 
14,607 
47,148 
61,755 
 
16,547 
51,272 
67,819 
Subordinated liabilities
2,346 
21,793 
24,139 
 
1,350 
22,662 
24,012 
 
 
 
 
 
 
 
 
Notes issued
16,953 
68,941 
85,894 
 
17,897 
73,934 
91,831 
 
 
 
 
 
 
 
 
Wholesale funding
50,765 
70,500 
121,265 
 
51,536 
75,624 
127,160 
 
 
 
 
 
 
 
 
Customer deposits
 
 
 
 
 
 
 
 derivative cash collateral (1)
6,747 
- 
6,747 
 
7,082 
- 
7,082 
 financial institution deposits
43,633 
1,870 
45,503 
 
44,621 
2,265 
46,886 
 personal deposits
183,427 
7,213 
190,640 
 
183,799 
8,115 
191,914 
 corporate deposits
157,177 
4,349 
161,526 
 
167,100 
4,687 
171,787 
 
 
 
 
 
 
 
 
Total customer deposits
390,984 
13,432 
404,416 
 
402,602 
15,067 
417,669 
 
 
 
 
 
 
 
 
Total funding
441,749 
83,932 
525,681 
 
454,138 
90,691 
544,829 


Note:
(1)
Cash collateral includes £6,094 million (31 December 2013 - £6,720 million) from financial institutions.



Appendix 2 Capital and risk management

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

Loans and related credit metrics
The tables below analyse gross loans and advances (excluding reverse repos) and the related credit metrics by division. Refer to the Group’s 2013 Annual Report and Accounts for a description of methodology relating to REIL and provisions.
 
 
 
 
Credit metrics
 
 
 
Gross loans to
REIL
Provisions
REIL as a %
 
 
 
of gross
Provisions
 
loans to
as a %
Impairment
Amounts
Banks
Customers
customers
of REIL
 charge
written-off
31 March 2014
£m
£m
£m
£m
%
%
£m
£m
 
 
 
 
 
 
 
 
 
UK Retail
1,014 
113,849 
3,336 
1,937 
2.9 
58 
59 
219 
UK Corporate
913 
103,189 
4,602 
2,272 
4.5 
49 
63 
109 
Wealth
1,566 
16,750 
260 
118 
1.6 
45 
(1)
1 
International Banking
7,869 
38,631 
10 
130 
- 
nm
11 
- 
Ulster Bank
1,715 
26,646 
4,728 
3,390 
17.7 
72 
47 
15 
US Retail & Commercial
225 
53,235 
1,317 
536 
2.5 
41 
73 
77 
Markets
12,132 
24,837 
97 
78 
0.4 
80 
2 
- 
Other
2,206 
5,394 
1 
64 
- 
nm
- 
- 
 
 
 
 
 
 
 
 
 
 
27,640 
382,531 
14,351 
8,525 
3.8 
59 
254 
421 
RCR
739 
34,043 
23,002 
15,719 
67.6 
68 
106 
792 
 
 
 
 
 
 
 
 
 
Group
28,379 
416,574 
37,353 
24,244 
9.0 
65 
360 
1,213 
 
 
 
 
 
Credit metrics
 
 
 
 
 
 
 
 
REIL as a %
 
 
 
 
 
 
 
 
 
of gross
Provisions
Quarter ended
 
Gross loans to
 
 
loans to
as a %
Impairment
Of which
Amounts
 
Banks
Customers
REIL
Provisions
customers
of REIL
charge
RCR (1)
written-off
31 December 2013
£m
£m
£m
£m
%
%
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
UK Retail
760 
113,152 
3,566 
2,106 
3.2 
59 
68 
- 
206 
UK Corporate
701 
102,547 
6,226 
2,833 
6.1 
46 
659 
410 
169 
Wealth
1,531 
16,764 
277 
120 
1.7 
43 
21 
- 
- 
International Banking
7,971 
35,993 
470 
325 
1.3 
69 
37 
52 
42 
Ulster Bank
591 
31,446 
8,466 
5,378 
26.9 
64 
1,067 
692 
123 
US Retail & Commercial
406 
50,551 
1,034 
272 
2.0 
26 
46 
- 
67 
Markets
12,579 
25,455 
338 
286 
1.3 
85 
25 
18 
- 
Other
2,670 
5,126 
1 
66 
- 
nm
1 
- 
- 
 
 
 
 
 
 
 
 
 
 
 
27,209 
381,034 
20,378 
11,386 
5.3 
56 
1,924 
1,372 
607 
Non-Core
431 
36,718 
19,014 
13,839 
51.8 
73 
3,207 
3,118 
586 
 
 
 
 
 
 
 
 
 
 
Group
27,640 
417,752 
39,392 
25,225 
9.4 
64 
5,131 
4,290 
1,193 

Note:
(1)
Pertaining to the creation of RCR and the related change of strategy.




Appendix 2 Capital and risk management

Credit risk (continued)

Loans and related credit metrics (continued)

Key points
·
Gross loans and advances to customers decreased by £1.2 billion to £416.6 billion. Adjusting for transfers to RCR and from Non-Core underlying loan growth improved, driven by strong mortgage lending in UK Retail, up £1.2 billion to £100.5 billion, and increased volumes in International Banking and US Retail & Commercial, with UK Corporate returning to modest net loan growth. This was offset primarily by disposals and run-off of RCR loans.
   
·
Commercial real estate (CRE) lending net of provisions decreased by £1.3 billion in the quarter to £38.1 billion. Provision coverage on CRE REIL was 65% compared with 66% at 31 December 2013.
   
·
The impairment charge of £360 million was significantly lower than the Q4 2013 charge of £841 million, excluding the RCR related impact, with improving trends in the UK retail and commercial businesses. The RCR charge of £106 million mainly related to CRE.
   
·
Write-offs in the quarter of £1.2 billion included £0.8 billion in RCR.
   
·
REIL decreased by £2.0 billion to £37.3 billion and represented 8.9% of loans as write-offs and repayments outpaced new defaulting balances, particularly within RCR (£1.1 billion). Excluding the impact of the RCR-creation related asset transfers, the decreases were in UK Corporate (£0.5 billion), UK Retail (£0.3 billion) and International Banking (£0.2 billion).
   
·
Provisions decreased by £1.0 billion mainly due to single name write-offs in RCR (£0.7 billion). Provision coverage increased slightly to 65% (31 December 2013 - 64%).


Appendix 2 Capital and risk management

Credit risk (continued)

Loans and related credit metrics: Loans, REIL, provisions and impairments 
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography (by location of lending office) for the Group.
 
 
 
 
Credit metrics
 
 
31 March 2014
 
 
 
REIL as a
Provisions
Provisions
 
 
Gross
 
 
% of gross
as a %
as a % of
Impairment
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
charge
written-off
£m
£m
£m
%
%
%
£m
£m
 
 
 
 
 
 
 
 
 
Central and local government
8,588 
4 
2 
- 
50 
- 
- 
- 
Finance
35,636 
525 
287 
1.5 
55 
0.8 
(3)
- 
Personal
- mortgages
148,401 
5,955 
1,741 
4.0 
29 
1.2 
16 
59 
 
- unsecured
28,411 
2,231 
1,765 
7.9 
79 
6.2 
106 
255 
Property
59,957 
19,390 
12,570 
32.3 
65 
21.0 
78 
574 
Construction
6,501 
1,327 
787 
20.4 
59 
12.1 
36 
22 
Manufacturing
21,944 
678 
520 
3.1 
77 
2.4 
(21)
31 
Finance leases (1)
13,442 
248 
175 
1.8 
71 
1.3 
- 
15 
Retail, wholesale and repairs
20,012 
1,216 
781 
6.1 
64 
3.9 
31 
28 
Transport and storage
15,990 
1,362 
642 
8.5 
47 
4.0 
24 
11 
Health, education and leisure
15,678 
1,182 
685 
7.5 
58 
4.4 
16 
18 
Hotels and restaurants
6,963 
1,402 
832 
20.1 
59 
11.9 
33 
8 
Utilities
5,204 
124 
77 
2.4 
62 
1.5 
- 
- 
Other
29,847 
1,635 
1,234 
5.5 
75 
4.1 
(35)
192 
Latent
- 
- 
2,084 
- 
- 
- 
79 
- 
 
 
 
 
 
 
 
 
 
 
416,574 
37,279 
24,182 
8.9 
65 
5.8 
360 
1,213 
 
 
 
 
 
 
 
 
 
of which:
 
 
 
 
 
 
 
 
UK
 
 
 
 
 
 
 
 
  - residential mortgages
111,089 
1,823 
306 
1.6 
17 
0.3 
7 
13 
  - personal lending
17,228 
1,883 
1,568 
10.9 
83 
9.1 
67 
216 
  - property
42,181 
8,811 
4,840 
20.9 
55 
11.5 
58 
466 
  - construction
4,809 
939 
528 
19.5 
56 
11.0 
28 
17 
  - other
110,854 
4,130 
2,932 
3.7 
71 
2.6 
71 
252 
Europe
 
 
 
 
 
 
 
 
  - residential mortgages
17,264 
3,159 
1,269 
18.3 
40 
7.4 
(15)
5 
  - personal lending
1,091 
135 
125 
12.4 
93 
11.5 
3 
6 
  - property
12,579 
10,480 
7,687 
83.3 
73 
61.1 
24 
104 
  - construction
1,340 
346 
227 
25.8 
66 
16.9 
8 
5 
  - other
22,370 
3,766 
3,592 
16.8 
95 
16.1 
54 
48 
US
 
 
 
 
 
 
 
 
  - residential mortgages
19,688 
956 
162 
4.9 
17 
0.8 
24 
41 
  - personal lending
9,001 
196 
55 
2.2 
28 
0.6 
36 
33 
  - property
4,590 
74 
18 
1.6 
24 
0.4 
(4)
1 
  - construction
326 
34 
24 
10.4 
71 
7.4 
- 
- 
  - other
28,716 
191 
599 
0.7 
314 
2.1 
8 
2 
RoW
 
 
 
 
 
 
 
 
  - residential mortgages
360 
17 
4 
4.7 
24 
1.1 
- 
- 
  - personal lending
1,091 
17 
17 
1.6 
100 
1.6 
- 
- 
  - property
607 
25 
25 
4.1 
100 
4.1 
- 
3 
  - construction
26 
8 
8 
30.8 
100 
30.8 
- 
- 
  - other
11,364 
289 
196 
2.5 
68 
1.7 
(9)
1 
 
 
 
 
 
 
 
 
 
 
416,574 
37,279 
24,182 
8.9 
65 
5.8 
360 
1,213 
 
 
 
 
 
 
 
 
 
Banks
28,379 
74 
62 
0.3 
84 
0.2 
- 
- 

Note:
(1)
Includes instalment credit.




Appendix 2 Capital and risk management

Credit risk (continued)

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

 
 
 
 
Credit metrics
 
 
31 December 2013
 
 
 
REIL as a
Provisions
Provisions
Quarter ended
Gross
 
 
% of gross
as a %
as a % of
Impairment
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
charge
written-off
£m
£m
£m
%
%
%
£m
£m
 
 
 
 
 
 
 
 
 
Central and local government
8,643 
2 
2 
- 
100 
- 
2 
- 
Finance
35,948 
593 
292 
1.6 
49 
0.8 
37 
60 
Personal
- mortgages
148,533 
6,025 
1,799 
4.1 
30 
1.2 
69 
122 
 
- unsecured
28,160 
2,417 
1,909 
8.6 
79 
6.8 
59 
195 
Property
62,292 
20,283 
13,189 
32.6 
65 
21.2 
3,590 
566 
Construction
6,331 
1,334 
774 
21.1 
58 
12.2 
151 
38 
Manufacturing
21,377 
742 
559 
3.5 
75 
2.6 
100 
20 
Finance leases (1)
13,587 
263 
190 
1.9 
72 
1.4 
14 
18 
Retail, wholesale and repairs
19,574 
1,187 
783 
6.1 
66 
4.0 
157 
23 
Transport and storage
16,697 
1,491 
635 
8.9 
43 
3.8 
392 
75 
Health, education and leisure
16,084 
1,324 
756 
8.2 
57 
4.7 
165 
46 
Hotels and restaurants
6,942 
1,427 
812 
20.6 
57 
11.7 
238 
86 
Utilities
4,960 
131 
80 
2.6 
61 
1.6 
(5)
22 
Other
28,624 
2,103 
1,370 
7.3 
65 
4.8 
341 
(78)
Latent
- 
- 
2,012 
- 
- 
- 
(173)
- 
 
 
 
 
 
 
 
 
 
 
417,752 
39,322 
25,162 
9.4 
64 
6.0 
5,137 
1,193 
 
 
 
 
 
 
 
 
 
of which:
 
 
 
 
 
 
 
 
UK
 
 
 
 
 
 
 
 
  - residential mortgages
110,515 
1,900 
319 
1.7 
17 
0.3 
(18)
67 
  - personal lending
17,098 
2,052 
1,718 
12.0 
84 
10.0 
18 
151 
  - property
44,252 
9,797 
5,190 
22.1 
53 
11.7 
1,221 
209 
  - construction
4,691 
941 
515 
20.1 
55 
11.0 
75 
38 
  - other
110,466 
4,684 
3,202 
4.2 
68 
2.9 
869 
104 
Europe
 
 
 
 
 
 
 
 
  - residential mortgages
17,540 
3,155 
1,303 
18.0 
41 
7.4 
18 
12 
  - personal lending
1,267 
141 
129 
11.1 
91 
10.2 
3 
6 
  - property
13,177 
10,372 
7,951 
78.7 
77 
60.3 
2,376 
343 
  - construction
979 
351 
227 
35.9 
65 
23.2 
58 
- 
  - other
22,620 
4,057 
3,498 
17.9 
86 
15.5 
379 
45 
US
 
 
 
 
 
 
 
 
  - residential mortgages
19,901 
951 
173 
4.8 
18 
0.9 
71 
42 
  - personal lending
8,722 
207 
45 
2.4 
22 
0.5 
21 
36 
  - property
4,279 
85 
19 
2.0 
22 
0.4 
(5)
6 
  - construction
313 
34 
24 
10.9 
71 
7.7 
18 
- 
  - other
27,887 
198 
589 
0.7 
297 
2.1 
(2)
67 
RoW
 
 
 
 
 
 
 
 
  - residential mortgages
577 
19 
4 
3.3 
21 
0.7 
(2)
1 
  - personal lending
1,073 
17 
17 
1.6 
100 
1.6 
17 
2 
  - property
584 
29 
29 
5.0 
100 
5.0 
(2)
8 
  - construction
348 
8 
8 
2.3 
100 
2.3 
- 
- 
  - other
11,463 
324 
202 
2.8 
62 
1.8 
22 
56 
 
 
 
 
 
 
 
 
 
 
417,752 
39,322 
25,162 
9.4 
64 
6.0 
5,137 
1,193 
 
 
 
 
 
 
 
 
 
Banks
27,640 
70 
63 
0.3 
90 
0.2 
(6)
- 

Note:
(1)
Includes instalment credit.



Appendix 2 Capital and risk management

Credit risk (continued)

Debt securities
The table below analyses debt securities by issuer and IFRS measurement classifications. US central and local government includes US federal agencies. Financial institutions includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS).
 
 
 
 
 
 
 
 
 
 
 
Central and local government
Banks
Other
Corporate
Total
 
 
financial
 
Of which
UK
US
Other
institutions
 
ABS
31 March 2014
£m
£m
£m
£m
£m
£m
£m
 
£m
 
 
 
 
 
 
 
 
 
 
Held-for-trading (HFT)
6,289 
10,251 
31,297 
1,955 
11,017 
2,145 
62,954 
 
8,215 
Designated as at fair value
- 
- 
108 
1 
18 
- 
127 
 
15 
Available-for-sale (AFS)
3,806 
11,937 
10,502 
5,115 
18,024 
166 
49,550 
 
25,100 
Loans and receivables
- 
- 
- 
116 
3,302 
153 
3,571 
 
3,186 
Held-to-maturity (HTM)
4,535 
- 
- 
- 
- 
- 
4,535 
 
- 
 
 
 
 
 
 
 
 
 
 
Long positions
14,630 
22,188 
41,907 
7,187 
32,361 
2,464 
120,737 
 
36,516 
 
 
 
 
 
 
 
 
 
 
Of which US agencies
- 
5,892 
- 
- 
13,318 
- 
19,210 
 
18,399 
 
 
 
 
 
 
 
 
 
 
Short positions (HFT)
(3,663)
(11,115)
(19,160)
(823)
(1,240)
(1,213)
(37,214)
 
(6)
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
Gross unrealised gains
140 
357 
508 
76 
427 
12 
1,520 
 
502 
Gross unrealised losses
(15)
(137)
(7)
(156)
(356)
- 
(671)
 
(629)
 
 
 
 
 
 
 
 
 
 
31 December 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-for-trading
6,764 
10,951 
22,818 
1,720 
12,406 
1,947 
56,606 
 
10,674 
Designated as at fair value
- 
- 
104 
- 
17 
1 
122 
 
15 
Available-for-sale
6,436 
12,880 
10,303 
5,974 
17,330 
184 
53,107 
 
24,174 
Loans and receivables
10 
1 
- 
175 
3,466 
136 
3,788 
 
3,423 
 
 
 
 
 
 
 
 
 
 
Long positions
13,210 
23,832 
33,225 
7,869 
33,219 
2,268 
113,623 
 
38,286 
 
 
 
 
 
 
 
 
 
 
Of which US agencies
- 
5,599 
- 
- 
13,132 
- 
18,731 
 
18,048 
 
 
 
 
 
 
 
 
 
 
Short positions (HFT)
(1,784)
(6,790)
(16,087)
(889)
(1,387)
(826)
(27,763)
 
(36)
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
Gross unrealised gains
201 
428 
445 
70 
386 
11 
1,541 
 
458 
Gross unrealised losses
(69)
(86)
(32)
(205)
(493)
(2)
(887)
 
(753)



Appendix 2 Capital and risk management

Credit risk (continued)

Key points
·
HFT: Holdings of UK and US government bonds, and ABS decreased, reflecting sales and continued focus on balance sheet reduction and capital management in Markets. The increase in other government bonds primarily reflected higher seasonal market activity in bond auctions compared with the year end. The increase in short positions in UK and US government bonds was driven by market conditions and customer demand, while that in other government reflected hedging of higher long positions.
   
·
AFS: Government securities decreased by £3.4 billion. The decreases in UK and US government bonds reflected net disposals as gains were realised, as well as transfers of UK government bonds to HTM in Treasury. Holdings in bank issuances fell by £0.9 billion due to maturities and disposals. The increase in financial institution securities of £0.7 billion was primarily due to a build up of ABS in US Retail & Commercial, partially offset by disposals in Treasury as risk exposure was reduced.
   
·
HTM: UK Government bonds in Treasury liquidity portfolio increased by £4.5 billion following transfers from AFS and purchases.
   
·
AFS gross unrealised gains and losses: The UK and US government decreases in unrealised gains reflect exposure reductions. The increases in bank and other financial institutions reflect maturities, disposals and market movements.



Appendix 2 Capital and risk management

Credit risk (continued)

Derivatives
The table below analyses the Group’s derivatives by type of contract. Master netting arrangements and collateral shown below do not result in a net presentation on the balance sheet under IFRS.
 
31 March 2014
 
31 December 2013
 
Notional (1)
Assets
Liabilities
 
Notional (1)
Assets
Liabilities
 
£bn
£m
£m
 
£bn
£m
£m
 
 
 
 
 
 
 
 
Interest rate (2)
32,950 
218,164 
208,837 
 
35,589 
218,041 
208,698 
Exchange rate
4,943 
52,236 
56,122 
 
4,555 
61,923 
65,749 
Credit
234 
4,425 
4,604 
 
253 
5,306 
5,388 
Equity and commodity
76 
2,469 
4,943 
 
81 
2,770 
5,692 
 
 
 
 
 
 
 
 
 
 
277,294 
274,506 
 
 
288,040 
285,527 
Counterparty mtm netting
 
(232,286)
(232,286)
 
 
(242,836)
(242,836)
Cash collateral
 
(24,292)
(18,730)
 
 
(24,288)
(20,429)
Securities collateral
 
(5,326)
(6,985)
 
 
(5,990)
(5,202)
 
 
 
 
 
 
 
 
Uncollateralised derivatives
 
15,390 
16,505 
 
 
14,926 
17,060 

 
Notes:
(1)
Includes exchange traded contracts of £2,736 billion (31 December 2013 - £2,298 billion) principally interest rate. Trades are margined daily hence carrying values were insignificant: assets - £16 million (31 December 2013 - £69 million) and liabilities - £216 million (31 December 2013 - £299 million).
(2)
Interest rate notional includes £19,667 billion (31 December 2013 - £22,563 billion) in respect of contracts with central clearing counterparties to the extent related assets and liabilities are offset.

Key points
·
Uncollateralised derivatives remained broadly stable.
   
·
Interest rate contracts: fair value remained broadly stable as the decrease due to the impact of currency retranslation and trade compression cycles was offset by the downward shift in yields, as Markets is materially positioned to pay floating and receive fixed. The decrease in notionals reflected increased participation in trade compression cycles.
   
·
Exchange rate, and equity and commodity contracts: Fair value decreased primarily due to the strengthening of sterling against the US dollar and euro.
   
·
Credit derivatives: The impact of trade compression cycles resulted in a significant decrease in fair values and notionals.



Appendix 2 Capital and risk management

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

Trading VaR
The table below analyses the internal VaR for the Group’s trading portfolios segregated by type of market risk exposure, and between Markets, RCR and Non-Core.
 
Quarter ended
 
31 March 2014
 
31 December 2013
 
31 March 2013
 
Average 
Period end 
Maximum 
Minimum 
 
Average 
Period end 
Maximum 
Minimum 
 
Average 
Period end 
Maximum 
Minimum 
Trading VaR (1-day 99%)
£m 
£m 
£m 
£m 
 
£m 
£m 
£m 
£m 
 
£m 
£m 
£m 
£m 
Interest rate
19.1 
14.0 
39.8 
10.9 
 
32.3 
44.1 
44.1 
19.1 
 
47.7 
38.9 
78.2 
35.4 
Credit spread
31.4 
25.6 
42.8 
24.1 
 
40.5 
37.3 
48.4 
33.3 
 
76.3 
70.8 
86.8 
69.8 
Currency
6.4 
3.7 
8.5 
3.7 
 
5.9 
6.5 
9.6 
3.6 
 
10.5 
13.0 
20.6 
4.6 
Equity
3.8 
4.5 
6.0 
2.7 
 
4.3 
4.1 
12.6 
3.2 
 
6.8 
8.5 
11.6 
4.2 
Commodity
0.5 
0.4 
0.8 
0.3 
 
0.7 
0.5 
2.5 
0.4 
 
1.5 
2.6 
3.7 
0.9 
Diversification (1)
 
(21.1)
 
 
 
 
(23.7)
 
 
 
 
(40.1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
36.3 
27.1 
58.2 
25.8 
 
58.6 
68.8 
69.7 
42.1 
 
106.9 
93.7 
118.8 
88.4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Markets
32.4 
23.6 
48.8 
22.6 
 
44.1 
52.4 
54.4 
35.6 
 
89.8 
77.3 
104.6 
74.7 
RCR (2)
8.0 
7.5 
16.2 
3.5 
 
n/a 
n/a 
n/a 
n/a 
 
n/a 
n/a 
n/a 
n/a 
Non-Core
n/a 
n/a 
n/a 
n/a 
 
15.7 
15.2 
17.7 
14.9 
 
22.0 
20.3 
24.9 
18.1 

Notes:
(1)
The Group benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
(2)
The detailed RCR perimeter was not finalised at the start of the year. As average, maximum and minimum VaR are measures that require daily data, they have been prepared on a best efforts basis.

Key points
·
The period end and average total VaR were lower in Q1 2014 compared with Q4 2013, driven by reductions in both credit spread and interest rate VaR.
·
The reduction in credit spread VaR was driven by risk reduction as well as CVA and FVA coming into the scope of the internal VaR measure in early February 2014. Previously, only associated hedges were included. This approach reflects a more comprehensive economic view of the risk.
·
The reduction in interest rate VaR was driven by de-risking and repositioning in the Rates business in Markets during January 2014.



Appendix 2 Capital and risk management

Market risk (continued)

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

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

 
CRR
Basel 2.5
 
31 March
31 December
 
2014
2013
 
£m
£m
 
 
 
Value-at-risk
367 
576 
Stressed VaR
856 
841 
Incremental risk charge
420 
443 
All price risk
5 
8 
Risk not in VaR (RNIV)
456 
218 
 
 
 
Total
2,104 
2,086 

Key points
·
Overall, the Pillar 1 model based PRR was stable during the quarter at £2.1 billion as the decrease in the VaR-based capital charge was offset by an increase in the RNIV based charge.
   
·
The decrease in the VaR charge was primarily driven by the removal of the CVA eligible hedges as noted above.
   
·
The RNIV charge increased as, following an agreement with the PRA, the materiality threshold previously in place was removed and all RNIVs are now capitalised.


Appendix 3

Inter-segmental transfers



Appendix 3 Inter-segmental transfers

Inter-segmental transfers at 1 January 2014
The tables below summarise the inter-segmental transfers underlying the creation of RCR and the cessation of Non-Core by donating division. RWAs, capital deductions and RWAe are on an end point CRR basis.

 
Creation of RCR
 
 
Cessation of Non-Core
 
Transfers
Transfers
 
 
 
 
Transfers
 
 
 from
 from other
Total
 
 
 
 from other
Transfers
 
 Non-Core
businesses
RCR
 
 
Non-Core
businesses
 to RCR
Funded assets
£bn
£bn
£bn
 
Funded assets
£bn
£bn
£bn
 
 
 
 
 
 
 
 
 
Ulster Bank
2.3 
2.5 
4.8 
 
Ulster Bank
2.4 
(0.1)
(2.3)
UK Corporate
1.0 
5.3 
6.3 
 
UK Corporate
6.4 
(5.4)
(1.0)
International Banking
10.8 
2.2 
13.0 
 
International Banking
14.3 
(3.5)
(10.8)
Markets
2.1 
2.7 
4.8 
 
Markets
2.8 
(0.7)
(2.1)
 
 
 
 
 
US Retail & Commercial
2.1 
(2.1)
- 
 
 
 
 
 
 
 
 
 
Total
16.2 
12.7 
28.9 
 
Total
28.0 
(11.8)
(16.2)
 
 
 
 
 
 
 
 
 
 
Transfers
Transfers
 
 
 
 
Transfers
 
 
 from
 from other
Total
 
 
 
 from other
Transfers
 
 Non-Core
businesses
RCR
 
 
Non-Core
businesses
 to RCR
RWAs
£bn
£bn
£bn
 
RWAs
£bn
£bn
£bn
 
 
 
 
 
 
 
 
 
Ulster Bank
1.2 
2.1 
3.3 
 
Ulster Bank
1.4 
(0.2)
(1.2)
UK Corporate
1.6 
8.0 
9.6 
 
UK Corporate
7.0 
(5.4)
(1.6)
International Banking
16.0 
4.3 
20.3 
 
International Banking
17.5 
(1.5)
(16.0)
Markets
4.9 
8.6 
13.5 
 
Markets
6.3 
(1.4)
(4.9)
 
 
 
 
 
US Retail & Commercial
2.0 
(2.0)
- 
 
 
 
 
 
 
 
 
 
Total
23.7 
23.0 
46.7 
 
Total
34.2 
(10.5)
(23.7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transfers
Transfers
 
 
 
 
Transfers
 
 
 from
 from other
Total
 
 
 
 from other
Transfers
 
 Non-Core
businesses
RCR
 
 
Non-Core
businesses
 to RCR
Capital deduction
£m
£m
£m
 
Capital deduction
£m
£m
£m
 
 
 
 
 
 
 
 
 
Ulster Bank
(54)
613 
559 
 
Ulster Bank
(54)
- 
54 
UK Corporate
16 
353 
369 
 
UK Corporate
16 
- 
(16)
International Banking
286 
201 
487 
 
International Banking
286 
- 
(286)
Markets
(5)
422 
417 
 
Markets
(5)
- 
5 
 
 
 
 
 
 
 
 
 
Total
243 
1,589 
1,832 
 
Total
243 
- 
(243)
 
 
 
 
 
 
 
 
 
 
Transfers
Transfers
 
 
 
 
Transfers
 
 
 from
 from other
Total
 
 
 
 from other
Transfers
 
 Non-Core
businesses
RCR
 
 
Non-Core
businesses
 to RCR
RWAe
£bn
£bn
£bn
 
RWAe
£bn
£bn
£bn
 
 
 
 
 
 
 
 
 
Ulster Bank
0.7 
8.2 
8.9 
 
Ulster Bank
0.8 
(0.1)
(0.7)
UK Corporate
1.8 
11.5 
13.3 
 
UK Corporate
7.2 
(5.4)
(1.8)
International Banking
18.9 
6.3 
25.2 
 
International Banking
20.4 
(1.5)
(18.9)
Markets
4.8 
12.8 
17.6 
 
Markets
6.2 
(1.4)
(4.8)
 
 
 
 
 
US Retail & Commercial
2.0 
(2.0)
- 
 
 
 
 
 
 
 
 
 
Total
26.2 
38.8 
65.0 
 
Total
36.6 
(10.4)
(26.2)


 
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: 02 May 2014
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary