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Banks
www.fitchratings.com 9 September 2011
UK
The Royal Bank of Scotland Group plc Full Rating Report
Key Rating Drivers IDRs Driven by Support: The Royal Bank of Scotland Group plc’s (RBSG) Long-Term IDR is
at its Support Rating Floor (SRF). In Fitch Ratings’ opinion, the systemic importance of RBSG
means that there is an extremely high probability of continued support for the group from the
UK authorities, if needed. Support has been provided via RBSG.
VR Improving: RBSG’s Viability Rating (VR) is assessed on a standalone basis and reflects its
strong franchises, reasonable capitalisation and good progress on transforming its balance
sheet, resulting in improved funding and liquidity. However, the VR also captures the risks
associated with the bank’s still considerable non-core assets, negative profitability, downside
risks to asset quality and strategic constraints arising from being state-controlled.
Delayed Return to Profitability: RBSG’s operating performance in non-core and core
(excluding Global Business and Markets (GBM) divisions is generally improving but is affected
by revenue volatility in the core GBM business. GBM had weak H111 performance due to
reduced risk positions. Return to profitability was further delayed by GBP850m payment
protection insurance (PPI) charges and GBP842m loss on the restructuring of Greek
government bonds incurred in H111.
Progress on Non-Core Deleveraging: Non-core assets more than halved to GBP113bn
(excluding derivatives) between end-2008 and end-H111, contributing to an improved operating
result. Reducing the remaining non-core portfolio is still pivotal to RBSG’s strategic plan, and
the pace of further deleveraging will depend on economic conditions. However, time pressure
for further deleveraging has reduced as the group’s funding profile has improved, allowing for a
degree of flexibility in the work-out of the non-core book.
Asset Quality Stabilising: Asset-quality problems appear to have peaked, but significant
downside risks still exist, given the uncertain operating environment and continuing problems in
the bank’s Irish portfolio. Single-name and sector concentrations built up through legacy
weaker risk management, particularly commercial property, remain a concern.
Funding and Liquidity Improved: Wholesale funding has been reduced through deleveraging
and an increase in deposits. Maturities have been extended, while short-term refinancing risks
were reduced through successful issuance in 2010 and H111. The liquidity portfolio fully
covered short-term wholesale funding (excluding derivative collateral) at end-H111.
Capital Reasonable: Although reasonable, Fitch expects regulatory capital ratios to be eroded
modestly in the short term. However, Fitch believes the group is relatively well positioned to
absorb additional regulatory requirements, assuming a return to sustainable profitability in 2012.
Execution Risks Still Material: Fitch believes that RBSG is well positioned to pursue its
strategic plan. Notable progress has already been made in reshaping the balance sheet,
embracing a stronger risk culture and improving risk-management tools. However, execution
risks, while reduced, are still material given the scale of the task, macroeconomic uncertainties,
regulatory challenges and potential government interference.
What Could Trigger a Rating Action Downward Pressure on SRF: Downward pressure on the SRF and IDRs could arise from
growing political will in the UK to reduce implicit state support for SIFIs. At the same time an
upgrade of RBSG’s VR would be driven by further success in implementing the group’s
strategic plan, an improving operating environment and a return to sustainable profitability.
Ratings
Foreign Currency
Long-Term IDR AA- Short-Term IDR F1+ Individual Rating C Viability Rating bbb Support Rating 1 Support Rating Floor AA-
Sovereign Risk Long-Term Foreign-Currency IDR AAA Long-Term Local-Currency IDR AAA
The Royal Bank of Scotland plc Long-Term IDR AA- Short-Term IDR F1+ Individual Rating C Viability Rating bbb Support Rating 1 Support Rating Floor AA-
Outlooks
Foreign-Currency Long-Term IDRs Stable Sovereign Long-Term Foreign-Currency IDR
Stable
Sovereign Long-Term Local-Currency IDR
Stable
Financial Data
The Royal Bank of Scotland Group plc
(statutory results)
(GBPm) 30 Jun
11 31 Dec
10
Total assets (GBPbn) 1,446.0 1,453.6 Published equity (GBPbn) 76.2 76.9 Operating profit (GBPm) -983 -1,191 Published net income (GBPm)
-1,408 -1,666
Comprehensive income (GBPm)
-471 -671
Tier 1 ratio (%) 13.5 12.9
Related Research
Major UK Banks: Semi-Annual Review and Outlook (April 2011)
Analysts
Svetlana Petrischeva +44 20 3530 1182 [email protected] Cynthia Chan +44 20 3530 1072 [email protected]
Banks
The Royal Bank of Scotland Group plc
September 2011 2
Profile
RBSG is a diversified financial services group with a long history. Its business is anchored in
the UK, where the group operates through two clearing banks, RBS and National Westminster
Bank Plc (NatWest, an RBS subsidiary). RBSG has significant commercial banking operations
in Ireland (through Ulster Bank Ltd; Ulster) and the United States (through Citizens Financial
Group Inc.; Citizens).
Following the acquisition of ABN AMRO Bank N.V. (ABN AMRO) in 2007, RBSG became the
largest recipient of UK state aid during the financial crisis. RBSG is now majority government-
owned (83%), and is the only participant in the UK Asset Protection Scheme (APS).
The restructuring of ABN AMRO was substantially completed in accordance with the
agreement between the RBSG, the Dutch state and Santander Group by end-Q110. RBS
Holding NV (RBSH, the holding company of ABN AMRO) is now 98% owned by RBSG and has
one direct subsidiary, The Royal Bank of Scotland N.V., (RBSNV), a fully operational bank. In
April 2011, RBSG announced the proposed transfers of a substantial part of business activities
of RBSNV to RBS. Description of RBSG’s divisions and the background on its receipt of UK
state aid can be found in Appendix 1 and Appendix 2.
Notable Progress in Implementing Strategic Restructuring Plan
RBSG’s restructuring plan, set out in 2009, aims to reduce risks and improve the group’s
liquidity and funding profile. The group targets a 15% or higher return on equity (ROE), an 8%
minimum core Tier 1 ratio (currently under review in light of new regulations), a 100%
loans/deposits ratio, a core cost/income ratio of below 50% and a GBP500bn gross reduction in
“funded” assets by end-2013 compared with end-2008.
Fitch believes the restructuring plan to be largely achievable. Management has made notable
progress in executing the strategic plan. In particular, non-core assets have more than halved
since 2008. The non-core division is on track to reduce its assets to less than GBP100bn by
end-2011, which would further improve RBSG’s funding and liquidity and facilitate a return to
sustainable profitability. However, besides general macroeconomic and market uncertainty,
Fitch believes that the group faces the following execution challenges:
Managing down the remaining GBP113bn non-core portfolio: RBSG disposed of some of
the riskier but also more liquid positions in the portfolio. However, the portfolio has become
more concentrated on less liquid commercial real-estate (CRE) exposures, which will take time
to work out. The timing of deleveraging depends on market conditions, and is thus uncertain.
Higher regulatory standards: UK banks face regulatory challenges in areas of financial
stability (Basel III), resolvability (the proposals by the UK Independent Commission on Banking
(ICB)) and in conduct matters (such as PPI). At a minimum, new regulation is likely to constrain
ROE improvements. Fitch believes that the ICB’s proposal to ring-fence UK retail operations,
while still lacking a sufficient level of detail, could potentially have more serious implications for
RBSG’s funding and risk profile.
EU divestiture programme: While on track, this is an unwelcome distraction for management.
Political interference: Still a risk, although direct interference so far, has been limited largely
to UK lending commitments, which RBS exceeded for the period March 2010 to February 2011.
Staffing: Retaining and attracting high-calibre staff is a challenging task amid the business
restructuring and political noise, especially on remuneration.
New culture: Despite notable progress in embracing a stronger risk culture and improved risk
infrastructure, it will take years for the new culture to be fully embedded in the organisation.
Related Criteria
Global Financial Institutions Rating Criteria (August 2011)
83% economic ownership by UK government
Broad client and product diversification
Strong franchise in UK
Strategy focused on client-driven businesses, lower risk profile and more traditional funding and balance sheet structure
Execution risk reduced but still material
Managing down large non-core asset pool pivotal to strategic plan
Banks
The Royal Bank of Scotland Group plc
September 2011 3
Performance
Figure 1
Pro Forma Income Statement
(GBPm) H111 H110 2010 2009 2008
Net interest income 6,535 7,218 14,200 13,567 15,764 Non-interest income, incl. 9,265 10,068 18,462 16,000 3,603 Net fee and commission income 2,759 2,946 5,983 5,948 6,434 Non-core credit market losses
a -68 -98 -31 -5,161 -7,739
Other income (loss) from trading 2,762 3,825 6,169 9,160 -1,345 Insurance net premium income 2,239 2,567 5,128 5,266 5,709 Other operating income 1,573 828 1,213 787 544 Total revenue 15,800 17,286 32,662 29,567 19,367 Attributable to core GBM 3,930 4,771 7,912 11,058 2,357 Attributable to core excluding GBM 10,406 10,742 21,786 20,879 20,042 Attributable to non-core 1,464 1,773 2,964 -2,370 -3,032 Operating expenses -8,013 -8,533 -16,710 -17,401 -16,188 Insurance net claims -1,705 -2,459 -4,783 -4,357 -3,917 Pre-impairment operating profit 6,082 6,294 11,169 7,809 -738 Impairment losses -4,211 -5,162 -9,256 -13,899 -7,432 Attributable to core GBM -13 -196 -151 -640 -522 Attributable to core excluding GBM -1,712 -1,872 -3,629 -4,038 -1,974 Attributable to non-core -2,486 -3,094 -5,476 -9,221 -4,936 Operating (loss)/profit 1,871 1,132 1,913 -6,090 -8,170 Attributable to core GBM 1,544 2,248 3,364 5,758 -2,153 Attributable to core excluding GBM 2,225 1,767 4,054 2,709 5,334 Attributable to non-core -1,898 -2,883 -5,505 -14,557 -11,351 Payment Protection Insurance costs -850 - - - - Sovereign debt impairment
b -842 - - - -
Integration and restructuring costs -353 -422 -1,032 -1,286 -1,357 Bonus tax -22 -69 -99 -208 - Amortisation of purchased intangibles -100 -150 -369 -272 -443 FV changes of own debt -141 450 174 -142 1,232 FV changes of APS CDS -637 - -1,550 - - Gain on redemption of own debt and pensions curtailment
255 553 553 5,938 -
Strategic disposals 27 -358 171 132 442 Tax -645 -932 -663 339 1,280 Write-down of goodwill and intangibles, net of tax - - -10 -363 -16,196 Profit/(loss) from discontinued operations, net of tax 31 -706 -28 -72 -86 Minority interest -19 635 -61 -648 -412 Preference share dividends - -124 -124 -935 -596 Net (loss)/profit attributable to shareholders -1,425 9 -1,125 -3,607 -24,306 a Included in trading income
b Including GBP109m Interest rate hedge adjustments on impaired available-for-sale Greek government bonds
Source: RBSG
Improving Core Profits Excluding GBM; Reducing Non-Core Losses
RBSG’s recent operating performance is generally improving in the non-core and core
(excluding GBM) divisions. However, performance is affected by revenue volatility in the core
GBM business, which contributed 25% of group revenue in H111 (2010: 24%; 2009: 37%).
About 68% of core GBM revenue in H111 came from trading income (2010: 63%; 2009: 71%).
Group revenue increased 10% in 2010 despite a 28% reduction in core GBM revenue, but was
down 9% in H111 (against H110). Net interest income increased 5% in 2010, benefiting from
an improved net interest margin (NIM), but decreased 9% in H111 as a result of the reduction
in non-core assets and resumed NIM pressure. Weak core GBM trading revenue had a
negative impact on non-interest income in both 2010 and H111. However, GBP5.1bn reduction
in credit-market write-downs from the non-core division benefited non-interest income in 2010.
Operating costs (excluding restructuring costs, amortisation of intangible assets and bonus tax)
declined both in 2010 and H111 (against H110) as a result of restructuring measures.
Impairment losses also fell, with 2010 impairments down 33% and H111 impairments down
18% (against H110). Impairment charges reduced in both core and non-core and across the
majority of divisions, with the exception of Ulster and Global Transaction Services (GTS).
Financial targets on track (in some cases ahead of schedule), but will remain sensitive to changes in global economic recovery and market conditions
Both core (excluding GBM) and non-core contributing to improvement in operating result
Exceptional and non-operating charges turned operating profits into net losses in 2010 and H111
GBM revenue likely to be weak in H211 and to continue to cause volatility in the income statement
Non-core losses reduced but still the main drag on earnings over the medium term
Presentation of Accounts RBSG’s statutory results since 2007 include the full consolidation of RBSH, while the interests of Santander and Fortis, and its successor the Dutch state, are included in minority interests.
The group also prepared pro-forma results for 2007-2010 that included only businesses that were retained by RBSG. The group no longer prepares pro-forma results as 2011 is the first full year following the completion of the restructuring of the ABN AMRO acquired businesses.
The analysis in this report is based on the pro-forma figures for 2008-2010; the attached spreadsheets are based on the statutory results.
Banks
The Royal Bank of Scotland Group plc
September 2011 4
Despite increased impairment charges in Ulster’s non-core book, the non-core business was
the main driver behind improved operating profit. The losses in the non-core division narrowed
by GBP9bn in 2010 and GBP1bn in H111 (against H110) as a result of reduced credit-market
write-downs, reduced total impairment charges and the substantially reduced asset base.
In the core business, GBM underperformed in 2010 relative to an exceptional 2009, had a good
start to the year in Q111 but had a 59% reduction in operating profit in Q211 (against Q111) as
RBSG reduced its market risk positions. GBM operating profit decreased by 31% in H111
(against H110). Excluding GBM, core operating profits were up 50% in 2010 and 26% in H111
(against H110; see Appendix 3 for divisional performance). UK retail and corporate delivered
strong results in both 2010 and H111. RBS Insurance was loss-making in 2010 but returned to
profit in Q111 and doubled its operating profit qoq in Q211.
US retail and commercial (R&C) returned to profit in 2010 and improving trends continued in
H111. GTS reported improved operating profit in 2010, while the performance in H111 (against
H110) was affected by the sale of Global Merchant Services in Q310 and a single name
impairment charge. Ulster suffered a significant deterioration in performance in 2010 and Q111,
but the operating loss narrowed in Q211.
Significant non-operating and exceptional items continue to turn RBSG’s operating profits into
net losses. In H111 RBSG booked GBP850m PPI charge and GBP842m loss on the
restructuring of Greek government bonds (including recycling of GBP733m cumulative losses
from available for sale reserves and GBP109m in interest rate hedge adjustments). In addition,
fair value (FV) changes to own debt and APS contributed to income volatility in 2010 and H111.
RBSG accounts for the APS as derivative which means that improvements in credit spreads
and the reduction in covered assets result in charges to the income statement.
Although there are still significant headwinds for the group, due to the uncertain economic
environment and market volatility, Fitch believes that the chances of a return to sustained
profitability have increased, especially as non-core assets have been substantially reduced.
Fitch believes that RBSG’s short-term performance will feature the following:
Continuing pressure on NIM: Liability margin pressure is unlikely to ease until interest rates
rise, while asset margin will need to see a stronger economic recovery, and demand for credit
in RBSG’s core markets to improve. NIM is also negatively affected by the need to keep a
significant amount of liquidity during a period of turbulence in funding markets.
Reducing operating costs: Efficiency will improve as the benefits of the integration of RBSNV
feed through the income statement. The run-down of non-core assets creates further scope for
cost-cutting. However, restructuring costs will remain a feature in the near term.
Reduced core impairment charges: Assuming positive credit trends continue, impairment
charges will continue to decrease. However, significant Irish and CRE exposures and core
portfolio vulnerabilities to fragile UK recovery create significant downside risks to any forecast.
Progress in UK and US R&C: Modest growth, operational leverage and improvement in
impairments should benefit profitability assuming sustainable economic recovery.
Weak/volatile performance of GBM: Markets remain unpredictable amid unresolved euro-
zone crises. GBM’s performance is likely to remain weak in H211 and volatile thereafter.
Reduced and more predictable non-core losses: In light of the reduced size of the portfolio,
impairments and write-downs should fall. Losses on disposal may still be significant. However,
with the level of deleveraging already achieved, the time pressure for further de-leveraging has
diminished, allowing for a degree of flexibility in the work-out of the non-core book. Fitch
believes that non-core losses will still be the main drag on earnings over the next few years.
Banks
The Royal Bank of Scotland Group plc
September 2011 5
Risk Management
Fitch believes that RBSG’s management has made significant progress in addressing
deficiencies in risk management. However, embedding the stronger risk culture, reducing
concentrations and upgrading systems, will take several years to complete.
Credit Risk – Stabilising But Irish and CRE Exposures Remain a Concern
Geographically, RBSG’s credit loan book is concentrated in UK (66%), US (14%), and Ireland
(9%). Personal lending accounted for 32% of gross loans (including reverse repos) at end-
Q111, and is heavily biased towards residential mortgages. In the UK, relatively low loan/value
ratios (LTVs; end-H111 average 59%), less aggressive risk appetite leading up to the crisis and
low interest rates support asset quality in the mortgage portfolio. In the US and Ireland, arrears
have risen more sharply, and a significant portion of these mortgages are riskier and have
higher LTVs. At Ulster, the average LTV was 75% at end-H111, and 39% of mortgages had
LTVs above 90%. At Citizens, the average LTV was 75% at end-H111, and home equity loans
(about USD24bn at end-H111) accounted for about 31% of the loan book.
Figure 2
Customer Loans by Industry (GBPbn) H111 (%) 2010 (%) 2009 (%)
Residential mortgages 150 26 147 26 141 23 Other personal lending 35 6 37 7 42 7 Property/construction 99 17 102 18 114 19 Finance 53 9 55 10 60 10 Government 8 1 8 1 8 1 Manufacturing 30 5 32 6 45 7 Services 114 20 118 20 134 22 Reverse repos 56 10 53 9 41 7 Other 21 4 22 4 26 4 Gross loans 566 100 573 100 611 100
Source: RBSG, Fitch
Although the corporate portfolio is fairly well diversified by borrower, some single-name and
portfolio concentrations have arisen from the ABN AMRO acquisition. There is also a very
significant sector concentration in CRE.
The CRE lending portfolio totalled GBP85bn at end-H111 (end-2010: GBP90bn), with half
being managed by the non-core division. The CRE portfolio is concentrated in UK (55%,
excluding Northern Ireland), Northern Ireland and the Republic of Ireland (combined 19%),
Western Europe (15%) and the US (9%) The development portion of the portfolio accounted for
GBP19bn, or 23% of the total. However, 49% of this was in Ireland (Northern and the Republic),
which is experiencing a significant property market dislocation. Fitch expects CRE market
conditions to remain challenging in RBSG’s key geographies, while the prospects of the
reduction in CRE exposure to be hampered by the lack of market liquidity, especially in Ireland.
Impaired Loans – Likely to Have Peaked
RBSG reports “risk elements in lending” (REIL, which include impaired loans as well as
unimpaired loans 90 days past due) and “potential problem loans” (PPL). REIL increased by
GBP3.6bn in 2010, GBP2.4bn in Q111 and GBP1.4bn in Q211, predominantly due to
continuing asset-quality problems at Ulster (2010: GBP4.6bn increase in REIL; Q111:
GBP2.2bn; Q211: GBP1.0bn), while PPL decreased from GBP924m at end-2009 to GBP481m
at end-H111. Coverage ratios improved slightly across the portfolio as a whole, improved at a
faster rate in non-core, and deteriorated in core in 2010, reflecting asset-value changes.
Ulster’s REIL was 32% of gross loans at end-H111, and was 51% covered by provisions.
Having deteriorated very sharply in 2009, asset quality showed signs of stabilisation in 2010
and H111. Customer loans in the ‘B’ range and below (AQ7-AQ10) were flat at end-2010
versus end-2009 at 23%. In the UK, there are some signs of improvement in the R&C book,
Figure 3
Asset Quality (GBPbn) H111 Q111 2010 2009
Impaired loans
39.6 38.1 35.7 31.8
REIL 42.4 41.0 38.6 35.0 REIL and PPL
42.8 41.6 39.2 35.9
(%) REIL/gross loans
8.3 7.9 7.3 6.1
Core 4.2 4.1 3.7 2.8 Non-core 26.1 23.0 20.7 15.1 REIL and PPL/gross loans
8.4 8.0 7.4 6.2
Provisions/REIL
49 47 47 44
Core 50 49 51 56 Non-core 48 45 44 37
Source: RBSG
Stabilising credit quality indicators
Credit-market exposures significantly reduced
Credit risk remains elevatedstill high due to portfolio concentrations and fragile key economies
Commercial real estate and Ulster createing significant downside risk
Peripheral Eurozone exposure is primarily though Ulster’s loan book
APS providesing a cushion to cover potential losses under extreme economic stress (not currently anticipated)
Market risk positions reduced significantly reduced in Q211
Operational risk heightened by restructuring plans
Banks
The Royal Bank of Scotland Group plc
September 2011 6
especially within the retail unsecured portfolio, although the pace of further improvement
depends on the fragile economic recovery and is vulnerable to UK government austerity
measures and monetary tightening. Asset quality in US R&C is also stabilising, although further
improvement in the Citizens retail book depends on the recovery of the US job market and
stabilisation of real-estate values. Although GBM’s asset quality appears to be improving, Fitch
believes it to be vulnerable to problems with single-name concentrations, meaning that
impairment charges could be lumpy.
Ulster’s GBP52bn loan portfolio consists predominately of CRE loans and residential
mortgages (35% and 42% respectively at end-H111), leaving RBSG vulnerable to further
deterioration in the fragile Irish economy and the distressed Irish property market. Fitch
believes that Ulster may still have to increase the level of provisioning in its CRE and mortgage
exposures; however, the rate of impairment is going to be significantly less.
Fitch believes that the level of impaired loans at group level is likely to have peaked. However,
risk remains high due to portfolio concentrations and fragile key economies. There is still
significant downside risk from Ulster and CRE exposures; however, it should be manageable,
in light of the level of provisions already taken.
Peripheral Eurozone Exposure – Mostly Through Irish Loan Portfolio
RBSG’s exposure to debt and derivatives in peripheral Eurozone countries was a very high
GBP76bn at end-H111 (see Figure 4). However, about 54% of this amount was through loan
exposure to corporate and personal customers in the Republic of Ireland (ROI) where problems
have already been well recognised and significant impairments taken, and restructuring
measures are under way.
Figure 4 Peripheral Eurozone Exposure at End-H111 (GBPbn) ROI Spain Italy Greece Portugal Total
Lending 43.5 8.5 3.6 0.5 0.7 56.7 HFT debt securities (net) 0.5 -0.8 2.0 0.3 0.0 1.9 AFS and LAR securities 0.5 7.2 1.8 0.7 0.2 10.5 Derivatives and reverse repo 2.3 2.0 2.2 0.2 0.4 7.1 Total debt and derivatives 46.8 16.9 9.6 1.7 1.3 76.2 of which to central and local government 0.2 -0.9 2.9 1.0 0.1 3.3 of which to central banks 1.8 0.0 0.1 0.0 0.0 1.9 of which to other banks and FIs 2.7 9.6 3.2 0.2 0.5 16.1
HFT – Held for trading; AFS – available for sale; LAR – Loans and receivables Source: RBSG
Sovereign exposure to the peripheral Eurozone region was manageable at GBP3.2bn,
including a GBP0.9bn short position in Spain, GBP2.9bn exposure to Italy and GBP1bn
exposure to the Greek sovereign (consisting of GBP733m in impaired AFS bonds and
GBP248m in HFT debt securities).
RBSG took a relatively conservative approach to impairing its exposure to Greek sovereign
bonds by impairing about half of the nominal exposure, well above the level of agreed
economic loss at 21%, although consistent with the market value of the exposure at the
reporting date. RBSG’s sovereign exposure to Ireland, Italy, Portugal and Spain was not
considered impaired at end-H111.
RBSG also had GBP1.8bn exposure to the Central Bank of Ireland, primarily through a cash
placement by Ulster. Exposure to banks and financial institutions in the region was a large
GBP16.1bn but consisted predominantly of Spanish covered bonds and collateralised reverse
repo and derivatives exposures.
APS – Now a Liability
APS-covered assets declined significantly to GBP168bn at end-H111 from GBP195bn at end-
Banks
The Royal Bank of Scotland Group plc
September 2011 7
2010 (end-2009: GBP231bn), primarily as a result of the run-off and early repayments. The
non-core division held about half of APS-covered assets at end-H111. The net triggered
amount under the APS was GBP30bn at end-H111, or half of the first-loss piece of GBP60bn.
Fitch believes it is unlikely that the first-loss piece will be exceeded. However, should this
extreme scenario materialise, the APS would offer significant downside protection.
However, this protection comes at a significant cost (GBP700m fees per year) and causes
income volatility. Cumulative APS derivative charges were GBP2.2bn at end-H111. The APS
derivative asset of GBP550m at end-2010 decreased to a liability of GBP87m at end-H111.
Fitch expects RBSG to consider exiting the APS after the minimum cumulative GBP2.5bn fee is
paid (expected in H211) and subject to favourable market conditions and regulatory approval.
Other Earning Assets – Significantly De-Risked
RBSG holds a sizable portfolio of debt securities (GBP244bn at end-H111, up from GBP217bn
at end-2010) that is split almost equally between AFS and HFT. Only around 3% of debt
securities are level 3, where valuation uses at least one input not based on observable market
data. The composition of the portfolio is typical of a large bank (H111: 57% central and local
governments; 31% asset-backed securities (ABS); 8% financial institutions; and 4% corporate
issuers). About 76% of government debt securities are ‘AAA’ rated.
The ABS portfolio (GBP75bn at end-H111) includes residential mortgage-backed securities
(RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations
(CDOs), and collateralised loan obligations (CLOs; see Figure 5). About 88% of ABS securities
are rated ‘A’ and above, with only 8% rated non-investment grade or unrated. About 47% of the
ABS portfolio at end-H111 was in RMBS either guaranteed or sponsored by G10 governments
(mostly US and Dutch).
The equities portfolio (GBP25bn at end-H111) is primarily held in the trading book, with only
8% of the portfolio accounted for as AFS and level 3 securities accounting for 5% of the
portfolio.
RBSG made significant progress in reducing its riskier credit-market exposures, such as some
riskier ABS classes, exposure to monolines, credit derivative product companies (CDPCs), and
credit valuation adjustment (CVA; see Figure 6). The sum of these exposures more than halved
from end-2008.
The GBM business means that RBSG is a significant participant in the derivative markets –
mainly interest-rate swaps. Taking into account master netting agreements and cash collateral,
the net exposure was 75% of Tier 1 capital at end-H111.
Market Risks – Reduced Significantly in Q211
RBSG manages market risk in its trading and non-trading portfolios on a centralised basis
using value-at-risk (VaR), stress testing, sensitivity and scenario analyses and other
frameworks for limit-setting purposes. The group is in the process of implementing a system of
dynamic limit setting that takes into account the changes in the liquidity of the securities.
RBSG’s VaR model uses one day time horizon, 99% confidence level (changed from 95% in
June 2009) and utilises historical data from the previous two years. A significant effort was
made in 2009-2010 to improve the accuracy of the model. The Financial Services Authority’s
(FSA) green model status (i.e., with four or fewer back-testing exceptions in a 12-month period)
was maintained throughout 2010.
The VaR disclosure is broken down into trading and non-trading as well as core and non-core
(see Appendix 5). RBSG’s market risk exposure arises mainly from its trading activities, which
now emphasise client flow business. Non-trading VaR relates to reclassified assets, money-
market business and the management of treasury funds. RBSG excluded the structured credit
Figure 5
Sub-prime
RMBS
2%
CDOs
5%
Other
ABS
9%
CLOs
7%
CMBS
6%
Prime
RMBS
9%
ABS Portfolio at End-H111
Source: RBSG, Fitch
G10
government
RMBS
47%
Covered bond
11%
Non-conforming
RMBS
4%
Figure 6 Credit Market Exposures (GBPbn) H111 2008
H111 vs. 2008 (%)
US subprime RMBS
0.1 0.4 -68.4
US non-conform. RMBS
0.8 1.1 -23.6
US CMBS 1.4 1.1 19.3 ABS CDO and CLO
3.4 6.3 -46.1
CVA 4.6 9.0 -49.4 Monoline 1.3 4.8 -73.9 CDPCs 0.7 3.5 -80.9 Total 12.2 26.2 -53.4 % CT1 capital
25.4 77.0
Source: RBSG
Banks
The Royal Bank of Scotland Group plc
September 2011 8
portfolio and LAR from the calculation of non-trading VaR in 2010, which had the effect of
significantly reducing reported non-trading VaR. Core and non-core businesses make about
equal contributions to the trading VAR, while non-trading VAR is mostly attributable to the core
business.
Credit spreads are the largest components of both trading and non-trading risks, although
credit spreads component of trading VAR reduced significantly in H111. The sale of RBS
Sempra Commodities in 2010 resulted in the decrease of commodities trading VaR. Both
trading and non-trading VaR statistics in H111 had a positive effect from the exclusion of the
period of extreme volatility from the two year time series used in the calculation.
Trading VaR increased in Q310 due to the unwinding of complex structured positions in the
non-core business, highlighting execution risks associated with the run-down of the non-core
book. However, the position was reduced when the sale of assets was completed in October
2010. Trading VaR was relatively stable in Q111 but decreased significantly in Q211 as GBM
responded to a volatile and risk-averse environment by managing down its risk positions.
Average trading VaR increased by 1% in Q111 and halved in Q211, while maximum trading
VaR decreased 5% in Q111 and 35% in Q211.
Non-trading maximum VaR reduced in 2010 as a result of the implementation of relative price-
based mapping and the sale of illiquid AFS securities in the US mortgage business, but almost
doubled in Q111 (primarily due to a change in the time series used for the Dutch RMBS). It
returned to normal levels in Q211 as volatile market data continued to drop out of the time
series.
Operational Risks – Remain Heightened
As a universal bank, RBSG is subject to substantial operational risk and numerous reviews and
investigations by authorities in numerous jurisdictions and business areas. Fitch believes that
operational risks are heightened at RBSG due to the disruption to staff and processes caused
by the restructuring plan, the run-down of non-core assets and the unwinding of complex
market positions. The operation of the APS subjects RBSG to additional operational risks, as
does the large-scale transfer of assets and liabilities from RBSNV to RBS.
RBSG uses the standardised approach to calculate operational risk regulatory capital, but is
considering adopting the advanced measurement approach.
Funding, Liquidity and Capital
Funding and Liquidity: Benefit from Reshaped Balance Sheet
RBSG has made notable progress in reshaping its balance sheet and improving the quality of
its funding and liquidity profile (see Figure 8).
Fitch expects RBSG to achieve its 2013 target of a 100% loans/deposits ratio through the
continuous run-down of the wholesale funded non-core assets and modest deposit growth. The
loans/deposits ratio (excluding repos) improved to 114% at end-H111, largely through de-
Figure 7 Market Risk Indicators RBSG
(‘bbb-’)
Barclays
(‘aa−’)
JPM
(‘aa−’)
Deutsche
(‘aa−’)
BNP Paribas
(‘aa−’)
Q211 2010 Q211 2010 Q211 2010 Q211 2010 Q211 2010
Investment banking/net revenue (%) 18.8 24.8 36.5 42.0 27.3 25.5 46.5 61.1 16.3 17.4 Net derivatives/reported Tier 1 (%) 75 109 79 79 52 56 116 133 n.a. n.a. High VaR/reported Tier 1 (%) 0.20 0.42 0.19 0.20 0.09 0.13 0.21 0.30 n.a. 0.11
Notes: High VaR takes the firm-reported total high trading VaR (scales that up to a 99% confidence level and for 1 day). Historical periods used in bank VaR models vary: Barclays – two years; RBSG – 500 days; JPM, Deutsche and BNP Paribas – 1 year. For BNPP, net derivatives and interim high VaR are not disclosed. For Barclays and Deutsche, half-year VaR figures were used. Investment banking revenue excludes fair value of own debt, where possible Source: Fitch, company annual reports
Notable progress in re-shaping funding and liquidity profile
Short-term refinancing risks significantly reduced due to successful issuance in 2010 and H111
Capital at solid levels following government recapitalisation programmes
EBA stress test passed with 6.3% Core Tier 1 ratio under two modelled two year adverse scenario
Relatively well positioned to absorb CRD3/4 impact on capital assuming return to sustainable profitability
Contingent capital providing comfort for catastrophe scenario
Banks
The Royal Bank of Scotland Group plc
September 2011 9
leveraging, and was already 96% excluding non-core business. Although RBSG is still reliant
on wholesale funding for a large portion of its balance sheet, the funding structure is now
reasonably consistent with the bank’s business model and asset structure. RBSG has
significantly extended the maturity profile of its wholesale funding. Management estimated the
net stable funding ratio (according to Basel III guidance) at 97% at end-H111 (end-2010: 101%).
Figure 8 Funding Mix (GBPbn) H111 (%) 2010 (%) 2009 (%) 2008 (%)
Interbank 72 8 66 8 116 13 179 16 Debt securities 214 25 218 26 246 27 269 25 Commercial paper 22 3 26 3 44 5 70 6 Certificates of deposits 35 4 38 4 58 6 74 7 Medium-term notes 132 15 131 15 126 14 109 10 Securitisations 17 2 19 2 18 2 17 2 Covered bonds 7 1 4 0 0 0 0 0 Subordinated debt 26 3 27 3 32 3 44 4 Wholesale funding 312 36 311 36 394 43 492 45 Customer deposits 429 50 429 50 414 45 460 42 Customer repos 89 10 82 10 68 7 58 5 Bank repos 35 4 33 4 38 4 84 8 Total funding
a 865 100 855 100 914 100 1,094 100
Net loans/deposits (excl. repos) (%) 114 117 166 151 a Excludes derivatives and trading balances
Source: RBSG, Fitch
During the crisis, RBSG issued a significant amount of debt under the UK Government’s Credit
Guarantee Scheme (CGS), which will mature in Q112 and requires refinancing. RBSG had
about GBP41bn of debt issued under the CGS at end-2010 (end-2009: GBP45bn), with most
significant maturities being in Q411 (GBP19bn) and Q112 (GBP16bn). Although funding
markets remain disrupted by the continuing Eurozone sovereign-debt crisis, RBSG’s short-term
refinancing risks have reduced significantly as a result of successful issuance in 2010 and
H111.
RBSG has been successfully accessing the funding markets with GBP38bn of term debt
issuance in 2010 (exceeding its GBP20 to GPP25bn target for the year) and pre-funded a
significant portion of its full year GBP23bn issuance target for 2011 by issuing GBP18bn in
H111. Utilisation of central bank funding was reduced to GBP19bn at end-Q111 from GBP26bn
at end-2010 and GBP48bn at end-2009.
RBSG had GBP155bn of available liquidity at end-H111 (versus GBP150bn long term target),
which fully covered its short term wholesale funding (excluding derivative collateral) of
GBP148bn. The liquidity portfolio is high quality and held predominantly in cash (38%),
government securities (41%), and unencumbered collateral (21%). The securities portfolio
included GBP35bn of FSA-eligible government bond portfolio.
RBSG’s senior debt is generally raised at operating-company level, and only a very small
amount of debt is outstanding at group level. A holding-company liquidity policy requires the
maintenance of sufficient resources to cover the next 12 months of cash outflows. There is no
double leverage, and the double leverage ratio is projected to be stable at about 90% in 2012.
Capital: Relatively Well Positioned to Absorb Regulatory Losses
RBSG’s budgets an internal capital buffer of at least 0.5% above the individual capital guidance
set by the FSA and other regulators. However, there is some flexibility in the subsidiary capital
policy. The majority of RBSG uses the advanced internal ratings-based approach for
calculating risk-weighted assets (RWAs) for credit risk. Exposures held at RBSNV moved from
the Basel I to Basel II approach at end-H110. Citizens will migrate in line with the final rules
regarding Basel II implementation in the US.
Figure 9
0% 50% 100%
H111
2009
2008
<1 year 1-5 years >5 years
Wholesale Funding
Maturitiesª
a Excluding interbank deposits
Source: RBSG, Fitch
Banks
The Royal Bank of Scotland Group plc
September 2011 10
Fitch believes RBSG’s capital position to be solid following government recapitalisation
programmes. RBSG repurchased GBP3.4bn of Tier 1 and GBP2.4bn of Tier 2 securities in
2010, realising a net Core Tier 1 (CT 1) benefit of around GBP1.2bn. An additional GBP0.8bn
of CT 1 capital was generated in 2010 as holders of preference shares exercised their right to
convert to ordinary shares (triggered by RBSG not calling the instruments). However, 2010 loss
outweighed the positive effect of the repurchase of subordinated securities and the bank’s CT 1
ratio deteriorated slightly to 10.7% at end-2010 on both a statutory and pro forma basis (see
Figure 10). Despite reported net losses for H111 the CT 1 ratio strengthened to 11.1% at end-
H111. This was achieved as a result of 7% reduction in RWAs as RBSG managed down
market risk positions in GBM and continued to run down non-core assets.
In July 2011, RBSG passed the stress tests undertaken by the European Banking Authority
(EBA) with core Tier 1 ratio of 6.3% under the modelled two-year adverse scenario (above 5%
minimum requirement) and without the need to draw on its GBP8bn contingent capital facility or
receive payments under APS. Although the result was the worst among UK tested banks, Fitch
notes that EBA used a static balance-sheet approach in its stress test and did not allow for the
mitigating effect of actions already taken to reduce some of the riskier exposures and further
balance-sheet transformation planned by the group.
Fitch expects capital ratios to deteriorate in the coming years due to the growth in R&C and the
need to absorb additional regulatory capital requirements. Management estimates GBP25bn-
30bn inflation in RWAs in 2011 arising from the implementation of the Capital Requirements
Directive (CRD) 3 and Basel 2.5 changes (market risk and re-securitisations). Management
estimates the total impact of CRD 3/4 implementation on RWAs at GPB88bn-100bn, with the
corresponding reduction in CT 1 ratio of about 1.3 percentage points (pp). Moreover, the
deduction of deferred tax assets and insurance subsidiary capital under Basel III would have a
significant impact on the RBSG’s regulatory capital position. However, the planned disposal of
the insurance business will mitigate some of this effect.
Fitch believes that, although the run off of non-core assets will partially mitigate the uplift in
RWAs (due to CRD 3/4 and the growth in R&C business), potential losses on disposal could
offset the capital relief benefit. The potential exit from the APS would result in further inflation of
RWAs (the APS provided capital relief for GBP95bn of RWAs at end-H111 and benefited the
core Tier 1 ratio by 1.3pp). This would require regulatory approval and would be subject to
RBSG meeting its capital requirements. Although RBSG is relatively well positioned to absorb
the CRD 3/4 impact on capital ratios, a return to sustainable profitability and positive internal
capital generation are needed for capital ratios to improve.
Fitch views positively the GBP8bn contingent capital from the UK government. The facility
provides catastrophe insurance, although Fitch believes that it is unlikely that the facility will be
used, especially as it has a low trigger point (5% CT 1 ratio). However, the terms of the facility
include restrictions on payments on RBSG’s hybrid instruments should its CT 1 ratio fall below
6%. The ratings of RBSG’s hybrids securities reflect the European Commission-required two-
year coupon deferral (expected to be lifted in 2012) or the existence of “must pay” features.
Figure 10 Pro Forma Capital Ratios (GBPbn) H111 2010 2009
Credit 366.1 383.0 410.4
Counterparty 66.1 68.1 56.5 Market 58.6 80.0 65.0 Operational 37.9 37.1 33.9 Total pre-APS RWAs
528.7 568.2 565.8
APS relief -95.2 -105.6 -127.6 Total RWAs 433.5 462.6 438.2 CT 1 capital 48.0 49.3 48.2 CT 1 ratio (%)
11.1 10.7 11.0
Tier 1 capital 58.4 59.8 62.9 Tier 1 ratio (%)
13.5 12.9 14.4
Source: RBSG
Banks
The Royal Bank of Scotland Group plc
September 2011 11
Appendix 1: Organisational Structure
RBSG’s customer-focused divisions are supported by a business-services division that
provides technology, account management, money transmission, property and other services,
through a single platform. The group’s activities are now organised into nine business divisions.
UK Retail: The group offers a full range of services through the RBS and NatWest brands,
utilising the UK’s largest branch and ATM network as well as telephone and internet channels.
UK Corporate: The largest provider of banking services to the UK SME, commercial and
corporate sector, with an SME market share ranging between 25%-30%.
Wealth: RBSG provides private banking and investment services through several channels
and brands: Coutts & Co, Adam & Company in UK; RBS Coutts internationally and offshore
businesses, RBS International, NatWest Offshore, and Isle of Man Bank.
GBM: GBM provides debt and equity finance (origination, trading, distribution and structuring of
a broad range of asset classes), risk management and investment services to financial
institutions and large businesses in the UK and globally (39 countries). It is organised along six
main business lines: rates flow trading; money markets; currencies and commodities; equities;
credit and mortgage markets and portfolio management and origination. RBSG ranked 10th
among global debt capital markets book-runners in 2010.
Global Transaction Services (GTS): GTS provides global payments, cash and liquidity
management, trade finance, and card services across 128 countries. US institutional fixed-
income activities are carried out through RBS Securities.
Ulster Bank: Ulster Bank is the group’s main European operation and provides a wide range of
retail and wholesale financial services in the Republic of Ireland and Northern Ireland, and is
the third-largest player in these combined markets.
US R&C: In the US, RBSG’s prime vehicle is Citizens, a US bank holding company operating
through Citizens Bank, Charter One and RBS Citizens brands in retail and corporate banking
markets. Over many years, Citizens has grown rapidly (through acquisitions and organically) to
create a strong franchise throughout 12 north-eastern and mid-western states, and is the 10th-
largest US bank by deposits.
RBS Insurance: This division sells and underwrites retail and SME insurance policies directly,
over the telephone and the internet, as well as through a network of brokers and intermediaries.
Its main brands are Direct Line Insurance, Churchill, Privilege, Green Flag and NIG. In the UK,
the group is the leading car insurer and the number two non-motor insurer.
Non-Core: GBP258bn of assets (excluding derivatives, or 30% of group pro-forma RWAs at
end-2008) were transferred in H109 to this newly-created division. The plan was to reduce risk
in a capital efficient manner and taking into account the earnings volatility. Assets included
businesses and higher risk asset portfolios, such as monolines, CDPCs, CDOs, ABS,
leveraged finance exposures, and some CRE. Other divisions contributed loan books no longer
considered strategic. Assets have more than halved since 2008, but reduction in RWAs was
only 27% primarily due to increase in risk weights. The main asset reduction was in corporate
exposure (including leveraged finance) and markets, while CRE was reduced at a lower pace.
Figure 11
1%
4%11%
3%
26%
30%8%
2%
15%
24%
2%
7%
10%
4%
27%
2%
9%
15%
UK retail UK corporate Wealth
GBM GTS US R&C
Ulster Other Non-core
RWAs by DivisionExternal -H111, Internal - FY08
Source: RBSG, Fitch
Figure 12 Non-Core Assets
(GBPbn) H111 FY08
H111 vs.
FY08
CRE 37 63 -42 Incl. Ulster 13 9 4 Corporate 50 112 -55 SME 3 6 -55 Retail 8 21 -62 Other 2 9 -74 Markets 13 47 -73 Total (excl. der.) 113 258 -56 Total (incl. der.) 135 343 -61 RWAs 125 171 -27
Source: RBSG
Banks
The Royal Bank of Scotland Group plc
September 2011 12
Appendix 2: Background to UK State Aid
In October 2008, the UK government initiated a bank recapitalisation programme as part of its
actions to stabilise the UK banking sector. The government became the majority shareholder
(58%) in RBSG following a very low take-up of the group’s GBP15bn share placing and open
offer in November 2008, which the state had underwritten. Subsequently, the holding increased
to 70.3% when RBSG replaced the government’s GBP5bn preference shares (also acquired in
November 2008) with new ordinary shares.
In terms of economic rights, state ownership is now about 83% after an additional GBP25.5bn
capital was injected as part of the APS agreement and the conversion of privately held
preference shares in H110. The GBP25.5bn capital injection was in the form of B shares, which
do not carry voting rights but rank pari passu with ordinary shares, have enhanced dividend
rights, are convertible into ordinary shares and are included in core Tier 1 capital. The
government capped its ordinary share-holding, and therefore voting, rights at 75%. UK
Financial Investments (UKFI) manages the government’s investments in RBSG and other UK
financial institutions.
Asset Protection Scheme
The APS announced in February 2009 was refined in November 2009 and involved GBP243bn
(as at end-Q309) of assets being covered by the state-backed insurance scheme. The first loss
to be absorbed by RBSG is GBP60bn. The government will be responsible for 90% of net
losses thereafter. This insurance scheme is designed such that RBSG absorbs all the expected
losses in a base-case economic scenario and only requires the second loss government cover
in the event of a substantial further deepening of the recession.
The group pays an annual fee of GBP700m for three years to 2011 and GBP500m thereafter,
although it can terminate the scheme at any time subject to the FSA’s requirements being met
and a break fee. APS covered 12% of on-balance-sheet assets and 18% of RWAs at end-H111.
Covered assets include most of the market turmoil exposures (monolines, ABS and leveraged
finance), higher-risk unsecured exposures, assets in work-out or restructuring units and higher-
risk mortgages (high LTV and certain specialist).
Contingent Capital
The APS and the recapitalisations were agreed with the FSA following a stress test that
required RBSG to maintain a core Tier 1 ratio above 4%. RBSG needed a GBP8bn contingent
capital facility from the government to meet this requirement. The government will provide
GBP8bn of contingent capital for five years should RBSG’s core Tier 1 ratio fall below 5%. A
4% annual fee is payable on this facility. RBSG can terminate the facility with FSA consent.
European Commission State Aid Requirements
To comply with European Commission state aid requirements, RBSG agreed to divest a
number of businesses over a four-year period from December 2009: RBS England and Wales
and NatWest Scotland branch-based businesses, RBS Insurance, Global Merchant Services
(GMS within GTS) and its interest in the RBS Sempra Commodities joint venture. In addition,
GBM division cannot rank higher than number five in global all debt league tables for three
years. The European Commission has also applied “burden sharing” to hybrid instruments, and
requires that RBSG does not make discretionary payments of coupons or dividends for two
years unless a legal obligation exists.
GMS and RBS Sempra have now effectively been disposed of. On 4 August 2010, the group
announced its agreement to sell 318 branches and associated assets and liabilities to
Santander UK plc for a premium of GBP350m to net assets at closing. The separation and
transfer process is under way and Fitch expects the transaction to be completed in H212. The
disposal of RBS Insurance (trade sale or flotation) is targeted for 2H12. Branch-based
businesses and RBS Insurance together accounted for about GBP32bn in assets, GBP12bn in
RWAs and GBP5bn in capital at end-H111 and contributed GBP391m of operating profit in
H111.
Figure 13
0
40
80
120
160
UK r
eta
il
UK
corp
ora
te
GBM
Uls
ter
Non-c
ore
Oth
er
APS Non-APS
APS: Divisional RWA at
End-H111
(GBPbn)
Source: RBSG, Fitch
Banks
The Royal Bank of Scotland Group plc
September 2011 13
Appendix 3: Operating Performance
Figure 14 Divisional Performance (Pro Forma)
(GBPm) Q211 Q111 Q410 Q310 Q210 Q110 2010 2009 2008
Revenue UK retail 1,419 1,380 1,490 1,433 1,298 1,279 5,500 5,087 5,122 UK corporate 966 1,021 983 986 987 939 3,895 3,582 3,737 Wealth 297 281 271 264 266 255 1,056 1,109 1,059 Global transaction services 560 542 638 668 648 607 2,561 2,487 2,431 Ulster Bank 222 220 243 244 247 241 975 1,034 1,039 US retail & commercial 715 694 698 751 777 720 2,946 2,724 2,587 Global banking and markets, incl. 1,550 2,380 1,587 1,554 1,947 2,824 7,912 11,058 2,357 Rates - money markets -41 -74 -65 38 4 88 65 1,714 1,641 Rates - flow 357 733 413 402 471 699 1,985 3,142 1,386 Currencies and commodities 234 224 178 218 179 295 870 1,277 1,539 Credit and mortgage markets 437 885 433 349 474 959 2,215 2,255 -3,435 Portfolio management and origination 329 337 445 349 581 469 1,844 1,196 858 Equities 234 275 183 198 238 314 933 1,474 368 RBS insurance 1,046 1,070 1,112 1,124 1,143 1,137 4,516 4,614 4,430 Central items 14 -41 116 23 -6 204 337 242 -363 Total core revenue 6,789 7,547 7,138 7,047 7,307 8,206 29,698 31,937 22,399 Non-core revenue 978 486 321 870 856 917 2,964 -2,370 -3,032 Total revenue 7,767 8,033 7,459 7,917 8,163 9,123 32,662 29,567 19,367 Impairment losses UK retail 208 194 222 251 300 387 1,160 1,679 1,019 UK corporate 218 105 219 158 198 186 761 927 319 Wealth 3 5 6 1 7 4 18 33 16 Global transaction services 54 20 3 3 3 - 9 39 54 Ulster Bank 269 461 376 286 281 218 1,161 649 106 US retail and commercial 66 110 105 125 144 143 517 702 437 Global banking and markets 37 -24 -5 -40 164 32 151 640 522 RBS insurance -- - - - - - - 8 42 Central items -2 1 4 -2 - 1 3 1 -19 Total core impairment losses 853 872 930 782 1,097 971 3,780 4,678 2,496 Non-core impairment losses 1,411 1,075 1,211 1,171 1,390 1,704 5,476 9,221 4,936 Total impairment losses 2,264 1,947 2,141 1,953 2,487 2,675 9,256 13,899 7,432 Operating (loss)/profit
a
UK retail 523 508 558 398 276 140 1,372 229 723 UK corporate 345 493 333 422 390 318 1,463 1,125 1,781 Wealth 74 80 87 74 81 62 304 420 348 GTS 164 187 267 309 279 233 1,088 973 1,002 Ulster Bank -189 -377 -271 -176 -177 -137 -761 -368 218 US retail and commercial 127 80 64 73 129 40 306 -113 528 GBM 446 1,098 527 589 750 1,498 3,364 5,758 -2,153 RBS insurance 139 67 -9 -33 -203 -50 -295 58 584 Central items 47 -43 115 76 49 337 577 385 150 Core operating (loss)/profit 1,676 2,093 1,671 1,732 1,574 2,441 7,418 8,467 3,181 Non-core operating (loss)/profit -858 -1,040 -1,616 -1,006 -1,324 -1,559 -5,505 -14,557 -11,351 Total operating (loss)/profit 818 1,053 55 726 250 882 1,913 -6,090 -8,170 a Before exceptional items
Source: RBSG
Banks
The Royal Bank of Scotland Group plc
September 2011 14
Appendix 4: Non-Core Assets
Figure 15 Non-core Gross Customer Loans by Division and Sectora
(GBPbn) Q211 Q111 Q410 Q310 Q210 Q110 Q409 Q408
UK retail 1.8 1.9 2.0 2.2 2.3 2.4 2.6 3.3 Mortgages 1.5 1.6 1.6 1.7 1.8 1.8 1.9 2.2 Personal 0.3 0.3 0.4 0.5 0.5 0.6 0.7 1.1 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 UK corporate 21.6 23.1 27.0 28.5 30.4 32.7 34.9 38.1 Manufacturing and infrastructure 0.3 0.2 0.3 0.3 0.4 0.4 0.3 0.3 Property and construction 7.2 8.0 11.4 12.1 12.9 13.2 14.1 11.3 Transport 5.0 5.1 5.4 5.6 5.9 5.8 Banks and financial institutions 0.9 0.8 0.8 0.9 0.7 1.0 Lombard 1.4 1.5 1.7 1.9 2.4 2.7 2.9 3.7 Invoice finance 0.0 0.0 0.0 0.0 0.0 0.4 0.4 0.7 Other 6.8 7.5 7.4 7.7 8.1 9.2 17.2 22.1 Ulster Bank 15.3 15.3 15.0 15.5 15.7 17.0 16.7 17.7 Mortgages 0.0 0.0 0.0 0.0 5.6 6.1 6.0 6.5 CRE 8.8 CRE investment 4.1 3.9 4.0 4.3 2.6 2.8 2.1 CRE development 9.0 8.9 8.4 8.4 5.4 5.7 6.3 Other corporate 1.8 2.0 2.2 2.0 1.2 1.3 1.3 1.1 Other EMEA 0.4 0.5 0.4 0.8 0.9 1.1 1.0 1.3 US retail & commercial 7.3 7.9 8.6 9.2 10.3 11.1 11.0 15.6 Auto and consumer 2.2 2.4 2.6 2.7 3.0 3.2 3.2 4.2 Cards 0.1 0.1 0.1 0.1 0.2 0.2 0.5 0.7 SBO/home equity 2.7 2.9 3.2 3.3 3.6 3.7 3.7 5.2 Residential mortgages 0.7 0.7 0.7 0.8 0.9 1.2 0.8 1.1 Commercial real estate 1.2 1.4 1.5 1.7 1.9 2.0 1.9 3.0 Commercial and other 0.4 0.4 0.5 0.6 0.7 0.8 0.9 1.4 Global banking & markets 48.4 52.9 55.7 64.5 67.4 77.8 81.7 104.8 Manufacturing and infrastructure 8.5 8.9 8.7 10.6 13.4 17.2 17.5 Property and construction 18.6 19.1 19.6 22.9 21.6 23.4 25.7 Transport 4.2 4.5 5.5 5.6 5.3 6.0 5.8 Telecoms, media and technology 0.8 1.1 0.9 1.1 2.0 3.4 3.2 Banks and financials 8.8 11.1 12.0 13.8 15.7 16.1 16.0 Other 7.5 8.2 9.0 10.5 9.4 11.7 13.5 Other 0.3 -0.3 -0.1 -0.7 -0.4 -0.9 0.4 5.2 Wealth 0.3 0.4 0.4 0.7 0.9 2.4 2.6 3.6 Global transaction services 0.3 0.2 0.3 0.5 0.6 0.8 0.8 1.4 RBS insurance 0.0 0.1 0.2 0.2 0.2 0.2 0.2 0.2 Central items -0.3 -1.0 -1.0 -2.1 -2.1 -4.3 -3.2 0.0 Gross loans 94.7 100.8 108.2 119.2 125.7 140.1 147.3 184.7 a Excluding reverse repurchase agreements
Source: RBSG
Banks
The Royal Bank of Scotland Group plc
September 2011 15
Appendix 5: Market Risk Indicators
Figure 16 Trading Risk
(GBPm) Q211 Q111 Q410 Q310 Q210 Q110 2010 2009
Trading positions maximum VaR Interest rate 75.7 79.2 83 74.3 60.4 64.2 83 112.8 Credit spread 95 151.1 196.1 243.2 203.2 191.5 243.2 231.2 Currency 14.2 18 25.6 26.2 28 24.7 28 35.8 Equity 17.3 14.5 15.2 17.9 12 17.3 17.9 23.2 Commodity 1.6 0.7 18.1 15.7 15.8 14.0 18.1 32.1 Total 117.9 181.3 191.5 252.1 210.5 204.7 252.1 229 Core 86 133.9 121 153.4 129 145.4 153.4 137.8 Non-core 110.1 128.6 119.7 169.4 108.1 98.8 169.4 162.1
Source: RBSG
Figure 17 Non-Trading Positions Maximum VaRa Excl. loans and receivables Incl. loans and receivables
Q211 Q111 Q410 Q310 Q110 2010 2009 Q310 Q210 Q110
Interest rate 9.2 10.8 10.8 20.5 13.3 20.5 26.3 24.2 11.2 13.6 Credit spread 24.2 39.3 21.8 26.4 101.2 101.2 131.5 139.3 155.1 227.2 Currency 3.3 1.8 3.7 6.1 4.9 7.6 7 6.1 7.6 4.9 Equity 2.4 3.1 4.6 1.7 3.5 4.6 5.8 0.5 0.8 3.4 Total 22.5 41.6 21.3 29.1 98 98 126.9 126.5 156.4 216.2 Core 24.6 38.9 21.3 29.3 98.1 98.1 126.9 58.2 77.8 145.7 Non-core 4.3 3.4 4.1 2 3.6 4.1 16.9 85.3 94.7 79.6 a Excluding structured credit portfolio
Source: RBSG
Banks
The Royal Bank of Scotland Group plc
September 2011 16
Appendix 6
Figure 18 Peer Comparison
RBSG
(‘bbb-’)
Barclays
(‘aa-’)
JPM
(‘aa-’)
Deutsche
(‘aa-’)
BNP Paribas
(‘aa-’)
H111 2010 H111 2010 H111 2010 H111 2010 H111 2010
Reported equity (USD) 112,563 109,627 87,744 84,329 175,079 168,306 74,691 72,498 110,409 100,082 Profitability (%) Operating profit/average assets -0.14 -0.07 0.48 0.37 1.49 1.21 0.52 0.35 0.72 0.59 Operating profit/average equity -2.83 -1.55 13.15 10.49 17.92 14.66 18.89 14.79 18.66 17.08 Cost/income 69.63 69.31 64.49 64.32 62.89 59.59 70.49 76.38 58.85 60.56 Loan and securities impairment charge/pre-impairment profits
124.15 114.77 33.96 50.93 18.21 40.1 14.85 16.97 24.34 27.81
Net interest margin 1.00 1.47 0.92 0.92 2.69 3.04 1.06 0.99 1.32 1.29 Capitalisation (%) Equity/assets 4.85 4.86 3.66 3.65 7.79 7.95 2.79 2.64 3.98 3.79 Equity/tangible assets 4.91 4.76 3.68 3.55 8.03 8.21 2.82 2.67 4.01 3.51 Fitch core capital/RWA 7.24 6.69 10.20 9.46 9.09 8.54 9.08 7.65 9.55 9.06 Regulatory core Tier 1 ratio 11.1 10.7 11.0 10.8 10.1 9.8 10.2 8.7 9.6 9.2 Regulatory tier 1 ratio 13.5 12.9 13.5 13.5 12.4 12.1 14.00 12.3 11.9 11.4 Net loans/assets 37.74 38.20 29.61 28.73 29.43 31.20 21.34 21.40 34.77 34.27 Asset quality and risk (%) Impaired loans/total gross loans 7.48 6.73 5.19 5.52 2.86 3.13 1.92 1.52 n.a. 6.06 Gross loan growth -1.72 -23.77 3.28 1.84 0.08 9.77 -3.32 57.97 -2.20 0.87 Reserves/impaired loans 48.71 46.78 49.34 51.11 144.61 148.62 45.64 66.45 n.a. 63.35 LIC/average loans 1.78 1.48 0.82 1.27 1.06 2.37 0.42 0.42 0.50 0.72 Liquidity and funding (%) Loans/deposits 114.20 117.00 118.38 124.00 65.77 74.48 72.51 77.14 120.94 125.56
Source: Fitch, company annual reports
Banks
The Royal Bank of Scotland Group plc
September 2011 17
The Royal Bank of Scotland Group plcIncome Statement
Year End Year End As % of Year End As % of Year End As % of Year End As % of
USDm GBPm Earning GBPm Earning GBPm Earning GBPm Earning
Unaudited Unaudited Assets Unqualified Assets Unqualified Assets Unqualified Assets
1. Interest Income on Loans 15,149.7 9,464.0 0.71 19,480.0 1.46 22,186.0 1.42 37,150.0 1.60
2. Other Interest Income 2,146.6 1,341.0 0.10 3,296.0 0.25 4,125.0 0.26 5,040.0 0.22
3. Dividend Income n.a. n.a. - n.a. - n.a. - n.a. -
4. Gross Interest and Dividend Income 17,296.3 10,805.0 0.81 22,776.0 1.71 26,311.0 1.68 42,190.0 1.82
5. Interest Expense on Customer Deposits 2,695.7 1,684.0 0.13 3,721.0 0.28 4,761.0 0.30 13,642.0 0.59
6. Other Interest Expense 4,150.8 2,593.0 0.20 4,846.0 0.36 8,162.0 0.52 13,066.0 0.56
7. Total Interest Expense 6,846.5 4,277.0 0.32 8,567.0 0.64 12,923.0 0.83 26,708.0 1.15
8. Net Interest Income 10,449.8 6,528.0 0.49 14,209.0 1.07 13,388.0 0.86 15,482.0 0.67
9. Net Gains (Losses) on Trading and Derivatives 3,172.7 1,982.0 0.15 4,517.0 0.34 3,761.0 0.24 -9,025.0 -0.39
10. Net Gains (Losses) on Other Securities n.a. n.a. - n.a. - n.a. - n.a. -
11. Net Gains (Losses) on Assets at FV through Income Statement n.a. n.a. - n.a. - n.a. - n.a. -
12. Net Insurance Income 854.8 534.0 0.04 345.0 0.03 909.0 0.06 1,792.0 0.08
13. Net Fees and Commissions 4,416.5 2,759.0 0.21 5,982.0 0.45 5,948.0 0.38 6,411.0 0.28
14. Other Operating Income 2,559.6 1,599.0 0.12 1,230.0 0.09 822.0 0.05 1,176.0 0.05
15. Total Non-Interest Operating Income 11,003.7 6,874.0 0.52 12,074.0 0.91 11,440.0 0.73 354.0 0.02
16. Personnel Expenses 7,377.9 4,609.0 0.35 9,671.0 0.72 9,993.0 0.64 8,898.0 0.38
17. Other Operating Expenses 7,560.4 4,723.0 0.36 8,547.0 0.64 9,209.0 0.59 9,256.0 0.40
18. Total Non-Interest Expenses 14,938.4 9,332.0 0.70 18,218.0 1.37 19,202.0 1.23 18,154.0 0.78
19. Equity-accounted Profit/ Loss - Operating n.a. n.a. - n.a. - n.a. - n.a. -
20. Pre-Impairment Operating Profit 6,515.1 4,070.0 0.31 8,065.0 0.60 5,626.0 0.36 -2,318.0 -0.10
21. Loan Impairment Charge 8,088.7 5,053.0 0.38 9,256.0 0.69 13,899.0 0.89 7,439.0 0.32
22. Securities and Other Credit Impairment Charges n.a. n.a. - n.a. - n.a. - n.a. -
23. Operating Profit -1,573.6 -983.0 -0.07 -1,191.0 -0.09 -8,273.0 -0.53 -9,757.0 -0.42
24. Equity-accounted Profit/ Loss - Non-operating n.a. n.a. - n.a. - n.a. - n.a. -
25. Non-recurring Income 408.2 255.0 0.02 553.0 0.04 3,790.0 0.24 0.0 0.00
26. Non-recurring Expense n.a. n.a. - 10.0 0.00 363.0 0.02 16,911.0 0.73
27. Change in Fair Value of Own Debt -105.7 -66.0 0.00 249.0 0.02 51.0 0.00 977.0 0.04
28. Other Non-operating Income and Expenses n.a. n.a. - n.a. - 2,148.0 0.14 n.a. -
29. Pre-tax Profit -1,271.0 -794.0 -0.06 -399.0 -0.03 -2,647.0 -0.17 -25,691.0 -1.11
30. Tax expense 1,032.5 645.0 0.05 634.0 0.05 -429.0 -0.03 -2,167.0 -0.09
31. Profit/Loss from Discontinued Operations 49.6 31.0 0.00 -633.0 -0.05 -105.0 -0.01 -11,018.0 -0.47
32. Net Income -2,253.9 -1,408.0 -0.11 -1,666.0 -0.12 -2,323.0 -0.15 -34,542.0 -1.49
33. Change in Value of AFS Investments 2,191.5 1,369.0 0.10 -389.0 -0.03 2,016.0 0.13 -7,406.0 -0.32
34. Revaluation of Fixed Assets n.a. n.a. - 0.0 0.00 0.0 0.00 0.0 0.00
35. Currency Translation Differences -481.8 -301.0 -0.02 81.0 0.01 -3,300.0 -0.21 15,425.0 0.66
36. Remaining OCI Gains/(losses) -209.7 -131.0 -0.01 1,303.0 0.10 -2,551.0 -0.16 -957.0 -0.04
37. Fitch Comprehensive Income -754.0 -471.0 -0.04 -671.0 -0.05 -6,158.0 -0.39 -27,480.0 -1.18
38. Memo: Profit Allocation to Non-controlling Interests 27.2 17.0 0.00 -665.0 -0.05 349.0 0.02 -10,832.0 -0.47
39. Memo: Net Income after Allocation to Non-controlling Interests -2,281.1 -1,425.0 -0.11 -1,125.0 -0.08 -3,607.0 -0.23 -24,306.0 -1.05
40. Memo: Common Dividends Relating to the Period 0.0 0.0 0.00 0.0 0.00 0.0 0.00 2,312.0 0.10
41. Memo: Preferred Dividends Related to the Period n.a. n.a. - n.a. - n.a. - n.a. -
Exchange rate
30 Jun 2011
USD1 = GBP0.62470
31 Dec 2010
USD1 = GBP0.63880
31 Dec 2009
USD1 = GBP0.61748
31 Dec 2008
USD1 = GBP0.68597
Banks
The Royal Bank of Scotland Group plc
September 2011 18
The Royal Bank of Scotland Group plcBalance Sheet
Year End Year End As % of Year End As % of Year End As % of Year End As % of
USDm GBPm Assets GBPm Assets GBPm Assets GBPm Assets
Assets
A. Loans
1. Residential Mortgage Loans 239,969.6 149,909.0 10.37 146,501.0 10.08 140,907.0 8.31 139,391.0 5.80
2. Other Mortgage Loans 158,469.7 98,996.0 6.85 102,138.0 7.03 114,186.0 6.73 123,526.0 5.14
3. Other Consumer/ Retail Loans 56,752.0 35,453.0 2.45 37,472.0 2.58 41,671.0 2.46 51,070.0 2.13
4. Corporate & Commercial Loans 360,092.8 224,950.0 15.56 233,583.0 16.07 405,493.0 23.90 525,942.0 21.90
5. Other Loans 91,328.6 57,053.0 3.95 53,621.0 3.69 43,262.0 2.55 45,682.0 1.90
6. Less: Reserves for Impaired Loans/ NPLs 33,019.0 20,627.0 1.43 18,055.0 1.24 17,126.0 1.01 10,889.0 0.45
7. Net Loans 873,593.7 545,734.0 37.74 555,260.0 38.20 728,393.0 42.94 874,722.0 36.42
8. Gross Loans 906,612.8 566,361.0 39.17 573,315.0 39.44 745,519.0 43.94 885,611.0 36.88
9. Memo: Impaired Loans included above 67,792.5 42,350.0 2.93 38,598.0 2.66 38,249.0 2.25 21,261.0 0.89
10. Memo: Loans at Fair Value included above n.a. n.a. - n.a. - n.a. - n.a. -
B. Other Earning Assets
1. Loans and Advances to Banks 85,053.6 53,133.0 3.67 57,911.0 3.98 56,656.0 3.34 79,426.0 3.31
2. Reverse Repos and Cash Collateral 67,189.1 41,973.0 2.90 42,607.0 2.93 35,097.0 2.07 58,771.0 2.45
3. Trading Securities and at FV through Income 226,195.0 141,304.0 9.77 119,470.0 8.22 130,720.0 7.71 140,863.0 5.87
4. Derivatives 632,098.6 394,872.0 27.31 427,077.0 29.38 441,454.0 26.02 992,559.0 41.33
5. Available for Sale Securities 193,207.9 120,697.0 8.35 113,129.0 7.78 146,191.0 8.62 140,031.0 5.83
6. Held to Maturity Securities 10,557.1 6,595.0 0.46 7,079.0 0.49 9,871.0 0.58 12,985.0 0.54
7. At-equity Investments in Associates n.a. n.a. - n.a. - n.a. - n.a. -
8. Other Securities n.a. n.a. - n.a. - n.a. - n.a. -
9. Total Securities 1,129,247.6 705,441.0 48.79 709,362.0 48.80 763,333.0 44.99 1,345,209.0 56.01
10. Memo: Government Securities included Above 223,829.0 139,826.0 9.67 123,940.0 8.53 146,857.0 8.66 105,779.0 4.40
11. Memo: Total Securities Pledged n.a. n.a. - n.a. - n.a. - n.a. -
12. Investments in Property n.a. n.a. - n.a. - 4,883.0 0.29 3,868.0 0.16
13. Insurance Assets n.a. n.a. - n.a. - n.a. - n.a. -
14. Other Earning Assets 39,324.5 24,566.0 1.70 11,605.0 0.80 12,033.0 0.71 17,832.0 0.74
15. Total Earning Assets 2,127,219.5 1,328,874.0 91.90 1,334,138.0 91.78 1,565,298.0 92.27 2,321,057.0 96.64
C. Non-Earning Assets
1. Cash and Due From Banks 103,011.0 64,351.0 4.45 57,014.0 3.92 52,261.0 3.08 12,400.0 0.52
2. Memo: Mandatory Reserves included above n.a. n.a. - n.a. - n.a. - n.a. -
3. Foreclosed Real Estate n.a. n.a. - n.a. - n.a. - n.a. -
4. Fixed Assets 27,784.5 17,357.0 1.20 16,543.0 1.14 14,514.0 0.86 15,081.0 0.63
5. Goodwill n.a. n.a. - n.a. - 14,264.0 0.84 15,562.0 0.65
6. Other Intangibles 23,358.4 14,592.0 1.01 14,448.0 0.99 3,583.0 0.21 4,487.0 0.19
7. Current Tax Assets n.a. n.a. - n.a. - n.a. - n.a. -
8. Deferred Tax Assets 9,996.8 6,245.0 0.43 6,373.0 0.44 7,039.0 0.41 7,082.0 0.29
9. Discontinued Operations 5,453.8 3,407.0 0.24 12,484.0 0.86 18,542.0 1.09 1,581.0 0.07
10. Other Assets 17,837.4 11,143.0 0.77 12,576.0 0.87 20,985.0 1.24 24,402.0 1.02
11. Total Assets 2,314,661.4 1,445,969.0 100.00 1,453,576.0 100.00 1,696,486.0 100.00 2,401,652.0 100.00
Liabilities and Equity
D. Interest-Bearing Liabilities
1. Customer Deposits - Current 828,437.7 517,525.0 35.79 510,693.0 35.13 614,202.0 36.20 639,512.0 26.63
2. Customer Deposits - Savings n.a. n.a. - n.a. - n.a. - n.a. -
3. Customer Deposits - Term n.a. n.a. - n.a. - n.a. - n.a. -
4. Total Customer Deposits 828,437.7 517,525.0 35.79 510,693.0 35.13 614,202.0 36.20 639,512.0 26.63
5. Deposits from Banks 171,208.6 106,954.0 7.40 98,790.0 6.80 142,144.0 8.38 258,044.0 10.74
6. Repos and Cash Collateral n.a. n.a. - n.a. - n.a. - n.a. -
7. Other Deposits and Short-term Borrowings 169,817.5 106,085.0 7.34 94,048.0 6.47 136,901.0 8.07 174,507.0 7.27
8. Total Deposits, Money Market and Short-term Funding 1,169,463.7 730,564.0 50.52 703,531.0 48.40 893,247.0 52.65 1,072,063.0 44.64
9. Senior Debt Maturing after 1 Year 172,422.0 107,712.0 7.45 124,324.0 8.55 130,667.0 7.70 125,782.0 5.24
10. Subordinated Borrowing 35,966.1 22,468.0 1.55 23,210.0 1.60 32,761.0 1.93 41,859.0 1.74
11. Other Funding n.a. n.a. - n.a. - n.a. - n.a. -
12. Total Long Term Funding 208,388.0 130,180.0 9.00 147,534.0 10.15 163,428.0 9.63 167,641.0 6.98
13. Derivatives 620,792.4 387,809.0 26.82 423,967.0 29.17 424,141.0 25.00 971,364.0 40.45
14. Trading Liabilities 126,478.3 79,011.0 5.46 54,109.0 3.72 50,876.0 3.00 54,277.0 2.26
15. Total Funding 2,125,122.5 1,327,564.0 91.81 1,329,141.0 91.44 1,531,692.0 90.29 2,265,345.0 94.32
E. Non-Interest Bearing Liabilities
1. Fair Value Portion of Debt n.a. n.a. - n.a. - n.a. - n.a. -
2. Credit impairment reserves n.a. n.a. - n.a. - n.a. - n.a. -
3. Reserves for Pensions and Other 3,584.1 2,239.0 0.15 2,288.0 0.16 2,963.0 0.17 2,032.0 0.08
4. Current Tax Liabilities n.a. n.a. - n.a. - n.a. - 585.0 0.02
5. Deferred Tax Liabilities 3,348.8 2,092.0 0.14 2,142.0 0.15 2,811.0 0.17 4,165.0 0.17
6. Other Deferred Liabilities n.a. n.a. - n.a. - n.a. - 7,640.0 0.32
7. Discontinued Operations 5,181.7 3,237.0 0.22 9,428.0 0.65 18,890.0 1.11 n.a. -
8. Insurance Liabilities 10,704.3 6,687.0 0.46 6,794.0 0.47 10,281.0 0.61 9,976.0 0.42
9. Other Liabilities 38,522.5 24,065.0 1.66 23,089.0 1.59 30,327.0 1.79 24,116.0 1.00
10. Total Liabilities 2,186,463.9 1,365,884.0 94.46 1,372,882.0 94.45 1,596,964.0 94.13 2,313,859.0 96.34
F. Hybrid Capital
1. Pref. Shares and Hybrid Capital accounted for as Debt 6,151.8 3,843.0 0.27 3,843.0 0.26 4,891.0 0.29 7,295.0 0.30
2. Pref. Shares and Hybrid Capital accounted for as Equity 9,753.5 6,093.0 0.42 6,229.0 0.43 11,587.0 0.68 16,743.0 0.70
G. Equity
1. Common Equity 106,124.5 66,296.0 4.58 67,508.0 4.64 65,330.0 3.85 41,839.0 1.74
2. Non-controlling Interest 1,507.9 942.0 0.07 1,163.0 0.08 16,231.0 0.96 19,798.0 0.82
3. Securities Revaluation Reserves -1,642.4 -1,026.0 -0.07 -2,037.0 -0.14 -1,755.0 -0.10 -3,561.0 -0.15
4. Foreign Exchange Revaluation Reserves 7,738.1 4,834.0 0.33 5,138.0 0.35 4,528.0 0.27 6,385.0 0.27
5. Fixed Asset Revaluations and Other Accumulated OCI -1,435.9 -897.0 -0.06 -1,150.0 -0.08 -1,290.0 -0.08 -706.0 -0.03
6. Total Equity 112,292.3 70,149.0 4.85 70,622.0 4.86 83,044.0 4.90 63,755.0 2.65
7. Total Liabilities and Equity 2,314,661.4 1,445,969.0 100.00 1,453,576.0 100.00 1,696,486.0 100.00 2,401,652.0 100.00
8. Memo: Fitch Core Capital 50,243.3 31,387.0 2.17 31,158.0 2.14 23,916.0 1.41 10,985.0 0.46
9. Memo: Fitch Eligible Capital 58,195.9 36,355.0 2.51 36,194.0 2.49 32,155.0 1.90 23,004.0 0.65
Exchange rate
30 Jun 2011
USD1 = GBP0.62470
31 Dec 2010
USD1 = GBP0.63880
31 Dec 2009
USD1 = GBP0.61748
31 Dec 2008
USD1 = GBP0.68597
Banks
The Royal Bank of Scotland Group plc
September 2011 19
The Royal Bank of Scotland Group plcSummary Analytics
30 Jun 2011 31 Dec 2010 31 Dec 2009 31 Dec 2008
Year End Year End Year End Year End
A. Interest Ratios
1. Interest Income on Loans/ Average Gross Loans 3.31 3.11 3.12 5.20
2. Interest Expense on Customer Deposits/ Average Customer Deposits 0.66 0.71 1.01 2.80
3. Interest Income/ Average Earning Assets 1.65 2.35 2.52 3.21
4. Interest Expense/ Average Interest-bearing Liabilities 0.66 0.96 1.12 2.06
5. Net Interest Income/ Average Earning Assets 1.00 1.47 1.28 1.18
6. Net Int. Inc Less Loan Impairment Charges/ Av. Earning Assets 0.23 0.51 -0.05 0.61
7. Net Interest Inc Less Preferred Stock Dividend/ Average Earning Assets 1.00 1.47 1.28 1.18
B. Other Operating Profitability Ratios
1. Non-Interest Income/ Gross Revenues 51.29 45.94 46.08 2.24
2. Non-Interest Expense/ Gross Revenues 69.63 69.31 77.34 114.64
3. Non-Interest Expense/ Average Assets 1.31 1.09 0.95 0.89
4. Pre-impairment Op. Profit/ Average Equity 11.70 10.49 9.82 -3.96
5. Pre-impairment Op. Profit/ Average Total Assets 0.57 0.48 0.28 -0.11
6. Loans and securities impairment charges/ Pre-impairment Op. Profit 124.15 114.77 247.05 -320.92
7. Operating Profit/ Average Equity -2.83 -1.55 -14.44 -16.67
8. Operating Profit/ Average Total Assets -0.14 -0.07 -0.41 -0.48
9. Taxes/ Pre-tax Profit -81.23 -158.90 16.21 8.43
10. Pre-Impairment Operating Profit / Risk Weighted Assets 1.89 1.73 1.04 -0.33
11. Operating Profit / Risk Weighted Assets -0.46 -0.26 -1.53 -1.40
C. Other Profitability Ratios
1. Net Income/ Average Total Equity -4.05 -2.17 -4.05 -59.00
2. Net Income/ Average Total Assets -0.20 -0.10 -0.11 -1.69
3. Fitch Comprehensive Income/ Average Total Equity -1.35 -0.87 -10.75 -46.94
4. Fitch Comprehensive Income/ Average Total Assets -0.07 -0.04 -0.30 -1.35
5. Net Income/ Av. Total Assets plus Av. Managed Securitized Assets n.a. n.a. n.a. n.a.
6. Net Income/ Risk Weighted Assets -0.65 -0.36 -0.43 -4.96
7. Fitch Comprehensive Income/ Risk Weighted Assets -0.22 -0.14 -1.14 -3.95
D. Capitalization
1. Fitch Core Capital/Weighted Risks 7.24 6.69 4.42 1.58
2. Fitch Eligible Capital/ Weighted Risks 8.39 7.78 5.94 3.31
3. Tangible Common Equity/ Tangible Assets 3.62 3.65 3.59 1.64
4. Tier 1 Regulatory Capital Ratio 13.50 12.90 14.10 10.00
5. Total Regulatory Capital Ratio 14.40 14.00 16.10 14.10
6. Core Tier 1 Regulatory Capital Ratio 11.10 10.70 11.00 6.60
7. Equity/ Total Assets 4.85 4.86 4.90 2.65
8. Cash Dividends Paid & Declared/ Net Income 0.00 0.00 0.00 -6.69
9. Cash Dividend Paid & Declared/ Fitch Comprehensive Income 0.00 0.00 0.00 -8.41
10. Cash Dividends & Share Repurchase/Net Income n.a. n.a. n.a. n.a.
11. Net Income - Cash Dividends/ Total Equity -4.05 -2.36 -2.80 -57.81
E. Loan Quality
1. Growth of Total Assets -0.52 -14.32 -29.36 26.37
2. Growth of Gross Loans -1.21 -23.10 -15.82 5.97
3. Impaired Loans(NPLs)/ Gross Loans 7.48 6.73 5.13 2.40
4. Reserves for Impaired Loans/ Gross loans 3.64 3.15 2.30 1.23
5. Reserves for Impaired Loans/ Impaired Loans 48.71 46.78 44.78 51.22
6. Impaired Loans less Reserves for Imp Loans/ Equity 30.97 29.09 25.44 16.27
7. Loan Impairment Charges/ Average Gross Loans 1.78 1.48 1.96 1.04
8. Net Charge-offs/ Average Gross Loans 0.29 0.90 0.87 0.40
9. Impaired Loans + Foreclosed Assets/ Gross Loans + Foreclosed Assets 7.48 6.73 5.13 2.40
F. Funding
1. Loans/ Customer Deposits 109.44 112.26 121.38 138.48
2. Interbank Assets/ Interbank Liabilities 49.68 58.62 39.86 30.78
3. Customer Deposits/ Total Funding excl Derivatives 55.07 56.42 55.46 49.42
Banks
The Royal Bank of Scotland Group plc
September 2011 20
The Royal Bank of Scotland Group plcReference Data
Year End Year End As % of Year End As % of Year End As % of Year End As % of
USDm GBPm Assets GBPm Assets GBPm Assets GBPm Assets
A. Off-Balance Sheet Items
1. Managed Securitized Assets Reported Off-Balance Sheet n.a. n.a. - n.a. - n.a. - n.a. -
2. Other off-balance sheet exposure to securitizations n.a. n.a. - n.a. - n.a. - n.a. -
3. Guarantees 46,090.9 28,793.0 1.99 31,070.0 2.14 36,579.0 2.16 49,262.0 2.05
4. Acceptances and documentary credits reported off-balance sheet n.a. n.a. - n.a. - n.a. - n.a. -
5. Committed Credit Lines 400,653.1 250,288.0 17.31 266,822.0 18.36 289,135.0 17.04 352,398.0 14.67
6. Other Contingent Liabilities 25,028.0 15,635.0 1.08 16,408.0 1.13 16,893.0 1.00 31,601.0 1.32
7. Total Business Volume 2,786,433.5 1,740,685.0 120.38 1,767,876.0 121.62 2,039,093.0 120.20 2,834,913.0 118.04
8. Memo: Total Weighted Risks 693,933.1 433,500.0 29.98 465,500.0 32.02 541,000.0 31.89 695,800.0 28.97
9. Fitch Adjustments to Weighted Risks. n.a. n.a. - n.a. - n.a. - n.a. -
10. Fitch Adjusted Weighted Risks 693,933.1 433,500.0 29.98 465,500.0 32.02 541,000.0 31.89 695,800.0 28.97
B. Average Balance Sheet
Average Loans 914,285.7 571,154.3 39.50 625,441.4 43.03 710,726.0 41.89 714,790.0 29.76
Average Earning Assets 2,112,893.1 1,319,924.3 91.28 967,313.0 66.55 1,043,587.0 61.51 1,312,648.0 54.66
Average Assets 2,301,263.5 1,437,599.3 99.42 1,672,204.0 115.04 2,023,480.0 119.27 2,040,685.0 84.97
Average Managed Securitized Assets (OBS) n.a. n.a. - n.a. - n.a. - n.a. -
Average Interest-Bearing Liabilities 2,107,560.4 1,316,593.0 91.05 894,153.0 61.51 1,149,802.0 67.78 1,298,960.0 54.09
Average Common equity 107,236.0 66,990.3 4.63 66,870.6 4.60 52,641.6 3.10 48,876.3 2.04
Average Equity 112,298.7 70,153.0 4.85 76,906.0 5.29 57,303.0 3.38 58,544.0 2.44
Average Customer Deposits 825,529.1 515,708.0 35.67 526,122.4 36.20 472,207.0 27.83 487,081.0 20.28
C. Maturities
Asset Maturities:
Loans & Advances < 3 months n.a. n.a. - n.a. - n.a. - n.a. -
Loans & Advances 3 - 12 Months n.a. n.a. - n.a. - 227,745.0 13.42 338,751.0 14.10
Loans and Advances 1 - 5 Years n.a. n.a. - n.a. - 500,648.0 29.51 535,971.0 22.32
Loans & Advances > 5 years n.a. n.a. - n.a. - n.a. - n.a. -
Debt Securities < 3 Months n.a. n.a. - n.a. - n.a. - n.a. -
Debt Securities 3 - 12 Months n.a. n.a. - n.a. - 69,197.0 4.08 69,912.0 2.91
Debt Securities 1 - 5 Years n.a. n.a. - n.a. - 198,057.0 11.67 197,637.0 8.23
Debt Securities > 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Interbank < 3 Months n.a. n.a. - n.a. - n.a. - n.a. -
Interbank 3 - 12 Months n.a. n.a. - n.a. - 89,622.0 5.28 133,565.0 5.56
Interbank 1 - 5 Years n.a. n.a. - n.a. - 2,131.0 0.13 4,632.0 0.19
Interbank > 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Liability Maturities:
Retail Deposits < 3 months n.a. n.a. - n.a. - n.a. - n.a. -
Retail Deposits 3 - 12 Months n.a. n.a. - n.a. - 586,628.0 34.58 611,047.0 25.44
Retail Deposits 1 - 5 Years n.a. n.a. - n.a. - 27,574.0 1.63 28,465.0 1.19
Retail Deposits > 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Other Deposits < 3 Months n.a. n.a. - n.a. - n.a. - n.a. -
Other Deposits 3 - 12 Months n.a. n.a. - n.a. - n.a. - n.a. -
Other Deposits 1 - 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Other Deposits > 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Interbank < 3 Months n.a. n.a. - n.a. - n.a. - n.a. -
Interbank 3 - 12 Months n.a. n.a. - n.a. - 135,641.0 8.00 248,896.0 10.36
Interbank 1 - 5 Years n.a. n.a. - n.a. - 6,503.0 0.38 9,148.0 0.38
Interbank > 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Senior Debt Maturing < 3 months n.a. n.a. - n.a. - n.a. - n.a. -
Senior Debt Maturing 3-12 Months 169,817.5 106,085.0 7.34 94,048.0 6.47 136,901.0 8.07 174,507.0 7.27
Senior Debt Maturing 1- 5 Years 92,066.6 57,514.0 3.98 71,955.0 4.95 70,437.0 4.15 125,782.0 5.24
Senior Debt Maturing > 5 Years 80,355.4 50,198.0 3.47 52,369.0 3.60 38,991.0 2.30 n.a. -
Total Senior Debt on Balance Sheet 342,239.5 213,797.0 14.79 218,372.0 15.02 246,329.0 14.52 300,289.0 12.50
Fair Value Portion of Senior Debt n.a. n.a. - n.a. - n.a. - n.a. -
Covered Bonds n.a. n.a. - n.a. - n.a. - n.a. -
Subordinated Debt Maturing < 3 months n.a. n.a. - n.a. - n.a. - n.a. -
Subordinated Debt Maturing 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. -
Subordinated Debt Maturing 1- 5 Year n.a. n.a. - n.a. - n.a. - n.a. -
Subordinated Debt Maturing > 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Total Subordinated Debt on Balance Sheet 35,966.1 22,468.0 1.55 23,210.0 1.60 32,761.0 1.93 41,859.0 1.74
Fair Value Portion of Subordinated Debt n.a. n.a. - n.a. - n.a. - n.a. -
D. Equity Reconciliation
1. Equity 112,292.3 70,149.0 4.85 70,622.0 4.86 83,044.0 4.90 63,755.0 2.65
2. Add: Pref. Shares and Hybrid Capital accounted for as Equity 9,753.5 6,093.0 0.42 6,229.0 0.43 11,587.0 0.68 16,743.0 0.70
3. Add: Other Adjustments n.a. n.a. - n.a. - n.a. - n.a. -
4. Published Equity 122,045.8 76,242.0 5.27 76,851.0 5.29 94,631.0 5.58 80,498.0 3.35
E. Fitch Eligible Capital Reconciliation
1. Total Equity as reported (including non-controlling interests) 112,292.3 70,149.0 4.85 70,622.0 4.86 83,044.0 4.90 63,755.0 2.65
2. Fair value effect incl in own debt/borrowings at fv on the B/S- CC only -4,392.5 -2,744.0 -0.19 -2,950.0 -0.20 -2,798.0 -0.16 -2,823.0 -0.12
3. Non-loss-absorbing non-controlling interests 1,507.9 942.0 0.07 1,163.0 0.08 16,231.0 0.96 19,798.0 0.82
4. Goodwill 0.0 0.0 0.00 0.0 0.00 14,264.0 0.84 15,562.0 0.65
5. Other intangibles 23,358.4 14,592.0 1.01 14,448.0 0.99 3,583.0 0.21 4,487.0 0.19
6. Deferred tax assets deduction 6,211.0 3,880.0 0.27 3,849.0 0.26 5,134.0 0.30 4,730.0 0.20
7. Net asset value of insurance subsidiaries 6,684.8 4,176.0 0.29 3,962.0 0.27 4,200.0 0.25 4,044.0 0.17
8. First loss tranches of off-balance sheet securitizations 19,894.3 12,428.0 0.86 13,092.0 0.90 12,918.0 0.76 1,326.0 0.06
9. Fitch Core Capital 50,243.3 31,387.0 2.17 31,158.0 2.14 23,916.0 1.41 10,985.0 0.46
10. Eligible weighted Hybrid capital 7,952.6 4,968.0 0.34 5,036.0 0.35 8,239.0 0.49 4,707.8 0.20
11. Government held Hybrid Capital 0.0 0.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00
12. Fitch Eligible Capital 58,195.9 36,355.0 2.51 36,194.0 2.49 32,155.0 1.90 15,692.8 0.65
Exchange Rate
30 Jun 2011
USD1 = GBP0.62470
31 Dec 2010
USD1 = GBP0.63880
31 Dec 2009
USD1 = GBP0.61748
31 Dec 2008
USD1 = GBP0.68597
Banks
The Royal Bank of Scotland Group plc
September 2011 21
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