rbs201202236k4.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 February 23, 2012
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F X
  
Form 40-F ___
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):_________

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


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


Yes
   ___
No X
 
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

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

 
 

 

 
Condensed consolidated income statement
for the period ended 31 December 2011
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Interest receivable
21,410 
22,776 
  
5,234 
5,371 
5,612 
Interest payable
(8,731)
(8,567)
  
(2,160)
(2,294)
(2,032)
             
Net interest income
12,679 
14,209 
  
3,074 
3,077 
3,580 
             
Fees and commissions receivable
6,384 
8,193 
  
1,590 
1,452 
2,052 
Fees and commissions payable
(1,460)
(2,211)
  
(573)
(304)
(449)
Income from trading activities
2,701 
4,517 
  
(238)
957 
364 
Gain on redemption of own debt
255 
553 
  
(1)
1 
- 
Other operating income (excluding insurance
  premium income)
4,122 
1,479 
  
205 
2,384 
1,003 
Insurance net premium income
4,256 
5,128 
  
981 
1,036 
1,272 
             
Non-interest income
16,258 
17,659 
  
1,964 
5,526 
4,242 
             
Total income
28,937 
31,868 
  
5,038 
8,603 
7,822 
             
Staff costs
(8,678)
(9,671)
  
(1,993)
(2,076)
(2,194)
Premises and equipment
(2,451)
(2,402)
  
(674)
(604)
(709)
Other administrative expenses
(4,931)
(3,995)
  
(1,296)
(962)
(1,048)
Depreciation and amortisation
(1,875)
(2,150)
  
(513)
(485)
(546)
Write-down of goodwill and other intangible
   assets
(91)
(10)
  
(91)
- 
(10)
             
Operating expenses
(18,026)
(18,228)
  
(4,567)
(4,127)
(4,507)
             
Profit before insurance net claims and
  impairment losses
10,911 
13,640 
  
471 
4,476 
3,315 
Insurance net claims
(2,968)
(4,783)
  
(529)
(734)
(1,182)
Impairment losses
(8,709)
(9,256)
  
(1,918)
(1,738)
(2,141)
             
Operating (loss)/profit before tax
(766)
(399)
  
(1,976)
2,004 
(8)
Tax (charge)/credit
(1,250)
(634)
  
186 
(791)
3 
             
(Loss)/profit from continuing operations
(2,016)
(1,033)
  
(1,790)
1,213 
(5)
Profit/(loss) from discontinued operations,
  net of tax
47 
(633)
  
10 
6 
55 
             
(Loss)/profit for the period
(1,969)
(1,666)
  
(1,780)
1,219 
50 
Non-controlling interests
(28)
665 
  
(18)
7 
(38)
Preference share and other dividends
- 
(124)
  
- 
- 
- 
             
(Loss)/profit attributable to ordinary and
  B shareholders
(1,997)
(1,125)
  
(1,798)
1,226 
12 
             
Basic (loss)/earnings per ordinary and
  B share from continuing operations
(1.8p)
(0.5p)
  
(1.7p)
1.1p 
- 
             
Diluted (loss)/earnings per ordinary and
  B share from continuing operations
(1.8p)
(0.5p)
  
(1.7p)
1.1p 
- 
             
Basic (loss)/earnings per ordinary
   and B share from discontinued operations
- 
- 
  
- 
- 
- 
             
Diluted (loss)/earnings per ordinary
  and B shares from discontinued operations
- 
- 
  
- 
- 
- 
 
In the income statement above, one-off and other items as shown on page 17 are included in the appropriate captions. A reconciliation between the income statement above and the managed view income statement on page 10 is given in Appendix 1 to this announcement.
 
Condensed consolidated statement of comprehensive income
for the period ended 31 December 2011
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
(Loss)/profit for the period
(1,969)
(1,666)
  
(1,780)
1,219 
50 
             
Other comprehensive income/(loss)
            
Available-for-sale financial assets (1)
2,258 
(389)
  
(107)
996 
(1,132)
Cash flow hedges
1,424 
1,454 
  
124 
939 
(353)
Currency translation
(440)
81 
  
(117)
(22)
34 
Actuarial (losses)/gains on defined benefit
  plans
(581)
158 
  
(581)
- 
158 
             
Other comprehensive income/(loss)
  before tax
2,661 
1,304 
  
(681)
1,913 
(1,293)
Tax (charge)/credit
(1,472)
(309)
  
(500)
(480)
393 
             
Other comprehensive income/(loss)
  after tax
1,189 
995 
  
(1,181)
1,433 
(900)
             
Total comprehensive (loss)/income for
  the period
(780)
(671)
  
(2,961)
2,652 
(850)
             
Total comprehensive (loss)/income is
 attributable to:
            
Non-controlling interests
(24)
(197)
  
(12)
(6)
52 
Preference shareholders
- 
105 
  
- 
- 
- 
Paid-in equity holders
- 
19 
  
- 
- 
- 
Ordinary and B shareholders
(756)
(598)
  
(2,949)
2,658 
(902)
             
 
(780)
(671)
  
(2,961)
2,652 
(850)
 
Note:
 
(1)
Analysis provided on page 112.
 
Key points
 
·
The movement in available-for-sale financial assets reflects net unrealised gains on high quality sovereign bonds.
   
·
Actuarial losses on defined benefit plans reflect changes in assumptions of £1,017 million, primarily due to a reduction in the real discount rate in the UK and US, partially offset by £436 million net experience gains.
   
·
The tax charge for the year and Q4 2011 includes £664 million write-off of deferred tax assets in The Netherlands.
 
 
Condensed consolidated balance sheet
at 31 December 2011
 
 
 
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
£m 
       
Assets
      
Cash and balances at central banks
79,269 
78,445 
57,014 
Net loans and advances to banks
43,870 
52,602 
57,911 
Reverse repurchase agreements and stock borrowing
39,440 
48,127 
42,607 
Loans and advances to banks
83,310 
100,729 
100,518 
Net loans and advances to customers
454,112 
485,573 
502,748 
Reverse repurchase agreements and stock borrowing
61,494 
54,132 
52,512 
Loans and advances to customers
515,606 
539,705 
555,260 
Debt securities
209,080 
229,657 
217,480 
Equity shares
15,183 
14,888 
22,198 
Settlement balances
7,771 
21,526 
11,605 
Derivatives
529,618 
572,344 
427,077 
Intangible assets
14,858 
14,744 
14,448 
Property, plant and equipment
11,868 
17,060 
16,543 
Deferred tax
3,878 
4,988 
6,373 
Prepayments, accrued income and other assets
10,976 
10,598 
12,576 
Assets of disposal groups
25,450 
3,044 
12,484 
       
Total assets
1,506,867 
1,607,728 
1,453,576 
       
Liabilities
      
Bank deposits
69,113 
78,370 
66,051 
Repurchase agreements and stock lending
39,691 
36,227 
32,739 
Deposits by banks
108,804 
114,597 
98,790 
Customer deposits
414,143 
433,660 
428,599 
Repurchase agreements and stock lending
88,812 
95,691 
82,094 
Customer accounts
502,955 
529,351 
510,693 
Debt securities in issue
162,621 
194,511 
218,372 
Settlement balances
7,477 
17,983 
10,991 
Short positions
41,039 
48,495 
43,118 
Derivatives
523,983 
561,790 
423,967 
Accruals, deferred income and other liabilities
23,125 
22,938 
23,089 
Retirement benefit liabilities
2,239 
1,855 
2,288 
Deferred tax
1,945 
1,913 
2,142 
Insurance liabilities
6,312 
6,628 
6,794 
Subordinated liabilities
26,319 
26,275 
27,053 
Liabilities of disposal groups
23,995 
2,516 
9,428 
       
Total liabilities
1,430,814 
1,528,852 
1,376,725 
       
Equity
      
Non-controlling interests
1,234 
1,433 
1,719 
Owners' equity*
      
  Called up share capital
15,318 
15,318 
15,125 
  Reserves
59,501 
62,125 
60,007 
       
Total equity
76,053 
78,876 
76,851 
       
Total liabilities and equity
1,506,867 
1,607,728 
1,453,576 
       
* Owners' equity attributable to:
      
Ordinary and B shareholders
70,075 
72,699 
70,388 
Other equity owners
4,744 
4,744 
4,744 
       
 
74,819 
77,443 
75,132 
 
 
Commentary on condensed consolidated balance sheet
 
Total assets of £1,506.9 billion at 31 December 2011 were up £53.3 billion, 4%, compared with 31 December 2010. This principally reflects an increase in cash and balances at central banks and the mark-to-market value of derivatives in Global Banking & Markets, partly offset by decreases in debt securities and equity shares and the continuing disposal and run-off of Non-Core assets.
 
Cash and balances at central banks were up £22.3 billion, 39%, to £79.3 billion due to improvements in the Group's structured liquidity position during 2011.
 
Loans and advances to banks decreased by £17.2 billion, 17%, to £83.3 billion. Reverse repurchase agreements and stock borrowing ('reverse repos') were down £3.2 billion, 7%, to £39.4 billion and bank placings declined £14.0 billion, 24%, to £43.9 billion, primarily as a result of the reduction in exposure to eurozone banks and lower cash collateral requirements.
 
Loans and advances to customers were down £39.7 billion, 7%, to £515.6 billion. Within this, reverse repurchase agreements were up £9.0 billion, 17%, to £61.5 billion. Customer lending decreased by £48.7 billion, 10%, to £454.1 billion or £46.9 billion, 9%, to £473.9 billion before impairment provisions.  This reflected the transfer to disposal groups of £19.5 billion of customer balances relating to the UK branch-based businesses.  There were also planned reductions in Non-Core of £28.1 billion, together with declines in UK Corporate, £2.9 billion and Ulster Bank, £2.0 billion, together with the effect of exchange rate and other movements, £1.9 billion. These were partially offset by growth in Global Banking & Markets, £0.2 billion, Global Transaction Services, £1.5 billion, Wealth, £0.7 billion, UK Retail, £2.3 billion and US Retail & Commercial, £2.8 billion.

Debt securities were down £8.4 billion, 4%, to £209.1 billion driven mainly by a reduction in holdings of government and financial institution bonds in Global Banking & Markets and Group Treasury.
 
Equity shares decreased £7.0 billion, 32%, to £15.2 billion which largely reflects the closure of positions to reduce the Group's level of unsecured funding requirements to mitigate the potential impact of unfavourable market conditions.
 
Settlement balances declined £3.8 billion, 33% to £7.8 billion as a result of decreased customer activity.
 
Movements in the value of derivative assets up £102.5 billion, 24%, to £529.6 billion, and liabilities, up £100.0 billion, 24%, to £524.0 billion, primarily reflect increases in interest rate contracts as a result of a significant downward shift in interest rates across all major currencies, together with increases in the mark-to-market value of credit derivatives as a result of widening credit spreads and rising credit default swap prices.
 
Property, plant and equipment declined £4.7 billion, 28%, to £11.9 billion, primarily as a result of the transfer of RBS Aviation Capital's operating lease assets to disposal groups.
 
Deferred taxation was down £2.5 billion, 39%, to £3.9 billion, largely as a result of the utilisation of brought forward tax losses in the UK.
 
 
Commentary on condensed consolidated balance sheet
 
The increase in assets and liabilities of disposal groups reflects the reclassification of the UK branch-based businesses and RBS Aviation Capital pending their disposal, partly offset by the completion of disposals, primarily RBS Sempra Commodities JV and certain Non-Core project finance assets.
 
Deposits by banks increased £10.0 billion, 10%, to £108.8 billion, with higher repurchase agreements and stock lending ('repos'), up £6.9 billion, 21%, to £39.7 billion and higher inter-bank deposits, up £3.1 billion, 5%, to £69.1 billion.
 
Customer accounts fell £7.7 billion, 2%, to £503.0 billion. Within this, repos increased £6.7 billion, 8%, to £88.8 billion. Excluding repos, customer deposits were down £14.4 billion, 3%, to £414.1 billion, reflecting the transfer to disposal groups of £21.8 billion of customer accounts relating to the UK branch-based businesses. This was partly offset by the net effect of growth in Global Transaction Services, £2.7 billion, UK Corporate, £0.9 billion, UK Retail, £5.8 billion, US Retail & Commercial, £0.6 billion and Wealth, £1.8 billion, together with exchange rate and other movements of £0.3 billion and declines in Global Banking & Markets, £0.8 billion, Ulster Bank, £0.8 billion and Non-Core, £3.1 billion.
 
Debt securities in issue were down £55.8 billion, 26% to £162.6 billion driven by reductions in the level of certificates of deposit and commercial paper in Global Banking & Markets and Group Treasury.
 
Settlement balances declined £3.5 billion, 32%, to £7.5 billion and short positions were down £2.1 billion, 5%, to £41.0 billion due to decreased customer activity.
 
Subordinated liabilities were down £0.7 billion, 3%, to £26.3 billion, primarily reflecting the redemption of £0.2 billion US dollar and £0.4 billion Euro denominated dated loan capital.
 
The Group's non-controlling interests decreased by £0.5 billion, 28%, to £1.2 billion, primarily due to the disposal of the majority of the RBS Sempra Commodities JV business, £0.4 billion.
 
Owners' equity decreased by £0.3 billion to £74.8 billion. This was driven by the attributable loss for the year, £2.0 billion, together with the recognition of actuarial losses in respect of the Group's defined benefit pension schemes, net of tax, £0.5 billion and exchange rate and other movements of £0.3 billion.  Offsetting these reductions were gains in available-for-sale reserves, £1.1 billion and cash flow hedging reserves, £1.0 billion and the issue of shares under employee share schemes, £0.4 billion.
 
 
Average balance sheet
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
 
% 
% 
  
% 
% 
           
Average yields, spreads and margins of the
  banking business
          
Gross yield on interest-earning assets of banking business
3.24 
3.29 
  
3.13 
3.21 
Cost of interest-bearing liabilities of banking business
(1.63)
(1.48)
  
(1.64)
(1.69)
           
Interest spread of banking business
1.61 
1.81 
  
1.49 
1.52 
Benefit from interest-free funds
0.31 
0.20 
  
0.35 
0.32 
           
Net interest margin of banking business
1.92 
2.01 
  
1.84 
1.84 
           
           
Average interest rates
          
The Group's base rate
0.50 
0.50 
  
0.50 
0.50 
           
London inter-bank three month offered rates
          
  - Sterling
0.87 
0.70 
  
0.99 
0.87 
  - Eurodollar
0.33 
0.34 
  
0.43 
0.30 
  - Euro
1.36 
0.75 
  
1.50 
1.51 
 
 
Average balance sheet (continued)
 
 
 
Year ended
Year ended
 
31 December 2011
31 December 2010
 
Average 
    
Average 
    
 
balance 
Interest 
Rate 
balance 
Interest 
Rate 
 
£m 
£m 
% 
£m 
£m 
% 
             
Assets
            
Loans and advances to banks
73,825 
697 
0.94 
52,721 
592 
1.12 
Loans and advances to
  customers
466,888 
17,979 
3.85 
508,400 
18,843 
3.71 
Debt securities
121,509 
2,749 
2.26 
128,837 
3,258 
2.53 
             
Interest-earning assets -
  banking business
662,222 
21,425 
3.24 
689,958 
22,693 
3.29 
             
Trading business
278,975 
    
276,330 
    
Non-interest earning assets
593,958 
    
705,916 
    
             
Total assets
1,535,155 
    
1,672,204 
    
             
Memo: Funded assets
1,075,717 
    
1,166,311 
    
             
Liabilities
            
Deposits by banks
64,114 
977 
1.52 
81,358 
1,330 
1.63 
Customer accounts
336,365 
3,531 
1.05 
341,641 
3,723 
1.09 
Debt securities in issue
162,208 
3,520 
2.17 
195,976 
3,251 
1.66 
Subordinated liabilities
23,571 
598 
2.54 
29,334 
732 
2.50 
Internal funding of trading
  business
(49,025)
109 
(0.22)
(48,315)
(181)
0.37 
             
Interest-bearing liabilities -
  banking business
537,233 
8,735 
1.63 
599,994 
8,855 
1.48 
             
Trading business
307,564 
    
293,993 
    
Non-interest-bearing liabilities
            
  - demand deposits
66,404 
    
53,016 
    
  - other liabilities
548,915 
    
648,295 
    
Owners' equity
75,039 
    
76,906 
    
             
Total liabilities and
  owners' equity
1,535,155 
    
1,672,204 
    
 
Notes:
 
(1)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(2)
Interest-earning assets and interest-bearing liabilities for 2010 exclude the Retail bancassurance long-term assets and liabilities, attributable to policyholders, in view of their distinct nature. As a result, net interest income has been increased by £6 million for the year ended 31 December 2010.
(3)
Interest receivable has been increased by £8 million (2010 - £11 million) and interest payable has been increased by £150 million (2010 - £30 million decrease) 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.
(4)
Interest receivable has been increased by nil (2010 - £90 million decrease) and interest payable has been decreased by £143 million (2010 - £319 million increase) in respect of non-recurring adjustments.
(5)
Interest receivable has been increased by £5 million (2010 - £10 million decrease) and interest payable has been decreased by £3 million (2010 - £1 million) to exclude the RFS Holdings minority interest and increased by £2 million in respect of exceptional interest receivable. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
 
 
Average balance sheet (continued)
 
 
 
Quarter ended
Quarter ended
 
31 December 2011
30 September 2011
 
Average 
    
Average 
    
 
balance 
Interest 
Rate 
balance 
Interest 
Rate 
 
£m 
£m 
% 
£m 
£m 
% 
             
Assets
            
Loans and advances to banks
91,359 
207 
0.90 
72,461 
154 
0.84 
Loans and advances to
  customers
453,051 
4,335 
3.80 
469,910 
4,506 
3.80 
Debt securities
120,203 
693 
2.29 
121,585 
713 
2.33 
             
Interest-earning assets -
  banking business
664,613 
5,235 
3.13 
663,956 
5,373 
3.21 
             
Trading business
271,183 
    
281,267 
    
Non-interest earning assets
655,374 
    
653,592 
    
             
Total assets
1,591,170 
    
1,598,815 
    
             
Memo: Funded assets
1,058,372 
    
1,087,227 
    
             
Liabilities
            
Deposits by banks
60,526 
228 
1.49 
64,198 
245 
1.51 
Customer accounts
340,742 
922 
1.07 
338,469 
921 
1.08 
Debt securities in issue
140,208 
833 
2.36 
161,703 
944 
2.32 
Subordinated liabilities
22,906 
146 
2.53 
23,000 
134 
2.31 
Internal funding of trading
  business
(44,408)
24 
(0.21)
(48,161)
55 
(0.45)
             
Interest-bearing liabilities -
  banking business
519,974 
2,153 
1.64 
539,209 
2,299 
1.69 
             
Trading business
299,789 
    
314,626 
    
Non-interest-bearing liabilities
            
  - demand deposits
70,538 
    
66,496 
    
  - other liabilities
625,702 
    
602,235 
    
Owners' equity
75,167 
    
76,249 
    
             
Total liabilities and
  owners' equity
1,591,170 
    
1,598,815 
    
 
Notes:
 
(1)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(2)
Interest payable has been decreased by £2 million (Q3 2011 - £1 million) to exclude the RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)
Interest receivable has been increased by £1 million (Q3 2011 - £2 million) and interest payable has been increased by £40 million (Q3 2011 - £47 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.
(4)
Interest payable has been decreased by £45 million (Q3 2011 - £41 million) in respect of non-recurring adjustments.
 
 
Condensed consolidated statement of changes in equity
for the period ended 31 December 2011
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Called-up share capital
            
At beginning of period
15,125 
14,630 
  
15,318 
15,317 
15,030 
Ordinary shares issued
193 
523 
  
- 
1 
121 
Preference shares redeemed
- 
(1)
  
- 
- 
1 
Cancellation of non-voting deferred shares
- 
(27)
  
- 
- 
(27)
             
At end of period
15,318 
15,125 
  
15,318 
15,318 
15,125 
             
Paid-in equity
            
At beginning of period
431 
565 
  
431 
431 
431 
Securities redeemed
- 
(132)
  
- 
- 
- 
Transfer to retained earnings
- 
(2)
  
- 
- 
- 
             
At end of period
431 
431 
  
431 
431 
431 
             
Share premium account
            
At beginning of period
23,922 
23,523 
  
23,923 
23,923 
23,858 
Ordinary shares issued
79 
281 
  
78 
- 
64 
Redemption of preference shares classified
  as debt
- 
118 
  
- 
- 
- 
             
At end of period
24,001 
23,922 
  
24,001 
23,923 
23,922 
             
Merger reserve
            
At beginning of period
13,272 
25,522 
  
13,222 
13,222 
13,272 
Transfer to retained earnings
(50)
(12,250)
  
- 
- 
- 
             
At end of period
13,222 
13,272 
  
13,222 
13,222 
13,272 
             
Available-for-sale reserve
            
At beginning of period
(2,037)
(1,755)
  
(292)
(1,026)
(1,242)
Unrealised gains/(losses)
1,769 
179 
  
(179)
1,005 
(1,148)
Realised losses/(gains) (1)
486 
(519)
  
69 
(12)
16 
Tax
(1,175)
74 
  
(555)
(259)
337 
Recycled to profit or loss on disposal of
  businesses (2)
- 
(16)
  
- 
- 
- 
             
At end of period
(957)
(2,037)
  
(957)
(292)
(2,037)
             
Cash flow hedging reserve
            
At beginning of period
(140)
(252)
  
798 
113 
119 
Amount recognised in equity
2,417 
180 
  
389 
1,203 
(149)
Amount transferred from equity to earnings
(993)
(59)
  
(265)
(264)
(197)
Tax
(405)
(67)
  
(43) 
(254)
87 
Recycled to profit or loss on disposal of
  businesses (3)
- 
58 
  
- 
- 
- 
             
At end of period
879 
(140)
  
879 
798 
(140)
 
For the notes to this table refer to page 78.
 
Condensed consolidated statement of changes in equity
for the period ended 31 December 2011 (continued)
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Foreign exchange reserve
            
At beginning of period
5,138 
4,528 
  
4,847 
4,834 
5,085 
Retranslation of net assets
(382)
997 
  
(111)
(31)
- 
Foreign currency (losses)/gains on hedges
  of net assets
(10)
(458)
  
20 
10 
(6)
Tax
23 
63 
  
13 
34 
34 
Recycled to profit or loss on disposal of
  businesses
6 
8 
  
6 
- 
25 
             
At end of period
4,775 
5,138 
  
4,775 
4,847 
5,138 
             
Capital redemption reserve
            
At beginning of period
198 
170 
  
198 
198 
172 
Preference shares redeemed
- 
1 
  
- 
- 
(1)
Cancellation of non-voting deferred shares
- 
27 
  
- 
- 
27 
             
At end of period
198 
198 
  
198 
198 
198 
             
Contingent capital reserve
            
At beginning and end of period
(1,208)
(1,208)
  
(1,208)
(1,208)
(1,208)
             
Retained earnings
            
At beginning of period
21,239 
12,134 
  
20,977 
19,726 
20,904 
(Loss)/profit attributable to ordinary and B
  shareholders and other equity owners
            
  - continuing operations
(2,002)
(973)
  
(1,798)
1,225 
12 
  - discontinued operations
5 
(28)
  
- 
1 
- 
Equity preference dividends paid
- 
(105)
  
- 
- 
- 
Paid-in equity dividends paid, net of tax
- 
(19)
  
- 
- 
- 
Transfer from paid-in equity
            
  - gross
- 
2 
  
- 
- 
- 
  - tax
- 
(1)
  
- 
- 
- 
Equity owners gain on withdrawal of
  non-controlling interest
            
  - gross
- 
40 
  
- 
- 
- 
  - tax
- 
(11)
  
- 
- 
- 
Redemption of equity preference shares
- 
(2,968)
  
- 
- 
- 
Gain on redemption of equity preference
  shares
- 
609 
  
- 
- 
- 
Redemption of preference shares classified
  as debt
- 
(118)
  
- 
- 
- 
Transfer from merger reserve
50 
12,250 
  
- 
- 
- 
Actuarial (losses)/gains recognised in
  retirement benefit schemes
            
  - gross
(581)
158 
  
(581)
- 
158 
  - tax
86 
(71)
  
86 
- 
(71)
Purchase of non-controlling interest
- 
(38)
  
- 
- 
(38)
Shares issued under employee share
  schemes
(58)
(13)
  
151 
(2)
(2)
Share-based payments
            
  - gross
200 
385 
  
98 
35 
282 
  - tax
(10)
6 
  
(4)
(8)
(6)
             
At end of period
18,929 
21,239 
  
18,929 
20,977 
21,239 
 
Condensed consolidated statement of changes in equity
for the period ended 31 December 2011 (continued)
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Own shares held
            
At beginning of period
(808)
(121)
  
(771)
(786)
(821)
Disposal/(purchase) of own shares
20 
(700)
  
1 
13 
11 
Shares issued under employee share
  schemes
19 
13 
  
1 
2 
2 
             
At end of period
(769)
(808)
  
(769)
(771)
(808)
             
Owners' equity at end of period
74,819 
75,132 
  
74,819 
77,443 
75,132 
             
Non-controlling interests
            
At beginning of period
1,719 
16,895 
  
1,433 
1,498 
1,780 
Currency translation adjustments and other
  movements
(54)
(466)
  
(32)
(1)
15 
Profit/(loss) attributable to non-controlling
  interests
            
  - continuing operations
(14)
(60)
  
8 
(12)
(17)
  - discontinued operations
42 
(605)
  
10 
5 
55 
Dividends paid
(40)
(4,200)
  
(1)
- 
17 
Movements in available-for-sale securities
            
  - unrealised gains/(losses)
1 
(56)
  
1 
- 
(2)
  - realised losses
2 
37 
  
2 
3 
1 
  - tax
(1)
5 
  
(1)
(1)
- 
  - recycled to profit or loss on disposal of
    discontinued operations (4)
- 
(7)
  
- 
- 
- 
Movements in cash flow hedging reserves
            
  - amounts recognised in equity
- 
(120)
  
- 
- 
(21)
  - tax
- 
39 
  
- 
- 
6 
  - recycled to profit or loss on disposal of
    discontinued operations (5)
- 
1,036 
  
- 
- 
15 
Equity raised
- 
559 
  
- 
- 
58 
Equity withdrawn and disposals
(421)
(11,298)
  
(186)
(59)
(188)
Transfer to retained earnings
- 
(40)
  
- 
- 
- 
             
At end of period
1,234 
1,719 
  
1,234 
1,433 
1,719 
             
Total equity at end of period
76,053 
76,851 
  
76,053 
78,876 
76,851 
             
Total comprehensive (loss)/income
  recognised in the statement of
  changes in equity is attributable to:
            
Non-controlling interests
(24)
(197)
  
(12)
(6)
52 
Preference shareholders
- 
105 
  
- 
- 
- 
Paid-in equity holders
- 
19 
  
- 
- 
- 
Ordinary and B shareholders
(756)
(598)
  
(2,949)
2,658 
(902)
             
 
(780)
(671)
  
(2,961)
2,652 
(850)
 
Notes:
 
(1)
Includes an impairment loss of £1,099 million in respect of the Group's holding of Greek government bonds, together with £169 million of related interest rate hedge adjustments, for the year ended 31 December 2011.
(2)
Net of tax (year ended 31 December 2010 - £5 million credit).
(3)
Net of tax (year ended 31 December 2010 - £19 million credit).
(4)
Net of tax (year ended 31 December 2010 - £2 million credit).
(5)
Net of tax (year ended 31 December 2010 - £340 million credit).
 Condensed consolidated cash flow statement
for the year ended 31 December 2011
 
 
 
2011 
2010 
 
£m 
£m 
     
Operating activities
    
Operating loss before tax
(766)
(399)
Operating loss before tax on discontinued operations
58 
(541)
Adjustments for non-cash items
7,661 
2,571 
     
Net cash inflow from trading activities
6,953 
1,631 
Changes in operating assets and liabilities
(3,444)
17,095 
     
Net cash flows from operating activities before tax
3,509 
18,726 
Income taxes received/(paid)
(184)
565 
     
Net cash flows from operating activities
3,325 
19,291 
     
Net cash flows from investing activities
14 
3,351 
     
Net cash flows from financing activities
(1,741)
(14,380)
     
Effects of exchange rate changes on cash and cash equivalents
(1,473)
82 
     
Net increase in cash and cash equivalents
125 
8,344 
Cash and cash equivalents at beginning of year
152,530 
144,186 
     
Cash and cash equivalents at end of year
152,655 
152,530 

 
Notes 
 
1. Basis of preparation
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 accounts for the year ended 31 December 2011 have been prepared on a going concern basis.
 
2. Accounting policies
The annual accounts are 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).
 
Recent developments in IFRS
In May 2011, the IASB issued six new or revised standards:
 
IFRS 10 Consolidated Financial Statements which replaces SIC-12 Consolidation - Special Purpose Entities and the consolidation elements of the existing IAS 27 Consolidated and Separate Financial Statements.  The new standard adopts a single definition of control: a reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity.
 
IAS 27 Separate Financial Statements which comprises those parts of the existing IAS 27 that dealt with separate financial statements.
 
IFRS 11 Joint Arrangements which supersedes IAS 31 Interests in Joint Ventures. IFRS 11 distinguishes between joint operations and joint ventures. Joint operations are accounted for by the investor recognising its assets and liabilities including its share of any assets held and liabilities incurred jointly and its share of revenues and costs. Joint ventures are accounted for in the investor's consolidated accounts using the equity method.
 
IAS 28 Investments in Associates and Joint Ventures covers joint ventures as well as associates; both must be accounted for using the equity method. The mechanics of the equity method are unchanged.
 
IFRS 12 Disclosure of Interests in Other Entities covers disclosures for entities reporting under IFRS 10 and IFRS 11 replacing those in IAS 28 and IAS 27. Entities are required to disclose information that helps financial statement readers evaluate the nature, risks and financial effects associated with an entity's interests in subsidiaries, in associates and joint arrangements and in unconsolidated structured entities.
 
IFRS 13 Fair Value Measurement which sets out a single IFRS framework for defining and measuring fair value and requiring disclosures about fair value measurements.
 
These standards are effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted. The Group is reviewing the standards to determine their effect on the Group's financial reporting.
 
 
Notes (continued)
 
2. Accounting policies (continued)
 
Recent developments in IFRS (continued)
In June 2011, the IASB issued amendments to two standards:
 
Amendments to IAS 1 Presentation of Items of Other Comprehensive Income that require items that will never be recognised in profit or loss to be presented separately in other comprehensive income from those that are subject to subsequent reclassification. The amendments are effective for annual periods beginning on or after 1 July 2012. Earlier application is permitted.
 
Amendments IAS 19 Employee Benefits - these require the immediate recognition of all actuarial gains and losses eliminating the 'corridor approach'; interest cost to be calculated on the net pension liability or asset at the appropriate corporate bond rate; and all past service costs to be recognised immediately when a scheme is curtailed or amended. These amendments are effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted. The Group is reviewing the amendments to determine their effect on the Group's financial reporting.
 
In December 2011, the IASB issued Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) andDisclosures-Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). The amendment to IAS 32 adds application guidance on the meaning of 'a legally enforceable right to set off' and on simultaneous settlement. IFRS 7 is amended to require disclosures facilitating comparisons between those entities reporting under IFRS and those reporting under US GAAP.  The amendments are effective for annual periods beginning on or after 1 January 2014 and are required to be applied retrospectively.
 
 
Notes (continued)
 
3. Analysis of income, expenses and impairment losses
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Loans and advances to customers
17,969 
18,889 
  
4,336 
4,505 
4,755 
Loans and advances to banks
697 
591 
  
207 
154 
167 
Debt securities
2,744 
3,296 
  
691 
712 
690 
             
Interest receivable
21,410 
22,776 
  
5,234 
5,371 
5,612 
             
Customer accounts
3,529 
3,721 
  
926 
919 
926 
Deposits by banks
982 
1,333 
  
226 
248 
288 
Debt securities in issue
3,371 
3,277 
  
794 
897 
866 
Subordinated liabilities
740 
417 
  
190 
175 
(18)
Internal funding of trading businesses
109 
(181)
  
24 
55 
(30)
             
Interest payable
8,731 
8,567 
  
2,160 
2,294 
2,032 
             
Net interest income
12,679 
14,209 
  
3,074 
3,077 
3,580 
             
Fees and commissions receivable
6,384 
8,193 
  
1,590 
1,452 
2,052 
Fees and commissions payable
            
  - banking
(962)
(1,892)
  
(339)
(204)
(392)
  - insurance related
(498)
(319)
  
(234)
(100)
(57)
             
Net fees and commissions
4,924 
5,982 
  
1,017 
1,148 
1,603 
             
Foreign exchange
1,327 
1,491 
  
308 
441 
217 
Interest rate
760 
1,862 
  
76 
33 
(165)
Credit
(15)
41 
  
(695)
366 
83 
Other
629 
1,123 
  
73 
117 
229 
             
Income/(loss) from trading activities
2,701 
4,517 
  
(238)
957 
364 
             
Gain on redemption of own debt
255 
553 
  
(1)
1 
- 
             
Operating lease and other rental income
1,307 
1,394 
  
308 
327 
369 
Changes in fair value of own debt
1,621 
249 
  
(200)
1,887 
472 
Changes in the fair value of securities and
  other financial assets and liabilities
150 
(180)
  
6 
(148)
(83)
Changes in the fair value of investment
  properties
(139)
(405)
  
(65)
(22)
(293)
Profit on sale of securities
882 
496 
  
179 
274 
(10)
Profit on sale of property, plant and
  equipment
22 
50 
  
(5)
5 
29 
(Loss)/profit on sale of subsidiaries and
  associates
(28)
(107) 
  
(15)
(39)
511 
Life business (losses)/profits
(13)
90 
  
- 
(8)
29 
Dividend income
62 
69 
  
15 
14 
11 
Share of profits less losses of associated
  entities
26 
70 
  
6 
5 
14 
Other income
232 
(247)
  
(24)
89 
(46)
             
Other operating income
4,122 
1,479 
  
205 
2,384 
1,003 
 
Refer to Appendix 1 for a reconciliation between the managed and statutory bases for key line items.
 
 
Notes (continued)
 
3. Analysis of income, expenses and impairment losses (continued)
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Non-interest income (excluding
  insurance net premium income)
12,002 
12,531 
  
983 
4,490 
2,970 
Insurance net premium income
4,256 
5,128 
  
981 
1,036 
1,272 
             
Total non-interest income
16,258 
17,659 
  
1,964 
5,526 
4,242 
             
Total income
28,937 
31,868 
  
5,038 
8,603 
7,822 
             
             
Staff costs
8,678 
9,671 
  
1,993 
2,076 
2,194 
Premises and equipment
2,451 
2,402 
  
674 
604 
709 
Other (1)
4,931 
3,995 
  
1,296 
962 
1,048 
             
Administrative expenses
16,060 
16,068 
  
3,963 
3,642 
3,951 
Depreciation and amortisation
1,875 
2,150 
  
513 
485 
546 
Write-down of goodwill and other
  intangible assets
91 
10 
  
91 
- 
10 
             
Operating expenses
18,026 
18,228 
  
4,567 
4,127 
4,507 
             
General insurance
2,968 
4,698 
  
529 
734 
1,151 
Bancassurance
- 
85 
  
- 
- 
31 
             
Insurance net claims
2,968 
4,783 
  
529 
734 
1,182 
             
Loan impairment losses
7,241 
9,144 
  
1,654 
1,452 
2,155 
Securities impairment losses
            
  - sovereign debt impairment and related
    interest rate hedge adjustments
1,268 
- 
  
224 
202 
- 
  - other
200 
112 
  
40 
84 
(14)
             
Impairment losses
8,709 
9,256 
  
1,918 
1,738 
2,141 
 
Note:
 
(1)
Includes Payment Protection Insurance costs of £850 million reflected in the quarter ended 30 June 2011.
 
Refer to Appendix 1 for a reconciliation between the managed and statutory bases for key line items.

 
Notes (continued)
 
3. Analysis of income, expenses and impairment losses (continued)
 
Staff expenses
 
 
Staff expenses comprise
2011 
£m 
2010 
£m 
Change
%
       
Salaries
5,423 
5,473 
(1)
Variable compensation
985 
1,246 
(21)
Temporary and contract costs
846 
700 
21 
Share based compensation
197 
397 
(50)
Bonus tax
27 
99 
(73)
Social security costs
640 
661 
(3)
Post retirement benefits
447 
569 
(21)
Other *
113 
526 
(79)
       
Staff  expenses
8,678 
9,671 
(10)
 
*  Other includes severance costs and variable compensation for disposal groups.
 
Variable compensation awards
The following table analyses Group and GBM variable compensation awards for 2011, which are 43% and 58% respectively lower than in 2010.
 
 
Group
  
GBM
 
2011 
£m 
2010 
£m 
Change
%
  
2011 
£m 
2010 
£m 
Change
%
               
Non-deferred cash awards (1)
72 
89 
(19)
  
10 
18 
(44)
Non-deferred share awards
35 
54 
(35)
  
23 
43 
(47)
               
Total non-deferred variable compensation
107 
143 
(25)
  
33 
61 
(46)
               
Deferred bond awards
582 
1,029 
(43)
  
286 
701 
(59)
Deferred share awards
96 
203 
(53)
  
71 
175 
(59)
               
Total deferred variable compensation
678 
1,232 
(45)
  
357 
876 
(59)
               
Total variable compensation
785 
1,375 
(43)
  
390 
937 
(58)
               
Variable compensation as a % of core
  operating profit (2)
11% 
16% 
    
18% 
22% 
  
Proportion of variable compensation that is
  deferred
86% 
90% 
    
92% 
93% 
  
               
Total employees
146,800 
148,500 
(1)
  
17,000 
18,700 
(9)
Variable compensation per employee
£5,347 
£9,260 
(42)
  
£22,941 
£50,114 
(54)
 
 
Reconciliation of variable compensation awards to income statement charge
2011 
£m 
2010 
£m 
     
Variable compensation awarded  for 2011
785 
1,375 
Less: deferral of charge for amounts awarded for current year
(302)
(512)
Add: current year charge for amounts deferred  from prior years
502 
383 
     
Income statement charge for variable compensation
985 
1,246 
 
 
 
Actual
  
Expected
Year in which income statement charge is expected to be taken for deferred variable compensation
2010 
£m 
2011 
£m 
  
 
2012 
£m 
2013
and beyond 
£m 
           
Variable compensation deferred from 2009 and earlier
383 
160 
  
78 
- 
Variable compensation deferred from  2010
- 
342 
  
105 
65 
Variable compensation for  2011 deferred
- 
- 
  
225 
77 
           
 
383 
502 
  
408 
142 
 
Notes:
 
(1)
Cash payments to all employees are limited to £2,000.
(2)
Core operating profit pre variable compensation expense and before one-off and other items.
 
 
Notes (continued)
 
4. Loan impairment provisions  
Operating (loss)/profit is stated after charging loan impairment losses of £7,241 million (2010 - £9,144 million). The balance sheet loan impairment provisions increased in the year ended 31 December 2011 from £18,182 million to £19,883 million and the movements thereon were:
 
 
 
Year ended
 
31 December 2011
  
31 December 2010
 
Core 
Non- 
Core 
RFS MI 
Total 
  
Core 
Non- 
Core 
RFS MI 
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
At beginning of period
7,866 
10,316 
- 
18,182 
  
6,921 
8,252 
2,110 
17,283 
Transfers to disposal groups
(773)
- 
- 
(773)
  
- 
(72)
- 
(72)
Intra-group transfers
177 
(177)
- 
- 
  
(568)
568 
- 
- 
Currency translation and other
  adjustments
(76)
(207)
- 
(283)
  
(16)
59 
- 
43 
Disposals
- 
- 
8 
8 
  
- 
(20)
(2,152)
(2,172)
Amounts written-off
(2,137)
(2,390)
- 
(4,527)
  
(2,224)
(3,818)
- 
(6,042)
Recoveries of amounts previously
  written-off
167 
360 
- 
527 
  
213 
198
- 
411 
Charge to income statement
                  
  - continued
3,403 
3,838 
- 
7,241 
  
3,737 
5,407
- 
9,144 
  - discontinued
- 
- 
(8)
(8)
  
- 
- 
42 
42 
Unwind of discount (recognised in interest
  income)
(213)
(271)
- 
(484)
  
(197)
(258)
- 
(455)
                   
At end of period
8,414 
11,469 
- 
19,883 
  
7,866 
10,316 
- 
18,182 
 
 
 
Quarter ended
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
Core 
Non- 
Core 
RFS 
MI 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
RFS 
MI 
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                           
At beginning of period
8,873 
11,850 
- 
20,723 
  
8,752 
12,007 
20,759 
  
7,791 
9,879 
- 
17,670 
Transfers to disposal
  groups
(773)
- 
- 
(773)
  
- 
- 
- 
  
- 
(5)
 
- 
(5)
Intra-group transfers
- 
- 
- 
- 
  
- 
- 
- 
  
(217)
217 
- 
- 
Currency translation and
  other adjustments
(75)
(162)
- 
(237)
  
(90)
(285)
(375)
  
147 
(235)
- 
(88)
Disposals
- 
- 
(3)
(3)
  
- 
- 
- 
  
- 
(3)
(3)
(6)
Amounts written-off
(526)
(981)
- 
(1,507)
  
(593)
(497)
(1,090)
  
(745)
(771)
- 
(1,516)
Recoveries of amounts
  previously written-off
48 
99 
- 
147 
  
39 
55 
94 
  
29 
67 
- 
96 
Charge to income
  statement
                          
  - continued
924 
730 
- 
1,654 
  
817 
635 
1,452 
  
912 
1,243 
- 
2,155 
  - discontinued
- 
- 
3 
3 
  
- 
- 
- 
  
- 
- 
3 
3 
Unwind of discount
  (recognised in interest
  income)
(57)
(67)
- 
(124)
  
(52)
(65)
(117)
  
(51)
(76)
- 
(127)
                           
At end of period
8,414 
11,469 
- 
19,883 
  
8,873 
11,850 
20,723 
  
7,866 
10,316 
- 
18,182 
 
Provisions at 31 December 2011 include £123 million (30 September 2011 - £126 million; 31 December 2010 - £127 million) in respect of loans and advances to banks.
 
The table above excludes impairments relating to securities (see page 153).
 
 
Notes (continued)
 
5. Pensions
 
 
 
2011 
2010 
Pension costs
£m 
£m 
     
Defined benefit schemes
349 
462 
Defined contribution schemes
98 
107 
     
 
447 
569 
 
 
 
2011 
2010 
Net pension deficit/(surplus)
£m 
£m 
     
At 1 January
2,183 
2,905 
Currency translation and other adjustments
(3)
- 
Income statement
    
  - pension costs
    
    - continuing operations
349 
519 
    - discontinued operations
- 
21 
  - curtailment gains: continuing operations
- 
(78)
Net actuarial losses/(gains)
581 
(158)
Contributions by employer
(1,059)
(832)
Disposal of RFS minority interest
- 
(194)
     
At 31 December
2,051 
2,183 
     
Net assets of schemes in surplus
(188)
(105)
Net liabilities of schemes in deficit
2,239 
2,288 
 
The Group and the Trustees of The Royal Bank of Scotland Group Pension Fund agreed the funding valuation as at 31 March 2010 during the year. It showed that the value of liabilities exceed the value of assets by £3.5 billion as at 31 March 2010, a ratio of assets to liabilities of 84%. In order to eliminate this deficit, the Group will pay additional contributions each year over the period 2011 to 2018. These contributions started at £375 million per annum in 2011, increasing to £400 million per annum in 2013 and from 2016 onwards will be further increased in line with price inflation. These contributions are in addition to the regular annual contributions of around £300 million for future accrual benefits.
 
 
Notes (continued)
 
6. Tax
The actual tax (charge)/credit differs from the expected tax (charge)/credit computed by applying the standard UK corporation tax rate of 26.5% (2010 - 28%) as follows:
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
(Loss)/profit before tax
(766)
(399)
  
(1,976)
2,004 
(8)
             
Tax credit/(charge) based on the standard UK
  corporation tax rate of 26.5% (2010 - 28%)
203 
112 
  
524 
(531)
2 
Sovereign debt impairment where no
  deferred tax asset recognised
(275)
- 
  
(56)
(36)
- 
Other losses in period where no deferred
  tax asset recognised
(530)
(450)
  
(195)
(67)
(96)
Foreign profits taxed at other rates
(417)
(517)
  
(46)
(71)
(131)
UK tax rate change - deferred tax impact
(110)
(82)
  
27 
(50)
8 
Unrecognised timing differences
(20)
11 
  
- 
(10)
18 
Non-deductible goodwill impairment
(24)
(3)
  
(24)
- 
(3)
Items not allowed for tax
            
  - losses on strategic disposals and
     write-downs
(72)
(311)
  
(58)
(4)
(129)
  - UK bank levy
(80)
- 
  
(80)
- 
- 
  - employee share schemes
(113)
(32)
  
(101)
(4)
(32)
  - other disallowable items
(271)
(296)
  
(123)
(46)
(162)
Non-taxable items
            
  - gain on sale of Global Merchant Services
12 
221 
  
- 
- 
221 
  - gain on redemption of own debt
- 
11 
  
- 
- 
(1)
  - other non-taxable items
245 
341 
  
208 
16 
240 
Taxable foreign exchange movements
4 
4 
  
2 
2 
2 
Losses brought forward and utilised
2 
2 
  
(29)
2 
(8)
Adjustments in respect of prior periods
196 
355 
  
137 
8 
74 
             
Actual tax (charge)/credit
(1,250)
(634)
  
186 
(791)
3 
 
The high tax charge in the year ended 31 December 2011 reflects profits in high tax regimes (principally US) and losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland and the Netherlands) and the effect of the two reductions of 1% in the rate of UK corporation tax enacted in March 2011 and July 2011 on the net deferred tax balance.
 
The combined effect of the tax losses in Ireland and the Netherlands (including the sovereign debt impairment and related interest rate hedge adjustments) in the year ended 31 December 2011 for which no deferred tax asset has been recognised and the two 1% changes in the standard rate of UK corporation tax, account for £1,020 million (70%) of the difference between the actual tax charge and the tax credit derived from applying the standard UK Corporation Tax rate to the results for the period. The impact of these items for the quarter ended 31 December 2011 is £165 million (49%).
 
 
Notes (continued)
 
6. Tax (continued)
The Group has recognised a deferred tax asset at 31 December 2011 of £3,878 million (30 September 2011 - £4,988 million; 31 December 2010 - £6,373 million), of which £2,933 million (30 September 2011 - £3,014 million; 31 December 2010 - £3,849 million) relates to carried forward trading losses in the UK. Under UK tax legislation, these UK losses can be carried forward indefinitely to be utilised against profits arising in the future. The deferred tax asset balance has reduced over the period primarily as a result of the utilisation of tax losses brought forward and the impact of the reductions in the rate of UK corporation tax. The Group has considered the carrying value of this asset as at 31 December 2011 and concluded that it is recoverable based on future profit projections.
 
7. Profit/(loss) attributable to non-controlling interests
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Trust preferred securities
- 
10 
  
- 
- 
- 
RBS Sempra Commodities JV
(18)
35 
  
(5)
(8)
(11)
RFS Holdings BV Consortium Members
35 
(726)
  
8 
3 
49 
RBS Life Holdings
- 
26 
  
- 
- 
9 
Other
11 
(10)
  
15 
(2)
(9)
             
Profit/(loss) attributable to non-controlling
  interests
28 
(665)
  
18 
(7)
38 
 
8. Dividends
The Group has undertaken that, unless otherwise agreed with the European Commission, neither the company nor any of its direct or indirect subsidiaries (other than companies in the RBS Holdings N.V. group, which are subject to different restrictions) will pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier 2 instruments) from 30 April 2010 and for a period of two years thereafter ("the Deferral period"), or exercise any call rights in relation to these capital instruments between 24 November 2009 and the end of the deferral period, unless there is a legal obligation to do so. Hybrid capital instruments issued after 24 November 2009 will generally not be subject to the restriction on dividend or coupon payments or call options.
 
 
Notes (continued)
 
9. Earnings per ordinary and B share
Earnings per ordinary and B share have been calculated based on the following:
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
Earnings
            
(Loss)/profit from continuing operations
  attributable to ordinary and B shareholders
(2,002)
(1,097)
  
(1,798)
1,225 
12 
Gain on redemption of preference shares and
  paid-in equity
- 
610 
  
- 
- 
- 
             
(Loss)/adjusted profit from continuing
  operations attributable to ordinary and
  B shareholders
(2,002)
(487)
  
(1,798)
1,225 
12 
             
Profit/(loss) from discontinued operations
  attributable to ordinary and B shareholders
5 
(28)
  
- 
1 
- 
             
Ordinary shares in issue during the period
  (millions)
57,219 
56,245 
  
57,552 
57,541 
56,166 
B shares in issue during the period (millions)
51,000 
51,000 
  
51,000 
51,000 
51,000 
             
Weighted average number of ordinary
  and B shares in issue during the
  period (millions)
108,219 
107,245 
  
108,552 
108,541 
107,166 
Effect of dilutive share options and
  convertible securities
- 
- 
  
- 
891 
- 
             
Diluted weighted average number of ordinary
  and B shares in issue during the period
108,219 
107,245 
  
108,552 
109,432 
107,166 
             
Basic (loss)/earnings per ordinary and B
  share from continuing operations
(1.8p)
(0.5p)
  
(1.7p)
1.1p 
- 
Fair value of own debt
(1.3p)
(0.1p)
  
0.2p 
(1.7p)
(0.4p)
Asset Protection Scheme
0.6p 
1.1p 
  
0.1p 
- 
0.5p 
Payment Protection Insurance costs
0.6p 
- 
  
- 
- 
- 
Sovereign debt impairment
1.0p 
- 
  
0.2p 
- 
- 
Amortisation of purchased intangible assets
0.1p 
0.2p 
  
- 
- 
0.1p 
Integration and restructuring costs
0.6p 
0.8p 
  
0.5p 
0.3p 
0.3p 
Gain on redemption of own debt
(0.2p)
(1.0p)
  
- 
- 
- 
Strategic disposals
0.1p 
(0.1p)
  
0.1p 
- 
(0.5p)
Bank levy
0.3p 
- 
  
0.3p 
- 
- 
Bonus tax
- 
0.1p 
  
- 
- 
- 
Interest rate hedge adjustments on impaired
  available-for-sale Greek government bonds
0.2p 
- 
  
- 
0.2p 
- 
             
Adjusted earnings/(loss) per ordinary
  and B share from continuing operations
0.2p 
0.5p 
  
(0.3p)
(0.1p)
- 
Earnings/(loss) from Non-Core attributable to
  ordinary and B shareholders
0.5p 
1.9p 
  
(0.3p)
0.1p 
0.4p 
             
Core adjusted earnings per ordinary
  and B share from continuing operations
0.7p 
2.4p 
  
(0.6p)
- 
0.4p 
Core impairment losses
0.5p 
1.3p 
  
(0.2p)
0.1p 
0.3p 
             
Pre-impairment Core adjusted
  earnings per ordinary and B share
1.2p 
3.7p
  
(0.8p)
0.1p 
0.7p 
Memo: Core adjusted earnings per
  ordinary and B share from continuing
  operations assuming normalised tax
  rate of 26.5% (2010 - 28.0%)
4.1p 
4.8p 
  
0.7p 
0.9p 
1.1p 
             
Diluted (loss)/earnings per ordinary and
  B share from continuing operations
(1.8p)
(0.5p)
  
(1.7p)
1.1p 
- 
 
 
Notes (continued)
 
10. Segmental analysis
There have been no significant changes in the Group's divisions during the year.
 
Analysis of divisional operating profit/(loss)
The following tables provide an analysis of divisional operating profit/(loss) for the years ended 31 December 2011 and 31 December 2010 and the quarters ended 31 December 2011, 30 September 2011 and 31 December 2010 by main income statement captions. The divisional income statements on pages 22 to 67 reflect certain presentational reallocations as described in the notes below. These do not affect the overall operating profit/(loss).
 
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Year ended 31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
4,272 
1,206 
5,478 
(2,699)
- 
(788)
1,991 
UK Corporate
2,585 
1,275 
3,860 
(1,661)
- 
(785)
1,414 
Wealth
718 
459 
1,177 
(831)
- 
(25)
321 
Global Transaction Services
1,076 
1,175 
2,251 
(1,342)
- 
(166)
743 
Ulster Bank
696 
211 
907 
(547)
- 
(1,384)
(1,024)
US Retail & Commercial
1,896 
1,004 
2,900 
(2,096)
- 
(325)
479 
Global Banking & Markets (1)
665 
5,276 
5,941 
(4,331)
- 
(49)
1,561 
RBS Insurance (2)
343 
3,729 
4,072 
(846)
(2,772)
- 
454 
Central items
(228)
213 
(15)
170 
(1)
2 
156 
               
Core
12,023 
14,548 
26,571 
(14,183)
(2,773)
(3,520)
6,095 
Non-Core (3)
666 
540 
1,206 
(1,295)
(195)
(3,919)
(4,203)
               
Managed basis
12,689 
15,088 
27,777 
(15,478)
(2,968)
(7,439)
1,892 
Reconciling items
              
Fair value of own debt (4)
- 
1,846 
1,846 
- 
- 
- 
1,846 
Asset Protection Scheme (5)    
- 
(906)
(906)
- 
- 
- 
(906)
Payment Protection Insurance costs
- 
- 
- 
(850)
- 
- 
(850)
Sovereign debt impairment
- 
- 
- 
- 
- 
(1,099)
(1,099)
Amortisation of purchased
  intangible assets
- 
- 
- 
(222)
- 
- 
(222)
Integration and restructuring costs
(2)
(3)
(5)
(1,059)
- 
- 
(1,064)
Gain on redemption of own debt
- 
255 
255 
- 
- 
- 
255 
Strategic disposals
- 
(24)
(24)
(80)
- 
- 
(104)
Bank levy
- 
- 
- 
(300)
- 
- 
(300)
Bonus tax
- 
- 
- 
(27)
- 
- 
(27)
Write-down of goodwill and other
  intangible assets
- 
- 
- 
(11)
- 
- 
(11)
Interest rate hedge adjustments on
  impaired available-for-sale Greek
  government bonds
- 
- 
- 
- 
- 
(169)
(169)
RFS Holdings minority interest
(8)
2 
(6)
1 
- 
(2)
(7)
               
Statutory basis
12,679 
16,258 
28,937 
(18,026)
(2,968)
(8,709)
(766)
 
Notes:
 
(1)
Reallocation of £54 million between net interest income and non-interest income in respect of funding costs of rental assets, £42 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £12 million.
(2)
Total income includes £265 million investment income, of which £205 million is included in net interest income and £60 million in non-interest income.  Reallocation of £138 million between non-interest income and net interest income in respect of instalment income.
(3)
Reallocation of £215 million between net interest income and non-interest income in respect of funding costs of rental assets, £210 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £5 million.
(4)
Comprises £225 million gain included in 'Income and trading activities' and £1,621 million gain included in 'Other operating income' on a statutory basis.
(5)
Included in 'Income from trading activities' on a statutory basis.

 
 
Notes (continued)
 
10. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Year ended 31 December 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail (1)
4,078 
1,422 
5,500 
(2,883)
(85)
(1,160)
1,372 
UK Corporate
2,572 
1,323 
3,895 
(1,671)
- 
(761)
1,463 
Wealth
609 
447 
1,056 
(734)
- 
(18)
304 
Global Transaction Services
974 
1,587 
2,561 
(1,464)
- 
(9)
1,088 
Ulster Bank
761 
214 
975 
(575)
- 
(1,161)
(761)
US Retail & Commercial
1,917 
1,029 
2,946 
(2,123)
- 
(517)
306 
Global Banking & Markets (2)
1,215 
6,697 
7,912 
(4,397)
- 
(151)
3,364 
RBS Insurance (3)
381 
4,135 
4,516 
(879)
(3,932)
- 
(295)
Central items
10 
327 
337 
272 
(29)
(3)
577 
               
Core
12,517 
17,181 
29,698 
(14,454)
(4,046)
(3,780)
7,418 
Non-Core (4)
1,683 
1,281 
2,964 
(2,256)
(737)
(5,476)
(5,505)
               
Managed basis
14,200 
18,462 
32,662 
(16,710)
(4,783)
(9,256)
1,913 
Reconciling items
              
Fair value of own debt (5)
- 
174 
174 
- 
- 
- 
174 
Asset Protection Scheme (6)    
- 
(1,550)
(1,550)
- 
- 
- 
(1,550)
Amortisation of purchased
  intangible assets
- 
- 
- 
(369)
- 
- 
(369)
Integration and restructuring costs
- 
- 
- 
(1,032)
- 
- 
(1,032)
Gain on redemption of own debt
- 
553 
553 
- 
- 
- 
553 
Strategic disposals
- 
171 
171 
- 
- 
- 
171 
Bonus tax
- 
- 
- 
(99)
- 
- 
(99)
Write-down of goodwill and other
  intangible assets
- 
- 
- 
(10)
- 
- 
(10)
RFS Holdings minority interest
9 
(151)
(142)
(8)
- 
- 
(150)
               
Statutory basis
14,209 
17,659 
31,868 
(18,228)
(4,783)
(9,256)
(399)
 
Notes:
 
(1)
Reallocation of bancassurance claims of £85 million from non-interest income.
(2)
Reallocation of £61 million between net interest income and non-interest income in respect of funding costs of rental assets, £37 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £24 million.
(3)
Total income includes £277 million investment income of which £222 million is included in net interest income and £55 million in non-interest income. Reallocation of £159 million between non-interest income and net interest income in respect of instalment income.
(4)
Reallocation of £276 million between net interest income and non-interest income in respect of funding assets, £283 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £7 million.
(5)
Comprises £75 million loss included in 'Income from trading activities' and £249 million gain included in 'Other operating income', on a statutory basis.
(6)
Included in 'Income from trading activities' on a statutory basis.
 
 

 
Notes (continued)
 
10. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Quarter ended 31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
1,036 
277 
1,313 
(661)
- 
(191)
461 
UK Corporate
634 
291 
925 
(416)
- 
(234)
275 
Wealth
191 
112 
303 
(194)
- 
(13)
96 
Global Transaction Services
277 
296 
573 
(329)
- 
(47)
197 
Ulster Bank
171 
49 
220 
(132)
- 
(327)
(239)
US Retail & Commercial
493 
258 
751 
(529)
- 
(65)
157 
Global Banking & Markets (1)
159 
753 
912 
(939)
- 
(68)
(95)
RBS Insurance (2)
82 
841 
923 
(209)
(589)
- 
125 
Central items
(40)
43 
3 
79 
(1)
4 
85 
               
Core
3,003 
2,920 
5,923 
(3,330)
(590)
(941)
1,062 
Non-Core (3)
73 
(377)
(304)
(314)
61 
(751)
(1,308)
               
Managed basis
3,076 
2,543 
5,619 
(3,644)
(529)
(1,692)
(246)
Reconciling items
              
Fair value of own debt (4)
- 
(370)
(370)
- 
- 
- 
(370)
Asset Protection Scheme (5)
- 
(209)
(209)
- 
- 
- 
(209)
Sovereign debt impairment
- 
- 
- 
- 
- 
(224)
(224)
Amortisation of purchased intangible
  assets
- 
- 
- 
(53)
- 
- 
(53)
Integration and restructuring costs
- 
- 
- 
(478)
- 
- 
(478)
Gain on redemption of own debt
- 
(1)
(1)
- 
- 
- 
(1)
Strategic disposals
- 
(2)
(2)
(80)
- 
- 
(82)
Bank levy
- 
- 
- 
(300)
- 
- 
(300)
Write-down of goodwill and other
  intangible assets
- 
- 
- 
(11)
- 
- 
(11)
RFS Holdings minority interest
(2)
3 
1 
(1)
- 
(2)
(2)
               
Statutory basis
3,074 
1,964 
5,038 
(4,567)
(529)
(1,918)
(1,976)
 
Notes:
 
(1)
Reallocation of £15 million between net interest income and non-interest income in respect of funding costs of rental assets, £12 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £3 million.
(2)
Total income includes £60 million investment income of which £49 million is included in net interest income and £11 million in non-interest income. Reallocation of £33 million between non-interest income and net interest income in respect of instalment income.
(3)
Reallocation of £56 million between net interest income and non-interest income in respect of funding costs of rental assets, £55 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(4)
Comprises £170 million loss included in 'Income from trading activities' and £200 million loss included in 'Other operating income' on a statutory basis.
(5)
Included in 'Income from trading activities' on a statutory basis.

 
Notes (continued)
 
10. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Quarter ended 30 September 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
1,074 
292 
1,366 
(672)
- 
(195)
499 
UK Corporate
621 
327 
948 
(419)
- 
(228)
301 
Wealth
178 
118 
296 
(221)
- 
(4)
71 
Global Transaction Services
276 
300 
576 
(336)
- 
(45)
195 
Ulster Bank
185 
60 
245 
(137)
- 
(327)
(219)
US Retail & Commercial
483 
257 
740 
(541)
- 
(84)
115 
Global Banking & Markets (1)
161 
938 
1,099 
(1,019)
- 
32 
112 
RBS Insurance (2)
84 
949 
1,033 
(215)
(695)
- 
123 
Central items
(94)
103 
9 
62 
(1)
(3)
67 
               
Core
2,968 
3,344 
6,312 
(3,498)
(696)
(854)
1,264 
Non-Core (3)
110 
(64)
46 
(323)
(38)
(682)
(997)
               
Managed basis
3,078 
3,280 
6,358 
(3,821)
(734)
(1,536)
267 
Reconciling items
              
Fair value of own debt (4)
- 
2,357 
2,357 
- 
- 
- 
2,357 
Asset Protection Scheme (5)
- 
(60)
(60)
- 
- 
- 
(60)
Sovereign debt impairment and related
  interest rate hedge adjustments
- 
- 
- 
- 
- 
(202)
(202)
Amortisation of purchased intangible
  assets
- 
- 
- 
(69)
- 
- 
(69)
Integration and restructuring costs
- 
- 
- 
(233)
- 
- 
(233)
Gain on redemption of own debt
- 
1 
1 
- 
- 
- 
1 
Strategic disposals
- 
(49)
(49)
- 
- 
- 
(49)
Bonus tax
- 
- 
- 
(5)
- 
- 
(5)
RFS Holdings minority interest
(1)
(3)
(4)
1 
- 
- 
(3)
               
Statutory basis
3,077 
5,526 
8,603 
(4,127)
(734)
(1,738)
2,004 
 
Notes:
 
(1)
Reallocation of £13 million between net interest income and non-interest income in respect of funding costs of rental assets, £10 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £3 million.
(2)
Total income includes £72 million investment income of which £49 million is included in net interest income and £23 million in non-interest income. Reallocation of £35 million between non-interest income and net interest income in respect of instalment income.
(3)
Reallocation of £54 million between net interest income and non-interest income in respect of funding costs of rental assets, £53 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(4)
Comprises £470 million gain included in 'Income from trading activities' and £1,887 million gain included in 'Other operating income' on a statutory basis.
(5)
Included in 'Income from trading activities' on a statutory basis.
 
 
Notes (continued)
 
10. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Quarter ended 31 December 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail (1)
1,088 
402 
1,490 
(679)
(31)
(222)
558 
UK Corporate
653 
330 
983 
(431)
- 
(219)
333 
Wealth
160 
111 
271 
(178)
- 
(6)
87 
Global Transaction Services
263 
375 
638 
(368)
- 
(3)
267 
Ulster Bank
187 
56 
243 
(138)
- 
(376)
(271)
US Retail & Commercial
467 
231 
698 
(529)
- 
(105)
64 
Global Banking & Markets (2)
214 
1,373 
1,587 
(1,065)
- 
5 
527 
RBS Insurance (3)
96 
1,016 
1,112 
(223)
(898)
- 
(9)
Central items
92 
24 
116 
11 
(8)
(4)
115 
               
Core
3,220 
3,918 
7,138 
(3,600)
(937)
(930)
1,671 
Non-Core (4)
358 
(37)
321 
(481)
(245)
(1,211)
(1,616)
               
Managed basis
3,578 
3,881 
7,459 
(4,081)
(1,182)
(2,141)
55 
Reconciling items
              
Fair value of own debt (5)
- 
582 
582 
- 
- 
- 
582 
Asset Protection Scheme (6)
- 
(725)
(725)
- 
- 
- 
(725)
Amortisation of purchased
  intangible assets
- 
- 
- 
(96)
- 
- 
(96)
Integration and restructuring costs
- 
- 
- 
(299)
- 
- 
(299)
Strategic disposals
- 
502 
502 
- 
- 
- 
502 
Bonus tax
- 
- 
- 
(15)
- 
- 
(15)
RFS Holdings minority interest
2 
2 
4 
(6)
- 
- 
 (2)
Write-down of goodwill and other
  intangible assets
- 
- 
- 
(10)
- 
- 
(10)
               
Statutory basis
3,580 
4,242 
7,822 
(4,507)
(1,182)
(2,141)
(8)
 
Notes:
 
(1)
Reallocation of bancassurance claims of £31 million from non-interest income.
(2)
Reallocation of £31 million between net interest income and non-interest income in respect of funding costs of rental assets, £11 million and to record interest on financial assets and liabilities designated as at fair value profit or loss, £20 million.
(3)
Total income includes £77 million investment income, of which £58 million is included in net interest income and £19 million in non-interest income. Reallocation of £38 million between non-interest income and net interest income in respect of instalment income.
(4)
Reallocation of £61 million between net interest income and non-interest income in respect of funding costs of rental assets, £57 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £4 million.
(5)
Comprises £110 million gain included in 'Income from trading activities' and £472 million gain included in 'Other operating income' on a statutory basis.
(6)
Included in 'Income from trading activities' on a statutory basis.
 
 
Notes (continued)
 
Total assets by division
 
 
31 December
2011 
30 September 
2011 
31 December 
 2010 
Total assets
£m 
£m 
£m 
       
UK Retail
114,469 
113,308 
111,793 
UK Corporate
111,835 
112,737 
114,550 
Wealth
21,718 
21,946 
21,073 
Global Transaction Services
25,937 
29,889 
25,221 
Ulster Bank
34,810 
37,356 
40,081 
US Retail & Commercial
74,502 
72,879 
71,173 
Global Banking & Markets
874,848 
952,374 
802,578 
RBS Insurance
12,912 
13,031 
12,555 
Central items
130,306 
135,545 
99,728 
       
Core
1,401,337 
1,489,065 
1,298,752 
Non-Core
104,726 
117,671 
153,882 
       
 
1,506,063 
1,606,736 
1,452,634 
RFS Holdings minority interest
804 
992 
942 
       
 
1,506,867 
1,607,728 
1,453,576 
 
11. Discontinued operations and assets and liabilities of disposal groups
 
Profit/(loss) from discontinued operations, net of tax
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Discontinued operations
            
Total income
42 
1,433 
  
15 
10 
6 
Operating expenses
(5)
(803)
  
(1)
(3)
(2)
Insurance net claims
- 
(161)
  
- 
- 
- 
Impairment recoveries/(losses)
8 
(42)
  
(3)
- 
(3)
             
Profit before tax
45 
427 
  
11 
7 
1 
Gain on disposal before recycling
  of reserves
- 
113 
  
- 
- 
56 
Recycled reserves
- 
(1,076)
  
- 
- 
- 
             
Operating profit/(loss) before tax
45 
(536)
  
11 
7 
57 
Tax
(11)
(92)
  
(1)
(3)
(3)
             
Profit/(loss) after tax
34 
(628)
  
10 
4 
54 
Businesses acquired exclusively with a
  view to disposal
            
Profit/(loss) after tax
13 
(5)
  
- 
2 
1 
             
Profit/(loss) from discontinued operations,
  net of tax
47 
(633)
  
10 
6 
55 
 
Discontinued operations reflect the results of RFS Holdings attributable to the State of the Netherlands and Santander following the legal separation of ABN AMRO Bank N.V. on 1 April 2010.
 
 
Notes (continued)
 
11. Discontinued operations and assets and liabilities of disposal groups (continued)
 
 
 
31 December 2011
30 September 
2011 
£m 
31 December 
2010 
£m 
 
UK branch 
based 
businesses 
Other 
Total 
 
£m 
£m 
£m 
           
Assets of disposal groups
          
Cash and balances at central banks
100 
27 
127 
119 
184 
Loans and advances to banks
- 
87 
87 
95 
651 
Loans and advances to customers
18,676 
729 
19,405 
1,711 
5,013 
Debt securities and equity shares
- 
5 
5 
10 
20 
Derivatives
431 
8 
439 
24 
5,148 
Intangible assets
- 
15 
15 
- 
- 
Settlement balances
- 
14 
14 
206 
555 
Property, plant and equipment
112 
4,637 
4,749 
220 
18 
Other assets
- 
456 
456 
448 
704 
           
Discontinued operations and other disposal groups
19,319 
5,978 
25,297 
2,833 
12,293 
Assets acquired exclusively with a view to disposal
- 
153 
153 
211 
191 
           
 
19,319 
6,131 
25,450 
3,044 
12,484 
           
Liabilities of disposal groups
          
Deposits by banks
- 
1 
1 
288 
266 
Customer accounts
21,784 
826 
22,610 
1,743 
2,267 
Derivatives
117 
9 
126 
24 
5,042 
Settlement balances
- 
8 
8 
264 
907 
Other liabilities
- 
1,233 
1,233 
178 
925 
           
Discontinued operations and other disposal groups
21,901 
2,077 
23,978 
2,497 
9,407 
Liabilities acquired exclusively with a view  to disposal
- 
17 
17 
19 
21 
           
 
21,901 
2,094 
23,995 
2,516 
9,428 
 
The assets and liabilities of disposal groups at 31 December 2011 primarily comprise the RBS England and Wales and NatWest Scotland branch-based businesses ("UK branch-based businesses") and the RBS Aviation Capital business.
 
The disposal of the RBS Sempra Commodities JV was substantially completed in 2010. Certain contracts of the RBS Sempra Commodities JV were sold in risk transfer transactions prior to being novated to the purchaser, the majority of which completed during 2011.
 
UK branch-based businesses
Loans, REIL and impairment provisions at 31 December 2011 relating to the Group's UK branch-based businesses are set out below.
 
 
 
Gross loans 
REIL 
Impairment 
 provisions 
 
£m 
£m 
£m 
       
Residential mortgages
5,662 
186 
34 
Personal lending
1,801 
333 
284 
Property
4,290 
446 
132 
Construction
416 
181 
58 
Service industries and business activities
4,497 
329 
156 
Other
2,783 
50 
30 
Latent
- 
- 
79 
       
Total
19,449 
1,525 
773 
 
 
Notes (continued)
 
12. Financial instruments
 
Classification
The following tables analyse the Group's financial assets and liabilities in accordance with the categories of financial instruments in IAS 39 with assets and liabilities outside the scope of IAS 39 shown separately.
 
 
   
AFS (3)
LAR (4)
Other 
financial 
instruments 
(amortised 
cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
At fair value
through profit or loss
HFT (1)
DFV (2)
31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Assets
                
Cash and balances at
  central banks
- 
- 
- 
79,269 
      
79,269 
Loans and advances to
  banks
                
  - reverse repos
34,659 
- 
- 
4,781 
      
39,440 
  - other
20,317 
- 
- 
23,553 
      
43,870 
Loans and advances to
  Customers
                
  - reverse repos
53,584 
- 
- 
7,910 
      
61,494 
  - other
25,322 
476 
- 
419,895 
  
8,419 
  
454,112 
Debt securities
95,076 
647 
107,298 
6,059 
      
209,080 
Equity shares
12,433 
774 
1,976 
- 
      
15,183 
Settlement balances
- 
- 
- 
7,771 
      
7,771 
Derivatives
529,618 
            
529,618 
Intangible assets
            
14,858 
14,858 
Property, plant and
  equipment
            
11,868 
11,868 
Deferred tax
            
3,878 
3,878 
Prepayments, accrued
  income and other assets
- 
- 
- 
1,309 
    
9,667 
10,976 
Assets of disposal groups
            
25,450 
25,450 
                 
 
771,009 
1,897 
109,274 
550,547 
  
8,419 
65,721 
1,506,867 
 
For the notes to this table refer to page 102.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
 
   
AFS (3)
LAR (4)
Other 
financial 
instruments 
(amortised 
cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
At fair value
through profit or loss
HFT (1)
DFV (2)
31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Liabilities
                
Deposits by banks
                
  - repos
23,342 
- 
    
16,349 
    
39,691 
  - other
34,172 
- 
    
34,941 
    
69,113 
Customer accounts
                
  - repos
65,526 
- 
    
23,286 
    
88,812 
  - other
14,286 
5,627 
    
394,230 
    
414,143 
Debt securities in issue
11,492 
35,747 
    
115,382 
    
162,621 
Settlement balances
- 
- 
    
7,477 
    
7,477 
Short positions
41,039 
- 
          
41,039 
Derivatives
523,983 
    
- 
      
523,983 
Accruals, deferred income
  and other liabilities
- 
- 
    
1,683 
19 
21,423 
23,125 
Retirement benefit
  liabilities
        
- 
  
2,239 
2,239 
Deferred tax
        
- 
  
1,945 
1,945 
Insurance liabilities
        
- 
  
6,312 
6,312 
Subordinated liabilities
- 
903 
    
25,416 
    
26,319 
Liabilities of disposal
  groups
            
23,995 
23,995 
                 
 
713,840 
42,277 
  
- 
618,764 
19 
55,914 
1,430,814 
                 
Equity
              
76,053 
                 
               
1,506,867 
 
For the notes to this table refer to page 102.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Classification (continued)
 
 
   
AFS (3)
LAR (4)
Other 
financial 
instruments 
(amortised 
cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
At fair value
through profit or loss
HFT (1)
DFV (2)
30 September 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Assets
                
Cash and balances at
  central banks
- 
- 
- 
78,445 
      
78,445 
Loans and advances to
  banks
                
  - reverse repos
40,181 
- 
- 
7,946 
      
48,127 
  - other
20,423 
- 
- 
32,179 
      
52,602 
Loans and advances to
  customers
                
  - reverse repos
41,692 
- 
- 
12,440 
      
54,132 
  - other
24,608 
1,040 
- 
450,193 
  
9,732 
  
485,573 
Debt securities
112,568 
162 
110,401 
6,526 
      
229,657 
Equity shares
12,044 
834 
2,010 
- 
      
14,888 
Settlement balances
- 
- 
- 
21,526 
      
21,526 
Derivatives
572,344 
            
572,344 
Intangible assets
            
14,744 
14,744 
Property, plant and
  equipment
            
17,060 
17,060 
Deferred tax
            
4,988 
4,988 
Prepayments, accrued
  income and other assets
- 
- 
- 
1,394 
    
9,204 
10,598 
Assets of disposal groups
            
3,044 
3,044 
                 
 
823,860 
2,036 
112,411 
610,649 
  
9,732 
49,040 
1,607,728 
                                                                                                                                       
For the notes to this table refer to page 102.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
 
   
AFS (3)
LAR (4)
Other 
financial 
instruments 
(amortised 
cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
At fair value
through profit or loss
HFT (1)
DFV (2)
30 September 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Liabilities
                
Deposits by banks
                
  - repos
24,583 
- 
    
11,644 
    
36,227 
  - other
34,754 
- 
    
43,616 
    
78,370 
Customer accounts
                
  - repos
67,447 
- 
    
28,244 
    
95,691 
  - other
14,459 
5,836 
    
413,365 
    
433,660 
Debt securities in issue
10,754 
37,910 
    
145,847 
    
194,511 
Settlement balances
- 
- 
    
17,983 
    
17,983 
Short positions
48,495 
- 
          
48,495 
Derivatives
561,790 
            
561,790 
Accruals, deferred income
  and other liabilities
- 
- 
    
1,629 
471 
20,838 
22,938 
Retirement benefit
  liabilities
        
- 
  
1,855 
1,855 
Deferred tax
        
- 
  
1,913 
1,913 
Insurance liabilities
        
- 
  
6,628 
6,628 
Subordinated liabilities
- 
934 
    
25,341 
    
26,275 
Liabilities of disposal
  groups
            
2,516 
2,516 
                 
 
762,282 
44,680 
    
687,669 
471 
33,750 
1,528,852 
                 
Equity
              
78,876 
                 
               
1,607,728 
 
 
For the notes to this table refer to page 102.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Classification (continued)
 
 
   
AFS (3)
LAR (4)
Other 
financial 
instruments 
(amortised 
cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
At fair value
through profit or loss
HFT (1)
DFV (2)
31 December 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Assets
                
Cash and balances at
  central banks
- 
- 
- 
57,014 
      
57,014 
Loans and advances to
  banks
                
  - reverse repos
38,215 
- 
- 
4,392 
      
42,607 
  - other
26,082 
- 
- 
31,829 
      
57,911 
Loans and advances to
  customers
                
  - reverse repos
41,110 
- 
- 
11,402 
      
52,512 
  - other
19,903 
1,100 
- 
471,308 
  
10,437 
  
502,748 
Debt securities
98,869 
402 
111,130 
7,079 
      
217,480 
Equity shares
19,186 
1,013 
1,999 
- 
      
22,198 
Settlement balances
- 
- 
- 
11,605 
      
11,605 
Derivatives
427,077 
            
427,077 
Intangible assets
            
14,448 
14,448 
Property, plant and
  equipment
            
16,543 
16,543 
Deferred tax
            
6,373 
6,373 
Prepayments, accrued
  income and other assets
- 
- 
- 
1,306 
    
11,270 
12,576 
Assets of disposal groups
            
12,484 
12,484 
                 
 
670,442 
2,515 
113,129 
595,935 
  
10,437 
61,118 
1,453,576 
 
For the notes to this table refer to page 102.

 
Notes (continued)
 
12. Financial instruments (continued)
 
Classification (continued)
 
 
   
AFS (3)
LAR (4)
Other 
financial 
instruments 
(amortised 
cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
At fair value
through profit or loss
HFT (1)
DFV (2)
31 December 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Liabilities
                
Deposits by banks
                
  - repos
20,585 
- 
    
12,154 
    
32,739 
  - other
28,216 
- 
    
37,835 
    
66,051 
Customer accounts
                
  - repos
53,031 
- 
    
29,063 
    
82,094 
  - other
14,357 
4,824 
    
409,418 
    
428,599 
Debt securities in issue
7,730 
43,488 
    
167,154 
    
218,372 
Settlement balances
- 
- 
    
10,991 
    
10,991 
Short positions
43,118 
- 
          
43,118 
Derivatives
423,967 
            
423,967 
Accruals, deferred income
  and other liabilities
- 
- 
    
1,793 
458 
20,838 
23,089 
Retirement benefit
  liabilities
        
- 
  
2,288 
2,288 
Deferred tax
        
- 
  
2,142 
2,142 
Insurance liabilities
        
- 
  
6,794 
6,794 
Subordinated liabilities
- 
1,129 
    
25,924 
    
27,053 
Liabilities of disposal
  groups
            
9,428 
9,428 
                 
 
591,004 
49,441 
    
694,332 
458 
41,490 
1,376,725 
                 
Equity
              
76,851 
                 
               
1,453,576 
 
Notes:
 
(1)
Held-for-trading.
(2)
Designated as at fair value through profit or loss.
(3)
Available-for-sale.
(4)
Loans and receivables.
 
There were no reclassifications in 2011 or 2010.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Financial instruments carried at fair value
Detailed explanations of the valuation techniques are set out in the Group's 2011 Annual Report and Accounts. Certain aspects relating to the valuation of financial instruments carried at fair value are discussed below.
 
Valuation reserves
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. CVA represent an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures.
 
The table below shows the valuation reserves and adjustments.
 
 
 
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
£m 
       
Credit valuation adjustments (CVA)
      
  Monoline insurers
1,198 
2,827 
2,443 
  Credit derivative product companies (CDPCs)
1,034 
1,233 
490 
  Other counterparties
2,254 
2,222 
1,714 
       
 
4,486 
6,282 
4,647 
Bid-offer, liquidity  and other reserves
2,704 
2,712 
2,797 
       
 
7,190 
8,994 
7,444 
 
Key points
 
31 December 2011 compared with 31 December 2010
 
·
The exposure to monolines reduced over the period primarily due to the restructuring of some  exposures, partially offset by lower prices of underlying reference instruments. The CVA decreased due to the reduction in exposure partially offset by wider credit spreads.
   
·
The exposure to CDPCs has increased over the period, primarily driven by wider credit spreads of the underlying reference loans and bonds. The CVA increased in line with the increase in exposure.
   
·
The CVA held against exposures to other counterparties increased over the period primarily due to wider credit spreads, together with the impact of counterparty rating downgrades.
 
31 December 2011 compared with 30 September 2011
 
·
The exposure to monolines reduced over the period primarily due to the restructuring of some exposures. The CVA decreased in line with the reduction in exposure.
   
·
The exposure to CDPCs has decreased over the period, primarily driven by tighter credit spreads of the underlying reference loans and bonds together with a decrease in the relative value of senior tranches compared with the underlying reference portfolios. The CVA decreased in line with the decrease in exposure.
   
·
The CVA held against exposures to other counterparties increased slightly over the period with the impact of counterparty rating downgrades partially offset by tighter credit spreads.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Valuation reserves (continued)
 
Own credit
Until the first half of 2011, primary issuance spreads were used to calculate the own credit adjustment for senior debt issuances.  As issuances by the Group declined significantly during 2011, the credit spread used for this adjustment was refined to reference more liquid secondary market senior debt issuance spreads, as they are considered to provide a fairer representation of fair value.
 
 
   
Subordinated 
liabilities 
DFV 
£m 
Total (3)
£m 
Derivatives 
£m 
Total 
£m 
Cumulative own credit adjustment (1)
Debt securities in issue (2)
HFT 
£m 
DFV 
£m 
Total 
£m 
               
31 December 2011
882 
2,647 
3,529 
679 
4,208 
602 
4,810 
30 September 2011
939 
3,054 
3,993 
657 
4,650 
700 
5,350 
31 December 2010
517 
1,574 
2,091 
325 
2,416 
534 
2,950 
               
Carrying values of underlying liabilities
£bn 
£bn 
£bn 
£bn 
£bn 
    
               
31 December 2011
11.5 
35.7 
47.2 
0.9 
48.1 
    
30 September 2011
10.8 
37.9 
48.7 
0.9 
49.6 
    
31 December 2010
7.7 
43.5 
51.2 
1.1 
52.3 
    
 
Notes:
 
(1)
The own credit adjustment for fair value does not alter cash flows, is not used for performance management and is disregarded for regulatory capital reporting and will reverse over time as the liabilities mature.
(2)
Consists of wholesale and retail note issuances.
(3)
The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserves are stated by conversion of underlying currency balances at spot rates for each period whereas the income statement includes intra-period foreign exchange sell-offs.
 
Key points
 
·
Own credit adjustment increased significantly during the year reflecting widening credit spreads across all tenors.
   
·
Liabilities decreased due to maturities, redemptions, lower issuances and the appreciation of sterling against the euro.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Valuation hierarchy
 
 
 
31 December 2011
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Assets
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Loans and advances to banks
              
  - reverse repos
- 
34.7 
- 
34.7 
  
- 
- 
  - collateral
- 
19.7 
- 
19.7 
  
- 
- 
  - other
- 
0.2 
0.4 
0.6 
  
40 
(50)
               
 
- 
54.6 
0.4 
55.0 
  
40 
(50)
               
Loans and advances to customers
              
  - reverse repos
- 
53.6 
- 
53.6 
  
- 
- 
  - collateral
- 
22.0 
- 
22.0 
  
- 
- 
  - other
- 
3.4 
0.4 
3.8 
  
80 
(20)
               
 
- 
79.0 
0.4 
79.4 
  
80 
(20)
               
Debt securities
              
  - UK government
22.4 
- 
- 
22.4 
  
- 
- 
  - US government
35.5 
5.0 
- 
40.5 
  
- 
- 
  - other government
53.9 
8.7 
- 
62.6 
  
- 
- 
  - corporate
- 
5.0 
0.5 
5.5 
  
30 
(30)
  - other financial institutions
3.0 
61.6 
7.4 
72.0 
  
560 
(180)
               
 
114.8 
80.3 
7.9 
203.0 
  
590 
(210)
               
Equity shares
12.4 
1.8 
1.0 
15.2 
  
140 
(130)
               
Derivatives
              
  - foreign exchange
- 
72.9 
1.6 
74.5 
  
100 
(100)
  - interest rate
0.2 
420.8 
1.1 
422.1 
  
80 
(80)
  - equities and commodities
- 
5.9 
0.2 
6.1 
  
- 
- 
  - credit
- 
23.1 
3.8 
26.9 
  
680 
(400)
               
 
0.2 
522.7 
6.7 
529.6 
  
860 
(580)
               
 
127.4 
738.4 
16.4 
882.2 
  
1,710 
(990)
               
Proportion
14.4% 
83.7% 
1.9% 
100.0% 
      
               
Of which
              
Core
126.9 
724.5 
7.2 
858.6 
      
Non-Core
0.5 
13.9 
9.2 
23.6 
      
               
 
127.4 
738.4 
16.4 
882.2 
      
 
For the notes to this table refer to page 109.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
 
31 December 2010
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Assets
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Loans and advances to banks
              
  - reverse repos
- 
38.2 
- 
38.2 
  
- 
- 
  - collateral
- 
25.1 
- 
25.1 
  
- 
- 
  - other
- 
0.6 
0.4 
1.0 
  
40 
(20)
               
 
- 
63.9 
0.4 
64.3 
  
40 
(20)
               
Loans and advances to customers
              
  - reverse repos
- 
41.1 
- 
41.1 
  
- 
- 
  - collateral
- 
14.4 
- 
14.4 
  
- 
- 
  - other
- 
6.2 
0.4 
6.6 
  
30 
(40)
               
 
- 
61.7 
0.4 
62.1 
  
30 
(40)
               
Debt securities
              
  - UK government
13.5 
- 
- 
13.5 
  
- 
- 
  - US government
31.0 
7.0 
- 
38.0 
  
- 
- 
  - other government
62.3 
13.6 
- 
75.9 
  
- 
- 
  - corporate
- 
6.5 
1.2 
7.7 
  
210 
(170)
  - other financial institutions
3.5 
64.8 
7.0 
75.3 
  
540 
(180)
               
 
110.3 
91.9 
8.2 
210.4 
  
750 
(350)
               
Equity shares
18.4 
2.8 
1.0 
22.2 
  
160 
(160)
               
Derivatives
              
  - foreign exchange
- 
83.2 
0.1 
83.3 
  
- 
- 
  - interest rate
1.7 
308.3 
1.7 
311.7 
  
150 
(140)
  - equities and commodities
0.1 
4.9 
0.2 
5.2 
  
- 
- 
  - credit - APS (2)
- 
- 
0.6 
0.6 
  
860 
(940)
  - credit - other
- 
23.2 
3.1 
26.3 
  
320 
(170)
               
 
1.8 
419.6 
5.7 
427.1 
  
1,330 
(1,250)
               
 
130.5 
639.9 
15.7 
786.1 
  
2,310 
(1,820)
               
Proportion
16.6% 
81.4% 
2.0% 
100% 
      
               
Of which
              
Core
129.4 
617.6 
7.2 
754.2 
      
Non-Core
1.1 
22.3 
8.5 
31.9 
      
               
 
130.5 
639.9 
15.7 
786.1 
      
 
For the notes to this table refer to page 109.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
The following tables detail AFS assets included within total assets on pages 97 and 103.
 
 
 
31 December 2011
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Assets
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Debt securities
              
  - UK government
13.4 
- 
- 
13.4 
  
- 
- 
  - US government
18.1 
2.7 
- 
20.8 
  
- 
- 
  - other government
21.6 
4.0 
- 
25.6 
  
- 
- 
  - corporate
- 
2.3 
0.2 
2.5 
  
10 
(10)
  - other financial institutions
0.2 
39.3 
5.5 
45.0 
  
310 
(50)
               
 
53.3 
48.3 
5.7 
107.3 
  
320 
(60)
Equity shares
0.3 
1.3 
0.4 
2.0 
  
70 
(70)
               
 
53.6 
49.6 
6.1 
109.3 
  
390 
(130)
               
Of which
              
Core
53.6 
46.9 
0.6 
101.1 
      
Non-Core
- 
2.7 
5.5 
8.2 
      
               
 
53.6 
49.6 
6.1 
109.3 
      
 
 
 
 
31 December 2010
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Assets
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Debt securities
              
  - UK government
8.4 
- 
- 
8.4 
  
- 
- 
  - US government
17.8 
4.4 
- 
22.2 
  
- 
- 
  - other government
26.5 
6.4 
- 
32.9 
  
- 
- 
  - corporate
- 
1.4 
0.1 
1.5 
  
20 
(20)
  - other financial institutions
0.4 
41.4 
4.3 
46.1 
  
280 
(40)
               
 
53.1 
53.6 
4.4 
111.1 
  
300 
(60)
Equity shares
0.3 
1.4 
0.3 
2.0 
  
60 
(60)
               
 
53.4 
55.0 
4.7 
113.1 
  
360 
(120)
               
Of which
              
Core
52.8 
49.2 
1.0 
103.0 
      
Non-Core
0.6 
5.8 
3.7 
10.1 
      
               
 
53.4 
55.0 
4.7 
113.1 
      
 
 
For the notes to this table refer to page 109.

 
Notes (continued)
 
12. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
 
31 December 2011
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Liabilities
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Deposits by banks
              
  - repos
- 
23.3 
- 
23.3 
  
- 
- 
  - collateral
- 
31.8 
- 
31.8 
  
- 
- 
  - other
- 
2.4 
- 
2.4 
  
- 
- 
               
 
- 
57.5 
- 
57.5 
  
- 
- 
               
Customer accounts
              
  - repos
- 
65.5 
- 
65.5 
  
- 
- 
  - collateral
- 
9.2 
- 
9.2 
  
- 
- 
  - other
- 
10.8 
- 
10.8 
  
20 
(20)
               
 
- 
85.5 
- 
85.5 
  
20 
(20)
               
Debt securities in issue
- 
45.0 
2.2 
47.2 
  
80 
(60)
               
Short positions
34.4 
6.3 
0.3 
41.0 
  
10 
(100)
               
Derivatives
              
  - foreign exchange
- 
80.5 
0.4 
80.9 
  
30 
(20)
  - interest rate
0.4 
405.5 
1.1 
407.0 
  
80 
(90)
  - equities and commodities
- 
8.9 
0.5 
9.4 
  
10 
(10)
  - credit - APS (2)
- 
- 
0.2 
0.2 
  
300 
(40)
  - credit - other
- 
24.9 
1.6 
26.5 
  
80 
(130)
               
 
0.4 
519.8 
3.8 
524.0 
  
500 
(290)
               
Subordinated liabilities
- 
0.9 
- 
0.9 
  
- 
- 
               
Total
34.8 
715.0 
6.3 
756.1 
  
610 
(470)
               
Proportion
4.6% 
94.6% 
0.8% 
100.0% 
      
               
Of which
              
Core
34.8 
708.9 
5.7 
749.4 
      
Non-Core
- 
6.1 
0.6 
6.7 
      
               
Total
34.8 
715.0 
6.3 
756.1 
      
 
For the notes to this table refer to page 109.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
 
31 December 2010
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Liabilities
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Deposits by banks
              
  - repos
- 
20.6 
- 
20.6 
  
- 
- 
  - collateral
- 
26.6 
- 
26.6 
  
- 
- 
  - other
- 
1.6 
- 
1.6 
  
- 
- 
               
 
- 
48.8 
- 
48.8 
  
- 
- 
               
Customer accounts
              
  - repos
- 
53.0 
- 
53.0 
  
- 
- 
  - collateral
- 
10.4 
- 
10.4 
  
- 
- 
  - other
- 
8.7 
0.1 
8.8 
  
60 
(60)
               
 
- 
72.1 
0.1 
72.2 
  
60 
(60)
               
Debt securities in issue
- 
49.0 
2.2 
51.2 
  
90 
(110)
               
Short positions
35.0 
7.3 
0.8 
43.1 
  
20 
(50)
               
Derivatives
              
  - foreign exchange
0.1 
89.3 
- 
89.4 
  
- 
(10)
  - interest rate
0.2 
298.0 
1.0 
299.2 
  
70 
(90)
  - equities and commodities
0.1 
9.6 
0.4 
10.1 
  
10 
- 
  - credit - other
- 
25.0 
0.3 
25.3 
  
40 
(40)
               
 
0.4 
421.9 
1.7 
424.0 
  
120 
(140)
               
Subordinated liabilities
- 
1.1 
- 
1.1 
  
- 
- 
               
Total
35.4 
600.2 
4.8 
640.4 
  
290 
(360)
               
Proportion
5.5% 
93.7% 
0.8% 
100% 
      
               
Of which
              
Core
35.4 
586.9 
3.8 
626.1 
      
Non-Core
- 
13.3 
1.0 
14.3 
      
               
Total
35.4 
600.2 
4.8 
640.4 
      
 
Notes:
 
(1)
Sensitivity represents the favourable and unfavourable effect respectively on the income statement or the statement of comprehensive income due to reasonably possible changes to valuations using reasonably possible alternative inputs to the Group's valuation techniques or models. The level 3 sensitivities are calculated at a sub-portfolio level and hence these aggregated figures do not reflect the correlation between some of the sensitivities.
(2)
Asset Protection Scheme.
 
 
Notes (continued)
 
12. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
Key points
 
·
Total assets carried at fair value increased by £96.1 billion in the year to £882.2 billion at 31 December 2011, principally reflecting increases in derivative assets (£102.5 billion) and reverse repos of (£9.0 billion), partially offset by decreases in debt securities (£7.4 billion), equity shares  (£7.0 billion) and derivative collateral (£2.2 billion).
   
·
Total liabilities carried at fair value increased by £115.7 billion, with increases in derivative liabilities (£100.0 billion), repos (£15.2 billion) and collateral (£4.0 billion), partially offset by decreases in debt securities in issue (£4.0 billion) and short positions (£2.1 billion).
   
·
Level 3 assets of £16.4 billion represented 1.9% (2010 - £15.7 billion and 2.0%), an increase of £0.7 billion.  This reflected transfers from level 2 to level 3 of £5.7 billion in the latter part of 2011 in light of liquidity in the market as well as maturity and sale of instruments. These transfers to level 3 principally related to structured credit assets in Non-Core and certain foreign exchange options and credit derivatives in GBM.  £1.9 billion (derivatives £1.4 billion, securities £0.5 billion) was transferred from level 3 to level 2, based on the re-assessment of the impact and nature of unobservable inputs used in valuation models.
   
·
Level 3 liabilities increased to £6.3 billion in the year from £4.8 billion, mainly in credit derivatives due to market liquidity and resultant transfers from level 2 to level 3.
   
·
The favourable and unfavourable effects of reasonably possible alternative assumptions on level 3 instruments carried at fair value excluding APS credit derivatives were £2.0 billion (2010 - £1.7 billion) and £(1.4) billion (2010 - £(1.2) billion) respectively. Favourable and unfavourable sensitivities for APS credit derivatives were £0.3 billion (2010 - £0.9 billion) and £(0.1) billion (2010 - (0.9) billion). The change in APS sensitivities reflected the decrease in overall value of the Scheme.
   
·
There were no significant transfers between level 1 and level 2.

 
 
 

 
Notes (continued)
 
12. Financial instruments (continued)
 
Movement in level 3 portfolios
 
 
 
1 January 
 2011 
Gains or 
losses (1)
  
Purchases 
and issues 
Sales and 
settle- 
ments 
FX (2)
31 December
 2011
  
Amounts 
recorded in the 
income statement 
relating to 
instruments held at  
31 December 
2011 
 
Level 3 transfers
In 
Out 
 
£m 
£m  
£m 
£m 
£m 
£m 
£m
£m
  
£m
                     
Assets
                    
Fair value through
profit or loss:
                    
Loans and
  advances
843 
(15)
145 
- 
701 
(920)
6 
760 
  
(11)
Debt securities
3,784 
(177)
164 
(380)
1,014 
(2,175)
13 
2,243 
  
(61)
Equity shares
716 
(46)
143 
(33)
56 
(258)
(5)
573 
  
(43)
Derivatives
5,737 
(511)
3,042 
(1,441)
684 
(834)
55 
6,732 
  
(522)
                     
 
11,080 
(749)
3,494 
(1,854)
2,455 
(4,187)
69 
10,308 
  
(637)
                     
AFS:
                    
Debt securities
4,379 
5 
2,097 
(21)
98 
(864)
3 
5,697 
  
2 
Equity shares
279 
61 
82 
- 
7 
(30)
(4)
395 
  
(4)
                     
 
4,658 
66 
2,179 
(21)
105 
(894)
(1)
6,092 
  
(2)
                     
Total
15,738 
(683)
5,673 
(1,875)
2,560 
(5,081)
68 
16,400 
  
(639)
                     
Liabilities
                    
Deposits
84 
(35)
- 
(24)
- 
(4)
1 
22 
  
(25)
Debt securities
  in issue
2,203 
(201)
948 
(520)
688 
(886)
(33)
2,199 
  
(50)
Short positions
776 
(71)
58 
(3)
34 
(506)
3 
291 
  
(207)
Derivatives
1,740 
279 
1,822 
(240)
538 
(366)
38 
3,811 
  
325 
Other
1 
- 
- 
(1)
- 
- 
- 
- 
  
- 
                     
Total
4,804 
(28)
2,828 
(788)
1,260 
(1,762)
9 
6,323 
  
43 
                     
Net losses
  
(655)
              
(682)
 
Notes:
 
(1)
Net (losses)/gains recognised in the income statement and statement of comprehensive income during the year were £(717) million and £62 million respectively.
(2)
Foreign exchange movements.
 

 
Notes (continued)
 
13. Available-for-sale financial assets
The 2011 full year movement in available-for-sale financial assets reflects net unrealised gains on securities of £2,339 million, primarily as yields tightened on high quality sovereign bonds. This was partially offset by the transfer to profit or loss of realised gains primarily from routine portfolio management in Group Treasury of £545 million, along with disposals across several divisions.  Impairment of Greek government debt led to the recycling of unrealised losses to the income statement.
 
The Q4 2011 movement mainly reflects net realised gains of £155 million. Unrealised gains in Q3 2011 principally related to gains in UK government bonds, reflecting flight to quality.
 
The 2011 full year and Q4 2011 tax charge include a £664 million write-off of deferred tax assets in The Netherlands.
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
Available-for-sale reserve
£m 
£m 
  
£m 
£m 
£m 
             
At beginning of period
(2,037)
(1,755)
  
(292)
(1,026)
(1,242)
Unrealised losses on Greek sovereign debt
(570)
(437)
  
(224)
(202)
(7)
Impairment of Greek sovereign debt
1,268 
- 
  
224 
202 
- 
Other unrealised net gains/(losses)
2,339 
616 
  
45 
1,207 
(1,141)
Realised net (gains)/losses
(782)
(519)
  
(155)
(214)
16 
Tax
(1,175)
74 
  
(555)
(259)
337 
Recycled to profit or loss on disposal of
  businesses (1)
- 
(16)
  
- 
- 
- 
             
At end of period
(957)
(2,037)
  
(957)
(292)
(2,037)
 
Note:
 
(1)
Net of tax - £5 million credit.
 
In Q2 2011, as a result of the deterioration in Greece's fiscal position and the announcement of proposals to restructure Greek government debt, the Group concluded that the Greek sovereign debt was impaired. Accordingly, £733 million of unrealised losses recognised in available-for-sale reserves together with £109 million related interest rate hedge adjustments were recycled to the income statement. Further losses of £142 million and £224 million were recorded in Q3 2011 and Q4 2011 respectively, along with £60 of million related interest rate hedge adjustments in Q3 2011.
 
Ireland, Italy, Portugal and Spain are facing less acute fiscal difficulties and the Group's sovereign exposures to these countries were not considered impaired at 31 December 2011.

 
 
Notes (continued)
 
14. Contingent liabilities and commitments
 
 
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
Contingent liabilities
                      
Guarantees and assets pledged
  as collateral security
23,702 
1,330 
25,032 
  
24,518 
1,417 
25,935 
  
28,859 
2,242 
31,101 
Other contingent liabilities
10,667 
245 
10,912 
  
10,916 
215 
11,131 
  
11,833 
421 
12,254 
                       
 
34,369 
1,575 
35,944 
  
35,434 
1,632 
37,066 
  
40,692 
2,663 
43,355 
                       
Commitments
                      
Undrawn formal standby
  facilities, credit lines and other
  commitments to lend
227,419 
12,544 
239,963 
  
230,369 
14,258 
244,627 
  
245,425 
21,397 
266,822 
Other commitments
301 
2,611 
2,912 
  
1,163 
2,228 
3,391 
  
1,560 
2,594 
4,154 
                       
 
227,720 
15,155 
242,875 
  
231,532 
16,486 
248,018 
  
246,985 
23,991 
270,976 
                       
Total contingent liabilities
  and commitments
262,089 
16,730 
278,819 
  
266,966 
18,118 
285,084 
  
287,677 
26,654 
314,331 
 
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.
 
15. Litigation
The Group and certain Group members are party to legal proceedings, investigations and regulatory matters in the United Kingdom, the United States and other jurisdictions, arising out of their normal business operations. 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. The Group recognises a provision for a liability in relation to these matters when it is probable that an outflow of economic benefits will be required to settle an obligation which has arisen as a result of past events, and for which a reliable estimate can be made of the amount of the obligation.
 
In many proceedings, it is not possible to determine whether any loss is probable or to estimate the amount of any loss.  Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can be reasonably estimated for any claim.  The Group cannot predict if, how, or when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.
 
While the outcome of the legal proceedings, investigations and regulatory matters in which the Group is involved is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of legal proceedings, investigations and regulatory matters as at 31 December 2011.

 
Notes (continued)
 
15. Litigation (continued)
Other than as set out in these sections entitled "Litigation" and "Investigations, reviews and proceedings", no member of the Group is or has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which RBS is aware) during the 12 months prior to the date of this document which may have, or have had in the recent past, significant effects on the financial position or profitability of RBS and/or the Group taken as a whole.
 
In each of the material legal proceedings and investigations, reviews and proceedings described below, unless specifically noted otherwise, it is not possible to reliably estimate with any certainty the liability, if any, or the effect these proceedings investigations and reviews, and any related developments, may have on the Group.  However, in the event that any such matters were resolved against the Group, these matters could, individually or in the aggregate, have a material adverse effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Set out below are descriptions of the material legal proceedings involving the Group.
 
Shareholder litigation  
RBS and certain of its subsidiaries, together with certain current and former individual officers and directors have been named as defendants in purported class actions filed in the United States District Court for the Southern District of New York involving holders of RBS preferred shares (the "Preferred Shares litigation") and holders of American Depositary Receipts (the "ADR claims").
 
In the Preferred Shares litigation, the consolidated amended complaint alleges certain false and misleading statements and omissions in public filings and other communications during the period 1 March 2007 to 19 January 2009, and variously asserts claims under Sections 11, 12 and 15 of the US Securities Act of 1933, as amended (the "Securities Act"). The putative class is composed of all persons who purchased or otherwise acquired Group Series Q, R, S, T and/or U non-cumulative dollar preference shares issued pursuant or traceable to the 8 April 2005 US Securities and Exchange Commission (the SEC) registration statement. Plaintiffs seek unquantified damages on behalf of the putative class. The defendants have moved to dismiss the complaint and briefing on the motions was completed in September 2011.
 
With respect to the ADR Claims, a complaint was filed in January 2011 and a further complaint was filed in February 2011asserting claims under Sections 10 and 20 of the US Securities Exchange Act of 1934, as amended (the "Exchange Act") on behalf of all persons who purchased or otherwise acquired the Group's American Depositary Receipts (ADRs) between 1 March 2007 and 19 January 2009. On 18 August 2011, these two ADR cases were consolidated and lead plaintiff and lead counsel were appointed.  On 1 November 2011, the lead plaintiff filed a consolidated amended complaint asserting ADR-related claims under Sections 10 and 20 of the Exchange Act and Sections 11, 12 and 15 of the Securities Act.  The defendants moved to dismiss the complaint in January 2012 and briefing is ongoing.
 
The Group has also received notification of similar prospective claims in the United Kingdom and elsewhere but no court proceedings have been commenced in relation to these claims.
 
The Group considers that it has substantial and credible legal and factual defences to the remaining and prospective claims and will defend itself vigorously.                                    
 
 
Notes (continued)
 
15. Litigation (continued)
 
Other securitisation and securities related litigation in the United States
Recently, the level of litigation activity in the financial services industry focused on residential mortgage and credit crisis related matters has increased.  As a result, the Group has become and expects that it may further be the subject of additional claims for damages and other relief regarding residential mortgages and related securities in the future.
 
To date, Group companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the United States that relate to the securitisation and securities underwriting businesses. These cases include actions by individual purchasers of securities and purported class action suits. Together, the individual and class action cases involve the issuance of more than US$83 billion of mortgage-backed securities (MBS) issued primarily from 2005 to 2007. Although the allegations vary by claim, in general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the securities were issued. Group companies have been named as defendants in more than 30 lawsuits brought by purchasers of MBS, including five purported class actions.  Among the lawsuits are six cases filed on 2 September 2011 by the US Federal Housing Finance Agency (FHFA) as conservator for the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The primary FHFA lawsuit pending in the federal court in Connecticut relates to approximately US$32 billion of AAA rated MBS for which Group entities acted as sponsor/depositor and/or lead underwriter or co-lead underwriter. 
 
FHFA has also filed five separate lawsuits (against Ally Financial Group, Countrywide Financial Corporation, JP Morgan, Morgan Stanley and Nomura respectively) in which RBS Securities Inc. is named as a defendant by virtue of the fact that it was an underwriter of some of the securities at issue.
 
Other lawsuitsagainst Group companies include two cases filed by the National Credit Union Administration Board (on behalf of US Central Federal Credit Union and Western Corporate Federal Credit Union) and eight cases filed by the Federal Home Loan Banks of Boston, Chicago, Indianapolis, Seattle and San Francisco.
 
The purported MBS class actions in which Group companies are defendants include New Jersey Carpenters Vacation Fund et al. v. The Royal Bank of Scotland plc et al.;  New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al.;  In re IndyMac Mortgage-Backed Securities Litigation;  Genesee County Employees' Retirement System et al.  v. Thornburg Mortgage Securities Trust 2006-3, et al.; and Luther v. Countrywide Financial Corp. et al. and related cases.
 
Certain other institutional investors have threatened to bring claims against the Group in connection with various mortgage-related offerings. The Group cannot predict with any certainty whether any of these individual investors will pursue these threatened claims (or their outcome), but expects that several may. If such claims are asserted and were successful, the amounts involved may be material.

 
Notes (continued)
 
15. Litigation (continued)
In many of these actions, the Group has or will have contractual claims to indemnification from the issuers of the securities (where a Group company is underwriter) and/or the underlying mortgage originator (where a Group company is issuer). The amount and extent of any recovery on an indemnification claim, however, is uncertain and subject to a number of factors, including the ongoingcreditworthiness of the indemnifying party. 
 
With respect to the current claims described above, the Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously.
 
Madoff    
In December 2010, Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC filed a claim against RBS N.V. for approximately US$271 million. This is a clawback action similar to claims filed against six other institutions in December 2010. RBS N.V. (or its subsidiaries) invested in Madoff funds through feeder funds. The Trustee alleges that RBS N.V. received US$71 million in redemptions from the feeder funds and US$200 million from its swap counterparties while RBS N.V. 'knew or should have known of Madoff's possible fraud'. The Trustee alleges that those transfers were preferences or fraudulent conveyances under the US bankruptcy code and New York law and he asserts the purported right to claw them back for the benefit of Madoff's estate. A further claim, for US$21.8 million, was filed in October 2011.  The Group considers that it has substantial and credible legal and factual defences to these claims and intends to defend itself vigorously.
 
Unarranged overdraft charges  
In the US, Citizens Financial Group, Inc ("Citizens") in common with other US banks, has been named as a defendant in a class action asserting that Citizens charges excessive overdraft fees. The plaintiffs claim that overdraft fees resulting from point of sale and automated teller machine (ATM) transactions violate the duty of good faith implied in Citizens' customer account agreement and constitute an unfair trade practice. The Group considers that it has substantial and credible legal and factual defences to these claims and will defend them vigorously.
 
London Interbank Offered Rate (LIBOR)   
Certain members of the Group have been named as defendants in a number of class actions and individual claims filed in the US with respect to the setting of LIBOR. The complaints are substantially similar and allege that certain members of the Group and other panel banks individually and collectively violated US commodities and antitrust laws and state common law by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means. The Group considers that it has substantial and credible legal and factual defences to these and prospective claims.
 
Summary of other disputes, legal proceedings and litigation
In addition to the matters described above, members of the Group are engaged in other legal proceedings in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. The Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, does not expect that the outcome of any of these other claims and proceedings will have a significant effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Notes (continued)
 
16. Investigations, reviews and proceedings
The Group's businesses and financial condition can be affected by the fiscal or other policies and actions of various governmental and regulatory authorities in the United Kingdom, the European Union, the United States and elsewhere. The Group has engaged, and will continue to engage, in discussions with relevant regulators, including in the United Kingdom and the United States, on an ongoing and regular basis regarding operational, systems and control evaluations and issues including those related to compliance with applicable anti-bribery, anti-money laundering and sanctions regimes. It is possible that any matters discussed or identified may result in investigatory or other action being taken by the regulators, increased costs being incurred by the Group, remediation of systems and controls, public or private censure, restriction of the Group's business activities or fines. Any of these events or circumstances could have a significant effect on the Group, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
 
Political and regulatory scrutiny of the operation of retail banking and consumer credit industries in the United Kingdom, United States and elsewhere continues. The nature and impact of future changes in policies and regulatory action are not predictable and are beyond the Group's control but could have a significant effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
The Group is cooperating fully with the investigations and proceedings described below.
 
Retail banking   
In the European Union, regulatory actions included an inquiry into retail banking initiated on 13 June 2005 in all of the then 25 member states by the European Commission's Directorate General for Competition. The inquiry examined retail banking in Europe generally. On 31 January 2007, the European Commission (EC) announced that barriers to competition in certain areas of retail banking, payment cards and payment systems in the European Union had been identified. The EC indicated that it will consider using its powers to address these barriers and will encourage national competition authorities to enforce European and national competition laws where appropriate. In addition, in late 2010, the EC launched an initiative pressing for increased transparency in respect of bank fees. The EC is currently proposing to legislate for the increased harmonisation of terminology across Member States, with proposals expected in 2012.  The Group cannot predict the outcome of these actions at this stage and is unable reliably to estimate the effect, if any, that these may have on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Multilateral interchange fees  
In 2007, the EC issued a decision that while interchange is not illegal per se, MasterCard's current multilateral interchange fee (MIF) arrangements for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the European Union are in breach of competition law. MasterCard was required by the decision to withdraw the relevant cross-border MIF (i.e. set these fees to zero) by 21 June 2008.

 
Notes (continued)
 
16. Investigations, reviews and proceedings (continued)
MasterCard appealed against the decision to the European Court of First Instance (subsequently re-named the General Court) on 1 March 2008, and the Group has intervened in the appeal proceedings. In addition, in summer 2008, MasterCard announced various changes to its scheme arrangements. The EC was concerned that these changes might be used as a means of circumventing the requirements of the infringement decision. In April 2009, MasterCard agreed an interim settlement on the level of cross-border MIF with the EC pending the outcome of the appeal process and, as a result, the EC has advised it will no longer investigate the non-compliance issue (although MasterCard is continuing with its appeal). The appeal was heard on 8 July 2011 by the General Court and judgment is awaited. This could be delivered in spring or summer 2012, although it may take longer.
 
Visa's cross-border MIFs were exempted in 2002 by the EC for a period of five years up to 31 December 2007 subject to certain conditions. On 26 March 2008, the EC opened a formal inquiry into Visa's current MIF arrangements for cross border payment card transactions with Visa branded debit and consumer credit cards in the European Union and on 6 April 2009 the EC announced that it had issued Visa with a formal Statement of Objections. At the same time Visa announced changes to its interchange levels and introduced some changes to enhance transparency. There is no deadline for the closure of the inquiry. However, on 26 April 2010 Visa announced it had reached an agreement with the EC as regards immediate cross border debit card MIF rates only and in December 2010 the commitments were finalised for a four year period commencing December 2010 under Article 9 of Regulation 1/2003. The EC is continuing its investigations into Visa's cross border MIF arrangements for deferred debit and credit transactions.
 
In the UK, the Office of Fair Trading (OFT) has carried out investigations into Visa and MasterCard domestic credit card interchange rates. The decision by the OFT in the MasterCard interchange case was set aside by the Competition Appeal Tribunal (CAT) in June 2006. The OFT's investigations in the Visa interchange case and a second MasterCard interchange case are ongoing. On 9 February 2007, the OFT announced that it was expanding its investigation into domestic interchange rates to include debit cards. In January 2010 the OFT advised that it did not anticipate issuing a Statement of Objections prior to the General Court's judgment, although it has reserved the right to do so if it considers it appropriate.
 
The outcome of these investigations is not known, but they may have a significant effect on the consumer credit industry in general and, therefore, on the Group's business in this sector.

 
Notes (continued)
 
16. Investigations, reviews and proceedings (continued)
 
Payment Protection Insurance  
Having conducted a market study relating to Payment Protection Insurance (PPI), in February 2007 the OFT referred the PPI market to the Competition Commission (CC) for an in-depth inquiry. The CC published its final report in January 2009 and announced its intention to order a range of remedies, including a prohibition on actively selling PPI at point of sale of the credit product (and for 7 days thereafter), a ban on single premium policies and other measures to increase transparency (in order to improve customers' ability to search and improve price competition). Barclays Bank PLC subsequently appealed certain CC findings to the CAT. In October 2009, the CAT handed down a judgment remitting the matter back to the CC for review. Following further review, in October 2010, the CC published its final decision on remedies following the remittal which confirmed the point of sale prohibition. In March 2011, the CC made a final order setting out its remedies with a commencement date of 6 April 2011. The key remedies come into force in two parts. A number came into force in October 2011, and the remainder come into force in April 2012.
 
The FSA conducted a broad industry thematic review of PPI sales practices and in September 2008, the FSA announced that it intended to escalate its level of regulatory intervention. Substantial numbers of customer complaints alleging the mis-selling of PPI policies have been made to banks and to the Financial Ombudsman Service (FOS) and many of these are being upheld by the FOS against the banks.
 
Following unsuccessful negotiations with the industry, the FSA issued consultation papers on PPI complaint handling and redress in September 2009 and in March 2010. The FSA published its final policy statement in August 2010.  The new rules imposed significant changes with respect to the handling of mis-selling PPI complaints. In October 2010, the British Bankers' Association (BBA) filed an application for judicial review of the FSA's policy statement and of related guidance issued by the FOS.   In April 2011 the High Court issued judgment in favour of the FSA and the FOS and in May 2011 the BBA announced that it would not appeal that judgment. The Group then recorded an additional provision of £850 million in respect of PPI.  During 2011, the Group reached agreement with the FSA on a process for implementation of its policy statement and for the future handling of PPI complaints.
 
Personal current accounts   
On 16 July 2008, the OFT published the results of its market study into Personal Current Accounts (PCAs) in the United Kingdom. The OFT found evidence of competition and several positive features in the personal current account market but believed that the market as a whole was not working well for consumers and that the ability of the market to function well had become distorted.
 
On 7 October 2009, the OFT published a follow-up report summarising the initiatives agreed between the OFT and personal current account providers to address the OFT's concerns about transparency and switching, following its market study. Personal current account providers will take a number of steps to improve transparency, including providing customers with an annual summary of the cost of their account and making charges prominent on monthly statements. To improve the switching process, a number of steps are being introduced following work with Bacs, the payment processor, including measures to reduce the impact on consumers of any problems with transferring direct debits.
 

 
Notes (continued)
 
16. Investigations, reviews and proceedings (continued)
On 22 December 2009, the OFT published a further report in which it stated that it continued to have significant concerns about the operation of the personal current account market in the United Kingdom, in particular in relation to unarranged overdrafts, and that it believed that fundamental changes are required for the market to work in the best interests of bank customers. The OFT stated that it would discuss these issues intensively with banks, consumer groups and other organisations, with the aim of reporting on progress by the end of March 2010. On 16 March 2010, the OFT announced that it had secured agreement from the banks on four industry-wide initiatives, namely minimum standards on the operation of opt-outs from unarranged overdrafts, new working groups on information sharing with customers, best practice for PCA customers in financial difficulties and incurring charges, and PCA providers to publish their policies on dealing with PCA customers in financial difficulties. The OFT also announced its plan to conduct six-monthly ongoing reviews, fully to review the market again in 2012 and to undertake a brief analysis on barriers to entry.
 
The first six-monthly ongoing review was completed in September 2010. The OFT noted progress in the areas of switching, transparency and unarranged overdrafts for the period March to September 2010, as well as highlighting further changes the OFT expected to see in the market. On 29 March 2011, the OFT published its update report in relation to personal current accounts. This noted further progress in improving consumer control over the use of unarranged overdrafts. In particular, the Lending Standards Board had led on producing standards and guidance to be included in a revised Lending Code. The OFT stated it would continue to monitor the market and would consider the need for, and appropriate timing of, further update reports in light of other developments, in particular the work of the UK Government's Independent Commission on Banking (ICB). The OFT has indicated its intention to conduct a more comprehensive review of the market in 2012.
 
On 26 May 2010, the OFT announced its review of barriers to entry. The review concerned retail banking for individuals and small and medium size enterprises (up to £25 million turnover) and looked at products which require a banking licence to sell mortgages, loan products and, where appropriate, other products such as insurance or credit cards wherecross-selling may facilitate entry or expansion. The OFT published its report in November 2010. It advised that it expected its review to be relevant to the ICB, the FSA, HM Treasury and the Department for Business, Innovation and Skills and to the devolved governments in the United Kingdom. The OFT did not indicate whether it would undertake any further work. The report maintained that barriers to entry remain, in particular regarding switching, branch networks and brands. At this stage, it is not possible to estimate the effect of the OFT's report and recommendations regarding barriers to entry upon the Group.
 
Private motor insurance
On 14 December 2011, the OFT launched a market study into private motor insurance, with a focus on the provision of third party vehicle repairs and credit hire replacement vehicles to claimants. The OFT aims to complete its market study by spring 2012. At this stage, it is not possible to estimate with any certainty the effect the market study and any related developments may have on the Group.
 
Independent Commission on Banking
Following an interim report published on 11 April 2011, the ICB published its final report to the Cabinet Committee on Banking Reform on 12 September 2011 (the "Final Report"). The Final Report makes a number of recommendations, including in relation to (i) the implementation of a ring-fence of retail banking operations, (ii) loss-absorbency (including bail-in) and (iii) competition.

 
Notes (continued)
 
16. Investigations, reviews and proceedings (continued)
On 19 December 2011 the UK Government published a response to the Final Report (the "Response"), reaffirming its intention to accept the majority of the ICB's recommendations. The Government agreed that "vital banking services - in particular the taking of retail deposits - should only be provided by 'ring-fenced banks', and that these banks should be prohibited from undertaking certain investment bankingactivities." It also broadly accepted the ICB's recommendations on loss absorbency and on competition.
 
The UK Government has now embarked on an extensive consultation on how exactly the general principles outlined by the ICB should be implemented, and intends to bring forward a White Paper in the spring of 2012. Its intention is to complete primary and secondary legislation before the end of the current Parliamentary term in May 2015 and to implement the ring-fencing measures as soon as practicable thereafter and the loss absorbency measures by 2019. The Government also stated its determination that changes to the account switching process should be completed by September 2013, as already scheduled.
 
With regard to the competition aspects, the Government recommended a number of initiatives aimed at improving transparency and switching in the market and ensuring a level playing field for new entrants. In addition, the Government has recommended that HM Treasury should consult on regulating the UK Payments Council and has confirmed that the Financial Conduct Authority's remit will include competition.
 
Until the UK Government consultation is concluded and significantly more detail is known on how the precise legislative and regulatory framework is to be implemented it is impossible to estimate the potential impact of these measures with any level of precision.
 
The Group will continue to participate in the debate and to consult with the UK Government on the implementation of the recommendations set out in the Final Report and the Response, the effects of which could have a negative impact on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
US dollar clearing activities   
In May 2010, following a criminal investigation by the United States Department of Justice (DoJ) into its dollar clearing activities, Office of Foreign Assets Control compliance procedures and other Bank Secrecy Act compliance matters, RBS N.V. formally entered into a Deferred Prosecution Agreement (DPA) with the DoJ resolving the investigation. Pursuant to the DPA, RBS N.V. paid a penalty of US$500 million in 2010 and agreed to comply with the terms of the DPA and to co-operate fully with any further investigations. Payment of the penalty was made from a provision established in April 2007 when an agreement in principle to settle was first announced. On 20 December 2011, the DoJ filed a motion with the US District Court to dismiss the criminal information underlying the DPA, stating that RBS N.V. had met the terms and obligations of the DPA.  The US District Court granted the DoJ's motion on the same day, and this matter is now fully resolved.
 

 
Notes (continued)
 
16. Investigations, reviews and proceedings (continued)
 
Securitisation and collateralised debt obligation business  
In the United States, the Group is also involved in other reviews, investigations and proceedings (both formal and informal) by federal and state governmental law enforcement and other agencies and self-regulatory organisations relating to, among other things, mortgage-backed securities, collateralised debt obligations (CDOs), and synthetic products.  In connection with these inquiries, Group companies have received requests for information and subpoenas seeking information about, among other things, the structuring of CDOs, financing to loan originators, purchase of whole loans, sponsorship and underwriting of securitisations, due diligence, representations and warranties, communications with ratings agencies, disclosure to investors, document deficiencies, and repurchase requests.
 
By way of example, in September and October 2010, the SEC requested voluntary production of information concerning residential mortgage-backed securities underwritten by subsidiaries of RBS during the period from September 2006 to July 2007 inclusive. In November 2010, the SEC commenced a formal investigation and requested testimony from a former Group employee. The investigation is in its preliminary stages and it is difficult to predict any potential exposure that may result.
 
Also in October 2010, the SEC commenced an inquiry into document deficiencies and repurchase requests with respect to certain securitisations, and in January 2011, this was converted to a formal investigation. Among other matters, the investigation seeks information related to document deficiencies and remedial measures taken with respect to such deficiencies. The investigation also seeks information related to early payment defaults and loan repurchase requests.
 
In June 2009, in connection with an investigation into the role of investment banks in the origination and securitisation of sub-prime loans in Massachusetts, the Massachusetts Attorney General issued subpoenas to various banks, including an RBS subsidiary, seeking information related to residential mortgage lending practices and sales and securitisation of residential mortgage loans. On 28 November 2011, an Assurance of Discontinuance between RBS Financial Products Inc. and the Massachusetts Attorney General was filed in Massachusetts State Court which resolves the Massachusetts Attorney General's investigation as to RBS.  The Assurance of Discontinuance required RBS Financial Products Inc. to make payments totalling approximately US$52 million.
 
In 2007, the New York State Attorney General issued subpoenas to a wide array of participants in the securitisation and securities industry, focusing on the information underwriters obtained from the independent firms hired to perform due diligence on mortgages. The Group completed its production of documents requested by the New York State Attorney General in 2008, principally producing documents related to loans that were pooled into one securitisation transaction. In May 2011, at the New York State Attorney General's request, representatives of the Group attended an informal meeting to provide additional information about the Group's mortgage securitisation business.  The investigation is ongoing and the Group continues to provide requested information. 

 
Notes (continued)
 
16. Investigations, reviews and proceedings (continued)
 
In September 2010, RBS subsidiaries received a request from the Nevada State Attorney General requesting information related to securitisations of mortgages issued by three specific originators. The investigation by the Nevada State Attorney General is in the early stages and therefore it is difficult to predict the potential exposure from any such investigation.
 
US mortgages - Loan Repurchase Matters
The Group's Global Banking & Markets N.A. (GBM N.A.), has been a purchaser of non-agency US residential mortgages in the secondary market, and an issuer and underwriter of non-agency residential mortgage-backed securities (RMBS). GBM N.A. did not originate or service any US residential mortgages and it was not a significant seller of mortgage loans to government sponsored enterprises (GSEs) (e.g., the Federal National Mortgage Association and the Federal Home Loan Mortgage Association).
 
In issuing RMBS, GBM N.A. generally assigned certain representations and warranties regarding the characteristics of the underlying loans made by the originator of the residential mortgages; however, in some circumstances, GBM N.A. made such representations and warranties itself. Where GBM N.A. has given those or other representations and warranties (whether relating to underlying loans or otherwise), GBM N.A. may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties. In certain instances where it is required to repurchase loans or related securities, GBM N.A. may be able to assert claims against third parties who provided representations or warranties to GBM N.A. when selling loans to it; although the ability to recover against such parties is uncertain. Since January 2009, GBM N.A. has received approximately US$75 million in repurchase demands in respect of loans made primarily from 2005 to 2008 and related securities sold where obligations in respect of contractual representations or warranties were undertaken by GBM N.A.. However, repurchase demands presented to GBM N.A. are subject to challenge and, to date, GBM N.A. has rebutted a significant percentage of these claims.
 
Citizens has not been an issuer or underwriter of non-agency RMBS. However, Citizens is an originator and servicer of residential mortgages, and it routinely sells such mortgage loans in the secondary market and to GSEs. In the context of such sales, Citizens makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of the representations and warranties concerning the underlying loans. Since January 2009, Citizens has received approximately US$41.2 million in repurchase demands in respect of loans originated primarily since 2003. However, repurchase demands presented to Citizens are subject to challenge and, to date, Citizens has rebutted a significant percentage of these claims.
 
Although there has been disruption in the ability of certain financial institutions operating in the United States to complete foreclosure proceedings in respect of US mortgage loans in a timely manner (or at all) over the last year (including as a result of interventions by certain states and local governments), to date, Citizens has not been materially impacted by such disruptions and the Group has not ceased making foreclosures.

 
 
Notes (continued)
 
16. Investigations, reviews and proceedings (continued)
The Group cannot estimate what the future level of repurchase demands or ultimate exposure of GBM N.A. or Citizens may be, and cannot give any assurance that the historical experience will continue in the future. It is possible that the volume of repurchase demands will increase in the future.  Furthermore, the Group is unable to estimate the extent to which the matters described above will impact it and future developments may have an adverse impact on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
LIBOR   
The Group continues to receive requests from various regulators investigating the setting of LIBOR and other interest rates, including the US Commodity Futures Trading Commission, the US Department of Justice, the European Commission, the FSA and the Japanese Financial Services Agency. The authorities are seeking documents and communications related to the process and procedures for setting LIBOR and other interest rates, together with related trading information. In addition to co-operating with the investigations as described above, the Group is also keeping relevant regulators informed. It is not possible to estimate with any certainty what effect these investigations and any related developments may have on the Group.
 
Other investigations
The Federal Reserve and state banking supervisors have been reviewing the Group's US operations and RBS and its subsidiaries have been required to make improvements with respect to various matters, including enterprise-wide governance, US Bank Secrecy Act and anti-money laundering compliance, risk management and asset quality. The Group is in the process of implementing measures for matters identified to date.
 
On 27 July 2011, the Group consented to the issuance of a Cease and Desist Order ("the Order") setting forth measures required to address deficiencies related to governance, risk management and compliance systems and controls identified by the Federal Reserve and state banking supervisors during examinations of the RBS plc and RBS N.V. branches in 2010. The Order requires the Group to strengthen its US corporate governance structure, to develop an enterprise-wide risk management programme, and to develop and enhance its programmes to ensure compliance with US law, particularly the US Bank Secrecy Act and anti-money laundering laws, rules and regulations. The Group has established a strategic and remedial programme of change to address the identified concerns and is committed to working closely with the US bank regulators to implement the remedial measures required by the Order.
 
The Group's operations include businesses outside the United States that are responsible for processing US dollar payments. The Group is conducting a review of its policies, procedures and practices in respect of such payments and has initiated discussions with UK and US authorities to discuss its historical compliance with applicable laws and regulations, including US economic sanctions regulations. Although the Group cannot currently determine when the review of its operations will be completed or what the outcome of its discussions with UK and US authorities will be, the investigation costs, remediation required or liability incurred could have a material adverse effect on the Group's consolidated net assets, operating results or cash flows in any particular period.

 
Notes (continued)
 
16. Investigations, reviews and proceedings (continued)
The Group may become subject to formal and informal supervisory actions and may be required by its US banking supervisors to take further actions and implement additional remedial measures with respect to these and additional matters. Any limitations or conditions placed on the Group's activities in the United States, as well as the terms of any supervisory action applicable to RBS and its subsidiaries, could have a material adverse effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
In April 2009, the FSA notified the Group that it was commencing a supervisory review of the acquisition of ABN AMRO Holding N.V. in 2007 and the 2008 capital raisings and an investigation into conduct, systems and controls within the Global Banking & Markets division of the Group. RBS and its subsidiaries co-operated fully with this review and investigation. On 2 December 2010, the FSA confirmed that it had completed its investigation and had concluded that no enforcement action, either against the Group or against individuals, was warranted. On 12 December 2011, the FSA published its report 'The Failure of the Royal Bank of Scotland', on which the Group engaged constructively with the FSA.
 
In July 2010, the FSA notified the Group that it was commencing an investigation into the sale by Coutts & Co of the ALICO (American Life Insurance Company) Premier Access Bond Enhanced Variable Rate Fund ("EVRF") to customers between 2001 and 2008 as well as its subsequent review of those sales. Subsequently, on 11 January 2011 the FSA revised the investigation start date to December 2003.
 
On 8 November 2011, the FSA published its Final Notice having reached a settlement with Coutts & Co, under which Coutts & Co agreed to pay a fine of £6.3 million.  The FSA did not make any findings on the suitability of advice given in individual cases. Nonetheless, Coutts & Co has agreed to undertake a past business review of its sales of the product.  This review will be overseen by an independent third party and will consider the advice given to customers invested in the EVRF as at the date of its suspension, 15 September 2008.  For any sales which are found to be unsuitable, redress will be paid to the customers to ensure that they have not suffered financially.    
 
On 18 January 2012, the FSA published its Final Notice having reached a settlement with UK Insurance Limited for breaches of Principle 2 by Direct Line and Churchill (the "Firms"), under which UK Insurance Limited agreed to pay a fine of £2.17 million.  The Firms were found to have acted without due skill, care and diligence in the way that they responded to the FSA's request to provide it with a sample of their closed complaint files.  The Firms' breaches of Principle 2 did not result in any customer detriment.
 
During March 2008, the Group was advised by the SEC that it had commenced a non-public, formal investigation relating to the Group's United States sub-prime securities exposures and United States residential mortgage exposures. In December 2010, the SEC contacted the Group and indicated that it would also examine valuations of various RBS N.V. structured products, including CDOs.
 

 
Notes (continued)
 
17. Other developments
 
Proposed transfers of a substantial part of the business activities of RBS N.V. to The Royal Bank of Scotland plc (RBS plc) 
On 19 April 2011, the Group announced its intention to transfer a substantial part of the business activities of RBS N.V. to RBS plc (the "Proposed Transfers"), subject, amongst other matters, to regulatory and other approvals, further tax and other analysis in respect of the assets and liabilities to be transferred and employee consultation procedures.
 
The Proposed Transfers will streamline the manner in which the GBM and GTS businesses of the Group interact with clients with simplified access to the GBM and GTS product suites. 
 
It is expected that the Proposed Transfers will be implemented on a phased basis over a period ending 31 December 2013. The transfer of eligible business carried out in the UK, including certain securities issued by RBS N.V. was completed on 17 October 2011. A large part of the remainder of Proposed Transfers (including the transfers of certain securities issued by RBS N.V.) is expected to have taken place by the end of 2012.
 
Rating agencies
RBS and RBS plc's long-term and short-term ratings remained unchanged in the quarter, however in several of the Group's credit ratings have been updated during the quarter. During October 2011, both Moody's and Fitch have taken rating action on RBS and certain subsidiaries. On 7 October 2011, Moody's Investor Services downgraded the long term ratings of RBS, RBS plc and National Westminster Bank Plc (NatWest), following the conclusion of its review into the systemic support assumptions from the UK government for 14 UK financial institutions. As a result of this review, 12 UK entities, including RBS, were downgraded. RBS was downgraded to A3 from A1 (long-term) and to P-2 from P-1 (short term), RBS plc and NatWest were downgraded to A2 from Aa3 (long-term); their P-1 short-term ratings were affirmed. These ratings will all have a negative outlook assigned due to Moody's opinion that the likelihood of government support will likely weaken further in the future, however, Moody's affirmed RBS's underlying Baa2 rating, noting that these downgrades did not reflect a worsening in the credit quality of UK financial institutions.
 
On 11 October 2011, following the reduction of support factored into the ratings of RBS, Moody's downgraded the ratings of Ulster Bank Ltd and Ulster Bank Ireland Ltd to Baa1 from A2 (long term) and to P-2 from P-1 (short term); Moody's also placed these ratings on negative outlook to be in line with the outlook of RBS plc. In addition, Moody's has placed the ratings of RBS N.V. on negative outlook, to match those of RBS plc.
 
On 13 October 2011, Fitch Ratings downgraded RBS and certain subsidiaries, having lowered its 'Support Rating Floors' for large UK banks. The ratings of RBS, RBS plc, NatWest, RBS International and RBS N.V. were reduced to A from AA- (long-term) and to F1 from F1+ (short term). The ratings of Citizens Financial Group, Ulster Bank Ltd and Ulster Bank Ireland Ltd were downgraded to A- from A+ (long term). The short term rating of Citizens Financial Group was affirmed at F1 following the downgrade of RBS plc, while the rating of Ulster Bank Ltd and Ulster Bank Ireland Limited was downgraded to F1 from F1+. Fitch assigned all of these ratings a stable outlook. The standalone ratings of RBS Group and RBS plc were unchanged by this action and were upgraded from C/D to C on 29 June 2011, corresponding to a bbb viability rating.
 
 
Notes (continued)
 
17. Other developments (continued)
On 29 November 2011, S&P announced the results of the reviews into a group of 37 of the largest global financial institutions, including all major UK banks. This review has resulted in a one notch downgrade of the long-term ratings of RBS plc and NatWest plc to A from A+, the short term rating of A-1 was affirmed.  RBS was also downgraded one notch bringing the long-term rating to A- from A and the short term to A-2 from A-1.  Standard & Poor's assigned all these ratings a stable outlook.
 
As a result of the 29 November rating action, S&P also lowered the ratings of RBS Securities Inc and RBS N.V. to A from A+ (long-term) and affirmed the A-1 short-term rating.  Finally, S&P upgraded the long and short term ratings of RBS Citizens NA and Citizens Bank of Pennsylvania to A from A- (long-term) and to A-1 from A-2 (short-term). Standard & Poor's assign all these ratings a stable outlook.
 
Further to its announcements on 11 and 7 of October 2011, on 15 February 2012 Moody's placed the ratings of RBS and certain subsidiaries on review for possible downgrade, along with 114 other European banks and 17 firms with capital markets activities.  Moody's have placed Bank Standalone Financial Strength Rating (BFSR) of RBS plc on review for possible downgrade and this has driven a review for downgrade of the long-term ratings of RBS, RBS plc, NatWest plc, RBS N.V., Ulster Bank Ireland Ltd and Ulster Bank Ltd; along with the short-term ratings of RBS plc, NatWest plc and RBS N.V.  The short-term ratings of RBS, Ulster Bank Ireland Ltd and Ulster Bank Ltd were affirmed.  Moody's cite three reasons for this review across all of the affected firms; the adverse and prolonged impact of the euro area crisis; the deteriorating creditworthiness of euro-area sovereigns; and the substantial challenges faced by banks and securities firms with significant capital market activities.  
 
18. Date of approval
This announcement was approved by the Board of directors on 22 February 2012.
 
19. Post balance sheet events
There have been no significant events between 31 December 2011 and the date of approval of this announcement which would require a change to or additional disclosure in the announcement.
 
 

 
 

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