rbs201208036k4.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 August 3, 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 30 June 2012
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Interest receivable
9,791 
10,805 
  
4,774 
5,017 
5,404 
Interest payable
(3,821)
(4,277)
  
(1,803)
(2,018)
(2,177)
             
Net interest income
5,970 
6,528 
  
2,971 
2,999 
3,227 
             
Fees and commissions receivable
2,937 
3,342 
  
1,450 
1,487 
1,700 
Fees and commissions payable
(604)
(583)
  
(314)
(290)
(323)
Income from trading activities
869 
1,982 
  
657 
212 
1,147 
Gain on redemption of own debt
577 
255 
  
- 
577 
255 
Other operating income (excluding insurance net
  premium income)
(353)
1,533 
  
394 
(747)
1,142 
Insurance net premium income
1,867 
2,239 
  
929 
938 
1,090 
             
Non-interest income
5,293 
8,768 
  
3,116 
2,177 
5,011 
             
Total income
11,263 
15,296 
  
6,087 
5,176 
8,238 
             
Staff costs
(4,713)
(4,609)
  
(2,143)
(2,570)
(2,210)
Premises and equipment
(1,107)
(1,173)
  
(544)
(563)
(602)
Other administrative expenses
(2,172)
(2,673)
  
(1,156)
(1,016)
(1,752)
Depreciation and amortisation
(902)
(877)
  
(434)
(468)
(453)
             
Operating expenses
(8,894)
(9,332)
  
(4,277)
(4,617)
(5,017)
             
Profit before insurance net claims and
  impairment losses
2,369 
5,964 
  
1,810 
559 
3,221 
Insurance net claims
(1,225)
(1,705)
  
(576)
(649)
(793)
Impairment losses
(2,649)
(5,053)
  
(1,335)
(1,314)
(3,106)
             
Operating loss before tax
(1,505)
(794)
  
(101)
(1,404)
(678)
Tax charge
(429)
(645)
  
(290)
(139)
(222)
             
Loss from continuing operations
(1,934)
(1,439)
  
(391)
(1,543)
(900)
Profit/(loss) from discontinued operations, net of tax
1 
31 
  
(4)
5 
21 
             
Loss for the period
(1,933)
(1,408)
  
(395)
(1,538)
(879)
Non-controlling interests
19 
(17)
  
5 
14 
(18)
Preference share and other dividends
(76)
- 
  
(76)
- 
- 
             
Loss attributable to ordinary and B shareholders
(1,990)
(1,425)
  
(466)
(1,524)
(897)
             
Basic and diluted loss per ordinary and B share from
  continuing operations (1)
(18.2p)
(13.2p)
  
(4.2p)
(14.0p)
(8.3p)
             
Basic and diluted loss per ordinary and B share from
  discontinued operations (1)
- 
- 
  
- 
- 
- 
 
Note:
(1)
Prior periods have been adjusted for the sub-division and one-for-ten ordinary share consolidation of ordinary shares.
 
In the income statement above, one-off and other items as shown on page 18 are included in the appropriate captions. A reconciliation between the income statement above and the managed view income statement on page 11 is given in Appendix 1 to this announcement.
 
 
Condensed consolidated statement of comprehensive income
for the period ended 30 June 2012
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Loss for the period
(1,933)
(1,408)
  
(395)
(1,538)
(879)
             
Other comprehensive income
            
Available-for-sale financial assets
591 
1,369 
  
66 
525 
1,406 
Cash flow hedges
695 
361 
  
662 
33 
588 
Currency translation
(496)
(301)
  
58 
(554)
59 
             
Other comprehensive income before tax
790 
1,429 
  
786 
4 
2,053 
Tax charge
(256)
(492)
  
(237)
(19)
(524)
             
Other comprehensive income/(loss)
  after tax
534 
937 
  
549 
(15)
1,529 
             
Total comprehensive (loss)/income for
  the period
(1,399)
(471)
  
154 
(1,553)
650 
             
Total comprehensive (loss)/income is
  attributable to:
            
Non-controlling interests
(13)
(6)
  
(10)
(3)
3 
Ordinary and B shareholders
(1,386)
(465)
  
164 
(1,550)
647 
             
 
(1,399)
(471)
  
154 
(1,553)
650 
 
Key points
·
The movement in available-for-sale financial assets reflects net unrealised gains on high quality sovereign bonds.
   
·
Cash flow hedging gains largely result from reductions in swap rates with significant movements during the second quarter of 2012.
   
·
Currency translation losses during the half year largely result from the strengthening of Sterling against both the Euro, by 3.5%, and the US Dollar, by 1.4%. Movements in Q2 2012 reflect the weakening of Sterling against the US Dollar by 1.9%, partially offset by a 3.2% strengthening of Sterling against the Euro.
 
 
Condensed consolidated balance sheet
at 30 June 2012
 
 
30 June 
2012 
31 March 
2012 
31 December 
2011 
 
£m 
£m 
£m 
       
Assets
      
Cash and balances at central banks
78,647 
82,363 
79,269 
Net loans and advances to banks
39,436 
36,064 
43,870 
Reverse repurchase agreements and stock borrowing
37,705 
34,626 
39,440 
Loans and advances to banks
77,141 
70,690 
83,310 
Net loans and advances to customers
434,965 
440,406 
454,112 
Reverse repurchase agreements and stock borrowing
60,196 
56,503 
61,494 
Loans and advances to customers
495,161 
496,909 
515,606 
Debt securities
187,626 
195,931 
209,080 
Equity shares
13,091 
17,603 
15,183 
Settlement balances
15,312 
20,970 
7,771 
Derivatives
486,432 
453,354 
529,618 
Intangible assets
14,888 
14,771 
14,858 
Property, plant and equipment
11,337 
11,442 
11,868 
Deferred tax
3,502 
3,849 
3,878 
Prepayments, accrued income and other assets
10,983 
10,079 
10,976 
Assets of disposal groups
21,069 
25,060 
25,450 
       
Total assets
1,415,189 
1,403,021 
1,506,867 
       
Liabilities
      
Bank deposits
67,619 
65,735 
69,113 
Repurchase agreements and stock lending
39,125 
41,415 
39,691 
Deposits by banks
106,744 
107,150 
108,804 
Customer deposits
412,769 
410,207 
414,143 
Repurchase agreements and stock lending
88,950 
87,303 
88,812 
Customer accounts
501,719 
497,510 
502,955 
Debt securities in issue
119,855 
142,943 
162,621 
Settlement balances
15,126 
17,597 
7,477 
Short positions
38,376 
37,322 
41,039 
Derivatives
480,745 
446,534 
523,983 
Accruals, deferred income and other liabilities
18,820 
20,278 
23,125 
Retirement benefit liabilities
1,791 
1,840 
2,239 
Deferred tax
1,815 
1,788 
1,945 
Insurance liabilities
6,322 
6,251 
6,312 
Subordinated liabilities
25,596 
25,513 
26,319 
Liabilities of disposal groups
23,064 
23,664 
23,995 
       
Total liabilities
1,339,973 
1,328,390 
1,430,814 
       
Equity
      
Non-controlling interests
1,200 
1,215 
1,234 
Owners' equity*
      
  Called up share capital
6,528 
15,397 
15,318 
  Reserves
67,488 
58,019 
59,501 
       
Total equity
75,216 
74,631 
76,053 
       
Total liabilities and equity
1,415,189 
1,403,021 
1,506,867 
       
* Owners' equity attributable to:
      
Ordinary and B shareholders
69,272 
68,672 
70,075 
Other equity owners
4,744 
4,744 
4,744 
       
 
74,016 
73,416 
74,819 
 
 
 
Commentary on condensed consolidated balance sheet
 
30 June 2012 compared with 31 December 2011
 
Key points
·
Total assets of £1,415.2 billion at 30 June 2012 were down £91.7 billion, 6%, compared with 31 December 2011.
This was principally driven by the Group's programme of deleveraging and reducing capital intensive assets, including Non-Core disposals and run-off, and the reduction in the mark-to-market value of derivatives.
   
·
Loans and advances to banks decreased by £6.2 billion, 7%, to £77.1 billion. Excluding reverse repurchase agreements and stock borrowing ('reverse repos'), down £1.8 billion, 4%, to £37.7 billion, bank placings declined £4.4 billion, 10%, to £39.4 billion.
   
·
Loans and advances to customers declined £20.4 billion, 4%, to £495.2 billion. Within this, reverse repurchase agreements were down £1.3 billion, 2%, to £60.2 billion. Customer lending decreased by £19.1 billion, 4%, to £435.0 billion, or £18.7 billion to £455.1 billion before impairments. This reflected planned reductions in Non-Core of £10.6 billion, along with declines in International Banking, £6.8 billion, Markets, £0.6 billion, UK Corporate, £0.5 billion and Ulster Bank, £0.2 billion, together with the effect of exchange rate and other movements, £3.6 billion. These were partially offset by growth in UK Retail, £2.2 billion, US Retail & Commercial, £1.3 billion and Wealth, £0.1 billion.
   
·
Debt securities were down £21.5 billion, 10%, to £187.6 billion, driven mainly by a reduction in Eurozone government and financial institution bonds within Markets and Group Treasury.
   
·
Settlement balance assets and liabilities increased £7.5 billion to £15.3 billion and £7.6 billion to £15.1 billion respectively as a result of increased customer activity from seasonal year-end lows.
   
·
Movements in the value of derivative assets, down £43.2 billion, 8%, to £486.4 billion, and liabilities, down £43.2 billion, 8%, to £480.7 billion, primarily reflect decreases in interest rate and credit derivative contracts, together with the effect of currency movements, with Sterling strengthening against both the US dollar and the Euro.
   
·
The reduction in assets and liabilities of disposal groups, down £4.4 billion, 17%, to £21.1 billion, and £0.9 billion, 4%, to £23.1 billion respectively, primarily reflects the disposal of RBS Aviation Capital in the second quarter.
   
·
Deposits by banks decreased £2.1 billion, 2%, to £106.7 billion, with a reduction in repurchase agreements and stock lending ('repos'), down £0.6 billion, 1%, to £39.1 billion and a decrease in inter-bank deposits, down £1.5 billion, 2%, to £67.6 billion.
   
·
Customer accounts decreased £1.2 billion to £501.7 billion. Within this, repos were broadly flat at £88.9 billion. Excluding repos, customer deposits were down £1.4 billion at £412.8 billion, reflecting decreases in International Banking, £2.2 billion, Markets, £1.9 billion, Non-Core, £0.7 billion and Ulster Bank, £0.6 billion, together with exchange and other movements, £2.2 billion. This was partially offset by increases in UK Retail, £4.8 billion, UK Corporate, £1.1 billion and Wealth, £0.3 billion.
 
 
 
Commentary on condensed consolidated balance sheet (continued)
 
·
Debt securities in issue decreased £42.8 billion, 26%, to £119.9 billion reflecting the maturity of the remaining notes issued under the UK Government's Credit Guarantee Scheme, £21.3 billion, and the reduction of commercial paper and medium term notes in issue in line with the Group's strategy.
   
·
Subordinated liabilities decreased by £0.7 billion, 3%, to £25.6 billion, primarily reflecting the net decrease in dated loan capital as a result of the liability management exercise completed in March 2012, with redemptions of £3.4 billion offset by the issuance of £2.8 billion new loan capital, together with exchange rate movements and other adjustments of £0.1 billion.
   
·
Owners' equity decreased by £0.8 billion, 1%, to £74.0 billion, due to the £1.9 billion attributable loss for the period together with movements in foreign exchange reserves, £0.5 billion and other reserve movements of £0.1 billion. Partially offsetting these reductions were positive movements in available-for-sale reserves, £0.5 billion and cash flow hedging reserves, £0.5 billion and share capital and reserve movements in respect of employee benefits, £0.7 billion.
 
 
 
Average balance sheet
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
 
% 
% 
  
% 
% 
           
Average yields, spreads and margins of the banking
  business
          
Gross yield on interest-earning assets of banking business
3.14 
3.30 
  
3.13 
3.15 
Cost of interest-bearing liabilities of banking business
(1.52)
(1.59)
  
(1.47)
(1.57)
           
Interest spread of banking business
1.62 
1.71 
  
1.66 
1.58 
Benefit from interest-free funds
0.30 
0.29 
  
0.29 
0.31 
           
Net interest margin of banking business
1.92 
2.00 
  
1.95 
1.89 
           
           
Average interest rates
          
The Group's base rate
0.50 
0.50 
  
0.50 
0.50 
           
London inter-bank three month offered rates
          
  - Sterling
1.02 
0.81 
  
0.99 
1.06 
  - Eurodollar
0.49 
0.29 
  
0.47 
0.51 
  - Euro
0.79 
1.20 
  
0.61 
0.97 
 
 
 
Average balance sheet (continued)
 
 
Half year ended
  
Half year ended
 
30 June 2012
  
30 June 2011
 
Average 
      
Average 
    
 
balance 
Interest 
Rate 
  
balance 
Interest 
Rate 
 
£m 
£m 
% 
  
£m 
£m 
% 
               
Assets
              
Loans and advances to banks
82,588 
282 
0.69 
  
65,606 
336 
1.03 
Loans and advances to
  customers
439,395 
8,369 
3.83 
  
472,385 
9,138 
3.90 
Debt securities
105,199 
1,149 
2.20 
  
122,134 
1,343 
2.22 
               
Interest-earning assets -
  banking business (1,2,3)
627,182 
9,800 
3.14 
  
660,125 
10,817 
3.30 
               
Trading business (4)
246,256 
      
281,771 
    
Non-interest earning assets
618,586 
      
532,429 
    
               
Total assets
1,492,024 
      
1,474,325 
    
               
Memo: Funded assets
984,037 
      
1,078,045 
    
               
Liabilities
              
Deposits by banks
42,965 
334 
1.56 
  
65,895 
504 
1.54 
Customer accounts
335,552 
1,787 
1.07 
  
333,071 
1,688 
1.02 
Debt securities in issue
109,934 
1,290 
2.36 
  
173,647 
1,743 
2.02 
Subordinated liabilities
22,297 
336 
3.03 
  
23,300 
318 
2.75 
Internal funding of trading
  business
(6,884)
66 
(1.93)
  
(51,811)
30 
(0.12)
               
Interest-bearing liabilities -
  banking business (1,2,3)
503,864 
3,813 
1.52 
  
544,102 
4,283 
1.59 
               
Trading business (4)
257,343 
      
307,926 
    
Non-interest-bearing liabilities
              
  - demand deposits
74,088 
      
64,256 
    
  - other liabilities
582,768 
      
483,682 
    
Owners' equity
73,961 
      
74,359 
    
               
Total liabilities and
  owners' equity
1,492,024 
      
1,474,325 
    
 
Notes:
(1)
Interest receivable has been increased by nil (H1 2011 - £5 million) and interest payable has been decreased by £10 million (H1 2011 - nil) to exclude RFS Holdings minority interest. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)
Interest receivable has been increased by £9 million (H1 2011 - £5 million) and interest payable has been increased by £82 million (H1 2011 - £63 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.
(3)
Interest receivable has been increased by nil (H1 2011 - £2 million) and interest payable has been decreased by £80 million (H1 2011 - £57 million) in respect of non-recurring adjustments.
(4)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
 
 
 
Average balance sheet (continued)
 
 
Quarter ended
  
Quarter ended
 
30 June 2012
  
31 March 2012
 
Average 
      
Average 
    
 
balance 
Interest 
Rate 
  
balance 
Interest 
Rate 
 
£m 
£m 
% 
  
£m 
£m 
% 
               
Assets
              
Loans and advances to banks
78,151 
134 
0.69 
  
87,025 
148 
0.68 
Loans and advances to
  customers
435,372 
4,117 
3.80 
  
443,418 
4,252 
3.86 
Debt securities
99,472 
524 
2.12 
  
110,926 
625 
2.27 
               
Interest-earning assets -
  banking business (1)
612,995 
4,775 
3.13 
  
641,369 
5,025 
3.15 
               
Trading business (4)
241,431 
      
251,081 
    
Non-interest earning assets
603,888 
      
633,284 
    
               
Total assets
1,458,314 
      
1,525,734 
    
               
Memo: Funded assets
955,789 
      
1,012,285 
    
               
Liabilities
              
Deposits by banks
41,543 
154 
1.49 
  
44,387 
180 
1.63 
Customer accounts
337,189 
870 
1.04 
  
333,915 
917 
1.10 
Debt securities in issue
96,977 
541 
2.24 
  
122,891 
749 
2.45 
Subordinated liabilities
22,064 
190 
3.46 
  
22,530 
146 
2.61 
Internal funding of trading
  business
(7,336)
41 
(2.25)
  
(6,432)
25 
(1.56)
               
Interest-bearing liabilities -
  banking business (1,2,3)
490,437 
1,796 
1.47 
  
517,291 
2,017 
1.57 
               
Trading business (4)
252,639 
      
262,047 
    
Non-interest-bearing liabilities
              
  - demand deposits
75,806 
      
72,370 
    
  - other liabilities
565,310 
      
600,226 
    
Owners' equity
74,122 
      
73,800 
    
               
Total liabilities and
  owners' equity
1,458,314 
      
1,525,734 
    
 
Notes:
(1)
Interest receivable has been increased by £1 million (Q1 2012 - £8 million) and interest payable has been increased by £30 million (Q1 2012 - £52 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)
Interest payable has been decreased by £2 million (Q1 2012 - £8 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)
Interest payable has been decreased by £35 million (Q1 2012 - £45 million) in respect of non-recurring adjustments.
(4)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
 
 
 
Condensed consolidated statement of changes in equity
for the period ended 30 June 2012
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Called-up share capital
            
At beginning of period
15,318 
15,125 
  
15,397 
15,318 
15,156 
Ordinary shares issued
143 
192 
  
64 
79 
161 
Share capital sub-division and consolidation
(8,933)
- 
  
(8,933)
- 
- 
             
At end of period
6,528 
15,317 
  
6,528 
15,397 
15,317 
             
Paid-in equity
            
At beginning and end of period
431 
431 
  
431 
431 
431 
             
Share premium account
            
At beginning of period
24,001 
23,922 
  
24,027 
24,001 
23,922 
Ordinary shares issued
197 
1 
  
171 
26 
1 
             
At end of period
24,198 
23,923 
  
24,198 
24,027 
23,923 
             
Merger reserve
            
At beginning of period
13,222 
13,272 
  
13,222 
13,222 
13,272 
Transfer to retained earnings
- 
(50)
  
- 
-
(50)
             
At end of period
13,222 
13,222 
  
13,222 
13,222 
13,222 
             
Available-for-sale reserve (1)
            
At beginning of period
(957)
(2,037)
  
(439)
(957)
(2,063)
Net unrealised gains
1,152 
943 
  
428 
724 
781 
Realised (gains)/losses
(582)
429 
  
(370)
(212)
626 
Tax
(63)
(361)
  
(69)
6 
(370)
             
At end of period
(450)
(1,026)
  
(450)
(439)
(1,026)
             
Cash flow hedging reserve
            
At beginning of period
879 
(140)
  
921 
879 
(314)
Amount recognised in equity
1,218 
825 
  
928 
290 
811 
Amount transferred from equity to earnings
(523)
(464)
  
(266)
(257)
(223)
Tax
(175)
(108)
  
(184)
9 
(161)
             
At end of period
1,399 
113 
  
1,399 
921 
113 
 
Note:
(1)
Analysis provided on page 110.
 
 
 
Condensed consolidated statement of changes in equity
for the period ended 30 June 2012 (continued)
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Foreign exchange reserve
            
At beginning of period
4,775 
5,138 
  
4,227 
4,775 
4,754 
Retranslation of net assets
(566)
(240)
  
82 
(648)
189 
Foreign currency gains/(losses) on hedges
  of net assets
88 
(40)
  
(8)
96 
(116)
Tax
20 
(24)
  
16 
4 
7 
Recycled to profit or loss on disposal of
  business (nil tax)
(3)
- 
  
(3)
- 
- 
             
At end of period
4,314 
4,834 
  
4,314 
4,227 
4,834 
             
Capital redemption reserve
            
At beginning of period
198 
198 
  
198 
198 
198 
Share capital sub-division and consolidation
8,933 
- 
  
8,933 
- 
- 
             
At end of period
9,131 
198 
  
9,131 
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
18,929 
21,239 
  
17,405 
18,929 
20,713 
(Loss)/profit attributable to ordinary and B
  shareholders and other equity owners
            
  - continuing operations
(1,911)
(1,429)
  
(387)
(1,524)
(899)
  - discontinued operations
(3)
4 
  
(3)
- 
2 
Transfer from merger reserve
- 
50 
  
- 
- 
50 
Equity preference dividends paid
(76)
- 
  
(76)
- 
- 
Actuarial losses recognised in retirement
  benefit schemes
            
  - tax
(38)
- 
  
- 
(38)
- 
Loss on disposal of own shares held
(196)
- 
  
(196)
- 
- 
Shares released for employee benefits
(129)
(207)
  
(116)
(13)
(166)
Share-based payments
            
  - gross
92 
67 
  
47 
45 
29 
  - tax
(11)
2 
  
(17)
6 
(3)
             
At end of period
16,657 
19,726 
  
16,657 
17,405 
19,726 
 
 
 
Condensed consolidated statement of changes in equity
for the period ended 30 June 2012 (continued)
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Own shares held
            
At beginning of period
(769)
(808)
  
(765)
(769)
(785)
Disposal/(purchase) of own shares
449 
6 
  
451 
(2)
(6)
Shares released for employee benefits
114 
16 
  
108 
6 
5 
             
At end of period
(206)
(786)
  
(206)
(765)
(786)
             
Owners' equity at end of period
74,016 
74,744 
  
74,016 
73,416 
74,744 
             
Non-controlling interests
            
At beginning of period
1,234 
1,719 
  
1,215 
1,234 
1,710 
Currency translation adjustments and other
  movements
(15)
(21)
  
(13)
(2)
(14)
(Loss)/profit attributable to non-controlling
  interests
            
  - continuing operations
(23)
(10)
  
(4)
(19)
(1)
  - discontinued operations
4 
27 
  
(1)
5 
19 
Dividends paid
(6)
(39)
  
(6)
- 
(39)
Movements in available-for-sale securities
            
  - unrealised gains/(losses)
1 
- 
  
5 
(4)
(1)
  - realised losses/(gains)
20 
(3)
  
3 
17 
- 
  - tax
- 
1 
  
- 
- 
- 
Equity raised
1 
- 
  
1 
- 
- 
Equity withdrawn and disposals
(16)
(176)
  
- 
(16)
(176)
             
At end of period
1,200 
1,498 
  
1,200 
1,215 
1,498 
             
Total equity at end of period
75,216 
76,242 
  
75,216 
74,631 
76,242 
             
Total comprehensive (loss)/income
  recognised in the statement of
  changes in equity is attributable to:
            
Non-controlling interests
(13)
(6)
  
(10)
(3)
3 
Ordinary and B shareholders
(1,386)
(465)
  
164 
(1,550)
647 
             
 
(1,399)
(471)
  
154 
(1,553)
650 
 
 
 
Condensed consolidated cash flow statement
for the period ended 30 June 2012
 
 
Half year ended
 
30 June 
2012 
30 June 
2011 
 
£m 
£m 
     
Operating activities
    
Operating loss before tax
(1,505)
(794)
Operating profit before tax on discontinued operations
6 
38 
Adjustments for non-cash items
4,969 
1,503 
     
Net cash inflow from trading activities
3,470 
747 
Changes in operating assets and liabilities
(20,487)
7,595 
     
Net cash flows from operating activities before tax
(17,017)
8,342 
Income taxes paid
(90)
(90)
     
Net cash flows from operating activities
(17,107)
8,252 
     
Net cash flows from investing activities
18,697 
(4,362)
     
Net cash flows from financing activities
(40)
(1,212)
     
Effects of exchange rate changes on cash and cash equivalents
(3,108)
482 
     
Net (decrease)/increase in cash and cash equivalents
(1,558)
3,160 
Cash and cash equivalents at beginning of period
152,655 
152,530 
     
Cash and cash equivalents at end of period
151,097 
155,690 
 
 
 
Notes
 
1. Basis of preparation
The Group's condensed financial statements have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Services Authority and IAS 34 'Interim Financial Reporting'. They should be read in conjunction with the Group's 2011 annual accounts which were prepared in accordance with International Financial Reporting Standards issued by the IASB and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the EU (together IFRS).  
 
In line with the Group's policy of providing users of its financial reports with relevant and transparent disclosures, it has adopted the British Bankers' Association Code for Financial Reporting Disclosure published in September 2010. The code sets out five disclosure principles together with supporting guidance: the overarching principle being a commitment to provide high quality, meaningful and decision-useful disclosures. The Group's 2012 interim financial statements have been prepared in compliance with the code.
 
The Group's business activities and financial position, and the factors likely to affect its future development and performance are discussed on pages 6 to 128. Its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the risk and balance sheet management sections on pages 129 to 236. A summary of the risk factors which could materially affect the Group's future results are described on pages 239 and 240. The Group's regulatory capital resources are set on page 133 and 134. The Group's liquidity and funding management is described on pages 137 to 148. Having reviewed the Group's forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group will continue in operational existence for the foreseeable future. Accordingly, the interim financial statements for the six months ended 30 June 2012 have been prepared on a going concern basis.
 
2. Accounting policies
There have been no significant changes to the Group's principal accounting policies as set out on pages 314 to 323 of the 2011 Annual Report and Accounts.
 
Critical accounting policies and key sources of estimation uncertainty
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions that are considered to be the most important to the portrayal of Group's financial condition are those relating to loan impairment provisions; pensions; financial instrument fair values; general insurance claims and deferred tax. These critical accounting policies and judgments are described on pages 323 to 325 of the Group's 2011 Annual Report and Accounts.
 
Recent developments in IFRS
In May 2012, the IASB issued Annual Improvements 2009-2011 Cycle which clarified:
·
the requirements for comparative information in IAS 1 Presentation of Financial Statements and IAS 34 Interim Financial Reporting;
·
the classification of servicing equipment in IAS 16 Property, Plant and Equipment;
·
the accounting for the tax effect of distributions to holders of equity instruments in IAS 32 Financial Instruments: Presentation; and
·
the requirement to disclose segmental net assets in IAS 34.
 
None of the amendments are effective before 1 January 2013. Earlier application is permitted. The Group is reviewing the amendments to determine their effect, if any, on the Group's financial reporting.
 
 
 
Notes (continued)
 
3. Analysis of income, expenses and impairment losses
 
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Loans and advances to customers
8,369 
9,128 
  
4,117 
4,252 
4,535 
Loans and advances to banks
282 
336 
  
134 
148 
164 
Debt securities
1,140 
1,341 
  
523 
617 
705 
             
Interest receivable
9,791 
10,805 
  
4,774 
5,017 
5,404 
             
Customer accounts
1,784 
1,684 
  
870 
914 
853 
Deposits by banks
347 
508 
  
156 
191 
249 
Debt securities in issue
1,209 
1,680 
  
511 
698 
863 
Subordinated liabilities
415 
375 
  
225 
190 
190 
Internal funding of trading businesses
66 
30 
  
41 
25 
22 
             
Interest payable
3,821 
4,277 
  
1,803 
2,018 
2,177 
             
Net interest income
5,970 
6,528 
  
2,971 
2,999 
3,227 
             
Fees and commissions receivable
2,937 
3,342 
  
1,450 
1,487 
1,700 
Fees and commissions payable
            
  - banking
(380)
(419)
  
(201)
(179)
(238)
  - insurance related
(224)
(164)
  
(113)
(111)
(85)
             
Net fees and commissions
2,333 
2,759 
  
1,136 
1,197 
1,377 
             
Foreign exchange
435 
578 
  
210 
225 
375 
Interest rate
1,100 
651 
  
428 
672 
2 
Credit
(893)
314 
  
(94)
(799)
562 
Other
227 
439 
  
113 
114 
208 
             
Income from trading activities
869 
1,982 
  
657 
212 
1,147 
             
Gain on redemption of own debt
577 
255 
  
- 
577 
255 
             
Operating lease and other rental income
562 
672 
  
261 
301 
350 
Own credit adjustments
(1,694)
(66)
  
(247)
(1,447)
228 
Changes in the fair value of securities and
  other financial assets and liabilities
55 
292 
  
(26)
81 
224 
Changes in the fair value of investment
  properties
(56)
(52)
  
(88)
32 
(27)
Profit on sale of securities
482 
429 
  
259 
223 
193 
Profit on sale of property, plant and equipment
23 
22 
  
18 
5 
11 
Profit/(loss) on sale of subsidiaries and
  associates
143 
26 
  
155 
(12)
55 
Life business losses
(6)
(5)
  
(4)
(2)
(3)
Dividend income
33 
33 
  
17 
16 
18 
Share of profits less losses of associated entities
1 
15 
  
5 
(4)
8 
Other income
104 
167 
  
44 
60 
85 
             
Other operating (loss)/income
(353)
1,533 
  
394 
(747)
1,142 
 
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)
 
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Non-interest income (excluding
  insurance net premium income)
3,426 
6,529 
  
2,187 
1,239 
3,921 
Insurance net premium income
1,867 
2,239 
  
929 
938 
1,090 
             
Total non-interest income
5,293 
8,768 
  
3,116 
2,177 
5,011 
             
Total income
11,263 
15,296 
  
6,087 
5,176 
8,238 
             
Staff costs
4,713 
4,609 
  
2,143 
2,570 
2,210 
Premises and equipment
1,107 
1,173 
  
544 
563 
602 
Other
2,172 
2,673 
  
1,156 
1,016 
1,752 
             
Administrative expenses
7,992 
8,455 
  
3,843 
4,149 
4,564 
Depreciation and amortisation
902 
877 
  
434 
468 
453 
             
Operating expenses
8,894 
9,332 
  
4,277 
4,617 
5,017 
             
Loan impairment losses
2,730 
4,135 
  
1,435 
1,295 
2,237 
Securities impairment (recoveries)/losses
            
  - sovereign debt impairment and related
    interest rate hedge adjustments
- 
842 
  
- 
- 
842 
  - other
(81)
76 
  
(100)
19 
27 
             
Impairment losses
2,649 
5,053 
  
1,335 
1,314 
3,106 
 
Refer to Appendix 1 for a reconciliation between the managed and statutory bases for key line items.
 
Payment Protection Insurance (PPI)
To reflect current experience of PPI complaints received, the Group strengthened its provision for PPI by £125 million in Q1 2012 and a further £135 million in Q2 2012, bringing the cumulative charge taken to £1.3 billion, of which £0.7 billion in redress had been paid by 30 June 2012. The eventual cost is dependent upon complaint volumes, uphold rates and average redress costs. Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different than the amount provided. The Group will continue to monitor the position closely and refresh its assumptions as more information becomes available.
 
 
Half year 
ended 
30 June
2012 
Quarter ended
Year 
ended 
31 December
2011 
30 June 
2012 
31 March 
2012 
 
£m 
£m 
£m 
£m 
         
At beginning of period
745 
689 
745 
- 
Transfers from accruals and other liabilities
- 
- 
- 
215 
Charge to income statement
260 
135 
125 
850 
Utilisations
(417)
(236)
(181)
(320)
         
At end of period
588 
588 
689 
745 
 
 
 
Notes (continued)
 
4. Loan impairment provisions
Operating loss is stated after charging loan impairment losses of £2,730 million (H1 2011 - £4,135 million). The balance sheet loan impairment provisions increased in the half year ended 30 June 2012 from £19,883 million to £20,297 million and the movements thereon were:
 
 
 
Half year ended
 
30 June 2012
  
30 June 2011
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
RFS 
MI 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                 
At beginning of period
8,414 
11,469 
19,883 
  
7,866 
10,316 
- 
18,182 
Intra-group transfers
- 
- 
- 
  
177 
(177)
- 
- 
Currency translation and other adjustments
1 
(316)
(315)
  
89 
240 
- 
329 
Disposals
- 
- 
- 
  
- 
- 
11 
11 
Amounts written-off
(991)
(934)
(1,925)
  
(1,018)
(912)
- 
(1,930)
Recoveries of amounts previously written-off
127 
53 
180 
  
80 
206 
- 
286 
Charge to income statement
                
  - continuing
1,515 
1,215 
2,730 
  
1,662 
2,473 
- 
4,135 
  - discontinued
- 
- 
- 
  
- 
- 
(11)
(11)
Unwind of discount (recognised in interest
  income)
(122)
(134)
(256)
  
(104)
(139)
- 
(243)
                 
At end of period
8,944 
11,353 
20,297 
  
8,752 
12,007 
- 
20,759 
 
 
 
Quarter ended
 
30 June 2012
  
31 March 2012
  
30 June 2011
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
RFS 
MI 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                         
At beginning of period
8,797 
11,414 
20,211 
  
8,414 
11,469 
19,883 
  
8,416 
10,842 
- 
19,258 
Transfers to disposal
  groups
- 
- 
- 
  
- 
- 
- 
  
- 
9 
- 
9 
Currency translation and
  other adjustments
9 
(236)
(227)
  
(8)
(80)
(88)
  
33 
145 
- 
178 
Disposals
- 
- 
- 
  
- 
- 
- 
  
- 
- 
11 
11 
Amounts written-off
(586)
(494)
(1,080)
  
(405)
(440)
(845)
  
(504)
(474)
- 
(978)
Recoveries of amounts
  previously written-off
65 
20 
85 
  
62 
33 
95 
  
41 
126 
- 
167 
Charge to income
  statement
                        
  - continuing
719 
716 
1,435 
  
796 
499 
1,295 
  
810 
1,427 
- 
2,237 
  - discontinued
- 
- 
- 
  
- 
- 
- 
  
- 
- 
(11)
(11)
Unwind of discount
  (recognised in interest
  income)
(60)
(67)
(127)
  
(62)
(67)
(129)
  
(44)
(68)
- 
(112)
                         
At end of period
8,944 
11,353 
20,297 
  
8,797 
11,414 
20,211 
  
8,752 
12,007 
- 
20,759 
 
Provisions at 30 June 2012 include £119 million in respect of loans and advances to banks (31 March 2012 - £135 million; 30 June 2011 - £132 million).
 
 
 
Notes (continued)
 
5. Pensions
Pension costs for the half year ended 30 June 2012 amounted to £267 million (half year ended 30 June 2011 - £245 million; quarter ended 30 June 2012 - £132 million; quarter ended 31 March 2012 - £135 million; quarter ended 30 June 2011 - £108 million). Defined benefit schemes charges are based on the actuarially determined pension cost rates at 31 December 2011.
 
The most recent funding valuation of the main UK scheme, as at 31 March 2010, showed the value of liabilities exceeded the value of assets by £3.5 billion, a ratio of assets to liabilities of 84%. In order to eliminate this deficit, the Group has agreed to pay additional contributions each year over the period 2011 to 2018. These contributions started at £375 million in September 2011 and in March 2012, 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.
 
6. Tax
The actual tax charge differs from the expected tax credit computed by applying the standard UK corporation tax rate of 24.5% (2011 - 26.5%).
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Loss before tax
(1,505)
(794)
  
(101)
(1,404)
(678)
             
Expected tax credit
369 
210 
  
25 
344 
179 
Sovereign debt impairment where no
  deferred tax asset recognised
- 
(183)
  
- 
- 
(183)
Derecognition of deferred tax asset in respect
  of losses in Australia
(182)
- 
  
(21)
(161)
- 
Other losses in period where no deferred
  tax asset recognised
(253)
(268)
  
(80)
(173)
(102)
Foreign profits taxed at other rates
(211)
(300)
  
(109)
(102)
(100)
UK tax rate change - deferred tax impact
(46)
(87)
  
(16)
(30)
- 
Unrecognised timing differences
14 
(10)
  
14 
- 
(15)
Items not allowed for tax
            
  - losses on strategic disposals and
     write-downs
(4)
(10)
  
- 
(4)
(7)
  - UK bank levy
(37)
- 
  
(19)
(18)
- 
  - employee share schemes
(29)
(8)
  
(14)
(15)
(4)
  - other disallowable items
(80)
(102)
  
(29)
(51)
(66)
Non-taxable items
            
  - gain on sale of RBS Aviation Capital
27 
- 
  
27 
- 
- 
  - gain on sale of Global Merchant Services
- 
12 
  
- 
- 
- 
  - other non-taxable items
26 
21 
  
2 
24 
9 
Taxable foreign exchange movements
(2)
- 
  
(3)
1 
(2)
Losses brought forward and utilised
11 
29 
  
(4)
15 
13 
Adjustments in respect of prior periods
(32)
51 
  
(63)
31 
56 
             
Actual tax charge
(429)
(645)
  
(290)
(139)
(222)
 
 
 
Notes (continued)
 
6. Tax (continued)
The high tax charge for the half year ended 30 June 2012 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 derecognition of deferred tax assets in respect of losses in Australia, following the strategic changes to the Markets and International Banking businesses announced in January 2012.
 
The combined effect of tax losses in Ireland and the Netherlands in the half year ended 30 June 2012 for which no deferred tax asset has been recognised and the derecognition of the deferred tax asset in respect of losses in Australia account for £502 million (63%) 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 Group has recognised a deferred tax asset at 30 June 2012 of £3,502 million (31 March 2012 - £3,849 million; 31 December 2011 - £3,878 million) of which £3,029 million (31 March 2012 - £3,134 million; 31 December 2011 - £2,933 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 Group has considered the carrying value of this asset as at 30 June 2012 and concluded that it is recoverable based on future profit projections.
 
7. (Loss)/profit attributable to non-controlling interests
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
RBS Sempra Commodities JV
4 
(5)
  
4 
- 
4 
RFS Holdings BV Consortium Members
(35)
24 
  
(16)
(19)
14 
Other
12 
(2)
  
7 
5 
- 
             
(Loss)/profit attributable to non-controlling
  interests
(19)
17 
  
(5)
(14)
18 
 
 
 
Notes (continued)
 
8. Dividends
On 26 November 2009, RBS entered into a State Aid Commitment Deed with HM Treasury containing commitments and undertakings that were designed to ensure that HM Treasury was able to comply with the commitments to be given by it to the European Commission for the purposes of obtaining approval for the State aid provided to RBS. As part of these commitments and undertakings, RBS agreed not to pay discretionary coupons and dividends on its existing hybrid capital instruments for a period of two years. This period commenced on 30 April 2010 for RBS Group instruments (the two year deferral period for RBS Holdings N.V. instruments commenced on 1 April 2011). On 30 April 2012 this period ended for RBS Group instruments.
 
On 4 May 2012, RBS determined that it was in a position to recommence payments on RBS Group instruments. The Core Tier 1 capital impact of discretionary amounts that will be payable over the remainder of 2012 on RBSG instruments on which payments have previously been stopped is c.£340 million. In the context of recent macro-prudential policy discussions, the Board of RBS decided to neutralise any impact on Core Tier 1 capital through equity issuance. Approximately 65% of this is ascribed to equity funding of employee incentive awards through the sale of surplus shares held by the Group's Employee Benefit Trust, which is now complete. The remaining 35% will be raised through the issue of new ordinary shares, which is expected to take place during the remainder of 2012.
 
In May 2012, the Directors declared the discretionary dividends on certain non-cumulative dollar preference shares which were payable on 30 June 2012, and announced that the discretionary distributions on certain RBSG innovative securities which were payable in June 2012 would also be paid. Future coupons and dividends on RBSG hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
 
9. Share consolidation
Following approval at the Group's Annual General Meeting on 30 May 2012, the sub-division and consolidation of the Group's ordinary shares on a one-for-ten basis took effect on 6 June 2012. There was a corresponding change in the Group's share price to reflect this.
 
The Board believes that the consolidation will result in a more appropriate share price for a company of the Group's size in the UK market. It may also help reduce volatility, thereby enabling a more consistent valuation of the Group.
 
Notes (continued)
 
10. Earnings per ordinary and B share
Earnings per ordinary and B share have been calculated based on the following:
 
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
             
Earnings
            
Loss from continuing operations attributable to
  ordinary and B shareholders (£m)
(1,987)
(1,429)
  
(463)
(1,524)
(899)
             
(Loss)/profit from discontinued operations
  attributable to ordinary and B shareholders (£m)
(3)
4 
  
(3)
- 
2 
             
Ordinary shares in issue during the period
  (millions)
5,812 
5,689 
  
5,854 
5,770 
5,697 
Effect of convertible B shares in issue during
  the period (millions)
5,100 
5,100 
  
5,100 
5,100 
5,100 
             
Weighted average number of ordinary shares and effect of convertible B shares in issue during the period (millions)
10,912 
10,789 
  
10,954 
10,870 
10,797 
             
Basic loss per ordinary and B share from
  continuing operations
(18.2p)
(13.2p)
  
(4.2p)
(14.0p)
(8.3p)
Own credit adjustments
21.5p 
1.6p 
  
4.1p 
17.4p 
(2.3p)
Asset Protection Scheme
0.3p 
4.3p 
  
- 
0.3p 
1.1p 
Payment Protection Insurance costs
1.8p 
5.8p 
  
0.9p 
0.9p 
5.8p 
Sovereign debt impairment
- 
7.8p 
  
- 
- 
7.8p 
Amortisation of purchased intangible assets
0.7p 
0.7p 
  
0.3p 
0.3p 
0.4p 
Integration and restructuring costs
4.8p 
2.5p 
  
1.7p 
3.2p 
1.5p 
Gain on redemption of own debt
(4.0p)
(2.3p)
  
- 
(4.0p)
(2.3p)
Strategic disposals
(1.3p)
(0.3p)
  
(1.4p)
0.1p 
(0.5p)
Bonus tax
- 
0.2p 
  
- 
- 
0.1p 
             
Adjusted earnings per ordinary and B share from continuing operations
5.6p 
7.1p 
  
1.4p 
4.2p 
3.3p 
Loss from Non-Core divisions attributable to
  ordinary shareholders
4.8p 
6.9p 
  
3.0p 
1.8p 
3.6p 
             
Core adjusted earnings per ordinary
  and B share from continuing operations
10.4p 
14.0p 
  
4.4p 
6.0p 
6.9p 
Core impairment losses
5.4p 
6.2p 
  
2.5p 
2.9p 
3.3p 
             
Pre-impairment Core adjusted
  earnings per ordinary and B share
15.8p 
20.2p 
  
6.9p 
8.9p 
10.2p 
Memo: Core adjusted earnings per
  ordinary and B share from continuing
  operations assuming normalised tax
  rate of 24.5% (2011 - 26.5%)
21.3p 
26.8p 
  
9.7p 
11.6p 
11.6p 
             
Diluted loss per ordinary and B share from continuing operations
(18.2p)
(13.2p)
  
(4.2p)
(14.0p)
(8.3p)
 
Prior period data have been adjusted for the sub-division and one-for-ten consolidation of ordinary shares, which took effect in June 2012.
 
 
 
Notes (continued)
 
11. Segmental analysis
In January 2012, the Group announced the reorganisation of its wholesale businesses into 'Markets' and 'International Banking'. Divisional results have been presented based on the new organisational structure. The Group has also revised its allocation of funding and liquidity costs and capital for the new divisional structure as well as for a new methodology. In addition, the Group had previously included movements in the fair value of own derivative liabilities within the Markets operating segment. These movements have now been combined with movements in the fair value of own debt in a single measure, 'own credit adjustments' and presented as a reconciling item. Refer to 'presentation of information' on page 5 for further details. Comparatives have been restated accordingly.
 
Analysis of divisional operating profit/(loss)
The following tables provide an analysis of divisional operating profit/(loss) by main income statement captions. The divisional income statements on pages 21 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)
Half year ended 30 June 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
1,989 
508 
2,497 
(1,288)
- 
(295)
914 
UK Corporate
1,528 
884 
2,412 
(1,051)
- 
(357)
1,004 
Wealth
357 
236 
593 
(462)
- 
(22)
109 
International Banking (1)
485 
618 
1,103 
(777)
- 
(62)
264 
Ulster Bank
325 
95 
420 
(258)
- 
(717)
(555)
US Retail & Commercial
988 
583 
1,571 
(1,193)
- 
(47)
331 
Markets (2)
48 
2,752 
2,800 
(1,704)
- 
(21)
1,075 
Direct Line Group (3)
152 
1,748 
1,900 
(456)
(1,225)
- 
219 
Central items
(4)
7 
3 
(147)
- 
(32)
(176)
               
Core
5,868 
7,431 
13,299 
(7,336)
(1,225)
(1,553)
3,185 
Non-Core (4)
112 
158 
270 
(525)
- 
(1,096)
(1,351)
               
Managed basis
5,980 
7,589 
13,569 
(7,861)
(1,225)
(2,649)
1,834 
Reconciling items
              
Own credit adjustments (5)
- 
(2,974)
(2,974)
- 
- 
- 
(2,974)
Asset Protection Scheme (6)
- 
(45)
(45)
- 
- 
- 
(45)
Payment Protection Insurance costs
- 
- 
- 
(260)
- 
- 
(260)
Amortisation of purchased intangible
  assets
- 
- 
- 
(99)
- 
- 
(99)
Integration and restructuring costs
- 
- 
- 
(673)
- 
- 
(673)
Gain on redemption of own debt
- 
577 
577 
- 
- 
- 
577 
Strategic disposals
- 
152 
152 
- 
- 
- 
152 
RFS Holdings minority interest
(10)
(6)
(16)
(1)
- 
- 
(17)
               
Statutory basis
5,970 
5,293 
11,263 
(8,894)
(1,225)
(2,649)
(1,505)
 
Notes:
(1)
Reallocation of £9 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Reallocation of £8 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(3)
Total income includes £163 million investment income, of which £90 million is included in net interest income and £73 million in non-interest income. Reallocation of £62 million between non-interest income and net interest income in respect of instalment income.
(4)
Reallocation of £89 million between net interest income and non-interest income in respect of funding costs of rental assets, £91 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £2 million.
(5)
Comprises £1,280 million loss included in 'Income from trading activities' and £1,694 million loss included in 'Other operating income' on a statutory basis.
(6)
Included in 'Income from trading activities' on a statutory basis.
 
 
 
Notes (continued)
 
11. 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)
Half year ended 30 June 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
2,184 
637 
2,821 
(1,366)
- 
(402)
1,053 
UK Corporate
1,581 
899 
2,480 
(1,064)
- 
(327)
1,089 
Wealth
325 
229 
554 
(416)
- 
(8)
130 
International Banking (1)
583 
729 
1,312 
(839)
- 
(98)
375 
Ulster Bank
363 
102 
465 
(278)
- 
(730)
(543)
US Retail & Commercial
922 
554 
1,476 
(1,063)
- 
(176)
237 
Markets (2)
56 
3,220 
3,276 
(1,934)
- 
14 
1,356 
Direct Line Group (3)
177 
1,939 
2,116 
(422)
(1,488)
- 
206 
Central items
(76)
70 
(6)
27 
1 
2 
24 
               
Core
6,115 
8,379 
14,494 
(7,355)
(1,487)
(1,725)
3,927 
Non-Core (4)
420 
981 
1,401 
(658)
(218)
(2,486)
(1,961)
               
Managed basis
6,535 
9,360 
15,895 
(8,013)
(1,705)
(4,211)
1,966 
Reconciling items
              
Own credit adjustments (5)
- 
(236)
(236)
- 
- 
- 
(236)
Asset Protection Scheme (6)
- 
(637)
(637)
- 
- 
- 
(637)
Payment Protection Insurance costs
- 
- 
- 
(850)
- 
- 
(850)
Sovereign debt impairment
- 
- 
- 
- 
- 
(733)
(733)
Interest rate hedge adjustments on
  impaired available-for-sale sovereign
  debt
- 
- 
- 
- 
- 
(109)
(109)
Amortisation of purchased intangible
  assets
- 
- 
- 
(100)
- 
- 
(100)
Integration and restructuring costs
(2)
(3)
(5)
(348)
- 
- 
(353)
Gain on redemption of own debt
- 
255 
255 
- 
- 
- 
255 
Strategic disposals
- 
27 
27 
- 
- 
- 
27 
Bonus tax
- 
- 
- 
(22)
- 
- 
(22)
RFS Holdings minority interest
(5)
2 
(3)
1 
- 
- 
(2)
               
Statutory basis
6,528 
8,768 
15,296 
(9,332)
(1,705)
(5,053)
(794)
 
Notes:
(1)
Reallocation of £21 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Reallocation of £6 million between net interest income and non-interest income to record interest in financial assets and liabilities designated as at fair value through profit or loss.
(3)
Total income includes £133 million investment income, of which £107 million is included in net interest income and £26 million in non-interest income. Reallocation of £70 million between non-interest income and net interest income in respect of instalment income.
(4)
Reallocation of £105 million between net interest income and non-interest income in respect of funding costs of rental assets, £102 million and to record interest in financial assets and liabilities designated as at fair value through profit or loss, £3 million.
(5)
Comprises £170 million loss included in 'Income from trading activities' and £66 million loss included in 'Other operating income' on a statutory basis.
(6)
Included in 'Income from trading activities' on a statutory basis.
 
 
 
Notes (continued)
 
11. 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 June 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
988 
242 
1,230 
(653)
- 
(140)
437 
UK Corporate
772 
439 
1,211 
(518)
- 
(181)
512 
Wealth
178 
125 
303 
(227)
- 
(12)
64 
International Banking
234 
327 
561 
(367)
- 
(27)
167 
Ulster Bank
160 
46 
206 
(128)
- 
(323)
(245)
US Retail & Commercial
492 
323 
815 
(558)
- 
(28)
229 
Markets
32 
1,034 
1,066 
(796)
- 
(19)
251 
Direct Line Group (1)
68 
866 
934 
(223)
(576)
- 
135 
Central items
1 
110 
111 
(145)
- 
2 
(32)
               
Core
2,925 
3,512 
6,437 
(3,615)
(576)
(728)
1,518 
Non-Core (2)
48 
(47)
1 
(262)
- 
(607)
(868)
               
Managed basis
2,973 
3,465 
6,438 
(3,877)
(576)
(1,335)
650 
Reconciling items
              
Own credit adjustments (3)
- 
(518)
(518)
- 
- 
- 
(518)
Asset Protection Scheme (4)
- 
(2)
(2)
- 
- 
- 
(2)
Payment Protection Insurance costs
- 
- 
- 
(135)
- 
- 
(135)
Amortisation of purchased intangible
  assets
- 
- 
- 
(51)
- 
- 
(51)
Integration and restructuring costs
- 
- 
- 
(213)
- 
- 
(213)
Strategic disposals
- 
160 
160 
- 
- 
- 
160 
RFS Holdings minority interest
(2)
11 
9 
(1)
- 
- 
8 
               
Statutory basis
2,971 
3,116 
6,087 
(4,277)
(576)
(1,335)
(101)
 
Notes:
(1)
Total income includes £73 million investment income, of which £37 million is included in net interest income and £36 million in non-interest income. Reallocation of £31 million between non-interest income and net interest income in respect of instalment income.
(2)
Reallocation of £38 million between net interest income and non-interest income in respect of funding costs of rental assets, £40 million and to record interest in financial assets and liabilities designated as fair value through profit or loss, £2 million.
(3)
Comprises £271 million loss included in 'Income from trading activities' and £247 million loss included in 'Other operating income' on a statutory basis.
(4)
Included in 'Income from trading activities' on a statutory basis.
 
 
 
Notes (continued)
 
11. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
Net 
interest 
income 
Non- 
interest 
income 
 
Total 
income 
 
Operating 
expenses 
Insurance 
net claims 
 
Impairment 
losses 
 
Operating 
profit/(loss)
Quarter ended 31 March 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
1,001 
266 
1,267 
(635)
- 
(155)
477 
UK Corporate
756 
445 
1,201 
(533)
- 
(176)
492 
Wealth
179 
111 
290 
(235)
- 
(10)
45 
International Banking (1)
251 
291 
542 
(410)
- 
(35)
97 
Ulster Bank
165 
49 
214 
(130)
- 
(394)
(310)
US Retail & Commercial
496 
260 
756 
(635)
- 
(19)
102 
Markets (2)
16 
1,718 
1,734 
(908)
- 
(2)
824 
Direct Line Group (3)
84 
882 
966 
(233)
(649)
- 
84 
Central items
(5)
(103)
(108)
(2)
- 
(34)
(144)
               
Core
2,943 
3,919 
6,862 
(3,721)
(649)
(825)
1,667 
Non-Core (4)
64 
205 
269 
(263)
- 
(489)
(483)
               
Managed basis
3,007 
4,124 
7,131 
(3,984)
(649)
(1,314)
1,184 
Reconciling items
              
Own credit adjustments (5)
- 
(2,456)
(2,456)
- 
- 
- 
(2,456)
Asset Protection Scheme (6)
- 
(43)
(43)
- 
- 
- 
(43)
Payment Protection Insurance costs
- 
- 
- 
(125)
- 
- 
(125)
Amortisation of purchased intangible
  assets
- 
- 
- 
(48)
- 
- 
(48)
Integration and restructuring costs
- 
- 
- 
(460)
- 
- 
(460)
Gain on redemption of own debt
- 
577 
577 
- 
- 
- 
577 
Strategic disposals
- 
(8)
(8)
- 
- 
- 
(8)
RFS Holdings minority interest
(8)
(17)
(25)
- 
- 
- 
(25)
               
Statutory basis
2,999 
2,177 
5,176 
(4,617)
(649)
(1,314)
(1,404)
 
Notes:
(1)
Reallocation of £9 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Reallocation of £8 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(3)
Total income includes £90 million of investment income, of which £53 million is included in net interest income and £37 million in non-interest income. Reallocation of £31 million between non-interest income and net interest income in respect of instalment income.
(4)
Reallocation of £51 million between net interest income and non-interest income in respect of funding costs of rental assets.
(5)
Comprises £1,009 million loss included in 'Income from trading activities' and £1,447 million loss included in 'Other operating income' on a statutory basis.
(6)
Included in 'Income from trading activities' on a statutory basis.
 
 
 
Notes (continued)
 
11. 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 June 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
1,098 
333 
1,431 
(688)
- 
(208)
535 
UK Corporate
770 
448 
1,218 
(526)
- 
(220)
472 
Wealth
168 
115 
283 
(220)
- 
(3)
60 
International Banking (1)
290 
375 
665 
(412)
- 
(104)
149 
Ulster Bank
182 
51 
233 
(142)
- 
(269)
(178)
US Retail & Commercial
470 
279 
749 
(541)
- 
(65)
143 
Markets (2)
3 
1,165 
1,168 
(855)
- 
14 
327 
Direct Line Group (3)
89 
957 
1,046 
(203)
(704)
- 
139 
Central items
(58)
81 
23 
30 
1
2 
56 
               
Core
3,012 
3,804 
6,816 
(3,557)
(703)
(853)
1,703 
Non-Core (4)
221 
745 
966 
(335)
(90)
(1,411)
(870)
               
Managed basis
3,233 
4,549 
7,782 
(3,892)
(793)
(2,264)
833 
Reconciling items
              
Own credit adjustments (5)
- 
324 
324 
- 
- 
- 
324 
Asset Protection Scheme (6)
- 
(168)
(168)
- 
- 
- 
(168)
Payment Protection Insurance costs
- 
- 
- 
(850)
- 
- 
(850)
Sovereign debt impairment
- 
- 
- 
- 
- 
(733)
(733)
Interest rate hedge adjustments on
  impaired available-for-sale sovereign
  debt
- 
- 
- 
- 
- 
(109)
(109)
Amortisation of purchased
  intangible assets
- 
- 
- 
(56)
- 
- 
(56)
Integration and restructuring costs
- 
1 
1 
(209)
- 
- 
(208)
Gain on redemption of own debt
- 
255 
255 
- 
- 
- 
255 
Strategic disposals
- 
50 
50 
- 
- 
- 
50 
Bonus tax
- 
- 
- 
(11)
- 
- 
(11)
RFS Holdings minority interest
(6)
- 
(6)
1 
- 
- 
(5)
               
Statutory basis
3,227 
5,011 
8,238 
(5,017)
(793)
(3,106)
(678)
 
Notes:
(1)
Reallocation of £11 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Reallocation of £3 million between net interest income and non-interest income to record interest in financial assets and liabilities designated as at fair value through profit or loss.
(3)
Total income includes £69 million investment income, of which £54 million is included in net interest income and £15 million in non-interest income. Reallocation of £35 million between non-interest income and net interest income in respect of instalment income.
(4)
Reallocation of £52 million between net interest income and non-interest income in respect of funding costs of rental assets, £51 million and to record interest in financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(5)
Comprises £96 million gain included in 'Income from trading activities' and £228 million gain included in 'Other operating income' on a statutory basis.
(6)
Included in 'Income from trading activities' on a statutory basis.
 
 
 
Notes (continued)
 
11. Segmental analysis (continued)
 
Total revenue by division
 
 
 
Half year ended
30 June 2012
  
30 June 2011
 
External 
Inter 
 segment 
Total 
  
External 
Inter 
 segment 
Total 
Total revenue
£m 
£m 
£m 
  
£m 
£m 
£m 
               
UK Retail
3,277 
320 
3,597 
  
3,440 
204 
3,644 
UK Corporate
2,541 
40 
2,581 
  
2,532 
39 
2,571 
Wealth
526 
401 
927 
  
501 
353 
854 
International Banking
1,409 
189 
1,598 
  
1,609 
204 
1,813 
Ulster Bank
557 
(8)
549 
  
636 
2 
638 
US Retail & Commercial
1,755 
68 
1,823 
  
1,715 
108 
1,823 
Markets
3,199 
2,805 
6,004 
  
3,850 
3,589 
7,439 
Direct Line Group
2,296 
5 
2,301 
  
2,386 
4 
2,390 
Central items
1,270 
8,379 
9,649 
  
1,459 
6,032 
7,491 
               
Core
16,830 
12,199 
29,029 
  
18,128 
10,535 
28,663 
Non-Core
1,322 
498 
1,820 
  
2,754 
171 
2,925 
               
Managed basis
18,152 
12,697 
30,849 
  
20,882 
10,706 
31,588 
Reconciling items
              
Own credit adjustments
(2,974)
- 
(2,974)
  
(236)
  
(236)
Asset Protection Scheme
(45)
- 
(45)
  
(637)
- 
(637)
Integration and restructuring costs
- 
- 
- 
  
(5)
- 
(5)
Gain on redemption of own debt
577 
- 
577 
  
255 
- 
255 
Strategic disposals
152 
- 
152 
  
27 
- 
27 
RFS Holdings minority interest
(4)
- 
(4)
  
(3)
- 
(3)
Elimination of intra-group transactions
- 
(12,697)
(12,697)
  
- 
(10,706)
(10,706)
               
Statutory basis
15,858 
- 
15,858 
  
20,283 
- 
20,283 
 
 
 
Notes (continued)
 
11. Segmental analysis (continued)
 
Total revenue by division (continued)
 
 
Quarter ended
 
30 June 2012
  
31 March 2012
  
30 June 2011
 
External 
Inter 
 segment 
Total 
  
External 
Inter 
 segment 
Total 
  
External 
Inter 
segment 
Total 
Total revenue
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
UK Retail
1,627 
178 
1,805 
  
1,650 
142 
1,792 
  
1,744 
88 
1,832 
UK Corporate
1,262 
22 
1,284 
  
1,279 
18 
1,297 
  
1,249 
18 
1,267 
Wealth
266 
190 
456 
  
260 
211 
471 
  
253 
185 
438 
International Banking
709 
89 
798 
  
700 
100 
800 
  
833 
113 
946 
Ulster Bank
267 
(2)
265 
  
290 
(6)
284 
  
309 
2 
311 
US Retail & Commercial
900 
32 
932 
  
855 
36 
891 
  
861 
52 
913 
Markets
1,265 
1,294 
2,559 
  
1,934 
1,511 
3,445 
  
1,517 
1,879 
3,396 
Direct Line Group
1,138 
2 
1,140 
  
1,158 
3 
1,161 
  
1,187 
2 
1,189 
Central items
701 
4,478 
5,179 
  
569 
3,901 
4,470 
  
762 
3,063 
3,825 
                       
Core
8,135 
6,283 
14,418 
  
8,695 
5,916 
14,611 
  
8,715 
5,402 
14,117 
Non-Core
502 
350 
852 
  
820 
148 
968 
  
1,632 
116 
1,748 
                       
Managed basis
8,637 
6,633 
15,270 
  
9,515 
6,064 
15,579 
  
10,347 
5,518 
15,865 
Reconciling items
                      
Own credit adjustments
(518)
- 
(518)
  
(2,456)
  
(2,456)
  
324 
- 
324 
Asset Protection Scheme
(2)
- 
(2)
  
(43)
  
(43)
  
(168)
- 
(168)
Integration and restructuring
  costs
- 
- 
- 
  
- 
- 
- 
  
1 
- 
1 
Gain on redemption of
  own debt
-
- 
- 
  
577 
- 
577 
  
255 
- 
255 
Strategic disposals
160 
- 
160 
  
(8)
- 
(8)
  
50 
- 
50 
RFS Holdings minority
  interest
13 
- 
13 
  
(17)
- 
(17)
  
(6)
- 
(6)
Elimination of intra-group
  transactions
- 
(6,633)
(6,633)
  
- 
(6,064)
(6,064)
  
- 
(5,518)
(5,518)
                       
Statutory basis
8,290 
- 
8,290 
  
7,568 
- 
7,568 
  
10,803 
- 
10,803 
 
 
 
Notes (continued)
 
11. Segmental analysis (continued)
 
Total assets by division
 
 
30 June 
2012 
31 March 
2012 
31 December 
2011 
Total assets
£m 
£m 
£m 
       
UK Retail
116,849 
116,255 
114,469 
UK Corporate
113,655 
113,140 
114,237 
Wealth
21,285 
21,325 
21,718 
International Banking
61,480 
63,719 
69,987 
Ulster Bank
33,293 
33,614 
34,810 
US Retail & Commercial
75,084 
73,693 
75,791 
Markets
774,443 
740,332 
826,947 
Direct Line Group
13,559 
13,430 
12,912 
Central items
124,120 
134,780 
130,466 
       
Core
1,333,768 
1,310,288 
1,401,337 
Non-Core
80,590 
91,823 
104,726 
       
 
1,414,358 
1,402,111 
1,506,063 
RFS Holdings minority interest
831 
910 
804 
       
 
1,415,189 
1,403,021 
1,506,867 
 
12. Discontinued operations and assets and liabilities of disposal groups
 
(a) Profit/(loss) from discontinued operations, net of tax
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
 
£m 
£m 
  
£m 
£m 
£m 
             
Discontinued operations
            
Total income
16 
17 
  
8 
8 
9 
Operating expenses
(2)
(1)
  
(1)
(1)
- 
Impairment losses
- 
11 
  
- 
- 
11 
             
Profit before tax
14 
27 
  
7 
7 
20 
Tax
(5)
(7)
  
(2)
(3)
(4)
             
Profit after tax
9 
20 
  
5 
4 
16 
Businesses acquired exclusively with a
  view to disposal
            
(Loss)/profit after tax
(8)
11 
  
(9)
1 
5 
             
Profit/(loss) from discontinued operations,
  net of tax
1 
31 
  
(4)
5 
21 
 
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)
 
12. Discontinued operations and assets and liabilities of disposal groups (continued)
 
(b) Assets and liabilities of disposal groups
 
 
30 June 2012
31 March 
2012 
£m 
31 December 
2011 
£m 
 
UK branch 
based 
businesses 
Other 
Total 
 
£m 
£m 
£m 
           
Assets of disposal groups
          
Cash and balances at central banks
90 
50 
140 
87 
127 
Loans and advances to banks
- 
88 
88 
112 
87 
Loans and advances to customers
18,608 
1,092 
19,700 
19,264 
19,405 
Debt securities and equity shares
- 
36 
36 
5 
5 
Derivatives
372 
4 
376 
368 
439 
Intangible assets
- 
- 
- 
15 
15 
Settlement balances
- 
2 
2 
4 
14 
Property, plant and equipment
114 
1 
115 
4,609 
4,749 
Other assets
4 
441 
445 
438 
456 
           
Discontinued operations and other disposal groups
19,188 
1,714 
20,902 
24,902 
25,297 
Assets acquired exclusively with a view to disposal
- 
167 
167 
158 
153 
           
 
19,188 
1,881 
21,069 
25,060 
25,450 
           
Liabilities of disposal groups
          
Deposits by banks
1 
- 
1 
83 
1 
Customer accounts
21,729 
802 
22,531 
22,281 
22,610 
Derivatives
56 
5 
61 
49 
126 
Settlement balances
- 
- 
- 
- 
8 
Other liabilities
15 
446 
461 
1,239 
1,233 
           
Discontinued operations and other disposal groups
21,801 
1,253 
23,054 
23,652 
23,978 
Liabilities acquired exclusively with a view to disposal
- 
10 
10 
12 
17 
           
 
21,801 
1,263 
23,064 
23,664 
23,995 
 
The assets and liabilities of disposal groups at 30 June 2012 primarily comprise the RBS England and Wales and NatWest Scotland branch-based businesses ("UK branch-based businesses").
 
UK branch-based businesses
Gross loans, Risk elements in lending (REIL) and impairment provisions at 30 June 2012 relating to the Group's UK branch-based businesses are set out below.
 
 
Gross 
loans 
REIL 
Impairment 
 provisions 
 
£m 
£m 
£m 
       
Residential mortgages
5,849 
197 
34 
Personal lending
1,782 
325 
267 
Property
5,519 
422 
136 
Construction
562 
160 
60 
Service industries and business activities
4,824 
286 
153 
Other
839 
43 
42 
Latent
- 
- 
75 
       
Total
19,375 
1,433 
767 
 
 
 
Notes (continued)
 
13. 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. There have been no reclassifications during H1 2012.
 
 
HFT (1)
DFV (2)
AFS (3)
LAR (4)
Other 
financial 
instruments 
(amortised 
cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
30 June 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Assets
                
Cash and balances at central
  banks
- 
- 
- 
78,647 
      
78,647 
Loans and advances to banks
                
  - reverse repos
37,165 
- 
- 
540 
      
37,705 
  - other
18,857 
- 
- 
20,579 
      
39,436 
Loans and advances to
  customers
                
  - reverse repos
59,680 
- 
- 
516 
      
60,196 
  - other
24,542 
206 
- 
402,355 
  
7,862 
  
434,965 
Debt securities
92,194 
873 
89,336 
5,223 
      
187,626 
Equity shares
11,019 
640 
1,432 
- 
      
13,091 
Settlement balances
- 
- 
- 
15,312 
      
15,312 
Derivatives (5)
486,432 
            
486,432 
Intangible assets
            
14,888 
14,888 
Property, plant and equipment
            
11,337 
11,337 
Deferred tax
            
3,502 
3,502 
Prepayments, accrued
  income and other assets
- 
- 
- 
1,490 
    
9,493 
10,983 
Assets of disposal groups
            
21,069 
21,069 
                 
 
729,889 
1,719 
90,768 
524,662 
  
7,862 
60,289 
1,415,189 
                 
Liabilities
                
Deposits by banks
                
  - repos
33,077 
- 
    
6,048 
    
39,125 
  - other
33,615 
- 
    
34,004 
    
67,619 
Customer accounts
                
  - repos
83,463 
- 
    
5,487 
    
88,950 
  - other
14,356 
5,752 
    
392,661 
    
412,769 
Debt securities in issue
10,780 
30,355 
    
78,720 
    
119,855 
Settlement balances
- 
- 
    
15,126 
    
15,126 
Short positions
38,376 
- 
          
38,376 
Derivatives (5)
480,745 
            
480,745 
Accruals, deferred income
  and other liabilities
- 
- 
    
1,748 
16 
17,056 
18,820 
Retirement benefit liabilities
            
1,791 
1,791 
Deferred tax
            
1,815 
1,815 
Insurance liabilities
            
6,322 
6,322 
Subordinated liabilities
- 
923 
    
24,673 
    
25,596 
Liabilities of disposal groups
            
23,064 
23,064 
                 
 
694,412 
37,030 
    
558,467 
16 
50,048 
1,339,973 
                 
Equity
              
75,216 
                 
               
1,415,189 
For the notes to this table refer to page 99.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Classification (continued)
 
 
HFT (1)
DFV (2)
AFS (3)
LAR (4)
Other 
 financial 
 instruments 
(amortised 
 cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
31 March 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Assets
                
Cash and balances at central
  banks
- 
- 
- 
82,363 
      
82,363 
Loans and advances to banks
                
  - reverse repos
32,232 
- 
- 
2,394 
      
34,626 
  - other
17,055 
- 
- 
19,009 
      
36,064 
Loans and advances to
  customers
                
  - reverse repos
50,039 
- 
- 
6,464 
      
56,503 
  - other
24,142 
254 
- 
408,031 
  
7,979 
  
440,406 
Debt securities
92,250 
818 
97,381 
5,482 
      
195,931 
Equity shares
14,903 
784 
1,916 
- 
      
17,603 
Settlement balances
- 
- 
- 
20,970 
      
20,970 
Derivatives (5)
453,354 
            
453,354 
Intangible assets
            
14,771 
14,771 
Property, plant and equipment
            
11,442 
11,442 
Deferred tax
            
3,849 
3,849 
Prepayments, accrued
  income and other assets
- 
- 
- 
1,341 
    
8,738 
10,079 
Assets of disposal groups
            
25,060 
25,060 
                 
 
683,975 
1,856 
99,297 
546,054 
  
7,979 
63,860 
1,403,021 
                 
Liabilities
                
Deposits by banks
                
  - repos
26,926 
- 
    
14,489 
    
41,415 
  - other
30,967 
- 
    
34,768 
    
65,735 
Customer accounts
                
  - repos
68,308 
- 
    
18,995 
    
87,303 
  - other
13,957 
5,755 
    
390,495 
    
410,207 
Debt securities in issue
10,692 
33,317 
    
98,934 
    
142,943 
Settlement balances
- 
- 
    
17,597 
    
17,597 
Short positions
37,322 
- 
          
37,322 
Derivatives (5)
446,534 
            
446,534 
Accruals, deferred income
  and other liabilities
- 
- 
    
1,672 
17 
18,589 
20,278 
Retirement benefit liabilities
            
1,840 
1,840 
Deferred tax
            
1,788 
1,788 
Insurance liabilities
            
6,251 
6,251 
Subordinated liabilities
- 
1,006 
    
24,507 
    
25,513 
Liabilities of disposal groups
            
23,664 
23,664 
                 
 
634,706 
40,078 
    
601,457 
17 
52,132 
1,328,390 
                 
Equity
              
74,631 
                 
               
1,403,021 
 
For the notes to this table refer to page 99.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Classification (continued)
 
 
HFT (1)
DFV (2)
AFS (3)
LAR (4)
Other 
 financial 
 instruments 
(amortised 
 cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
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 (5)
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 
                 
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 (5)
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 
Notes:
(1)
Held-for-trading.
(2)
Designated as at fair value.
(3)
Available-for-sale.
(4)
Loans and receivables.
(5)
Held-for-trading derivatives include hedging derivatives.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Valuation reserves
Credit valuation adjustments (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. Certain credit derivative product companies (CDPC) exposures were restructured during the first half of the year and the CVA methodology applied to these exposures was updated to reflect the revised risk mitigation strategy that is now in place. There were no changes to other valuation methodologies.
 
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk.
 
The following table shows credit valuation adjustments and other reserves.
 
 
30 June 
2012 
31 March 
2012 
31 December 
2011 
 
£m 
£m 
£m 
       
CVA
      
  - Monoline insurers
481 
991 
1,198 
  - Credit derivative product companies
479 
624 
1,034 
  - Other counterparties
2,334 
2,014 
2,254 
       
 
3,294 
3,629 
4,486 
Bid-offer, liquidity and other reserves
2,207 
2,228 
2,704 
       
Valuation reserves
5,501 
5,857 
7,190 
 
Key points
 
30 June 2012 compared with 31 December 2011
·
The gross exposure to monolines reduced in the first half of the year from £1.9 billion to £0.9 billion primarily due to trade restructurings and unwinds and an increase in underlying asset prices. The CVA decreased on a total basis reflecting the lower exposure, and also on a relative basis (from 63% to 51%) due to the impact of restructurings and unwinds as well as tighter credit spreads.
   
·
The exposure to CDPCs decreased from £1.9 billion to £1.1 billion. This was primarily driven by tighter credit spreads of underlying reference instruments, together with the impact of restructuring certain exposures. The CVA decreased on an absolute basis in line with the decrease in exposure and also on a relative basis (from 55% to 42%) due to the restructuring of certain exposures.
   
·
The CVA held against exposure to other counterparties increased primarily due to counterparty rating downgrades and increased weighted average life assumptions, partially offset by tighter credit spreads.
   
·
Within other reserves, bid-offer reserves decreased due to risk reduction and the impact of Greek government debt restructuring. Other reserves were also lower across a range of businesses and products.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Key points (continued)
 
30 June 2012 compared with 31 March 2012
·
The gross exposure to monolines reduced from £1.6 billion to £0.9 billion primarily due to trade restructurings and unwinds. The CVA decreased on a total basis reflecting the lower exposure, and also on a relative basis (from 60% to 51%) due to the impact of trade restructurings and unwinds.
·
The exposure to CDPCs was stable as the impact of restructuring certain exposures was offset by wider credit spreads. The CVA decreased on a total basis and also on a relative basis (from 56% to 42%) due to restructuring of certain exposures.
·
Other counterparty CVA increased primarily due to counterparty rating downgrades, increased weighted average life assumptions and wider credit spreads.
 
Own credit
The following table shows the cumulative own credit adjustment recorded on securities classified as fair value through profit or loss and derivative liabilities. There have been some refinements to methodologies during the first half of the year, but they did not have a material overall impact on cumulative own credit adjustment.
 
Cumulative own credit adjustment (1)
 
Debt securities in issue (2)
Subordinated 
liabilities 
DFV 
£m 
Total 
£m 
Derivatives 
£m 
Total (3)
£m 
HFT 
£m 
DFV 
£m 
Total 
£m 
               
30 June 2012
(323)
1,040 
717 
572 
1,289 
452 
1,741 
31 March 2012
91 
1,207 
1,298 
520 
1,818 
466 
2,284 
31 December 2011
882 
2,647 
3,529 
679 
4,208 
602 
4,810 
               
Carrying values of underlying liabilities
£bn 
£bn 
£bn 
£bn 
£bn 
    
               
30 June 2012
10.8 
30.3 
41.1 
0.9 
42.0 
    
31 March 2012
10.7 
33.3 
44.0 
1.0 
45.0 
    
31 December 2011
11.5 
35.7 
47.2 
0.9 
48.1 
    
 
Notes:
(1)
The own credit fair value adjustment does not alter cash flows and is not used for performance management. It is disregarded for regulatory capital reporting purposes 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
·
The total own credit adjustment decreased significantly during the first half of the year reflecting tightening of credit spreads.
·
Senior issued debt valuation adjustments are determined with reference to secondary debt issuance spreads. At 30 June 2012, the five year level tightened to 246 basis points from 451 basis points at the year end, reflecting strengthened investor perceptions.
·
Significant tightening of credit spreads, buy-backs exceeding issuances and the impact of buying back certain securities at lower spreads than at issuance, resulted in overall negative own credit adjustment in respect of HFT debt securities at 30 June 2012.
·
Derivative liability own credit adjustment decreased as credit default swaps spreads tightened.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Valuation hierarchy
The following tables show financial instruments carried at fair value on the Group's balance sheet by valuation hierarchy - level 1, level 2 and level 3.
 
A detailed explanation of the valuation techniques and sensitivity analysis methodology are set out in the Group's 2011 Annual Report and Accounts on pages 345 to 358.
 
 
30 June 2012
           
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
- 
37.2 
- 
37.2 
  
- 
- 
  - collateral
- 
18.3 
- 
18.3 
  
- 
- 
  - other
- 
0.2 
0.4 
0.6 
  
30 
(50)
               
 
- 
55.7 
0.4 
56.1 
  
30 
(50)
               
Loans and advances to customers
              
  - reverse repos
- 
59.7 
- 
59.7 
  
- 
- 
  - collateral
- 
22.2 
- 
22.2 
  
- 
- 
  - other
- 
2.2 
0.3 
2.5 
  
80 
(20)
               
 
- 
84.1 
0.3 
84.4 
  
80 
(20)
               
Debt securities
              
  - UK government
18.3 
- 
- 
18.3 
  
- 
- 
  - US government
33.6 
6.1 
- 
39.7 
  
- 
- 
  - other government
43.0 
11.2 
- 
54.2 
  
- 
- 
  - corporate
- 
4.8 
0.2 
5.0 
  
20 
(20)
  - other financial institutions
1.8 
57.8 
5.6 
65.2 
  
370 
(220)
               
 
96.7 
79.9 
5.8 
182.4 
  
390 
(240)
               
Equity shares
10.6 
1.5 
1.0 
13.1 
  
140 
(150)
               
Derivatives
              
  - foreign exchange
- 
60.4 
1.4 
61.8 
  
170 
(70)
  - interest rate
0.1 
399.7 
0.7 
400.5 
  
50 
(50)
  - equities and commodities
- 
5.5 
0.2 
5.7 
  
- 
- 
  - credit
- 
15.6 
2.8 
18.4 
  
490 
(330)
               
 
0.1 
481.2 
5.1 
486.4 
  
710 
(450)
               
 
107.4 
702.4 
12.6 
822.4 
  
1,350 
(910)
               
Proportion
13.1% 
85.4% 
1.5% 
100% 
      
               
Of which
              
Core
107.0 
693.0 
5.7 
805.7 
      
Non-Core
0.4 
9.4 
6.9 
16.7 
      
               
 
107.4 
702.4 
12.6 
822.4 
      
 
For the notes to this table refer to page 108.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
31 March 2012
           
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
- 
32.2 
 - 
32.2 
  
- 
- 
  - collateral
- 
16.4 
- 
16.4 
  
- 
- 
  - other
- 
0.3 
0.4 
0.7 
  
30 
(50)
               
 
- 
48.9 
0.4 
49.3 
  
30 
(50)
               
Loans and advances to customers
              
  - reverse repos
- 
50.0 
- 
50.0 
  
- 
- 
  - collateral
- 
21.2 
- 
21.2 
  
- 
- 
  - other
- 
2.9 
0.3 
3.2 
  
80 
(20)
               
 
- 
74.1 
0.3 
74.4 
  
80 
(20)
               
Debt securities
              
  - UK government
18.7 
- 
- 
18.7 
  
- 
- 
  - US government
32.8 
4.8 
- 
37.6 
  
- 
- 
  - other government
49.4 
8.3 
- 
57.7 
  
- 
- 
  - corporate
- 
5.0 
0.3 
5.3 
  
20 
(20)
  - other financial institutions
2.0 
63.6 
5.5 
71.1 
  
450 
(130)
               
 
102.9 
81.7 
5.8 
190.4 
  
470 
(150)
               
Equity shares
14.7 
2.0 
0.9 
17.6 
  
130 
(140)
               
Derivatives
              
  - foreign exchange
- 
61.5 
1.8 
63.3 
  
120 
(120)
  - interest rate
0.2 
364.5 
0.9 
365.6 
  
70 
(90)
  - equities and commodities
0.1 
5.8 
0.2 
6.1 
  
- 
- 
  - credit
- 
15.5 
2.9 
18.4 
  
540 
(280)
               
 
0.3 
447.3 
5.8 
453.4 
  
730 
(490)
               
 
117.9 
654.0 
13.2 
785.1 
  
1,440 
(850)
               
Proportion
15.0% 
83.3% 
1.7% 
100% 
      
               
Of which
              
Core
117.4 
643.2 
6.2 
766.8 
      
Non-Core
0.5 
10.8 
7.0 
18.3 
      
               
 
117.9 
654.0 
13.2 
785.1 
      
 
For the notes to this table refer to page 108.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
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% 
      
               
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 108.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Valuation hierarchy (continued)
The following tables detail AFS assets included within debt securities and equity shares on pages 102 to 104.
 
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Assets
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
30 June 2012
              
Debt securities
              
  - UK government
11.9 
- 
- 
11.9 
  
- 
- 
  - US government
17.3 
2.8 
- 
20.1 
  
- 
- 
  - other government
12.3 
5.2 
- 
17.5 
  
- 
- 
  - corporate
- 
2.5 
0.1 
2.6 
  
10 
(10)
  - other financial institutions
0.2 
33.3 
3.7 
37.2 
  
210 
(100)
               
 
41.7 
43.8 
3.8 
89.3 
  
220 
(110)
Equity shares
0.2 
0.7 
0.5 
1.4 
  
90 
(90)
               
 
41.9 
44.5 
4.3 
90.7 
  
310 
(200)
               
Of which
              
Core
41.9 
43.0 
0.7 
85.6 
      
Non-Core
- 
1.5 
3.6 
5.1 
      
               
 
41.9 
44.5 
4.3 
90.7 
      
               
31 March 2012
              
               
Debt securities
              
  - UK government
11.9 
- 
- 
11.9 
  
- 
- 
  - US government
18.0 
2.6 
- 
20.6 
  
- 
- 
  - other government
16.4 
3.6 
- 
20.0 
  
- 
- 
  - corporate
- 
2.1 
0.1 
2.2 
  
10 
(10)
  - other financial institutions
0.1 
38.4 
4.2 
42.7 
  
260 
(30)
               
 
46.4 
46.7 
4.3 
97.4 
  
270 
(40)
Equity shares
0.3 
1.2 
0.4 
1.9 
  
70 
(80)
               
 
46.7 
47.9 
4.7 
99.3 
  
340 
(120)
               
Of which
              
Core
46.6 
45.8 
0.6 
93.0 
      
Non-Core
0.1 
2.1 
4.1 
6.3 
      
               
 
46.7 
47.9 
4.7 
99.3 
      
               
31 December 2011
              
               
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 
      
 
For the notes to this table refer to page 108.
 
Notes (continued)
 
13. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
30 June 2012
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Liabilities
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Deposits by banks
              
  - repos
- 
33.1 
- 
33.1 
  
- 
- 
  - collateral
- 
31.9 
- 
31.9 
  
- 
- 
  - other
- 
1.6 
0.1 
1.7 
  
- 
(90)
               
 
- 
66.6 
0.1 
66.7 
  
- 
(90)
               
Customer accounts
              
  - repos
- 
83.5 
- 
83.5 
  
- 
- 
  - collateral
- 
9.8 
- 
9.8 
  
- 
- 
  - other
- 
10.3 
- 
10.3 
  
20 
(20)
               
 
- 
103.6 
- 
103.6 
  
20 
(20)
               
Debt securities in issue
- 
38.3 
2.8 
41.1 
  
70 
(70)
               
Short positions
32.4 
5.9 
0.1 
38.4 
  
20 
(20)
               
Derivatives
              
  - foreign exchange
- 
70.1 
0.7 
70.8 
  
110 
(30)
  - interest rate
0.2 
382.4 
0.5 
383.1 
  
40 
(40)
  - equities and commodities
- 
8.5 
0.8 
9.3 
  
10 
(10)
  - credit
- 
16.4 
1.1 
17.5 
  
50 
(80)
               
 
0.2 
477.4 
3.1 
480.7 
  
210 
(160)
               
Subordinated liabilities
- 
0.9 
- 
0.9 
  
- 
- 
               
 
32.6 
692.7 
6.1 
731.4 
  
320 
(360)
               
Proportion
4.5% 
94.7% 
0.8% 
100% 
      
               
Of which
              
Core
32.6 
688.4 
5.8 
726.8 
      
Non-Core
- 
4.3 
0.3 
4.6 
      
               
 
32.6 
692.7 
6.1 
731.4 
      
 
For the notes to this table refer to page 108.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
31 March 2012
           
Level 3 sensitivity (1)
 
Level 1 
Level 2 
Level 3 
Total 
  
Favourable 
Unfavourable 
Liabilities
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Deposits by banks
              
  - repos
- 
26.9 
- 
26.9 
  
- 
- 
  - collateral
- 
29.4 
- 
29.4 
  
- 
- 
  - other
- 
1.6 
- 
1.6 
  
- 
(70)
               
 
- 
57.9 
- 
57.9 
  
- 
(70)
               
Customer accounts
              
  - repos
- 
68.3 
- 
68.3 
  
- 
- 
  - collateral
- 
8.8 
- 
8.8 
  
- 
- 
  - other
- 
10.9 
- 
10.9 
  
30 
(30)
               
 
- 
88.0 
- 
88.0 
  
30 
(30)
               
Debt securities in issue
- 
41.8 
2.2 
44.0 
  
60 
(60)
               
Short positions
31.4 
5.7 
0.2 
37.3 
  
- 
(30)
               
Derivatives
              
  - foreign exchange
- 
68.6 
1.0 
69.6 
  
50 
(50)
  - interest rate
0.2 
348.7 
0.7 
349.6 
  
70 
(60)
  - equities and commodities
- 
8.9 
0.8 
9.7 
  
10 
(10)
  - credit - APS (2)
- 
- 
0.1 
0.1 
  
50 
- 
  - credit - other
- 
16.4 
1.2 
17.6 
  
60 
(90)
               
 
0.2 
442.6 
3.8 
446.6 
  
240 
(210)
               
Subordinated liabilities
- 
1.0 
- 
1.0 
  
- 
- 
               
 
31.6 
637.0 
6.2 
674.8 
  
330 
(400)
               
Proportion
4.7% 
94.4% 
0.9% 
100% 
      
               
Of which
              
Core
31.6 
632.7 
5.8 
670.1 
      
Non-Core
- 
4.3 
0.4 
4.7 
      
               
 
31.6 
637.0 
6.2 
674.8 
      
 
For the notes to this table refer to page 108.
 
 
 
Notes (continued)
 
13. 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 
  
- 
- 
               
 
34.8 
715.0 
6.3 
756.1 
  
610 
(470)
               
Proportion
4.6% 
94.6% 
0.8% 
100% 
      
               
Of which
              
Core
34.8 
708.9 
5.7 
749.4 
      
Non-Core
- 
6.1 
0.6 
6.7 
      
               
 
34.8 
715.0 
6.3 
756.1 
      
 
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. 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. In particular, for some of the portfolios, the sensitivities may be negatively correlated where a downward movement in one asset would produce an upward movement in another, but due to the additive presentation above, this correlation cannot be observed.
(2)
Asset Protection Scheme.
 
 
 
Notes (continued)
 
13. Financial instruments (continued)
 
Movement in level 3 portfolios
 
 
1 January 
2012 
(Losses)/ 
gains 
  
Purchases 
and issues 
Sales and 
settlements 
FX (2)
30 June 
2012 
  
Gains/(losses)
recorded in 
the income 
statement 
relating to 
instruments 
held at 
30 June 
2012 
 
 
 
 
 
Level 3 transfers
In 
Out 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
                     
Assets
                    
Fair value through
  profit or loss:
                    
Loans and
  advances
760 
(1)
5 
(16)
69 
(82)
(3)
732 
  
(5)
Debt securities
2,243 
181 
546 
(86)
367 
(1,301)
(4)
1,946 
  
43 
Equity shares
573 
8 
33 
(27)
134 
(193)
(6)
522 
  
4 
Derivatives
6,732 
(933)
26 
(259)
372 
(772)
(26)
5,140 
  
(1,002)
                     
 
10,308 
(745)
610 
(388)
942 
(2,348)
(39)
8,340 
  
(960)
                     
AFS:
                    
Debt securities
5,697 
106 
86 
(410)
- 
(1,637)
1 
3,843 
  
(67)
Equity shares
395 
63 
20 
- 
9 
(12)
(8)
467 
  
7 
                     
 
6,092 
169 
106 
(410)
9 
(1,649)
(7)
4,310 
  
(60)
                     
 
16,400 
(576)
716 
(798)
951 
(3,997)
(46)
12,650 
  
(1,020)
                     
Liabilities
                    
Deposits
22 
49 
- 
- 
- 
- 
(1)
70 
  
(7)
Debt securities
  in issue
2,199 
34 
107 
(79)
827 
(328)
(9)
2,751 
  
34 
Short positions
291 
(155)
- 
- 
33 
(21)
1 
149 
  
90 
Derivatives
3,811 
(437)
92 
(206)
390 
(542)
(18)
3,090 
  
(668)
Other
- 
- 
- 
- 
- 
- 
- 
- 
  
- 
                     
 
6,323 
(509)
199 
(285)
1,250 
(891)
(27)
6,060 
  
(551)
                     
Net losses (1)
  
(67)
              
(469)
 
Notes:
(1)
Losses of £176 million and gains of £109 million were recognised in the income statement and statement of comprehensive income during the first half of 2012.
(2)
Foreign exchange movements.
 
 
 
Notes (continued)
 
14. Available-for-sale reserve
 
 
Half year ended
  
Quarter ended
 
30 June 
2012 
30 June 
2011 
  
30 June 
2012 
31 March 
2012 
30 June 
2011 
Available-for-sale reserve
£m 
£m 
  
£m 
£m 
£m 
             
At beginning of period
(957)
(2,037)
  
(439)
(957)
(2,063)
Unrealised losses on Greek sovereign debt
- 
(842)
  
- 
- 
(842)
Impairment of Greek sovereign debt
- 
842 
  
- 
- 
842 
Other unrealised net gains
1,152 
1,785 
  
428 
724 
1,623 
Realised net gains
(582)
(413)
  
(370)
(212)
(216)
Tax
(63)
(361)
  
(69)
6 
(370)
             
At end of period
(450)
(1,026)
  
(450)
(439)
(1,026)
 
The H1 2012 movement in available-for-sale reserve primarily reflects unrealised net gains on securities of £1,158 million, largely as yields tightened on German, US and UK sovereign bonds.
 
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 £224 million were recorded in Q4 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 30 June 2012.
 
15. Contingent liabilities and commitments
 
 
30 June 2012
  
31 March 2012
  
31 December 2011
 
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
21,706 
802 
22,508 
  
22,660 
921 
23,581 
  
23,702 
1,330 
25,032 
Other contingent liabilities
11,234 
232 
11,466 
  
11,582 
223 
11,805 
  
10,667 
245 
10,912 
                       
 
32,940 
1,034 
33,974 
  
34,242 
1,144 
35,386 
  
34,369 
1,575 
35,944 
                       
Commitments
                      
Undrawn formal standby
  facilities, credit lines and
  other commitments to lend
221,091 
6,941 
228,032 
  
225,237 
11,575 
236,812 
  
227,419 
12,544 
239,963 
Other commitments
1,303 
70 
1,373 
  
666 
1,919 
2,585 
  
301 
2,611 
2,912 
                       
 
222,394 
7,011 
229,405 
  
225,903 
13,494 
239,397 
  
227,720 
15,155 
242,875 
                       
Total contingent liabilities
  and commitments
255,334 
8,045 
263,379 
  
260,145 
14,638 
274,783 
  
262,089 
16,730 
278,819 
 
Additional contingent liabilities arise in the normal course of the Group's business. It is not anticipated that any material loss will arise from these transactions.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews
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 30 June 2012.
 
Other than as set out in the following sub-sections of this Note entitled 'Litigation' and 'Investigations and reviews', 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 the Group 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 the Group.
 
In each of the material legal proceedings, investigations and reviews 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.
 
Litigation
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).
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
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 (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 (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 2011 asserting claims under Sections 10 and 20 of the US Securities Exchange Act of 1934, as amended (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 on the motions was completed in April 2012. The Court heard oral argument on the motions on 19 July 2012.
 
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 recently submitted a detailed response to a letter before action from one purported plaintiff group in the United Kingdom.
 
The Group considers that it has substantial and credible legal and factual defences to the remaining and prospective claims and will defend itself vigorously.
 
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.
 
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$85 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).
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
The primary FHFA lawsuit pending in the federal court in Connecticut relates to approximately US$32 billion of 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 lawsuits against 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. 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 ongoing creditworthiness 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.
 
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. It is possible that further claims may be threatened or brought in the US or elsewhere relating to the setting of interest rates or interest rate-related trading.
 
Details of LIBOR investigations affecting the Group are set out under 'Investigations and reviews' on page 115.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
 
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
RBS Citizens Financial Group, Inc (RBS Citizens) and its affiliates were among more than thirty banks named as defendants in US class action lawsuits alleging that the manner in which defendant banks posted transactions to consumer accounts caused customers to incur excessive overdraft fees. The complaints against RBS Citizens, which concern the period between 2002 and 2010 and were consolidated into one case, alleged that this conduct violated its duty of good faith and fair dealing, was unconscionable and constituted an unfair trade practice and a conversion of customers' funds. RBS Citizens has agreed to settle this matter for US$137.5 million and, as a result, the matter has been stayed. The Group has made a provision for the settlement although payment has not yet been made, pending court approval. If the settlement is given final approval by the United States District Court for the Southern District of Florida, consumers who do not opt out of the settlement will be deemed to have released any claims related to the allegations in the lawsuits.
 
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. Litigation, investigations and reviews (continued)
 
Investigations and reviews
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 government and regulatory authorities, 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 governmental and regulatory authorities, 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 co-operating fully with the investigations, reviews and proceedings described below.
 
LIBOR
The Group continues to co-operate fully with investigations by various governmental and regulatory authorities into its submissions, communications and procedures relating to the setting of LIBOR and other interest rates. The relevant authorities include, amongst others, the US Commodity Futures Trading Commission, the US Department of Justice (Fraud Division), the FSA and the Japanese Financial Services Agency. The Group has dismissed a number of employees for misconduct as a result of its investigations into these matters.
 
The Group is also under investigation by competition authorities in a number of jurisdictions, including the European Commission, Department of Justice (Antitrust Division) and Canadian Competition Bureau, stemming from the actions of certain individuals in the setting of LIBOR and other interest rates, as well as interest rate-related trading. The Group is also co-operating fully with these investigations.
 
It is not possible to reliably measure what effect these investigations, any regulatory findings and any related developments may have on the Group, including the timing and amount of fines or settlements.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
 
Technology incident
On 19 June 2012, the Group was affected by a technology incident as a result of which the processing of certain customer accounts and payments were subject to considerable delay. The cause of the incident is being investigated by independent external counsel with the assistance of third party advisors, who have been instructed to carry out an independent review. The Group has agreed to reimburse customers for any loss suffered as a result of the incident and has made a provision of £125 million in its Q2 2012 results for this matter. Additional costs may arise once all redress and business disruption items are clear and a further update will be given in Q3.
 
The incident, the Group's handling of the incident and the systems and controls surrounding the processes affected, are the subject of regulatory enquiries (both from the UK and Ireland) and the Group could become a party to litigation. In particular, the Group could face legal claims from those whose accounts were affected and could itself have claims against third parties.
 
Interest rate hedging products
In June 2012, following an industry wide review, the FSA announced that the Group and other UK banks had agreed to a redress exercise and past business review in relation to the sale of interest rate hedging products to some small and medium sized businesses who were classified as retail clients under FSA rules.
 
The Group will provide fair and reasonable redress to non-sophisticated customers classified as retail clients, who were sold structured collars. The Group has made a provision of £50 million in its Q2 2012 results for the redress it expects to offer to these customers. As the actual amount that the Group will be required to pay will depend on the facts and circumstances of each case, there is no certainty as to the eventual costs of redress.
 
The Group will also write to non-sophisticated customers classified as retail clients sold other interest rate products (other than interest rate caps) on or after 1 December 2001 offering a review of their sale and, if it is appropriate in the individual circumstances, the Group will propose fair and reasonable redress on a case by case basis. Furthermore, non-sophisticated customers classified as retail clients who have purchased interest rate caps will be entitled to approach the Group and request a review. At this stage, the Group is not able to estimate reliably the cost of redress for these customers.
 
The redress exercise and the past business review will be scrutinised by an independent reviewer, who will review and agree any redress, and will be overseen by the FSA.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
 
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 the second half of 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.
 
MasterCard appealed against the decision to the European Court of First Instance (subsequently re-named the General Court) in March 2008, and the Group 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 advised it would no longer investigate the non-compliance issue. The General Court heard MasterCard's appeal in July 2011 and issued its judgment on 24 May 2012, upholding the EC's original decision. The Group understands that MasterCard will appeal further and is awaiting confirmation of the basis of such appeal.
 
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. In 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 in 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, in 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.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
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. In 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. The OFT has advised that it is currently reviewing the implications of the European General Court judgment for its own investigations and that it will issue a project update in due course.
 
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.
 
Payment Protection Insurance
In January 2009, the Competition Commission (CC) announced its intention to order a range of remedies in relation to Payment Protection Insurance (PPI), 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). In October 2010, the CC published its final decision on remedies which confirmed the point of sale prohibition. In March 2011, the CC issued a final order setting out its remedies with a commencement date of 6 April 2011. The key remedies came into force in two parts, in October 2011 and 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.
 
The FSA published a final policy statement in August 2010 imposing significant changes with respect to the handling of complaints about the mis-selling of PPI. 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. In the first half of 2012 an additional provision of £260 million was recorded, with an overall total of £1.3 billion accrued as at 30 June 2012. 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. Implementation of the agreed processes is currently under way.
 
Personal current accounts
On 16 July 2008, the OFT published the results of its market study into Personal Current Accounts (PCA) in the United Kingdom. The OFT found evidence of competition and several positive features in the PCA 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.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
On 7 October 2009, the OFT published a follow-up report summarising the initiatives agreed between the OFT and PCA providers to address the OFT's concerns about transparency and switching, following its market study. PCA 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.
 
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 PCA 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, to review the market again fully 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. In March 2011, the OFT published its update report in relation to PCAs. 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).
 
In 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 where cross-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.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
On 13 July 2012, the OFT launched its planned review of the PCA market. The review will look at whether the initiatives agreed by the OFT with banks have been successful. The OFT has also announced a wider programme of work on retail banking and will consider the operation of the payment systems and the banking market for SMEs. The PCA review and wider programme of work are aimed at informing the OFT's response to the Independent Commission on Banking's recommendation that the OFT consider making a reference to the Competition Commission by 2015 if it had not already done so and if sufficient improvements in the market have not been made by that time.
 
Private motor insurance
In 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 issued its report on 31 May 2012 and has advised that it believes there are features of the market that potentially restrict, distort or prevent competition in the market and that would merit a referral to the Competition Commission (CC). The OFT's particular focus is on credit hire replacement vehicles and third party vehicle repairs. Following publication of the consultation, which closed on 6 July 2012, the Group is awaiting the OFT's decision on whether to refer the market to the CC.If a referral is made, this is likely to take place in the second half of 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 (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.
 
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 banking activities." It also broadly accepted the ICB's recommendations on loss absorbency and on competition.
 
Following an extensive first consultation, the UK Government published a White Paper on 14 June 2012 (White Paper), setting out its more detailed proposals for implementing the ICB's recommendations. Its intention remains to complete primary and secondary legislation before the end of the current Parliamentary term in May 2015 and for banks to comply with all the measures proposed in the paper by 2019, as the ICB recommended. The Government also reaffirmed its determination that changes to the account switching process should be completed by September 2013, as already scheduled. A further period of consultation has now been established, which runs until 6 September 2012.
 
The content of the White Paper was broadly in line with expectations following the Response, with ring-fencing to be implemented as set out in the ICB recommendations and loss-absorbency requirements also largely consistent.
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
With regard to the competition aspects, the White Paper supports the Payment Council proposals to increase competition by making account switching easier and confirms that the Bank of England and the FSA will publish reviews on how prudential standards and conduct requirements can be a barrier to market entry. The White Paper also urges the OFT to consider what further transparency measures would be appropriate during its review of the PCA market in the second half of this year and a consultation regarding the structure of UK Payments Council is recommended.
 
While the UK Government's White Paper provides some additional detail, until the further consultation is concluded and significantly more is known on the precise detail of the legislative and regulatory framework it is not possible 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 proposals set out in the White Paper, 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.
 
Securitisation and collateralised debt obligation business
In the United States, the Group is involved in 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.
 
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. The investigation is in its preliminary stages and it is not possible 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 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. Litigation, investigations and reviews (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 continues. Whilst it is difficult to predict the final outcome of this investigation, it is not expected to have a material adverse effect on the Group's net assets, operating results or cash flows in any particular period.
 
US mortgages - loan repurchase matters
The Group's Markets & International Banking N.A. or M&IB N.A. business (formerly Global Banking & Markets 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). M&IB 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, M&IB 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, M&IB N.A. made such representations and warranties itself. Where M&IB N.A. has given those or other representations and warranties (whether relating to underlying loans or otherwise), M&IB 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, M&IB N.A. may be able to assert claims against third parties who provided representations or warranties to M&IB N.A. when selling loans to it; although the ability to recover against such parties is uncertain. Between the start of 2009 and the end of June 2012, M&IB N.A. received approximately US$512 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 M&IB N.A..
 
However, repurchase demands presented to M&IB N.A. are subject to challenge and, to date, M&IB N.A. has rebutted a significant percentage of these claims.
 
RBS Citizens has not been an issuer or underwriter of non-agency RMBS. However, RBS 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, RBS 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. Between the start of 2009 and the end of June 2012, RBS Citizens received US$69.1 million in repurchase demands in respect of loans originated primarily since 2003. However, repurchase demands presented to RBS Citizens are subject to challenge and, to date, RBS 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, RBS Citizens has not been materially impacted by such disruptions and the Group has not ceased making foreclosures.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
The volume of repurchase demands is increasing and is expected to continue to increase, and the Group cannot currently estimate what the ultimate exposure of M&IB N.A. or RBS Citizens may be. 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 net assets, operating results or cash flows in any particular period.
 
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 net assets, operating results or cash flows in any particular period.
 
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 net assets, operating results or cash flows in any particular period.
 
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.
 
 
 
Notes (continued)
 
16. Litigation, investigations and reviews (continued)
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 is being overseen by an independent third party and considers 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 26 March 2012, the FSA published a Final Notice that it had reached a settlement with Coutts & Co under which Coutts agreed to pay a fine of £8.75 million. This follows an investigation by the FSA into Coutts & Co's anti-money laundering (AML) systems and controls in relation to high risk clients. The fine relates to historic activity undertaken between December 2007 and November 2010.
 
Coutts & Co has cooperated fully and openly with the FSA throughout the investigation. Coutts & Co has accepted the findings contained in the FSA's Final Notice regarding certain failures to meet the relevant regulatory standards between December 2007 and November 2010. Coutts & Co has found no evidence that money laundering took place during that time.
 
Since concerns were first identified by the FSA, Coutts & Co has enhanced its client relationship management process which included a review of its AML procedures, and is confident in its current processes and procedures.
 
On 18 January 2012, the FSA published its Final Notice having reached a settlement with U K Insurance Limited for breaches of Principle 2 by Direct Line and Churchill (the Firms), under which U K 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.
 
In 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. With respect to the latter inquiry, in March 2012, the SEC communicated to the Group that it had completed its investigation and that it did not, as of the date of that communication and based upon the information then in its possession, intend to recommend any enforcement action against RBS.
 
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 The Royal Bank of Scotland N.V. (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.
 
 
 
Notes (continued)
 
17. Other developments (continued)
It is expected that the Proposed Transfers will be implemented on a phased basis over a period ending 31 December 2013. The transfer of substantially all of the UK business was completed during Q4 2011. A large part of the remainder of the Proposed Transfers is expected to have taken place by the end of 2012.
 
On 26 March 2012, the Boards of The Royal Bank of Scotland Group plc (RBSG), RBS plc, RBS Holdings N.V., RBS N.V. and RBS II B.V. announced that (1) RBS N.V. (as the demerging company) and RBS II B.V. (as the acquiring company) filed a proposal with the Dutch Trade Register for a legal demerger and (2) following a preliminary hearing at the Court of Session in Scotland, RBS plc and RBS II B.V. made filings with Companies House in the UK and the Dutch Trade Register respectively for a proposed cross-border merger of RBS II B.V. into RBS plc ("the Dutch Scheme").
 
Upon implementation of these proposals, a substantial part of the business conducted by RBS N.V. in the Netherlands as well as in certain EMEA branches of RBS N.V. will be transferred to RBS plc. Implementation will be by the demerger of the transferring businesses into RBS II B.V. by way of a Dutch statutory demerger followed by the merger of RBS II B.V. into RBS plc through a cross-border merger. RBS plc and RBS N.V. have discussed the transfer in detail with De Nederlandsche Bank and the Financial Services Authority.
 
On 18 June 2012, the Court of Session in Scotland made an order approving the completion of the Merger. This order fixed the effective date of the Merger and its effects as 9 July 2012.
 
On 4 July 2012, it was announced that RBSG, RBS plc, RBS Holdings N.V., RBS N.V. and RBS II B.V. had decided that, as a result of technology issues which affected the RBS Group in the UK and Ireland, it would be prudent to defer the implementation of the Dutch Scheme. On 20 July 2012, it was announced that the Dutch Scheme is now expected to be implemented on 10 September 2012, subject to (among other matters) regulatory approvals and the approval of the Court of Session in Scotland.
 
Rating agencies
On 15 February 2012, the rating agency Moody's Investor Service ("Moody's") placed on review for possible downgrade, or extended reviews on, the ratings of 114 European banks and 17 firms with global capital markets activities. Included in the rating reviews were the ratings of RBS and certain subsidiaries. Moody's cited three reasons for their reviews across all of the affected firms; (i) the adverse and prolonged impact of the euro area crisis; (ii) the deteriorating creditworthiness of euro area sovereigns; and (iii) the substantial challenges faced by banks and securities firms with significant capital market activities.
 
On 22 February 2012, Moody's also placed on review for possible downgrade selected ratings of North American bank subsidiaries of European banks. Included in these rating actions were the ratings of RBS Citizens, N.A. and Citizens Bank of Pennsylvania.
 
 
 
Notes (continued)
 
17. Other developments (continued)
Moody's completed its ratings review on the Group on 21 June 2012. As a result the agency downgraded RBS Group plc's long-term ratings by one-notch to 'Baa1' from 'A3' (short-term ratings were affirmed unchanged at 'P-2') whilst downgrading ratings of RBS plc, NatWest Plc, RBS N.V., RBS Citizens, N.A. and Citizens Bank of Pennsylvania by one-notch: long term ratings to 'A3' from 'A2' and short term ratings to 'P-2' from 'P-1'. The long term ratings of Ulster Bank Ltd and Ulster Bank Ireland Ltd were downgraded by one-notch to 'Baa2' from 'Baa1' whilst the short-term ratings of these entities were affirmed as unchanged at 'P-2'.
 
The outlook on RBS plc's standalone rating ('D'+/'baa3') is now stable reflecting Moody's view that capital markets-related risk factors have now been fully incorporated into the bank's standalone rating. The outlook on RBS plc's long-term rating is negative (in line with other large UK banks) reflecting Moody's' view that government support for large UK banks may be lowered in the medium term.
 
There was very limited impact from these downgrades given the underlying robust improvement in the Group's liquidity, funding and capital position.
 
On 17 July 2012, Fitch affirmed its ratings on the Group and its subsidiaries. Fitch's ratings outlooks were also affirmed as unchanged at this time except for the outlook on Ulster Bank Ireland Ltd which was changed to Negative from Stable. This Negative outlook is in line with the outlook on the sovereign (Republic of Ireland).
 
No material rating actions have been undertaken on the Group or its subsidiaries by Standard & Poor's since the start of the year.
 
Current Group and subsidiary ratings are shown in the table below.
 
 
Moody's
  
S&P
  
Fitch
 
Long-term 
Short-term 
  
Long-term 
Short-term 
  
Long-term 
Short-term 
                 
RBS Group plc
Baa1 
P-2 
  
A- 
A-2 
  
A 
F1 
                 
RBS plc
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
NatWest Plc
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
RBS N.V.
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
RBS Citizens, N.A/Citizens
  Bank of Pennsylvania
A3 
P-2 
  
A 
A-1 
  
A- 
F1 
                 
Ulster Bank Ltd/Ulster Bank
  Ireland Ltd
Baa2 
P-2 
  
BBB+ 
A-2 
  
A- 
F1 
 
Additionally, U K Insurance Limited has an insurance financial strength rating of 'A2' from Moody's and an insurer financial strength rating of 'A' from S&P. Both agencies have assigned a stable outlook to the company.
 
 
 
Notes (continued)
 
18. Related party transactions
UK Government
The UK Government and bodies controlled or jointly controlled by the UK Government and bodies over which it has significant influence are related parties of the Group. The Group enters into transactions with many of these bodies on an arm's length basis.
 
Asset Protection Scheme
The Group is party to the UK Government's Asset Protection Scheme (APS). Under the APS the Group purchased credit protection over a portfolio of specified assets and exposures (covered assets) from Her Majesty's Treasury. The contract is accounted for as a derivative financial instrument and recognised as a liability at a fair value of £25 million (31 December 2011 - £231 million). Changes in fair value of £45 million (2011 - £906 million) were charged to profit or loss (Income from trading activities).
 
Government credit and asset-backed securities guarantee schemes
Under these schemes the UK Government guarantees eligible debt issued by qualifying institutions for a fee. During the first half of 2012 the Group repaid all its borrowings under these schemes. At 31 December 2011, the amount outstanding was £21.3 billion.
 
Bank of England facilities
In the ordinary course of business, the Group may from time to time access market-wide facilities provided by the Bank of England.
 
National Loan Guarantee Scheme
Under the UK Government's National Loan Guarantee Scheme, launched on 20 March 2012, eligible customers receive a 1 per cent discount on their funding rate. Up to 30 June 2012, the Group had provided loans and asset finance facilities of £470 million under this scheme.
 
The Group's other transactions with the UK Government include the payment of taxes, principally UK corporation tax and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy and FSCS levies).
 
Other related parties
(a) In their roles as providers of finance, Group companies provide development and other types of capital support to businesses. These investments are made in the normal course of business and on arm's length terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24.
 
(b) The Group recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to the Group.
 
Full details of the Group's related party transactions for the year ended 31 December 2011 are included in the Group's 2011 Annual Report and Accounts.
 
 
 
Notes (continued)
 
19. Date of approval
This announcement was approved by the Board of directors on 2 August 2012.
 
20. Post balance sheet events
There have been no significant events between 30 June 2012 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: 3 August 2012
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary