Interim Management Statement

RNS Number : 5059L

Royal Bank of Scotland Group PLC

07 May 2010

 

Condensed consolidated balance sheet

at 31 March 2010 - pro forma

	31 March  2010	31 December  2009
	£m	£m
Assets
Cash and balances at central banks	42,008	51,548
Net loans and advances to banks	56,508	48,777
Reverse repurchase agreements and stock borrowing	43,019	35,097
Loans and advances to banks	99,527	83,874
Net loans and advances to customers	553,872	554,654
Reverse repurchase agreements and stock borrowing	52,906	41,040
Loans and advances to customers	606,778	595,694
Debt securities	252,116	249,095
Equity shares	21,054	15,960
Settlement balances	24,369	12,024
Derivatives	462,272	438,199
Intangible assets	14,683	14,786
Property, plant and equipment	18,248	17,773
Deferred taxation	6,540	6,492
Prepayments, accrued income and other assets	13,909	18,604
Assets of disposal groups	21,394	18,432
Total assets	1,582,898	1,522,481
Liabilities
Bank deposits	100,168	115,642
Repurchase agreements and stock lending	48,083	38,006
Deposits by banks	148,251	153,648
Customer deposits	425,102	414,251
Repurchase agreements and stock lending	81,144	68,353
Customer accounts	506,246	482,604
Debt securities in issue	239,212	246,329
Settlement balances and short positions	70,632	50,875
Derivatives	444,223	421,534
Accruals, deferred income and other liabilities	28,247	24,624
Retirement benefit liabilities	2,670	2,715
Deferred taxation	2,226	2,161
Insurance liabilities	7,711	7,633
Subordinated liabilities	31,936	31,538
Liabilities of disposal groups	20,563	18,857
Total liabilities	1,501,917	1,442,518
Equity
Minority interests	2,305	2,227
Owners' equity*	78,676	77,736
Total equity	80,981	79,963
Total liabilities and equity	1,582,898	1,522,481
* Owners' equity attributable to:
Ordinary and B shareholders	70,830	69,890
Other equity owners	7,846	7,846
	78,676	77,736

Commentary on condensed consolidated balance sheet - pro forma 

Total assets of £1,582.9 billion at 31 March 2010 were up £60.4 billion, 4%, compared with 31 December 2009.

Cash and balances at central banks were down £9.5 billion, 19% to £42.0 billion due to reduced placings of short-term cash surpluses.

Loans and advances to banks increased by £15.7 billion, 19%, to £99.5 billion with reverse repurchase agreements and stock borrowing ('reverse repos') up £7.9 billion, 23% to £43.0 billion and higher bank placings, up £7.8 billion, 16%, to £56.5 billion, largely as a result of increased wholesale funding activity in Global Banking & Markets and Ulster Bank.

Loans and advances to customers were up £11.1 billion, 2%, at £606.8 billion reflecting increased reverse repos, up 29%, £11.9 billion to £52.9 billion. Excluding reverse repos, lending decreased by £0.8 billion to £553.9 billion but grew by £0.9 billion before impairment provisions. This reflected growth in UK Corporate & Commercial, £2.7 billion, Global Transaction Services, £1.4 billion, UK Retail, £0.9 billion and Wealth, £0.8 billion and the effect of exchange rate movements, £8.8 billion, following the weakening of sterling against the US dollar since the year end. These were partially offset by planned reductions in Non-Core of £10.0 billion, together with declines in Ulster Bank, £1.1 billion, US Retail & Commercial, £0.9 billion and Global Banking & Markets, £1.8 billion.   

Equity shares were up £5.1 billion, 32%, to £21.1 billion, principally due to increased holdings in Global Banking & Markets.

Settlement balances rose £12.3 billion to £24.4 billion as a result of increased customer activity from seasonal year end lows.

Movements in the value of derivative assets, up £24.1 billion, 5%, to £462.3 billion, and liabilities, up £22.7 billion, 5%, to £444.2 billion, primarily reflect changes in interest rates, the weakening of sterling against the US dollar and growth in trading volumes.

Growth in assets and liabilities of disposal groups principally reflects the inclusion of the Global Merchant Services business and increases in respect of the Group's retail and commercial activities in Asia and Latin America.

Deposits by banks declined by £5.4 billion, 4%, to £148.3 billion. Reduced inter-bank deposits, down £15.5 billion, 13%, to £100.2 billion, principally in Group Treasury, were offset in part by increased repurchase agreements and stock lending ('repos'), up £10.1 billion, 27%, to £48.1 billion.

Customer accounts rose £23.6 billion, 5%, to £506.2 billion. Within this, repos increased £12.8 billion, 19%, to £81.1 billion.  Excluding repos, customer deposits were up £10.8 billion, 3%, to £425.1 billion, reflecting growth in UK Corporate & Commercial, £3.6 billion, UK Retail, £2.3 billion, Global Transaction Services, £2.1 billion, Ulster Bank, £1.7 billion and Wealth, £0.8 billion, together with exchange rate movements of £6.3 billion. This was partially offset by reductions in Non-Core, £3.0 billion, US Retail & Commercial, £1.7 billion and Global Banking & Markets, £1.1 billion.

Commentary on condensed consolidated balance sheet - pro forma (continued) 

Debt securities in issue were down £7.1 billion, 3% to £239.2 billion, mainly as a result of reductions in Global Banking & Markets.

Subordinated liabilities increased £0.4 billion, 1% to £31.9 billion. The conversion of £0.6 billion non-cumulative US dollar preference shares and the redemption of £0.5 billion dated loan capital were more than offset by the effect of exchange rate movements and other adjustments of £1.5 billion.

Owners' equity increased by £0.9 billion, 1% to £78.7 billion. The issue of £0.6 billion ordinary shares on conversion of the US dollar non-cumulative preference shares classified as debt and exchange rate movements, £0.7 billion, were partially offset by an increase in own shares held of £0.4 billion.

Condensed consolidated statement of changes in equity

for the period ended 31 March 2010 - pro forma

	31 March  2010	31 December  2009
	£m	£m
Called-up share capital
At beginning of period	14,630	9,898
Ordinary shares issued in respect of placing and open offers	-	4,227
B shares issued	-	510
Other shares issued during the period	401	-
Preference shares redeemed during the period	-	(5)
At end of period	15,031	14,630
Paid-in equity
At beginning of period	565	1,073
Securities redeemed during the period	-	(308)
Transfer to retained earnings	-	(200)
At end of period	565	565
Share premium account
At beginning of period	23,523	27,471
Ordinary shares issued in respect of placing and open offer, net of £95 million expenses	-	1,047
Other shares issued during the period	217	-
Preference shares redeemed during the period	-	(4,995)
At end of period	23,740	23,523
Merger reserve
At beginning of period	25,522	10,881
Issue of B shares, net of £399 million expenses	-	24,591
Transfer to retained earnings	(12,250)	(9,950)
At end of period	13,272	25,522
Available-for-sale reserves
At beginning of period	(1,755)	(3,561)
Unrealised gains in the period	528	1,202
Realised (gains)/losses in the period	(147)	981
Taxation	(153)	(377)
At end of period	(1,527)	(1,755)
Cash flow hedging reserve
At beginning of period	(252)	(876)
Amount recognised in equity during the period	(11)	380
Amount transferred from equity to earnings in the period	10	513
Taxation	(19)	(269)
At end of period	(272)	(252)

Condensed consolidated statement of changes in equity

for the period ended 31 March 2010 - pro forma (continued)

	31 March  2010	31 December  2009
	£m	£m
Foreign exchange reserve
At beginning of period	4,528	6,385
Retranslation of net assets	1,109	(2,322)
Foreign currency (losses)/gains on hedges of net assets	(420)	456
Taxation	12	9
At end of period	5,229	4,528
Capital redemption reserve
At beginning and end of period	170	170
Contingent capital reserve
At beginning of period	(1,208)	-
Contingent capital agreement  - consideration payable	-	(1,208)
At end of period	(1,208)	(1,208)
Retained earnings
At beginning of period	12,134	7,542
Loss attributable to ordinary and B shareholders and other equity owners	(143)	(2,672)
Equity preference dividends paid	(105)	(878)
Paid-in equity dividends paid, net of tax	-	(57)
Transfer from paid-in equity	-	200
Equity owners gain on withdrawal of minority interest
- gross	-	629
- taxation	-	(176)
Transfer from merger reserve	12,250	9,950
Actuarial losses recognised in retirement benefit schemes
- gross	-	(3,756)
- taxation	-	1,043
Net cost of shares bought and used to satisfy share-based payments	(7)	(16)
Share-based payments
- gross	35	325
- taxation	-	-
At end of period	24,164	12,134
Own shares held
At beginning of period	(121)	(104)
Shares purchased during the period	(374)	(33)
Shares issued under employee share schemes	7	16
At end of period	(488)	(121)
Owners' equity at end of period	78,676	77,736

Condensed consolidated statement of changes in equity

for the period ended 31 March 2010 - pro forma (continued)

	31 March  2010	31 December  2009
	£m	£m
Minority interests
At beginning of period	2,227	5,436
Currency translation adjustments and other movements	77	(152)
Profit attributable to minority interests	12	648
Dividends paid	(11)	(313)
Movements in available-for-sale securities
- unrealised gains in the period	-	23
- realised gains in the period	-	(359)
Equity raised	-	9
Equity withdrawn and disposals	-	(2,436)
Transfer to retained earnings	-	(629)
At end of period	2,305	2,227
Total equity at end of period	80,981	79,963
Total comprehensive income/(loss) recognised in the statement of changes in equity is   attributable as follows:
Minority interests	89	160
Preference shareholders	(105)	878
Paid-in equity holders	-	57
Ordinary and B shareholders	871	(5,747)
	855	(4,652)

Notes to pro forma results 

1. Basis of preparation

The pro forma financial information shows the underlying performance of the Group including the results of the ABN AMRO businesses to be retained by the Group.  This information is prepared using the Group's accounting policies and is being provided to give a better understanding of the results of the RBS operations excluding the results attributable to the other Consortium Members.

Group operating profit on a pro forma basis excludes:

·	amortisation of purchased intangible assets;
·	integration and restructuring costs;
·	strategic disposals;
·	bonus tax;
·	Asset Protection Scheme credit default swap - fair value changes;
·	gains on pensions curtailment; and
·	write-down of goodwill and other intangible assets.

2. Loan impairment provisions  

Operating profit/(loss) is stated after charging loan impairment losses of £2,602 million (year ended 31 December 2009 - £13,090 million). The balance sheet loan impairment provisions increased in the quarter ended 31 March 2010 from £15,173 million to £16,827 million and the movements thereon were:

	31 March 2010
	Core	Non-Core	Total		31 December   2009
	£m	£m	£m		£m
At beginning of period	6,921	8,252	15,173		9,451
Transfers to disposal groups	-	(29)	(29)		(321)
Currency translation and other adjustments	30	185	215		(428)
Disposals	-	-	-		(65)
Amounts written-off	(501)	(596)	(1,097)		(6,478)
Recoveries of amounts previously written-off	45	25	70		325
Charge to income statement	950	1,652	2,602		13,090
Unwind of discount	(48)	(59)	(107)		(401)
	7,397	9,430	16,827		15,173

Provisions at 31 March 2010 include £158 million (31 December 2009 - £157 million) in respect of loans and advances to banks. The table above excludes impairment charges relating to securities.

Notes to pro forma results (continued)

3. Available-for-sale financial assets

Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs and are subsequently measured at fair value with changes in fair value reported in shareholders' equity until disposal, at which stage the cumulative gain or loss is recognised in the income statement.  When there is objective evidence that an available-for-sale financial asset is impaired, any decline in its fair value below original cost is removed from equity and recognised in the income statement.

Impairment losses are recognised when there is objective evidence of impairment. The Group reviews its portfolios of available-for-sale financial assets for such evidence which includes: default or delinquency in interest or principal payments; significant financial difficulty of the issuer or obligor; and it becoming probable that the issuer will enter bankruptcy or other financial reorganisation. However, the disappearance of an active market because an entity's financial instruments are no longer publicly traded is not evidence of impairment. Furthermore, a downgrade of an entity's credit rating is not, of itself, evidence of impairment, although it may be evidence of impairment when considered with other available information.  A decline in the fair value of a financial asset below its cost or amortised cost is not necessarily evidence of impairment.  Determining whether objective evidence of impairment exists requires the exercise of management judgment. The unrecognised losses on the Group's available- for-sale debt securities are concentrated in its portfolios of mortgage-backed securities. The losses reflect the widening of credit spreads as a result of the reduced market liquidity in these securities and the current uncertain macroeconomic outlook in the US and Europe. The underlying securities remain unimpaired.

During the first quarter of 2010 impairment losses of £28 million (quarter ended 31 December 2009 - £67 million) were charged to the income statement and net unrealised gains of £528 million (year ended 31 December 2009 - £1,202 million) were recognised directly in equity on available-for-sale financial assets. Available-for-sale reserves at 31 March 2010 amounted to net losses of £1,527 million (31 December 2009 - net losses £1,755 million), and the movements were as follows: 

	31 March  2010	31 December  2009
Available-for-sale reserves	£m	£m
At beginning of period	(1,755)	(3,561)
Unrealised gains in the period	528	1,202
Realised (gains)/losses in the period	(147)	981
Taxation	(153)	(377)
At end of period	(1,527)	(1,755)

The above excludes movements attributable to minority interests of £336 million in the year ended 31 December 2009 (quarter ended 31 March 2010 - nil).

Notes to pro forma results (continued)

4. Strategic disposals

	Quarter ended
	31 March  2010	31 December   2009	31 March   2009
	£m	£m	£m
Gain on sale of investments in:
-  RBS Asset Management's investment strategies business	80	-	-
-  Bank of China (1)	-	-	241
-  Linea Directa	-	2	-
Provision for loss on disposal of:
- Latin American businesses	(22)	(159)	-
- Asian branches and businesses	5	(9)	-
- Other	(10)	-	-
	53	(166)	241

Note:

(1)	Including £359 million attributable to minority interests.

5. Goodwill

	Quarter ended
	31 March  2010	31 December   2009	31 March   2009
	£m	£m	£m
Write-down of goodwill and other intangible assets	-	52	-

Notes to pro forma results (continued)

6. Taxation

The credit for taxation differs from the tax credit computed by applying the standard UK corporation tax rate of 28% as follows:

	Quarter ended
	31 March  2010	31 December   2009	31 March   2009
	£m	£m	£m
(Loss)/profit before tax	(21)	134	(44)
Expected tax (credit)/charge at 28%	(6)	38	(12)
Unrecognised timing differences	52	(67)	89
Non-deductible items	31	400	35
Non-taxable items	(2)	(208)	(83)
Taxable foreign exchange movements	-	13	-
Foreign profits taxed at other rates	128	159	65
Losses in year not recognised	83	448	3
Losses brought forward and utilised	(8)	(65)	2
Adjustments in respect of prior periods	(172)	(69)	129
Actual tax charge	106	649	228

The Group has recognised a deferred tax asset at 31 March 2010 of £6,540 million (31 December 2009 - £6,492 million), of which £4,496 million (31 December 2009 - £4,803 million) relates to carried forward trading losses in the UK.  Under UK tax legislation, these 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 at 31 March 2010 and concluded that it is recoverable based on base case future profit projections.

Notes to pro forma results (continued)

7. Profit attributable to minority interests

	Quarter ended
	31 March  2010	31 December   2009	31 March   2009
	£m	£m	£m
Trust preferred securities	10	(8)	30
Investment in Bank of China	-	-	359
Sempra	-	55	79
ABN AMRO	-	-	2
Other	2	-	1
Profit attributable to minority interests	12	47	471

8. Other owners' dividends

	Quarter ended
	31 March  2010	31 December   2009	31 March   2009
	£m	£m	£m
Preference shareholders:
Non-cumulative preference shares of US$0.01	105	63	114
Non-cumulative preference shares of €0.01	-	63	-
Paid-in equity holders:
Interest on securities classified as equity, net of tax	-	18	-
	105	144	114

Notes to pro forma results (continued)

9. Earnings per ordinary and B share

Earnings per ordinary and B share have been calculated based on the following:

	Quarter ended
	31 March  2010	31 December   2009	31 March   2009
	£m	£m	£m
Earnings
Loss from continuing operations attributable to ordinary and B shareholders	(244)	(758)	(857)
Loss from discontinued operations attributable to ordinary and B shareholders	(4)	(7)	(45)
Ordinary shares in issue during the period (millions)	56,238	56,227	39,397
B shares in issue during the period (millions)	51,000	5,543	-
Weighted average number of ordinary and B shares in issue during the   period (millions)	107,238	61,770	39,397
Basic loss per ordinary and B share from continuing operations	(0.2p)	(1.2p)	(2.2p)
Amortisation of purchased intangible assets	-	0.1p	0.1p
Integration and restructuring costs	0.1p	0.3p	0.7p
Strategic disposals	-	0.3p	(0.6p)
Bonus tax	0.1p	0.3p	-
Asset Protection Scheme credit default swap - fair value changes	0.3p	-	-
Gains on pensions curtailment	-	(2.6p)	-
Write-down of goodwill and other intangible assets	-	0.1p	-
Adjusted earnings/(loss) per ordinary and B share from continuing   operations	0.3p	(2.7p)	(2.0p)
Loss from Non-Core division attributable to ordinary and B shareholders	0.8p	4.9p	11.1p
Core adjusted earnings per ordinary and B share from continuing   operations	1.1p	2.2p	9.1p
Core impairment losses	0.5p	2.2p	2.2p
Pre-impairment Core adjusted earnings per ordinary and B share	1.6p	4.4p	11.3p
Basic loss per ordinary and B share from discontinued operations	-	-	(0.1p)

Notes to pro forma results (continued)

10. Segmental analysis

Analysis of divisional operating profit/(loss)

The following tables provide an analysis of the divisional profit/(loss) for the quarters ended 31 March 2010, 31 December 2009 and 31 March 2009, by main income statement captions. The pro forma divisional income statements on pages 27 to 57 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)
Quarter ended 31 March 2010	£m	£m	£m	£m	£m	£m	£m
UK Retail (1)	933	344	1,277	(721)	(29)	(387)	140
UK Corporate	610	329	939	(435)	-	(186)	318
Wealth	143	112	255	(189)	-	(4)	62
Global Banking & Markets (2)	373	2,419	2,792	(1,294)	-	(32)	1,466
Global Transaction Services	217	390	607	(374)	-	-	233
Ulster Bank	188	53	241	(160)	-	(218)	(137)
US Retail & Commercial	468	252	720	(537)	-	(143)	40
RBS Insurance	89	1,010	1,099	(175)	(974)	-	(50)
Central items	14	76	90	111	-	(1)	200
Core	3,035	4,985	8,020	(3,774)	(1,003)	(971)	2,272
Non-Core (3)	499	435	934	(656)	(133)	(1,704)	(1,559)
Amortisation of purchased intangible assets	-	-	-	(65)	-	-	(65)
Integration and restructuring costs	-	-	-	(168)	-	-	(168)
Strategic disposals	-	53	53	-	-	-	53
Bonus tax	-	-	-	(54)	-	-	(54)
Asset Protection Scheme credit   default swap - fair value changes	-	(500)	(500)	-	-	-	(500)
	3,534	4,973	8,507	(4,717)	(1,136)	(2,675)	(21)
RFS Holdings minority interest	8	8	16	-	-	-	16
Total statutory	3,542	4,981	8,523	(4,717)	(1,136)	(2,675)	(5)

Notes:

(1)	Reallocation of netting of bancassurance claims of £29 million from non-interest income.
(2)	Reallocation of £6 million between net interest income and non-interest income in respect of funding costs of rental assets, £9 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £3 million.
(3)	Reallocation of £69 million between net interest income and non-interest income in respect of funding costs of rental assets.

Notes to pro forma results (continued)

10. Segmental analysis (continued)

Analysis of divisional operating profit/(loss) (continued)

	Net  interest   income	Non-  interest   income	Total   income	Operating   expenses	Insurance  net   claims	Impairment   losses	Operating   profit/(loss)
Quarter ended 31 December 2009	£m	£m	£m	£m	£m	£m	£m
UK Retail (1)	939	360	1,299	(703)	(17)	(451)	128
UK Corporate	626	322	948	(418)	-	(190)	340
Wealth	161	113	274	(175)	-	(10)	89
Global Banking & Markets (2)	406	1,663	2,069	(1,068)	-	(130)	871
Global Transaction Services	233	404	637	(409)	-	(4)	224
Ulster Bank	194	91	285	(212)	-	(348)	(275)
US Retail & Commercial	423	221	644	(510)	-	(153)	(19)
RBS Insurance	86	1,090	1,176	(190)	(1,156)	-	(170)
Central items	(133)	233	100	(103)	-	(2)	(5)
Core	2,935	4,497	7,432	(3,788)	(1,173)	(1,288)	1,183
Non-Core (3)	511	(403)	108	(685)	(148)	(1,811)	(2,536)
Amortisation of purchased      intangible assets	-	-	-	(59)	-	-	(59)
Integration and restructuring costs	-	-	-	(228)	-	-	(228)
Strategic disposals	-	(166)	(166)	-	-	-	(166)
Bonus tax	-	-	-	(208)	-	-	(208)
Gains on pensions curtailment	-	-	-	2,148	-	-	2,148
Write-down of goodwill and other   intangible assets	-	-	-	(52)	-	-	(52)
	3,446	3,928	7,374	(2,872)	(1,321)	(3,099)	82
RFS Holdings minority interest	(27)	(148)	(175)	5	-	-	(170)
Total statutory	3,419	3,780	7,199	(2,867)	(1,321)	(3,099)	(88)

Notes:

(1)	Reallocation of netting of bancassurance claims of £17 million from non-interest income.
(2)	Reallocation of £82 million between net interest income and non-interest income in respect of funding costs of rental assets, £10 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £92 million.
(3)	Reallocation of £67 million between net interest income and non-interest income in respect of funding costs of rental assets, £64 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £3 million.

Notes to pro forma results (continued)

10. Segmental analysis (continued)

Analysis of divisional operating profit/(loss) (continued)

	Net  interest   income	Non-  interest   income	Total   income	Operating   expenses	Insurance  net   claims	Impairment   losses	Operating   profit/(loss)
Quarter ended 31 March 2009	£m	£m	£m	£m	£m	£m	£m
UK Retail (1)	797	386	1,183	(816)	4	(354)	17
UK Corporate	499	311	810	(389)	-	(100)	321
Wealth	158	111	269	(169)	-	(6)	94
Global Banking & Markets (2)	804	4,288	5,092	(1,355)	-	(269)	3,468
Global Transaction Services	220	385	605	(365)	-	(9)	231
Ulster Bank	202	57	259	(188)	-	(67)	4
US Retail & Commercial	494	250	744	(562)	-	(223)	(41)
RBS Insurance	93	984	1,077	(203)	(793)	(5)	76
Central items	(51)	458	407	79	-	3	489
Core	3,216	7,230	10,446	(3,968)	(789)	(1,030)	4,659
Non-Core (3)	322	(2,098)	(1,776)	(699)	(177)	(1,828)	(4,480)
Amortisation of purchased      intangible assets	-	-	-	(85)	-	-	(85)
Integration and restructuring costs				(379)	-	-	(379)
Strategic disposals	-	241	241	-	-	-	241
	3,538	5,373	8,911	(5,131)	(966)	(2,858)	(44)
RFS Holdings minority interest	26	(16)	10	(11)	-	-	(1)
Total statutory	3,564	5,357	8,921	(5,142)	(966)	(2,858)	(45)

Notes:

(1)	Reallocation of netting of bancassurance claims of £4 million from non-interest income.
(2)	Reallocation of £8 million between net interest income and non-interest income in respect of funding costs of rental assets, £15 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £7 million.
(3)	Reallocation of £73 million between net interest income and non-interest income in respect of funding costs of rental assets.

Notes to pro forma results (continued) 

11. 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 'Financial Instruments: Recognition and Measurement'.  Assets and liabilities outside the scope of IAS 39 are shown separately.

	Held-for-  trading	Designated  as at fair value   through  profit or loss	Available-  for-sale	Loans and  receivables	Other   financial  instruments  (amortised   cost)	Finance   leases	Other   assets/  liabilities	Total
31 March 2010	£m	£m	£m	£m	£m	£m	£m	£m
Cash and balances at   central banks	-	-	-	42,008	-	-	-	42,008
Loans and advances to   banks	56,718	-	-	42,809	-	-	-	99,527
Loans and advances to   customers	53,907	2,045	-	537,598	-	13,228	-	606,778
Debt securities	113,576	2,440	126,592	9,508	-	-	-	252,116
Equity shares	16,085	2,212	2,757	-	-	-	-	21,054
Settlement balances	-	-	-	24,369	-	-	-	24,369
Derivatives (1)	462,272	-	-	-	-	-	-	462,272
Intangible assets	-	-	-	-	-	-	14,683	14,683
Property, plant and   equipment	-	-	-	-	-	-	18,248	18,248
Deferred taxation	-	-	-	-	-	-	6,540	6,540
Prepayments, accrued   income and other assets	-	-	-	1,501	-	-	12,408	13,909
Assets of disposal groups	-	-	-	-	-	-	21,394	21,394
Total assets	702,558	6,697	129,349	657,793	-	13,228	73,273	1,582,898
Deposits by banks	62,531	-	-	-	85,720	-	-	148,251
Customer accounts	65,878	5,927	-	-	434,441	-	-	506,246
Debt securities in issue	4,688	43,484	-	-	191,040	-	-	239,212
Settlement balances and   short positions	47,657	-	-	-	22,975	-	-	70,632
Derivatives (1)	444,223	-	-	-	-	-	-	444,223
Accruals, deferred income   and other liabilities	-	-	-	-	1,865	492	25,890	28,247
Retirement benefit   liabilities	-	-	-	-	-	-	2,670	2,670
Deferred taxation	-	-	-	-	-	-	2,226	2,226
Insurance liabilities	-	-	-	-	-	-	7,711	7,711
Subordinated liabilities	-	1,411	-	-	30,525	-	-	31,936
Liabilities of disposal   groups	-	-	-	-	-	-	20,563	20,563
Total liabilities	624,977	50,822	-	-	766,566	492	59,060	1,501,917
Equity								80,981
								1,582,898

Note:

(1)	Held-for-trading derivatives include hedging derivatives.

Notes to pro forma results(continued)

11. Financial instruments (continued)

Classification (continued)

	Held-for-  trading	Designated  as at fair value through   profit or loss	Available-  for-sale	Loans and   receivables	Other  financial  instruments    (amortised   cost)	Finance   leases	Other   assets/  liabilities	Total
31 December 2009	£m	£m	£m	£m	£m	£m	£m	£m
Cash and balances at   central banks	-	-	-	51,548	-	-	-	51,548
Loans and advances to   banks	45,449	-	-	38,425	-	-	-	83,874
Loans and advances to   customers	41,684	1,981	-	538,669	-	13,360	-	595,694
Debt securities	111,413	2,429	125,382	9,871	-	-	-	249,095
Equity shares	11,318	2,083	2,559	-	-	-	-	15,960
Settlement balances	-	-	-	12,024	-	-	-	12,024
Derivatives (1)	438,199	-	-	-	-	-	-	438,199
Intangible assets	-	-	-	-	-	-	14,786	14,786
Property, plant and   equipment	-	-	-	-	-	-	17,773	17,773
Deferred taxation	-	-	-	-	-	-	6,492	6,492
Prepayments, accrued   income and other assets	-	-	-	1,421	-	-	17,183	18,604
Assets of disposal groups	-	-	-	-	-	-	18,432	18,432
Total assets	648,063	6,493	127,941	651,958	-	13,360	74,666	1,522,481
Deposits by banks	53,609	-	-	-	100,039	-	-	153,648
Customer accounts	52,737	5,256	-	-	424,611	-	-	482,604
Debt securities in issue	3,925	41,444	-	-	200,960	-	-	246,329
Settlement balances and   short positions	40,463	-	-	-	10,412	-	-	50,875
Derivatives (1)	421,534	-	-	-	-	-	-	421,534
Accruals, deferred income   and other liabilities	-	-	-	-	1,888	467	22,269	24,624
Retirement benefit liabilities	-	-	-	-	-	-	2,715	2,715
Deferred taxation	-	-	-	-	-	-	2,161	2,161
Insurance liabilities	-	-	-	-	-	-	7,633	7,633
Subordinated liabilities	-	1,277	-	-	30,261	-	-	31,538
Liabilities of disposal     groups	-	-	-	-	-	-	18,857	18,857
Total liabilities	572,268	47,977	-	-	768,171	467	53,635	1,442,518
Equity								79,963
								1,522,481

Note:

(1)	Held-for-trading derivatives include hedging derivatives.

Notes to pro forma results (continued)

11. Financial instruments (continued)

Financial instruments carried at fair value

Refer to Note 11 Financial instruments of the 2009 Annual Report and Accounts for valuation techniques. Certain aspects relating to the valuation of financial instruments carried at fair value are discussed below.

Valuation reserves

When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity, credit risk and future administrative costs.

Valuation reserves and adjustments comprise:

	31 March  2010	31 December  2009
	£m	£m
Credit valuation adjustments:
Monoline insurers	3,870	3,796
Credit derivative product companies	465	499
Other counterparties	1,737	1,588
	6,072	5,883
Bid-offer and liquidity reserves	2,965	2,814
	9,037	8,697
Debit valuation adjustments:
Debt securities in issue	(2,151)	(2,331)
Derivatives	(475)	(467)
Total debit valuation adjustments	(2,626)	(2,798)
Total reserves	6,411	5,899

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. CVA is discussed in Risk and capital management - Other risk exposures: Credit valuation adjustments (page 112). Bid-offer and liquidity reserves and own credit (page 80) are discussed below.

Bid-offer and liquidity reserves

Fair value positions are adjusted to bid or offer levels, by marking individual cash based positions directly to bid or offer or by taking bid-offer reserves calculated on a portfolio basis for derivatives exposures.

Notes to pro forma results (continued) 

11. Financial instruments (continued)

Own credit

In accordance with IFRS, when valuing financial liabilities recorded at fair value, the Group takes into account the effect of its own credit standing.  The categories of financial liabilities on which own credit spread adjustments are made are issued debt, including structured notes, and derivatives. An own credit adjustment is applied to positions where it is believed that counterparties would consider the Group's creditworthiness when pricing trades. 

For issued debt and structured notes, this adjustment is based on independent quotes from market participants for the debt issuance spreads above average inter-bank rates (at a range of tenors), which the market would demand when purchasing new senior or subordinated debt issuances from the Group.  Where necessary, these quotes are interpolated using a curve shape derived from credit default swap prices. 

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.

The table below details the own credit spread adjustments on liabilities recorded during the period. 

	Debt securities in issue
	Held-for  -trading (1)	Designated as at   fair value through   profit and loss	Total		Derivatives (2)	Total
Cumulative own credit adjustment	£m	£m	£m		£m	£m
At 31 March 2010	1,224	927	2,151		475	2,626
At 31 December 2009	1,237	1,094	2,331		467	2,798

Notes:

(1)	The held-for-trading portfolio consists of wholesale and retail note issuances.
(2)	The adjustment takes into account collateral posted by the Group and the effect of master netting arrangements.

Notes to pro forma results (continued)

11. Financial instruments (continued)

Valuation hierarchy

The table below analyses financial instruments carried at fair value by valuation method.

	31 March 2010					31 December 2009
	Total	Level 1	Level 2	Level 3		Total	Level 1	Level 2	Level 3
	£bn	£bn	£bn	£bn		£bn	£bn	£bn	£bn
Assets
Loans and advances:
- reverse repos	72.6	-	72.6	-		53.2	-	53.2	-
- other	40.1	-	38.9	1.2		35.9	-	34.8	1.1
	112.7	-	111.5	1.2		89.1	-	88.0	1.1
Debt securities
- government	139.7	123.2	16.5	-		134.1	118.2	15.9	-
- RMBS (2)	52.6	-	52.0	0.6		57.1	-	56.6	0.5
- CMBS (3)	4.5	-	4.1	0.4		4.1	-	4.0	0.1
- CDOs (4)	3.8	-	1.1	2.7		3.6	-	2.6	1.0
- CLOs (5)	9.6	-	7.4	2.2		8.8	-	8.0	0.8
- other ABS (6)	6.2	-	4.6	1.6		6.1	-	5.2	0.9
- corporate	10.9	-	10.4	0.5		10.5	-	9.9	0.6
- other (7)	15.3	-	15.0	0.3		14.9	-	14.7	0.2
	242.6	123.2	111.1	8.3		239.2	118.2	116.9	4.1
Equity shares	21.0	16.4	2.8	1.8		16.0	12.2	2.5	1.3
Derivatives
- foreign exchange	75.4	-	75.3	0.1		68.3	-	68.1	0.2
- interest rate	343.1	0.1	341.3	1.7		321.5	0.3	319.7	1.5
- equities and commodities	6.5	-	6.5	-		6.7	0.3	6.1	0.3
- credit - APS (8)	0.9	-	-	0.9		1.4	-	-	1.4
- credit - other	36.4	-	32.6	3.8		40.3	0.1	37.2	3.0
	462.3	0.1	455.7	6.5		438.2	0.7	431.1	6.4
Total assets	838.6	139.7	681.1	17.8		782.5	131.1	638.5	12.9
Liabilities
Deposits:
- repos	82.0	-	82.0	-		62.5	-	62.5	-
- other	52.3	-	52.2	0.1		49.1	-	49.0	0.1
	134.3	-	134.2	0.1		111.6	-	111.5	0.1
Debt securities in issue	48.2	-	46.2	2.0		45.4	-	43.1	2.3
Short positions	47.7	34.0	12.6	1.1		40.5	27.1	13.2	0.2
Derivatives
- foreign exchange	72.7	-	72.6	0.1		63.6	-	63.6	-
- interest rate	330.4	0.2	329.4	0.8		309.3	0.1	308.4	0.8
- equities and commodities	9.3	0.8	8.4	0.1		9.5	0.8	8.5	0.2
- credit - other	31.8	-	31.3	0.5		39.1	-	38.2	0.9
	444.2	1.0	441.7	1.5		421.5	0.9	418.7	1.9
Other financial liabilities (9)	1.4	-	1.4	-		1.3	-	1.3	-
Total liabilities	675.8	35.0	636.1	4.7		620.3	28.0	587.8	4.5

For notes to this table refer to page 82.

Notes to pro forma results (continued)

11. Financial instruments (continued)

Valuation hierarchy (continued)

Amounts classified as available-for-sale included in the table above comprise:

	31 March 2010					31 December 2009
	Total	Level 1	Level 2	Level 3		Total	Level 1	Level 2	Level 3
	£bn	£bn	£bn	£bn		£bn	£bn	£bn	£bn
Debt securities
- government	64.9	57.8	7.1	-		64.9	58.3	6.6	-
- RMBS (2)	37.2	-	37.0	0.2		37.2	-	37.0	0.2
- CMBS (3)	1.8	-	1.7	0.1		1.6	-	1.6	-
- CDOs (4)	1.9	-	0.5	1.4		1.6	-	1.2	0.4
- CLOs (5)	5.8	-	4.5	1.3		5.5	-	5.4	0.1
- other ABS (6)	4.7	-	3.4	1.3		4.6	-	4.0	0.6
- corporate	2.4	-	2.4	-		2.5	-	2.5	-
- other (7)	7.9	-	7.9	-		7.5	-	7.5	-
	126.6	57.8	64.5	4.3		125.4	58.3	65.8	1.3
Equity shares	2.8	0.3	1.8	0.7		2.6	0.3	1.6	0.7
	129.4	58.1	66.3	5.0		128.0	58.6	67.4	2.0

Notes:

(1)	For details on levels 1, 2 and 3 refer to Note 11 - Financial instruments of the 2009 Annual Report and Accounts.
(2)	Residential mortgage-backed securities.
(3)	Commercial mortgage-backed securities.
(4)	Collateralised debt obligations.
(5)	Collateralised loan obligation.
(6)	Asset-backed securities.
(7)	Primarily includes debt securities issued by banks and building societies.
(8)	Asset Protection Scheme.
(9)	Comprises subordinated liabilities.

Key points

·	Asset portfolios increased by £56.1 billion since 31 December 2009. This reflects increases in reverse repos (£19.4 billion), government debt securities (£5.6 billion), equity shares (£5.0 billion), other loans and advances (£4.2 billion) and a net decrease in ABS (£3.0 billion). Increases in derivative assets (£24.1 billion) are largely offset by a similar increase in derivative liabilities.
·	Total liabilities increased by £55.5 billion with increases in derivative liabilities (£22.7 billion) and repos (£19.5 billion) being the largest contributors. Short positions and other deposits increased by £7.2 billion and £3.2 billion over the quarter respectively.
·	Level 3 assets increased by £4.9 billion due primarily to transfers from level 2, reflecting the movement of some lower quality CDO and CLO positions in the Non-Core division, primarily available-for-sale, where recent price discovery indicates uncertainty in observability. In addition, the use of more conservative internal recovery rates for the calculation of CVA for certain monolines have resulted in these positions moving to level 3.
·	Level 3 liabilities remained broadly unchanged with increases in short positions reflecting transfers of lower quality ABS to level 3 as in assets above, largely being offset by decreases in other categories.

Notes to pro forma results (continued)

11.  Financial instruments (continued)

Reclassification of financial instruments

During 2008, as permitted by amended IAS 39, the Group reclassified certain financial assets from the held-for-trading and available-for-sale categories into loans and receivables and from the held-for-trading category into the available-for-sale category. There were further reclassifications from the held-for-trading to loans and receivables during 2009.  There were no reclassifications in the first quarter of 2010.  The following tables detail the effect of the reclassifications and the balance sheet values of the assets.

	Reduction in profit   for the quarter   ended 31 March   2010 as a result of   reclassifications
	£m
From held-for-trading to:
Available-for-sale	50
Loans and receivables	157
	207

	31 March 2010 All reclassifications			31 December 2009 All reclassifications
	Carrying value	Fair value		Carrying   value	Fair value
	£m	£m		£m	£m
From held-for-trading to:
Available-for-sale	7,682	7,682		7,629	7,629
Loans and receivables	11,694	9,775		12,933	10,644
	19,376	17,457		20,562	18,273
From available-for-sale to:
Loans and receivables	924	774		869	745
	20,300	18,231		21,431	19,018

During the quarter ended 31 March 2010, the balance sheet value of reclassified assets decreased by £1.1 billion.  This was primarily due to disposals and repayments of £1.7 billion across a range of asset backed securities and loans.  Other movements include impairment charges of £0.1 billion offset by foreign exchange rate gains of £0.8 billion and gains taken to the available-for-sale reserve of £0.1 billion. 

For assets reclassified from held-for-trading to available-for-sale, net unrealised losses recorded in equity at 31 March 2010 were £0.5 billion (31 December 2009 - £0.6 billion).

Notes to pro forma results (continued)

12. Debt securities

	UK central   and local  government	US central   and local  government	Other   central and   local  government	Bank and   building   society	Asset   backed   securities	Corporate	Other	Total
	£m	£m	£m	£m	£m	£m	£m	£m
31 March 2010
Held-for-trading	8,231	18,058	47,919	6,308	25,004	7,376	680	113,576
Designated at fair value   through profit or loss	76	3	490	378	397	1,093	3	2,440
Available-for-sale	8,607	16,189	40,089	7,884	51,381	2,421	21	126,592
Loans and receivables	11	-	-	14	7,603	1,877	3	9,508
	16,925	34,250	88,498	14,584	84,385	12,767	707	252,116
31 December 2009
Held-for-trading	8,128	10,427	50,150	6,103	28,820	6,892	893	111,413
Designated at fair value   through profit or loss	122	3	385	418	394	1,087	20	2,429
Available-for-sale	18,350	12,789	33,727	7,472	50,464	2,550	30	125,382
Loans and receivables	1	-	-	-	7,924	1,853	93	9,871
	26,601	23,219	84,262	13,993	87,602	12,382	1,036	249,095

Key points

·	55% (31 December 2009 - 54%) of the debt securities portfolios were issued by central and local governments.  Of those issued by governments other than the UK and US, 90% were issued by G10 governments.
·	Of the ABS portfolios, 70% (31 December 2009 - 74%) were AAA rated and 47% (31 December 2009 - 49%) were guaranteed or effectively guaranteed by G10 governments.
·	59% (31 December 2009 - 63%) of corporate debt securities are investment grade.
·	Excluding held-for-trading positions in GBM, the Group held debt securities issued by the Greek government with a carrying value of £1.3 billion in Group Treasury, which were accounted for as available-for-sale (AFS).  This balance is net of fair value losses of £247 million after tax.  Further fair value losses on these AFS securities of £183 million after tax were incurred in April 2010.

See Risk and capital management section for additional information on ratings. 

Notes to pro forma results (continued)

13. Derivatives

	31 March 2010			31 December 2009
	Assets	Liabilities		Assets	Liabilities
	£m	£m		£m	£m
Exchange rate contracts
Spot, forwards and futures	34,054	32,482		26,559	24,763
Currency swaps	26,541	26,594		25,221	23,337
Options purchased	14,828	-		16,572	-
Options written	-	13,653		-	15,499
Interest rate contracts
Interest rate swaps	284,442	273,766		263,902	251,829
Options purchased	56,142	-		55,471	-
Options written	-	54,504		-	55,462
Futures and forwards	2,469	2,146		2,088	2,033
Credit derivatives	37,284	31,818		41,748	39,127
Equity and commodity contracts	6,512	9,260		6,638	9,484
	462,272	444,223		438,199	421,534

The Group enters into master netting agreements in respect of its derivative activities. These arrangements give the Group a legal right to set-off derivative assets and liabilities with the same counterparty.  They do not result in a net presentation in the Group's balance sheet for which IFRS requires an intention to settle net or to realise the asset and settle the liability simultaneously, as well as a legally enforceable right to set-off.  These agreements are, however, effective in reducing the Group's credit exposure from derivative assets.  The Group has executed master netting agreements with the majority of its derivative counterparties resulting in a significant reduction in its net exposure to derivative assets.

Key point

·	Of the £462 billion (31 December 2009 - £438 billion) derivatives assets, £368 billion (31 December 2009 - £359 billion) were under netting agreements. Furthermore, the Group holds substantial collateral against this net derivative asset exposure.

Notes to pro forma results (continued)

14. Analysis of contingent liabilities and commitments

	31 March 2010
	Core	Non-Core	Total		31 December   2009
	£m	£m	£m		£m
Contingent liabilities
Guarantees and assets pledged as collateral security	32,924	3,123	36,047		36,579
Other contingent liabilities	12,824	679	13,503		13,410
	45,748	3,802	49,550		49,989
Commitments
Undrawn formal standby facilities, credit lines and other   commitments to lend	251,625	30,997	282,622		289,135
Other commitments	1,233	2,631	3,864		3,483
	252,858	33,628	286,486		292,618
Total contingent liabilities and commitments	298,606	37,430	336,036		342,607

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 to pro forma results (continued)

15. Analysis of non-interest income, expenses and impairment losses

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
Fees and commissions receivable	2,051	2,353	2,276
Fees and commissions payable
- banking	(466)	(810)	(562)
- insurance related	(106)	(84)	(129)
Net fees and commissions	1,479	1,459	1,585
Foreign exchange	452	572	852
Interest rate	960	(386)	1,720
Credit	506	109	(1,446)
Other	348	416	534
Income from trading activities	2,266	711	1,660
Operating lease and other rental income	343	341	337
Changes in the fair value of own debt	(210)	349	741
Changes in the fair value of securities and other financial assets   and liabilities	14	54	(383)
Changes in the fair value of investment properties	(3)	36	(4)
Profit/(loss) on sale of securities	147	92	(114)
Profit on sale of property, plant and equipment	9	13	14
(Loss)/profit on sale of subsidiaries and associates	-	(38)	9
Life business profits/(losses)	35	24	(24)
Dividend income	20	17	14
Share of profits less losses of associated entities	14	(83)	(7)
Other income	17	(189)	(52)
Other operating income	386	616	531
Non-interest income (excluding insurance premiums)	4,131	2,786	3,776
Insurance net premium income	1,289	1,308	1,356
Total non-interest income	5,420	4,094	5,132
Staff costs
- wages, salaries and other staff costs	2,195	1,957	2,183
- social security costs	192	179	160
- pension costs	166	110	167
Premises and equipment	528	618	644
Other	935	1,075	1,046
Administrative expenses	4,016	3,939	4,200
Depreciation and amortisation	414	534	467
Operating expenses	4,430	4,473	4,667

Notes to pro forma results (continued)

15. Analysis of non-interest income, expenses and impairment losses (continued)

	Quarter ended
	31 March  2010	31 December  2009	31 March  2009
	£m	£m	£m
General insurance	1,107	1,304	970
Bancassurance	29	17	(4)
Insurance net claims	1,136	1,321	966
Loan impairment losses	2,602	3,032	2,276
Securities impairment losses	73	67	582
Impairment losses	2,675	3,099	2,858

Note:

(1)	The data above exclude purchased intangibles amortisation, integration and restructuring costs, strategic disposals, write-down of goodwill and other intangible assets, gains on pensions curtailment, Asset Protection Scheme credit default swap and bonus tax.

 

END

 

 

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