Final Results - Part 1 of 8

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	Page

Highlights	1
Contacts	4
Presentation of information	5
Summary consolidated results	7
Comment	10
Business update	15
Analysis of results	18
Divisional performance	30

Statutory results

Condensed consolidated income statement	78
Condensed consolidated statement of comprehensive income	79
Condensed consolidated balance sheet	80
Commentary on condensed consolidated balance sheet	81
Average balance sheet	83
Condensed consolidated statement of changes in equity	86
Condensed consolidated cash flow statement	89
Notes to accounts	90

Risk and balance sheet management

Risk principles	141
Capital management	153
Liquidity, funding and related risks	164
Credit risk	180
Market risk	235
Country risk	243

Risk factors	290

Statement of directors' responsibilities	292

Additional information

Share information	293
Statutory results	293
Financial calendar	293

Appendix 1 Income statement reconciliations
Appendix 2 Businesses outlined for disposal
Appendix 3 Analysis of balance sheet pre and post disposal groups
Index

·	RBS has made good progress on the safety and soundness agenda at the heart of its five year recovery plan:
	○	Funded assets were down £107 billion in 2012 to £870 billion, driven by Non-Core and Markets.
	○	Risk-weighted assets decreased by £48 billion to £460 billion, with £21 billion Q4 reduction.
	○	Core Tier 1 ratio of 10.3%, up from 9.7% in 2011⁽²⁾.
	○	Strong and liquid balance sheet, with loan book now 100% funded by customer deposits.
	○	Short-term wholesale funding down a further £60 billion in 2012 to £42 billion, covered 3.5 times by the Group's high quality liquid asset portfolio.

·	RBS's strengthening credit profile has been recognised in traded debt markets, with CDS spreads more than halving over the course of 2012 and secondary bond spreads tightening by more than 340 basis points. This strengthening resulted in a 2012 accounting charge for improved own credit of £4,649 million, compared with a credit of £1,914 million in 2011.

·	Loan impairment provision balances were raised to £21.3 billion, increasing coverage of risk elements in lending to 52%, compared with 49% in 2011.

·	Risk-weighted assets were 53% of funded assets at 31 December 2012, above the average of peers in the UK and Europe. The Group absorbed £44 billion of regulatory RWA increases in 2012.

·	Group operating profit⁽¹⁾ in 2012 was £3,462 million, almost double 2011's result, with a steady improvement in Core and a 32% reduction in Non-Core losses.

·	Core operating profit totalled £6,341 million, up 5% from 2011, with Retail & Commercial down 6%, reflecting weaker income, but Markets improving by 68%.
	○	Income was down 4%, driven by UK Retail and International Banking.

	○	Expenses decreased by 4%, with continuing benefits from the cost reduction programme launched in 2009 and a 6,600 reduction in Core staffing levels.
	○	Impairment charge declined by 13% to £3,056 million, with improved credit trends in UK Retail and US Retail & Commercial coupled with stabilisation, though still at elevated levels, in Core Ulster Bank.

·	Non-Core operating losses were £2,879 million, £1,342 million lower than 2011, mainly driven by a significant fall in impairments in the Ulster Bank and other real estate portfolios.

·	RBS passed a number of significant milestones in 2012 as it moved towards becoming a stable, capital-generative business capable of providing outstanding service to its customers.
	○	Resumption of coupon payments on hybrid capital instruments.
	○	Exit from the UK Government Asset Protection Scheme with no claims made.
	○	Repayment in full of remaining Special Liquidity Scheme and Credit Guarantee Scheme funding.
	○	Successful flotation of Direct Line Group.
	○	Relaunch of the sale process for 315 profitable branches required to be sold under the EC State Aid agreement.
	○	Restructuring of the Markets business with balance sheet and capital intensity reduced further.
	○	Over £200 billion of Non-Core funded assets taken off the balance sheet since 2008.

Final Results - Part 1 of 8

Highlights

Contacts

Presentation of information

Summary consolidated income statement

for the period ended 31 December 2012

Comment

Comment (continued)

Business update

Business update

Business update

Analysis of results

Analysis of results - Funding & liquidity

Companies

UK 100

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·	2012 has brought significant challenges as RBS has continued to work through the conduct issues resulting from past failings while seeking to lay the foundations for changes to bring about a healthier and more sustainable culture and do its part to enable the banking industry to rebuild reputation. These conduct issues have had a material financial impact on the Group, in addition to reputational damage.

·	On 6 February 2013, RBS reached agreement with the Financial Services Authority, the US Department of Justice and the Commodity Futures Trading Commission in relation to the setting of LIBOR and other trading rates, including financial penalties of £381 million. The Group continues to co-operate with other bodies in this regard and expects it will incur some additional financial penalties.

·	A further £450 million charge was taken in Q4 in relation to Payment Protection Insurance (PPI) claims. This strengthened the cumulative provision for PPI to £2.2 billion, from which £1.3 billion in redress had been paid by 31 December 2012.

·	In Q2 2012 RBS provided £50 million for the redress it expected to offer retail classified clients who had been sold structured collar products. Following the Financial Services Authority's announcement of its pilot review findings and redress framework, a further charge of £650 million has been booked in Q4 2012 to meet the additional costs of redress to the broader SME customer set who bought other simpler interest rate hedging products, largely in the period 2001-2008 when interest rates were significantly higher.

·	RBS is committed to serving its customers well and helping them realise their ambitions. We strive to earn their trust by focusing on their needs and delivering excellent service.

·	In 2012, the Group served its core customer base of 33 million, three quarters of it in the UK.

·	RBS has maintained its support for UK households and businesses by ensuring that credit remains appropriately available. In 2012 the Group:
	○	Offered more than £58 billion of loans and facilities to UK businesses, of which more than £30 billion was to SMEs, and renewed £27 billion of overdrafts including £8 billion for SMEs.
	○	Advanced £16 billion of UK home loans, including £3 billion to first time buyers.
	○	Accounted for 36% of all SME lending, compared with its overall customer market share of 24%.

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·	own credit adjustments;

·	Asset Protection Scheme (APS);

·	Payment Protection Insurance (PPI) costs;

·	Interest Rate Hedging Products (IRHP) redress and related costs;

·	regulatory fines;

·	sovereign debt impairment;

·	interest rate hedge adjustments on impaired available-for-sale sovereign debt;

·	amortisation of purchased intangible assets;

·	integration and restructuring costs;

·	gain/(loss) on redemption of own debt;

·	strategic disposals;

·	bank levy;

·	bonus tax;

·	write-down of goodwill and other intangible assets; and

·	RFS Holdings minority interest (RFS MI).

and includes the results of Direct Line Group on a managed basis, which are included in discontinued operations in the statutory results.

	Year ended		Quarter ended
	31 December 2012	31 December 2011	31 December 2012	30 September 2012	31 December 2011
	£m	£m	£m	£m	£m

Net interest income	11,695	12,689	2,842	2,873	3,076

Non-interest income (excluding insurance net premium income)	10,374	10,764	1,999	2,653	1,664
Insurance net premium income	3,718	4,256	919	932	981

Non-interest income	14,092	15,020	2,918	3,585	2,645

Total income (1)	25,787	27,709	5,760	6,458	5,721
Operating expenses (2)	(14,619)	(15,478)	(3,119)	(3,639)	(3,644)

Profit before insurance net claims and impairment losses	11,168	12,231	2,641	2,819	2,077
Insurance net claims	(2,427)	(2,968)	(606)	(596)	(529)

Operating profit before impairment losses (3)	8,741	9,263	2,035	2,223	1,548
Impairment losses (4)	(5,279)	(7,439)	(1,454)	(1,176)	(1,692)

Operating profit/(loss) (3)	3,462	1,824	581	1,047	(144)
Own credit adjustments	(4,649)	1,914	(220)	(1,455)	(472)
Asset Protection Scheme	(44)	(906)	-	1	(209)
Payment Protection Insurance costs	(1,110)	(850)	(450)	(400)	-
Interest Rate Hedging Products redress and related costs	(700)	-	(700)	-	-
Regulatory fines	(381)	-	(381)	-	-
Sovereign debt impairment	-	(1,099)	-	-	(224)
Amortisation of purchased intangible assets	(178)	(222)	(32)	(47)	(53)
Integration and restructuring costs	(1,550)	(1,064)	(620)	(257)	(478)
Gain/(loss) on redemption of own debt	454	255	-	(123)	(1)
Strategic disposals	113	(104)	(16)	(23)	(82)
Bank levy	(175)	(300)	(175)	-	(300)
Write-down of goodwill and other intangible assets	(518)	(11)	(518)	-	(11)
Other items	(20)	(203)	(2)	(1)	(2)

Operating loss including the results of Direct Line Group discontinued operations	(5,296)	(766)	(2,533)	(1,258)	(1,976)
Direct Line Group discontinued operations (5)	131	(424)	334	(82)	(63)

Operating loss before tax	(5,165)	(1,190)	(2,199)	(1,340)	(2,039)
Tax (charge)/credit	(469)	(1,127)	(46)	(10)	213

Loss from continuing operations	(5,634)	(2,317)	(2,245)	(1,350)	(1,826)

(Loss)/profit from discontinued operations, net of tax
- Direct Line Group	(184)	301	(351)	62	36
- Other	12	47	6	5	10

(Loss)/profit from discontinued operations, net of tax	(172)	348	(345)	67	46

Loss for the period	(5,806)	(1,969)	(2,590)	(1,283)	(1,780)
Non-controlling interests	123	(28)	107	(3)	(18)
Other owners' dividends	(288)	-	(114)	(98)	-

Loss attributable to ordinary and B shareholders	(5,971)	(1,997)	(2,597)	(1,384)	(1,798)

Key metrics

Core performance ratios
- Net interest margin	2.16%	2.16%	2.16%	2.15%	2.07%
- Cost:income ratio (6)	59%	60%	56%	59%	62%
- Return on equity	9.8%	10.4%	9.1%	9.7%	7.6%
- Adjusted earnings/(loss) per ordinary and B share (7)	18.3p	6.1p	1.8p	6.1p	(5.3p)
- Adjusted earnings per ordinary and B share assuming a normalised tax rate of 24.5% (2011 - 26.5%) (7)	41.9p	41.0p	10.3p	10.3p	7.6p

(1)	Excluding own credit adjustments, Asset Protection Scheme, gain on redemption of own debt, strategic disposals and RFS Holdings minority interest, and including Direct Line Group, which is classified as a discontinued operation on a statutory basis.
(2)	Excluding PPI costs, IRHP redress and related costs, regulatory fines, amortisation of purchased intangible assets, integration and restructuring costs, bank levy, bonus tax, write-down of goodwill and other intangible assets and RFS Holdings minority interest, and including Direct Line Group, which is classified as a discontinued operation on a statutory basis.
(3)	Operating profit/(loss) before tax, own credit adjustments, Asset Protection Scheme, PPI costs, IRHP redress and related costs, regulatory fines, sovereign debt impairment, interest rate hedge adjustments on impaired available-for-sale sovereign debt, amortisation of purchased intangible assets, integration and restructuring costs, gain/(loss) on redemption of own debt, strategic disposals, bank levy, bonus tax, write-down of goodwill and other intangible assets and RFS Holdings minority interest, and includes the results of Direct Line Group, which is classified as a discontinued operation.
(4)	Excluding sovereign debt impairment and related interest rate hedge adjustments and including Direct Line Group, which is classified as a discontinued operation on a statutory basis.
(5)	Analysis provided in Note 12. Included within Direct Line Group discontinued operations are the managed basis divisional results of Direct Line Group (DLG), certain DLG related activities in Central items; and related one-off and other items including write-down of goodwill, integration and restructuring costs and strategic disposals.
(6)	Cost:income ratio is based on total income and operating expenses as defined in (1) and (2) above and after netting insurance claims against income.
(7)	Data for 2011 have been adjusted for the sub-division and one-for-ten consolidation of ordinary shares, which took effect in June 2012.

(1)	Excludes reverse repurchase agreements and stock borrowing.
(2)	Excludes disposal groups (see page 113).
(3)	Includes disposal groups (see page 113).
(4)	Excludes repurchase agreements and stock lending.
(5)	Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.

·	Sustained its 33 million customer franchise in the face of substantial restructuring and other pressures. Lending balances to Core UK businesses and homeowners (excluding commercial real estate) were grown by 3% while the wider economy shrank by over 1%.

·	Rebuilt financial resilience. RBS's huge restructuring process is moving successfully to its later stages. From their worst point, total assets are down £906 billion, short-term wholesale borrowing is £255 billion down. Risk concentrations are well down. Balance sheet leverage is reduced from 21x to 15x. In each case we are well ahead of original targets. And a Core Tier 1 capital ratio of 10.3% provides us some 3.5 times more capital per unit of equivalent risk than pre-crisis levels.

·	Reached a loan to deposit ratio - perhaps the clearest indicator of a bank's funding prudence - of 1:1 from a worst point of 154%. Achieving this 'golden rule' of banking is a powerful symbol of our recovery.

·	Produced £43 billion in pre-impairment profits from Core businesses. These have been used to self fund the majority of £52 billion of legacy losses, loan impairments, restructuring charges, regulatory costs and other clean-up items.

	31 December 2012	30 September 2012	31 December 2011
	£m	£m	£m

Net loans and advances to banks (1,2)	29,168	38,347	43,870
Net loans and advances to customers (1,2)	430,088	423,155	454,112
Reverse repurchase agreements and stock borrowing	104,830	97,935	100,934
Debt securities and equity shares	172,670	193,249	224,263
Other assets (3)	133,636	156,037	154,070

Funded assets	870,392	908,723	977,249
Derivatives	441,903	468,171	529,618

Total assets	1,312,295	1,376,894	1,506,867

Bank deposits (2,4)	57,073	58,127	69,113
Customer deposits (2,4)	433,239	412,712	414,143
Repurchase agreements and stock lending	132,372	142,565	128,503
Debt securities in issue	94,592	104,157	162,621
Settlement balances and short positions	33,469	46,989	48,516
Subordinated liabilities	26,773	25,309	26,319
Other liabilities (3)	29,996	50,842	57,616

Liabilities excluding derivatives	807,514	840,701	906,831
Derivatives	434,333	462,300	523,983

Total liabilities	1,241,847	1,303,001	1,430,814
Non-controlling interests	2,318	1,194	1,234
Owners' equity	68,130	72,699	74,819

Total liabilities and equity	1,312,295	1,376,894	1,506,867

Memo: Tangible equity (5)	49,841	53,157	55,217

(1)	2008 Core balances used in the calculation are management estimates based on the 2009 Core/Non-Core split as Non-Core was not created and reported separately until 2009.
(2)	Source: British Bankers' Association; RBS internal data; the Charterhouse UK Business Banking Survey, based on a sample of 16,594 businesses interviewed throughout 2012, weighted by region and turnover to be representative of businesses in Great Britain.

Key Measures	Worst point	2011	2012	Medium- term target

Value drivers		Core	Core	Core
· Return on equity (1)	(31%)(2)	10.4%	9.8%	>12%
· Cost:income ratio (3)	97%(4)	60%	59%	<55%

Risk measures		Group	Group	Group
· Core Tier 1 ratio	4%(5)	9.7%⁽⁶⁾	10.3%	>10%
· Loan:deposit ratio	154%(7)	108%	100%	c.100%
· Short-term wholesale funding (STWF)	£297bn(8)	£102bn	£42bn	<10% TPAs(9)
· Liquidity portfolio (10)	£90bn(8)	£155bn	£147bn	>1.5x STWF
· Leverage ratio (11)	28.7x(12)	16.9x	15.0x	<18x

·	R&C NIM increased by 2 basis points, reflecting targeted reductions in lower yielding assets in International Banking, mostly offset by lower deposit margin compression in UK Retail, UK Corporate and US Retail & Commercial.
·	The fall in average interest-earning assets, principally arising from targeted reductions in Non-Core and International Banking, drove an 8% decrease in net interest income.

·	Offered more than £58 billion of loans and facilities to UK businesses, of which more than £30 billion was to SMEs.
·	Renewed £27 billion of UK business overdrafts, including £8 billion for SMEs.
·	Advanced £16 billion of UK home loans, including £3 billion to first time buyers.
·	Accounted for 36% of all SME lending, compared with overall customer market share of 24%⁽²⁾.
·	Grew net advances in its Lombard asset finance business by 8%, with advances to the manufacturing sector up 66%, and increased invoice finance advances by 4%.
·	Successfully restructured over 857 UK companies, helping to preserve 163,000 UK jobs.

·	the loan:deposit ratio improved by 8% over the year, reaching the medium-term target of 100% by the year-end and 12 months ahead of management's original 2013 goal;

·	short-term wholesale funding of £42 billion represented 5% of funded assets, versus the target of under 10%; and

·	the £147 billion liquidity portfolio covered short-term wholesale funding balances 3.5 times, comfortably above the target of more than 1.5 times.

(1)	For further analysis and details of adjustments refer to pages 78 and 79.
(2)	Retail & Commercial (R&C) comprises the UK Retail, UK Corporate, Wealth, International Banking, Ulster Bank and US R&C divisions.

·	Group net interest income declined by 8%, largely reflecting lower interest-earning asset balances.
·	Average interest-earning assets fell by £58 billion to £605 billion, reflecting strong progress on the run-down of Non-Core and targeted asset reductions in International Banking. Unsecured balances also declined in UK Retail.
·	Core NIM was stable at 2.16%, with the stronger balance sheet enabling a reduction in the size of the Group's liquidity buffer and offsetting a decline in R&C NIM.
·	The fall in R&C NIM was predominantly driven by weaker deposit margins in UK Retail and International Banking and lower asset yields in US Retail & Commercial, partly offset by improved margins in Wealth.

·	Average interest-earning assets fell by £10 billion, with the continued run-down of Non-Core, a smaller investment portfolio in US Retail & Commercial, targeted loan portfolio reductions in International Banking and customer repayments in UK Corporate.
·	Group NIM increased by 1 basis point to 1.95% as an improvement in Markets NIM due to lower reliance on external funding offset the lower Retail & Commercial balances.
·	R&C NIM held flat as an uplift in UK Retail NIM of 7 basis points, with higher mortgage balances and lower funding costs, was offset by the effect of lower interest rates on UK deposit hedges in Wealth and lower asset yields in US Retail & Commercial.

·	Non-interest income was down 6% at £14,092 million with higher profits on available-for-sale bond disposals in Group Treasury more than offset by a 10% decline in net fees and commissions, largely due to a decline in UK Retail fees as a result of weaker consumer spending volumes, and lower insurance net premium income.

·	Markets trading income was sustained, despite the significant reduction in trading assets through balance sheet management and optimisation.

·	The decrease in other operating income included the impact of the disposal of RBS Aviation Capital in Q2 2012, which resulted in lower rental income in Non-Core.

·	Insurance net premium income fell by 13%, primarily reflecting lower written premiums in Direct Line Group.

·	Income from trading activities declined by 26% due to a seasonal reduction in activity versus particularly favourable market conditions in Q3 2012, which led to a £419 million fall in Markets.

·	Other operating income fell by £441 million largely due to higher losses on disposals in Non-Core and lower gains on available-for-sale bond disposals in Group Treasury of £187 million versus £325 million in Q3 2012.

·	Income from trading activities was up by £325 million, reflecting lower Non-Core trading losses and a £61 million increase in profits on disposal of available-for-sale bonds. Partly offsetting this was lower IPED and Currency income in Markets.

·	Insurance net premium income was down by 6%, reflecting the flow through of lower written premiums across Motor, Home and International.

·	Operating expenses fell by £859 million, or 6%, with staff costs also down 6% (but broadly stable as a percentage of total income) as headcount fell by 9,600 to 137,200. The decline in expenses was largely driven by Non-Core run-down and lower variable compensation (particularly in Markets), including variable compensation award reductions and clawbacks following the settlements reached with UK and US authorities in relation to attempts to manipulate LIBOR. The run-off of discontinued businesses in Markets and International Banking, following the restructuring announced in January 2012, and simplification of processes and headcount reduction in UK Retail also yielded cost benefits.

·	Included in expenses in 2012 were £175 million costs associated with the technology incident and £160 million provision for various litigation and legacy conduct issues.

·	Business Services costs were down 6% in the year, reflecting increased benefits from earlier cost saving programmes as a number of initiatives reached their full run rate. Technology Services costs were 8% lower and Corporate Services costs 6% lower. Headcount was 2% down on 2011.

·	Insurance net claims decreased by 18% as lower volumes, higher reserve releases and improved claims experience more than offset an increase of £85 million in Home weather events claims.

·	The Core cost:income ratio was broadly flat at 59%, reflecting the ongoing focus on cost control in an environment where income growth remained challenging.

·	Operating expenses were 14% lower in the quarter with significant falls in Markets, down 36% reflecting the reduction in variable compensation following the LIBOR settlements, and the full impact of headcount reductions over the year. International Banking expenses were down 16% primarily as a result of lower variable compensation. More broadly across the Group, a continued focus on costs saw lower expenses, mostly staff related, in the majority of other divisions.

·	The Core cost:income ratio improved from 59% to 56% in the quarter as a 10% drop in income was more than offset by rigorous cost control, particularly through lower staff expenses.

·	The 14% decline in operating expenses was mainly driven by lower variable compensation following the LIBOR settlements. In addition, the restructuring of Markets and International Banking and further progress in the run-down of Non-Core drove expenses lower, with a significant proportion of this movement in staff expenses, through headcount reductions.

·	Insurance net claims increased by 15%, predominantly reflecting the non-repeat of a reserve release on two specific products in Q4 2011.

·	Loan impairment losses declined by £1,926 million to £5,315 million, primarily driven by a £1,518 million fall in Non-Core impairments, mostly in the Ulster Bank and commercial real estate portfolios.

·	Core loan impairments were down £408 million, or 12%, largely due to lower default rates in UK Retail and an improved credit environment for US Retail & Commercial, which helped drive loan impairment reductions of £259 million and £165 million, respectively. Core Ulster Bank impairments stabilised, though still at a very high level (£1,364 million in 2012 versus £1,384 million in 2011).

·	Loan impairments as a percentage of gross loans and advances improved by 30 basis points, principally reflecting the improved credit profile in Non-Core and the better US credit environment.

·	Loan impairment provisions rose to £21.3 billion, increasing coverage of risk elements in lending to 52%, compared with 49% in 2011.

·	Core loan impairment losses fell by 3%, principally reflecting quality improvements and lower default rates in UK Retail. Non-Core impairments ticked upwards, largely as a result of a £200 million increase in Ulster Bank portfolio impairments, driving an increase of £219 million in Group loan impairments to £1,402 million.

·	Loan impairments as a percentage of gross loans and advances increased by 20 basis points, as an increase in Non-Core was only partly offset by decreases in both UK Retail and Core Ulster Bank.

·	The continuing strengthening of RBS's credit profile resulted in a £4,649 million accounting charge in relation to own credit adjustment versus a gain of £1,914 million in 2011. This reflects a tightening of more than 340 basis points in the Group's cash market credit spreads over the year.

·	To reflect current experience of Payment Protection Insurance complaints received, RBS increased its PPI provision by £1,110 million in 2012, bringing the cumulative charge taken to £2.2 billion, of which £1.3 billion (59%) in redress had been paid by 31 December 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. The Group expects a significant percentage of the cash outflows associated with this provision to have occurred by the end of 2013.

·	In Q2 2012 RBS provided £50 million for the redress it expected to offer some small and medium-sized businesses classified as retail clients under FSA rules who had purchased structured collar products. On 31 January 2013 the FSA announced its findings following a pilot review of the sale of all interest rate hedging products, including vanilla hedging products, to clients classified as non-sophisticated, along with a framework for redress. As a result, a further charge of £650 million has been booked to meet the additional costs of redress to the broader SME customer set who bought these products, making a total of £700 million. The portfolio of interest rate hedging products under review comprises 5% structured collars, 78% vanilla hedging products and 17% vanilla caps. Of the interest rate hedging products sold, 74% were written in the period 2001-2008, when interest rates were significantly higher, with 46% of all sales to the real estate sector. Fewer than 10% of all cases were written with initial maturities longer than 10 years. Prior to the FSA review, RBS's sales processes had generally been found to be appropriate during the period, with 59 out of 62 adjudications by the Financial Ombudsman's Service in the bank's favour. This included 20 out of 20 adjudications relating to the disclosure of break costs. Two recent court cases also found in favour of RBS, including rulings on past sales processes and the adequacy of related disclosures.

·	A charge of £381 million was recognised in 2012 in relation to penalties and fines relating to the setting of LIBOR and other rates.

·	Integration and restructuring costs of £1,550 million increased by £486 million versus £1,064 million in 2011, primarily driven by costs incurred in relation to the strategic restructuring of Markets and International Banking (M&IB) that took place during 2012.

·	The Group recognised an impairment charge of £1.1 billion in 2011 in respect of available-for-sale Greek sovereign bonds. These bonds were sold in Q1 2012.

·	The Asset Protection Scheme (APS) is accounted for as a derivative and movements in fair value are recorded each quarter. The fair value charge was £44 million in 2012 versus £906 million in 2011.

·	Integration and restructuring costs increased from £257 million to £620 million, largely due to higher asset write-offs of £135 million in relation to the restructuring of M&IB.

·	A charge of £175 million was taken in Q4 2012 for the annual bank levy.

·	The provision for PPI was increased by £450 million in Q4 2012 and £400 million in Q3 2012. The Group also increased its provision in respect of redress it expects to offer for interest rate hedging products by £700 million in Q4 2012. A charge of £381 million was recognised in Q4 2012 in relation to penalties and fines relating to the setting of LIBOR and other rates.

·	A £394 million goodwill write-down was taken following the IPO of Direct Line Group in Q4 2012. The business is presented as a discontinued operation and its assets and liabilities are included in disposal groups on a statutory basis. A charge of £124 million was also taken for the write-off of intangible assets, principally as a result of exits from selective countries and lower revenue projections by Markets.

·	The own credit adjustment charge of £220 million was lower than the £472 million in Q4 2011, as a result of a relatively smaller tightening of spreads in Q4 2012 following significant tightening in the first three quarters of 2012.

·	The Group exited the APS in October 2012. No APS charge was booked in Q4 2012, compared with a charge of £209 million in Q4 2011.

Capital resources and ratios	31 December 2012	30 September 2012	31 December 2011

Core Tier 1 capital	£47bn	£48bn	£46bn
Tier 1 capital	£57bn	£58bn	£57bn
Total capital	£67bn	£63bn	£61bn
Risk-weighted assets
- gross	£460bn	£481bn	£508bn
- benefit of Asset Protection Scheme (APS)	-	(£48bn)	(£69bn)
Risk-weighted assets	£460bn	£433bn	£439bn
Core Tier 1 ratio (1)	10.3%	11.1%	10.6%
Core Tier 1 excluding capital relief provided by APS	10.3%	10.4%	9.7%
Tier 1 ratio	12.4%	13.4%	13.0%
Total capital ratio	14.5%	14.6%	13.8%

·	The Group's Core Tier 1 ratio was 10.3% compared with 9.7% in 2011, excluding the effect of the APS. The Group's headline Core Tier 1 ratio in 2011 included 90 basis points of APS benefit.

·	The Group's strengthened capital ratios largely reflect the significant reduction in risk profile, with gross risk-weighted assets down 9% to £460 billion, excluding the effect of the APS. The decline was principally driven by Non-Core (down £33 billion from disposals and portfolio run-off) and Markets (£19 billion lower reflecting continued focus on balance sheet management and risk reduction in the division).

·	The Core Tier 1 ratio was stable at 10.3%, excluding the effect of the APS.

·	Risk-weighted assets fell by 4%, excluding the effect of the APS, with declines in Non-Core and Markets exposures outweighing the impact of regulatory uplifts principally affecting UK Corporate and International Banking.