Final Results - Part 2 of 13

Companies

NATWEST GROUP (NWG)

UK 100

Latest directors dealings

3 minutes ago Dillistone Group
12 minutes ago SSP Group
43 minutes ago Greencoat Renewables (CDI)
55 minutes ago TotalEnergies SE
1 hour ago Prudential

All directors dealings today


	Page

Forward-looking statements	3

Presentation of information	4

Results summary - pro forma	5

Results summary - statutory	8

Pro forma results	9

Summary consolidated income statement	9

Condensed consolidated statement of comprehensive income	11

Summary consolidated balance sheet	12

Results summary	13

Divisional performance	23
UK Retail	26
UK Corporate	31
Wealth	34
Global Transaction Services	36
Ulster Bank	39
US Retail & Commercial	43
Global Banking & Markets	49
RBS Insurance	53
Central items	57
Non-Core	58

Condensed consolidated balance sheet	66

Commentary on condensed consolidated balance sheet	67

Average balance sheet	69

Condensed consolidated statement of changes in equity	71

Notes	74


	Page

Risk and balance sheet management	86

Presentation of information	86

Capital	88

Regulatory developments	91

Funding and liquidity risk	94

Interest rate risk	101

Structural foreign currency exposures	102

Credit risk	103

Market risk	135

Statutory results	142

Condensed consolidated income statement	143

Condensed consolidated statement of comprehensive income	144

Financial review	145

Condensed consolidated balance sheet	146

Commentary on condensed consolidated balance sheet	147

Condensed consolidated statement of changes in equity	149

Condensed consolidated cash flow statement	152

Notes	153

Average balance sheet	195

Capital resources and ratios	196

Risk factors	197

Statement of directors' responsibilities	199

Additional information	200


Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets

Appendix 2 Businesses outlined for disposal

Appendix 3 Additional risk management disclosures

Appendix 4 Asset Protection Scheme

	Quarter ended			Year ended
	31 December 2010	30 September 2010	31 December 2009	31 December 2010	31 December 2009
	£m	£m	£m	£m	£m

Core
Total income (1)	7,121	7,029	7,162	29,629	31,868
Operating expenses (2)	(3,583)	(3,517)	(3,788)	(14,385)	(14,954)
Insurance net claims	(937)	(998)	(1,173)	(4,046)	(3,769)
Operating profit before impairment losses and fair value of own debt (3)	2,601	2,514	2,201	11,198	13,145
Impairment losses	(930)	(782)	(1,288)	(3,780)	(4,678)
Operating profit before fair value of own debt	1,671	1,732	913	7,418	8,467
Fair value of own debt	582	(858)	270	174	(142)
Operating profit (3)	2,253	874	1,183	7,592	8,325

Non-Core
Total income (1)	338	888	108	3,033	(2,301)
Operating expenses (2)	(498)	(579)	(685)	(2,325)	(2,447)
Insurance net claims	(245)	(144)	(148)	(737)	(588)
Operating (loss)/profit before impairment losses (3)	(405)	165	(725)	(29)	(5,336)
Impairment losses	(1,211)	(1,171)	(1,811)	(5,476)	(9,221)
Operating loss (3)	(1,616)	(1,006)	(2,536)	(5,505)	(14,557)

Total
Total income (1)	7,459	7,917	7,270	32,662	29,567
Operating expenses (2)	(4,081)	(4,096)	(4,473)	(16,710)	(17,401)
Insurance net claims	(1,182)	(1,142)	(1,321)	(4,783)	(4,357)
Operating profit before impairment losses and fair value of own debt (3)	2,196	2,679	1,476	11,169	7,809
Impairment losses	(2,141)	(1,953)	(3,099)	(9,256)	(13,899)
Operating profit/(loss) before fair value of own debt	55	726	(1,623)	1,913	(6,090)
Fair value of own debt	582	(858)	270	174	(142)
Operating profit/(loss) (3)	637	(132)	(1,353)	2,087	(6,232)
Integration and restructuring costs	(299)	(311)	(228)	(1,032)	(1,286)
Gain on redemption of own debt	-	-	-	553	3,790
Asset Protection Scheme credit default swap - fair value changes	(725)	(825)	-	(1,550)	-
Other non-operating items	391	(111)	1,715	(297)	1,800
Profit/(loss) before tax (4)	4	(1,379)	134	(239)	(1,928)

Memo: Profit/(loss) before tax, pre APS	729	(554)	134	1,311	(1,928)

	Quarter ended			Year ended
Key metrics	31 December 2010	30 September 2010	31 December 2009	31 December 2010	31 December 2009

Performance ratios
Core
- Net interest margin	2.27%	2.30%	2.06%	2.23%	2.12%
- Cost:income ratio (5)	58%	58%	63%	56%	53%
- Return on equity	12.1%	12.6%	6.2%	13.3%	13.5%
- Adjusted earnings/(loss) per ordinary and B share from continuing operations	1.3p	(0.2p)	2.2p	2.7p	11.7p
- Adjusted earnings per ordinary and B share from continuing operations assuming normalised tax rate of 28%	1.5p	0.6p	1.2p	5.0p	9.5p
Non-Core
- Net interest margin	1.10%	1.05%	1.17%	1.16%	0.69%
- Cost:income ratio (5)	535%	78%	(1,713%)	101%	(85%)
Group
- Net interest margin	2.04%	2.05%	1.83%	2.01%	1.76%
- Cost:income ratio (5)	65%	60%	75%	60%	69%
Continuing operations
Basic (loss)/earnings per ordinary and B share (6)	-	(1.1p)	(1.2p)	(0.5p)	(6.3p)

	31 December 2010	30 September 2010	Change	31 December 2009	Change

Capital and balance sheet
Total assets	£1,453bn	£1,629bn	(11%)	£1,522bn	(5%)
Funded balance sheet (7)	£1,026bn	£1,080bn	(5%)	£1,084bn	(5%)
Loan:deposit ratio (Core - net of provisions)	96%	101%	(500bp)	104%	(800bp)
Loan:deposit ratio (Group - net of provisions)	117%	126%	(900bp)	135%	(1,800bp)
Risk-weighted assets - gross	£568bn	£592bn	(4%)	£566bn	-
Benefit of Asset Protection Scheme (APS)	(£106bn)	(£117bn)	(9%)	(£128bn)	(17%)
Risk-weighted assets - net of APS	£462bn	£475bn	(3%)	£438bn	5%
Total equity	£76bn	£77bn	(1%)	£80bn	(5%)
Core Tier 1 ratio*	10.7%	10.2%	50bp	11.0%	(30bp)
Tier 1 ratio	12.9%	12.5%	40bp	14.4%	(150bp)
Risk elements in lending (REIL)	£39bn	£38bn	3%	£35bn	11%
REIL as a % of gross loans and advances (8)	7.3%	7.0%	30bp	6.1%	120bp
Provision balance as % of REIL and potential problem loans (PPL)	46%	46%	-	42%	400bp
Tier 1 leverage ratio (9)	16.9x	18.0x	(6%)	17.0x	(1%)
Tangible equity leverage ratio (10)	5.5%	5.3%	20bp	5.2%	30bp
Net tangible equity per ordinary and B share	51.1p	51.8p	(1%)	51.3p	-

(1)	Excluding fair value of own debt, gain on redemption of own debt, strategic disposals and Asset Protection Scheme credit default swap - fair value changes.
(2)	Excluding amortisation of purchased intangible assets, integration and restructuring costs, bonus tax, gains on pensions curtailment and write-down of goodwill and other intangible assets.
(3)	Operating profit/(loss) before tax, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, 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.
(4)	Excluding write-down of goodwill and other intangible assets.
(5)	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.
(6)	Adjusted (loss)/profit from continuing operations attributable to ordinary and B shareholders divided by weighted average number of ordinary and B shares in issue. Refer to page 81.
(7)	Funded balance sheet represents total assets less derivatives.
(8)	Gross loans and advances to customers excluding reverse repurchase agreements (reverse repos).
(9)	Tier 1 leverage ratio is total tangible assets (after netting derivatives) divided by Tier 1 capital.
(10)	Tangible equity leverage ratio is total tangible equity divided by total tangible assets (after netting derivatives).

·	Income of £7,822 million for Q4 2010 and £31,868 million for full year 2010.

·	Operating loss before tax of £8 million for Q4 2010 and £399 million for full year 2010.

·	Core Tier 1 ratio 10.7%.

(1)	Including write-down of goodwill and other intangible assets, net of tax.
(2)	Analysis provided on pages 71, 118 and 181.

(1)	Excluding reverse repurchase agreements and stock borrowing.
(2)	Excluding repurchase agreements and stock lending.
(3)	Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.

(1)	Refer to further analysis on page 70.
(2)	Retail & Commercial comprises the UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank and US Retail & Commercial divisions.

·	Group net interest margin ('NIM') was 2.04%, stable with the third quarter. Higher margin in Retail and Commercial businesses (1 basis point) was more than offset by increased funding and liquidity costs (-2 basis points). Non-Core margins benefited from some interest recoveries (2 basis points) which were negated by lower money market interest income in GBM (-2 basis points).

·	NIM in the Core Retail & Commercial business improved by 1 basis point, with steady rebuilding of margins in the UK and US Retail businesses. Back book asset margins continue to strengthen as older business written at tighter margins rolled off, while front book asset margins have stabilised. Liability margins remain tight, reflecting robust competition and the Group's focus on deposit growth.

·	Group NIM was 21 basis points higher, as substantial progress in rebuilding asset margins from the trough levels recorded in 2008 and 2009 more than offset higher term funding and liquidity portfolio costs, as well as declining liability margins.

·	Net interest income in the Core Retail & Commercial divisions was up 8%, with NIM up 20 basis points from Q4 2009, reflecting the above factors.

·	An improvement of 25 basis points in Group NIM reflects expanding asset margins in Core UK Retail and Corporate divisions as well as in the US.

·	The run-off of low-yielding Non-Core assets contributed 7 basis points to the increase in Group NIM.

·	The Group NIM is affected by increased funding costs, with deposit margins still low, and negatively affected by the expansion of the liquidity portfolio, and higher costs arising from the successful execution of the term funding programme.

·	The increase in net fees and commissions principally reflected an increase in Non-Core general insurance underwriting income received in respect of legacy policies during Q4 2010. This increase in net fees and commissions is offset by an increase in insurance claims.

·	Income from trading activities declined, principally due to a change in assumption relating to the expected life of several trades and fair value write-downs on property exposures.

·	Other operating income fell, reflecting declines in the fair value of certain Non-Core property exposures.

·	Movements in fair value of own debt (FVOD) increased revenue by £582 million in the quarter. This reflected a widening of the Group's credit spreads driven by the European sovereign debt crisis and reversed the loss of the previous quarter.

·	Trading revenues in GBM were lower than in 2009, which saw unusually buoyant market conditions as rapidly falling interest rates generated significant revenue opportunities. This was more than offset by the improvement in Non-Core trading losses from £5,161 million for 2009 to £31 million for 2010 as underlying asset prices recovered, monoline spreads tightened and exposures were actively managed. The unwinding of some banking book hedges also helped to reduce trading losses.

·	Movements in FVOD have been volatile from quarter to quarter, but the full year impact was more limited, with FVOD generating a credit of £174 million for 2010 compared with a charge of £142 million in 2009.

	Quarter ended			Year ended
	31 December 2010	30 September 2010	31 December 2009	31 December 2010	31 December 2009
	£m	£m	£m	£m	£m

Profit/(loss) for the period (1)	1	(1,116)	(574)	(940)	(2,024)

Other comprehensive (loss)/income
Available-for-sale financial assets (2)	(1,131)	272	619	(361)	1,847
Cash flow hedges	(347)	508	217	198	893
Currency translation	25	(661)	(230)	610	(2,018)
Actuarial gains/(losses) on defined benefit plans	158	-	(3,756)	158	(3,756)

Other comprehensive (loss)/income before tax	(1,295)	119	(3,150)	605	(3,034)
Tax credit/(charge)	387	(252)	844	(15)	406

Other comprehensive (loss)/income after tax	(908)	(133)	(2,306)	590	(2,628)

Total comprehensive loss for the period	(907)	(1,249)	(2,880)	(350)	(4,652)

Total comprehensive loss recognised in the statement of changes in equity is attributable as follows:
Non-controlling interests	(5)	(4)	29	124	160
Preference shareholders	-	-	126	105	878
Paid-in equity holders	-	-	18	19	57
Ordinary and B shareholders	(902)	(1,245)	(3,053)	(598)	(5,747)

	(907)	(1,249)	(2,880)	(350)	(4,652)

	31 December 2010	30 September 2010	31 December 2009
	£m	£m	£m

Loans and advances to banks (1)	57,909	60,330	48,777
Loans and advances to customers (1)	502,748	528,049	554,654
Reverse repurchase agreements and stock borrowing	95,119	92,910	76,137
Debt securities and equity shares	239,678	248,165	265,055
Other assets	130,103	150,404	139,659

Funded assets	1,025,557	1,079,858	1,084,282
Derivatives	427,077	548,805	438,199

Total assets	1,452,634	1,628,663	1,522,481

Equity owners	75,132	75,600	77,736
Non-controlling interests	1,424	1,542	2,227
Subordinated liabilities	27,053	27,890	31,538
Bank deposits (2)	65,938	80,186	115,642
Customer deposits (2)	428,599	420,639	414,251
Repurchase agreements and stock lending	114,833	128,752	106,359
Derivatives, settlement balances and short positions	478,076	608,029	472,409
Other liabilities	261,579	286,025	302,319

Total liabilities and equity	1,452,634	1,628,663	1,522,481

Memo: Tangible equity (3)	55,940	56,487	55,104

	Quarter ended			Year ended
	31 December 2010	30 September 2010	31 December 2009	31 December 2010	31 December 2009
Operating expenses	£m	£m	£m	£m	£m

Staff costs	2,059	2,166	2,246	8,956	9,081
Premises and equipment	636	596	618	2,276	2,468
Other	938	869	1,075	3,716	3,979

Administrative expenses	3,633	3,631	3,939	14,948	15,528
Depreciation and amortisation	448	465	534	1,762	1,873

Operating expenses	4,081	4,096	4,473	16,710	17,401


General insurance	1,151	1,092	1,304	4,698	4,223
Bancassurance	31	50	17	85	134

Insurance net claims	1,182	1,142	1,321	4,783	4,357



Staff costs as a % of total income	28%	27%	31%	27%	31%

·	Expenses were broadly flat at £4,081 million driven by the benefits of the Group's efficiency programme offset by higher premises and equipment costs.

·	Insurance net claims were 4% higher, driven by an increase in Non-Core claims related to legacy business. RBS Insurance claims fell 5%, as bodily injury reserving has stabilised, providing a partial offset.

·	Operating expenses fell by 9% compared with Q4 2009 reflecting the realisation of cost saving initiatives, including a fall of 35% in Ulster Bank costs driven by the culmination of its business restructuring and restructuring programme.

·	Insurance claims decreased to £1,182 million driven by the £272 million strengthening of bodily injury reserves in Q4 2009, not repeated in 2010. This was partially offset by the impact of the unusually cold December in 2010.

·	The main driver of a 4% decrease in operating expenses is the recognition of benefits from the Group-wide efficiency programme. The programme continues to deliver material savings which have been funding investments to strengthen our Core franchises. Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013.

·	Premises and equipment costs fell by 8% in the year largely driven by efficiency cost savings, significant one-off property impairments recognised in 2009 and country exits following Non-Core disposals.

·	Insurance claims increased 10%, driven by an overall increase in bodily injury reserves, reflecting prior year claims and more claims being settled as periodic payment orders. Severe weather experienced during Q1 and Q4 2010 also drove up claims in the year.

·	Total impairments increased by 10% in Q4 2010. The increase was driven by higher specific impairments in Ulster Bank (Core and Non-Core) and UK Corporate. There was a reduction in collective impairments (UK Retail) and a net release of latent provisions overall reflecting a gradual improvement in the underlying credit environment.

·	The increase in Ulster Bank Group's (Core and Non-Core) quarter-on-quarter impairments of £190 million to £1,165 million reflects higher latent provisions recorded on the mortgage and property portfolios. UK Corporate impairments increased by £61 million, largely driven by a small number of specific impairment cases as well as increases in its collectively assessed portfolios.

·	Group impairments fell 31%, driven by the overall improvement in the economic environment.

·	In the Core businesses the largest decreases were in collective impairments (UK Retail), largely driven by lower arrears volumes on the unsecured portfolio, and in GBM, reflecting a general improvement in credit conditions and a release of latent loss provisions.

·	Non-Core specific impairments fell significantly from Q4 2009 levels, in line with the overall improvement in the economic environment.

·	Impairment losses were £9,256 million, compared with £13,899 million in 2009. The 33% decrease reflects an overall improvement in the economic environments in which the Group operates.

·	Impairments fell in all Core businesses, except Ulster Bank Group, which faced an economic environment that remains challenging, with rising default levels across both personal and corporate portfolios.

·	Impairments for Ulster Bank Group (Core and Non-Core) increased to £3,843 million compared with £1,927 million in 2009.

·	A significant proportion of the reduction in Core impairments relates to lower specific and latent provisions in UK Corporate, US Retail & Commercial and GBM.

·	Non-Core impairments fell by 41% in 2010 reflecting the gradual improvement in the economic environment through 2010 and lower specific provisions, alongside a non-repeat of a large single name loss seen in 2009.

(1)	Included in 'Income from trading activities', significantly all in Non-Core.
(2)	Credit derivative product companies.

·	Tightening credit spreads, a recovery in underlying asset prices and gains on sales of asset-backed products during 2010 contributed to significantly lower losses in 2010. Unwinding of some banking book hedges in 2010 also resulted in lower losses. Monoline losses of £2.4 billion in 2009 reflected widening credit spreads and lower recovery rates. CDPC losses were higher in 2009 due to losses on market risk hedges.

·	Other losses include credit valuation and other reserves against derivative counterparties other than monolines and CDPCs. Losses increased due to rating downgrades as well as other losses on specific deals.

·	Integration and restructuring costs were £299 million in Q4 2010, compared with £311 million in Q3 2010, as costs relating to country and business exits remain high.

·	Net gains of £502 million were booked on strategic disposals in Q4 2010, with a gain of £837 million on the sale of GMS partially offset by losses on the sale of certain project finance assets.

·	APS is accounted for as a credit derivative, and movements in the fair value of the contract are taken as non-operating items. The charge of £725 million in Q4 2010 reflects improving credit spreads on the portfolio of covered assets, as well as a decrease in covered assets from £205.4 to £194.7 billion.

·	Integration and restructuring costs were £299 million in Q4 2010, compared with £228 million in Q4 2009. Costs relating to the ABN AMRO integration have significantly declined although costs relating to country and business exits remain high.

·	Gains of £502 million were booked on strategic disposals in Q4 2010 compared with a loss on disposal of £166 million in Q4 2009. The loss in 2009 primarily related to the sale of part of the Latin American businesses.

●	The charge for the amortisation of purchased intangible assets increased to £369 million for 2010, reflecting the write down of brands and other intangibles following Non-Core disposals.

·	A gain of £553 million was booked associated with the liability management exercise undertaken in May 2010, through which the Group strengthened its Core Tier 1 capital base by repurchasing existing Tier 1 securities and exchanging selected existing Upper Tier 2 securities for new senior debt securities. A similar series of exchange and tender offers concluded in April 2009 resulted in a gain of £3,790 million.

·	Strategic disposal gains of £171 million primarily reflected the gain on the sale of GMS offset by losses booked in Q2 2010 on the restructuring of the life assurance business and on the sale of a number of Latin American businesses.

Final Results - Part 2 of 13

Non-interest income (excluding insurance net premium income)*

Operating expenses

Companies

UK 100

Latest directors dealings

●	The full year APS charge was £1,550 million (£1,116 million after tax).

●	Pension curtailment gains of £2,148 million were recognised in 2009 arising from changes to prospective pension benefits in the Group's main UK defined benefit scheme and certain other subsidiary schemes.

·	Core Tier 1 ratio improved in Q4 by 50 basis points to 10.7% principally reflecting the capital benefit from disposals coupled with reductions in RWAs due to Non-Core disposals.

·	Capital relief arising from APS continued to decline as the run-off of covered assets proceeds.

Balance sheet	31 December 2010	30 September 2010	31 December 2009

Total assets	£1,453bn	£1,629bn	£1,522bn
Funded balance sheet	£1,026bn	£1,080bn	£1,084bn
Loans and advances to customers (1)	£503bn	£528bn	£555bn
Customer deposits (2)	£429bn	£421bn	£414bn
Loan:deposit ratio (Core) (3)	96%	101%	104%
Loan:deposit ratio (Group) (3)	117%	126%	135%

(1)	Excluding reverse repurchase agreements and stock borrowing.
(2)	Excluding repurchase agreements and stock lending.
(3)	Net of provisions.

·	Total funded assets reduced by £58 billion over the course of 2010. Non-Core's funded assets fell by £16 billion in Q4 2010, of which £13 billion reflected disposals completed during the quarter. GBM assets fell by £24 billion in Q4, with low trading volumes in Q4 2010 resulting in a reduction in balances pending settlement.

·	Total loans and advances fell by £25 billion in Q4 2010 principally reflecting reductions in GBM and Non-Core. Core Retail & Commercial loans and advances to customers remained stable in Q4 2010 but have risen by £6 billion over the course of 2010, driven by growth in UK mortgages.

·	The Group has been particularly successful in attracting and retaining deposits, with customer deposits growing by £8 billion in Q4 2010 and by £14 billion for the full year. Combined with the loan reduction, the result has been that the Group's loan to deposit ratio has improved markedly from 135% in December 2009 to 117% at the end of 2010. The Core loan to deposit ratio improved to 96%, from 104% at the end of 2009.