Final Results - Part 3 of 13 | Company Announcement

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

Operating profit/(loss) before impairment losses by division
UK Retail	780	649	579	2,532	1,908
UK Corporate	552	580	530	2,224	2,052
Wealth	93	75	99	322	453
Global Transaction Services	270	312	228	1,097	1,012
Ulster Bank	105	110	73	400	281
US Retail & Commercial	169	198	134	823	589

Retail & Commercial	1,969	1,924	1,643	7,398	6,295
Global Banking & Markets	522	549	895	3,515	6,398
RBS Insurance	(9)	(33)	(170)	(295)	66
Central items	119	74	(167)	580	386

Core divisions before fair value of own debt	2,601	2,514	2,201	11,198	13,145
Non-Core	(405)	165	(725)	(29)	(5,336)

Group operating profit before impairment losses and fair value of own debt	2,196	2,679	1,476	11,169	7,809

Fair value of own debt
Global Banking & Markets	438	(598)	106	139	(49)
Central items	144	(260)	164	35	(93)

Group operating profit before impairment losses	2,778	1,821	1,746	11,343	7,667

Impairment losses by division
UK Retail	222	251	451	1,160	1,679
UK Corporate	219	158	190	761	927
Wealth	6	1	10	18	33
Global Transaction Services	3	3	4	9	39
Ulster Bank	376	286	348	1,161	649
US Retail & Commercial	105	125	153	517	702

Retail & Commercial	931	824	1,156	3,626	4,029
Global Banking & Markets	(5)	(40)	130	151	640
RBS Insurance	-	-	-	-	8
Central items	4	(2)	2	3	1

Core	930	782	1,288	3,780	4,678
Non-Core	1,211	1,171	1,811	5,476	9,221

Group impairment losses	2,141	1,953	3,099	9,256	13,899

·	Retail & Commercial pre-impairment operating profit improved by 18% to £7,398 million for the year ended 31 December 2010, but this was more than offset by weaker GBM and RBS Insurance performance given challenging environments. Non-Core improved significantly to a pre-impairment loss of £29 million.

·	Q4 2010 Core pre-impairment profit of £2,601 million exceeded Q3 2010's £2,514 million and Q4 2009's £2,201 million, reflecting Retail & Commercial's continued momentum.

·	For Q4 2010 relative to Q3 2010, Core impairments were up 19% to £930 million, with improvements in UK Retail and US Retail & Commercial more than offset by increases in Ulster Bank and UK Corporate.

·	For the year ended 31 December 2010 Group impairments fell 33%, as Non-Core reported substantially lower impairments, down 41%, while Core impairments were down 19%.

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

Operating profit/(loss) by division
UK Retail	558	398	128	1,372	229
UK Corporate	333	422	340	1,463	1,125
Wealth	87	74	89	304	420
Global Transaction Services	267	309	224	1,088	973
Ulster Bank	(271)	(176)	(275)	(761)	(368)
US Retail & Commercial	64	73	(19)	306	(113)

Retail & Commercial	1,038	1,100	487	3,772	2,266
Global Banking & Markets	527	589	765	3,364	5,758
RBS Insurance	(9)	(33)	(170)	(295)	58
Central items	115	76	(169)	577	385

Core	1,671	1,732	913	7,418	8,467
Non-Core	(1,616)	(1,006)	(2,536)	(5,505)	(14,557)

Group 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)

Group operating profit/(loss)	637	(132)	(1,353)	2,087	(6,232)

	Quarter ended			Year ended
	31 December 2010	30 September 2010	31 December 2009	31 December 2010	31 December 2009
	%	%	%	%	%

Net interest margin by division
UK Retail	4.08	4.02	3.74	3.91	3.59
UK Corporate	2.57	2.58	2.47	2.51	2.22
Wealth	3.32	3.44	3.94	3.37	4.38
Global Transaction Services	6.19	6.72	9.81	6.73	9.22
Ulster Bank	1.78	1.90	1.83	1.84	1.87
US Retail & Commercial	3.02	2.92	2.45	2.85	2.37

Retail & Commercial	3.24	3.23	3.04	3.14	2.89
Global Banking & Markets	0.94	1.14	0.89	1.05	1.38
Non-Core	1.10	1.05	1.17	1.16	0.69

Group net interest margin	2.04	2.05	1.83	2.01	1.76

	31 December 2010	30 September 2010		31 December 2009
	£bn	£bn	Change	£bn	Change

Risk-weighted assets by division
UK Retail	48.8	49.3	(1%)	51.3	(5%)
UK Corporate	81.4	84.7	(4%)	90.2	(10%)
Wealth	12.5	12.1	3%	11.2	12%
Global Transaction Services	18.3	18.6	(2%)	19.1	(4%)
Ulster Bank	31.6	32.6	(3%)	29.9	6%
US Retail & Commercial	57.0	64.1	(11%)	59.7	(5%)

Retail & Commercial	249.6	261.4	(5%)	261.4	(5%)
Global Banking & Markets	146.9	143.7	2%	123.7	19%
Other	18.0	19.9	(10%)	9.4	91%

Core	414.5	425.0	(2%)	394.5	5%
Non-Core	153.7	166.9	(8%)	171.3	(10%)

Group before benefit of Asset Protection Scheme	568.2	591.9	(4%)	565.8	-
Benefit of Asset Protection Scheme	(105.6)	(116.9)	(10%)	(127.6)	(17%)

Group	462.6	475.0	(3%)	438.2	6%

Final Results - Part 3 of 13

Companies

UK 100

Latest directors dealings

Employee numbers (full time equivalents in continuing operations rounded to the nearest hundred)	31 December 2010	30 September 2010	31 December 2009

UK Retail	23,800	24,400	25,500
UK Corporate	13,100	13,000	12,300
Wealth	5,200	5,100	4,600
Global Transaction Services	2,600	3,700	3,500
Ulster Bank	4,200	4,500	4,500
US Retail & Commercial	15,700	15,700	15,500
Retail & Commercial	64,600	66,400	65,900
Global Banking & Markets	18,700	19,500	17,900
RBS Insurance	14,500	14,400	13,900
Group Centre	4,700	4,600	4,200

Core	102,500	104,900	101,900
Non-Core	6,900	10,000	15,100

	109,400	114,900	117,000
Business Services	38,800	41,300	43,100
Integration	300	300	500
RFS Holdings minority interest	-	-	300

Group	148,500	156,500	160,900

(1)	Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 9% of the monthly average of divisional RWAs, adjusted for capital deductions); adjusted for timing of intra-quarter items.
(2)	Adjusted cost:income ratio is based on total income after netting insurance claims, and operating expenses.

	UK Retail continued to drive strong growth in customer deposits and secured lending. o Total deposits grew by £4.7 billion or 5% in Q4 2010, with two particularly strong campaigns in the quarter on fixed rate bonds and the e-savings account. o Mortgage balances increased 2% on Q3 2010. Although market activity has weakened, RBS mortgage application volumes increased in the quarter, with good retention rates among existing customers. Market share of new mortgage lending remained broadly stable at 11% in the quarter, well above the Group's 8% share of stock. o Unsecured lending fell 4% in the quarter, in line with the Group's continued focus on lower risk secured lending. o The loan to deposit ratio at 31 December 2010 was 110%, an improvement on the prior quarter's ratio of 115%.
·	Net interest income increased by 3%, with net interest margin at 4.08%, a 6 basis point improvement on Q3 2010. Asset margins widened, with customers continuing to roll on to standard variable rate mortgages, although the overall proportion of customers on standard variable rate mortgages decreased marginally. Liability margins fell further compared with Q3 2010, with highly competitive positioning in fixed term bonds and bonus savings accounts putting continued pressure on margins, compounded by a continuing reduction in yield on longer term current account hedges.

·	Non-interest income increased by 13% principally reflecting a profit share payment from RBS Insurance.

·	Expenses fell by 8% in the quarter, largely due to lower Financial Services Compensation Scheme Levy cost. Excluding the levy, costs declined by 2% on Q3 2010 with continued management focus on process re-engineering and technology investment. The cost:income ratio (net of insurance claims) improved from 53% to 46%, although excluding the profit share and FSCS levy benefits mentioned above, the cost:income ratio was broadly flat quarter-on-quarter.

·	Impairment losses improved by 12% in Q4 2010. Impairments are expected to stabilise subject to normal seasonal fluctuations and economic conditions remaining broadly stable. o Mortgage impairment losses were £30 million on a total book of £91 billion. The quarter on quarter decrease of £25 million primarily results from more conservative assumptions on recoveries implemented in Q3 2010. o The unsecured portfolio charge fell 2% to £192 million, on a book of £18 billion, with lower default volumes and improved collections performance.

·	Risk-weighted assets decreased in the quarter, with lower unsecured lending balances and improving portfolio credit metrics partly offset by growth in mortgages.

·	Operating profit increased by £430 million, with income up 13%, costs down 4% and impairments 51% lower than in Q4 2009.

·	Net interest income was 16% higher than Q4 2009, with strong mortgage balance growth and recovering asset margins across all products, which together more than offset the decline in liability margins.

·	Costs were 4% lower than in Q4 2009, driven by process re-engineering efficiencies within the branch network and operational centres. The cost:income ratio (net of insurance claims) improved from 55% to 46%.

·	Impairment losses decreased by 51% on Q4 2009 primarily reflecting lower arrears volumes on the unsecured portfolio.

·	Operating profit recovered strongly from the low levels recorded in 2008 and 2009 to £1,372 million. Profit before impairments was up £624 million or 33% and impairments fell by £519 million as the economic environment continued to recover.

·	The division has continued to focus in 2010 on growing secured lending while at the same time building customer deposits, thereby reducing the Group's reliance on wholesale funding. Loans and advances to customers grew 5%, with a change in mix from unsecured to secured as the Group actively sought to improve its risk profile. Mortgage balances grew by 9% while unsecured lending contracted by 10%. o Mortgage growth was due to good retention of existing customers and new business, the majority of which comes from the existing customer base. Gross mortgage lending market share remained broadly in line with 2009 at 12%, with the Group on track to meet its Government target on net mortgage lending. o Customer deposits grew 10% on 2009, reflecting the strength of the UK Retail customer franchise, which outperformed the market in an increasingly competitive environment. Savings balances grew by £8 billion or 13% with 1.8 million accounts opened, outperforming the market total deposit growth of 3%. Personal current account balances increased by 3% on 2009.

·	Net interest income increased significantly by 18% to £4,078 million, driven by strong balance sheet growth and repricing. Net interest margin improved by 32 basis points to 3.91%, with widening asset margins partially offset by contracting liability margins in the face of a competitive deposit market.

·	Non-interest income declined 11% to £1,327 million, principally reflecting the restructuring of current account overdraft fees in the final quarter of 2009.
·	Expenses decreased by 5%, with the cost:income ratio (net of insurance claims) improving from 61% to 53%. o Direct staff costs declined by 8%, largely driven by a clear management focus on process re-engineering enabling a 7% reduction in headcount. o RBS continues to progress towards a more convenient, lower cost operating model, with over 4.8 million active users of online banking and a record share of new sales achieved through direct channels. More than 7.8 million accounts have switched to paperless statements and 276 branches now utilise automated cash deposit machines.

·	Operating profit of £333 million was 21% lower, with income stable but impairments up by £61 million as a result of a small number of individual exposures.

·	Net interest income fell by 1% due to reduced lending income. Net loans and advances to customers were marginally down from the previous quarter, with above target levels of gross new lending offset by customer deleveraging. Customer deposits grew by £2 billion with deposit gathering initiatives continuing to deliver, albeit at fine margins, reflecting an intensely competitive market.

·	Non-interest income increased by 2%, supported by financial markets transaction income.

·	Total costs rose 6%, reflecting further investment in strategic initiatives and an increase in costs relating to higher value of financial market transactions in the quarter.

·	Impairments of £219 million were £61 million higher than Q3 2010 and slightly above recent quarterly trends, mainly due to a small number of specific impairment cases.

·	Operating profit decreased 2% to £333 million, with strong income growth offset by higher costs and specific impairments.

·	Net interest income rose by 4%, driven primarily by the lending book. Net interest margin improved by 10 basis points, reflecting the progress made in repricing the loan portfolio and a more favourable funding environment.

·	Non-interest income was 2% higher (£8 million), as a result of increased sales of financial market products and services and operating lease activity.

·	Total costs increased 3%, driven by investment in strategic initiatives, operating lease depreciation and costs related to financial markets income.

·	Impairments increased £29 million reflecting a small number of specific impairments in Q4 2010, partly offset by a reduction in latent loss provisions booked on the portfolio.

·	Operating profit grew by £338 million, 30%, compared with 2009, driven by strong income growth and significantly lower impairments, partially offset by higher costs.

·	UK Corporate performed strongly in the deposit market, with customer deposit balance growth of £12 billion contributing to a 16 percentage point improvement in the loan to deposit ratio in 2010. While customer lending increased only marginally (with gross lending largely offset by customer deleveraging) net interest income rose by £280 million, 12%, and net interest margin rose by 29 basis points driven primarily by the good progress made on loan repricing.

·	Non-interest income increased 3% reflecting strong refinancing levels and increased operating lease activity, partially offset by lower sales of financial market products.

·	Total costs increased 9% (£141 million) or 5% excluding the OFT penalty in Q1 2010, legal recovery in 2009 and the normalisation of staff compensation phasing.

·	Impairments were 18% lower, primarily as a result of higher charges taken during the first half of 2009 to reflect potential losses in the portfolio not yet specifically identified.

·	Return on equity increased from 9.4% to 12.1%, reflecting higher operating profit and lower RWAs as a result of improved risk metrics.

·	Operating profit increased 18% to £87 million in the fourth quarter, with stronger investment fee income and a reduction in expenses.

·	Total income increased 3% in Q4 2010 with net interest income also up 3%, primarily driven by growth in UK lending. Non-interest income rose 3% reflecting growth in assets under management and improved investment margins.

·	Deposits saw strong growth of 5%, reflecting the impact of new product launches within the UK and offshore markets. Pricing competition on new products has further compressed net interest margin, which narrowed by 12 basis points.

·	Loans and advances continued to grow strongly, increasing 4% in the quarter, primarily driven by UK mortgage lending, which rose by £300 million.

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

Income statement
Net interest income	1,088	1,056	939	4,078	3,452

Net fees and commissions	316	262	283	1,100	1,244
Other non-interest income (net of insurance claims)	51	64	60	227	251

Non-interest income	367	326	343	1,327	1,495

Total income	1,455	1,382	1,282	5,405	4,947

Direct expenses
- staff	(180)	(197)	(211)	(778)	(845)
- other	(68)	(134)	(46)	(474)	(453)
Indirect expenses	(427)	(402)	(446)	(1,621)	(1,741)

	(675)	(733)	(703)	(2,873)	(3,039)

Operating profit before impairment losses	780	649	579	2,532	1,908
Impairment losses	(222)	(251)	(451)	(1,160)	(1,679)

Operating profit	558	398	128	1,372	229


Analysis of income by product
Personal advances	275	248	273	993	1,192
Personal deposits	271	277	279	1,102	1,349
Mortgages	557	527	415	1,984	1,214
Bancassurance	52	60	56	229	246
Cards	251	243	228	962	869
Other	49	27	31	135	77

Total income	1,455	1,382	1,282	5,405	4,947


Analysis of impairments by sector
Mortgages	30	55	35	177	124

	31 December 2010	30 September 2010		31 December 2009
	£bn	£bn	Change	£bn	Change

Capital and balance sheet
Loans and advances to customers (gross)
- mortgages	90.6	89.1	2%	83.2	9%
- personal	11.7	12.4	(6%)	13.6	(14%)
- cards	6.1	6.1	-	6.2	(2%)
	108.4	107.6	1%	103.0	5%
Customer deposits (excluding bancassurance)	96.1	91.4	5%	87.2	10%
Assets under management (excluding deposits)	5.7	5.4	6%	5.3	8%
Risk elements in lending	4.6	5.0	(8%)	4.6	-
Loan:deposit ratio (excluding repos)	110%	115%	(500 bp)	115%	(500 bp)
Risk-weighted assets	48.8	49.3	(1%)	51.3	(5%)

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

Income statement
Net interest income	653	662	626	2,572	2,292

Net fees and commissions	251	244	222	952	858
Other non-interest income	79	80	100	371	432

Non-interest income	330	324	322	1,323	1,290

Total income	983	986	948	3,895	3,582

Direct expenses
- staff	(198)	(186)	(212)	(778)	(753)
- other	(93)	(81)	(69)	(359)	(260)
Indirect expenses	(140)	(139)	(137)	(534)	(517)

	(431)	(406)	(418)	(1,671)	(1,530)

Operating profit before impairment losses	552	580	530	2,224	2,052
Impairment losses	(219)	(158)	(190)	(761)	(927)

Operating profit	333	422	340	1,463	1,125


Analysis of income by business
Corporate and commercial lending	657	651	589	2,598	2,131
Asset and invoice finance	166	163	140	617	501
Corporate deposits	184	183	191	728	986
Other	(24)	(11)	28	(48)	(36)

Total income	983	986	948	3,895	3,582


Analysis of impairments by sector
Banks and financial institutions	12	15	6	20	15
Hotels and restaurants	18	6	40	52	98
Housebuilding and construction	47	62	(13)	131	106

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

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Banks and financial institutions	0.8%	1.0%	0.4%	0.3%	0.2%
Hotels and restaurants	1.1%	0.3%	2.4%	0.8%	1.5%
Housebuilding and construction	4.2%	5.5%	(1.2%)	2.9%	2.5%
Manufacturing	(0.7%)	0.2%	1.9%	-	0.9%
Other	(0.2%)	0.2%	0.2%	0.4%	0.5%
Private sector education, health, social work, recreational and community services	0.9%	-	1.4%	0.3%	0.9%
Property	1.1%	0.5%	0.4%	0.8%	0.8%
Wholesale and retail trade, repairs	1.3%	0.5%	0.9%	0.9%	0.7%
Asset and invoice finance	1.1%	0.2%	1.9%	0.6%	1.3%

	0.8%	0.6%	0.7%	0.7%	0.8%

·	Q4 2010 operating profit was 2% lower than Q4 2009. Marginally lower income and an increase in expenses were partially offset by a fall in impairments.

·	Deposits grew 2%, with growth most evident in the UK, where a number of new products were successfully launched in the quarter. These included notice accounts and fixed term products.

·	Lending performance was particularly strong, with strong client demand (especially in the UK) driving an 18% growth in balances and average lending margins improving by 29 basis points.

·	2010 operating profit fell by 28% driven by lower net interest income and higher expenses, partly offset by a 45% decline in impairments in the year.

·	Income declined by 5% primarily due to lower net interest income. Strong lending and investment income was offset by the impact of a competitive deposit market.

·	Expenses grew by 12% to £734 million. Direct expenses were up 5%, £23 million reflecting additional strategic investment. Indirect expenses increased by £55 million reflecting a change in allocation of Business Services costs.

·	Assets under management grew by 5% largely through improving market conditions. On a constant currency basis, assets fell 2% with valuation gains being offset by client losses in the international businesses, resulting from the private banker attrition previously experienced.

·	Operating profit decreased 14%, or 13% at constant exchange rates, reflecting the sale of GMS, which completed on 30 November 2010. Adjusting for the disposal, operating profit decreased 6%.

·	For the two months in Q4 before completion of the disposal, GMS recorded income of £80 million, total expenses of £50 million and an operating profit of £30 million compared with £123 million income, total expenses of £67 million and an operating profit of £56 million for Q3.

·	For the remainder of the business, overall income was marginally higher, with a strong increase in revenues from International Cash Management products.

·	Expenses increased by 3% or 2% on a constant foreign exchange basis and 8% excluding GMS, driven by higher marketing costs and investment in front office and support infrastructure.

·	Customer deposits increased by 7% to £69.9 billion as a result of higher international cash management balances. The loan to deposit ratio has fallen 100 basis points to 21%.

·	Third party assets increased by £1 billion, or £2 billion excluding GMS, due to an increase in Trade Finance loans and advances, partly offset by a decrease in loans and advances to banks.

·	Operating profit increased 19%, or 14% on a constant foreign exchange basis, with income broadly flat but a 10% decrease in costs. Adjusting for the disposal, operating profit increased 38%.

·	Total income remained broadly flat. Excluding GMS, income rose by 10% reflecting higher deposit balances, a strong performance in both Trade Finance and International Cash Management with improved Commercial Card transaction volumes partially offset by tighter deposit margins.

·	Expenses decreased by 10%, or 8% on a constant foreign exchange basis and 5% excluding GMS, driven largely by the realisation of cost saving initiatives and the timing of investment spend.

·	Customer deposits increased by £8.1 billion, or 13%, to £69.9 billion, driven by growth in interest-bearing balances in the International Cash Management business. Loans and advances increased by £1.7 billion, 13% to £14.4 billion mainly driven by growth in the Trade Finance business.

·	Operating profit increased 12%, or 10% on a constant foreign exchange basis, driven by a robust income performance (which has more than compensated for the loss of GMS income), good cost control and lower impairments. Adjusting for the disposal operating profit increased 21%.

·	For the eleven months before disposal, GTS booked income of £451 million and total expenses of £244 million for GMS, generating an operating profit of £207 million.

·	Income was up 3%, or 6% excluding GMS, reflecting higher deposit volumes in the International Cash Management business, growth in the Trade Finance business and improved Commercial Card transaction volumes.

·	Expenses were broadly in line with 2009, at £1,464 million, as increased investment in front office and support infrastructure was mitigated by tight management of business costs.

·	Third party assets increased by £6.8 billion, or £7.6 billion excluding GMS, as Yen clearing activities were brought in-house and loans and advances increased.

·	An operating loss of £271 million for the quarter was £95 million higher than Q3 2010, reflecting an increase in impairment losses.

·	Net interest income decreased by 6%, at constant exchange rates largely driven by higher wholesale market funding costs, resulting in a 12 basis points reduction in net interest margin to 1.78% for the quarter.

·	Loans to customers decreased by 2% in constant currency terms reflecting further maturing of the loan book and muted new business levels. Customer deposits have remained stable despite challenging market conditions, with strong growth in both current and savings accounts offset by lower wholesale balances, primarily driven by deterioration in the Republic of Ireland's sovereign debt ratings during the period.

·	Non-interest income increased by 7% in constant currency terms, reflecting a strong performance in fees across the corporate and retail businesses.

·	Expenses decreased by 4% on a constant currency basis, mainly driven by savings on business support services during the period.

·	Impairment losses increased to £376 million, up £90 million from Q3 2010, reflecting emerging losses on a deteriorating loan book where, in line with market trends, customer credit quality has worsened and has been impacted by further decline in Irish house prices.

·	Net interest income was 1% higher on a constant currency basis, with loan pricing actions partly offset by higher funding costs. Net interest margin has reduced by 5 basis points over the period, reflecting increased liquidity reserves.

·	Non-interest income decreased by 36% on a constant currency basis, reflecting a non-recurring gain of £38 million in Q4 2009. Excluding this gain, non-interest income was broadly flat.

·	Expenses fell by 35% in constant currency terms reflecting continued management focus on cost control coupled with a decrease in property charges.

·	Impairment charges increased by 13% on a constant currency basis, largely driven by higher losses on the mortgage portfolio.

·	Overall performance deteriorated in 2010, largely as a result of an increase in impairment losses of £512 million. Operating profit before impairment increased to £400 million, up 50% in constant currency terms, driven by the culmination of a bank-wide cost saving programme during 2010.

·	Net interest income increased by 1% on a constant currency basis as actions to increase asset margins were largely eroded by tightening deposit margins due to intensive market competition.

·	Non-interest income was 14% lower on a constant currency basis reflecting a non-recurring gain in Q4 2009.

·	Loans to customers fell by 5% in constant currency terms. As previously disclosed, on 1 July 2010 the division transferred a portfolio of development property assets to the Non-Core division, partially offset by a simultaneous transfer of a portfolio of retail mortgage assets to the core business.

·	Despite intense competition, customer deposit balances increased by 8% in constant currency terms over the year with strong growth across all deposit categories, driven by a focus on improving the bank's funding profile.

·	Expenses at constant exchange rates were 22% lower. The strong year-on-year performance in expenses was primarily driven by an increased focus on active management of the cost base, and the benefits derived from the business restructuring and cost-saving programme which commenced in 2009.

·	Impairment losses increased by £512 million to £1,161 million reflecting the deteriorating economic environment in Ireland and rising default levels across both personal and corporate portfolios. Lower asset values, particularly in property-related lending together with pressure on borrowers with a dependence on consumer spending have resulted in higher corporate loan losses, while higher unemployment, lower incomes and increased taxation have driven mortgage impairment increases.

·	Risk-weighted assets have increased due to deteriorating credit risk metrics.

·	Customer numbers increased by 3% during 2010, with a strong performance in current and savings accounts switchers.

·	Sterling strengthened relative to the US dollar during the fourth quarter, with the average exchange rate increasing by 2% compared with Q3 2010.

·	Performance is described in full in the US dollar-based financial statements set out on pages 45 and 46.

·	US Retail & Commercial returned a profit for the fourth consecutive quarter, posting an operating profit of $102 million compared with $113 million in the prior quarter. The decrease was substantially driven by the effects of legislative changes, principally related to the implementation of Regulation E, and lower mortgage banking income which decreased income by $21 million. Economic conditions in the division's core regions remain difficult, with lingering high unemployment, a low interest rate environment, soft housing market and subdued consumer activity.

·	Regulation E prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-off debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

·	Net interest income was down 1%. Loans and advances were in line with the previous quarter but net interest income continued to be negatively impacted by older, high-yielding housing related loans and securities running off and being replaced with lower yielding assets.

·	Customer deposits decreased 4%, principally through balance loss from higher cost term and time products, reflecting the continued impact of a changed pricing strategy. However, consumer checking balances grew by 1% and small business checking balances grew by 4%.

·	Net interest margin improved by 10 basis points to 3.02% substantially driven by the full quarter impact from a balance sheet restructuring carried out during the previous quarter.

·	Non-interest income was down 12%, reflecting a fall in mortgage banking income as rates rose from record low rates in the prior quarter, leading to a decrease in applications and lower gains on sales to the secondary market. Lower deposit fees of $14 million as a result of a full quarter impact of Regulation E legislative changes also impacted the quarterly movement, as did a gain on the sale of student loans of $14 million recognised in Q3 2010.

·	Total expenses were down 3%, driven by the positive impact of higher mortgage banking rates in Q4 2010 on the valuation of mortgage servicing rights and lower Federal Deposit Insurance Corporation (FDIC) deposit insurance levies of $28 million, partially offset by increased litigation costs.

·	Impairment losses were down 13% reflecting a continued improvement in the underlying credit environment, offset by higher impairments related to securities.

·	Operating profit increased to $102 million from an operating loss of $31 million largely reflecting higher net interest margins and lower impairments.

·	Net interest income was up 7% with net interest margin improving by 57 basis points to 3.02%. The margin improvement was primarily due to changes in deposit mix and new deposit pricing strategies, as well as a positive impact from a balance sheet restructuring carried out during Q3 2010.

·	Customer deposits were down 6%, reflecting the impact of a changed pricing strategy on low margin term and time products partly offset by strong growth achieved in checking balances. Consumer checking balances grew by 6% while small business checking balances grew by 11%.

·	Non-interest income was in line with Q4 2009 reflecting higher mortgage banking income, commercial banking fees and higher gains on the sale of securities offsetting lower fees impacted by Regulation E legislative changes in 2010.

·	Total expenses were broadly in line with Q4 2009.

·	Impairment losses declined 33%, following a gradual improvement in the underlying credit environment offset by higher impairments related to securities.

·	Operating profit of $473 million represented a marked improvement from an operating loss of $174 million with income up 7%, expenses down 2% and impairment losses down 27%.

·	Net interest income was up 7%, despite a smaller balance sheet, with net interest margin improving by 48 basis points to 2.85%.

·	Non-interest income was up 7% reflecting higher mortgage banking and debit card income, commercial banking fees and higher gains on securities realisations. This was partially offset by lower deposit fees which were impacted by Regulation E legislative changes in 2010. In addition, gains of $330 million were recognised on the sale of available-for-sale securities as part of the balance sheet restructuring exercise, but these were almost wholly offset by losses crystallised on the termination of swaps hedging fixed-rate funding.

·	Total expenses were down 2%, reflecting a $113 million credit related to changes to the defined benefit pension plan in Q2 2010, and lower FDIC deposit insurance levies, partially offset by the impact of changing rates on the valuation of mortgage servicing rights and litigation costs.

·	Impairment losses declined 27%, following significant loan reserve building in 2009 and a gradual improvement in the underlying credit environment, offset by higher impairments related to securities. Loan impairments as a proportion of loans and advances decreased from 1.4% to 1.0%.

(1)	Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)	Compensation ratio is based on staff costs as a percentage of total income, excluding the fair value of own debt.

·	Operating profit, excluding fair value of own debt, fell 11% to £527 million. Revenue was up slightly but this was more than offset by an increase in non-recurrent legal costs and a lower credit to impairments.

·	Excluding fair value of own debt, revenue increased by 2%, reflecting continued investor uncertainty driven by the European sovereign debt crisis. Rates-money markets was adversely impacted by reduced client activity, although excluding the division's funding activities, the Money Markets business remained profitable. Portfolio income benefited from an uplift in market derivative values.

·	In the Currencies and Rates Flow businesses client activity remained subdued in Q4 2010.

·	Credit Markets continued to perform well in Q4 2010 and benefited from higher fees in the Syndicate business.

·	Movements in fair value of own debt increased revenue by £438 million in the quarter. This reflects a widening of the Group's credit spreads driven by the European sovereign debt crisis and largely reversed the loss of the previous quarter.

·	Total costs increased by £60 million in the quarter reflecting the timing of investment spend as well as legal costs related to business and corporate activities. Staff costs fell 11% during Q4 2010, as a result of cost synergies from long term investment and integration programmes.

·	Specific impairments of £80 million were incurred on a small number of individual exposures, but specific losses remain low, and were offset in Q4 by recoveries and by a release of latent loss provisions, reflecting lower balance sheet usage combined with a general improvement in credit conditions.

·	Third party assets fell by £24 billion during Q4 2010 reflecting a seasonal decline in activity, and a disciplined approach to balance sheet utilisation.

·	The increase in risk-weighted assets was driven by regulatory changes in relation to risk weightings of large exposures, partially offset by a reduction in the banking book.

·	Excluding fair value of own debt, return on equity of 10.2% - down from 11.6% in Q3 2010 - reflected the generally quiet late Q4 trading conditions and the increase in risk-weighted assets.

·	Operating profit decreased by 31%, excluding fair value of own debt, driven by a fall in revenue only partially offset by improved impairments.

·	Excluding the movement in fair value on own debt, revenue fell 19%. This was due to a slowdown in client activity during 2010, especially in the Rates Flow and Money Markets businesses.

·	The fall in Equities reflected a very quiet Q4 2010 and the non-repeat of gains on retail-issued notes and other recoveries, both recognised in Q4 2009. Increased revenue in Portfolio Management reflected lower costs associated with balance sheet management activity during Q4 2010.

·	Impairments improved significantly compared with Q4 2009, with Q4 2010 benefiting from more benign credit conditions, lower balance sheet usage and a release of latent loss provisions.