Final Results - Part 5 of 8 | Company Announcement

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Risk type	Definition	2011 key areas of focus
Capital, liquidity and funding risk	The risk that the Group has insufficient capital or is unable to meet its financial liabilities as they fall due.	Active run-down of capital intensive assets in Non-Core and other risk mitigation left the Core Tier 1 ratio strong at 10.6%, despite a £21 billion uplift in RWAs from the implementation of CRD III in December 2011. Refer to pages 130 to 135. Maintaining the structural integrity of the Group's balance sheet requires active management of both asset and liability portfolios as necessary. Strong term debt issuance and planned reductions in the funded balance sheet enabled the Group to strengthen its liquidity and funding position as market conditions worsened. Refer to pages 136 to 145.
Credit risk (including counterparty risk)	The risk that the Group will incur losses owing to the failure of a customer to meet its obligation to settle outstanding amounts.	During 2011, asset quality continued to improve, resulting in loan impairment charges 21% lower than in 2010 despite continuing challenges in Ulster Bank Group (Core and Non-Core) and corporate real estate portfolios. The Group continued to make progress in reducing key credit concentration risks, with credit exposures in excess of single name concentration limits declining 15% during the year and exposure to commercial real estate declining 14%. Refer to pages 148 to 180.
Country risk	The risk of material losses arising from significant country-specific events.	Sovereign risk increased in 2011, resulting in rating downgrades for a number of countries, including several eurozone members. This resulted in an impairment charge recognised by the Group in 2011 in respect of available-for-sale Greek government bonds. In response the Group further strengthened its country risk appetite setting and risk management systems during the year and brought a number of advanced countries under limit control. This contributed to a reduction in exposure to a range of countries. Refer to pages 181 to 204.

Risk type	Definition	2011 key areas of focus
Market risk	The risk arising from changes in interest rates, foreign currency, credit spreads, equity prices and risk related factors such as market volatilities.	During 2011, the Group continued to manage down its market risk exposure in Non-Core and reduce the ABS trading inventory such that the trading portfolio became less exposed to credit risk. Refer to pages 205 to 209.
Insurance risk	The risk of financial loss through fluctuations in the timing, frequency and/or severity of insured events, relative to the expectations at the time of underwriting.	During 2011, focus on insurance risk appetite resulted in the de-risking and significant re-pricing of certain classes of business and exiting some altogether.
Operational risk	The risk of loss resulting from inadequate or failed processes, people, systems or from external events.	During 2011, the Group took steps to enhance its management of operational risks. This was particularly evident in respect of risk appetite, the Group Policy Framework, risk assessment, scenario analysis and statistical modelling for capital requirements. The level of operational risk remains high due to the scale of structural change occurring across the Group, the pace of regulatory change, the economic downturn and other external threats, such as e-crime.
Compliance risk	The risk arising from non-compliance with national and international laws, rules and regulations.	During 2011, the Group managed the increased levels of scrutiny and legislation by enlarging the capacity of its compliance, anti-money laundering and regulatory affairs teams and taking steps to improve its operating model, tools, systems and processes.
Reputational risk	The risk of brand damage arising from financial and non-financial events arising from the failure to meet stakeholders' expectations of the Group's performance and behaviour.	In 2011, an Environmental, Social and Ethical (ESE) Risk Policy was developed with sector ESE risk appetite positions drawn up to assess the Group's appetite to support customers in sensitive sectors including defence, oil and gas. This also included the establishment of divisional reputational risk committees. Stakeholder engagement was broadened with the implementation of formal sessions between the Group Sustainability Commitee and relevant advocacy groups and non-governmental organisations.

Risk type	Definition	2011 key areas of focus
Business risk	The risk of lower-than-expected revenues and/or higher-than-expected operating costs.	Business risk is incorporated within the Group's risk appetite target for earnings volatility that was set in 2011.
Pension risk	The risk that the Group will have to make additional contributions to its defined benefit pension schemes.	In 2011, the Group focused on improved stress testing and risk governance mechanisms. This included the establishment of the Pension Risk Committee and the articulation of its view of risk appetite for the various Group pension schemes.

	31 December 2011	30 September 2011	31 December 2010
Risk-weighted assets (RWAs) by risk	£bn	£bn	£bn

Credit risk	344.3	346.8	385.9
Counterparty risk	61.9	72.2	68.1
Market risk	64.0	55.0	80.0
Operational risk	37.9	37.9	37.1

	508.1	511.9	571.1
Asset Protection Scheme relief	(69.1)	(88.6)	(105.6)

	439.0	423.3	465.5

Risk asset ratios	%	%	%

Core Tier 1	10.6	11.3	10.7
Tier 1	13.0	13.8	12.9
Total	13.8	14.7	14.0

Final Results - Part 5 of 8

Risk type

Definition

2011 key areas of focus

Risk type

Definition

2011 key areas of focus

Risk type

Definition

2011 key areas of focus

Companies

UK 100

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·	The increase in market risk RWAs of £9 billion in Q4 2011 reflects the impact of the new CRD III rules.

·	APS relief decreased by £19.5 billion in Q4 2011, reflecting pool movements, assets moving into default and changes in risk parameters.

	31 December 2011 £m	30 September 2011 £m	31 December 2010 £m

Shareholders' equity (excluding non-controlling interests)
Shareholders' equity per balance sheet	74,819	77,443	75,132
Preference shares - equity	(4,313)	(4,313)	(4,313)
Other equity instruments	(431)	(431)	(431)
	70,075	72,699	70,388

Non-controlling interests
Non-controlling interests per balance sheet	1,234	1,433	1,719
Non-controlling preference shares	(548)	(548)	(548)
Other adjustments to non-controlling interests for regulatory purposes	(259)	(259)	(259)
	427	626	912

Regulatory adjustments and deductions
Own credit	(2,634)	(2,931)	(1,182)
Unrealised losses on AFS debt securities	1,065	379	2,061
Unrealised gains on AFS equity shares	(108)	(88)	(25)
Cash flow hedging reserve	(879)	(798)	140
Other adjustments for regulatory purposes	571	523	204
Goodwill and other intangible assets	(14,858)	(14,744)	(14,448)
50% excess of expected losses over impairment provisions (net of tax)	(2,536)	(2,127)	(1,900)
50% of securitisation positions	(2,019)	(2,164)	(2,321)
50% of APS first loss	(2,763)	(3,545)	(4,225)
	(24,161)	(25,495)	(21,696)

Core Tier 1 capital	46,341	47,830	49,604

Other Tier 1 capital
Preference shares - equity	4,313	4,313	4,313
Preference shares - debt	1,094	1,085	1,097
Innovative/hybrid Tier 1 securities	4,667	4,644	4,662
	10,074	10,042	10,072

Deductions
50% of material holdings	(340)	(303)	(310)
Tax on excess of expected losses over impairment provisions	915	767	758
	575	464	448

Total Tier 1 capital	56,990	58,336	60,124

Movement in Core Tier 1 capital	2011 £m

At beginning of the year	49,604
Attributable loss net of movements in fair value of own debt	(3,449)
Foreign currency reserves	(363)
Decrease in non-controlling interests	(485)
Decrease in capital deductions including APS first loss	1,128
Other movements	(94)

At end of the year	46,341

	Credit risk	Counterparty risk	Market risk	Operational risk	Gross RWAs	APS relief	Net RWAs
31 December 2011	£bn	£bn	£bn	£bn	£bn	£bn	£bn

UK Retail	41.1	-	-	7.3	48.4	(9.4)	39.0
UK Corporate	69.4	-	-	6.7	76.1	(15.5)	60.6
Wealth	10.9	-	0.1	1.9	12.9	-	12.9
Global Transaction Services	12.4	-	-	4.9	17.3	-	17.3
Ulster Bank	33.6	0.6	0.3	1.8	36.3	(6.8)	29.5
US Retail & Commercial	53.4	1.0	-	4.4	58.8	-	58.8

Retail & Commercial	220.8	1.6	0.4	27.0	249.8	(31.7)	218.1
Global Banking & Markets	45.1	39.9	50.6	15.5	151.1	(8.5)	142.6
Other	9.9	0.2	-	0.7	10.8	-	10.8

Core	275.8	41.7	51.0	43.2	411.7	(40.2)	371.5
Non-Core	65.6	20.2	13.0	(5.5)	93.3	(28.9)	64.4

Group before RFS MI	341.4	61.9	64.0	37.7	505.0	(69.1)	435.9
RFS MI	2.9	-	-	0.2	3.1	-	3.1

Group	344.3	61.9	64.0	37.9	508.1	(69.1)	439.0

30 September 2011

UK Retail	41.4	-	-	7.3	48.7	(9.9)	38.8
UK Corporate	69.0	-	-	6.7	75.7	(16.9)	58.8
Wealth	11.0	-	0.1	1.9	13.0	-	13.0
Global Transaction Services	13.7	-	-	4.9	18.6	-	18.6
Ulster Bank	32.0	0.5	0.1	1.8	34.4	(6.7)	27.7
US Retail & Commercial	51.0	1.1	-	4.4	56.5	-	56.5

Retail & Commercial	218.1	1.6	0.2	27.0	246.9	(33.5)	213.4
Global Banking & Markets	46.1	35.1	37.6	15.5	134.3	(10.4)	123.9
Other	8.8	0.3	-	0.7	9.8	-	9.8

Core	273.0	37.0	37.8	43.2	391.0	(43.9)	347.1
Non-Core	71.0	35.2	17.2	(5.5)	117.9	(44.7)	73.2

Group before RFS MI	344.0	72.2	55.0	37.7	508.9	(88.6)	420.3
RFS MI	2.8	-	-	0.2	3.0	-	3.0

Group	346.8	72.2	55.0	37.9	511.9	(88.6)	423.3

31 December 2010

UK Retail	41.7	-	-	7.1	48.8	(12.4)	36.4
UK Corporate	74.8	-	-	6.6	81.4	(22.9)	58.5
Wealth	10.4	-	0.1	2.0	12.5	-	12.5
Global Transaction Services	13.7	-	-	4.6	18.3	-	18.3
Ulster Bank	29.2	0.5	0.1	1.8	31.6	(7.9)	23.7
US Retail & Commercial	52.0	0.9	-	4.1	57.0	-	57.0

Retail & Commercial	221.8	1.4	0.2	26.2	249.6	(43.2)	206.4
Global Banking & Markets	53.5	34.5	44.7	14.2	146.9	(11.5)	135.4
Other	16.4	0.4	0.2	1.0	18.0	-	18.0

Core	291.7	36.3	45.1	41.4	414.5	(54.7)	359.8
Non-Core	91.3	31.8	34.9	(4.3)	153.7	(50.9)	102.8

Group before RFS MI	383.0	68.1	80.0	37.1	568.2	(105.6)	462.6
RFS MI	2.9	-	-	-	2.9	-	2.9

Group	385.9	68.1	80.0	37.1	571.1	(105.6)	465.5

·	National implementation of increased capital requirements will begin on 1 January 2013;

·	There will be a phased five year implementation of new deductions and regulatory adjustments to Core Tier 1 capital commencing on 1 January 2014;

·	The de-recognition of non-qualifying non-common Tier 1 and Tier 2 capital instruments will be phased in over 10 years from 1 January 2013; and

·	Requirements for changes to minimum capital ratios, including conservation and countercyclical buffers, as well as additional requirements for Global Systemically Important Banks, will be phased in from 2013 to 2019.

·	Expected loss net of provisions;

·	Deferred tax assets not relating to timing differences;

·	Unrealised losses on available-for-sale securities; and

·	Significant investments in non-consolidated financial institutions.

·	Deposit growth: Core Retail & Commercial deposits rose by 9%, and together with Non-Core deleveraging, took the Group loan to deposit ratio to 108%, compared with 118% at the end of 2010.

·	Wholesale funding: £21 billion of net term wholesale debt was issued in 2011 from secured and unsecured funding programmes, across a variety of maturities and currencies.

·	Short-term wholesale funding (STWF): The overall level of STWF fell by £27 billion to £102 billion, below the 2013 target of circa £125 billion.

·	Liquidity portfolio: The liquidity portfolio of £155 billion was maintained above the 2013 target level of £150 billion against a backdrop of heightened market uncertainty in the second half of the year and was higher than STWF. This represents a £53 billion cushion over STWF.

	31 December 2011	31 September 2011	31 December 2010
Short-term wholesale funding	£bn	£bn	£bn

Deposits	32.9	41.8	34.7
Notes issued	69.5	99.8	95.0

STWF excluding derivative collateral	102.4	141.6	129.7
Derivative collateral	31.8	32.5	28.1

STWF including derivative collateral	134.2	174.1	157.8

Interbank funding excluding derivative collateral
- bank deposits	37.3	46.2	38.2
- bank loans	(24.3)	(33.0)	(31.3)

Net interbank funding	13.0	13.2	6.9

·	Short-term wholesale funding excluding derivative collateral declined £27.3 billion in 2011, from £129.7 billion to £102.4 billion. This is £52.9 billion lower than the Group's liquidity portfolio. Deleveraging in Non-Core and GBM has led to the reduced need for funding.

·	The Group's customer deposits grew by approximately £7.1 billion in 2011.

	31 December 2011		30 September 2011		31 December 2010
	£m	%	£m	%	£m	%

Deposits by banks
- central banks	3,680	0.5	3,568	0.5	6,655	0.9
- derivative cash collateral	31,807	4.6	32,466	4.4	28,074	3.8
- other	33,627	4.8	42,624	5.8	31,588	4.3

	69,114	9.9	78,658	10.7	66,317	9.0

Debt securities in issue
- conduit asset backed commercial paper (ABCP)	11,164	1.6	11,783	1.6	17,320	2.3
- other commercial paper (CP)	5,310	0.8	8,680	1.2	8,915	1.2
- certificates of deposits (CDs)	16,367	2.4	25,036	3.4	37,855	5.1
- medium-term notes (MTNs)	105,709	15.2	127,719	17.4	131,026	17.6
- covered bonds	9,107	1.3	8,541	1.1	4,100	0.6
- securitisations	14,964	2.1	12,752	1.7	19,156	2.6

	162,621	23.4	194,511	26.4	218,372	29.4
Subordinated liabilities	26,319	3.8	26,275	3.6	27,053	3.6

Notes issued	188,940	27.2	220,786	30.0	245,425	33.0

Wholesale funding	258,054	37.1	299,444	40.7	311,742	42.0

Customer deposits
- cash collateral	9,242	1.4	10,278	1.4	10,433	1.4
- other	427,511	61.5	425,125	57.9	420,433	56.6

Total customer deposits	436,753	62.9	435,403	59.3	430,866	58.0

Total funding	694,807	100.0	734,847	100.0	742,608	100.0

Disposal group deposits included above
- banks	1		288		266
- customers	22,610		1,743		2,267

	22,611		2,031		2,533

	Debt securities in issue
	Conduit ABCP	Other CP and CDs	MTNs	Covered bonds	Securitisations	Total	Subordinated liabilities	Total notes issued
	£m	£m	£m	£m	£m	£m	£m	£m	%

31 December 2011
Less than 1 year	11,164	21,396	36,302	-	27	68,889	624	69,513	36.8
1-3 years	-	278	26,595	2,760	479	30,112	3,338	33,450	17.7
3-5 years	-	2	16,627	3,673	-	20,302	7,232	27,534	14.6
More than 5 years	-	1	26,185	2,674	14,458	43,318	15,125	58,443	30.9

	11,164	21,677	105,709	9,107	14,964	162,621	26,319	188,940	100.0

30 September 2011
Less than 1 year	11,783	32,914	54,622	-	43	99,362	400	99,762	45.2
1-3 years	-	795	28,456	2,800	26	32,077	2,045	34,122	15.5
3-5 years	-	2	18,049	3,037	33	21,121	8,265	29,386	13.3
More than 5 years	-	5	26,592	2,704	12,650	41,951	15,565	57,516	26.0

	11,783	33,716	127,719	8,541	12,752	194,511	26,275	220,786	100.0

31 December 2010
Less than 1 year	17,320	46,051	30,589	-	88	94,048	964	95,012	38.7
1-3 years	-	702	47,357	1,078	12	49,149	754	49,903	20.3
3-5 years	-	12	21,466	1,294	34	22,806	8,476	31,282	12.8
More than 5 years	-	5	31,614	1,728	19,022	52,369	16,859	69,228	28.2

	17,320	46,770	131,026	4,100	19,156	218,372	27,053	245,425	100.0

	Year ended		Quarter ended
	31 December 2011	31 December 2010	31 December 2011	30 September 2011	31 December 2010
	£m	£m	£m	£m	£m

Public
- unsecured	5,085	12,887	-	-	775
- secured	9,807	8,041	3,223	1,721	1,725
Private
- unsecured	12,414	17,450	911	3,255	4,623
- secured	500	-	500	-	-

Gross issuance	27,806	38,378	4,634	4,976	7,123
Buy backs	(6,892)	(6,298)	(1,270)	(2,386)	(1,702)

Net issuance	20,914	32,080	3,364	2,590	5,421

	1-3 years	3-5 years	5-10 years	>10 years	Total
Year ended 31 December 2011	£m	£m	£m	£m	£m

MTNs	904	1,407	1,839	935	5,085
Covered bonds	-	1,721	3,280	-	5,001
Securitisations	-	-	-	4,806	4,806

	904	3,128	5,119	5,741	14,892

% of total	6	21	34	39	100

Year ended 31 December 2010

MTNs	1,445	2,150	6,559	2,733	12,887
Covered bonds	-	1,030	1,244	1,725	3,999
Securitisations	-	-	-	4,042	4,042

	1,445	3,180	7,803	8,500	20,928

% of total	7	15	37	41	100

·	In line with the Group's strategic plan, it has been an active issuer in recent years as it improved its liquidity and funding profile. Secured funding has increased as a proportion of total wholesale funding more recently as market dislocation and uncertainty over future regulatory developments have made unsecured markets less liquid.

·	As the Group delevers, with Non-Core and GBM third party assets decreasing and Retail & Commercial deposits increasing, net term debt issuance decreased from £32 billion in 2010 to £21 billion in 2011. The net requirement in 2012 is expected not to exceed £10 billion as further deleveraging should cover the differences.

·	The Group undertakes voluntary buy-backs of its privately issued debt in order to maintain client relationships and as part of its normal market making activities. These transactions are conducted at prevailing market rates.

·	In line with the Group's plan to diversify its funding mix, issuances were spread across G10 currencies and maturity bands, including £5.7 billion of public issuance with an original maturity of greater than 10 years.

·	The Group has issued approximately £2.8 billion since the year end, including a £1 billion public covered bond issuance and a US$1.2 billion securitisation.

(1)	Assets that have been pledged to the SPEs which itself is a subset of the total portfolio of eligible assets within a collateral pool.
(2)	Debt securities that have been sold to third party investors and represents a source of external wholesale funding.
(3)	Debt securities issued pursuant to own-asset securitisations where the debt securities are retained by the Group as a source of contingent liquidity where those securities can be used in repurchase agreements with central banks.
(4)	Cash deposits, £11.2 billion from mortgage repayments and £0.8 billion from other loan repayments held in the SPEs, to repay debt securities issued by the own-asset securitisation vehicles.

Assets pledged against liabilities	31 December 2011 £m	31 December 2010 £m

Debt securities	79,480	80,100
Equity shares	6,534	5,148

	31 December 2011		30 September 2011 Period end	31 December 2010 Period end
	Average	Period end	30 September 2011 Period end	31 December 2010 Period end
	£m	£m	£m	£m

Cash and balances at central banks	74,711	69,932	76,833	53,661
Treasury bills	5,937	-	4,037	14,529
Central and local government bonds (1)
- AAA rated governments and US agencies	37,947	29,632	29,850	41,435
- AA- to AA+ rated governments (2)	3,074	14,102	18,077	3,744
- governments rated below AA	925	955	700	1,029
- local government	4,779	4,302	4,700	5,672

	46,725	48,991	53,327	51,880
Other assets (3)
- AAA rated	21,973	25,202	24,186	17,836
- below AAA rated and other high quality assets	12,102	11,205	11,444	16,693

	34,075	36,407	35,630	34,529

Total liquidity portfolio	161,448	155,330	169,827	154,599

(1)	Includes FSA eligible government bonds of £36.7 billion at 31 December 2011 (30 September 2011 - £36.8 billion; 31 December 2010 - £34.7 billion).
(2)	Includes AAA rated US government guaranteed and US government sponsored agencies. The US government was downgraded from AAA to AA+ by S&P on 5 August 2011, although not by Moody's or Fitch. These securities are reflected here.
(3)	Includes assets eligible for discounting at central banks.

	Loan to deposit ratio		Customer funding gap
	Group	Core	Group
	%	%	£bn

31 December 2011	108	94	37
30 September 2011	112	95	52
30 June 2011	114	96	60
31 March 2011	116	96	67
31 December 2010	118	96	77

·	The Group's loan to deposit ratio improved 1,000 basis points to 108% during 2011, as loans declined and deposits grew.

·	The customer funding gap halved with Non-Core contributing £27 billion of the £37 billion reduction.

(1)	Available stable funding.
(2)	Deferred tax, insurance liabilities and other liabilities.
(3)	Prepayments, accrued income, deferred tax and other assets.

·	The NSFR increased by 10% in the year to 111%, with the funding cushion over term assets and undrawn commitments increasing from £4 billion to £51 billion.

·	Available stable funding decreased by £12 billion in the year as a result of a £30 billion reduction in long-term wholesale funding, including the move into short-term of approximately £20 billion of balances under the CGS. This was offset by a £19 billion increase in qualifying deposit balances, including classification of certain deposits as more stable, as some assumptions and methodologies were refined.

·	Term assets decreased in the year by £38 billion primarily reflecting Non-Core disposals and run-offs. The decrease in other assets is primarily due to the closures of certain equities businesses in Global Banking & Markets and other asset movements.

	Average	Period end	Maximum	Minimum
	£m	£m	£m	£m

31 December 2011	63	51	80	44
31 December 2010	58	96	96	30

Currency	31 December 2011 £m	31 December 2010 £m

Euro	26	33
Sterling	57	79
US dollar	61	121
Other	5	10

·	Interest rate exposure at 31 December 2011 was considerably lower than at 31 December 2010 but average exposure was 9% higher in 2011 than in 2010.

·	The reduction in US dollar VaR reflects, in part, changes in holding period assumptions following changes in Non-Core assets.

Potential favourable/(adverse) impact on NII	31 December 2011 £m	30 September 2011 £m	31 December 2010 £m

+ 100 basis points shift in yield curves	244	188	232
- 100 basis points shift in yield curves	(183)	(74)	(352)
Bear steepener	443	487
Bull flattener	(146)	(248)

·	The Group's interest rate exposure remains slightly asset sensitive, driven in part by changes to underlying business assumptions as rates rise. The impact of the steepening and flattening scenarios is largely driven by the investment of net free reserves.

·	The reported sensitivity will vary over time due to a number of factors such as market conditions and strategic changes to the balance sheet mix and should not therefore be considered predictive of future performance.