Half Yearly Report: Part 2

Companies

NATWEST GROUP (NWG)

UK 100

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Capital management
Pillar 2A and MDA	5
Capital resources	7
Leverage exposure	8
Risk-weighted assets	9

Liquidity and funding risk
Liquidity risk	13
Funding risk	15

Credit risk
Loans and related credit metrics	17
Debt securities	22
Derivatives	23
Key loan portfolios	25

Market risk
Trading portfolios	34
Non-trading portfolios	36

Country risk
Key points	40
Country exposures	42

Risk type	Overview
Capital and leverage	· RBS's CET1 ratio: continued to strengthen from 11.2% at the end of 2014 to 12.3% at 30 June 2015, an improvement of 110 basis points. · Key milestones were: o the reduction of CFG ownership interest to 40.8%; and o the continued run down of RCR and CIB assets. · RWAs: continued to decline with a £30 billion reduction from the 2014 year end to £326 billion, £26 billion above the year end 2015 target of £300 billion, following reductions in CIB (£19.1 billion) and RCR (£7.6 billion). · Leverage ratio (under the revised 2014 Basel III leverage ratio framework and the 2015 CRR Delegated Act): 4.6% compared with 4.2% at the end of 2014 reflecting capital strength and leverage exposure reduction, from £940 billion to £875 billion, principally in CIB. · RBS plans to issue £4-5 billion of end-point CRR compliant Additional Tier 1, of which £2 billion is planned to be issued in 2015.
Liquidity and funding	· Liquidity position continues to be robust: the liquidity portfolio of £161 billion at 30 June 2015 covered short-term wholesale funding by more than six times. Excluding CFG, the liquidity portfolio was £148 billion. Short-term wholesale funding reduced to £25 billion, due to term debt maturities. · Liquidity portfolio increased by £10.8 billion in the six months to 30 June 2015 mainly driven by CIB and RCR run-down, Citizens share disposals and continuation of sales from RBS N.V. treasury portfolio. · Liquidity coverage ratio (LCR) improved by five percentage points to 117% since the year end; excluding Citizens the LCR was 118%. From 1 October 2015, RBS will be required by the PRA to have a LCR of at least 80%. · Net stable funding ratio (NSFR) at 30 June 2015 was 115% in total and 112% excluding Citizens, broadly unchanged from 2014 year end. · The loan:deposit ratio fell to 92% at 30 June 2015, primarily reflecting asset reductions and a stable deposit base. · Based on its current assessment of the Financial Stability Board's proposals, RBS may issue £3-£5 billion of qualifying debt per annum between 2015 and 2019 to meet future total loss absorbing capacity requirements.
Conduct and legal	RBS continued to remediate historical conduct issues. RBS co-operated with global regulators on investigations into the foreign exchange market and the more significant penalties were settled. Litigation and conduct costs were £1.3 billion in H1 2015 compared with £0.25 billion in H1 2014. The conduct risk framework was further embedded in Conduct and Regulatory Affairs' new operating model, focussing assurance coverage and testing towards customer outcomes.

Risk type	Overview
Country	RBS continued to maintain a cautious stance as it becomes a UK-centred bank with a focus on Western Europe. Total eurozone net balance sheet exposure decreased by £12 billion or 12% to £85.6 billion in the first half of 2015. Eurozone periphery exposures decreased by £7.4 billion or 24%, to £24.0 billion. Most of this reduction was in Italy, driven by maturity of derivative transactions and higher short positions due to uncertainty around Greece, and in Ireland, reflecting RCR portfolio sales and currency movements. Total exposure to Greece was reduced from £0.4 billion to £110 million and £86 million after the effect of credit mitigation. Exposure to Russia remained under strict control and continued to be reviewed regularly against international sanctions.
Operational	The risks associated with RBS's transformation plan are being closely monitored. Separate to this activity, in June, there was a one or two day delay to payments applied to some customer accounts. A detailed investigation is underway into the root cause of the problem - the findings will be used to reduce the risk of recurrence.
Regulatory	The level of regulatory risk remained high, given the large volume of regulatory change still impacting the industry. Various legacy conduct issues also continued to be managed.
Reputational	The most material threats to RBS's reputation continued to be as a result of conduct and operational-related matters: RBS was the subject of investigations and review by a number of regulators, some of which resulted in fines and public censure. The failure of IT systems in June 2015 also impacted customers, with reputational damage to the bank.
Business	RBS further reduced its business risk profile by continuing to scale back CIB's business activities and by pursuing RCR's asset disposal strategy.
Strategic	2015 has seen further progress in RBS's shift towards the UK and the retail and commercial banking segments to achieve a lower risk profile. Capital ratios continued to increase further towards targets which, when attained, will provide RBS with increased strategic options

●	4.5% Pillar 1 minimum CET1 ratio;
●	2.5% Capital conservation buffer;
●	1.9% Pillar 2A CET1 ratio; and
●	1.5% Global Systemically Important Institution buffer.

Capital resources
	End-point CRR basis (1)			PRA transitional basis (1)
	30 June	31 March	31 December	30 June	31 March	31 December
	2015	2015	2014	2015	2015	2014
	£m	£m	£m	£m	£m	£m

Shareholders' equity (excluding
non-controlling interests)
Shareholders' equity	56,064	56,808	57,246	56,064	56,808	57,246
Preference shares - equity	(4,313)	(4,313)	(4,313)	(4,313)	(4,313)	(4,313)
Other equity instruments	(634)	(634)	(784)	(634)	(634)	(784)
	51,117	51,861	52,149	51,117	51,861	52,149

Regulatory adjustments and deductions
Own credit	345	609	500	345	609	500
Defined benefit pension fund
adjustment	(250)	(245)	(238)	(250)	(245)	(238)
Cash flow hedging reserve	(435)	(1,109)	(1,029)	(435)	(1,109)	(1,029)
Deferred tax assets	(1,206)	(1,140)	(1,222)	(1,206)	(1,140)	(1,222)
Prudential valuation adjustments	(366)	(393)	(384)	(366)	(393)	(384)
Goodwill and other intangible assets	(7,198)	(7,619)	(7,781)	(7,198)	(7,619)	(7,781)
Expected losses less impairments	(1,319)	(1,512)	(1,491)	(1,319)	(1,512)	(1,491)
Other regulatory adjustments	(635)	(327)	(585)	(612)	(305)	(855)

	(11,064)	(11,736)	(12,230)	(11,041)	(11,714)	(12,500)

CET1 capital	40,053	40,125	39,919	40,076	40,147	39,649

Additional Tier 1 (AT1) capital
Qualifying instruments and related
share premium subject to phase out	-	-	-	6,709	5,092	5,820
Qualifying instruments issued by
subsidiaries and held by third parties	-	-	-	-	1,114	1,648

AT1 capital	-	-	-	6,709	6,206	7,648

Tier 1 capital	40,053	40,125	39,919	46,785	46,353	47,117

Qualifying Tier 2 capital
Qualifying instruments and related
share premium	5,433	5,734	5,542	10,141	6,254	6,136
Qualifying instruments issued by
subsidiaries and held by third parties	2,748	2,955	3,175	3,432	6,716	7,490

Tier 2 capital	8,181	8,689	8,717	13,573	12,970	13,626

Total regulatory capital	48,234	48,814	48,636	60,358	59,323	60,743

	CET1	Tier 2	Total
	£m	£m	£m

At 1 January 2015	39,919	8,717	48,636
Loss for the year net of movements in fair value of own credit	(308)	-	(308)
Share capital and reserve movements in respect of employee share schemes	161	-	161
Ordinary shares issued	150	-	150
Foreign exchange reserve	(1,166)	-	(1,166)
AFS reserves	(55)	-	(55)
Decrease in goodwill and intangibles deduction	583	-	583
Deferred tax assets	16	-	16
Prudential valuation adjustments	18	-	18
Excess of expected loss over impairment provisions	172	-	172
Dated subordinated debt issues/(maturities)	-	(50)	(50)
Net dated subordinated debt/grandfathered instruments	-	(76)	(76)
Foreign exchange movements	-	(400)	(400)
Other movements	563	(10)	553

At 30 June 2015	40,053	8,181	48,234

				Credit derivatives (2)
	Derivatives other than credit derivatives (1)				Non-
	<1 year	1-5 years	>5 years	Qualifying	qualifying	Total
Derivative notionals	£bn	£bn	£bn	£bn	£bn	£bn
30 June 2015
Interest rate	9,642	6,631	3,850			20,123
Exchange rate	3,403	505	288			4,196
Equity	42	16	2			60
Credit				78	22	100

Total	13,087	7,152	4,140	78	22	24,479

31 December 2014

Interest rate	11,069	10,423	5,839			27,331
Exchange rate	3,649	720	306			4,675
Equity	42	33	2			77
Commodities	1	-	-			1
Credit				99	26	125

Total	14,761	11,176	6,147	99	26	32,209

(1)	Derivative potential future exposures (PFE) are calculated based on the notional value of the contracts and is dependent on the type of contract. For contracts other than credit derivatives the PFE is based on the type and maturity of the contract after the effect of netting arrangements.
(2)	The PFE on credit derivatives is based on add-on factors determined by the asset quality of the referenced instrument. Qualifying credit derivatives attract a PFE add-on of 5% and have reference securities issued by public sector entities, multilateral development banks or other investment grade issuers. Non-qualifying credit derivatives attract a PFE add-on of 10%.

Weighted undrawn commitments*
		Ulster	Commercial	Private		Central
	UK PBB	Bank	Banking	Banking	CIB	items	CFG	RCR	Total
30 June 2015	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn

Unconditionally cancellable items (1)	3.2	0.4	1.2	0.1	3.6	2.6	1.8	-	12.9
Items with a 20% CCF	0.1	-	0.4	-	2.0	0.1	0.3	-	2.9
Items with a 50% CCF	5.4	0.6	15.0	0.7	22.5	0.8	7.9	0.3	53.2
Items with a 100% CCF	0.1	0.1	2.2	0.4	7.7	3.6	1.4	0.2	15.7

	8.8	1.1	18.8	1.2	35.8	7.1	11.4	0.5	84.7

31 December 2014

Unconditionally cancellable items (1)	3.1	0.1	1.0	0.2	2.4	-	1.8	-	8.6
Items with a 20% CCF	0.4	-	0.7	0.1	3.2	-	0.4	-	4.8
Items with a 50% CCF	4.8	1.0	9.8	1.4	36.8	1.6	7.8	0.5	63.7
Items with a 100% CCF	0.1	0.3	2.2	0.8	10.2	3.9	1.5	0.3	19.3

	8.4	1.4	13.7	2.5	52.6	5.5	11.5	0.8	96.4

	Credit risk RWAs
	Non-counterparty	Counterparty	Total
	£bn	£bn	£bn

At 1 January 2015	264.7	30.4	295.1
Foreign exchange movement	(3.5)	0.1	(3.4)
Business movements	(12.9)	(3.3)	(16.2)
Risk parameter changes	(4.1)	-	(4.1)
Methodology changes	(0.2)	-	(0.2)
Model updates	0.7	(0.1)	0.6
Other changes	0.3	0.4	0.7

At 30 June 2015	245.0	27.5	272.5

Modelled (1)	143.7	24.2	167.9
Non-modelled	101.3	3.3	104.6

	245.0	27.5	272.5

	Market risk RWAs			Operational
	CIB	Other	Total	risk RWAs	Total
	£bn	£bn	£bn	£bn	£bn

At 1 January 2015	18.9	5.1	24.0	36.8	60.8
Business and market movements	(0.8)	(0.9)	(1.7)	(5.2)	(6.9)

At 30 June 2015	18.1	4.2	22.3	31.6	53.9

Modelled (1)	15.4	3.3	18.7	-	18.7
Non-modelled	2.7	0.9	3.6	31.6	35.2

	18.1	4.2	22.3	31.6	53.9

Presentation of information	1
General overview	2


	EAD post CRM (1,2)			RWAs (1)			RWA density
	AIRB	STD	Total	AIRB	STD	Total	AIRB	STD	Total
30 June 2015	£m	£m	£m	£m	£m	£m	%	%	%

Sector cluster
Sovereign
Central banks	47,477	55,729	103,206	1,868	1	1,869	4	-	2
Central government	16,564	12,287	28,851	1,652	162	1,814	10	1	6
Other sovereign	3,958	7,473	11,431	671	327	998	17	4	9

Total sovereign	67,999	75,489	143,488	4,191	490	4,681	6	1	3

Financial institutions (FI)
Banks	27,831	2,387	30,218	12,822	569	13,391	46	24	44
Other FI (2)	35,420	20,727	56,147	15,982	9,380	25,362	45	45	45
SSPEs (3)	14,282	2,326	16,608	5,480	4,078	9,558	38	175	58

Total FI	77,533	25,440	102,973	34,284	14,027	48,311	44	55	47

Corporates
Property
- UK	42,808	3,493	46,301	21,824	3,478	25,302	51	100	55
- Ireland	4,077	15	4,092	912	15	927	22	100	23
- Other Western Europe	3,526	484	4,010	1,520	503	2,023	43	104	50
- US	1,036	8,024	9,060	519	8,059	8,578	50	100	95
- RoW	1,639	361	2,000	1,115	335	1,450	68	93	73

Total property	53,086	12,377	65,463	25,890	12,390	38,280	49	100	58
Natural resources
- Oil and gas	11,145	2,043	13,188	5,401	1,856	7,257	48	91	55
- Mining and metals	2,438	613	3,051	2,058	641	2,699	84	105	88
- Other	13,793	974	14,767	5,227	759	5,986	38	78	41
Transport
- Shipping	6,322	2,731	9,053	4,186	2,745	6,931	66	101	77
- Other	19,794	3,091	22,885	8,310	2,734	11,044	42	88	48
Manufacturing	25,070	8,408	33,478	10,801	8,219	19,020	43	98	57
Retail and leisure	21,388	8,095	29,483	12,786	7,981	20,767	60	99	70
Services	21,919	7,973	29,892	12,901	8,028	20,929	59	101	70
TMT (4)	10,131	2,785	12,916	5,513	2,671	8,184	54	96	63

	EAD post CRM (1,2)			RWAs (1)			RWA density
	AIRB	STD	Total	AIRB	STD	Total	AIRB	STD	Total
31 December 2014	£m	£m	£m	£m	£m	£m	%	%	%

Sector cluster
Sovereign
Central banks	44,007	50,539	94,546	1,632	78	1,710	4	-	2
Central government	16,373	9,944	26,317	1,775	61	1,836	11	1	7
Other sovereign	4,936	6,548	11,484	1,250	386	1,636	25	6	14

Total sovereign	65,316	67,031	132,347	4,657	525	5,182	7	1	4

Financial institutions (FI)
Banks	32,777	2,081	34,858	15,089	488	15,577	46	23	45
Other FI (2)	41,420	22,535	63,955	15,585	9,960	25,545	38	44	40
SSPEs (3)	17,504	2,634	20,138	6,216	4,410	10,626	36	167	53

Total FI	91,701	27,250	118,951	36,890	14,858	51,748	40	55	44

Corporates
Property
- UK	48,081	3,463	51,544	23,736	3,390	27,126	49	98	53
- Ireland	7,541	31	7,572	1,283	33	1,316	17	106	17
- Other Western Europe	4,625	431	5,056	2,321	445	2,766	50	103	55
- US	1,334	7,481	8,815	722	7,551	8,273	54	101	94
- RoW	2,048	284	2,332	1,296	249	1,545	63	88	66

Total property	63,629	11,690	75,319	29,358	11,668	41,026	46	100	54
Natural resources
- Oil and gas	15,704	1,876	17,580	6,864	1,665	8,529	44	89	49
- Mining and metals	3,744	635	4,379	2,602	660	3,262	69	104	74
- Other	16,173	1,070	17,243	6,367	861	7,228	39	80	42
Transport
- Shipping	8,332	2,571	10,903	5,790	2,575	8,365	69	100	77
- Other	21,268	3,297	24,565	9,176	2,865	12,041	43	87	49
Manufacturing	29,450	8,430	37,880	12,673	8,257	20,930	43	98	55
Retail and leisure	24,564	8,262	32,826	14,940	8,027	22,967	61	97	70
Services	23,489	8,426	31,915	13,327	8,350	21,677	57	99	68
TMT (4)	13,555	2,790	16,345	7,079	2,806	9,885	52	101	60

(1)	Regulatory permissions to model counterparty credit risk exposure is independent from the scope of applying AIRB methodology. As such, standardised EAD and RWA will incorporate an element of modelled counterparty credit risk exposure.
(2)	Exposure at default post credit risk mitigation reflects an estimate of the extent to which a bank will be exposed under a specific facility, in the event of the default of a counterparty; AIRB: advanced internal ratings based; STD: standardised.
(3)	Non-bank financial institutions, such as US agencies, insurance companies, pension funds, hedge and leverage funds, broker-dealers and non-bank subsidiaries of banks.
(4)	Securitisation structured purpose entities primarily relate to securitisation related vehicles.
(5)	Telecommunications, media and technology.

The table below analyses the movement in end-point CRR RWAs by segment during the half year.

		Ulster	Commercial	Private		Central
	UK PBB	Bank	Banking	Banking	CIB	items	CFG	RCR	Total
Total RWAs	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn

At 1 January 2015	42.8	23.8	64.0	11.5	107.1	16.3	68.4	22.0	355.9
Foreign exchange movement	-	(1.5)	(0.3)	0.1	(1.0)	-	(0.3)	(0.4)	(3.4)
Business movements	(0.6)	(0.4)	1.1	(0.8)	(18.3)	(0.6)	1.7	(5.2)	(23.1)
Risk parameter changes (1)	(1.3)	(0.7)	(0.2)	-	0.3	(0.2)	-	(2.0)	(4.1)
Methodology changes (2)	-	-	(0.2)	-	-	-	-	-	(0.2)
Model updates (3)	(0.2)	-	-	-	1.4	(0.6)	-	-	0.6
Other changes	0.3	-	2.5	(1.0)	(1.5)	0.4	-	-	0.7

At 30 June 2015	41.0	21.2	66.9	9.8	88.0	15.3	69.8	14.4	326.4

Credit risk
- non-counterparty	32.0	19.6	60.7	8.2	38.6	14.1	64.0	7.8	245.0
- counterparty	-	0.1	-	-	22.9	0.6	0.9	3.0	27.5
Market risk	-	-	-	0.1	18.1	0.1	-	4.0	22.3
Operational risk	9.0	1.5	6.2	1.5	8.4	0.5	4.9	(0.4)	31.6

Total RWAs	41.0	21.2	66.9	9.8	88.0	15.3	69.8	14.4	326.4

·	RWAs fell by £29.5 billion to £326.4 billion in the first half of 2015 principally in CIB and RCR.
·	CIB reduced RWAs by £19 billion to £88 billion in line with expected business run-off as it implemented the new strategy. These reductions included:
	○	regional loan portfolio disposals and run-offs (£6.8 billion), including US corporate loan portfolio sales to Mizuho (£3.2 billion);
	○	US asset-backed product exit (£2.3 billion);
	○	other trading portfolio disposals (£2.1 billion);
	○	restructuring of certain derivative transactions (£1.7 billion); and
	○	run down of the trade finance in GTS in line with contractual maturities (£3.2 billion).
·	RCR disposal and run-off strategy continued to progress, resulting in RWA reductions of £7.6 billion.
·	Improvements in credit quality metrics contributed to RWA decreases in Ulster Bank and UK PBB.
·	Sterling strengthening against the euro and US dollar resulted in lower RWAs in Ulster Bank and CIB.
·	Commercial Banking RWAs at 30 June 2015 included the transfer of UK Corporate coverage from CIB (£2.3 billion) and Private Banking RBSI (£1.5 billion).
·	Annual recalculation of operational risk resulted in a £5.2 billion RWA reduction, primarily £3.4 billion in CIB and £0.4 billion in both UK PBB and Private Banking.
·	In terms of RWA density for AIRB portfolios:
	○	other sovereign density decreased from 25% to 17% following the sale of term loans in RCR;
	○	non-bank financial institution density increased from 38% to 45% primarily reflecting close-out of a large low risk-weighted exposure and implementation of new LGD and PD models;
	○	commercial property RWA density increased overall principally due to the impact of RCR disposals, including defaulted assets; and
	○	the increase in RWA density for oil and gas and mining and metal sectors reflected implementation of the new large corporate PD model for mining exposures.

(1)	RBS's liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows under the worst of three internal severe stress scenarios (a market-wide stress, an idiosyncratic stress and a combination of both) in accordance with PRA guidance on Individual Liquidity Adequacy Assessment.
(2)	Within the EU, the LCR is due to come into effect from 1 October 2015 on a phased basis, and replace the current PRA regime from this date. RBS monitors the LCR based on its internal interpretations of the EU Delegated Act rules for the implementation of the LCR. Consequently, RBS's ratio may change over time and may not be comparable with those of other financial institutions.
(3)	Pending further guidelines from the EU and the PRA, RBS uses its own interpretation of the proposals from the BCBS recommendations to calculate the NSFR. Consequently RBS's ratio may change over time and may not be comparable with those of other financial institutions. The ratio is due to come into effect from 1 January 2018.

	Liquidity value
	Period end				Average
	UK DLG (1)	CFG	Other	Total	Quarter	H1 2015
30 June 2015	£m	£m	£m	£m	£m	£m

Cash and balances at central banks	73,218	1,183	1,406	75,807	71,113	66,392
Central and local government bonds
AAA rated governments	3,932	12	1,033	4,977	5,609	6,529
AA- to AA+ rated governments and US agencies	10,202	9,845	2,852	22,899	21,154	20,285
Below AA rated governments	-	-	-	-	80	91
Local government	-	-	-	-	-	24

	14,134	9,857	3,885	27,876	26,843	26,929

Primary liquidity	87,352	11,040	5,291	103,683	97,956	93,321
Secondary liquidity (2)	54,667	2,085	1,022	57,774	57,586	57,024

Total liquidity value	142,019	13,125	6,313	161,457	155,542	150,345

Total carrying value	177,485	14,199	7,262	198,946


	Short-term wholesale		Total wholesale		Net inter-bank
	funding (1)		funding		funding (2)
	Excluding	Including	Excluding	Including	Deposits	Loans (3)	Net
	derivative	derivative	derivative	derivative			inter-bank
	collateral	collateral	collateral	collateral			funding
	£bn	£bn	£bn	£bn	£bn	£bn	£bn

30 June 2015	25.0	47.0	76.4	98.4	13.5	(12.3)	1.2
31 March 2015	27.2	55.3	84.0	112.1	14.3	(14.8)	(0.5)
31 December 2014	27.8	53.3	90.5	116.0	15.4	(13.3)	2.1
30 September 2014	31.4	53.9	94.4	116.9	16.5	(18.2)	(1.7)
30 June 2014	33.6	55.1	101.6	123.1	17.7	(19.3)	(1.6)

(1)	Short-term wholesale funding is funding with a residual maturity of less than one year.
(2)	Excludes derivative cash collateral.
(3)	Principally short-term balances.

The table below shows RBS's principal funding sources excluding repurchase agreements (repos).

		30 June 2015			31 December 2014
		Short-term	Long-term		Short-term	Long-term
		less than	more than	Total	less than	more than	Total
		1 year	1 year	Total	1 year	1 year	Total
		£m	£m	£m	£m	£m	£m

Deposits by banks
derivative cash collateral		21,993	-	21,993	25,503	-	25,503
other deposits		11,938	1,521	13,459	13,137	2,294	15,431

		33,931	1,521	35,452	38,640	2,294	40,934
Debt securities in issue
commercial paper		154	-	154	625	-	625
certificates of deposit		1,413	196	1,609	1,695	149	1,844
medium-term notes		7,842	22,199	30,041	7,741	29,007	36,748
covered bonds		2,625	3,861	6,486	1,284	5,830	7,114
securitisations		8	4,699	4,707	10	5,564	5,574

		12,042	30,955	42,997	11,355	40,550	51,905
Subordinated liabilities		1,057	18,852	19,909	3,274	19,857	23,131

Notes issued		13,099	49,807	62,906	14,629	60,407	75,036

Wholesale funding		47,030	51,328	98,358	53,269	62,701	115,970

Customer deposits
derivative cash collateral (1)		11,133	-	11,133	13,003	-	13,003
financial institution deposits		47,274	1,547	48,821	46,359	1,422	47,781
personal deposits		188,191	5,337	193,528	185,781	6,121	191,902
corporate deposits		157,200	1,832	159,032	159,782	2,403	162,185

Total customer deposits		403,798	8,716	412,514	404,925	9,946	414,871

Total funding excluding repos		450,828	60,044	510,872	458,194	72,647	530,841

Of which CFG:
Wholesale funding		4,529	1,332	5,861
Total customer deposits		62,064	1,727	63,791
Total funding excluding repos		66,593	3,059	69,652

					Credit metrics
	Gross loans to		REIL	Provisions	REIL as a %		Provisions	YTD
					of gross	Provisions	as a % of	Impairment	YTD
					loans to	as a %	gross loans	losses/	Amounts
	Banks	Customers			customers	of REIL	to customers	(releases)	written-off
30 June 2015	£m	£m	£m	£m	%	%	%	£m	£m

UK PBB	1,023	130,688	3,232	2,131	2.5	66	1.6	(17)	439
Ulster Bank	2,495	22,603	4,190	2,410	18.5	58	10.7	(52)	46

PBB	3,518	153,291	7,422	4,541	4.8	61	3.0	(69)	485

Commercial Banking	510	91,009	2,284	898	2.5	39	1.0	27	120
Private Banking	1,176	13,520	150	47	1.1	31	0.3	(3)	1

CPB	1,686	104,529	2,434	945	2.3	39	0.9	24	121

CIB	13,717	57,956	221	143	0.4	65	0.2	(29)	28
Central items	2,385	2,039	1	1	-	100	-	(2)	-
CFG	1,438	61,960	1,240	532	2.0	43	0.9	89	156
RCR	567	11,006	7,396	5,141	67.2	69	46.7	(355)	4,981

	23,311	390,781	18,714	11,303	4.8	60	2.9	(342)	5,771

31 December 2014

UK PBB	641	129,848	3,778	2,604	2.9	69	2.0	268	728
Ulster Bank	1,381	24,719	4,775	2,711	19.3	57	11.0	(365)	131

PBB	2,022	154,567	8,553	5,315	5.5	62	3.4	(97)	859

Commercial Banking	486	86,008	2,506	955	2.9	38	1.1	77	436
Private Banking	972	16,599	226	76	1.4	34	0.5	(5)	37

CPB	1,458	102,607	2,732	1,031	2.7	38	1.0	72	473

CIB	16,910	72,957	197	206	0.3	105	0.3	(7)	-
Central items	2,178	619	7	6	1.1	86	1.0	(12)	55
CFG	1,728	60,142	1,330	536	2.2	40	0.9	194	300
RCR	516	21,909	15,400	10,946	70.3	71	50.0	(1,320)	3,591

	24,812	412,801	28,219	18,040	6.8	64	4.4	(1,170)	5,278

·	Loans to banks decreased by £1.5 billion with a strategy-driven reduction of £3.2 billion in CIB, which was partially offset by some increases in other segments. Liquidity management saw an increase in Ulster Bank of £1.1 billion and £0.4 billion in UK PBB.

·	Customer loans fell by £22.0 billion: CIB decreased by £15.0 billion and RCR by £10.9 billion; Commercial Banking and UK PBB saw net growth of £5.0 billion and £0.8 billion respectively.

·	Risk elements in lending (REIL) at £18.7 billion was 4.8% of gross customer loans, a significant improvement on the £28.2 billion (or 6.8%) six months ago. This reflects the success of RCR's disposal strategy, particularly in relation to Irish assets. REIL is now covered 60% by impairment provisions, lower than 64% as a result of the disposals.

·	In UK PBB, gross customer loans increased by £0.8 billion to £130.7 billion. Mortgage lending was up by £2.2 billion, £1.8 billion in Q2 2015, reflecting targeted growth partially offset by decreases in unsecured lending. Impairments and credit metrics continued to improve. REIL as a percentage of gross loans fell from 2.9% to 2.5% due to repayments of £494 million, reflecting improved asset quality and write-offs of £439 million. Impairment release reflected recoveries on the back of improved economic conditions.

·	Ulster Bank: gross customers lending was £2.1 billion lower primarily driven by the weakening euro. Significant growth in new lending volumes was more than offset by continued customer deleveraging including a reduction in the tracker mortgage portfolio. Improved economic conditions and lower observable defaults have resulted in recoveries contributing to an impairment release of £52 million.

·	In Commercial Banking, gross customer lending increased by £5.0 billion, of which £2.4 billion related to transfers from Private Banking and £2.1 billion to transfers from CIB, partially offset by a £0.5 billion decrease in legacy portfolios. REIL as a percentage of gross loans continued to decrease falling from 2.9% to 2.5%. The overall reduction in REIL reflects a low number of new individual cases.

·	CIB: gross loans fell by £15.0 billion largely through asset disposals throughout the regions, repayments and exit of non-strategic clients in GTS and included sectors such as oil and gas and shipping. There were also transfers to Commercial Banking (£2.1 billion). REIL increases were seen in shipping, electric and gas sectors.

·	CFG gross loans to customers increased by £1.8 billion or 3.0% to £62.0 billion, reflecting growth in the retail and wholesale portfolio. Impairments and REIL were broadly unchanged.

·	RCR saw a significant reduction in gross customer loans - £6.5 billion in commercial real estate, £3.3 billion in other corporate and £1.1 billion in asset finance - as the execution of its disposal and run-down strategy continued. REIL fell by £8.0 billion to £7.4 billion and provisions decreased by £5.8 billion to £5.1 billion as a consequence. This contributed to the significant improvements in credit metrics in both RCR and RBS overall.


					Credit metrics
30 June 2015					REIL as a	Provisions	Provisions	Impairment
		Gross			% of gross	as a %	as a % of	losses/	Amounts
		loans	REIL	Provisions	loans	of REIL	gross loans	(releases)	written-off
		£m	£m	£m	%	%	%	£m	£m

Central and local government		7,644	15	10	0.2	67	0.1	9	-
Finance		37,464	258	172	0.7	67	0.5	(5)	52
Personal	- mortgages	150,222	4,951	1,319	3.3	27	0.9	17	120
	- unsecured	30,187	1,705	1,389	5.6	81	4.6	144	351
Property		44,127	7,105	4,559	16.1	64	10.3	(45)	3,952
Construction		5,639	489	335	8.7	69	5.9	(44)	216
of which: CRE		36,396	7,191	4,608	19.8	64	12.7	(65)	3,948
Manufacturing		20,127	351	243	1.7	69	1.2	4	65
Finance leases (1)		13,835	119	90	0.9	76	0.7	(3)	16
Retail, wholesale and repairs		16,860	655	444	3.9	68	2.6	-	173
Transport and storage		11,233	625	254	5.6	41	2.3	-	252
Health, education and leisure		14,995	512	234	3.4	46	1.6	-	122
Hotels and restaurants		7,475	581	315	7.8	54	4.2	10	240
Utilities		4,698	100	45	2.1	45	1.0	(15)	20
Other		26,275	1,220	922	4.6	76	3.5	(83)	183
Latent		-	-	946	-	-	-	(331)	n/a

Customers		390,781	18,686	11,277	4.8	60	2.9	(342)	5,762

Geographic regional analysis
UK - residential mortgages		115,661	1,235	174	1.1	14	0.2	15	23
- personal lending		14,964	1,454	1,254	9.7	86	8.4	84	287
- property		34,009	3,760	1,768	11.1	47	5.2	65	1,957
- construction		3,915	398	245	10.2	62	6.3	48	169
- other		112,252	2,431	1,684	2.2	69	1.5	(295)	474

Total		280,801	9,278	5,125	3.3	55	1.8	(83)	2,910

Europe - residential mortgages		14,052	2,801	1,001	19.9	36	7.1	(42)	16
- personal lending		1,171	57	52	4.9	91	4.4	(6)	3
- property		3,967	3,271	2,747	82.5	84	69.2	(101)	1,993
- construction		1,251	86	86	6.9	100	6.9	(91)	47
- other		12,515	1,658	1,510	13.2	91	12.1	(86)	615

Total		32,956	7,873	5,396	23.9	69	16.4	(326)	2,674

US - residential mortgages		20,508	915	144	4.5	16	0.7	44	81
- personal lending		12,306	177	66	1.4	37	0.5	66	61
- property		5,574	50	20	0.9	40	0.4	(8)	2
- construction		450	-	-	-	-	-	(1)	-
- other		29,505	157	346	0.5	220	1.2	(32)	12

Total		68,343	1,299	576	1.9	44	0.8	69	156

RoW - residential mortgages		1	-	-	-	-	-	-	-
- personal lending		1,746	17	17	1.0	100	1.0	-	-
- property		577	24	24	4.2	100	4.2	(1)	-
- construction		23	5	4	21.7	80	17.4	-	-
- other		6,334	190	135	3.0	71	2.1	(1)	22

Total		8,681	236	180	2.7	76	2.1	(2)	22

Customers		390,781	18,686	11,277	4.8	60	2.9	(342)	5,762

Banks		23,311	28	26	0.1	93	0.1	-	9

·	HFT: Holdings of government and ABS decreased, principally in US bonds, following continuing exits from US asset-backed products business, focus on balance sheet and RWA reduction and risk mitigation. The decrease in other government bonds was driven by a decrease in Germany as bund yields reached historic lows in Q1 2015, largely offset by higher Japanese treasury bills, reflecting favourable rates, used for collateral upgrades. The increase in short positions (largely Italy, Germany and Spain) reflected hedging of reverse repo collateral following liquidity concerns and uncertainty around Greece. The increase in UK government short positions reflected positioning ahead of expected interest rate rise.

·	AFS: Holdings of UK and US government bonds increased due to purchases by Treasury reflecting liquidity portfolio mix management and price optimisation. CFG switched from asset-backed securities to US government bonds as part of RWA and liquidity coverage ratio management.

·	Market concerns and consequent lower bond prices resulted in lower gross unrealised gains and higher gross unrealised losses relating to AFS debt securities. Lower gains also reflected sales and redemptions in Treasury.

Half Yearly Report: Part 2

Capital resources (continued)

Companies

UK 100

Latest directors dealings


	30 June 2015			31 December 2014
	Notional (1)	Assets	Liabilities	Notional (1)	Assets	Liabilities
	£bn	£m	£m	£bn	£m	£m

Interest rate (2)	20,123	216,983	204,738	27,331	269,912	259,971
Exchange rate	4,196	61,566	65,228	4,675	78,707	83,781
Credit	100	1,704	1,681	125	2,254	2,615
Equity and commodity	60	2,032	2,133	78	3,119	3,582

		282,285	273,780		353,992	349,949
Counterparty mark-to-market netting		(228,780)	(228,780)		(295,315)	(295,315)
Cash collateral		(28,295)	(25,627)		(33,272)	(30,203)
Securities collateral		(6,999)	(8,299)		(7,013)	(14,437)

Net exposure		18,211	11,074		18,392	9,994

Net exposure by sector
Banks		1,357	2,065		1,875	1,534
Other financial institutions		6,205	5,313		4,035	3,721
Corporate		9,820	3,585		11,186	4,382
Government		829	111		1,296	357

		18,211	11,074		18,392	9,994

Net exposure by region of counterparty
UK		9,708	4,524		9,037	3,233
Europe		4,818	2,395		5,628	3,521
US		1,344	1,867		1,544	1,280
RoW		2,341	2,288		2,183	1,960

		18,211	11,074		18,392	9,994

(1)	Includes exchange traded contracts of £2,620 billion (31 December 2014 - £2,436 billion) principally interest rate. Trades are generally closed out daily hence carrying values were insignificant; assets £3 million (31 December 2014 - £8 million); liabilities £81 million (31 December 2014 - £119 million).
(2)	Interest rate notional includes £12,007 billion (31 December 2014 - £18,452 billion) in respect of contracts with central clearing counterparties to the extent related assets and liabilities are offset.

·	Over-the-counter derivative notionals reduced from £29.8 trillion to £21.9 trillion in the six months to 30 June 2015 reflecting active participation in trade compression cycles, as well as targeted bilateral tear-ups.
·	The carrying value of derivative assets and liabilities at 30 June 2015 have been materially impacted by changes in market rates:
	○	Interest rate contracts: Fair values decreased by approximately 20% in the first half of 2015 due to an upward shift in yields, based on the expectation of interest rate rises in the US and UK. Eurozone yields also increased following favourable economic outlook.
	○	Foreign exchange contracts: Fair value decreases from targeted tear-ups and risk reductions have more than offset the impact of US dollar strengthening against the euro (9%) and Japanese yen (3%).
	○	Credit derivatives: fair values decreased despite widening credit spreads due to Greek debt crisis concerns as RBS continued to de-risk the credit default swap portfolio.

30 June 2015		Wholesale
		Banks and			Natural	Retail and			Of which:
	Personal	other FIs	Sovereign	Property	resources	leisure	Other	Total	RCR
	£m	£m	£m	£m	£m	£m	£m	£m	£m

UK	130,302	25,382	50,922	39,438	8,099	14,618	40,062	308,823	7,168
Western Europe (excl. UK)	15,113	33,644	11,025	7,523	3,232	2,418	11,485	84,440	6,241
North America	33,113	12,779	22,465	7,308	5,057	5,945	19,892	106,559	556
RoW (1)	3,383	9,916	3,599	1,511	3,703	597	11,933	34,642	2,936

Total	181,911	81,721	88,011	55,780	20,091	23,578	83,372	534,464	16,901

of which: RCR	90	2,621	30	7,458	2,746	796	3,160	16,901	n/a

Flow into forbearance (2)	1,625	88	-	1,934	412	454	902	5,415	1,420
of which: RCR	-	11	-	1,060	36	145	168	1,420	n/a

AQ10	7,477	715	1	8,003	258	1,278	2,397	20,129	7,662
of which: RCR	75	304	-	5,540	150	483	1,110	7,662	n/a

31 December 2014

UK	129,091	27,560	45,308	44,401	7,825	15,539	40,199	309,923	11,579
Western Europe (excl. UK)	16,802	37,156	6,855	11,858	4,030	3,221	13,162	93,084	12,159
North America	32,449	13,367	27,162	6,846	7,070	5,736	21,642	114,272	851
RoW (1)	2,406	13,406	3,039	1,875	5,685	1,188	17,187	44,786	5,061

Total	180,748	91,489	82,364	64,980	24,610	25,684	92,190	562,065	29,650

of which: RCR	203	3,587	536	14,819	2,910	1,828	5,767	29,650	n/a

Flow into forbearance (2)	4,350	60	-	5,416	377	984	1,956	13,143	4,839
of which: RCR	-	29	-	3,551	28	535	696	4,839	n/a

AQ10	8,424	638	1	14,743	263	2,329	3,662	30,060	16,099
of which: RCR	182	423	-	11,886	112	1,355	2,141	16,099	n/a

(1)	Rest of World comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa, and supranationals such as the World Bank.
(2)	Completed during the period.

·	The CRA decrease reflected a continued focus on risk reduction and improving overall credit quality.

·	CRA decreased in all regions and sectors except sovereign where CRA increased by 7%, reflecting Treasury activity. UK CRA (excluding RCR) increased by 1%, in personal (mainly mortgage lending).

·	For wholesale loans, the flow into forbearance decreased during H1 2015 compared with H2 2014 in line with improving market conditions and RCR's disposal strategy. Of the total forbearance granted, 54% related to non-performing loans with a provision coverage of 48% (2014 - 62%).
·	The property sector remained the most significant contributor to the forborne portfolio. There was an increase in forbearance granted in the natural resources sector driven by counterparties in the oil and gas sector (refer to page 28 for further sector information).

·	RCR is on track to complete its targeted run-down by the end of 2015, with CRA down by 43% to £16.9 billion. Non-performing exposures decreased significantly to £7.7 billion (2014 - £16.1 billion) driven by the disposal strategy and the improving economic climate.

	Investment			Development
	Commercial	Residential	Total	Commercial	Residential	Total	Total
By geography	£m	£m	£m	£m	£m	£m	£m

30 June 2015
UK (excluding NI (1))	15,959	4,351	20,310	541	3,393	3,934	24,244
Ireland (ROI and NI (1))	1,519	312	1,831	614	2,022	2,636	4,467
Western Europe (other)	947	29	976	110	22	132	1,108
US	4,489	1,362	5,851	-	5	5	5,856
RoW (1)	415	16	431	41	249	290	721

	23,329	6,070	29,399	1,306	5,691	6,997	36,396

31 December 2014

UK (excluding NI (1))	17,327	4,757	22,084	600	3,446	4,046	26,130
Ireland (ROI and NI (1))	2,864	740	3,604	1,499	4,469	5,968	9,572
Western Europe (other)	1,222	53	1,275	189	24	213	1,488
US	4,063	1,358	5,421	-	59	59	5,480
RoW (1)	406	22	428	34	185	219	647

	25,882	6,930	32,812	2,322	8,183	10,505	43,317

·	Overall gross CRE lending fell in the first half of 2015 mostly in RCR (£6.5 billion) due to asset sales, repayments, and write-offs.

·	The RCR portfolio contains legacy CIB, Commercial Bank and Ulster Bank assets and now represents 17% of the total portfolio (2014 - 29%). Geographically, 57% (£3.5 billion) of the remaining RCR portfolio is located in Ireland (ROI and NI), with the UK (excluding NI) accounting for 28% (£1.7 billion) and the remainder (£1.0 billion) in Western Europe and the RoW.

·	The reduction of the commercial investment UK sub-sector is almost entirely driven by reductions of £1.3 billion in RCR. RCR divestments in the development sub-sector have also led to the portfolio being more weighted towards the investment sub-sector.

·	The increase in US exposure was predominantly driven by higher business volumes in CFG, in line with risk appetite and business strategy.

	RBS excluding RCR			RCR			Total
LTV ratio by value		Non-			Non-			Non-
	Performing	performing	Total	Performing	performing	Total	Performing	performing	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m

30 June 2015
<= 50%	10,147	139	10,286	243	18	261	10,390	157	10,547
> 50% and <= 70%	8,500	249	8,749	387	87	474	8,887	336	9,223
> 70% and <= 90%	1,944	356	2,300	76	391	467	2,020	747	2,767
> 90% and <= 100%	374	106	480	79	42	121	453	148	601
> 100% and <= 110%	185	145	330	42	173	215	227	318	545
> 110% and <= 130%	174	156	330	29	385	414	203	541	744
> 130% and <= 150%	77	128	205	2	120	122	79	248	327
> 150%	331	410	741	44	1,582	1,626	375	1,992	2,367

Total with LTVs	21,732	1,689	23,421	902	2,798	3,700	22,634	4,487	27,121
Minimal security (1)	13	38	51	-	1,206	1,206	13	1,244	1,257
Other	6,316	420	6,736	16	1,266	1,282	6,332	1,686	8,018

Total	28,061	2,147	30,208	918	5,270	6,188	28,979	7,417	36,396

Total portfolio
average LTV (2)	56%	140%	62%	74%	287%	236%	56%	232%	85%