Interim Management Statement - Part 1 of 2

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NATWEST GROUP (NWG)

UK 100

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	Page

Highlights	1
Chief Executive's message	4
Relationship with HM Treasury	9
Internal Bad Bank	10
Contacts	13
Presentation of information	14
Summary consolidated results	16
Analysis of results	19
Divisional performance	27

Statutory results	66

Condensed consolidated income statement	66
Condensed consolidated statement of comprehensive income	67
Condensed consolidated balance sheet	68
Average balance sheet	69
Condensed consolidated statement of changes in equity	72
Notes	74

Risk and balance sheet management	89

Presentation of information	89
Capital management	89
Capital and leverage ratios	89
Capital resources	90
Risk-weighted assets flow statement	92
Liquidity, funding and related risks	93
Overview	93
Funding sources	94
Liquidity portfolio	95
Basel III liquidity ratios and other metrics	95
Credit risk	96
Loans and related credit metrics	96
Debt securities: IFRS measurement classification by issuer	100
Derivatives	101
Market risk	102
Country risk	104

Risk factors	107

Additional information	111

Share information	111
Statutory results	111
Financial calendar	111

Appendix 1 Risk management supplement
Appendix 2 Income statement reconciliations and Segmental analysis

●	RBS announces management actions to accelerate the building of its capital strength and to enhance its strategic focus on its core UK businesses and its international corporate capabilities.

●	The measures will include the creation of an internal "bad bank" to manage the run-down of high risk assets projected to be £38 billion by the end of 2013. The goal is to remove 55-70% of these assets over the next two years. While there is inevitable uncertainty associated with running down such assets, there is a clear aspiration to remove all these assets from the balance sheet in three years.

●	Faster run-down of high risk assets is expected to entail accelerated and increased impairments in Q4 2013 of £4.0 billion to £4.5 billion but the capital impact of this will be neutralised by a commensurate reduction in expected loss capital deductions. The net impact on the current Core Tier 1 ratio is expected to be a reduction of c.10 basis points. However, the new strategy will result in a strengthening of the Group's capital ratios in the medium term.

●	In light of a changing regulatory landscape and other capital headwinds RBS will target a Core Tier 1 ratio of c.11% on a fully loaded Basel III basis by the end of 2015, 200 basis points higher than the current position, rising to 12% or beyond by the end of 2016.

●	The Group will accelerate the divestment of Citizens, the Group's US banking subsidiary. A partial initial public offering is now planned for 2014 and the Group intends to fully divest the business by the end of 2016.

●	RBS's capital strength improved in Q3 2013 as the Group delivered a Core Tier 1 ratio of 11.6%. On a fully loaded Basel III basis Core Tier 1 ratio was 9.1%, up from 8.7% at 30 June 2013.

●	To capture the full potential of its customer businesses RBS is undertaking a comprehensive business review of its:

	○	Customer-facing businesses
	○	IT and operations
	○	Organisational and decision-making structures

●	The review will aim to improve the bank's performance and effectiveness in serving its customers, shareholders and wider stakeholders. The results of the review will be announced in February 2014 alongside the 2013 annual results. This will include detailed plans to realign the Group's cost base, with a cost:income percentage target in the mid 50s, down from 65% currently.

●	Q3 2013 Core operating profit of £1,283 million was 6% higher than the prior quarter, driven by continuing reductions in impairment losses in Retail & Commercial and an improvement in Markets operating profits. Core operating profit was down 14% from Q3 2012, driven by ongoing strategic contraction of the Markets business, with income down 9% and costs down 4%. Core return on equity was 7.7%.

●	Non-Core operating losses of £845 million compared with losses of £281 million in the prior quarter and £586 million in Q3 2012, reflecting exit and restructuring costs as the division saw accelerated disposals and asset run-off, and higher impairment losses.

●	Group operating profit⁽¹⁾ was £438 million in Q3 2013, compared with £931 million in Q2 2013 and £909 million in Q3 2012. After one-off items totalling £576 million, including £99 million of regulatory provisions and an additional charge of £250 million for Payment Protection Insurance redress, a pre-tax loss of £138 million was recorded, excluding own credit adjustments.

●	Own credit adjustments represented a charge of £496 million, reflecting the strengthening of Group's credit profile during the quarter. After these and a tax charge of £81 million (including a £197 million charge relating to the UK corporation tax change) and preference and other dividends of £102 million, the Group reported a loss attributable to ordinary and B shareholders of £828 million.

●	Tangible net asset value at 30 September 2013 was 431 pence per share, with foreign exchange movements accounting for 12 pence of the 14 pence fall since 30 June 2013.

●	RBS maintained its strong track record of running off legacy assets, with Non-Core's funded balance sheet down £8 billion to £37 billion, hitting its year-end target three months ahead of schedule. The reshaping of the Markets business also made strong progress, with funded assets down £20 billion to £248 billion and RWAs down £14 billion to £73 billion.

●	UK Retail made good progress in the UK mortgage market, with applications up 14% in Q3 2013 from the prior quarter to £6.4 billion and net new lending of £607 million representing the strongest quarterly performance since 2010. Mortgage balances remained strong at £99 billion.

·	RBS and NatWest were first to make mortgages available to customers with smaller deposits under the second phase of the UK Government's Help To Buy mortgage guarantee scheme, with strong demand evident in the early days of the scheme's operation.

·	During Q3 2013 UK Retail has simplified pricing on its savings accounts and launched Cashback Plus, which rewards current account holders for using their debit cards in selected retailers.

·	The detailed recommendations of Sir Andrew Large's independent review of RBS's lending to SMEs will be addressed in the Group's comprehensive business review, due in February 2014.

·	UK Business & Commercial has received a positive response to 10,000 letters sent to advise customers of its appetite to lend to them if they should wish to increase their borrowing or take out new credit. Over £3.8 billion of funding had been offered through these statements of appetite by the end of Q3 2013.

·	In Q3 2013 RBS offered more than £15.0 billion of loans and facilities to UK businesses, of which £7.7 billion was to SMEs. In addition, the Group renewed £7.3 billion of UK business overdrafts, including £1.5 billion to SMEs.

·	There have been continuing signs of improving credit demand, with Q3 2013 SME loan and overdraft applications up 6% from Q2 2013.

·	RBS continues to support the Bank of England's Funding for Lending Scheme (FLS). Net lending within the scope of the extended FLS was £273 million in Q3 2013, despite £1,240 million of run-off in Non-Core and commercial real estate portfolios. This compares with a reduction in net lending of £2,793 million in Q2 2013.

·	In Q3 2013 Markets helped UK corporates raise £2.4 billion, by acting as bookrunner for debt capital market issues, including £1.0 billion sterling bonds, meeting UK customers' needs in both domestic and international markets.

1)	What can we do to meet more of our customers' needs and make ourselves simple and easy to do business with?
2)	How do our operations and IT systems function for the benefit of customers? How do our core systems help or impede our employees in their work for customers?
3)	How well does RBS work together as an organisation built to serve our customers? What can we do to make life simpler for employees and how can we simplify things so the whole of RBS can be greater than the sum of its parts?

1.	You only have to pick up the newspaper every day to know that the sector faces capital risks from the continued cost of litigation and charges for bad conduct with our customers. As we have been disclosing for some time, we are squarely in the mix on some of the issues that have proved expensive elsewhere. The only option is to plan to carry more capital so we can absorb these costs as we work to put things right for customers.
2.	The PRA has established a capital regime which gives it sufficient scope to vary capital requirements based on its assessment of the risk an individual bank poses to the UK financial system. Having completed a consultation period with relevant institutions, the PRA is expected to publish finalised rules for the new capital regime in December 2013. We expect that the PRA will require banks to hold a higher quality of capital in greater amounts and it is therefore prudent that RBS respond in a pro-active manner.
3.	The current pace of momentum in our core businesses means we are not rebuilding capital as quickly as we planned.

●	In June 2013, in response to a recommendation by the Parliamentary Commission on Banking Standards, the UK Government announced that it would review the case for an external "bad bank" to deal with RBS's legacy and poorly-performing assets, based on three objectives:
	○	accelerating the return of RBS to the private sector;
	○	supporting the British economy; and
	○	getting best value for the taxpayer.
●	Following this announcement, RBS worked closely with HMT and its advisers and identified a pool of c.£38 billion of assets with particularly high long-term capital intensity and/or potentially volatile outcomes in stressed environments.

●	HMT is publishing the results of its own review separately. The review concluded that the effort, risk and expense involved in the creation of an external bad bank could not be justified.

●	The options open to the Group for addressing its highest risk assets were reviewed and debated extensively by the Board, which decided to create an internal "bad bank" ('IBB') to manage these assets down so as to release capital. The IBB will bring assets under common management and increase focus on the run down (much as Non-Core does now).

●	Based on the July 2013 forecast of the 31 December 2013 balance sheet, c.£38 billion of funded assets were identified (see page 12), which together with associated derivatives, attract c.£116 billion of RWA equivalent.

●	While the IBB is of a similar size to the current Non-Core division, the assets have been selected on a different basis and no direct comparisons can be drawn:
	○	Non-Core assets were selected in 2009 on the basis of five strategic tests and comprised non-strategic businesses and countries; the lift and drop of entire activities; creditworthy assets and activities with low returns or low growth potential; high or volatile wholesale funding requirements; and assets with credit losses or capital intensity; whereas
	○	The IBB will comprise assets with potentially volatile outcomes in stressed environments or with long-term capital intensity.
●	The IBB being established to manage these assets will be fully operational on 1 January 2014. It will be separately managed, but within the existing legal and governance structures of the Group including the creation of an IBB oversight board.

●	As part of its external reporting, the Group will provide comprehensive and transparent disclosures on the progress of the IBB, including funding and capital employed and released.

●	At 31 December 2013, approximately 50% of the portfolio's funded assets are from Non-Core (excluding Ulster Bank), 20% from Ulster Bank (Core and Non-Core) and the remainder are from UK Corporate, International Banking and Markets, most of which are managed by the Global Restructuring Group (GRG). Additional details are set out on page 12.

●	Approximately £10 billion to £12 billion of assets currently managed in Non-Core will be returned to relevant Core divisions.

●	The IBB will target a reduction of between 55% and 70% of assets by the end of 2015. While there is inevitable uncertainty associated with running down such assets, it is the Group's aspiration to remove most of these assets from the balance sheet in three years. RBS believes that under many of the possible outcomes, and assuming favourable market conditions, no more than 15% of the IBB assets should be left on the RBS balance sheet after 3 years. The IBB is expected to be capital accretive and neutral for shareholder value, taking account of the benefits of a material reduction in the credit risk profile of the Group.

●	The new strategy to exit these assets over a shorter timeframe than envisaged in current plans will lead to accelerated and increased impairment losses on the non-performing assets. An estimated £4.0 billion to £4.5 billion is expected to be recognised in Q4 2013.

●	At the same time, there will be an immediate reduction in the Group's expected loss capital deduction and a net capital benefit of c.£2 billion to the Group's fully loaded Basel III Common Equity Tier 1 (CET1) capital is expected by the end of 2016.

●	The Group's regulatory stress capital requirements and Pillar 2B stressed loss capital buffer are also expected to be reduced over time.

●	The new strategy will also normalise credit metrics, particularly REIL, contributing approximately 50% of the planned reductions in the Group NPL ratio from c.9% to c.3% (the original plan had a reduction to 6% by the end of 2016).

●	An additional c.£1 billion of impairments is expected to be incurred during the period 2014 to 2016 on assets which are currently performing.

●	Of the total c.£5.0 billion to £5.5 billion of IBB accelerated and increased impairment losses noted above, approximately 50% to 60% were expected in the original plan to be incurred in 2017 or later.

●	The cost of disposal of the IBB assets is expected to be in the range of c.£1.5 billion to £2.0 billion over 2014 to 2016.

●	As many of the IBB assets are in Ireland, the tax relief on the losses is expected to be relatively limited.

●	Operating and funding costs of the IBB in 2014 to 2016 of c.£1.5 billion are already included in previous Group forecasts.

●	All numbers are indicative only at this stage.

●	The new IBB will formally commence on 1 January 2014 and will be called RBS Capital Resolution Group. For the fourth quarter of 2013 and 2013 as a whole, the Group's results will continue to be reported on the existing basis.

	31 December 2013			30 June 2013
	Forecast total			Non-performing			Performing			Total
	Gross TPA	Net TPA	RWAe	Gross TPA	Net TPA	RWAe	Gross TPA	Net TPA	RWAe	Gross TPA	Net TPA	RWAe
	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn

Non-Core
- CRE	10.4	8.4	17.5	7.2	4.8	14.2	6.1	6.1	13.2	13.3	10.9	27.4
- Ulster Bank	10.9	4.6	15.6	12.5	5.3	20.8	-	-	-	12.5	5.3	20.8
- Corporate	4.6	3.7	17.1	1.6	1.0	3.0	4.8	4.7	7.6	6.4	5.7	10.6
- Asset Finance	2.9	2.7	4.8	0.6	0.4	1.2	2.4	2.5	4.2	3.0	2.9	5.4
- Markets	4.1	4.1	5.8	0.4	0.3	0.2	4.6	4.6	6.6	5.0	4.9	6.8

Total Non-Core	32.9	23.5	60.8	22.3	11.8	39.4	17.9	17.9	31.6	40.2	29.7	71.0

Core
Ulster Bank	6.2	4.1	17.4	5.1	2.8	12.9	1.4	1.4	5.2	6.5	4.2	18.1
UK Corporate
- CRE	2.1	1.8	5.5	1.5	1.2	3.6	1.8	1.8	5.7	3.3	3.0	9.3
- Asset Finance	2.2	2.2	5.0	1.0	1.0	3.5	1.4	1.4	2.5	2.4	2.4	6.0
- Corporate	1.6	1.5	4.1	0.4	0.3	0.5	1.4	1.4	4.1	1.8	1.7	4.6

Total UK Corporate	5.9	5.5	14.6	2.9	2.5	7.6	4.6	4.6	12.3	7.5	7.1	19.9
International Banking	2.9	2.6	7.3	0.9	0.6	3.2	2.4	2.4	4.8	3.3	3.0	8.0
Markets	2.7	2.6	15.5	-	-	-	2.8	2.8	19.8	2.8	2.8	19.8

Total Core	17.7	14.8	54.8	8.9	5.9	23.7	11.2	11.2	42.1	20.1	17.1	65.8

Total IBB	50.6	38.3	115.6	31.2	17.7	63.1	29.1	29.1	73.7	60.3	46.8	136.8

(1)	The amounts at 31 December 2013 are based on the July 2013 forecast of the 31 December 2013 balance sheet.
(2)	Funded assets or third party assets excluding derivatives (TPA) are shown gross and net of impairment provisions.
(3)	Performing assets are shown gross and net of latent provisions and valuation adjustments.
(4)	RWAs and RWA equivalent (RWAe) are on a fully loaded Basel III basis. RWAe include RWA equivalent of capital deductions.
(5)	Non-Core Ulster Bank predominantly comprises commercial real estate lending (CRE).
(6)	Core Ulster Bank comprises corporate and CRE lending.

For analyst enquiries:

Richard O'Connor	Head of Investor Relations	+44 (0) 20 7672 1758


For media enquiries:

Group Media Centre		+44 (0) 131 523 4205

Date:		Friday 1 November 2013
Time:		9.00 am UK time
Webcast:		www.rbs.com/results
Dial in details:		International - +44 (0) 1452 568 172 UK Free Call - 0800 694 8082 US Toll Free - 1 866 966 8024

·	own credit adjustments;

·	Payment Protection Insurance (PPI) costs;

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

·	regulatory and legal actions;

·	integration and restructuring costs;

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

·	Asset Protection Scheme (APS);

·	amortisation of purchased intangible assets;

·	strategic disposals; and

·	RFS Holdings minority interest (RFS MI).

	Quarter ended			Nine months ended
	30 September	30 June	30 September	30 September	30 September
	2013	2013	2012	2013	2012
	£m	£m	£m	£m	£m

Net interest income	2,783	2,770	2,811	8,225	8,641
Non-interest income	2,111	2,677	2,747	7,277	8,602

Total income (1)	4,894	5,447	5,558	15,502	17,243
Operating expenses (2)	(3,286)	(3,399)	(3,473)	(10,066)	(10,906)

Operating profit before impairment losses (3)	1,608	2,048	2,085	5,436	6,337
Impairment losses	(1,170)	(1,117)	(1,176)	(3,320)	(3,825)

Operating profit (3)	438	931	909	2,116	2,512
Own credit adjustments	(496)	127	(1,455)	(120)	(4,429)
Payment Protection Insurance costs	(250)	(185)	(400)	(435)	(660)
Interest Rate Hedging Products redress and
related costs	-	-	-	(50)	-
Regulatory and legal actions	(99)	(385)	-	(484)	-
Integration and restructuring costs	(205)	(149)	(229)	(476)	(848)
Gain/(loss) on redemption of own debt	13	242	(123)	204	454
Other items	(35)	(33)	(70)	(15)	(79)

Operating (loss)/profit before tax	(634)	548	(1,368)	740	(3,050)
Tax charge	(81)	(328)	(3)	(759)	(402)

(Loss)/profit from continuing operations	(715)	220	(1,371)	(19)	(3,452)

(Loss)/profit from discontinued operations, net of tax
- Direct Line Group	-	-	62	127	167
- Other	(5)	9	5	6	6

(Loss)/profit from discontinued operations,
net of tax	(5)	9	67	133	173

(Loss)/profit for the period	(720)	229	(1,304)	114	(3,279)
Non-controlling interests	(6)	14	3	(123)	28
Other owners' dividends	(102)	(101)	(104)	(284)	(186)

	Quarter ended			Nine months ended
	30 September	30 June	30 September	30 September	30 September
	2013	2013	2012	2013	2012
	£m	£m	£m	£m	£m

Net interest income	2,826	2,751	2,732	8,286	8,450
Non-interest income	2,187	2,423	2,776	6,969	8,473

Total income (1)	5,013	5,174	5,508	15,255	16,923
Operating expenses (2)	(3,141)	(3,243)	(3,261)	(9,600)	(10,169)

Operating profit before impairment losses (3)	1,872	1,931	2,247	5,655	6,754
Impairment losses	(589)	(719)	(752)	(1,908)	(2,305)

Operating profit (3)	1,283	1,212	1,495	3,747	4,449

Key metrics

Core performance ratios
- Net interest margin	2.24%	2.21%	2.15%	2.21%	2.15%
- Cost:income ratio	63%	63%	59%	63%	60%
- Return on equity	7.7%	7.2%	8.8%	7.5%	9.2%
- Adjusted earnings per ordinary and B share	4.0p	5.6p	5.1p	14.9p	13.7p
- Adjusted earnings per ordinary and B share
assuming a normalised tax rate of 23.25%
(2012 - 24.5%)	7.9p	7.4p	9.3p	23.2p	29.0p

(1)	Excluding own credit adjustments, gain/(loss) on redemption of own debt, Asset Protection Scheme, strategic disposals and RFS Holdings minority interest.
(2)	Excluding PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, amortisation of purchased intangible assets and RFS Holdings minority interest.
(3)	Operating profit before tax, own credit adjustments, PPI costs, IRHP redress and related costs, regulatory and legal actions, integration and restructuring costs, gain/(loss) on redemption of own debt, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals and RFS Holdings minority interest.

	30 September	30 June	31 December
	2013	2013	2012
	£m	£m	£m

Cash and balances at central banks	87,066	89,613	79,290
Net loans and advances to banks (1,2)	28,206	30,241	29,168
Net loans and advances to customers (1,2)	406,927	418,792	430,088
Reverse repurchase agreements and stock borrowing	95,971	99,283	104,830
Debt securities and equity shares	133,249	149,625	172,670
Settlement balances	18,099	17,966	5,741
Intangible assets	13,742	13,997	13,545
Other assets (3)	22,519	23,020	35,060

Funded assets	805,779	842,537	870,392
Derivatives	323,657	373,692	441,903

Total assets	1,129,436	1,216,229	1,312,295

Bank deposits (2,4)	38,601	45,287	57,073
Customer deposits (2,4)	434,305	437,097	433,239
Repurchase agreements and stock lending	105,384	123,740	132,372
Debt securities in issue	71,781	79,721	94,592
Settlement balances	18,514	17,207	5,878
Short positions	31,020	27,979	27,591
Subordinated liabilities	23,720	26,538	26,773
Other liabilities (3)	18,517	18,955	29,996

Liabilities excluding derivatives	741,842	776,524	807,514
Derivatives	319,464	370,047	434,333

Total liabilities	1,061,306	1,146,571	1,241,847
Non-controlling interests	462	475	1,770
Owners' equity	67,668	69,183	68,678

Total liabilities and equity	1,129,436	1,216,229	1,312,295

Memo: Tangible equity (5)	48,634	49,894	49,841

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

·	The ongoing reduction in Non-Core assets and strategic reshaping of the Markets balance sheet significantly reduced the Group's funded assets, down by £64.6 billion compared with 31 December 2012.
·	Loans and advances to customers decreased by £23.2 billion, primarily led by the Non-Core and Markets reductions.
·	Debt securities and equity shares were down £39.4 billion, mainly due to the sale of available-for-sale securities as part of the Group's on-going liquidity management, and the focus on balance sheet reduction and capital management in Markets.
·	Bank deposits decreased by £18.5 billion and debt securities in issue decreased by £22.8 billion in line with the overall reduction in the size of the Group's balance sheet and the planned reduction in wholesale funding.
·	Derivative assets and liabilities decreased by £118.2 billion and £114.9 billion respectively, primarily due to decreases in fair values of interest rate contracts driven by upward shifts in interest rate yield curves.

(1)	For further analysis and details refer to pages 69 to 71.
(2)	Retail & Commercial (R&C) comprises the UK Retail, UK Corporate, Wealth, International Banking, Ulster Bank and US R&C divisions.

·	Retail & Commercial net interest income increased by £52 million, 2%. Net interest margin rose by 3 basis points as deposit repricing took effect, with asset spreads broadly stable in most R&C businesses.

·	Non-Core net interest income decreased by £63 million compared with Q2 2013, which included a one-off interest in suspense recovery of £54 million.

·	Group net interest margin (NIM) increased by 1 basis point in Q3 2013. Reduced funding costs in Markets and the margin improvement in R&C were partially offset by the non-repeat of the Non-Core recovery in Q2 2013.

·	Group net interest income decreased by £78 million, 3%, largely due to a decline in interest earning assets, down 6%, partially offset by deposit repricing.

·	Group NIM increased by 8 basis points to 2.01%, driven by deposit repricing partially offset by a reduction in higher yielding securities.

·	The reduction in rates on rolling current account hedges continued to have a negative impact, though the drag on net interest income has started to diminish.

·	Income from trading activities was £275 million lower. While Markets income remained steady, with improved results from flow rates trading, Non-Core was a loss of £109 million in Q3 2013 compared with a £134 million gain in Q2 2013 reflecting the exit and restructuring costs on a number of transactions.

·	Disposal gains on available-for-sale securities, primarily in Group Treasury, were £251 million lower at £168 million.

·	Lower non-interest income primarily reflects the targeted reduction in Markets balance sheet and risk-weighted assets.

·	The decrease in other operating income reflects lower disposal gains on available-for-sale securities as noted above and lower operating lease income, together with higher Non-Core disposal losses in Q3 2013.

·	Staff expenses were £6 million lower, with headcount down by 1,400, principally in UK Retail, Markets and Non-Core. Premises and equipment costs, however, were £14 million higher, as the Group stepped up investment to improve its IT delivery capability.

·	Conduct-related costs were £83 million lower, including reduced legal costs in Centre and customer remediation charges in UK Corporate.

·	The deterioration in the Group cost:income ratio was principally driven by reduced income in Non-Core. The Core cost:income ratio was stable at 63%.

·	Staff costs were 7% lower, driven by the Markets headcount reductions implemented since Q3 2012. Markets' compensation ratio in the first nine months of the year was 37%, an increase of 1% compared with the same period of 2012.

·	The Core cost:income ratio worsened to 63% from 59% in Q3 2012, largely driven by weaker income in Markets.

Interim Management Statement - Part 1 of 2

Highlights

Highlights

Highlights

Components of capital (Basel 2.5)

Companies

UK 100

Latest directors dealings

·	Core Retail & Commercial loan impairments fell by £158 million, or 23%, with charges relating to a small number of large single name cases in International Banking and UK Corporate in Q2 not being repeated. Core Ulster Bank also showed improvements, with a reduction in losses on the mortgage portfolio as arrears formation continued to fall and residential property prices stabilised.

·	Non-Core loan impairments were up £70 million to £536 million. The increase primarily related to Ulster Bank's CRE development portfolio. This was partially offset by reduced losses on the UK Corporate portfolio.

·	Core Retail & Commercial loan impairments fell by £238 million or 31%, including a £125 million reduction in Core Ulster Bank, accompanied by significant improvements in UK Retail and UK Corporate.

·	Non-Core loan impairments increased by £104 million due to higher impairment charges on commercial real estate loans in the Ulster Bank-originated book, partly offset by continued portfolio run-off.

·	Excluding own credit adjustments (OCA), one-off items totalled £576 million compared with £510 million in Q2. This included £205 million of restructuring charges, principally relating to the strategic reshaping of the Markets division and to streamlining UK Retail operations.

·	Regulatory provisions of £99 million were recorded in the quarter. An additional charge of £250 million was booked in respect of PPI redress.

·	OCA represented a charge of £496 million as the Group's credit spreads tightened, reversing the OCA credits booked in the first half of the year.

·	The Group's Core Tier 1 ratio strengthened further to 11.6%, driven by a substantial reduction in risk-weighted assets, principally reflecting the strategic reshaping of the Markets division.

·	Group RWAs fell by £26 billion to £410 billion. Markets was £14 billion lower, with a reduced balance sheet and declining market risk while Non-Core fell £5 billion. Retail & Commercial RWAs were down £6 billion, largely driven by foreign exchange movements.

·	On a fully loaded Basel III basis, the Core Tier 1 ratio strengthened by 40 basis points to 9.1%, above the Group's year end capital target of over 9%.

·	The Group's Core Tier 1 ratio was 130 basis points higher at 11.6%. On a fully loaded Basel III basis, the Core Tier 1 ratio was 140 basis points higher.

·	Since 31 December 2012, Group RWAs have fallen by £50 billion, with Markets declining by £28 billion and Non-Core £19 billion lower.

·	The total capital ratio increased by 170 basis points to 16.2%.

(1)	Funded balance sheet represents total assets less derivatives.
(2)	Excluding reverse repurchase agreements and stock borrowing, and including disposal groups.
(3)	Excluding repurchase agreements and stock lending, and including disposal groups.
(4)	Net of provisions, including disposal groups and excluding repurchase agreements. Excluding disposal groups, the loan:deposit ratios of Core and Group at 30 September 2013 were 87% and 94% respectively (30 June 2013 - 88% and 96%; 31 December 2012 - 90% and 99%)
(5)	Tangible net asset value per ordinary and B share is total tangible equity divided by the number of ordinary shares in issue and the effect of convertible B shares.
(6)	Funded tangible assets divided by total Tier 1 capital. See also Appendix 1 for the regulatory leverage ratio.
(7)	Tangible equity leverage ratio is tangible equity attributable to ordinary and B shareholders divided by funded tangible assets.

·	The Group's funding position remained strong, reflecting continuing Non-Core run-off and reduced Markets collateral requirements. Total customer deposits declined by only 1% despite tighter pricing.

·	Retail & Commercial loans and advances were down £2 billion, as the strength of sterling reduced dollar and euro-denominated balances. UK Corporate property balances declined, offset by growth in International Banking trade finance balances.

·	Tangible net asset value per ordinary and B share was 431 pence, with exchange rate movements accounting for 12 pence of the 14 pence fall.

·	The Group loan:deposit ratio was 94% compared with 100% at the end of 2012. The Group has continued to attract deposits despite tightening its pricing, leaving a significant customer funding surplus as Non-Core loans and advances continue to run off.

·	Funded assets fell to £806 billion, a reduction of £64 billion since 31 December 2012, principally reflecting strategic reshaping of Markets and Non-Core run-off.

·	The Group's funded balance sheet has been reduced by £757 billion from its worst point, with only £37 billion of Non-Core assets remaining.

(1)	Excludes repurchase agreements and stock lending and includes disposal groups.
(2)	Excludes derivative collateral.

·	Short-term wholesale funding fell in the quarter to £35 billion, just 4% of the funded balance sheet.

·	The Group's liquidity portfolio was reduced to £151 billion compared with £158 billion at 30 June 2013, but remained flat as a proportion of the total funded balance sheet at 19%.