Interim Management Statement - Part 1 of 5

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NATWEST GROUP (NWG)

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	Page

Highlights	1
Contacts	4
Presentation of information	5
Summary consolidated results	7
Comment	10
Business update	11
Analysis of results	13
Divisional performance	22

Statutory results	65

Condensed consolidated income statement	65
Condensed consolidated statement of comprehensive income	66
Condensed consolidated balance sheet	67
Average balance sheet	68
Condensed consolidated statement of changes in equity	70
Notes to accounts	72

Risk and balance sheet management	85

Presentation of information	85
Capital management	85
Capital ratios	85
Capital resources	86
Liquidity, funding and related risks	88
Overview	88
Funding sources	89
Liquidity portfolio	90
Basel III liquidity ratios and other metrics	90
Credit risk	91
Loans and related credit metrics	91
Debt securities	92
Derivatives	93
Market risk	94
Country risk	96

Additional information	98

Share information	98
Statutory results	98
Financial calendar	98

Appendix 1 Income statement reconciliations and Segmental analysis
Appendix 2 Analysis of balance sheet pre and post disposal groups
Appendix 3 Risk management supplement

·	RBS's Core Tier 1 ratio strengthened by 50 basis points to 10.8%, largely driven by the continuing reduction in Non-Core and Markets risk-weighted assets.

·	On a fully loaded Basel III basis, the Group's Core Tier 1 ratio improved by 50 basis points to 8.2%.

·	Non-Core funded assets were reduced by £6 billion at constant exchange rates to £53 billion and the division is on track to hit its target of £40 billion by the end of 2013.

·	Continuing deposit inflows improved the loan:deposit ratio to 99%, and our liquidity pool of £158 billion covered short-term wholesale funding of £43 billion by 3.7 times.

·	Risk elements in lending fell by 2% at constant exchange rates and provision coverage was further strengthened in Non-Core and Ulster Bank. The Group charge for loan impairments fell 20% versus prior year.

·	Credit trends in Ireland are turning a corner, with Ulster Bank Core and Non-Core impairment losses down 27% from Q1 2012 and 29% from Q4 2012.

·	Tangible net asset value per share increased 3% to 459p from 446p at 31 December 2012.

·	Group pre-tax profit was £826 million, £577 million excluding own credit adjustments, compared with a loss of £2,227 million in Q4 2012. Group operating profit⁽¹⁾ was £829 million, up 50% from Q4 2012, driven by a reduction in Non-Core losses.

·	Profit attributable to shareholders was £393 million, or £194 million excluding the impact of own credit adjustments.

·	Core operating profit of £1,334 million compares with £1,495 million in Q4 2012 and £1,639 million in Q1 2012. Retail & Commercial profits were up 12% from Q1 2012 to £1,010 million, with Ulster Bank posting a material improvement. Markets showed a seasonal increase versus Q4 2012 to £278 million, though down significantly relative to the prior year's strong first quarter.

·	Non-Core operating losses of £505 million were 46% lower than in Q4 2012, driven by a further reduction in impairments.

·	The sale of a further tranche of Direct Line Group shares in March took the Group's stake below 50%, in line with the European Commission (EC) state aid agreement.

·	The Group continues to work towards a full separation and initial public offering of its branch-based business that is mandated for disposal by the EC. The business is profitable and well-funded, and we continue to have discussions with potential investors in the business. We anticipate re-branding this business under the Williams & Glyn's name.

·	As indicated in the Group's 2012 annual results announcement, the Markets business is being restructured with a 2014 target of reducing risk-weighted assets to £80 billion, on a Basel III basis. Our intention is to sustain the business's core strengths in fixed income products while focusing on serving our corporate and investor clients well.

·	RBS is committed to serving its customers well. Right across our business this is our top priority, to sustain and to improve what we do.

·	Core lending to SMEs⁽²⁾ rose 1% from Q4 2012 to £34 billion, while the wider market remained flat. UK residential mortgage lending remained broadly stable at £110.2 billion. UK Retail mortgage balances stand 33% above 2008 levels, although Q1 2013 volumes were affected by extensive staff retraining.

·	During Q1 2013 RBS has been pleased to offer over £1.5 billion of discounted loans to SMEs and more than £327 million of mortgages to homebuyers in association with the Bank of England's Funding for Lending Scheme (FLS). Given its very strong liquidity position, RBS has had no need to draw on this public funding during the quarter.

·	During the quarter RBS offered more than £13 billion of loans and facilities to UK businesses, including £8 billion to SMEs, and renewed nearly £7 billion of overdrafts, of which £2 billion was for SMEs.

·	The average interest rate charged on RBS's SME loans was 3.88% in Q1 2013, down from 3.93% in the prior quarter and from 4.14% in Q1 2012.

·	The Group has maintained broadly stable market shares across its major customer franchises. Net Promoter Scores improved slightly in Q1 2013 in a number of key areas.

·	Efforts to simplify processes and improve customer experience continue; changes to the current account opening process are being piloted that have so far significantly reduced account opening times.

Interim Management Statement - Part 1 of 5

Highlights

Highlights (continued)

Highlights (continued)

Contacts

Presentation of information

for the quarter ended 31 March 2013

Comment

Business update

Business update (continued)

Analysis of results

Companies

UK 100

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Date:		Friday 3 May 2013
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·	own credit adjustments;

·	Payment Protection Insurance (PPI) costs;

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

·	regulatory fines;

·	integration and restructuring costs;

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

·	write-down of goodwill and other intangible assets;

·	Asset Protection Scheme (APS);

·	amortisation of purchased intangible assets;

·	strategic disposals;

·	bank levy; and

·	RFS Holdings minority interest (RFS MI).

	Quarter ended
	31 March 2013	31 December 2012	31 March 2012
	£m	£m	£m

Net interest income	2,722	2,842	3,007

Non-interest income (excluding insurance net premium income)	2,429	1,999	3,186
Insurance net premium income	699	919	938

Non-interest income	3,128	2,918	4,124

Total income (1)	5,850	5,760	7,131
Operating expenses (2)	(3,543)	(3,147)	(4,012)

Profit before insurance net claims and impairment losses	2,307	2,613	3,119
Insurance net claims	(445)	(606)	(649)

Operating profit before impairment losses (3)	1,862	2,007	2,470
Impairment losses	(1,033)	(1,454)	(1,314)

Operating profit (3)	829	553	1,156
Own credit adjustments	249	(220)	(2,456)
Payment Protection Insurance costs	-	(450)	(125)
Interest Rate Hedging Products redress and related costs	(50)	(700)	-
Regulatory fines	-	(381)	-
Integration and restructuring costs	(131)	(620)	(460)
(Loss)/gain on redemption of own debt	(51)	-	577
Write-down of goodwill and other intangible assets	-	(518)	-
Other items	125	(225)	(124)

Operating profit/(loss) including the results of Direct Line Group discontinued operations	971	(2,561)	(1,432)
Direct Line Group discontinued operations (4)	(145)	334	(82)

Operating profit/(loss) before tax	826	(2,227)	(1,514)
Tax charge	(350)	(39)	(138)

Profit/(loss) from continuing operations	476	(2,266)	(1,652)

Profit/(loss) from discontinued operations, net of tax
- Direct Line Group	127	(351)	88
- Other	2	6	5

Profit/(loss) from discontinued operations, net of tax	129	(345)	93

Profit/(loss) for the period	605	(2,611)	(1,559)
Non-controlling interests	(131)	108	14
Other owners' dividends	(81)	(115)	-

Profit/(loss) attributable to ordinary and B shareholders	393	(2,618)	(1,545)

Key metrics

Core performance ratios
- Net interest margin	2.21%	2.16%	2.12%
- Cost:income ratio (5)	64%	57%	60%
- Return on equity	8.2%	8.9%	10.8%
- Adjusted earnings per ordinary and B share (6)	5.6p	1.5p	5.8p
- Adjusted earnings per ordinary and B share assuming a normalised tax rate of 23.25% (2012 - 24.5%) (6)	8.3p	10.1p	11.4p

(1)	Excluding own credit adjustments, (loss)/gain on redemption of own debt, Asset Protection Scheme, strategic disposals and RFS Holdings minority interest, and including Direct Line Group, which is classified as a discontinued operation on a statutory basis until 12 March 2013 and as an associated undertaking thereafter.
(2)	Excluding PPI costs, IRHP redress and related costs, regulatory fines, integration and restructuring costs, write-down of goodwill and other intangible assets, amortisation of purchased intangible assets, bank levy and RFS Holdings minority interest, and including Direct Line Group, which is classified as a discontinued operation on a statutory basis until 12 March 2013 and as an associated undertaking thereafter.
(3)	Operating profit/(loss) before tax, own credit adjustments, PPI costs, IRHP redress and related costs, regulatory fines, integration and restructuring costs, (loss)/gain on redemption of own debt, write-down of goodwill and other intangible assets, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals, bank levy and RFS Holdings minority interest, and including the results of Direct Line Group, which is classified as a discontinued operation on a statutory basis until 12 March 2013 and as an associated undertaking thereafter.
(4)	Included within Direct Line Group discontinued operations are the managed basis divisional results of Direct Line Group (DLG), certain DLG related activities in Central items; and related one-off and other items including integration and restructuring costs, write-down of goodwill, and strategic disposals until 12 March 2013. Thereafter, the Group's share of the post tax profit of DLG is included in non-interest income as an associated undertaking.
(5)	Cost:income ratio is based on total income and operating expenses as defined in (1) and (2) above and after netting insurance claims against income.
(6)	Data for the quarter ended 31 March 2012 have been adjusted for the sub-division and one-for-ten consolidation of ordinary shares, which took effect in June 2012.

	31 March 2013	31 December 2012
	£m	£m

Cash and balances at central banks	86,718	79,290
Net loans and advances to banks (1,2)	34,025	29,168
Net loans and advances to customers (1,2)	432,360	430,088
Reverse repurchase agreements and stock borrowing	103,105	104,830
Debt securities and equity shares	165,109	172,670
Intangible assets	13,928	13,545
Other assets (3)	40,493	40,801

Funded assets	875,738	870,392
Derivatives	432,435	441,903

Total assets	1,308,173	1,312,295

Bank deposits (2,4)	54,536	57,073
Customer deposits (2,4)	437,437	433,239
Repurchase agreements and stock lending	128,233	132,372
Debt securities in issue	92,740	94,592
Settlement balances and short positions	45,250	33,469
Subordinated liabilities	27,788	26,773
Other liabilities (3)	21,143	29,996

Liabilities excluding derivatives	807,127	807,514
Derivatives	429,881	434,333

Total liabilities	1,237,008	1,241,847
Non-controlling interests	532	1,770
Owners' equity	70,633	68,678

Total liabilities and equity	1,308,173	1,312,295

Memo: Tangible equity (5)	51,413	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.

·	Funded assets increased by £5.3 billion, as Markets settlement balances rebounded off seasonal lows and loans increased modestly.

·	Debt securities and equity shares were £7.6 billion lower as a result of disposals of available-for-sale debt securities and the ongoing focus on reducing and de-risking the Markets balance sheet. Cash and liquid balances increased as a result.

·	Customer deposits increased as a result of an inflow of Retail & Commercial deposits in the quarter and a 6% strengthening of the US dollar against Sterling, partly offset by seasonal decreases in Corporate deposits.

·	Supplied £13.2 billion of loans and facilities to UK business, including £7.8 billion to SME customers;

·	Renewed £6.5 billion of UK business overdrafts, including £1.7 billion for SMEs;

·	Offered £1.5 billion of discounted loans to nearly 8,500 SMEs in association with the Bank of England's Funding for Lending Scheme (FLS);

·	Accounted for 35% of all SME lending in the UK, compared with overall customer market share of 24%⁽¹⁾; and

·	Advanced £3.6 billion of mortgages to around 28,000 UK homeowners, including £327 million of discounted FLS loans.

Key Measures	Worst point	FY 2012	Q1 2013	Medium- term target

Value drivers		Core	Core	Core
· Return on equity (1)	(31%)(2)	9.6%	8.2%	>12%
· Cost:income ratio (3)	97%(4)	60%	64%	<55%

Risk measures		Group	Group	Group
· Core Tier 1 ratio	4%(5)	10.3%	10.8%	>10%
· Loan:deposit ratio	154%(6)	100%	99%	c.100%
· Short-term wholesale funding (STWF)	£297bn(7)	£42bn	£43bn	<10% TPAs(8)
· Liquidity portfolio (9)	£90bn(7)	£147bn	£158bn	>1.5x STWF
· Leverage ratio (10)	28.7x(11)	15.0x	15.0x	<18x

	Quarter ended
	31 March 2013	31 December 2012	31 March 2012
Impairment losses	£m	£m	£m

Loan impairment losses	1,036	1,402	1,295
Securities impairment (gains)/losses	(3)	52	19

Group impairment losses	1,033	1,454	1,314

Loan impairment losses
- individually assessed	646	818	745
- collectively assessed	441	505	595
- latent	(51)	80	(57)

Customer loans	1,036	1,403	1,283
Bank loans	-	(1)	12

Loan impairment losses	1,036	1,402	1,295

Core	599	729	796
Non-Core	437	673	499

Group	1,036	1,402	1,295

Customer loan impairment charge as a % of gross loans and advances (1)
Group	0.9%	1.2%	1.1%
Core	0.6%	0.7%	0.8%
Non-Core	3.3%	4.8%	2.7%

·	Good progress was made in Q1 2013 towards the Group's Core Tier 1 ratio target, with the Basel 2.5 and fully loaded Basel III ratios increasing by 50 basis points to 10.8% and 8.2% respectively.

·	The loan:deposit ratio fell to 99%. The Group continues to pursue opportunities to lend to businesses; however, demand for borrowing remains subdued, which is the main headwind for the Group being able to put to use its excess liquidity.

·	The liquidity portfolio remains significantly above target, covering short-term wholesale funding balances by a very conservative 3.7 times.

·	Achievement of the value driver measures remain a challenge. Management continues to be highly focused on actions to meet the medium-term cost:income ratio target of <55% for Core.

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

·	Net interest income fell by £99 million, largely reflecting continued run-off and divestment in Non-Core and a lower day count in Q1 2013 which particularly affected R&C. Excluding the impact of the lower day count, R&C net interest income was resilient, with continued lower rates on current account hedges and a small decline in asset volumes partly offset by improved rates on deposits.

·	Average interest-earning assets fell by a further £9 billion in line with the Group's planned balance sheet reductions in Non-Core and Markets.

·	R&C NIM was 1 basis point lower, primarily driven by UK Retail with continued lower rates on current account hedges and the non-repeat of an internal funding benefit in Q4 2012.

·	Group NIM remained flat at 1.95% as lower Group Treasury funding costs offset declines in R&C and Non-Core NIM.

·	Group NIM was up 6 basis points, largely reflecting a smaller liquidity portfolio and the decline of lower-yielding Non-Core assets as the division continued to shrink.

·	A £271 million fall in net interest income was driven by continuing pressure on liability margins in the R&C businesses as deposit hedges roll off as well as significantly lower interest-earning assets.

·	A £73 billion reduction in average interest-earning assets reflected the reduction in Non-Core and International Banking assets along with planned run-off of the low-yielding liquidity buffer.

·	Income from trading activities increased by 79% in line with a seasonally stronger first quarter, with a particularly good performance in Asset Backed Products in the Markets division as investors renewed their search for yield. Non-Core income from trading activities also benefited from the seasonal trend, with tighter spreads, asset price improvements and lower disposal losses.

·	Slightly offsetting these seasonal gains was a 17% decline in UK Corporate non-interest income, with lower revenue share from Markets and the non-repeat of equity investment gains in Q4 2012.

·	Insurance net premium income fell by £220 million, primarily reflecting the non-consolidation of Direct Line Group from 13 March 2013.

·	The majority of the £996 million fall in non-interest income was driven by Markets which fell by £700 million, reflecting the business's de-risking activity and the impact of less attractive market conditions in the Rates business versus Q1 2012.

·	Insurance net premium income was down £239 million, given the accounting change described above and lower net premium income reflecting a decline in the volume of Motor-related insurance revenue.

·	The increase in operating expenses largely reflects the substantial bonus accrual releases and clawback recorded in Q4 2012, principally in Markets and International Banking. Excluding this and other one-offs included in Q4 2012, operating expenses were flat on a constant currency basis.

·	US R&C expenses were flat, excluding a $33 million pension gain recorded in Q4 2012. A 5% increase in UK Corporate expenses was driven by costs set aside for customer remediation.

·	The increase in the Core cost:income ratio to 64% largely reflects these factors.

·	The 12% decrease in operating expenses reflects a £162 million reduction in Markets, £98 million reduction in Non-Core, and falls in US R&C of £80 million, International Banking of £77 million and Direct Line Group of £71 million.

·	Staff costs in Markets were driven lower as a result of significant headcount reductions, down 2,000, and lower performance-related pay.

·	The decline in Non-Core expenses reflected a reduction in operating lease depreciation (£56 million), predominantly due to the disposal of RBS Aviation Capital in Q2 2012, and a 1,700 fall in headcount in line with the run-off of the business.

·	Business Services costs of £918 million were down 5%, reflecting continuing benefits from the Group's efficiency initiatives.

·	Group loan impairment losses fell by 26%, with the biggest improvements occurring in the Core and Non-Core Ulster Bank portfolios.

·	Non-Core loan impairments fell by £236 million (35%) with £122 million of the fall relating to the Ulster Bank portfolio. Core Ulster Bank loan impairments declined by £78 million, reflecting improving trends on the mortgage portfolio.

·	Loan impairments as a percentage of gross loans and advances declined to 0.6% in Core and 3.3% in Non-Core.

·	Risk elements in lending (REIL) totalled £41 billion, down £1 billion (2%) in the quarter on a constant currency basis. Group provision coverage of REIL remained stable at 52%.

·	Group loan impairment losses fell by 20%, largely reflecting a £154 million improvement in Core Ulster Bank, along with improvements in UK Retail (down £75 million as a result of lower default rates) and Non-Core (down £62 million) as the size of the portfolio declined by 28%.

·	The improvement in Ulster Bank reflects a significant reduction in losses in the mortgage portfolio, as the pace of deterioration in credit metrics slowed in line with relative macroeconomic stabilisation.

·	RBS continues to monitor its provision for Payment Protection Insurance redress costs. No further charge was made in Q1 2013. Of the cumulative £2.2 billion charge accrued so far, £1.5 billion in redress had been paid by 31 March 2013.

·	Following progress on the Interest Rate Hedging Products redress exercise, the Group now expects administrative costs to be higher than anticipated at the time of the 2012 annual results. Consequently, the Group has increased the provision by £50 million in Q1 2013.

·	Integration and restructuring costs of £131 million were down £489 million from elevated Q4 2012 charges, which reflected asset write-offs in relation to the restructuring of Markets and International Banking. The charge in Q1 2013 largely comprised costs relating to the separation of the Williams & Glyn's branch-based business.

·	An accounting gain of £249 million was recorded in relation to the Group's own credit as uncertainty in the Eurozone led to a 9 basis points widening of cash market credit spreads in the quarter. In Q4 2012 spreads tightened by 5 basis points, resulting in a £220 million own credit accounting charge.

·	The Group recognised a net gain on disposal of £72 million in relation to the sale of a further 16.8% of its shareholding in Direct Line Group on 13 March 2013. The Group now holds 48.5% of Direct Line Group's issued ordinary share capital.

·	The own credit adjustment of £249 million credit contrasted with a charge of £2,456 million in Q1 2012 when spreads tightened significantly. Integration and restructuring costs were £329 million lower.

·	A loss on redemption of own debt of £51 million was recorded on a liability management exercise conducted in Q1 2013, compared with a gain of £577 million recorded in Q1 2012 on a separate transaction.

Capital resources and ratios	31 March 2013	31 December 2012

Core Tier 1 capital	£48bn	£47bn
Tier 1 capital	£57bn	£57bn
Total capital	£69bn	£67bn
Risk-weighted assets	£446bn	£460bn
Core Tier 1 ratio	10.8%	10.3%
Tier 1 ratio	12.9%	12.4%
Total capital ratio	15.5%	14.5%

·	Core Tier 1 ratio increased by 50 basis points to 10.8% largely as a result of a £14 billion decrease in risk-weighted assets.

·	The £14 billion fall in risk-weighted assets was largely attributable to an £13 billion decline in Markets, with lower operational and market risk, and a £6 billion reduction in Non-Core, through disposals and run-off.

·	The Group continues to absorb significant regulatory credit model uplifts, although the impact in Q1 2013 was smaller than in recent periods.

·	On a fully loaded Basel III basis, the Common Equity Tier 1 ratio strengthened by 50 basis points to 8.2%⁽¹⁾ in line with management's target of reaching in the region of 9% by the end of 2013 and 10% by the end of 2014. This is well ahead of the Basel implementation timetable, which calls for RBS to have a fully loaded ratio of 8.5% by 2018.

Balance sheet	31 March 2013	31 December 2012

Funded balance sheet (1)	£876bn	£870bn
Total assets	£1,308bn	£1,312bn
Loans and advances to customers (2)	£433bn	£432bn
Customer deposits (3)	£438bn	£434bn
Loan:deposit ratio - Core (4)	90%	90%
Loan:deposit ratio - Group (4)	99%	100%
Tangible net asset value per ordinary and B share (5)	459p	446p
Tier 1 leverage ratio (6)	15.0x	15.0x
Tangible equity leverage ratio (7)	6.0%	5.8%

·	The Group's loan:deposit ratio ticked down to 99%, driven by further Non-Core asset reductions and continuing strong deposit inflows.

·	Loans and advances to customers grew by £1 billion as a £3 billion increase in US R&C, largely reflecting the strengthening of the US dollar against sterling, was partly offset by run-off and disposals in Non-Core. In the UK, subdued customer demand for borrowing continued to hamper loan growth.

·	Customer deposits increased by £4 billion as a result of the US dollar strengthening against sterling and deposit inflows in most R&C businesses despite market-wide pricing reductions, driven by an overall excess of liquidity in the market. This was partially offset by a fall in UK Corporate deposits, largely reflecting seasonality.

·	The funded balance sheet increased by £6 billion, principally reflecting larger central bank deposits within Group Treasury and a small rebound in Markets counterparty positions compared with a seasonally low Q4 2012. The change in accounting treatment for Direct Line Group led to an £11 billion reduction in third party assets.

·	Tangible net asset value per ordinary and B share increased by 13 pence to 459 pence, reflecting attributable profit of £393 million, along with currency movements.

Funding & liquidity metrics	31 March 2013	31 December 2012

Deposits (1)	£493bn	£491bn
Deposits as a percentage of funded balance sheet	56%	56%
Short-term wholesale funding (2)	£43bn	£42bn
Wholesale funding (2)	£147bn	£150bn
Short-term wholesale funding as a percentage of funded balance sheet	5%	5%
Short-term wholesale funding as a percentage of total wholesale funding	29%	28%

Liquidity portfolio	£158bn	£147bn
Liquidity portfolio as a percentage of funded balance sheet	18%	17%
Liquidity portfolio as a percentage of short-term wholesale funding	367%	350%

Net stable funding ratio	119%	117%

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

·	The liquidity portfolio grew by a further £11 billion, with Non-Core run-down and deposit growth continuing to bring in additional liquidity and subdued customer demand for borrowing making it harder to lend.

·	This liquidity portfolio covered the Group's short-term wholesale funding 3.7 times, significantly above the Group's medium-term target of 1.5 times, as short-term wholesale funding as a proportion of the funded balance sheet remained at 5%.

·	The Group monitors its liquidity coverage ratio (LCR) and, based on its interpretation of the draft guidance available, maintained its LCR at over 100% as at 31 March 2013. The net stable funding ratio was 119%.