Interim Management Statement - Part 2 of 5 | Company Announcement

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

Operating profit/(loss) before impairment losses by division
UK Retail	557	606	632
UK Corporate	543	658	668
Wealth	61	92	53
International Banking	149	192	132
Ulster Bank	76	75	84
US Retail & Commercial	208	223	121

Retail & Commercial	1,594	1,846	1,690
Markets	294	161	826
Direct Line Group	89	113	84
Central items	(43)	126	(136)

Core	1,934	2,246	2,464
Non-Core	(72)	(239)	6

Group operating profit before impairment losses	1,862	2,007	2,470

Impairment losses by division
UK Retail	80	93	155
UK Corporate	185	234	176
Wealth	5	16	10
International Banking	55	37	35
Ulster Bank	240	318	394
US Retail & Commercial	19	23	19

Retail & Commercial	584	721	789
Markets	16	22	2
Central items	-	8	34

Core	600	751	825
Non-Core	433	703	489

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

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

Operating profit/(loss) by division
UK Retail	477	513	477
UK Corporate	358	424	492
Wealth	56	76	43
International Banking	94	155	97
Ulster Bank	(164)	(243)	(310)
US Retail & Commercial	189	200	102

Retail & Commercial	1,010	1,125	901
Markets	278	139	824
Direct Line Group	89	113	84
Central items	(43)	118	(170)

Core	1,334	1,495	1,639
Non-Core	(505)	(942)	(483)

Group operating profit	829	553	1,156

	Quarter ended
	31 March 2013	31 December 2012	31 March 2012
	%	%	%

Net interest margin by division
UK Retail	3.49	3.60	3.61
UK Corporate	3.01	2.97	3.09
Wealth	3.55	3.69	3.67
International Banking	1.74	1.62	1.60
Ulster Bank	1.85	1.93	1.87
US Retail & Commercial	2.93	2.90	3.03

Retail & Commercial	2.90	2.91	2.91
Non-Core	(0.25)	0.29	0.31

Group net interest margin	1.95	1.95	1.89

	31 March 2013	31 December 2012
	£bn	£bn

Total funded assets by division
UK Retail	117.1	117.4
UK Corporate	109.9	110.2
Wealth	21.7	21.4
International Banking	54.4	53.0
Ulster Bank	30.6	30.6
US Retail & Commercial	76.3	72.1

Retail & Commercial	410.0	404.7
Markets	288.0	284.5
Other (primarily Group Treasury)	123.8	123.0

Core	821.8	812.2
Non-Core	52.9	57.4

	874.7	869.6
RFS Holdings minority interest	1.0	0.8

Group	875.7	870.4

	31 March 2013	31 December 2012		31 March 2012
	£bn	£bn	Change	£bn	Change

Risk-weighted assets by division
UK Retail	44.5	45.7	(3%)	48.2	(8%)
UK Corporate	87.0	86.3	1%	76.9	13%
Wealth	12.5	12.3	2%	12.9	(3%)
International Banking	48.9	51.9	(6%)	41.8	17%
Ulster Bank	36.8	36.1	2%	38.4	(4%)
US Retail & Commercial	58.9	56.5	4%	58.6	1%

Retail & Commercial	288.6	288.8	-	276.8	4%
Markets	88.5	101.3	(13%)	115.6	(23%)
Other (primarily Group Treasury)	10.2	5.8	76%	11.0	(7%)

Core	387.3	395.9	(2%)	403.4	(4%)
Non-Core	54.6	60.4	(10%)	89.9	(39%)

Group before benefit of Asset Protection Scheme	441.9	456.3	(3%)	493.3	(10%)
Benefit of Asset Protection Scheme	-	-	-	(62.2)	(100%)

Group before RFS Holdings minority interest	441.9	456.3	(3%)	431.1	3%
RFS Holdings minority interest	3.9	3.3	18%	3.2	22%

Group	445.8	459.6	(3%)	434.3	3%

Interim Management Statement - Part 2 of 5

US Retail & Commercial (US Dollar)

Companies

UK 100

Latest directors dealings

Employee numbers by division (full time equivalents rounded to the nearest hundred)	31 March 2013	31 December 2012	31 March 2012

UK Retail	25,800	26,000	27,600
UK Corporate	13,600	13,300	13,400
Wealth	5,100	5,100	5,500
International Banking	4,800	4,600	5,600
Ulster Bank	5,000	4,500	4,500
US Retail & Commercial	18,600	18,700	18,700

Retail & Commercial	72,900	72,200	75,300
Markets	11,300	11,300	13,300
Direct Line Group	-	14,200	15,100
Group Centre	6,800	6,800	6,600

Core	91,000	104,500	110,300
Non-Core	2,600	3,100	4,300

	93,600	107,600	114,600
Business Services	29,100	29,100	29,500
Integration and restructuring	300	500	1,000

Group	123,000	137,200	145,100

(1)	Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(3)	Divisional RWAs are based on a long-term conservative average secured mortgage probability of default methodology rather than the current lower point in time basis required for regulatory reporting.

·	Operating profit of £477 million held up well, excluding the impact on income of fewer days in the quarter (£22 million) and the effect on expenses of higher FSCS levy charges (£22 million). Return on equity remained robust.

·	Mortgage balances remained flat as the direct sales force took part in a re-accreditation training exercise to help ensure optimal customer outcomes. Credit card balances reflected seasonal customer behaviour, although the interest-bearing balances remained stable.

·	Customer deposit balances increased by 2%, mainly due to strong current account and instant access savings performance, which helped drive a 3% reduction in the loan:deposit ratio to 100%.

·	Net interest income, down £46 million, reflected the result of fewer days in the quarter as well as continued lower rates on current account hedges. This, along with the non-recurrence of an internal funding benefit in Q4 2012, drove net interest margin 11 basis points lower to 3.49%.

·	Non-interest income increased by £7 million although investment advice income has been adversely impacted by the Retail Distribution Review (RDR).

·	Staff costs declined by a further 4% as a consequence of increased branch efficiency and automation which drove headcount reductions. Other direct costs were successfully controlled, with the increase due to a rise in the FSCS levy charge of £22 million.

·	Impairment losses declined by 14% reflecting slightly lower default levels and the recognition of improved recoveries on previously defaulted unsecured debt.

·	Risk-weighted assets fell by 3%, reflecting quality improvements and small balance reductions across the unsecured portfolio.

·	Operating profit was resilient as impairments improved by £75 million, offsetting weaker income trends.

·	The loan:deposit ratio improved by 5%.

	○	Mortgage balances increased by 2% reflecting strong growth in 2012. Personal lending balances declined by 9% largely as a result of continued customer deleveraging.
	○	Customer deposits increased by 6% with strong instant access balance growth and a healthy 2012/13 ISA season.

·	Net interest income reflected the continuing roll-over of current account hedges at lower prevailing market rates and lower unsecured balances.

·	Non-interest income was affected by restructuring and retraining to meet industry-wide RDR regulatory changes. In addition, packaged account fees and credit card insurance income were lower.

·	Total costs remained stable as staff costs declined, reflecting headcount reductions of 1,800 offset by a higher FSCS levy and other regulatory charges.

·	Impairment losses declined, reflecting lower default rates.

·	Operating profit fell by 16%, with revenues 8% lower than the more buoyant Q4 2012. This was partially offset by lower impairments (down 21%), with improving trends in the SME portfolio.

·	Net interest income was down 2% mainly as a result of fewer days in the quarter. Deposit margin compression, due to a continuation of low yields, was largely offset by an improvement in asset margins from selected sector re-pricing and back book refinancing.

·	Non-interest income declined by 17%, mainly from lower revenue share from Markets hedging activities, the non-repeat of equity investment gains of £19 million in Q4 2012, higher derivative close-out charges associated with impaired assets, up £11 million, and subdued transaction services.

·	Expenses were 5% higher, reflecting costs of £17 million provided for customer remediation. Excluding these, expenses were broadly in line with lower revenue-related costs offset by the implementation of revised internal charging arrangements, which resulted in UK Corporate taking an increased share of branch network costs.

·	Impairments fell by 21% in the quarter, with fewer significant individual cases and improving trends in the SME market.

·	Lending balances remained broadly flat over the course of Q1 2013, whilst absorbing targeted reductions in the commercial property sector.

·	Risk-weighted assets increased by 1% to £87 billion following further regulatory changes to models relating to the market-wide slotting approach on real estate.

·	Operating profit fell 27%, with continuing pressure on liability margins and with small increases in costs and impairments. Return on equity fell to 10.7%, reflecting the fall in operating profit and higher risk-weighted assets.

·	Net interest income decreased by 7%, primarily driven by continuing pressure on liability margins and the non-repeat of income deferral benefits of £28 million in Q1 2012. This was partially offset by improvements in asset margins.

·	Non-interest income was 15% lower, reflecting a decline in Markets revenue share, and derivative close-out charges up £14 million.

·	Total expenses increased by 2% as a result of customer remediation costs of £17 million and increased branch network charges, partially offset by lower revenue-related and staff incentive costs.

·	Impairments were slightly higher than in Q1 2012, which had benefited from a higher latent provision release.

·	Risk-weighted assets were 13%, or £10 billion, higher as a result of significant increases in market-wide regulatory capital model requirements and increases to default risk weights in other models.

Key metrics	Quarter ended
Key metrics	31 March 2013	31 December 2012	31 March 2012

Performance ratios
Return on equity (1)	12.1%	16.7%	9.0%
Net interest margin	3.55%	3.69%	3.67%
Cost:income ratio	78%	68%	82%

·	Operating profit was lower than in the prior quarter, in large part reflecting the reversion of staff expenses following a significant reduction in incentive costs in Q4 2012, partially offset by an improvement in impairments.

·	Net interest income reflected the continued impact of lower rates on UK deposit hedges. Small improvements in deposit and lending margins were more than offset by lower income on hedges, driving the net interest margin 14 basis points lower.

·	Investment in technology and the global platform infrastructure was reflected in lower non-staff expenses, as a result of efficiency gains, and higher staff expenses, as headcount was increased to support this investment as well as to support regulatory projects. The phasing of Financial Services Compensation Scheme levies and the timing of incentive accruals also pushed expenses higher.

·	Impairments fell by £11 million, reflecting the non-recurrence of one-off items in Q4 2012.

·	Client assets and liabilities increased by 3%. Assets under management increased by 7%, benefiting from a recovery in markets in Q1 2013. Deposit volumes increased by 2%, while lending remained stable.

·	Operating profit increased, driven by a decrease in expenses and impairments, despite the continuation of a challenging income environment.

·	Income trends reflect the wider economic environment, with muted investment activity and lower rates available on UK deposit hedges. Non-interest income was also impacted by client transfers resulting from the disposal of the Latin American, Caribbean and African businesses.

·	Expenses decreased by £25 million, partially due to the non-repeat of an £8.75 million fine from the Financial Services Authority incurred in Q1 2012 and a fall in headcount.

·	Client assets and liabilities increased marginally. Assets under management were largely maintained as positive market movements offset net outflows of low margin custody assets and client transfers resulting from the disposal of the Latin American, Caribbean and African businesses.

(1)	Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions), for the ongoing businesses.
(2)	Excludes disposal groups.
(3)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

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

Income statement
Net interest income	965	1,011	1,001

Net fees and commissions	212	202	237
Other non-interest income	14	17	29

Non-interest income	226	219	266

Total income	1,191	1,230	1,267

Direct expenses
- staff	(178)	(186)	(211)
- other	(112)	(90)	(78)
Indirect expenses	(344)	(348)	(346)

	(634)	(624)	(635)

Operating profit before impairment losses	557	606	632
Impairment losses	(80)	(93)	(155)

Operating profit	477	513	477


Analysis of income by product
Personal advances	223	228	236
Personal deposits	103	150	185
Mortgages	628	610	563
Cards	209	214	219
Other	28	28	64

Total income	1,191	1,230	1,267


Analysis of impairments by sector
Mortgages	10	5	34
Personal	35	64	82

	31 March 2013	31 December 2012		31 March 2012
	£bn	£bn	Change	£bn	Change

Capital and balance sheet
Loans and advances to customers (gross)
- mortgages	99.1	99.1	-	97.5	2%
- personal	8.6	8.8	(2%)	9.4	(9%)
- cards	5.5	5.7	(4%)	5.6	(2%)

	113.2	113.6	-	112.5	1%
Loan impairment provisions	(2.6)	(2.6)	-	(2.7)	(4%)

Net loans and advances to customers	110.6	111.0	-	109.8	1%

Risk elements in lending	4.4	4.6	(4%)	4.6	(4%)
Provision coverage (2)	58%	58%	-	58%	-

Customer deposits	110.1	107.6	2%	104.1	6%
Assets under management (excluding deposits)	6.2	6.0	3%	5.8	7%
Loan:deposit ratio (excluding repos)	100%	103%	(300bp)	105%	(500bp)

Risk-weighted assets (3)
- Credit risk (non-counterparty)	36.7	37.9	(3%)	40.4	(9%)
- Operational risk	7.8	7.8	-	7.8	-

	44.5	45.7	(3%)	48.2	(8%)

	Quarter ended
	31 March 2013	31 December 2012	31 March 2012

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Financial institutions	0.2%	0.2%	0.1%
Hotels and restaurants	1.3%	1.6%	1.0%
Housebuilding and construction	1.5%	2.9%	2.7%
Manufacturing	0.7%	0.9%	-
Private sector education, health, social work, recreational and community services	1.1%	0.1%	1.0%
Property	1.1%	1.1%	0.4%
Wholesale and retail trade, repairs	1.5%	2.2%	1.5%
Asset and invoice finance	-	0.4%	0.3%
Shipping	0.4%	2.2%	0.1%
Other	0.1%	-	0.6%

Total	0.7%	0.9%	0.6%

	31 March 2013	31 December 2012		31 March 2012
	£bn	£bn	Change	£bn	Change

Capital and balance sheet
Loans and advances to customers (gross)
- financial institutions	5.1	5.8	(12%)	6.2	(18%)
- hotels and restaurants	5.6	5.6	-	6.0	(7%)
- housebuilding and construction	3.1	3.4	(9%)	3.7	(16%)
- manufacturing	4.7	4.7	-	4.7	-
- private sector education, health, social work, recreational and community services	8.8	8.7	1%	8.6	2%
- property	24.4	24.8	(2%)	26.7	(9%)
- wholesale and retail trade, repairs	8.6	8.5	1%	9.1	(5%)
- asset and invoice finance	11.4	11.2	2%	10.3	11%
- shipping	7.7	7.6	1%	7.7	-
- other	27.4	26.7	3%	26.7	3%

	106.8	107.0	-	109.7	(3%)
Loan impairment provisions	(2.4)	(2.4)	-	(2.1)	14%

Net loans and advances to customers	104.4	104.6	-	107.6	(3%)

Total third party assets	109.9	110.2	-	113.2	(3%)
Risk elements in lending	5.3	5.5	(4%)	4.9	8%
Provision coverage (2)	45%	45%	-	43%	200bp

Customer deposits	123.9	127.1	(3%)	124.3	-
Loan:deposit ratio (excluding repos)	84%	82%	200bp	87%	(300bp)

Risk-weighted assets
- Credit risk (non-counterparty)	78.6	77.7	1%	68.3	15%
- Operational risk	8.4	8.6	(2%)	8.6	(2%)

	87.0	86.3	1%	76.9	13%

·	Best Trade Finance Bank in the UK (Global Finance Awards 2013).

·	Number Two in Sterling denominated Debt Capital Markets in Q1 2013 (Dealogic).

·	Operating profit was down £61 million, or 39%, largely reflecting the normalisation of expenses following the downward adjustment to variable compensation in Q4 2012, together with higher impairments.

·	Income remained stable:
	○	Loan portfolio income was up 8% following completion of one large hedging transaction.

	○	Cash management decreased by 9%, driven by tighter spreads following the decline in both three month LIBOR and five year fixed rates across Europe.

	○	Trade finance remained stable despite significant pressure on margins following increased competition in Asia.

·	Total expenses increased by £41 million, or 14%, mainly due to the normalisation of revenue-linked expenses following the downward revision to variable compensation in Q4 2012.

·	Impairments in Q1 2013 included a £38 million single-name provision.

·	Return on equity was 5.2%, compared with 8.3% in Q4 2012. Excluding the single-name impairment, return on equity was 7.2% in Q1 2013.

·	Customer deposits increased by £1 billion, with an improvement in the deposit profile as the business strategically reduced short-term deposits and increased operational balances, reducing future liquidity outflow risk.

·	Third party assets were up 3% as the impact of sterling weakening against the US dollar and euro more than offset reductions in the lending portfolio and increased levels of repayments.

·	Risk-weighted assets decreased by 6% reflecting an active reduction in higher risk exposures. This was partially offset by exchange rate movements.

·	Operating profit was little changed as expense reductions offset the impact on income of the strategic reduction in the loan portfolio undertaken in 2012.

·	Income was 11% lower:
	○	Loan portfolio income increased by 14%, mainly due to market movements associated with credit hedging activities.

	○	Cash management income was affected by tighter deposit margins following reductions in both three month LIBOR and five year fixed rates across Europe. Payment fees were also lower, reflecting growth in electronic, lower-margin payments.

·	Expenses declined by £77 million, reflecting planned restructuring initiatives following the formation of the International Banking division in January 2012. Savings were achieved through headcount reduction and the run-off of discontinued businesses, with a resulting decrease in infrastructure support costs. Revenue-linked expenses also fell in line with the decrease in income.

·	Third party assets declined by 15%, reflecting targeted reductions in the lending portfolio carried out in 2012.

·	Customer deposits increased by 4% with a focus on growing operational balances. The net funding position improved with the loan:deposit ratio moving from 116% to 90%.

·	Bank deposits were down 55%, mainly as a result of lower short tenor balances, reflecting a strategic initiative to reduce liquidity outflow risk.

·	Risk-weighted assets increased by 17%, reflecting the impact of regulatory uplifts partially offset by successful mitigation through balance sheet reduction. Risk-weighted asset intensity in the loan book has increased significantly given the uplifts, which will result in strategic adjustments going forward.

·	Operating loss decreased by £79 million to £164 million primarily reflecting a significant reduction in impairment losses.

·	Income fell by £4 million in the quarter largely driven by lower interest-earning assets, the cost of deposit growth at the end of 2012 and the impact of fewer days in the quarter. Net interest margin decreased by 8 basis points to 1.85%.

·	Expenses were £5 million lower with the impact of an impairment charge on own property assets in Q4 2012 partly offset by higher underlying pension charges and further investment in programmes to support customers in financial difficulty in Q1 2013.

·	Impairment losses declined by £78 million, 25%, while remaining elevated. Although risk elements in lending increased in both the mortgage and corporate portfolios, the pace of arrears formation has slowed, particularly in the mortgage book. Residential asset values have been stabilising over the past two to three quarters.

·	Customer deposits won during Q4 2012 were retained in Q1 2013 (flat on a constant currency basis) and the loan:deposit ratio fell further to 127%. Customer loan balances decreased by £0.6 billion, or by 2% in constant currency terms.

·	Operating loss decreased by £146 million or 47%, driven by a significant improvement in impairment losses.

·	Net interest income fell by £11 million reflecting lower customer loan balances, the impact of an increased volume of impaired loans and the relatively high cost of deposit raising. Net interest margin declined by 2 basis points, despite the impact of initiatives to widen loan margins and re-price deposits.

·	Non-interest income increased by £5 million, holding up well despite the low levels of new business and muted market activity.

·	Expenses showed a modest increase, reflecting investment in resources to support customers in arrears coupled with an increase in mandatory change requirements. Expenses continued to be managed efficiently with further progress made on initiatives to simplify the bank's operations.

·	Impairment losses decreased by £154 million, 39%, with a significant reduction in losses on the mortgage portfolio as underlying credit metrics improved and asset values began to stabilise.

·	The loan:deposit ratio further improved to 127% from 147% in Q1 2012. Loan balances declined by 4% in constant currency terms reflecting subdued demand for new lending coupled with customer action to reduce debt levels. Customer deposits increased by 7% at constant currency, largely driven by retail and SME balances, a key focus area in the bank's deposit gathering strategy.

(1)	Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
(2)	Excludes the litigation settlement in Q1 2012.
(3)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

●	Sterling weakened against the US Dollar, with the spot exchange rate at 31 March 2013 decreasing by 6% compared with 31 December 2012.

●	Performance is described in full in the US dollar-based financial statements set out on pages 47 to 50.

·	Operating profit of $292 million was resilient excluding the impact of a one-off $33 million pension gain in Q4 2012.

·	Net interest income was down 2% as favourable funding costs and commercial loan growth were more than offset by a smaller investment portfolio and consumer loan run-off.

·	Non-interest income was up $11 million, or 2%, reflecting higher securities gains offset by lower mortgage banking fees and deposit fees.

·	Excluding the one-off $33 million pension gain in Q4 2012, total expenses were flat, reflecting lower operational losses offset by phasing of the annual incentive plan accruals and a seasonal increase in payroll taxes.

·	Impairment losses were down $8 million, or 21%, reflecting lower impairments related to securities as well as a stable credit environment.

·	Operating profit of $292 million increased by $132 million, or 83%, and was broadly stable if adjusted for the $138 million litigation settlement in Q1 2012.

·	Net interest income was down 5% as the positive impact of commercial loan growth and lower funding costs was offset by the effect of prevailing economic conditions on asset yields and customer investment behaviour.

·	Loans and advances were up slightly with strong commercial loan growth mostly offset by planned run-off of long-term fixed-rate consumer products.

·	Customer deposits were up 1% with strong growth achieved in checking balances. Consumer checking balances grew by 2% while small business checking balances grew by 6% over the year.

·	Non-interest income was up $38 million, or 9%, reflecting higher securities gains partially offset by lower deposit and mortgage banking fees.

·	Excluding the $138 million litigation settlement in Q1 2012 relating to a class action lawsuit regarding the way overdraft fees were assessed on customer accounts prior to 2010, total expenses were broadly in line with Q1 2012.

·	Impairment losses were in line with Q1 2012. The credit environment remained broadly stable over the year.

(1)	Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions), for the ongoing businesses.
(2)	Compensation ratio is based on staff costs as a percentage of total income.
(3)	Excludes disposal groups.
(4)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

·	Operating profit doubled to £278 million, driven by 62% growth in income and a continued focus on cost management. Staff expenses normalised following the significant reduction in variable compensation in Q4 2012 relating to the Group's LIBOR settlements.

·	Rates and investor products income was broadly flat. Client activity was subdued and risk appetite was lowered. Trading performance was weak in vanilla products although this was offset by an improved performance in Derivative Product Solutions.

·	The increase in Currencies was partly driven by an increase in volumes as clients responded to greater volatility.

·	Asset Backed Products rallied early in the quarter as investors renewed their search for yield, compared with a seasonally quiet Q4 2012, generating both client flow and mark to market gains on trading inventory.

·	The 33% increase in Credit Markets was driven by Flow Credit which benefited from a rally in credit assets at the beginning of Q1 2013. Income from Origination was slightly down on a positive Q4 2012.

·	Staff expenses normalised following the reduction in variable compensation recognised in Q4 2012 relating to the Group's LIBOR settlement. Other expenses continued to benefit from effective cost management and control of discretionary expenditure.

·	Impairments remained low, with asset quality stable.

·	The normal increase in third party assets compared with the seasonally low fourth quarter was limited by management's ongoing determination to reduce and de-risk the balance sheet.

·	Risk-weighted assets continued to fall, reflecting management's continued focus on risk reduction and a fall in operational risk.

·	Market conditions were more challenging than a year earlier as heightened Eurozone uncertainty during Q1 2013 contrasted with the confidence boost from the ECB's LTRO in Q1 2012. A 29% reduction in staff costs helped to mitigate the income impact of the division's balance sheet realignment.

·	Rates and investor products declined, reflecting lower client volumes, de-risking and a weak trading performance. This contrasted with Q1 2012 which benefited from the impact of the LTRO and a heightened level of client activity.

·	Currencies continued to suffer from margin compression and subdued volumes in a competitive and diversified market.

·	Asset Backed Products benefited from investors' search for yield and a credit market rally in both Q1 2012 and Q1 2013.

·	Credit Markets declined following lower income in both Flow Credit, which benefited from the LTRO in Q1 2012, and Origination, where both corporate and financial client activity was lower.

·	Significant headcount reductions implemented during 2012, combined with a reduced level of performance-related pay, drove staff costs lower. Discretionary expenditure continued to be managed down, although other expenses increased as a result of higher legal costs.

·	Risk-weighted assets fell by £27 billion, demonstrating the division's commitment to reduce risk and manage down the balance sheet despite ongoing regulatory pressure. This was also reflected in the £12 billion fall in third party assets over the period.

	Quarter ended
	Memo (1) 31 March 2013	31 March 2013 (to 12 March)	31 December 2012	31 March 2012
	£m	£m	£m	£m

Income statement
Earned premiums	981	774	999	1,020
Reinsurers' share	(95)	(75)	(80)	(82)

Net premium income	886	699	919	938
Fees and commissions	(92)	(73)	(79)	(109)
Instalment income	30	24	32	31
Other income	15	12	14	16
Share of profit as an associated undertaking (13 March 2013 - 31 March 2013)	-	7	-	-

Total income	839	669	886	876
Net claims	(564)	(445)	(606)	(649)

Underwriting profit	275	224	280	227

Staff expenses	(91)	(72)	(90)	(79)
Other expenses	(115)	(90)	(109)	(91)

Total direct expenses	(206)	(162)	(199)	(170)
Indirect expenses	-	-	-	(63)

	(206)	(162)	(199)	(233)

Technical result	69	62	81	(6)
Investment income	34	27	32	90

Operating profit	103	89	113	84

(1)	Loss ratio is based on net claims divided by net premium income.
(2)	Commission ratio is based on fees and commissions divided by net premium income.
(3)	Expense ratio is based on expenses divided by net premium income.
(4)	Combined operating ratio is the sum of the loss, commission and expense ratios.

·	Operating profit for the full quarter of £103 million was £19 million, 23%, higher than 2012 as a fall in investment income of £56 million was more than offset by an improved technical result.

·	Investment income of £34 million was £56 million, 62%, lower than Q1 2012 due to non-repeat of gains, reduced reinvestment yields and a lower average investment asset base.

·	The improvement in the loss ratio was partially due to the absence of claims from major weather events in the first quarter of 2013, despite unseasonably cold weather across most of the UK.

·	The commission ratio improved by 200 basis points compared with Q1 2012 due to the non-repeat of payments to Tesco Personal Finance.

·	The expense ratio improved by 200 basis points reflecting lower expenses, due to the non-repeat of parallel running costs and the move to a fully stand-alone expense base, partially offset by lower net premium income.

·	The combined operating ratio of 97% improved by 900 basis points compared with 2012, driven by improvements in all ratios.

·	Central items not allocated represented a debit of £43 million compared with a credit of £118 million in Q4 2012.

·	Significant items included a gain of £105 million on available-for-sale bond disposals versus the £187 million gain recorded in Q4 2012 and a £65 million credit relating to the Group's share of profit from its stake in Saudi Hollandi, which was previously held as a disposal group.

·	Other unallocated Group Treasury costs, including volatile items under IFRS, were £103 million, up from £26 million in Q4 2012.

·	Central items not allocated represented a debit of £43 million compared with £170 million in Q1 2012.

·	The movement is primarily due to lower unallocated costs in Group Treasury, down £97 million, higher gains on available-for-sale bond disposals, up £15 million and the £65 million credit relating to Saudi Hollandi.

(1)	Asset-backed products include super senior asset-backed structures and other asset-backed products.
(2)	Includes Ulster Bank impairment losses of £242 million (Q4 2012 - £364 million; Q1 2012 - £264 million).
(3)	Includes disposal groups.
(4)	Ulster Bank - 7.4% (Q4 2012 - 11.3%; Q1 2012 - 7.7%). Banking and portfolios excluding Ulster Bank - 2.0% (Q4 2012 - 3.0%; Q1 2012 - 1.6%).