Interim Management Statement - Part 2 of 6

Companies

NATWEST GROUP (NWG)

UK 100

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	Page

Forward-looking statements	3
Presentation of information	4
Results summary	6
Results summary - statutory	9
Summary consolidated income statement	10
Summary consolidated balance sheet	12
Analysis of results	13
Net interest income	13
Non-interest income	14
Operating expenses	15
Impairment losses	16
One-off and other items	17
Capital resources and ratios	18
Balance sheet	19

Divisional performance	20

UK Retail	23
UK Corporate	26
Wealth	30
International Banking	33
Ulster Bank	36
US Retail & Commercial	39
Markets	45
Direct Line Group	49
Central items	55
Non-Core	56

Statutory results	63

Condensed consolidated income statement	63
Condensed consolidated statement of comprehensive income	64
Condensed consolidated balance sheet	65
Commentary on condensed consolidated balance sheet	66
Average balance sheet	68
Condensed consolidated statement of changes in equity	70

	Page

Notes	73

1. Basis of preparation	73
2. Accounting policies	73
3. Analysis of income, expenses and impairment losses	74
Payment Protection Insurance (PPI)	75
4. Loan impairment provisions	76
5. Tax	77
6. (Loss)/profit attributable to non-controlling interests	78
7. Dividends	78
8. Earnings per ordinary and B share	79
9. Segmental analysis	80
10. Discontinued operations and assets and liabilities of disposal groups	83
11. Valuation reserves	85
12. Available-for-sale financial assets	87
13. Contingent liabilities and commitments	87
14. Litigation, investigations, reviews and proceedings	88
15. Other developments	89
16. Date of approval	90
17. Post balance sheet events	90

Risk and balance sheet management	91

Capital	91
Risk-weighted assets by division	94
Liquidity and funding risk	95
Funding sources	95
Liquidity portfolio	98
Loan:deposit ratio and customer funding gap	99
Net stable funding ratio	100
Credit risk	101
Loans and advances to customers by sector	101
Risk elements in lending	102
Loans, REIL and impairments by division	104
Impairment provisions	105
Loan impairment charge	106
Debt securities	107
Ulster Bank Group (Core and Non-Core)	109
Country risk	114
Summary	116
Eurozone	121
Eurozone periphery	122
Market risk	128

Additional information	133

Appendix 1 Income statement reconciliations
Appendix 2 Businesses outlined for disposal

·	own credit adjustments;

·	Asset Protection Scheme;

·	Payment Protection Insurance (PPI) costs;

·	sovereign debt impairment;

·	amortisation of purchased intangible assets;

·	integration and restructuring costs;

·	gain on redemption of own debt;

·	strategic disposals;

·	bonus tax;

·	bank levy;

·	write-down of goodwill and other intangible assets; and

·	RFS Holdings minority interest (RFS MI).

	Quarter ended
	31 March 2012	31 December 2011	31 March 2011
	£m	£m	£m

Core
Total income (1)	6,862	5,999	7,678
Operating expenses (2)	(3,721)	(3,330)	(3,798)
Insurance net claims	(649)	(590)	(784)
Operating profit before impairment losses (3)	2,492	2,079	3,096
Impairment losses (4)	(825)	(941)	(872)
Operating profit (3)	1,667	1,138	2,224

Non-Core
Total income/(loss) (1)	269	(278)	435
Operating expenses (2)	(263)	(314)	(323)
Insurance net claims	-	61	(128)
Operating profit/(loss) before impairment losses (3)	6	(531)	(16)
Impairment losses (4)	(489)	(751)	(1,075)
Operating loss (3)	(483)	(1,282)	(1,091)

Total
Total income (1)	7,131	5,721	8,113
Operating expenses (2)	(3,984)	(3,644)	(4,121)
Insurance net claims	(649)	(529)	(912)
Operating profit before impairment losses (3)	2,498	1,548	3,080
Impairment losses (4)	(1,314)	(1,692)	(1,947)
Operating profit/(loss) (3)	1,184	(144)	1,133
Own credit adjustments	(2,456)	(472)	(560)
Asset Protection Scheme	(43)	(209)	(469)
Payment Protection Insurance costs	(125)	-	-
Sovereign debt impairment	-	(224)	-
Bank levy	-	(300)	-
Other items	36	(627)	(220)
Loss before tax	(1,404)	(1,976)	(116)

	Quarter ended
Key metrics	31 March 2012	31 December 2011	31 March 2011

Performance ratios
Core
- Net interest margin	2.12%	2.07%	2.30%
- Cost:income ratio (5)	60%	62%	55%
- Return on equity	11.0%	7.6%	16.0%
- Adjusted earnings/(loss) per ordinary and B share from continuing operations	0.6p	(0.5p)	0.7p
- Adjusted earnings per ordinary and B share from continuing operations assuming a normalised tax rate of 24.5% (2011 - 26.5%)	1.2p	0.8p	1.5p
Non-Core
- Net interest margin	0.31%	0.42%	0.72%
- Cost:income ratio (5)	98%	nm	105%
Group
- Net interest margin	1.89%	1.84%	2.03%
- Cost:income ratio (5)	61%	70%	57%
Continuing operations
- Basic loss per ordinary and B share (6)	(1.4p)	(1.7p)	(0.5p)

	31 March 2012	31 December 2011	Change

Capital and balance sheet
Funded balance sheet (7)	£950bn	£977bn	(3%)
Total assets	£1,403bn	£1,507bn	(7%)
Loan:deposit ratio - Core (8)	93%	94%	(100bp)
Loan:deposit ratio - Group (8)	106%	108%	(200bp)
Risk-weighted assets - gross	£496bn	£508bn	(2%)
Benefit of Asset Protection Scheme (APS)	(£62bn)	(£69bn)	(10%)
Risk-weighted assets - net of APS	£434bn	£439bn	(1%)
Total equity	£75bn	£76bn	(1%)
Core Tier 1 ratio*	10.8%	10.6%	20bp
Tier 1 ratio	13.2%	13.0%	20bp
Risk elements in lending (REIL)	£40bn	£41bn	(2%)
REIL as a % of gross loans and advances (9)	8.6%	8.6%	-
Tier 1 leverage ratio (10)	16.3x	16.9x	(4%)
Tangible equity leverage ratio (11)	5.8%	5.7%	10bp
Tangible equity per ordinary and B share (12)	48.8p	50.1p	(3%)

(1)	Excluding own credit adjustments, Asset Protection Scheme, gain on redemption of own debt, strategic disposals and RFS Holdings minority interest.
(2)	Excluding Payment Protection Insurance costs, amortisation of purchased intangible assets, integration and restructuring costs, bonus tax, bank levy, write-down of goodwill and other intangible assets and RFS Holdings minority interest.
(3)	Operating profit/(loss) before tax, own credit adjustments, Asset Protection Scheme, Payment Protection Insurance costs, sovereign debt impairment and related interest rate hedge adjustments, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, bank levy, write-down of goodwill and other intangible assets and RFS Holdings minority interest.
(4)	Excluding sovereign debt impairment and related interest rate hedge adjustments on impaired available-for-sale Greek government bonds.
(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)	Loss from continuing operations attributable to ordinary and B shareholders divided by the weighted average number of ordinary and B shares in issue. Refer to page 79.
(7)	Funded balance sheet represents total assets less derivatives.
(8)	Net of provisions, including disposal groups and excluding repurchase agreements.
(9)	Gross loans and advances to customers include disposal groups and exclude reverse repurchase agreements.
(10)	Tier 1 leverage ratio is total tangible assets (after netting derivatives) divided by Tier 1 capital.
(11)	Tangible equity leverage ratio is total tangible equity divided by total tangible assets (after netting derivatives).
(12)	Tangible equity per ordinary and B share is total tangible equity divided by the number of ordinary and B shares in issue.

·	Income of £5,176 million for Q1 2012.

·	Operating loss before tax of £1,404 million for Q1 2012.

	31 March 2012	31 December 2011
	£m	£m

Loans and advances to banks (1)	36,064	43,870
Loans and advances to customers (1)	440,406	454,112
Reverse repurchase agreements and stock borrowing	91,129	100,934
Debt securities and equity shares	213,534	224,263
Other assets (2)	168,534	154,070

Funded assets	949,667	977,249
Derivatives	453,354	529,618

Total assets	1,403,021	1,506,867

Bank deposits (3)	65,735	69,113
Customer deposits (3)	410,207	414,143
Repurchase agreements and stock lending	128,718	128,503
Debt securities in issue	142,943	162,621
Settlement balances and short positions	54,919	48,516
Subordinated liabilities	25,513	26,319
Other liabilities (2)	53,821	57,616

Liabilities excluding derivatives	881,856	906,831
Derivatives	446,534	523,983

Total liabilities	1,328,390	1,430,814
Owners' equity	73,416	74,819
Non-controlling interests	1,215	1,234

Total liabilities and equity	1,403,021	1,506,867

Memo: Tangible equity (4)	53,901	55,217

(1)	Excluding reverse repurchase agreements and stock borrowing, and disposal groups.
(2)	Includes disposal groups (see page 84).
(3)	Excluding repurchase agreements and stock lending, and disposal groups.
(4)	Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.

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

·	Group net interest income decreased by £74 million, primarily reflecting the deleveraging of the Group's balance sheet. Core was down £38 million, Non-Core £36 million.

·	Retail & Commercial net interest margin (NIM) was 1 basis point higher, driven by modest widening of asset margins, partially mitigated by continuing pressure on deposit margins in the Core UK franchises.

·	Group NIM increased 5 basis points benefiting from lower funding and liquidity costs, as the expensive Credit Guarantee Scheme funding was repaid, and the run-off of the lower spread Non-Core book continued.

·	Non-interest income increased by £1,479 million, 56%, primarily reflecting a strong seasonal bounce in trading income in Markets.

·	Non-Core non-interest income increased, with gains on disposals of £182 million compared with prior period losses of £36 million, along with lower fair-value write-downs.

·	Non-interest income was 14% lower, largely as a result of decreased trading income in Markets, reflecting a less pronounced seasonal recovery in activity and lower investor confidence compared with the same period last year.

·	UK Retail fees and commissions fell as subdued consumer spending activity led to reduced transaction volumes. In addition, various Helpful Banking initiatives resulted in lower current account fees.

·	Insurance net premium income decreased by 18% driven by lower volumes written by Direct Line Group during 2011, reflecting the de-risking of the Motor book and the exit of certain business lines.

·	Group operating expenses increased 9%, driven by the variability of staff expense accruals tied to increased revenues in Markets.

·	R&C expenses increased by 5% largely reflecting the phasing of staff expense accruals and a litigation settlement of £88 million ($138 million) in US Retail & Commercial.

·	Insurance net claims were 23% higher primarily due to adverse weather experienced in the early part of Q1 2012.

	Quarter ended
	31 March 2012	31 December 2011	31 March 2011
Operating expenses	£m	£m	£m

Staff expenses	2,221	1,781	2,320
Premises and equipment	550	575	556
Other	819	838	865

Administrative expenses	3,590	3,194	3,741
Depreciation and amortisation	394	450	380

Operating expenses	3,984	3,644	4,121

Insurance net claims	649	529	912

Staff costs as a % of total income	31%	31%	29%

	Quarter ended
	31 March 2012	31 December 2011	31 March 2011
Impairment losses	£m	£m	£m

Loan impairment losses	1,295	1,654	1,898
Securities impairment losses	19	38	49

Group impairment losses	1,314	1,692	1,947

Loan impairment losses
- individually assessed	745	1,253	1,285
- collectively assessed	595	591	720
- latent	(57)	(190)	(107)

Customer loans	1,283	1,654	1,898
Bank loans	12	-	-

Loan impairment losses	1,295	1,654	1,898

Core	796	924	852
Non-Core	499	730	1,046

Group	1,295	1,654	1,898

Customer loan impairment charge as a % of gross loans and advances (1)
Group	1.1%	1.3%	1.5%
Core	0.8%	0.9%	0.8%
Non-Core	2.7%	3.7%	4.0%

·	Significant tightening of the Group's credit spreads resulted in a charge of £2,456 million in relation to own credit adjustments, compared with a charge of £472 million in Q4 2011.
·	The Group recorded a gain of £577 million on the redemption of its own debt, following a liability management exercise as the Group exchanged £2.8 billion of new lower tier 2 (LT2) instruments for £3.4 billion of existing LT2 instruments.
·	Integration and restructuring costs totalled £460 million, driven by costs relating to business exits in Markets and International Banking, Group property exits, transfer of RBS NV activities to RBS plc, and further expenditure incurred in preparation for the divestment of Direct Line Group and the branch sale to Santander.
·	A charge of £43 million was taken in relation to the APS. The cumulative charge on APS now totals £2.5 billion, equal to the minimum fee payable. The Group plans to exit the APS, subject to the approval of the FSA, in the fourth quarter of 2012.

·	The Group's capital ratios strengthened further, with the Core Tier 1 ratio increasing to 10.8%, driven by retained profits and a reduction of 2% in gross risk-weighted assets.

·	RWAs fell by £12 billion during the quarter to £496 billion, excluding the effect of the APS. Post-APS, RWAs were £5 billion lower.

·	Group expenses declined 3% primarily driven by benefits from the Group cost reduction programme. Headcount declined by 1%, principally as a result of the restructuring of the Markets and International Banking businesses, and branch closures in the US.

·	Non-Core expenses fell by 19% reflecting the on-going run down of the division, including further business disposals and country exits.

·	Insurance net claims decreased by £263 million, driven by a combination of reduced exposure on Motor and the exit of certain business lines.

·	Group loan impairment losses fell by £359 million or 22% driven by lower individual charges in Non-Core and improvement across Retail & Commercial businesses, with the exception of Ulster Bank. Ulster Bank continued to face challenging credit conditions.
·	UK Retail impairment losses fell by £36 million, largely driven by lower default levels and improved collections performance on the unsecured portfolio. UK Corporate impairments were lower than Q4 2011, which included a number of sizeable single-name provisions.
·	Total Ulster Bank (Core and Non-Core) loan impairments were £654 million compared with £570 million in Q4 2011, an increase of 15%, primarily driven by further deterioration in asset quality in the Core residential mortgage portfolio. Non-Core Ulster Bank impairments increased by 7% to £260 million.

·	Group loan impairment losses decreased by £603 million or 32%, driven by a significant decrease in Non-Core, principally due to lower losses on the Ulster Bank portfolio.
·	R&C impairment losses, excluding Ulster Bank, were stable at £395 million, with improved credit conditions in UK Retail and US Retail & Commercial largely offset by lower provision releases in UK Corporate and International Banking.
·	Core and Non-Core Ulster Bank loan impairment losses fell from £1,294 million in Q1 2011 to £654 million in Q1 2012, although credit conditions in Ireland remain challenging with credit quality continuing to weaken over the period largely due to asset value deflation.

·	Group funded assets fell by £27 billion, driven by declines of £11 billion in Non-Core and £13 billion in Markets, as the Group continued to deleverage and to reduce capital-intensive assets.

·	Loans and advances to customers were £14 billion lower, principally reflecting accelerated customer repayments in International Banking and weak customer credit demand.

·	Customer deposits were £5 billion lower, principally reflecting seasonal movements in corporate balances. The Group loan:deposit ratio improved 200 basis points to 106% and the Core loan:deposit ratio also improved, by 100 basis points, to 93%.

·	The Group has maintained a robust liquidity position, with a liquidity portfolio of £153 billion (16% of funded assets) substantially exceeding outstanding short-term wholesale funding, which was reduced during the quarter by £23 billion to £80 billion.