Interim Management Statement - Part 2 of 7

Companies

NATWEST GROUP (NWG)

UK 100

Latest directors dealings

15 minutes ago Prudential
1 hour ago CC Japan Income & Growth Trust
1 hour ago Blackrock Frontiers Investment Trust
1 hour ago Sunda Energy
1 hour ago Avon Technologies plc

All directors dealings today

	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	29
International Banking	31
Ulster Bank	35
US Retail & Commercial	38
Markets	44
Direct Line Group	48
Central items	54
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	71
Notes	74

1. Basis of preparation	74
2. Accounting policies	74
3. Analysis of income, expenses and impairment losses	75
4. Loan impairment provisions	77
5. Tax	78
6. Profit/(loss) attributable to non-controlling interests	79
7. Dividends	80
8. Share consolidation	80
9. Earnings per ordinary and B share	81

Notes (continued)	Page

10. Discontinued operations and assets and liabilities of disposal groups	82
11. Financial instruments	84
12. Available-for-sale reserve	86
13. Contingent liabilities and commitments	86
14. Litigation, investigations and reviews	87
15. Other developments	89
16. Date of approval	90
17. Post balance sheet events	91
Risk and balance sheet management	92

Balance sheet management	92
Capital	92
Liquidity and funding risk	97
Overview	97
Funding sources	98
Liquidity portfolio	103
Net stable funding ratio	104
Credit risk	105
Financial assets	105
Problem debt management	112
Risk elements in lending	114
Impairment provisions	115
Ulster Bank Group (Core and Non-Core)	116
Market risk	122
Country risk	127
Introduction	127
Summary	130
Total eurozone	135
Ireland	137
Spain	140
Italy	143
Portugal	146
Greece	149
Additional information	152

Share information	152
Statutory results	152
Financial calendar	152

Appendix 1 Income statement reconciliations and Segmental analysis
Appendix 2 Businesses outlined for disposal
Index

·	own credit adjustments;

·	Asset Protection Scheme (APS);

·	Payment Protection Insurance (PPI) costs;

·	sovereign debt impairment;

·	interest rate hedge adjustments on impaired available-for-sale sovereign debt;

·	amortisation of purchased intangible assets;

·	integration and restructuring costs;

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

·	strategic disposals;

·	bonus tax; and

·	RFS Holdings minority interest (RFS MI).

	Quarter ended			Nine months ended
	30 September 2012	30 June 2012	30 September 2011	30 September 2012	30 September 2011
	£m	£m	£m	£m	£m

Core
Total income (1)	6,408	6,437	6,028	19,707	20,522
Operating expenses (2)	(3,427)	(3,615)	(3,498)	(10,763)	(10,853)
Insurance net claims	(596)	(576)	(696)	(1,821)	(2,183)
Operating profit before impairment losses (3)	2,385	2,246	1,834	7,123	7,486
Impairment losses (4)	(752)	(728)	(854)	(2,305)	(2,579)
Operating profit (3)	1,633	1,518	980	4,818	4,907

Non-Core
Total income (1)	50	1	65	320	1,466
Operating expenses (2)	(212)	(262)	(323)	(737)	(981)
Insurance net claims	-	-	(38)	-	(256)
Operating (loss)/profit before impairment losses (3)	(162)	(261)	(296)	(417)	229
Impairment losses (4)	(424)	(607)	(682)	(1,520)	(3,168)
Operating loss (3)	(586)	(868)	(978)	(1,937)	(2,939)

Total
Total income (1)	6,458	6,438	6,093	20,027	21,988
Operating expenses (2)	(3,639)	(3,877)	(3,821)	(11,500)	(11,834)
Insurance net claims	(596)	(576)	(734)	(1,821)	(2,439)
Operating profit before impairment losses (3)	2,223	1,985	1,538	6,706	7,715
Impairment losses (4)	(1,176)	(1,335)	(1,536)	(3,825)	(5,747)
Operating profit (3)	1,047	650	2	2,881	1,968
Own credit adjustments	(1,455)	(518)	2,622	(4,429)	2,386
Asset Protection Scheme	1	(2)	(60)	(44)	(697)
Payment Protection Insurance costs	(400)	(135)	-	(660)	(850)
Sovereign debt impairment	-	-	(142)	-	(875)
Other items	(451)	(96)	(418)	(511)	(722)
(Loss)/profit before tax	(1,258)	(101)	2,004	(2,763)	1,210

	Quarter ended			Nine months ended
Key metrics	30 September 2012	30 June 2012	30 September 2011	30 September 2012	30 September 2011

Performance ratios
Core
- Net interest margin	2.15%	2.20%	2.09%	2.16%	2.19%
- Cost:income ratio (5)	59%	62%	66%	60%	59%
- Return on equity	9.7%	9.3%	6.6%	10.0%	11.4%
- Adjusted earnings/(loss) per ordinary and B share from continuing operations (6)	6.1p	4.4p	(2.7p)	16.5p	11.3p
- Adjusted earnings per ordinary and B share from continuing operations assuming a normalised tax rate of 24.5% (2011 - 26.5%) (6)	10.3p	9.7p	6.7p	31.5p	33.4p
Non-Core
- Net interest margin	0.41%	0.24%	0.50%	0.32%	0.69%
- Cost:income ratio (5)	nm	nm	nm	nm	81%
Group
- Net interest margin	1.94%	1.95%	1.84%	1.93%	1.94%
- Cost:income ratio (5)	62%	66%	71%	63%	61%
Continuing operations
- Basic (loss)/earnings per ordinary and B share (6,7)	(12.5p)	(4.2p)	11.3p	(30.7p)	(1.9p)

	30 September 2012	30 June 2012	Change	31 December 2011	Change

Capital and balance sheet
Funded balance sheet (8)	£909bn	£929bn	(2%)	£977bn	(7%)
Total assets	£1,377bn	£1,415bn	(3%)	£1,507bn	(9%)
Loan:deposit ratio - Core (9)	91%	92%	(100bp)	94%	(300bp)
Loan:deposit ratio - Group (9)	102%	104%	(200bp)	108%	(600bp)
Risk-weighted assets - gross	£481bn	£488bn	(1%)	£508bn	(5%)
Benefit of Asset Protection Scheme (APS)	(£48bn)	(£53bn)	(9%)	(£69bn)	(30%)
Risk-weighted assets - net of APS	£433bn	£435bn	-	£439bn	(1%)
Total equity	£74bn	£75bn	(1%)	£76bn	(3%)
Core Tier 1 ratio*	11.1%	11.1%	-	10.6%	50bp
Tier 1 ratio	13.4%	13.4%	-	13.0%	40bp
Risk elements in lending (REIL) (10)	£40bn	£40bn	-	£41bn	(2%)
REIL as a % of gross loans and advances (11)	9.0%	8.6%	40bp	8.6%	40bp
Tier 1 leverage ratio (12)	15.4x	15.6x	(1%)	16.9x	(9%)
Tangible equity leverage ratio (13)	5.9%	6.0%	(10bp)	5.7%	20bp
Tangible net asset value per ordinary and B share (6,14)	476p	489p	(3%)	501p	(5%)

(1)	Excluding own credit adjustments, Asset Protection Scheme, (loss)/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 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, (loss)/gain on redemption of own debt, strategic disposals, bonus tax and RFS Holdings minority interest.
(4)	Excluding sovereign debt impairment and related interest rate hedge adjustments.
(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 2011 have been adjusted for the sub-division and one-for-ten consolidation of ordinary shares, which took effect in June 2012.
(7)	Loss from continuing operations attributable to ordinary and B shareholders divided by the weighted average number of ordinary and effect of convertible B shares in issue.
(8)	Funded balance sheet represents total assets less derivatives.
(9)	Net of provisions, including disposal groups and excluding repurchase agreements.
(10)	Excludes disposal groups.
(11)	Includes disposal groups and excludes reverse repurchase agreements.
(12)	Tier 1 leverage ratio is total tangible assets (after netting derivatives) divided by Tier 1 capital.
(13)	Tangible equity leverage ratio is total tangible equity divided by total tangible assets (after netting derivatives).
(14)	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.

·	Income of £4,859 million for the quarter ended 30 September 2012.

·	Operating loss before tax of £1,258 million for the quarter ended 30 September 2012.

(1)	Excluding reverse repurchase agreements and stock borrowing.
(2)	Excludes disposal groups (see page 82).
(3)	Includes disposal groups (see page 82).
(4)	Excluding repurchase agreements and stock lending.
(5)	Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.

(1)	For further analysis and details of adjustments refer to pages 69 and 70.
(2)	Retail & Commercial (R&C) comprises the UK Retail, UK Corporate, Wealth, International Banking, Ulster Bank and US R&C divisions.

·	Group NIM declined marginally to 1.94% from 1.95% with continued margin pressure in Retail & Commercial more than offsetting decreases in liquidity and funding costs across the Group following further run-down of low-yielding assets.

·	Retail & Commercial NIM fell by 2 basis points to 2.92% largely reflecting downward pressure on deposit margins in UK Retail and UK Corporate, and lower investment income in US Retail & Commercial.

·	Group net interest income decreased by £208 million, 7%, largely driven by a decline in interest earning assets of 12%. A 5% decline in Retail & Commercial interest earning assets and continued balance sheet run-off in Non-Core drove the reduction.

·	The decline in Retail & Commercial net interest income was primarily due to a targeted decrease in loans and advances in International Banking and the impact of lower long-term interest hedge income and the high cost of deposits in UK Retail.

·	Group NIM increased by 10 basis points to 1.94% driven by a decrease in liquidity and funding costs managed at the Group level and the continued run-off of low margin Non-Core balances.

·	Non-interest income increased by £120 million, 3%, primarily due to an increase of £325 million in realised bond gains as the Group repositioned its liquidity portfolio, partially offset by a decrease in Retail & Commercial.

·	Retail & Commercial non-interest income fell by 6%, largely reflecting the non-recurrence of a £47 million Q2 2012 gain on the sale of Visa B shares in US Retail & Commercial and a decline in the fair value of a property-related investment in UK Corporate of £25 million.

·	Income from trading activities fell by £162 million, primarily due to an increase in trading losses in Non-Core of £72 million as the business continued to de-risk its markets exposures.

·	Insurance net premium income remained flat, reflecting stable in-force policies in a competitive market place.

·	Non-interest income was 19% higher primarily as a result of a £652 million increase in income from trading activities in Markets, reflecting a significant improvement in the credit environment. This was partially offset by a decrease in Retail & Commercial.

·	Retail & Commercial non-interest income was £146 million lower, primarily reflecting negative movements on credit hedging activity within the lending portfolio in International Banking and a decline in the fair value of a property-related investment in UK Corporate. Changes in customer behaviour and sluggish transaction volumes also drove a decrease in UK Retail.

·	Insurance net premium income fell by £104 million, 10%, largely driven by actions to improve the quality of the motor book resulting in lower written premiums.

·	Group operating expenses fell by 6%, largely driven by the continued run-down of Non-Core and lower staff expenses in Markets and International Banking. An additional charge of £50 million was taken in relation to the June technology incident, compared with a charge of £125 million in Q2 2012.

·	Core cost:income ratio improved from 62% in Q2 2012 to 59%, largely due to a strict focus on cost-management in all of the Group's businesses. The Retail & Commercial cost:income ratio remained at 57%, with UK Retail improving to 51%.

·	Insurance net claims increased by 3% primarily due to a smaller release of reserves compared with Q2 2012.

	30 September 2012	30 June 2012	31 December 2011
	£m	£m	£m

Net loans and advances to banks (1,2)	38,347	39,436	43,870
Net loans and advances to customers (1,2)	423,155	434,965	454,112
Reverse repurchase agreements and stock borrowing	97,935	97,901	100,934
Debt securities and equity shares	193,249	200,717	224,263
Other assets (3)	156,037	155,738	154,070

Funded assets	908,723	928,757	977,249
Derivatives	468,171	486,432	529,618

Total assets	1,376,894	1,415,189	1,506,867

Bank deposits (2,4)	58,127	67,619	69,113
Customer deposits (2,4)	412,712	412,769	414,143
Repurchase agreements and stock lending	142,565	128,075	128,503
Debt securities in issue	104,157	119,855	162,621
Settlement balances and short positions	46,989	53,502	48,516
Subordinated liabilities	25,309	25,596	26,319
Other liabilities (3)	50,842	51,812	57,616

Liabilities excluding derivatives	840,701	859,228	906,831
Derivatives	462,300	480,745	523,983

Total liabilities	1,303,001	1,339,973	1,430,814
Owners' equity	72,699	74,016	74,819
Non-controlling interests	1,194	1,200	1,234

Total liabilities and equity	1,376,894	1,415,189	1,506,867

Memo: Tangible equity (5)	53,157	54,384	55,217

	Quarter ended			Nine months ended
	30 September 2012	30 June 2012	30 September 2011	30 September 2012	30 September 2011
Operating expenses	£m	£m	£m	£m	£m

Staff expenses	1,943	2,036	1,963	6,200	6,382
Premises and equipment	552	523	584	1,625	1,703
Other	770	936	858	2,525	2,557

Administrative expenses	3,265	3,495	3,405	10,350	10,642
Depreciation and amortisation	374	382	416	1,150	1,192

Operating expenses	3,639	3,877	3,821	11,500	11,834

Insurance net claims	596	576	734	1,821	2,439

Staff costs as a % of total income	30%	32%	32%	31%	29%

	Quarter ended			Nine months ended
	30 September 2012	30 June 2012	30 September 2011	30 September 2012	30 September 2011
Impairment losses	£m	£m	£m	£m	£m

Loan impairment losses	1,183	1,435	1,452	3,913	5,587
Securities impairment losses	(7)	(100)	84	(88)	160

Group impairment losses	1,176	1,335	1,536	3,825	5,747

Loan impairment losses
- individually assessed	661	945	823	2,351	3,942
- collectively assessed	562	534	689	1,691	2,000
- latent	(40)	(56)	(60)	(153)	(355)

Customer loans	1,183	1,423	1,452	3,889	5,587
Bank loans	-	12	-	24	-

Loan impairment losses	1,183	1,435	1,452	3,913	5,587

Core	751	719	817	2,266	2,479
Non-Core	432	716	635	1,647	3,108

Group	1,183	1,435	1,452	3,913	5,587

Customer loan impairment charge as a % of gross loans and advances (1)
Group	1.0%	1.2%	1.1%	1.1%	1.5%
Core	0.7%	0.7%	0.8%	0.8%	0.8%
Non-Core	2.8%	4.2%	2.8%	3.6%	4.6%

·	Group operating expenses were 5% lower, predominantly driven by a 34% decrease in Non-Core expenses as the division continued to shrink. An additional driver was the 15% fall in International Banking costs, due to planned headcount reduction and tight management of technology and discretionary costs following the restructuring of the business announced in January 2012.

·	Core cost:income ratio improved by 7 percentage points to 59% from 66% in Q3 2011. This was driven by a Group-wide focus on managing expenses and an improved business performance and market environment for the Markets businesses.

·	Loan impairment losses were down 18%. In the Non-Core portfolio, loan impairments fell by 40%, with the non-repeat of a large provision in Project Finance in Q2 2012. This was partially offset by a 4% increase in Core loan impairments, largely reflecting a small number of significant individual cases in UK Corporate.

·	Credit losses improved in International Banking, with the non-repeat of a single name impairment in Q2 2012. Lower specific impairments were also recorded in Wealth.

·	Core and Non-Core Ulster Bank loan impairments improved by £21 million, 4%.

·	Loan impairment losses fell by 19%, largely driven by a significant reduction in Non-Core impairments, particularly in exposures originating in UK Corporate and Ulster Bank.

·	Retail was the main driver of the 8% decrease in Core loan impairment losses, as credit metrics and book quality continued to improve. This was partly offset by the increase in UK Corporate loan impairments in Q3 2012.

·	The own credit adjustment charge in Q3 2012 was £1,455 million, compared with a smaller charge of £518 million in Q2 2012, as the Group's credit spreads tightened by a further 57 basis points in the quarter.

·	An additional £400 million provision relating to Payment Protection Insurance was taken, bringing the cumulative charge to £1.7 billion, of which £1.0 billion in redress had been paid by 30 September 2012.

·	Integration and restructuring costs increased by 21% to £257 million, largely driven by preparations for the divestment of UK branch-based businesses.

·	The Group's Core Tier 1 ratio remained strong at 11.1%. Gross risk-weighted assets (RWAs) fell by £7 billion reflecting a reduction in market risk coupled with balance sheet contraction.

·	The impact of the Asset Protection Scheme (APS) on the Core Tier 1 ratio continued to decline from 77 basis points at 30 June 2012 to 71 basis points at 30 September 2012.

·	The Core Tier 1 ratio increased by 50 basis points compared with 31 December 2011, driven by a 5% reduction in gross RWAs, lower regulatory capital deductions and the issuance of new shares.

·	Gross RWAs fell by £27 billion, excluding the effect of the APS. Post APS RWAs decreased by £6 billion.

·	The Group's funded balance sheet contracted by a further £20 billion to £909 billion, driven by a £7 billion reduction in Non-Core funded assets and lower International Banking and Ulster Bank balances.

·	Loans and advances to customers fell by 3%, largely due to Non-Core run-down and targeted reductions in the International Banking portfolio. Customer deposits were flat as growth in US Retail & Commercial was offset by a marginal decline in UK Corporate.

·	The Group loan:deposit ratio improved from 104% to 102%, while the Core and Retail & Commercial loan:deposit ratios improved to 91% in the quarter.

·	Significant falls in Non-Core (£29 billion), International Banking (£12 billion) and Markets (£10 billion) were the main elements in a £68 billion decrease in the Group's funded balance sheet in the period. Non-Core's focused asset disposal programme, including the sale of RBS Aviation Capital, planned loan portfolio reductions in International Banking and initiatives to reduce balance sheet usage in Markets drove these movements.

·	Customer deposits were flat as strong deposit growth in UK Retail was offset by lower deposit balances in International Banking as a result of difficult market conditions and strong competition. Loans and advances to customers fell by 7%, largely as a result of sales and run-off in Non-Core.

·	The Group loan:deposit ratio strengthened by 600 basis points from 108%, with Core and Retail & Commercial ratios improving by 300 basis points and 400 basis points, respectively.