Interim Management Statement - Part 3 of 6 | Company Announcement

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

Operating profit/(loss) before impairment losses by division
UK Retail	632	649	712
UK Corporate	668	642	724
Wealth	55	86	75
International Banking	132	208	220
Ulster Bank	84	94	96
US Retail & Commercial	121	242	205

Retail & Commercial	1,692	1,921	2,032
Markets	826	(52)	1,029
Direct Line Group	84	125	67
Central items	(110)	85	(32)

Core	2,492	2,079	3,096
Non-Core	6	(531)	(16)

Group operating profit before impairment losses	2,498	1,548	3,080

Impairment losses/(recoveries) by division
UK Retail	155	191	194
UK Corporate	176	236	107
Wealth	10	13	5
International Banking	35	56	(6)
Ulster Bank	394	327	461
US Retail & Commercial	19	65	111

Retail & Commercial	789	888	872
Markets	2	57	-
Central items	34	(4)	-

Core	825	941	872
Non-Core	489	751	1,075

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

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

Operating profit/(loss) by division
UK Retail	477	458	518
UK Corporate	492	406	617
Wealth	45	73	70
International Banking	97	152	226
Ulster Bank	(310)	(233)	(365)
US Retail & Commercial	102	177	94

Retail & Commercial	903	1,033	1,160
Markets	824	(109)	1,029
Direct Line Group	84	125	67
Central items	(144)	89	(32)

Core	1,667	1,138	2,224
Non-Core	(483)	(1,282)	(1,091)

Group operating profit/(loss)	1,184	(144)	1,133

	Quarter ended
	31 March 2012	31 December 2011	31 March 2011
	%	%	%

Net interest margin by division
UK Retail	3.61	3.74	4.08
UK Corporate	3.09	3.02	3.19
Wealth	3.67	3.39	3.24
International Banking	1.60	1.64	1.83
Ulster Bank	1.87	1.87	1.84
US Retail & Commercial	3.06	3.04	3.00

Retail & Commercial	2.91	2.90	3.05
Non-Core	0.31	0.42	0.72

Group net interest margin	1.89	1.84	2.03

	31 March 2012	31 December 2011
Total funded assets	£m	£m

UK Retail	116,255	114,469
UK Corporate	113,134	114,098
Wealth	21,265	21,628
International Banking	63,684	69,901
Ulster Bank	33,450	34,637
US Retail & Commercial	72,945	74,925
Markets	300,574	313,882
Direct Line Group	13,430	12,912
Central items	130,742	126,336

Core	865,479	882,788
Non-Core	83,278	93,657

	948,757	976,445
RFS Holdings minority interest	910	804

	949,667	977,249

	31 March 2012	31 December 2011		31 March 2011
	£bn	£bn	Change	£bn	Change

Risk-weighted assets by division
UK Retail	48.2	48.4	-	50.3	(4%)
UK Corporate	76.9	79.3	(3%)	82.3	(7%)
Wealth	12.9	12.9	-	12.6	2%
International Banking	41.8	43.2	(3%)	45.7	(9%)
Ulster Bank	38.4	36.3	6%	31.7	21%
US Retail & Commercial	58.6	59.3	(1%)	54.0	9%

Retail & Commercial	276.8	279.4	(1%)	276.6	-
Markets	115.6	120.3	(4%)	114.3	1%
Other	11.0	12.0	(8%)	15.8	(30%)

Core	403.4	411.7	(2%)	406.7	(1%)
Non-Core	89.9	93.3	(4%)	128.5	(30%)

Group before benefit of Asset Protection Scheme	493.3	505.0	(2%)	535.2	(8%)
Benefit of Asset Protection Scheme	(62.2)	(69.1)	(10%)	(98.4)	(37%)

Group before RFS Holdings minority interest	431.1	435.9	(1%)	436.8	(1%)
RFS Holdings minority interest	3.2	3.1	3%	2.9	10%

Group	434.3	439.0	(1%)	439.7	(1%)

Interim Management Statement - Part 3 of 6

Companies

UK 100

Latest directors dealings

Employee numbers by division (full time equivalents in continuing operations rounded to the nearest hundred)	31 March 2012	31 December 2011	31 March 2011

UK Retail	27,600	27,700	28,100
UK Corporate	13,400	13,600	13,200
Wealth	5,700	5,700	5,400
International Banking	5,400	5,400	5,500
Ulster Bank	4,500	4,200	4,300
US Retail & Commercial	14,700	15,400	15,600

Retail & Commercial	71,300	72,000	72,100
Markets	13,200	13,900	15,600
Direct Line Group	15,100	14,900	14,900
Group Centre	6,600	6,200	4,800

Core	106,200	107,000	107,400
Non-Core	4,300	4,700	6,700

	110,500	111,700	114,100
Business Services	33,600	34,000	34,100
Integration and restructuring	1,000	1,100	300

Group	145,100	146,800	148,500

(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)	Includes disposal groups: loans and advances to customers £7.3 billion; risk elements in lending £0.5 billion; customer deposits £8.7 billion (31 December 2011 - loans and advances to customers £7.3 billion; risk elements in lending £0.5 billion; customer deposits £8.8 billion).

·	UK Retail continued to deliver strong returns in Q1 2012. The division continued to achieve strong franchise growth, gaining market share on both sides of the balance sheet and increasing return on equity in the face of challenging economic conditions.

·	The division further reduced the loan to deposit ratio in the quarter to 105%.
	○	Customer deposits grew 2%, driven by increases in both savings balances, 1%, and current account balances, 5%.
	○	Gross mortgage lending market share of 11% continues above our stock position of 8%.
	○	Unsecured lending contracted by 5% as the Group actively sought to improve its risk profile and customer deleveraging continued.

·	Income growth is proving challenging in the current economic environment.
	○	Net interest margin declined 13 basis points as lower long term swap rates combined with competitive savings rates put pressure on liability margins.
	○	Consumer spending has remained subdued over the quarter resulting in lower transactional fees on cards.
	○	Customer behaviour continues to evolve supported by Helpful Banking initiatives, including the "Act Now" text alerts. This is reducing the level of late and overdraft fees.

·	The division continued to focus on strong cost discipline with good results.
	○	Headcount was further reduced, although staff costs were slightly higher as Q4 2011 included a reduction in full year incentive compensation accruals.
	○	Other costs were lower as strict cost control and efficiency measures delivered further benefits.
·	Impairment losses decreased 19% reflecting the impact of risk appetite tightening. Impairments are expected to remain stable subject to normal seasonal fluctuations and the economic environment.

	○	Mortgage impairment losses were broadly in line with the previous quarter with arrears rates and provision coverage levels remaining stable.
	○	The unsecured portfolio charge fell 24% with slightly lower default volumes and improved collections performance. The recoveries performance also gave rise to a small provision release from the defaulted book. Industry benchmarks for cards arrears remain stable, with RBS continuing to perform better than the market.

·	Risk-weighted assets were broadly stable, with volume growth in lower risk secured mortgages more than offset by a decrease in the unsecured portfolio. Asset quality remains stable.

·	Net interest income fell driven by lower liability margins, due to a continued decline in long-term swap rates and competitive pricing on savings.

·	Non-interest income declined as Helpful Banking initiatives and subdued consumer spending continued to depress card transaction volumes.

·	Overall expenses decreased with direct staff costs down largely due to headcount reductions. Other direct expenses decreased reflecting a number of cost saving initiatives.

·	Risk appetite tightening, combined with Helpful Banking initiatives are helping to reduce default levels, contributing to impairment losses decreasing by 20%.

·	the Regional Growth Fund, allowing businesses to safeguard and create new jobs across the country;

·	the Business Growth Fund, an equity investment fund established to help Britain's fast-growing small and medium sized businesses; and

·	the Enterprise Finance Guarantee, for small firms with viable business proposals that are unable to obtain a conventional loan due to lack of security.

·	UK Corporate delivered a strong performance, with return on equity of 16.2% and operating profit increasing 21% to £492 million, driven by non-interest income growth and lower impairments.

·	Net interest income was broadly flat while net interest margin increased 7 basis points, benefiting from a revision to deferred income recognition assumptions and increased customer margins, partially offset by higher funding costs.

·	Non-interest income increased 6% largely reflecting valuation movements and lower derivative close out costs associated with impaired assets.

·	Total costs were slightly lower, reflecting lower revenue related costs and cost efficiencies achieved in non-staff discretionary spend, largely offset by the phasing of staff incentive costs.

·	Impairments at £176 million were down 25%, primarily as a result of lower individual and collectively assessed provisions.

·	Risk-weighted assets decreased £2.4 billion reflecting improved risk parameters and marginally lower net lending, primarily property which more than offset growth in other sectors.

·	Operating profit decreased by £125 million, or 20%, with lower net interest income combined with an increase in impairments, partially offset by lower costs.

·	Net interest income decreased by 7% largely reflecting the higher impact from revisions made to deferred income recognition assumptions in Q1 2011 compared with Q1 2012. Excluding these revisions, net interest income fell 4% whilst net interest margin decreased 2 basis points reflecting higher net funding costs and lower lending. Lending decreased £5 billion, including targeted reductions in the property sector.

·	Non-interest income decreased 1%, largely reflecting strong refinancing activity in Q1 2011, not repeated in Q1 2012, partially offset by increased operating lease activity and Markets revenue share income.

·	Total costs declined £5 million, 1%, with reductions in non-staff discretionary spending, largely offset by increased staff costs relating to strategic investment and control initiatives.

·	Impairments were 64% higher primarily driven by the significant release of latent provisions in Q1 2011.

·	Risk-weighted assets decreased £5.4 billion as the result of improved risk parameters and lower lending balances.

(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)	31 March 2011 comparatives were revised in Q3 2011 to reflect the current reporting methodology.

·	Reshaping of the UK business progressed to the next phase with the restructure of key professionals in client servicing. The restructure will enable the division to provide class leading banking and wealth management propositions and assists in the preparations for the implementation of Retail Distribution Review (RDR) regulations. Revised Private Banker and Wealth Manager roles will ensure clients receive the best service and advice based on their specific needs.

·	On the international front, Coutts announced the sale of the Latin American, Caribbean and African business to RBC Wealth Management. The business has client assets in the region of £1.5 billion, representing approximately 2% of Coutts' total client assets. This decision followed from the 2011 divisional strategy to focus the Coutts growth strategy on key geographies. These include the UK, Switzerland, Middle East, Russia/Commonwealth of Independent States and selected countries in Asia.

·	Coutts continued to prepare the deployment of a single global technology platform with the UK rollout completed in Q1 2012. The bank's strategic investment will enable the business to operate as a global organisation on a single IT platform, transforming the way clients are served.

·	Operating profit decreased 38% to £45 million, with a 4% increase in income more than offset by increased expenses.

·	Income growth of £10 million largely reflects improved deposit margins and strong treasury income.

·	Expenses increased 21% largely driven by phasing in Financial Services Compensation Scheme levies and the timing of incentive accruals. The division also incurred an £8.75 million fine from the Financial Services Authority (FSA) relating to Anti Money Laundering control processes during the period from December 2007 to November 2010.

·	Client assets and liabilities managed by the division increased by 1%. Assets under management increased by 2%, benefiting from a recovery in the markets in Q1 2012, and positive net new business, particularly in Asia where an improved sales management framework has been introduced.

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

Income statement
Net interest income	1,001	1,032	1,086

Net fees and commissions	237	242	270
Other non-interest income	29	35	34

Non-interest income	266	277	304

Total income	1,267	1,309	1,390

Direct expenses
- staff	(207)	(200)	(215)
- other	(79)	(116)	(113)
Indirect expenses	(349)	(344)	(350)

	(635)	(660)	(678)

Operating profit before impairment losses	632	649	712
Impairment losses	(155)	(191)	(194)

Operating profit	477	458	518


Analysis of income by product
Personal advances	236	276	275
Personal deposits	185	214	254
Mortgages	563	577	543
Cards	219	238	238
Other	64	4	80

Total income	1,267	1,309	1,390


Analysis of impairments by sector
Mortgages	34	32	61
Personal	82	116	95

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

Income statement
Net interest income	756	758	811

Net fees and commissions	336	341	345
Other non-interest income	109	78	106

Non-interest income	445	419	451

Total income	1,201	1,177	1,262

Direct expenses
- staff	(245)	(231)	(235)
- other	(85)	(99)	(104)
Indirect expenses	(203)	(205)	(199)

	(533)	(535)	(538)

Operating profit before impairment losses	668	642	724
Impairment losses	(176)	(236)	(107)

Operating profit	492	406	617


Analysis of income by business
Corporate and commercial lending	687	623	722
Asset and invoice finance	162	169	151
Corporate deposits	166	171	174
Other	186	214	215

Total income	1,201	1,177	1,262


Analysis of impairments by sector
Financial institutions	2	(2)	3
Hotels and restaurants	15	16	8
Housebuilding and construction	25	27	32

	Quarter ended
	31 March 2012	31 December 2011	31 March 2011

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Financial institutions	0.1%	(0.1%)	0.2%
Hotels and restaurants	1.0%	1.0%	0.5%
Housebuilding and construction	2.7%	2.8%	2.8%
Manufacturing	-	1.1%	0.5%
Other	0.5%	0.5%	-
Private sector education, health, social work, recreational and community services	1.0%	3.7%	0.5%
Property	0.4%	0.3%	0.2%
Wholesale and retail trade, repairs	1.5%	1.3%	0.7%
Asset and invoice finance	0.3%	0.5%	0.4%

Total	0.6%	0.9%	0.4%

	31 March 2012	31 December 2011		31 March 2011
	£bn	£bn	Change	£bn	Change

Capital and balance sheet
Total third party assets	113.2	114.2	(1%)	117.7	(4%)
Loans and advances to customers (gross) (2)
- financial institutions	6.2	5.8	7%	6.1	2%
- hotels and restaurants	6.0	6.1	(2%)	6.7	(10%)
- housebuilding and construction	3.7	3.9	(5%)	4.5	(18%)
- manufacturing	4.7	4.7	-	5.2	(10%)
- other	34.4	34.2	1%	33.6	2%
- private sector education, health, social work, recreational and community services	8.6	8.7	(1%)	8.9	(3%)
- property	26.7	28.2	(5%)	30.2	(12%)
- wholesale and retail trade, repairs	9.1	8.7	5%	9.8	(7%)
- asset and invoice finance	10.3	10.4	(1%)	9.8	5%

	109.7	110.7	(1%)	114.8	(4%)

Customer deposits (2)	124.3	126.3	(2%)	124.4	-
Risk elements in lending (2)	4.9	5.0	(2%)	4.6	7%
Loan:deposit ratio (excluding repos)	87%	86%	100bp	91%	(400bp)
Risk-weighted assets	76.9	79.3	(3%)	82.3	(7%)

·	Operating profit decreased by 36% with a 7% growth in income more than offset by higher expenses and impairments.

·	Net interest income increased 14% with growth in lending volumes and margins, particularly within the UK, as well as sustained improvement in divisional treasury income. The decline in non-interest income reflected lower assets under management and a reduction in brokerage income.

·	Expenses increased 20% largely reflecting continued investment in International front office recruitment, strategic technology initiatives, including the new Avaloq based wealth management platform in the UK, regulatory projects and changes in bonus accounting methodology. Q1 2012 also included the FSA fine.

·	Client assets and liabilities managed by the division decreased by 2%. Customer deposits grew 2% and lending volumes increased by 2% in response to continued customer demand, particularly for UK mortgages, reflecting high interest in London property. Assets under management declined 9%, as a result of negative market movements and fund outflows occurring in the second half of 2011.

·	Operating profit was down £55 million, reflecting lower income and increased expenses, partially offset by lower impairments.
·	Excluding run-off businesses, income was £28 million lower reflecting the uncertain and volatile macroeconomic backdrop and the continued low interest rate environment. Net interest margin decreased by 4 basis points mainly due to a reduction in higher priced Portfolio assets.
	○	Portfolio income fell by £60 million reflecting the managed reduction in average assets in order to improve capital efficiency and liquidity levels.
	○	Trade finance income was 7% higher due to increased guarantee fee income, mainly in Asia.
	○	Cash management income was 11% higher than Q4 2011, despite weak European activity and lower global payments, and due to a higher funding surplus arising from lower liquidity buffer requirements.

·	Expenses increased by £25 million, largely reflecting the timing of incentive accruals and reduced pension accruals in Q4 2011 following actuarial valuations.

·	Impairments of £35 million related to a small number of specific provisions.

·	Third party assets decreased by 9% due to managed reductions in the Portfolio loan book of £5 billion, reflecting capital management discipline, (which also resulted in a decrease in undrawn commitments) and reduced collateral required for Japanese business activities.

·	Customer deposits remained flat despite an increasingly competitive environment and the adverse impact of Sterling:Euro exchange rate.

·	The loan to deposit ratio improved from 126% to 116% mainly driven by reductions in the loan book.

·	Operating profit was down £129 million reflecting lower Portfolio income and higher impairments, partially offset by lower discretionary expenses.

·	Income decreased by £105 million due to a managed reduction in average assets and lower business volumes. Net interest margin decreased by 23 basis points primarily reflecting a reduction in higher yielding Portfolio assets.
	○	Portfolio income was 44% lower largely reflecting an active reduction in third party assets, down 17%, and higher funding costs. Corporate product volumes fell as activity in the debt market remained subdued, and a low inflation environment also reduced hedging activity.
	○	Trade finance income grew 16% as a result of strong growth in trade funded assets and trade guarantees, mainly in Asia.
	○	Cash management was 24% higher, as customer deposits grew by £1 billion following the success of deposit gathering initiatives, partially offset by adverse exchange rate movements and lower interest rates.

·	Expenses decreased by 4% driven by lower headcount, continued cost saving initiatives including tight management control over discretionary non-staff related costs.

·	Impairments in Q1 2011 included a significant write back of latent provisions within Portfolio.

·	The Portfolio loan book fell by £10 billion due to repayments and active capital management. This drove a 17% reduction in third party assets and a 9% reduction in risk-weighted assets.

·	Operating profit before impairment losses fell by £10 million in the quarter reflecting the impact of higher funding costs on income. Impairment losses increased by 20%, primarily due to deteriorating credit metrics of the retail mortgage portfolio, in line with market trends.

·	Income decreased by £12 million due to the impact of intense deposit competition. Net interest margin remained stable at 1.87% with the benefit of loan pricing initiatives, coupled with a reduced stock of liquid assets offsetting the impact of higher funding costs.

·	Expenses decreased by £2 million with further progress made on cost initiatives across the business, with particular focus on reducing staff costs and marketing expenditure.

·	Impairment losses increased by £67 million in the quarter, largely due to rising arrears rates on the residential mortgage portfolio and the continued deterioration in asset quality as property prices declined further.

·	Retail and SME deposit balances remained stable in the quarter despite the competitive market. However, there were further outflows of wholesale balances. Loans and advances to customers fell marginally.

·	Risk-weighted assets increased by £2.1 billion, mainly as a result of deterioration in mortgage credit metrics.

·	Operating loss decreased by £55 million to £310 million, with lower impairment losses partly offset by lower income.

·	Income fell by 8% reflecting the impact of a reducing loan book coupled with higher funding costs. Net interest margin increased by 3 basis points primarily driven by the benefit of initiatives to improve asset margins implemented during 2011 coupled with a reduction in the stock of liquid assets.

·	Expenses decreased by 4%, with a 14% fall in direct expenses, primarily driven by tight management of discretionary spend. Management continued to focus on implementing cost saving initiatives.

·	Impairment losses fell by 15% but credit conditions in Ireland remain challenging and overall, credit quality has deteriorated over the period driven by asset price deflation and affordability issues.

·	Loans and advances to customers declined by 4% in constant currency terms reflecting further amortisation and ongoing weak demand for credit.

·	Customer deposit balances declined by 8% on a constant currency basis with growth in retail and SME balances of 2%, more than offset by lower wholesale balances.

·	While sterling strengthened by 3% relative to the dollar at 31 March 2012 compared with 31 December 2011, the average sterling:dollar exchange rate was stable in Q1 2012.

·	Performance is described in full in the US dollar-based financial statements set out on pages 41 and 42.

·	Operating profit of $160 million compares with $279 million in the prior quarter, a decrease of $119 million, or 43%, reflecting the settlement of an outstanding litigation matter. Excluding the litigation settlement, operating profit increased by $19 million or 7%, to $298 million reflecting lower impairment losses partially offset by lower gains on the sale of securities.

·	The macroeconomic operating environment remained challenging, with low rates, high unemployment, a soft housing market, sluggish consumer activity and the continuing impact of legislative changes.

·	Net interest income was down $2 million reflecting reducing asset yields offset by lower funding costs. Net interest margin was up 2 basis points from the prior quarter.

·	Loans and advances were up $1.7 billion, or 2%, due to strong growth in commercial loan volumes and the purchase of a $1 billion auto loan portfolio, partly offset by the planned run-off of long term fixed rate consumer products.

·	Non-interest income was down $53 million, or 11%, largely reflecting lower securities gains.

·	Total expenses were up $135 million, or 16%, reflecting a litigation settlement of $138 million in Q1 2012. A settlement has been reached in a class action lawsuit relating to how overdraft fees were assessed on customer accounts prior to 2010. Citizens was one of more than 30 banks included in these class action lawsuits.

·	Excluding the litigation settlement, total expenses were down $3 million reflecting a mortgage servicing rights recapture, lower costs related to regulatory projects and the elimination of the Everyday Points rewards programme for consumer debit card customers, partially offset by the phasing of the annual incentive plan accruals, and a seasonal increase in payroll taxes.

·	Impairment losses were down $71 million, or 70%, reflecting an improved credit environment and lower impairments related to securities. REIL decreased from $1.6 billion to $1.5 billion.

·	Operating profit increased to $160 million from $150 million, an increase of $10 million, or 7%, substantially driven by significantly lower impairments and increased income, largely offset by the settlement of an outstanding litigation. Excluding the litigation settlement operating profit increased by $148 million, or 99%, to $298 million.

·	Net interest income was up $55 million, or 8%, driven by commercial loan growth, deposit pricing discipline and lower funding costs, partially offset by consumer loan run off.

·	Customer deposits were up 2% with strong growth achieved in checking balances. Consumer checking balances grew by 3% while small business checking balances grew by 9% over the year.

·	Non-interest income was down $31 million, or 7%, reflecting lower debit card fees, as a result of the Durbin Amendment legislation, and lower gains on the sale of securities, partially offset by strong mortgage banking fees.

·	The Durbin Amendment became effective on 1 October 2011 and lowers the allowable interchange on debit transactions by approximately 50% to $0.23 - $0.24 per transaction.

·	Total expenses excluding the litigation settlement were up $22 million, or 3% reflecting a change in accrual methodology related to the annual incentive plan during Q1 2011, partially offset by a mortgage servicing rights recapture and the elimination of the Everyday Points rewards programme for consumer debit card customers in Q1 2012.

·	Impairment losses declined by $146 million, or 82%, reflecting an improved credit environment as well as lower impairments related to securities.

(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.

Balance sheet	£bn	£bn	£bn

Total third party assets (excluding derivatives mark to market)	0.8	1.3	3.0

·	Markets returned to profit during Q1 2012, reflecting seasonally improved trading conditions and greater investor confidence.

·	Rates benefited from the increased liquidity and normalisation in the markets following the success of the ECB's LTRO.

·	Currencies fell back as client activity declined. In response, client interaction has been increased through a more extensive programme of trading and research contact.

·	Asset backed products recovered strongly from a poor performance in Q4 2011. Trading volumes for non-agency products doubled, driven by strong investor demand, partly reflecting an improving macroeconomic environment in the United States.

·	Capital Markets benefited from the improved credit environment following the ECB's LTRO and a seasonal recovery in origination activity. The EMEA origination business completed two large transactions during the quarter, generating significant fees. Flow credit trading benefited from a rally in corporate credit and inflows from US and European investors contrasting sharply with Q4 2011, when client activity and investor confidence were both weak.

·	Total expenses increased by 22%, with staff costs up 54%, reflecting a higher incentive compensation accrual related to increased revenue compared with Q4 2011, partially offset by reduced headcount. Other costs declined as cost saving programmes continued to take effect. Improvement in the cost:income ratio, and a reduction in the compensation ratio largely reflected improved revenue performance.

·	Impairments in both Q1 2012 and Q4 2011 reflected a small number of individual provisions.

·	Markets continued to carefully manage the balance sheet, with third party assets falling by 4% compared with the end of 2011, well on track to meet previously disclosed funded balance sheet targets.

·	Return on equity for the ongoing businesses was 21%, a significant improvement on the prior quarter due to the recovery in revenue.

·	Both Q1 2012 and Q1 2011 benefited from seasonally high levels of investor activity, with Q1 2012 reflecting a significant recovery from prior quarter activity levels.

·	Operating profit of the ongoing businesses fell 17%, driven by lower revenue, partly offset by lower costs.
	○	The largest absolute fall in revenue was in Asset Backed Products where the recovery in client demand in Q1 2012, though significant, was not as strong as Q1 2011. Balance sheet usage was materially reduced, despite an increase in 'pass-through' trading volumes following the reorganisation of the agency desk.
	○	Similarly, Credit Markets also recovered in the quarter, although the increase in confidence and activity was less pronounced than Q1 2011.
	○	Investor Products and Equity Derivatives weakened significantly compared with a particularly strong Q1 2011, falling by 43%, as client volumes were significantly below the levels of a year ago.
·	Costs also declined, reflecting a lower level of incentive rewards and the implementation of cost saving measures, driving reduced headcount.

·	Active balance sheet management has lowered third party assets by 18% with an emphasis on reducing levels of short-term unsecured wholesale funding, improving the stability of the funding base.

·	Risk-weighted assets increased by 1% driven by the implementation of CRD III at the end of 2011, partially offset by lower levels of market risk across the period.

·	Return on equity for the ongoing businesses fell from 26% to 21% reflecting lower revenue, combined with higher risk-weighted assets.

(1)	'Other' predominantly consists of the personal lines broker business and from Q1 2012 business previously reported in Non-Core.
(2)	Total in-force policies include travel and creditor policies sold through RBS Group. These comprise travel policies included in bank accounts e.g. Royalties Gold Account, and creditor policies sold with bank products including mortgage, loan and card payment protection.
(3)	Return on tangible equity is based on annualised operating profit after tax divided by average tangible equity. Q1 2012 tangible equity has been adjusted for a £300 million dividend paid to RBS Group on 27 March 2012.
(4)	Loss ratio is based on net claims divided by net premium income.
(5)	Commission ratio is based on fees and commissions divided by net premium income.
(6)	Expense ratio is based on expenses divided by net premium income.
(7)	Combined operating ratio is the sum of the loss, commission and expense ratios.
(8)	Consists of general and life insurance liabilities, unearned premium reserve and liability adequacy reserve. Q1 2012 includes business previously reported in Non-Core.

·	Operating profit of £84 million was £41 million, 33%, lower compared with Q4 2011, due to higher weather related claims experienced during Q1 2012 and increased expenses resulting from the timing of marketing expenditure, partially offset by higher investment income. Q1 2012 includes the results of insurance business previously reported in Non-Core, which overall had a negligible impact on operating result.

·	Gross written premium of £1,046 million rose by £96 million, or 10%, primarily as a result of the Motor sales campaign with enhanced Direct Line and Churchill marketing activity and an increase in International gross written premium, where a significant proportion of policies on the German book start on 1 January each year.

·	Total income of £876 million rose £13 million, or 2%, primarily due to the non-repeat of £57 million profit share paid to UK Retail during Q4 2011, which was partially offset by commissions payable relating to business previously reported in Non-Core and lower net premium income.

·	Net claims of £649 million were £60 million, or 10%, higher partly due to the adverse weather experienced early in Q1 2012 and the non-repeat of a release from creditor insurance reserves in Q4 2011, which was matched by a similar payment to UK Retail within fees and commissions.

·	Total direct expenses of £170 million were £16 million, or 10%, higher mainly due to the timing of marketing expenditure associated with the new Churchill advertising campaign.

·	Investment income of £90 million was £30 million, or 50%, higher than Q4 2011 largely as a result of the inclusion of business previously reported in Non-Core and investment gains arising from portfolio management initiatives.

·	Total in-force policies grew by 1% due to Rescue and other personal lines, Motor and International. Rescue and other personal lines business grew as a result of a one-off migration of UK Retail customers to packaged current accounts, increasing the uptake of bundled travel insurance. Additionally 43,000 in-force policies relate to business moved across from Non-Core during Q1 2012 in preparation for separation.

·	Operating profit rose by £17 million, or 25%, compared with Q1 2011 due to an improvement in loss ratio and higher investment income, which was partially offset by higher commissions payable and increased direct expenses relating to the timing of marketing and to the preparation for separation.

·	Gross written premiums rose by £9 million, or 1%, driven by Motor as a result of sale and marketing campaigns and due to price increases in International.

·	Total income fell by £130 million, or 13%, reflecting lower volumes written during the previous year following planned de-risking and higher commissions payable, partly due to the inclusion of business previously reported within Non-Core.

·	Net claims decreased by £135 million, or 17%, through a combination of reduced exposure on Motor and the exit of certain business lines. Additionally Q1 2012 includes reserve releases from prior years.

·	Total direct expenses increased by £7 million or 4%, due to the marketing expenditure associated with the new Churchill advertising campaign, and activity to support separation.

·	Investment income rose by £26 million, or 41%, compared with Q1 2011 due to the inclusion of business previously reported within Non-Core and investment gains arising from portfolio management initiatives.

·	Combined operating ratio improved by 1 percent compared with Q1 2011 due to lower claims offset by higher expenses and commissions payable. For continuing business only (excluding personal lines broker and business previously reported in Non-Core) the combined operating ratio was 104% in Q1 2012 compared to 106% in Q1 2011.

·	Central items not allocated represented a debit of £144 million, a decrease of £233 million compared with Q4 2011. The debit primarily results from unallocated volatility costs in Group Treasury.

·	Q4 2011 benefited from higher securities gains and a VAT recovery.

·	Central items not allocated represented a debit of £144 million, a decrease of £112 million compared with Q1 2011.

·	The decrease was largely as a result of lower securities gains in Q1 2012, £90 million compared with £158 million.

(1)	Asset-backed products include super senior asset-backed structures and other asset-backed products.
(2)	Includes disposal groups.