Interim Results 2010 - Part 2

Companies

NATWEST GROUP (NWG)

UK 100

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	Page

Forward-looking statements	3

Presentation of information	4

Results summary - pro forma	5

Results summary - statutory	7

Pro forma results	8

Summary consolidated income statement	8

Condensed consolidated statement of comprehensive income	10

Summary consolidated balance sheet	10

Results summary	11

Divisional performance	21
UK Retail	24
UK Corporate	28
Wealth	31
Global Banking & Markets	33
Global Transaction Services	36
Ulster Bank	38
US Retail & Commercial	41
RBS Insurance	46
Central items	49
Non-Core	50

Allocation methodology for indirect costs	57

Average balance sheet	59

Condensed consolidated balance sheet	61

Commentary on condensed consolidated balance sheet	62

Condensed consolidated statement of changes in equity	64

Notes	67

Independent review report	77


	Page

Risk and capital management	78

Presentation of information	78

Capital	79

Credit risk	83

Funding and liquidity risk	115

Market risk	120

Other risk exposures	127

Statutory results	144

Condensed consolidated income statement	145

Condensed consolidated statement of comprehensive income	146

Financial review	147

Condensed consolidated balance sheet	148

Commentary on condensed consolidated balance sheet	149

Condensed consolidated statement of changes in equity	151

Condensed consolidated cash flow statement	154

Notes	155

Average balance sheet	192

Capital resources and ratios	193

Independent review report	194

Principal risks and uncertainties	196

Statement of directors' responsibilities	218

Additional information	219


Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets

Appendix 2 Analysis by quarter

Appendix 3 The Asset Protection Scheme

Appendix 4 Businesses outlined for disposal

Appendix 5 Indicative impact of future transfers

	Quarter ended			Half year ended
	30 June 2010	31 March 2010	30 June 2009	30 June 2010	30 June 2009
	£m	£m	£m	£m	£m

Core*
Total income (1)	7,909	8,020	6,808	15,929	17,254
Operating expenses (2)	(3,511)	(3,774)	(3,529)	(7,285)	(7,497)
Insurance net claims	(1,108)	(1,003)	(788)	(2,111)	(1,577)
Operating profit before impairment losses (3)	3,290	3,243	2,491	6,533	8,180
Impairment losses	(1,097)	(971)	(1,147)	(2,068)	(2,177)
Operating profit (3)	2,193	2,272	1,344	4,465	6,003

Non-Core
Total income (1)	873	934	(687)	1,807	(2,463)
Operating expenses (2)	(592)	(656)	(537)	(1,248)	(1,236)
Insurance net claims	(215)	(133)	(137)	(348)	(314)
Operating profit/(loss) before impairment losses (3)	66	145	(1,361)	211	(4,013)
Impairment losses	(1,390)	(1,704)	(3,516)	(3,094)	(5,344)
Operating loss (3)	(1,324)	(1,559)	(4,877)	(2,883)	(9,357)

Total
Total income (1)	8,782	8,954	6,121	17,736	14,791
Operating expenses (2)	(4,103)	(4,430)	(4,066)	(8,533)	(8,733)
Insurance net claims	(1,323)	(1,136)	(925)	(2,459)	(1,891)
Operating profit before impairment losses (3)	3,356	3,388	1,130	6,744	4,167
Impairment losses	(2,487)	(2,675)	(4,663)	(5,162)	(7,521)
Operating profit/(loss) (3)	869	713	(3,533)	1,582	(3,354)
Integration and restructuring costs	(254)	(168)	(355)	(422)	(734)
Gain on redemption of own debt	553	-	3,790	553	3,790
Asset Protection Scheme credit default swap - fair value changes	500	(500)	-	-	-
Other	(511)	(66)	157	(577)	313
Profit/(loss) before tax (4)	1,157	(21)	59	1,136	15

* Includes fair value of own debt impact	619	(169)	(960)	450	71

Key metrics	Quarter ended			Half year ended
	30 June 2010	31 March 2010	30 June 2009	30 June 2010	30 June 2009

Performance ratios
Core
- Net interest margin	2.24%	2.12%	2.11%	2.18%	2.16%
- Cost:income ratio (5)	44%	47%	52%	46%	43%
- Adjusted cost:income ratio (6)	52%	54%	59%	53%	48%
Non-Core
- Net interest margin	1.22%	1.25%	0.45%	1.24%	0.54%
- Cost:income ratio (5)	68%	70%	(78%)	69%	(50%)
- Adjusted cost:income ratio (6)	90%	82%	(65%)	86%	(45%)
Group
- Net interest margin	2.03%	1.92%	1.70%	1.97%	1.74%
- Cost:income ratio (5)	47%	49%	66%	48%	59%
- Adjusted cost:income ratio (6)	55%	57%	78%	56%	68%
Continuing operations:
Basic earnings/(loss) per ordinary and B share (7)	0.8p	(0.2p)	0.1p	0.6p	(1.7p)

	30 June 2010	31 March 2010	Change	31 December 2009	Change

Capital and balance sheet
Total assets	£1,581bn	£1,583bn	-	£1,522bn	4%
Funded balance sheet (8)	£1,058bn	£1,121bn	(6%)	£1,084bn	(2%)
Loan:deposit ratio (Core - net of provisions)	102%	102%	-	104%	(200bp)
Loan:deposit ratio (Group - net of provisions)	128%	131%	(300bp)	135%	(700bp)
Risk-weighted assets - gross	£597bn	£586bn	2%	£566bn	5%
Benefit of Asset Protection Scheme	(£123bn)	(£125bn)	(2%)	(£128bn)	(4%)
Risk-weighted assets	£474bn	£461bn	3%	£438bn	8%
Total equity	£79bn	£81bn	(2%)	£80bn	(1%)
Core Tier 1 ratio*	10.5%	10.6%	(10bp)	11.0%	(50bp)
Tier 1 ratio	12.8%	13.7%	(90bp)	14.4%	(160bp)
Risk elements in lending (REIL)	£36bn	£37bn	(3%)	£35bn	3%
REIL as a % of gross loans and advances	6.5%	6.3%	20bp	6.1%	40bp
Provision balance as % of REIL and PPL	43%	45%	(200bp)	42%	100bp
Tier 1 leverage ratio (9)	17.2x	17.6x	(2%)	17.0x	1%
Tangible equity leverage ratio (10)	5.5%	5.1%	40bp	5.2%	30bp
Net tangible equity per share	52.8p	51.5p	3%	51.3p	3%

(1)	Excluding gain on redemption of own debt, strategic disposals and Asset Protection Scheme credit default swap - fair value changes.
(2)	Excluding amortisation of purchased intangible assets, integration and restructuring costs, bonus tax and write-down of goodwill and other intangible assets.
(3)	Operating profit/(loss) before tax, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, Asset Protection Scheme credit default swap - fair value changes and write-down of goodwill and other intangible assets.
(4)	Excluding write-down of goodwill and other intangible assets.
(5)	Cost:income ratio is based on total income and operating expenses as defined in (1) and (2) above.
(6)	Adjusted 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.
(7)	Adjusted profit/(loss) from continuing operations attributable to ordinary and B shareholders divided by weighted average number of ordinary and B shares in issue. Refer to page 73.
(8)	Total assets less derivatives.
(9)	Tier 1 leverage ratio is total tangible assets (after netting derivatives) divided by Tier 1 capital.
(10)	Tangible equity leverage ratio is total tangible equity divided by total tangible assets (after netting derivatives).

·	Income of £17,960 million for H1 2010.

·	Operating profit before tax of £1,169 million for H1 2010.

·	Core Tier 1 ratio 10.5%

	Half year ended
	30 June 2010	30 June 2009*
	£m	£m

Continuing operations:
Total income	17,960	19,021
Operating expenses	(9,170)	(9,960)
Operating profit before impairment losses	6,331	7,170
Impairment losses	(5,162)	(7,521)
Operating profit/(loss) before tax	1,169	(351)

Profit/(loss) attributable to ordinary and B shareholders	9	(1,042)

(1)	Excluding reverse repurchase agreements and stock borrowing.
(2)	Excluding repurchase agreements and stock lending.

(1)	Refer to notes on page 59.
(2)	Retail & Commercial comprises UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank and US Retail & Commercial divisions.

·	Group net interest margin improved to 2.03%, up 11 basis points from the first quarter, with underlying up 8 basis points excluding the positive impact of capital hedging.

·	NIM in the Core Retail & Commercial business improved by 14 basis points, with improved asset margins offsetting continued pressure on liability margins as higher yielding hedges roll off. Wider asset margins primarily reflect the roll-off of older business written at lower margins, with front book margins remaining attractive, but stabilising.

·	Net interest income benefited from the higher day count in the second quarter (approximately 4 basis points of the 14 basis point movement in Core Retail & Commercial NIM), as well as from modest growth in UK Retail and Corporate loan balances.

·	Group NIM widened by 33 basis points compared with Q2 2009.

·	In Core Retail & Commercial, net interest income increased by 10%, while average interest earning assets increased by 4%, leaving NIM 19 basis points higher.

·	Group NIM recovered to 1.97%, up 23 basis points from the trough of 1.74% reached in the first half of 2009.

·	Core Retail & Commercial NIM was 23 basis points higher.

·	Income from trading activities, excluding movements in the fair value of own debt, declined by £723 million, with economic uncertainty leading to weak capital market conditions, thereby reducing GBM trading volumes from the strong first quarter. Non-Core trading results improved, however, as banking book hedges benefited from spread widening.

·	Other operating income includes losses of £105 million booked on the disposal of a portfolio of lower-rated sovereign debt securities, including Portugal and Greece.

·	The Group's credit spreads widened during the quarter, resulting in a gain of £619 million on the fair value of own debt, compared with a charge of £169 million in the first quarter.

·	Excluding fair value of own debt, GBM trading income was 24% lower than in the buoyant second quarter of 2009.

·	Non-Core trading results are inevitably volatile, with gains booked on single name credit default swaps, compared with losses booked on the same positions in Q2 2009.

·	UK Retail non-interest income fell, reflecting the reduction in overdraft administration charges following changes to the pricing structure introduced in Q4 2009.

·	The gain of £619 million on the fair value of own debt contrasts with a charge of £960 million in the second quarter of 2009, during which the Group's credit spreads tightened sharply.

	Quarter ended			Half year ended
	30 June 2010	31 March 2010	30 June 2009	30 June 2010	30 June 2009
	£m	£m	£m	£m	£m

Profit/(loss) for the period	306	(131)	375	175	58

Other comprehensive income
Available-for-sale financial assets	117	381	1,319	498	(1,633)
Cash flow hedges	38	(1)	277	37	521
Currency translation	480	766	(2,262)	1,246	(2,447)
Tax on other comprehensive income	10	(160)	(154)	(150)	408

Other comprehensive income/(loss) for the period, net of tax	645	986	(820)	1,631	(3,151)

Total comprehensive income/(loss) for the period	951	855	(445)	1,806	(3,093)

Attributable to:
Minority interests	44	89	(81)	133	53
Preference shareholders	-	105	396	105	510
Paid-in equity holders	19	-	36	19	36
Ordinary and B shareholders	888	661	(796)	1,549	(3,692)

	951	855	(445)	1,806	(3,093)

	30 June 2010	31 March 2010	31 December 2009
	£m	£m	£m

Loans and advances to banks (1)	54,471	56,508	48,777
Loans and advances to customers (1)	539,340	553,872	554,654
Reverse repurchase agreements and stock borrowing	87,059	95,925	76,137
Debt securities and equity shares	253,586	273,170	265,055
Other assets	123,526	141,151	139,659

Funded assets	1,057,982	1,120,626	1,084,282
Derivatives	522,871	462,272	438,199

Total assets	1,580,853	1,582,898	1,522,481

Owners' equity	76,802	78,676	77,736
Minority interests	2,109	2,305	2,227
Subordinated liabilities	27,523	31,936	31,538
Deposits by banks (2)	96,614	100,168	115,642
Customer accounts (2)	420,890	425,102	414,251
Repurchase agreements and stock lending	114,820	129,227	106,359
Derivatives, settlement balances and short positions	571,690	514,855	472,409
Other liabilities	270,405	300,629	302,319

Total liabilities and equity	1,580,853	1,582,898	1,522,481

	Quarter ended			Half year ended
	30 June 2010	31 March 2010	30 June 2009	30 June 2010	30 June 2009
Net interest income	£m	£m	£m	£m	£m

Net interest income (1)	3,567	3,447	3,276	7,014	6,746

Net interest margin
- Group	2.03%	1.92%	1.70%	1.97%	1.74%
- Core
- Retail & Commercial (2)	3.11%	2.97%	2.92%	3.04%	2.81%
- Global Banking & Markets	1.01%	1.11%	1.48%	1.06%	1.73%
- Non-Core	1.22%	1.25%	0.45%	1.24%	0.54%

Selected average balances
Loans and advances to banks	47,090	47,254	55,062	47,172	49,484
Loans and advances to customers	517,450	529,914	585,925	523,682	602,236
Debt securities	139,722	140,732	129,190	140,227	124,059
Interest earning assets	704,262	717,900	770,177	711,081	775,779
Deposits by banks	94,330	86,048	128,733	90,189	141,778
Customer accounts	351,282	340,872	359,539	346,077	365,187
Subordinated liabilities	30,639	32,629	33,813	31,634	36,234
Interest bearing liabilities	618,736	627,192	688,432	622,964	688,273
Non-interest bearing deposits	49,928	43,946	36,790	46,937	36,664

Selected average yields (%)
Loans and advances to banks	1.12	1.19	1.85	1.15	1.94
Loans and advances to customers	3.67	3.48	4.07	3.58	3.96
Debt securities	2.88	2.43	2.96	2.65	3.67
Interest earning assets	3.34	3.13	3.72	3.23	3.79
Deposits by banks	1.77	1.38	2.23	1.59	2.50
Customer accounts	1.09	1.03	1.49	1.06	1.50
Subordinated liabilities	1.91	2.46	3.60	2.19	4.04
Interest bearing deposits	1.50	1.38	2.26	1.44	2.31
Non-interest bearing deposits as a percentage of interest earning assets	7.09	6.12	4.78	6.60	4.73

	Quarter ended			Half year ended
	30 June 2010	31 March 2010	30 June 2009	30 June 2010	30 June 2009
Operating expenses	£m	£m	£m	£m	£m

Staff costs	2,178	2,553	2,150	4,731	4,660
Premises and equipment	516	528	587	1,044	1,231
Other	974	935	915	1,909	1,961

Administrative expenses	3,668	4,016	3,652	7,684	7,852
Depreciation and amortisation	435	414	414	849	881

Operating expenses	4,103	4,430	4,066	8,533	8,733



General insurance	1,348	1,107	895	2,455	1,865
Bancassurance	(25)	29	30	4	26

Insurance net claims	1,323	1,136	925	2,459	1,891



Staff costs as a percentage of total income	25%	29%	35%	27%	32%

·	Lower revenues in GBM were offset by a £3.7 billion increase in Non-Core trading income as conditions improved and risk continued to be reduced.

·	Excluding the reduction in UK Retail overdraft administration fees, Core Retail & Commercial non-interest income rose modestly.

·	Staff costs fell, driven by the reduction in GBM performance-related pay accruals in line with reduced revenue and a £74 million credit relating to changes to the US defined benefit pension plan. This was partially offset by the effects of the annual salary award.

·	Insurance net claims rose by 16%, reflecting higher reserves for bodily injury claims relating to prior years, partially offset by lower weather-related claims.

·	Administrative expenses were broadly flat compared with a year ago.

·	Insurance claims increased by £398 million, largely as a result of the increased bodily injury reserving.

·	Lower first half costs reflect more than £600 million of benefits from the Group's cost reduction programme, partially offset by increased investment activity across the core businesses.

·	US deposit insurance levies were lower than in the first half of 2009, which included a one-off FDIC assessment.

·	Core Retail & Commercial impairments were flat on Q1 2010, with improvements in UK Retail offset by increased impairments in Ulster Bank commercial property portfolios. UK Corporate and US Retail & Commercial impairments were stable as a percentage of loans and advances. GBM had a small number of individual impairments in Q2 2010.

·	The improvement in Non-Core impairments was largely driven by a provision recovery of £270 million on a significant single name exposure.

(1)	Included in 'Income from trading activities', significantly all in Non-Core.
(2)	Credit derivative product companies.

●	Total net losses were significantly lower than in Q1 2010 reflecting the widening of corporate credit spreads (benefiting banking book hedges) while other asset prices continued to improve and sterling strengthened.

●	Losses on monoline exposures reflect widening credit spreads which more than offset reductions in exposures and gains on restructuring.

●	In Q2 2010, widening corporate credit spreads resulted in a higher exposure to CDPCs leading to an increase in CVA.

●	Gains on asset-backed products in Q2 2010 included gains on disposals as well as price improvements, compared with a more mixed outcome in Q1 2010.

●	The gain on other credit exotics principally reflects lower reserving as a result of risk reduction.

●	Gains on banking book hedges in Q2 2010 compared with losses in Q1 2010 resulted from the widening of corporate credit spreads and the continued roll off of capital relief trades.

●		The losses on monolines decreased by £1.5 billion, due to management actions to reduce the monoline exposures as a result of improved underlying asset prices.

●	Similarly, CDPC losses declined by £0.5 billion as exposures have been reduced and losses on hedges incurred in 2009 subsided. Exposures to CDPCs have declined over the course of 2009 and the first half of 2010, accounting for the lower losses.

●	In H1 2009, losses were experienced on ABS due to price deterioration, principally in Q1 2009. However, in H1 2010 prices have improved and some net gains were realised.

●	Gains on banking book hedges in H1 2010 compared with losses in H1 2009 reflect the combination of unwinding during 2010 and movements in credit spreads, both direction and extent.

·	A gain of £553 million was booked associated with the liability management exercise undertaken during the second quarter, through which the Group strengthened its Core Tier 1 capital base by repurchasing existing Tier 1 securities and exchanging selected existing Upper Tier 2 securities for new senior debt securities. Note that a further gain of £651 million was booked directly to equity in Q2 2010.

·	The Asset Protection Scheme is structured as a credit derivative, with movements in the fair value of the contract taken as a credit of £500 million in the second quarter, compared with £500 million charged in Q1 2010. This reflects widening credit spreads across the portfolio of covered assets.

·	Losses booked on strategic disposals during the second quarter reflect the momentum in the Group's restructuring programme, including a number of country exits, primarily in Latin America and Asia. In addition, the Group recognised a loss of £235 million in relation to the restructuring of its bancassurance distribution arrangements with Aviva.

·	The Core Tier 1 ratio declined by 10 basis points during the second quarter, largely driven by an increase in risk-weighted assets, partially offset by the benefits of the liability management exercise.

·	RWAs were up £13 billion to £474 billion due to a new market risk-related event risk charge and an increase in RBS NV as historic capital relief trades rolled off.

·	The transition of RBS NV to the Basel II approach was successfully completed during the quarter. This resulted in an increase in Non-Core and Group Centre RWAs which was largely offset by reductions across other divisions.

·	Capital relief from the Asset Protection Scheme declined by £1 billion to £123 billion, reflecting run-off and the withdrawal of certain assets from the Scheme.

·	The Tier 1 capital ratio declined by 90 basis points to 12.8%, reflecting the increase in RWAs as well as the liability management exercise completed in the second quarter. The movement in the total capital ratio reflects the same drivers.

Interim Results 2010 - Part 2

Non-interest income (excluding insurance net premium income)*

Operating expenses

Companies

UK 100

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Balance sheet	30 June 2010	31 March 2010	31 December 2009

Funded balance sheet	£1,058bn	£1,121bn	£1,084bn
Total assets	£1,581bn	£1,583bn	£1,522bn
Loans and advances to customers (excluding reverse repurchase agreements and stock borrowing)	£539bn	£554bn	£555bn
Customer accounts (excluding repurchase agreements and stock lending)	£421bn	£425bn	£414bn
Loan:deposit ratio (Core - net of provisions)	102%	102%	104%
Loan:deposit ratio (Group - net of provisions)	128%	131%	135%

·	The funded balance sheet decreased by £63 billion during the second quarter, including £44 billion asset reduction in GBM and £20 billion in Non-Core, of which £8 billion was from disposals.

·	Compared with 30 June 2009, loans and advances have fallen by £29 billion in GBM and by £36 billion in Non-Core, while growing by £11 billion in Core Retail & Commercial.