Interim Results 2010 - Part 3 | Company Announcement

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	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

Operating profit/(loss) before impairment losses by division
UK Retail	576	527	490	1,103	861
UK Corporate	588	504	535	1,092	956
Wealth	88	66	134	154	234
Global Banking & Markets	1,245	1,498	1,018	2,743	4,755
Global Transaction Services	282	233	269	515	509
Ulster Bank	104	81	78	185	149
US Retail & Commercial	273	183	136	456	318
RBS Insurance	(203)	(50)	142	(253)	223
Central items	337	201	(311)	538	175

Core	3,290	3,243	2,491	6,533	8,180
Non-Core	66	145	(1,361)	211	(4,013)

Group operating profit before impairment losses	3,356	3,388	1,130	6,744	4,167

Included in the above are movements in fair value of own debt:
Global Banking & Markets	331	(32)	(482)	299	165
Central items	288	(137)	(478)	151	(94)

	619	(169)	(960)	450	71

Impairment losses by division
UK Retail	300	387	470	687	824
UK Corporate	198	186	450	384	550
Wealth	7	4	16	11	22
Global Banking & Markets	164	32	(31)	196	238
Global Transaction Services	3	-	4	3	13
Ulster Bank	281	218	90	499	157
US Retail & Commercial	144	143	146	287	369
RBS Insurance	-	-	1	-	6
Central items	-	1	1	1	(2)

Core	1,097	971	1,147	2,068	2,177
Non-Core	1,390	1,704	3,516	3,094	5,344

Group impairment losses	2,487	2,675	4,663	5,162	7,521

·	Operating profit before impairment losses, adjusted for the movement in the fair value of own debt, was £2,737 million, down 23% compared with the first quarter of 2010 but up 31% compared with the second quarter of 2009. Pre-impairment profits grew in every Core division except GBM and RBS Insurance.

·	Core Retail & Commercial generated good growth in pre-impairment operating profit during the second quarter, but this was offset by weaker GBM performance in more difficult conditions and by operating losses due to prior year reserve increases in RBS Insurance.

	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

Operating profit/(loss) by division
UK Retail	276	140	20	416	37
UK Corporate	390	318	85	708	406
Wealth	81	62	118	143	212
Global Banking & Markets	1,081	1,466	1,049	2,547	4,517
Global Transaction Services	279	233	265	512	496
Ulster Bank	(177)	(137)	(12)	(314)	(8)
US Retail & Commercial	129	40	(10)	169	(51)
RBS Insurance	(203)	(50)	141	(253)	217
Central items	337	200	(312)	537	177

Core	2,193	2,272	1,344	4,465	6,003
Non-Core	(1,324)	(1,559)	(4,877)	(2,883)	(9,357)

Group operating profit/(loss)	869	713	(3,533)	1,582	(3,354)

	Quarter ended			Half year ended
	30 June 2010	31 March 2010	30 June 2009	30 June 2010	30 June 2009
	%	%	%	%	%

Net interest margin by division
UK Retail	3.88	3.66	3.69	3.77	3.57
UK Corporate	2.50	2.38	2.17	2.44	2.03
Wealth	3.36	3.38	4.82	3.37	4.65
Global Banking & Markets	1.01	1.11	1.48	1.06	1.73
Global Transaction Services	6.47	7.97	9.23	7.11	8.74
Ulster Bank	1.92	1.77	2.03	1.84	1.95
US Retail & Commercial	2.78	2.69	2.32	2.73	2.32
Non-Core	1.22	1.25	0.45	1.24	0.54

Group	2.03	1.92	1.70	1.97	1.74

	30 June 2010	31 March 2010		31 December 2009
	£bn	£bn	Change	£bn	Change

Risk-weighted assets by division
UK Retail	49.1	49.8	(1%)	51.3	(4%)
UK Corporate	87.6	91.3	(4%)	90.2	(3%)
Wealth	12.0	11.7	3%	11.2	7%
Global Banking & Markets	141.3	141.8	-	123.7	14%
Global Transaction Services	19.4	20.4	(5%)	19.1	2%
Ulster Bank	30.5	32.8	(7%)	29.9	2%
US Retail & Commercial	65.5	63.8	3%	59.7	10%
Other	16.9	9.6	76%	9.4	80%

Core	422.3	421.2	-	394.5	7%
Non-Core	175.0	164.3	7%	171.3	2%

	597.3	585.5	2%	565.8	6%
Benefit of Asset Protection Scheme	(123.4)	(124.8)	(1%)	(127.6)	(3%)

Total	473.9	460.7	3%	438.2	8%

Interim Results 2010 - Part 3

Companies

UK 100

Latest directors dealings

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 8% of divisional risk-weighted assets, adjusted for capital deductions).
(2)	Adjusted cost:income ratio is based on total income after netting insurance claims and operating expenses.

·	Operating profit of £276 million in Q2 2010 was £136 million higher than in the previous quarter. Impairment losses fell £87 million to £300 million. Growth in income of 6% (£72 million) was partly offset by increased costs. Return on equity was 18.8%, compared with 9.4% in Q1 2010.

·	UK Retail continues to focus on the delivery of its strategic plan and is benefiting from investment in process improvements and automation. The division launched its customer charter during Q2 2010, which has been well received by customers and staff.

·	UK Retail continued to achieve its growth targets for secured lending while building customer deposits. o Mortgage balances were up 2% on Q1 2010, with continued retention of existing customers and new business sourced predominantly from the existing customer base. Gross lending increased 41% on Q1 2010, which saw low levels of business activity, driven by seasonality and removal of stamp duty relief at the end of 2009. Market share of new mortgage lending was 12%, still well above the Group's 7% share of stock. The Group considers mortgages to be a critical customer need and will continue to make lending available for both new and existing customers. o Unsecured lending fell 2% in the quarter, as repayments continued to exceed new borrowing, which remained subdued in line with trends in the economy. o Deposit growth continued albeit at a slower rate than previously with 1% growth in the quarter. This growth was despite a challenging market place, continued low interest rates and significant maturities of earlier fixed-term products. o The loan to deposit ratio at 30 June 2010 was 114%, 1 percentage point higher than Q1 2010 as a result of continued strong growth in mortgage balances.

·	Net interest income increased by 7%, with net interest margin increasing by 22 basis points. Asset margins continued to widen across all products, while liability margins in Q2 2010 were slightly lower than in Q1 2010. Savings margins remained stable, but swap rates on current account hedges declined.

·	Non-interest income increased by 1%, with transaction-based fee income remaining stable as growth in the current economic climate remained challenging.

·	Costs increased by 3% in the quarter reflecting marketing expenses associated with the launch of the customer charter as well as the impact of annual pay awards. Adjusted for insurance claims, the cost:income ratio improved by 2 percentage points to 56%.

·	Impairment losses declined by 22% in Q2 2010. The impairment outlook is expected to remain steady and may improve slightly, subject to economic conditions remaining stable. o Mortgage impairment losses decreased 8% in the quarter due to a reduction in customer default volumes, with performance continuing to benefit from the low interest rate environment. o The unsecured portfolio impairment charge fell 24% to £256 million, on a book of £19 billion, due to lower default volumes together with improved collections performance.

·	Risk-weighted assets fell marginally in the quarter as the impacts of mortgage volume growth and a retiring cards securitisation were more than offset by lower unsecured balances. Portfolio credit metrics remain stable.

·	Operating profit increased significantly, with income up 5% and costs down 3%, while impairments were 36% lower than in the previous year, primarily reflecting lower volumes of arrears on the unsecured portfolio.

·	Net interest income was 15% higher than Q2 2009, with widening asset margins across all products. Liability margins came under pressure during 2009, with savings margin sacrificed to support balance growth.

·	Non interest income decreased 18% versus prior year primarily as a result of changes to the structure of overdraft charges which took effect from Q4 2009.

·	Deposit balances were up 8% on Q2 2009. Savings balances grew by 9%, significantly outperforming the market, which remains intensely competitive. Personal current account balances were up 5%, with 2% growth in accounts.

·	Mortgage balances at 30 June 2010 were up 13%. UK Retail continues to take proactive steps to support and retain existing customers.

·	Costs were 3% lower than in Q2 2009, driven by process re-engineering efficiencies within the branch network and operational centres. The adjusted cost:income ratio fell from 61% to 56%.

·	Impairment losses dropped by 36% compared with Q2 2009, primarily reflecting lower arrears volumes on the unsecured portfolio and stabilisation of recovery expectations.

·	Net interest income was 16% higher, with net interest margin increasing 20 basis points. Widening asset margins across all products and an increasing number of mortgage customers choosing to remain on standard variable rate were the key drivers. Liability margins, however, fell as a result of lower interest rates, a competitive market place and our focus on saving balance growth.

·	Total customer lending grew 9% from H1 2009 with mortgage balances increasing 13%, whilst unsecured balances reduced 8%. Deposit balances grew 8% with savings deposits up 9% and current account balances up 5% on H1 2009.

·	Costs decreased by 8%, as process re-engineering helped to deliver lower staff costs and operational efficiencies.

·	Impairment losses fell 17% in H1 2010 as improved economic conditions favourably impacted unsecured impairments, which declined by £166 million whilst secured impairments grew by £29 million.

	30 June 2010	31 March 2010*		31 December 2009*
	£bn	£bn	Change	£bn	Change

Capital and balance sheet
Total third party assets	118.4	117.4	1%	114.9	3%
Loans and advances to customers (gross)
- banks and financial institutions	6.5	6.5	-	6.3	3%
- hotels and restaurants	7.0	6.6	6%	6.7	4%
- housebuilding and construction	4.6	4.3	7%	4.3	7%
- manufacturing	5.5	5.9	(7%)	5.9	(7%)
- other	32.6	31.1	5%	29.9	9%
- private sector education, health, social work, recreational and community services	9.1	8.5	7%	6.5	40%
- property	30.3	32.0	(5%)	33.0	(8%)
- wholesale and retail trade, repairs	10.4	10.4	-	10.2	2%
- asset and invoice finance	9.2	9.0	2%	8.8	5%
Customer deposits	95.4	91.4	4%	87.8	9%
Risk elements in lending	2.9	2.5	16%	2.3	26%
Loan:deposit ratio (excluding repos)	119%	124%	(500bp)	126%	(700bp)
Risk-weighted assets	87.6	91.3	(4%)	90.2	(3%)

·	Operating profit increased by 23% to £390 million, driven by good income growth and reduced costs.

·	Net interest income increased by 6%. Loans and advances to customers were broadly in line with previous quarter, despite robust levels of gross new lending; margins continue to recover from the low levels reached in 2008 and 2009. Customer deposits grew by £4 billion, with deposit-gathering initiatives continuing through the quarter. Deposit margins remained tight. Net interest margin increased by 12 basis points.

·	Non-interest income increased 3%, driven by GBM cross sales and money transmission fees.

·	Staff costs were £16 million lower due to phasing of staff compensation. Excluding the £29 million Office of Fair Trading (OFT) penalty taken in Q1 2010, total expenses were 2% lower.

·	Impairments were broadly in line with the previous three quarters and continue to reflect the delicate financial condition of many clients, especially in the property and SME sectors.

·	Although nominal assets increased by 1%, risk-weighted assets decreased by 4%, primarily reflecting improvements in risk metrics.

·	Operating profits increased by £305 million, reflecting income growth and significantly lower impairments.

·	Net interest income increased by 16%, driven by the recovery in lending margins. Non-interest income increased by 4%, from small increases across most fee and product lines.

·	Staff expenses increased by £7 million, with changes to the phasing of staff costs partially offset by reduced redundancy costs. Other expenses increased £32 million, partly as a result of a £19 million legal recovery in Q2 2009. Adjusting for this, total expenses were up 7%.

·	Impairments decreased by £252 million compared with Q2 2009, which included a higher charge taken to reflect potential losses in the portfolio not yet specifically identified.

·	Operating profit increased by £302 million or 74% compared with H1 2009, driven by strong income performance (up 13%) and significantly lower impairments.

·	Net interest income increased by £198 million, 19%, and net interest margin recovered, rising by 41 basis points, reflecting repricing of the loan portfolio and a better funding cost environment than in the prior year, offset by adverse deposit floor impacts. Deposit-gathering initiatives delivered balance growth of 11% and the loan:deposit ratio improved to 119%, compared with 130% at H1 2009.

·	Non-interest income increased by 5%, reflecting good refinancing activity levels.

·	Total expenses increased £92 million, 12%, or 2% after excluding the OFT penalty and legal recovery and normalising for phasing of staff compensation and 2009 redundancy costs.

·	Impairments were £166 million lower, primarily a result of higher charges taken in H1 2009 to reflect potential losses in the portfolio not yet specifically identified.

·	Operating profit rose 31% to £81 million, mostly reflecting increased net interest income and a reduction in expenses.

·	Competition in the deposit market remains intense. Deposits showed a slight decline from Q1 2010, with continued growth in the UK offset by reductions in the international businesses. At constant exchange rates deposits were flat.

·	Loans and advances grew in response to client demand, increasing 3% over the prior quarter with margins continuing to improve.

·	Assets under management were affected by adverse market conditions, with balances declining 5%. Assets under management outflows continued in the international businesses, where competition for private bankers has resulted in client attrition.

·	Total expenses decreased 6% on the previous quarter reflecting the phasing of compensation accruals. On an underlying basis, total expenses were flat with a reduction in indirect expenses offsetting the impact of the annual pay round and increased investment in staff.

	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

Income statement
Net interest income	1,001	933	868	1,934	1,665

Net fees and commissions - banking	263	259	321	522	658
Other non-interest income (net of insurance claims)	56	56	69	112	122

Non-interest income	319	315	390	634	780

Total income	1,320	1,248	1,258	2,568	2,445

Direct expenses
- staff	(203)	(198)	(214)	(401)	(428)
- other	(111)	(105)	(102)	(216)	(217)
Indirect expenses	(430)	(418)	(452)	(848)	(939)

	(744)	(721)	(768)	(1,465)	(1,584)

Operating profit before impairment losses	576	527	490	1,103	861
Impairment losses	(300)	(387)	(470)	(687)	(824)

Operating profit	276	140	20	416	37


Analysis of income by product
Personal advances	236	234	311	470	616
Personal deposits	277	277	354	554	751
Mortgages	478	422	273	900	480
Bancassurance	58	59	69	117	121
Cards	239	229	212	468	416
Other	32	27	39	59	61

Total income	1,320	1,248	1,258	2,568	2,445


Analysis of impairment by sector
Mortgages	44	48	41	92	63

	Quarter ended			Half year ended
	30 June 2010	31 March 2010*	30 June 2009*	30 June 2010*	30 June 2009*

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Banks and financial institutions	(0.6%)	0.1%	0.3%	(0.2%)	0.2%
Hotels and restaurants	0.7%	1.0%	2.2%	0.8%	1.6%
Housebuilding and construction	0.7%	1.3%	4.8%	1.0%	2.7%
Manufacturing	0.1%	0.4%	1.2%	0.3%	0.7%
Other	1.0%	0.5%	1.1%	0.7%	0.7%
Private sector education, health, social work, recreational and community services	-	0.4%	2.0%	0.2%	1.3%
Property	0.8%	0.8%	1.8%	0.8%	0.9%
Wholesale and retail trade, repairs	1.1%	0.7%	0.9%	0.9%	0.7%
Asset and invoice finance	0.6%	0.8%	2.2%	0.7%	1.6%

	0.7%	0.7%	1.6%	0.7%	1.0%

	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

Income statement
Net interest income	150	143	176	293	334

Net fees and commissions	97	95	90	192	180
Other non-interest income	19	17	21	36	42

Non-interest income	116	112	111	228	222

Total income	266	255	287	521	556

Direct expenses
- staff	(92)	(99)	(78)	(191)	(168)
- other	(34)	(30)	(34)	(64)	(67)
Indirect expenses	(52)	(60)	(41)	(112)	(87)

	(178)	(189)	(153)	(367)	(322)

Operating profit before impairment losses	88	66	134	154	234
Impairment losses	(7)	(4)	(16)	(11)	(22)

Operating profit	81	62	118	143	212


Analysis of income
Private Banking	216	204	242	420	461
Investments	50	51	45	101	95

Total income	266	255	287	521	556

	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

Income statement
Net interest income from banking activities	335	379	660	714	1,472

Net fees and commissions receivable	314	345	412	659	709
Income from trading activities	1,563	1,995	1,132	3,558	5,213
Other operating income (net of related funding costs)	66	73	(101)	139	(199)

Non-interest income	1,943	2,413	1,443	4,356	5,723

Total income	2,278	2,792	2,103	5,070	7,195

Direct expenses
- staff	(634)	(891)	(680)	(1,525)	(1,568)
- other	(237)	(229)	(204)	(466)	(478)
Indirect expenses	(162)	(174)	(201)	(336)	(394)

	(1,033)	(1,294)	(1,085)	(2,327)	(2,440)

Operating profit before impairment losses	1,245	1,498	1,018	2,743	4,755
Impairment losses	(164)	(32)	31	(196)	(238)

Operating profit	1,081	1,466	1,049	2,547	4,517


Analysis of income by product
Rates - money markets	4	88	466	92	1,319
Rates - flow	471	699	536	1,170	1,833
Currencies & Commodities	179	295	416	474	955
Equities	238	314	364	552	735
Credit markets	474	959	690	1,433	1,548
Portfolio management and origination	581	469	113	1,050	640
Fair value of own debt	331	(32)	(482)	299	165

Total income	2,278	2,792	2,103	5,070	7,195

·	Operating profit decreased by 31% reflecting significant margin pressure, particularly on the deposit book. Net interest income fell 15%, with a marked reduction in net interest margin partly offset by growth in client deposit and loan balances.

·	Client deposits grew 3% with increases most evident in the UK as new products attracted funds. Deposit outflows occurred in the international businesses where competition for private bankers has resulted in client attrition.

·	Lending margins widened by 22 basis points and loans and advances grew by 20%, reflecting the strong client demand evident during 2009 and 2010.

·	Total expenses rose 16% reflecting changes to compensation structures and to indirect expense allocations.

·	Trends in the first half were consistent with those exhibited in the second quarter.

·	The economic backdrop and highly competitive deposit market have left the division tracking behind its deposit growth targets. As a consequence the loan:deposit ratio has deteriorated to 41%.

·	Excluding the movement in fair value of own debt, revenue fell 31% from the strong first quarter, which included excellent performances in credit markets and rates-flow. All fixed income and currency products saw a reduction in revenue during Q2 2010, reflecting a drop in market liquidity as customer flows declined on increased risk aversion. Equities revenue also fell, with lower global equity capital markets volumes and subdued investor confidence.

·	Operating profit fell 26% in the quarter, in line with lower revenues. While headline return on equity (RoE) was 20%, adjusting for the fair value of own debt RoE was 14%, still broadly in line with the 2011 strategic plan target of c.15%, in spite of the tough market conditions.

·	Total costs fell by 20% as a result of lower incentive compensation accruals, with non-staff costs held flat. Excluding the impact of fair value own debt, the compensation ratio was 33%, while the cost:income ratio of 53% remains below 55%, the 2013 strategic plan target.

·	Higher impairments reflect a small number of individual provisions.

·	Balance sheet management remained tight in Q2 2010, with reverse repos and securities lower than in the prior quarter. Holdings of cash and Treasury bills were reduced at the divisional level, offset by greater holdings of term liquidity instruments at the Group level.

·	Risk-weighted assets remained flat over the period, reflecting tight management of underlying risks and regulatory charges.

·	Operating profit increased by 3% benefitting from an £813 million swing in the fair value of own debt. Excluding this, operating profit fell 51% due to lower revenue and higher impairment losses.

·	Excluding the movement in fair value of own debt, revenue fell 25%. Money markets revenue fell sharply from the levels achieved during the exceptional market conditions experienced during the first half of 2009. Credit markets revenue also fell as the trading environment deteriorated in response to uncertainty in the eurozone, although the largely US-based mortgage trading business continued to perform well and has maintained its revenue over the period.

·	Portfolio management revenue was boosted by a swing in market derivative values and by lower costs associated with credit risk and balance sheet management trades.

·	The widening of the Group credit spreads contrasted with a narrowing in Q2 2009, generating a £331 million credit from the movement in the fair value of own debt compared with a £482 million debit in Q2 2009.

·	Operating profit fell 44%. Although Q1 2010 was a strong quarter, Q2 2010 saw weakening investor confidence and subdued deal volumes. This was in contrast to H1 2009 when markets rebounded and revenues were enhanced by wide spreads and volatility.

·	Money markets revenue fell sharply as rapidly falling short term interest rates generated exceptional revenue opportunities last year. Rates-flow and Currencies & Commodities also fell meaningfully compared with H1 2009 as the exceptional volatility and wide bid-offer spreads were not repeated in 2010. Credit markets declined a more modest 7% as the mortgage trading business enjoyed both a buoyant market and strong customer demand in H1 2010.

·	Growth in portfolio management revenues reflects lower costs incurred on credit risk / balance sheet management trades. The underlying origination and lending business remained flat. A strong finish to Q1 2010 gave way to a subdued Q2 2010 as investor confidence waned following uncertainty in the eurozone.

·	Operating profit increased 20%, or 18% at constant foreign exchange rates, driven by increased deposit income and lower expenses.

·	Income increased by 7%, or 6% at constant foreign exchange rates, reflecting higher domestic and international average deposit balances and improving merchant acquiring volumes.

·	Expenses fell by 2% and were 1% lower at constant foreign exchange rates. Direct costs were broadly flat, with lower staff compensation offset by increased investment.

·	Customer deposits at 30 June were 3% lower than at 31 March, principally as a result of adverse currency movements (down 1% at constant exchange rates). Average balances for the quarter increased by 4%.

·	Risk-weighted assets decreased by £1.0 billion as a result of RBS NV moving to advanced status under Basel II.

·	Operating profit increased 5%, driven by higher income from deposits (average balances were 27% higher), partially offset by expense growth.

·	Income was up 4%, reflecting improved deposit volumes, higher transactional foreign exchange income and increased commercial cards activity.

·	Expenses increased by 3%, with higher staff compensation partially offset by lower indirect costs.

·	Operating loss totalled £177 million for the quarter, a deterioration of £40 million from the previous quarter, driven by higher impairment losses. Operating profit before impairment losses increased by 38% on a constant currency basis, with favourable movements on both income and expenses.

·	Net interest income increased by 6% in constant currency terms largely driven by higher income on capital. Although the deposit market remained competitive, placing continued pressure on liability spreads, loan margins continued on an upward trend, benefiting from the impact of ongoing pricing actions. As a result, net interest margin increased by 15 basis points to 192 basis points.

·	Loans to customers remain broadly unchanged in the quarter in constant currency terms. Customer deposit balances increased by 2% on the same basis, reflecting an ongoing focus on growing the core customer deposit base.

·	Total expenses decreased by 10% on a constant currency basis reflecting strong cost discipline across both direct and indirect cost bases.

·	Impairment losses increased by £63 million in the quarter. Economic conditions remain challenging with a continued downward pressure on asset values and a resultant impact on the credit quality of customers. The bank continues to support customers through a range of debt management initiatives.

·	Net interest income reduced by 7% on a constant currency basis with continued pressure on deposit margins partly offset by positive loan pricing actions.

·	Loans to customers decreased by 4% in constant currency terms as levels of new business activity remain muted. Customer deposits increased by 23% at constant currency from Q2 2009 driven by a significant uplift in both retail and wholesale customer balances.

·	Non-interest income has remained broadly flat over the period reflecting subdued activity levels across most business lines. The bank continues to focus on developing new product lines and diversifying its income base.

·	Total expenses declined by 20% in constant currency terms, largely driven by the restructuring programme, which commenced in 2009. The rollout of the programme has resulted in a downward trend in direct expenses throughout 2009 and is a key driver in the reduction in the cost:income ratio from 70% to 58% over the period.

·	Impairment losses increased significantly over the period reflecting the deterioration in the Irish economic environment and the resultant impact on customer repayment capacity.

·	Risk-weighted assets increased by 20% on a constant currency basis reflecting the continued weak credit environment and consequent procyclical impact.

·	An increase in impairment losses of £342 million from H1 2009 has resulted in a significant deterioration in financial performance and an operating loss of £314 million for the period.

·	Ulster Bank customer numbers increased by 3% over the period with strong flow trends particularly in retail current and deposit accounts.

·	Sterling continued to weaken over the course of the second quarter, with the average exchange rate declining by 4% compared with Q1 2010.

·	Performance is described in full in the US dollar-based financial statements set out on pages 43 and 44.

·	US Retail & Commercial returned a profit for the second consecutive quarter, posting an operating profit of $195 million compared with $63 million in the prior quarter. Excluding a $113 million credit related to changes to the defined benefit pension plan, operating profit was up $19 million, 30%, driven by growth in both net interest and non-interest income. However, economic conditions in the division's core regions remain difficult, with lingering high unemployment, a soft housing market and subdued consumer activity.

·	Net interest income was up 2%, while loans and advances were down 1%, reflecting a lack of credit demand. Net interest margin improved by 9 basis points to 2.78%, substantially driven by a continuing change in deposit mix, with continued migration from lower margin time deposits to more favourably priced demand deposit accounts.

·	Non-interest income was up 5% with an increase in deposit fees, debit card income and mortgage banking income more than offsetting a $13 million reduction in securities gains.

·	Expenses were down 10%, including the pension credit associated with changes to the defined benefit pension plan. This more than offset movements in mortgage servicing rights and marketing and communications costs partly related to a new brand launch.

·	Impairment losses improved slightly as losses associated with other than temporary impairment related to securities were taken in Q1 2010. Loan impairments remained flat at 1.1% of loans and advances.

·	Operating profit increased to $195 million from an operating loss of $19 million.

·	Net interest income was up 7%, with net interest margin improving by 46 basis points, driven by changes to deposit pricing and mix offset by lower loan volume.

·	Non-interest income was up 5% reflecting higher gains on securities realisations and improved debit card income, but mortgage refinancing activity moderated in 2010, compared with the record levels reached in 2009.

·	Expenses were down 14% reflecting the benefit associated with the changes to the defined benefit pension plan and lower deposit insurance costs, including a one-off FDIC assessment in Q2 2009, which more than offset an impairment of mortgage servicing rights, changes in compensation accrual methodology, and higher medical costs.

·	Impairment losses declined 7%, following significant loan reserve building in 2009, and have stabilised at 1.1% of loans and advances.

·	Customer deposits were down 5% reflecting pricing strategies on low margin term and time products but strong growth was achieved in checking balances. Over 31,000 consumer checking accounts and more than 13,500 small business checking accounts were added over the year. Consumer checking balances grew by 9% and small business balances by 9%.

·	Operating profit increased to $258 million from an operating loss of $76 million with income up 6%, expenses down 6% and impairment losses down 21%. The drivers are consistent with Q2 2010 compared with Q2 2009.

·	Loan impairments decreased as a proportion of loans and advances from 1.3% to 1.1%.

(1)	Based on divisional operating profit/(loss) after tax, divided by divisional notional equity (based on regulatory capital).
(2)	Cost:income ratio is based on total income, including investment income and total expenses.
(3)	Loss ratio is based on net claims divided by net premium income for the UK businesses.
(4)	Combined operating ratio is the expenses (including fees & commissions) divided by gross written premium income, added to the loss ratio, for the UK businesses.

●	The performance of RBS Insurance was adversely impacted by a significant increase in bodily injury reserving, including adding £241 million to reserves relating to prior years. This resulted in an underwriting and operating loss in the motor book. Actions are in progress to tighten underwriting criteria and to restore the profitability of the business.

●	RBS Insurance's home insurance business has continued to make good progress and the division has now established itself as the largest home insurance provider within the UK.

●	As planned, total in-force policies have declined due to a reduction in motor policies following significant re-pricing as well as exiting less profitable partnership and broker business. This decline has been partly offset by growth in home and international policies. International policy numbers now exceed one million.

●	Total income declined, as the increase in pricing was more than offset by the reduction in in-force policies, mainly resulting from the elimination of higher premium, higher risk motor business.

·	Net claims were significantly higher than Q1 2010 due to a further need for increased reserves in respect of bodily injury, driven by deterioration in the observed severity of bodily injury claims. An overall adjustment of £320 million was posted in the quarter, of which £241 million was in respect of business written in prior years. Motor pricing continued to be increased in response to the development in this claims experience. In addition, significant progress has been made in removing higher risk business from the overall motor book by targeted rating actions.

·	Expenses were flat in the quarter, with higher staff expenses off-set by lower indirect costs.