Interim Results - Part 2 of 7 | Company Announcement

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	Half year ended		Quarter ended
	30 June 2013	30 June 2012	30 June 2013	31 March 2013	30 June 2012
	£m	£m	£m	£m	£m

Operating profit/(loss) before impairment losses by division
UK Retail	1,123	1,209	566	557	577
UK Corporate	1,132	1,361	589	543	693
Wealth	119	126	58	61	73
International Banking	290	326	141	149	194
Ulster Bank	174	162	98	76	78
US Retail & Commercial	414	378	206	208	257

Retail & Commercial	3,252	3,562	1,658	1,594	1,872
Markets	430	1,096	136	294	270
Central items	101	(151)	137	(36)	5

Core	3,783	4,507	1,931	1,852	2,147
Non-Core	45	(255)	117	(72)	(261)

Group operating profit before impairment losses	3,828	4,252	2,048	1,780	1,886

Impairment losses/(recoveries) by division
UK Retail	169	295	89	80	140
UK Corporate	379	357	194	185	181
Wealth	7	22	2	5	12
International Banking	154	62	99	55	27
Ulster Bank	503	717	263	240	323
US Retail & Commercial	51	47	32	19	28

Retail & Commercial	1,263	1,500	679	584	711
Markets	59	21	43	16	19
Central items	(3)	32	(3)	-	(2)

Core	1,319	1,553	719	600	728
Non-Core	831	1,096	398	433	607

Group impairment losses	2,150	2,649	1,117	1,033	1,335

	Half year ended		Quarter ended
	30 June 2013	30 June 2012	30 June 2013	31 March 2013	30 June 2012
	£m	£m	£m	£m	£m

Operating profit/(loss) by division
UK Retail	954	914	477	477	437
UK Corporate	753	1,004	395	358	512
Wealth	112	104	56	56	61
International Banking	136	264	42	94	167
Ulster Bank	(329)	(555)	(165)	(164)	(245)
US Retail & Commercial	363	331	174	189	229

Retail & Commercial	1,989	2,062	979	1,010	1,161
Markets	371	1,075	93	278	251
Central items	104	(183)	140	(36)	7

Core	2,464	2,954	1,212	1,252	1,419
Non-Core	(786)	(1,351)	(281)	(505)	(868)

Group operating profit	1,678	1,603	931	747	551

	Half year ended		Quarter ended
	30 June 2013	30 June 2012	30 June 2013	31 March 2013	30 June 2012
	%	%	%	%	%

Net interest margin by division
UK Retail	3.53	3.59	3.56	3.49	3.57
UK Corporate	3.03	3.13	3.05	3.01	3.17
Wealth	3.48	3.68	3.41	3.55	3.69
International Banking	1.68	1.62	1.62	1.74	1.65
Ulster Bank	1.85	1.85	1.85	1.85	1.82
US Retail & Commercial	2.92	3.01	2.91	2.93	3.00

Retail & Commercial	2.91	2.92	2.92	2.90	2.93
Non-Core	(0.06)	0.28	0.15	(0.25)	0.24

Group net interest margin	1.97	1.90	2.00	1.94	1.94

	30 June 2013	31 March 2013	31 December 2012
	£bn	£bn	£bn

Total funded assets by division
UK Retail	116.1	117.1	117.4
UK Corporate	107.6	109.9	110.2
Wealth	21.3	21.7	21.4
International Banking	51.9	54.4	53.0
Ulster Bank	30.3	30.6	30.6
US Retail & Commercial	74.1	76.3	72.1

Retail & Commercial	401.3	410.0	404.7
Markets	267.9	288.0	284.5
Central Items	126.9	123.8	110.3

Core	796.1	821.8	799.5
Non-Core	45.4	52.9	57.4

	841.5	874.7	856.9
Direct Line Group	-	-	12.7
RFS Holdings minority interest	1.0	1.0	0.8

Group	842.5	875.7	870.4

	30 June 2013	31 March 2013		31 December 2012
	£bn	£bn	Change	£bn	Change

Risk-weighted assets by division
UK Retail	44.1	44.5	(1%)	45.7	(4%)
UK Corporate	88.1	87.0	1%	86.3	2%
Wealth	12.5	12.5	-	12.3	2%
International Banking	49.7	48.9	2%	51.9	(4%)
Ulster Bank	33.9	36.8	(8%)	36.1	(6%)
US Retail & Commercial	58.2	58.9	(1%)	56.5	3%

Retail & Commercial	286.5	288.6	(1%)	288.8	(1%)
Markets	86.8	88.5	(2%)	101.3	(14%)
Other (primarily Group Treasury)	12.3	10.2	21%	5.8	112%

Core	385.6	387.3	-	395.9	(3%)
Non-Core	46.3	54.6	(15%)	60.4	(23%)

Group before RFS Holdings minority interest	431.9	441.9	(2%)	456.3	(5%)
RFS Holdings minority interest	4.1	3.9	5%	3.3	24%

Group	436.0	445.8	(2%)	459.6	(5%)

Interim Results - Part 2 of 7

US Retail & Commercial (US Dollar)

Companies

UK 100

Latest directors dealings

Employee numbers by division (full time equivalents rounded to the nearest hundred)	30 June 2013	31 March 2013	31 December 2012

UK Retail	25,300	25,800	26,000
UK Corporate	13,800	13,600	13,300
Wealth	5,100	5,100	5,100
International Banking	4,800	4,800	4,600
Ulster Bank	4,800	5,000	4,500
US Retail & Commercial	18,500	18,600	18,700

Retail & Commercial	72,300	72,900	72,200
Markets	11,200	11,300	11,300
Group Centre	6,700	6,800	6,800

Core	90,200	91,000	90,300
Non-Core	2,200	2,600	3,100

	92,400	93,600	93,400
Business Services	29,000	29,100	29,100
Integration and restructuring	300	300	500

Group	121,700	123,000	123,000

(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)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(3)	Divisional RWAs are based on a long-term conservative average secured mortgage probability of default methodology rather than the current lower point in time basis required for regulatory reporting.

·	Operating profit increased by £40 million or 4% to £954 million. Impairment losses were lower and income trends improved in the second quarter.

·	Customer deposits were 5% higher than 30 June 2012 with both instant access savings and current account balances continuing to grow. Mortgage balances grew marginally, with H1 2013 affected by the completion of the advisor re-training programme. Unsecured lending balances declined 7%, reflecting muted demand from customers and continued consumer deleveraging.

·	Net interest income declined by 2%, reflecting lower rates on current account hedges, partly offset by good mortgage income growth mainly due to widening of back book margins. Savings margins improved as market pricing eased, although on new business this was offset by tighter mortgage margins.

·	Non-interest income has been adversely affected by changes to the investment advice business following the Retail Distribution Review (RDR) resulting in lower front book advice income.

·	Costs remained tightly controlled with continued business focus on efficiency.
	○	Staff costs were 16% lower following a headcount reduction of 2,200 as the division continues to streamline processes to improve customer experience.
	○	Other direct costs increased due to higher Financial Services Compensation Scheme levy charges.
	○	Greater investment in technology drove the increase in indirect costs.

·	In addition, the provision relating to historic Payment Protection Insurance (PPI) was increased by £0.2 billion, bringing the total PPI expense to date to £2.4 billion. This expense is not included in operating profit.

·	Impairment losses decreased by 43% as a result of lower default levels across all products, reflecting continued improvement in quality.

·	Risk-weighted assets fell by 7%, reflecting quality improvements and balance reductions across the unsecured portfolio.

·	Operating profit was stable with a 2% increase in income offset by slightly higher costs and impairment losses.

·	Mortgage balances declined by 1% as advisor training during Q1 2013 affected mortgage completions. Mortgage application values increased by 72% versus Q1 2013, indicating a strong pipeline of lending which will flow through to completion from Q3 2013 onwards. Customer deposits continued to grow, driving the loan:deposit ratio down to 98%.

·	Net interest income increased by 2%, reflecting improved back book mortgage margins and wider savings margins as market pricing eased. These were partly offset by the continuation of lower rates on current account hedges.

·	Non-interest income was flat. Strong transactional income from higher debit and credit card volumes was offset by increased regulatory provisions relating to card payment protection. Investment advice income post-RDR remained at subdued levels.

·	Costs increased by 2%, mainly due to higher levels of marketing spend and increased investment in technology.

·	Impairment losses increased by 11%. Default levels remained broadly flat; however, the level of recoveries on previously defaulted unsecured debt was slightly lower than Q1 2013.

·	Operating profit increased by 9% mainly due to lower impairments.

·	Net interest income from mortgages increased due to improved back book margins, partially offset by lower rates on current account hedges. Overall net interest income remained flat. Non-interest income was lower, reflecting a decline in investment advice income.

·	Total costs were down 1% as a fall in staff costs resulting from lower headcount was partially offset by higher regulatory charges and investment in technology.

·	Impairment losses fell by 36%, with improvements in asset quality resulting in lower default volumes.

·	After a subdued first quarter, improving income trends in the second quarter helped operating profit for H1 2013 recover to £753 million, albeit down 25% on H1 2012.

·	Net interest income was down 7% due to tightening yield curves and dampened lending volumes. In addition, H1 2012 had the benefit from a revision to deferred income recognition of £58 million. Excluding this revision, underlying net interest margin increased as a result of deposit re-pricing, initiated in Q4 2012, and moderately increased asset margins.

·	Non-interest income contracted by 9%, including higher equity gains of £23 million offset by lower Markets revenue share income, down £38 million, and higher derivative close-out charges associated with impaired assets of £21 million.

·	Expenses were up 4%, reflecting continued investment spend, provisions for customer remediation and an increased share of branch network costs. These have been partially offset by management actions on staff incentives and lower Markets revenue share related costs.

·	Impairments were 6% higher as increased specific and latent provisions in the mid-to-large corporate business were substantially offset by reduced individual and collectively assessed provisions in the SME business.

·	The loan to deposit ratio improved by 400 basis points with deposit volumes broadly flat and lending volumes down 5% as business demand for credit remains weak.

·	Risk-weighted assets increased due to industry-wide regulatory capital model changes applying the slotting approach to real estate and also due to changes to models for the shipping portfolio.

·	Operating profit improved by 10%, reflecting an increase in non-interest income which was partly offset by slightly higher impairments. Return on equity rose from 10.7% to 11.8%.

·	Net interest income increased by 1% as a result of management actions taken on deposit and asset re-pricing in order to help mitigate the impact of continued lacklustre loan demand and an additional day in the quarter.

·	Non-interest income was up 13%, largely reflecting an equity gain of £20 million and improved transaction services income.

·	Expenses increased by 2% due to lower staff incentive cost releases, along with higher SME marketing and customer remediation costs.

·	Impairments increased by 5%, driven by a small number of individual cases, partially offset by a modest reduction in collectively assessed provisions.

·	Risk elements in lending increased by 17% to £6.2 billion, primarily driven by a small number of legacy commercial real estate and shipping-related exposures.

·	Risk-weighted assets increased by 1% due to regulatory capital model changes in shipping, partially offset by a number of assets moving into default.

·	Operating profit declined by 23% reflecting the impact of economic factors, mainly interest rate driven, higher allocation of indirect costs and increased customer remediation provisions.

·	Net interest income fell by 7%, with the economic factors impacting deposit returns, subdued lending demand and the non-repeat of the deferred income recognition in Q2 2012 of £30 million, partially offset by improved asset margins as a result of re-pricing initiatives.

·	Non-interest income declined by 3% as a result of lower Markets revenue share and higher derivative close out charges, partially offset by an equity gain in Q2 2013.

·	Expenses increased by 7% as a result of higher customer remediation provisions and an increased share of branch network expenditure, partially offset by lower Markets revenue share related costs.

·	Impairments were up 7% due to higher individual and latent provisions partially offset by the releases in collectively assessed provisions.

·	Operating profit increased by 8% with lower expenses and impairments partially offset by the non-recurrence of the gain on sale, £15 million, of the Latin American, Caribbean and African business in Q2 2012.

·	Excluding this one-off gain, income was down 6%. Improvements in lending margins were offset by the continued impact of lower spreads received on a number of Wealth's deposits.

·	Expenses decreased by 9% reflecting reduced headcount as a result of efficiency gains from investment in the global platform infrastructure. H1 2012 also included a Financial Services Authority fine and client redress payments.

·	Impairments were £15 million lower, as the credit quality of the loan book remained strong.

·	Client assets and liabilities managed by the division increased by 1%. Lending volumes remained stable and deposit volumes grew by 1%, predominantly in the UK. Assets under management also grew by 2%.

·	Return on equity increased by 100 basis points to 12.1% in line with the increase in operating profit.

·	Operating profit was flat as higher expenses were offset by lower impairments.

·	Income was flat: a 6% increase in non-interest income, reflecting an increase in investment volumes and transactional activity, was offset by a decline in net interest income due to lower deposit funding rates. Further deposit re-pricing actions were taken in June 2013 to mitigate this impact.

·	Expenses increased by 1%, driven by restructuring expenditure in Q2 2013. Excluding this, staff costs were lower as a result of a reduction in headcount.

·	Client assets and liabilities managed by the division declined by 1%. Lending volumes were stable, deposit volumes declined by 2% and assets under management grew by 1% due to net inflows of £0.9 billion primarily in international markets.

	Half year ended		Quarter ended
	30 June 2013	30 June 2012	30 June 2013	31 March 2013	30 June 2012
	£m	£m	£m	£m	£m

Income statement
Net interest income	1,952	1,989	987	965	988

Net fees and commissions	427	451	215	212	214
Other non-interest income	24	57	10	14	28

Non-interest income	451	508	225	226	242

Total income	2,403	2,497	1,212	1,191	1,230

Direct expenses
- staff	(358)	(424)	(180)	(178)	(213)
- other	(227)	(189)	(115)	(112)	(111)
Indirect expenses	(695)	(675)	(351)	(344)	(329)

	(1,280)	(1,288)	(646)	(634)	(653)

Operating profit before impairment losses	1,123	1,209	566	557	577
Impairment losses	(169)	(295)	(89)	(80)	(140)

Operating profit	954	914	477	477	437


Analysis of income by product
Personal advances	443	458	220	223	222
Personal deposits	227	353	124	103	168
Mortgages	1,277	1,159	649	628	596
Cards	419	431	210	209	212
Other	37	96	9	28	32

Total income	2,403	2,497	1,212	1,191	1,230


Analysis of impairments by sector
Mortgages	25	58	15	10	24
Personal	85	166	50	35	84

	Half year ended		Quarter ended
	30 June 2013	30 June 2012	30 June 2013	31 March 2013	30 June 2012
	£m	£m	£m	£m	£m

Income statement
Net interest income	1,421	1,528	715	706	772

Net fees and commissions	656	682	335	321	346
Other non-interest income	149	202	92	57	93

Non-interest income	805	884	427	378	439

Total income	2,226	2,412	1,142	1,084	1,211

Direct expenses
- staff	(454)	(485)	(226)	(228)	(236)
- other	(218)	(174)	(113)	(105)	(89)
Indirect expenses	(422)	(392)	(214)	(208)	(193)

	(1,094)	(1,051)	(553)	(541)	(518)

Operating profit before impairment losses	1,132	1,361	589	543	693
Impairment losses	(379)	(357)	(194)	(185)	(181)

Operating profit	753	1,004	395	358	512


Analysis of income by business
Corporate and commercial lending	1,287	1,351	665	622	664
Asset and invoice finance	334	333	170	164	171
Corporate deposits	156	340	83	73	174
Other	449	388	224	225	202

Total income	2,226	2,412	1,142	1,084	1,211


Analysis of impairments by sector
Financial institutions	1	4	(1)	2	2
Hotels and restaurants	30	23	12	18	8
Housebuilding and construction	18	104	6	12	79

	Half year ended		Quarter ended
	30 June 2013	30 June 2012	30 June 2013	31 March 2013	30 June 2012

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Financial institutions	-	0.1%	(0.1%)	0.2%	0.1%
Hotels and restaurants	1.1%	0.8%	0.9%	1.3%	0.5%
Housebuilding and construction	1.2%	5.9%	0.8%	1.5%	9.0%
Manufacturing	0.6%	0.8%	0.5%	0.7%	1.6%
Private sector education, health, social work, recreational and community services	1.6%	1.0%	2.0%	1.1%	0.9%
Property	1.3%	0.5%	1.5%	1.1%	0.5%
Wholesale and retail trade, repairs	1.0%	1.1%	0.3%	1.5%	0.7%
Asset and invoice finance	0.1%	0.4%	0.2%	-	0.4%
Shipping	0.9%	0.3%	1.3%	0.4%	0.5%
Other	0.1%	0.2%	-	0.1%	(0.3%)

Total	0.7%	0.6%	0.7%	0.7%	0.7%

	30 June 2013	31 March 2013		31 December 2012
	£bn	£bn	Change	£bn	Change

Capital and balance sheet
Loans and advances to customers (gross)
- financial institutions	4.6	5.1	(10%)	5.8	(21%)
- hotels and restaurants	5.5	5.6	(2%)	5.6	(2%)
- housebuilding and construction	2.9	3.1	(6%)	3.4	(15%)
- manufacturing	4.4	4.7	(6%)	4.7	(6%)
- private sector education, health, social work, recreational and community services	8.7	8.8	(1%)	8.7	-
- property	24.1	24.4	(1%)	24.8	(3%)
- wholesale and retail trade, repairs	8.2	8.6	(5%)	8.5	(4%)
- asset and invoice finance	11.6	11.4	2%	11.2	4%
- shipping	7.3	7.7	(5%)	7.6	(4%)
- other	27.3	27.4	-	26.7	2%

	104.6	106.8	(2%)	107.0	(2%)
Loan impairment provisions	(2.4)	(2.4)	-	(2.4)	-

Net loans and advances to customers	102.2	104.4	(2%)	104.6	(2%)

Total third party assets	107.6	109.9	(2%)	110.2	(2%)
Risk elements in lending	6.2	5.3	17%	5.5	13%
Provision coverage (1)	39%	45%	(600bp)	45%	(600bp)

Customer deposits	126.2	123.9	2%	127.1	(1%)
Loan:deposit ratio (excluding repos)	81%	84%	(300bp)	82%	(100bp)

Risk-weighted assets
- Credit risk (non-counterparty)	79.7	78.6	1%	77.7	3%
- Operational risk	8.4	8.4	-	8.6	(2%)

	88.1	87.0	1%	86.3	2%

·	Operating profit was 8% lower, largely driven by the non-recurrence of the gain on sale, £15 million, of the Latin American, Caribbean and African business in Q2 2012.

·	Income decreased by 10% as a result of the non-recurrence of the gain on sale in Q2 2012 and lower net interest income. Net interest income declined by 9%, reflecting lower income on deposit funding rates. Lending income increased with a sustained improvement in margins. Excluding the impact of the business sale, non-interest income was flat.

·	Expenses decreased by 7% due to lower headcount and the non-recurrence of the client redress in Q2 2012. Excluding this, expenses decreased by 3%, assisted by active management of discretionary costs.

·	Impairments were £10 million lower.

(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)	Excludes disposal groups.
(3)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

·	Best Bank for Liquidity Management in Western Europe and Central & Eastern Europe (Global Finance Awards 2013)

·	Best Supply Chain Finance Provider in Western Europe (Global Finance Awards 2013)

·	Deal of the year for Corporate Bonds in America and Europe (The Banker)

·	Deal of the year for Loans in Europe and Middle East (The Banker)

·	Number One in Sterling denominated Debt Capital Markets in Q2 2013, Number Two for H1 2013 (Dealogic).

·	Operating profit was down £128 million, or 48%, driven by higher impairments and lower income, partially offset by lower expenses.

·	Income decreased by £153 million, 14%:
	○	Cash Management decreased by 29%, reflecting a decline in both three-month LIBOR and five year fixed rates as well as increased funding costs of liquidity buffer requirements.
	○	Loan Portfolio income was up 3%, mainly due to market movements associated with credit hedging activities and lower associated funding costs, partly offset by the impact on net interest income of the smaller balance sheet

·	Total expenses decreased by £117 million, or 15%, reflecting continued focus on cost reduction, which has been achieved through timely run-off of discontinued businesses, headcount reduction and management of technology and infrastructure support costs. Revenue-linked expenses also fell in line with the decrease in income.

·	Impairment losses increased by £92 million and included two large single-name provisions, in the manufacturing and infrastructure sector, totalling £109 million.

·	Return on equity was 4% compared with 9% in H1 2012.

·	Customer deposits increased by £4 billion in line with the division's strategy to meet its loan:deposit ratio objectives.

·	Third party assets were down 15%, reflecting a continued trend of repayments as customers carefully manage their debt profile in light of unfavourable economic conditions. This was partially offset by growth in Trade Finance as the business continues to grow capital efficient lending and increase market share.

·	Risk-weighted assets increased by 8% as regulatory credit model uplifts were only partly offset by continued mitigation activity.

·	Operating profit decreased by £52 million as a decline in income and increase in impairments were only partially mitigated by lower expenses.

·	Income was 3% lower:
	○	Cash Management income was affected by increased funding costs of liquidity buffer requirements.
	○	Loan Portfolio income was down, as Q1 2013 included one large hedging transaction.

·	Expenses declined by £6 million, driven by lower infrastructure support costs.

·	Impairments were higher, principally reflecting a £55 million single name provision.
·	Third party assets declined by 5% following increased levels of customer repayments.

·	Customer deposits remained stable while bank deposits were up 30%, driven by two significant transactions.

·	Risk-weighted assets increased by 2%, reflecting the impact of regulatory uplifts, partially offset by repayments and loan sale mitigation.

·	Operating profit decreased by £125 million as lower income and higher impairment losses were only partially offset by cost reduction.

·	Income was 17% lower:
	○	Cash Management income was affected by margin compression.
	○	Loan Portfolio decreased by 6% due to lower ancillary income.

·	Expenses declined by £40 million as benefits were realised from the run-off of discontinued businesses and planned headcount reductions. In addition, discretionary expenses were effectively managed.

·	Further enhancements to online and mobile apps improved the service for both retail and business customers.

·	Opening hours in the customer contact centre have been extended to 24 hours, 7 days a week to support Anytime banking customers.

·	The introduction of an Emergency Cash service via ATMs for customers who have lost their debit card or had it stolen.

·	The introduction of tailored corporate products for the not-for-profit sector makes it easier for customers to make donations to charities via the ATM network or through the bank's core websites and provides flexible day-to-day banking with free transaction fees for registered charities.

·	Operating loss decreased by £226 million driven by a significant improvement in impairment losses.

·	Net interest income fell by £17 million, primarily reflecting the relatively high cost of deposit raising. However, net interest margin remained steady at 1.85% as product re-pricing initiatives and the benefit of a smaller stock of liquid assets offset the higher deposit costs.

·	Non-interest income increased by £47 million primarily reflecting a significant gain on economic hedges of the mortgage portfolio.

·	Expenses increased by £18 million reflecting further investment in programmes to support customers in arrears, higher pension charges and the cost of mandatory change programmes.

·	Impairment losses fell by £214 million or 30%, with a significant reduction in losses on the mortgage portfolio as the pace of arrears formation slowed and residential property prices stabilised. Q2 2013 saw the first quarter on quarter decline in 90 day past due mortgage arrears since Q2 2008.

·	The loan:deposit ratio improved from 144% to 123%. Customer deposit balances increased by 8% on a constant currency basis, primarily in the retail and SME sectors. Loan balances declined by 5% in constant currency terms reflecting limited new lending due to low levels of demand coupled with amortisation as customers reduce their debt levels.

·	Risk elements in lending increased versus 30 June 2012 primarily reflecting further deterioration in credit quality during H2 2012. During H1 2013 credit trends have improved albeit risk elements in lending increased by a further £0.6 billion largely driven by the inclusion of exposures relating to corporate customers which were 90 days past due but subject to on-going renegotiations and awaiting final agreement with the customers.

·	Risk-weighted assets, which substantially represent the capital requirement of the performing loan book, decreased by 9% compared with 30 June 2012. This reflects a smaller performing loan book due in part to the impact of exposures on corporate customers which were 90 days past due, coupled with an improvement in credit metrics arising from stabilising economic conditions.

·	The significant improvement in financial performance achieved in Q1 2013 was maintained during Q2 2013, with operating loss stable at £165 million.

·	Net interest income and net interest margin remained stable. Non-interest income increased by £34 million, principally due to gains on economic hedges of the mortgage portfolio.

·	Expenses increased by £12 million reflecting the impact of an impairment charge on own property assets of £5 million, along with further investment in programmes to support customers in financial difficulty and the cost of mandatory change programmes.

·	Impairment losses on the mortgage portfolio remained stable as a significant improvement in the level of defaults and property values was maintained during Q2 2013. The underlying credit metrics on the corporate portfolio also continued to stabilise; however, overall impairment losses increased in the quarter due to a small number of significant charges on individual counterparty exposures. The increase in risk elements in lending during Q2 2013 was largely driven by the inclusion of exposures relating to corporate customers which were 90 days past due but subject to on-going renegotiations and awaiting final agreement with the customers.

·	Deposit balances increased by 2% in the quarter, while loan balances fell marginally. The loan:deposit ratio improved by 400 basis points to 123%.

·	Risk-weighted assets reduced by 8% reflecting improved credit metrics as economic conditions stabilised and the impact of exposures on corporate customers which were 90 days past due.

·	Operating loss decreased by £80 million, driven by higher income and lower impairment losses.

·	Income increased by £36 million largely driven by gains on economic hedges of the mortgage portfolio. Net interest margin increased by 3 basis points reflecting product re-pricing coupled with the benefit of a reduced stock of liquid assets.

·	Expenses increased by £16 million reflecting further investment in programmes to support customers in arrears, higher pension charges and the cost of mandatory change programmes.

·	Impairment losses fell by £60 million, primarily in the mortgage portfolio, reflecting a stabilisation in the macroeconomic environment in the Republic of Ireland.

(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)	Excludes the litigation settlement in Q1 2012 and net gain on sale of Visa B shares in Q2 2012.
(3)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

●	Sterling weakened against the US dollar during the first half of 2013, with the spot exchange rate decreasing 6% compared with 31 December 2012.

●	Performance is described in full in the US dollar-based financial statements set out on pages 50 to 53.

·	Operating profit of $560 million was up $37 million, 7%. An unsettled economy, combined with significant market liquidity has resulted in intensified competitive pricing and terms for loans. While short-term rates remained low, there was a sudden increase in the 10 year Treasury rate at the end of H1 2013 ending the half year at 2.52%, up 85 bps from the prior year.

·	Net interest income was down 6% due to a smaller investment portfolio, consumer loan run-off and the effect of prevailing economic conditions on asset yields, partially offset by the benefit of $4 billion of interest rate hedges executed during H1 2013 along with favourable funding costs and commercial loan growth.

·	Loans and advances were down 1%, with run-off of long-term fixed-rate consumer products partially offset by commercial loan growth.

·	Customer deposits were down 2% due to planned run-off of high priced time deposits partially offset by growth achieved in checking balances and savings products. Consumer checking balances grew by 3% while small business checking balances grew by 7% over the year.

·	Excluding the $75 million gross gain on the sale of Visa B shares in H1 2012, non-interest income was up $24 million, or 3%, reflecting higher securities gains (up $68 million), offset by lower mortgage banking fees and deposit fees.

·	Excluding the $138 million litigation settlement in H1 2012 relating to a class action lawsuit regarding the way overdraft fees were assessed on customer accounts prior to 2010 and the $13 million litigation reserve associated with the sale of Visa B shares, expenses were down 2%. This largely reflects a mortgage servicing rights impairment recapture of $39 million driven by the increase in long-term rates, partially offset by the cost of regulatory compliance and new technology investments.

·	Impairment losses remained low at $78 million, or 0.2% of loans and advances.

·	Operating profit of $268 million decreased by $24 million, or 8%.

·	Net interest income of $726 million was broadly in line with Q1 2013.

·	Non-interest income was down $25 million, or 6%, reflecting lower securities gains (down $10 million), mortgage fees and commercial banking fee income.

·	Expenses decreased by $24 million, or 3%, largely reflecting a mortgage servicing rights impairment recapture driven by the increase in long-term rates. The 10 year Treasury rate was up 65 bps from the prior quarter.

·	Impairment losses remained low at $48 million; the credit environment remained broadly stable in the quarter.

(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.
(3)	Excludes disposal groups.
(4)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

·	Operating profit fell by £704 million as Markets managed down both the scale and risk of the balance sheet. This, combined with a weaker trading performance, had a negative impact on income, although it was mitigated by a continued focus on costs which were 16% lower than H1 2012.

·	Rates income fell as risk was reduced and the trading performance was weaker. Fixed income markets were challenging following the Federal Reserve's indication that quantitative easing may be tapered earlier than anticipated, which contrasted with H1 2012 when the impact of the ECB's LTRO on market conditions resulted in significant gains.

·	Higher Currencies income was primarily driven by FX Options, which benefited from market volatility in response to Central Bank actions in the US and Japan. The Spot FX business continued to deliver good performance in a highly competitive market.

·	Asset Backed Products continued to perform well, although income was lower as a result of a weaker market rally in 2013 compared with 2012 and, during Q2 2013, a market sell-off of agency backed products after the Federal Reserve signalled a potential tapering of its asset buying programme.

·	Credit Markets results reflected lower revenue from both Flow Credit Trading, which benefitted from a rally in corporate credit at the beginning of H1 2012, and Origination, where client activity was down as the business's focus on investment grade clients limited opportunities to benefit from the growth in high yield issuance.

·	Staff expenses were 29% lower, reflecting both the substantial reductions in headcount that took place during 2012 and a reduced level of variable compensation. Although discretionary expenditure remained tightly controlled, other expenses have increased, driven by higher legal costs and mandatory investment spend.

·	Impairments reflected a small number of individual provisions in both H1 2012 and H1 2013.

·	The significant reduction in third party assets and, in particular, the £15 billion fall in risk-weighted assets since 31 December 2012 reflects Markets' commitment to risk reduction and balance sheet management, despite continuing upwards pressure from regulators on risk- weightings.

·	Operating profit declined to £93 million driven by a 21% fall in income. Market expectations of a tapering of quantitative easing drove volatility in Rates and a sell-off in Asset Backed Products, although the FX business benefited from currency volatility.

·	Rates improved compared with a weak Q1 2013, although volatility in fixed income markets continued to present challenging trading conditions.

·	Currencies income increased by 34% as options products gained from recent volatility and US dollar strengthening against both the Japanese yen and emerging market currencies. Spot FX remained consistent with a strong Q1 2013.

·	Asset Backed Products weakened as markets sold agency backed securities in anticipation of an easing of the Federal Reserve's asset buying programme. This contrasted with Q1 2013 which benefited from an early market rally.

·	Credit Markets fell significantly as spreads widened in response to a potential reduction in quantitative easing. This contrasted with the credit rally seen in early Q1 2013.

·	Expenses fell by 8%, as the compensation ratio was maintained at the Q1 2013 level.

·	Third party assets fell by £20 billion, reflecting the continued reduction in trading assets in line with the strategic decision to reduce risk and focus on core strengths.