Interim Results - Part 3 of 7

Companies

NATWEST GROUP (NWG)

UK 100

Latest directors dealings

30 minutes ago CC Japan Income & Growth Trust
44 minutes ago Blackrock Frontiers Investment Trust
48 minutes ago Sunda Energy
1 hour ago Avon Technologies plc
1 hour ago Thungela Resources Limited NPV (DI)

All directors dealings today

	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

Interest receivable	8,560	9,635	4,281	4,279	4,701
Interest payable	(3,123)	(3,815)	(1,514)	(1,609)	(1,796)

Net interest income	5,437	5,820	2,767	2,670	2,905

Fees and commissions receivable	2,708	2,935	1,392	1,316	1,450
Fees and commissions payable	(460)	(380)	(250)	(210)	(201)
Income from trading activities	2,064	867	949	1,115	655
Gain/(loss) on redemption of own debt	191	577	242	(51)	-
Other operating income	1,332	(440)	720	612	360

Non-interest income	5,835	3,559	3,053	2,782	2,264

Total income	11,272	9,379	5,820	5,452	5,169

Staff costs	(3,727)	(4,545)	(1,840)	(1,887)	(2,037)
Premises and equipment	(1,104)	(1,090)	(548)	(556)	(528)
Other administrative expenses	(2,181)	(1,894)	(1,418)	(763)	(1,011)
Depreciation and amortisation	(736)	(883)	(349)	(387)	(426)

Operating expenses	(7,748)	(8,412)	(4,155)	(3,593)	(4,002)

Profit before impairment losses	3,524	967	1,665	1,859	1,167
Impairment losses	(2,150)	(2,649)	(1,117)	(1,033)	(1,335)

Operating profit/(loss) before tax	1,374	(1,682)	548	826	(168)
Tax charge	(678)	(399)	(328)	(350)	(261)

Profit/(loss) from continuing operations	696	(2,081)	220	476	(429)

Profit from discontinued operations, net of tax
- Direct Line Group	127	105	-	127	17
- Other	11	1	9	2	(4)

Profit from discontinued operations, net of tax	138	106	9	129	13

Profit/(loss) for the period	834	(1,975)	229	605	(416)
Non-controlling interests	(117)	25	14	(131)	11
Preference share and other dividends	(182)	(82)	(101)	(81)	(82)

Profit/(loss) attributable to ordinary and B shareholders	535	(2,032)	142	393	(487)

Basic and diluted earnings/(loss) per ordinary and B share from continuing operations	3.8p	(19.6p)	1.2p	2.6p	(4.6p)

Basic earnings/(loss) per ordinary and B share from continuing and discontinued operations	4.8p	(18.6p)	1.2p	3.5p	(4.5p)

Diluted earnings/(loss) per ordinary and B share from continuing and discontinued operations	4.7p	(18.6p)	1.2p	3.5p	(4.5p)

	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

Profit/(loss) for the period	834	(1,975)	229	605	(416)

Items that do not qualify for reclassification
Income tax on items that do not qualify for reclassification	-	(38)	-	-	-


Items that do qualify for reclassification
Available-for-sale financial assets	(733)	591	(1,009)	276	66
Cash flow hedges	(1,536)	695	(1,502)	(34)	662
Currency translation	1,310	(496)	113	1,197	58
Income tax on items that do qualify for reclassification	726	(218)	678	48	(237)

	(233)	572	(1,720)	1,487	549

Other comprehensive (loss)/income after tax	(233)	534	(1,720)	1,487	549

Total comprehensive income/(loss) for the period	601	(1,441)	(1,491)	2,092	133

Total comprehensive income/(loss) is attributable to:
Non-controlling interests	134	(19)	(15)	149	(16)
Preference shareholders	152	76	81	71	76
Paid-in equity holders	30	6	20	10	6
Ordinary and B shareholders	285	(1,504)	(1,577)	1,862	67

	601	(1,441)	(1,491)	2,092	133

·	The movement in available-for-sale financial assets during both H1 and Q2 2013 consisted of realised gains on the sale of high quality UK, US and German sovereign bonds and unrealised losses on government bonds in Q2 2013 offset by unrealised gains in Q1 2013.

·	Cash flow hedging movements in H1 2013 represents unrealised losses as a result of increases in fixed/floating swap rates in the second quarter following statements by central banks indicating future monetary tightening.

·	Currency translation gains during H1 2013 are principally due to exchange rate movements in the first half of the year when Sterling weakened by 4.7% against Euro (1.2% in Q2 2013) and by 6.0% against US Dollar.

	30 June 2013	31 March 2013	31 December 2012*
	£m	£m	£m

Assets
Cash and balances at central banks	89,613	86,718	79,290
Net loans and advances to banks	30,241	34,025	29,168
Reverse repurchase agreements and stock borrowing	37,540	43,678	34,783
Loans and advances to banks	67,781	77,703	63,951
Net loans and advances to customers	418,792	432,360	430,088
Reverse repurchase agreements and stock borrowing	61,743	59,427	70,047
Loans and advances to customers	480,535	491,787	500,135
Debt securities	138,202	153,248	157,438
Equity shares	11,423	11,861	15,232
Settlement balances	17,966	15,805	5,741
Derivatives	373,692	432,435	441,903
Intangible assets	13,997	13,928	13,545
Property, plant and equipment	9,300	9,482	9,784
Deferred tax	3,344	3,280	3,443
Interests in associated undertakings	2,500	2,604	776
Prepayments, accrued income and other assets	6,563	7,596	7,044
Assets of disposal groups	1,313	1,726	14,013

Total assets	1,216,229	1,308,173	1,312,295

Liabilities
Bank deposits	45,287	54,536	57,073
Repurchase agreements and stock lending	34,419	39,575	44,332
Deposits by banks	79,706	94,111	101,405
Customer deposits	437,097	437,437	433,239
Repurchase agreements and stock lending	89,321	88,658	88,040
Customer accounts	526,418	526,095	521,279
Debt securities in issue	79,721	92,740	94,592
Settlement balances	17,207	14,640	5,878
Short positions	27,979	30,610	27,591
Derivatives	370,047	429,881	434,333
Accruals, deferred income and other liabilities	14,376	15,630	14,801
Retirement benefit liabilities	3,579	3,533	3,884
Deferred tax	694	1,019	1,141
Subordinated liabilities	26,538	27,788	26,773
Liabilities of disposal groups	306	961	10,170

Total liabilities	1,146,571	1,237,008	1,241,847

Equity
Non-controlling interests	475	532	1,770
Owners' equity*
Called up share capital	6,632	6,619	6,582
Reserves	62,551	64,014	62,096

Total equity	69,658	71,165	70,448

Total liabilities and equity	1,216,229	1,308,173	1,312,295

* Owners' equity attributable to:
Ordinary and B shareholders	63,891	65,341	63,386
Other equity owners	5,292	5,292	5,292

	69,183	70,633	68,678

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

Average yields, spreads and margins of the banking business
Gross yield on interest-earning assets of banking business	3.10	3.15	3.11	3.10
Cost of interest-bearing liabilities of banking business	(1.46)	(1.52)	(1.44)	(1.48)

Interest spread of banking business	1.64	1.63	1.67	1.62
Benefit from interest-free funds	0.33	0.27	0.33	0.32

Net interest margin of banking business	1.97	1.90	2.00	1.94


Average interest rates
The Group's base rate	0.50	0.50	0.50	0.50

London inter-bank three month offered rates
- Sterling	0.51	1.02	0.51	0.51
- Eurodollar	0.28	0.49	0.28	0.29
- Euro	0.21	0.79	0.21	0.21

	Half year ended
	30 June 2013			30 June 2012*
	Average			Average
	balance	Interest	Rate	balance	Interest	Rate
	£m	£m	%	£m	£m	%

Assets
Loans and advances to banks	74,631	222	0.60	79,655	273	0.69
Loans and advances to customers	406,534	7,640	3.79	438,602	8,311	3.81
Debt securities	75,129	700	1.88	98,270	1,060	2.17

Interest-earning assets - banking business (1,5)	556,294	8,562	3.10	616,527	9,644	3.15
- trading business (4)	232,773			246,256

Non-interest earning assets	521,217			629,241

Total assets	1,310,284			1,492,024

Memo: Funded assets	877,487			984,037

Liabilities
Deposits by banks	26,244	218	1.68	42,965	334	1.56
Customer accounts	338,938	1,577	0.94	335,891	1,789	1.07
Debt securities in issue	61,136	738	2.43	109,934	1,290	2.36
Subordinated liabilities	24,939	416	3.36	22,089	328	2.99
Internal funding of trading business	(18,266)	178	(1.97)	(6,884)	66	(1.93)

Interest-bearing liabilities - banking business (1,2,3)	432,991	3,127	1.46	503,995	3,807	1.52
- trading business (4)	236,675			257,343

Non-interest-bearing liabilities
- demand deposits	76,820			74,088
- other liabilities	493,938			582,089
Owners' equity	69,860			74,509

Total liabilities and owners' equity	1,310,284			1,492,024

(1)	Interest receivable has been increased by £2 million (H1 2012 - £9 million) and interest payable has been increased by £40 million (H1 2012 - £82 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)	Interest payable has been decreased by £5 million (H1 2012 - £10 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)	Interest payable has been decreased by £31 million (H1 2012 - £80 million) in respect of non-recurring adjustments.
(4)	Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(5)	Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.

	Quarter ended
	30 June 2013			31 March 2013
	Average			Average
	balance	Interest	Rate	balance	Interest	Rate
	£m	£m	%	£m	£m	%

Assets
Loans and advances to banks	78,277	114	0.58	70,945	108	0.62
Loans and advances to customers	402,679	3,809	3.79	410,432	3,831	3.79
Debt securities	71,116	359	2.02	79,186	341	1.75

Interest-earning assets - banking business (1,5)	552,072	4,282	3.11	560,563	4,280	3.10
- trading business (4)	227,401			238,205

Non-interest earning assets	512,610			529,919

Total assets	1,292,083			1,328,687

Memo: Funded assets	865,621			889,485

Liabilities
Deposits by banks	24,233	104	1.72	28,278	114	1.63
Customer accounts	339,095	740	0.88	338,779	837	1.00
Debt securities in issue	60,424	368	2.44	61,856	370	2.43
Subordinated liabilities	25,712	225	3.51	24,157	191	3.21
Internal funding of trading business	(21,078)	97	(1.85)	(15,422)	81	(2.13)

Interest-bearing liabilities - banking business (1,2,3)	428,386	1,534	1.44	437,648	1,593	1.48
- trading business (4)	232,873			240,519

Non-interest-bearing liabilities
- demand deposits	77,593			76,039
- other liabilities	483,310			504,683
Owners' equity	69,921			69,798

Total liabilities and owners' equity	1,292,083			1,328,687

(1)	Interest receivable has been increased by £1 million (Q1 2013 - £1 million) and interest payable has been increased by £23 million (Q1 2013 - £17 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)	Interest payable has been decreased by £3 million (Q1 2013 - £2 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)	Interest payable has been decreased by nil (Q1 2013 - £31 million) in respect of non-recurring adjustments.
(4)	Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(5)	Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.

(1)	Analysis provided on page 108.
(2)	Net of tax - £35 million charge.
(3)	Net of tax - £1 million charge.
(4)	Including the disposal of non-controlling interest in DLG as a result of ceding control following the sale of the second tranche of shares on 13 March 2013.

●	in May 2013 IFRIC 21 'Levies'. This interpretation provides guidance on accounting for the liability to pay a government imposed levy. IFRIC 21 is effective for annual periods beginning on or after 1 January 2014.

●	in May 2013 'Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36)'. These amendments align IAS 36's disclosure requirements about recoverable amounts with IASB's original intentions. They are effective for annual periods beginning on or after 1 January 2014.

●	in June 2013 'Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)'. These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. They are effective for annual periods beginning on or after 1 January 2014.

			Sensitivity
	Actual to date	Current assumption	Change in assumption	Consequential change in provision
Assumption	Actual to date	Current assumption	%	£m

Past business review take up rate	33%	35%	+/-5	+/-285
Uphold rate	64%	68%	+/-5	+/-25
Average redress	£1,725	£1,639	+/-5	+/-26

	Half year ended
	30 June 2013			30 June 2012
	Core	Non- Core	Total	Core	Non- Core	Total
	£m	£m	£m	£m	£m	£m

At beginning of period	10,062	11,188	21,250	8,414	11,469	19,883
Currency translation and other adjustments	207	341	548	1	(316)	(315)
Amounts written-off	(1,155)	(968)	(2,123)	(991)	(934)	(1,925)
Recoveries of amounts previously written-off	90	31	121	127	53	180
Charge to income statement
- continuing operations	1,258	903	2,161	1,515	1,215	2,730
Unwind of discount (recognised in interest income)	(104)	(100)	(204)	(122)	(134)	(256)

At end of period	10,358	11,395	21,753	8,944	11,353	20,297

	Net interest income	Non- interest income	Total income	Operating expenses	Impairment losses	Operating profit/(loss)
Half year ended 30 June 2013	£m	£m	£m	£m	£m	£m

UK Retail	1,952	451	2,403	(1,280)	(169)	954
UK Corporate	1,421	805	2,226	(1,094)	(379)	753
Wealth	331	214	545	(426)	(7)	112
International Banking	374	576	950	(660)	(154)	136
Ulster Bank	308	142	450	(276)	(503)	(329)
US Retail & Commercial	944	570	1,514	(1,100)	(51)	363
Markets (1)	55	1,807	1,862	(1,432)	(59)	371
Central items	75	217	292	(191)	3	104

Core	5,460	4,782	10,242	(6,459)	(1,319)	2,464
Non-Core (2)	(18)	384	366	(321)	(831)	(786)

Managed basis	5,442	5,166	10,608	(6,780)	(2,150)	1,678
Reconciling items
Own credit adjustments (3)	-	376	376	-	-	376
Payment Protection Insurance costs	-	-	-	(185)	-	(185)
Interest Rate Hedging Products redress and related costs	-	-	-	(50)	-	(50)
Regulatory and legal actions	-	-	-	(385)	-	(385)
Integration and restructuring costs	-	-	-	(271)	-	(271)
Gain on redemption of own debt	-	191	191	-	-	191
Amortisation of purchased intangible assets	-	-	-	(79)	-	(79)
RFS Holdings minority interest	(5)	102	97	2	-	99

Statutory basis	5,437	5,835	11,272	(7,748)	(2,150)	1,374

(1)	Reallocation of £1 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(2)	Reallocation of £20 million between net interest income and non-interest income in respect of funding costs of rental assets, £19 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(3)	Comprises £175 million gain included in 'Income from trading activities' and £201 million gain included in 'Other operating income' on a statutory basis.

	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

Called-up share capital
At beginning of period	6,582	15,318	6,619	6,582	15,397
Ordinary shares issued	50	143	13	37	64
Share capital sub-division and consolidation	-	(8,933)	-	-	(8,933)

At end of period	6,632	6,528	6,632	6,619	6,528

Paid-in equity
At beginning and end of period	979	979	979	979	979

Share premium account
At beginning of period	24,361	24,001	24,455	24,361	24,027
Ordinary shares issued	122	197	28	94	171

At end of period	24,483	24,198	24,483	24,455	24,198

Merger reserve
At beginning and end of period	13,222	13,222	13,222	13,222	13,222

Available-for-sale reserve (1)
At beginning of period	(346)	(957)	(10)	(346)	(439)
Unrealised gains/(losses)	14	1,152	(568)	582	428
Realised gains	(605)	(582)	(441)	(164)	(370)
Tax	333	(63)	305	28	(69)
Recycled to profit or loss on disposal of businesses (2)	(110)	-	-	(110)	-

At end of period	(714)	(450)	(714)	(10)	(450)

Cash flow hedging reserve
At beginning of period	1,666	879	1,635	1,666	921
Amount recognised in equity	(859)	1,218	(1,118)	259	928
Amount transferred from equity to earnings	(677)	(523)	(384)	(293)	(266)
Tax	361	(175)	358	3	(184)

At end of period	491	1,399	491	1,635	1,399

	Half year ended
	30 June 2013			30 June 2012*
	External	Inter segment	Total	External	Inter segment	Total
Total revenue	£m	£m	£m	£m	£m	£m

UK Retail	3,189	7	3,196	3,277	320	3,597
UK Corporate	2,284	44	2,328	2,541	40	2,581
Wealth	503	340	843	526	401	927
International Banking	1,153	233	1,386	1,409	189	1,598
Ulster Bank	549	36	585	557	(8)	549
US Retail & Commercial	1,644	50	1,694	1,757	67	1,824
Markets	2,217	2,430	4,647	3,199	2,805	6,004
Central items	1,566	4,665	6,231	1,280	8,379	9,659

Core	13,105	7,805	20,910	14,546	12,193	26,739
Non-Core	1,081	223	1,304	1,322	498	1,820

Managed basis	14,186	8,028	22,214	15,868	12,691	28,559
Reconciling items
Own credit adjustments	376	-	376	(2,974)	-	(2,974)
Gain on redemption of own debt	191	-	191	577	-	577
Asset Protection Scheme	-	-	-	(45)	-	(45)
Strategic disposals	-	-	-	152	-	152
RFS Holdings minority interest	102	-	102	(4)	-	(4)
Elimination of intra-group transactions	-	(8,028)	(8,028)	-	(12,691)	(12,691)

Statutory basis	14,855	-	14,855	13,574	-	13,574

	Quarter ended
	30 June 2013			31 March 2013			30 June 2012*
	External	Inter segment	Total	External	Inter segment	Total	External	Inter segment	Total
Total revenue	£m	£m	£m	£m	£m	£m	£m	£m	£m

UK Retail	1,597	4	1,601	1,592	3	1,595	1,627	178	1,805
UK Corporate	1,169	20	1,189	1,115	24	1,139	1,262	22	1,284
Wealth	255	162	417	248	178	426	266	190	456
International Banking	573	111	684	580	122	702	709	89	798
Ulster Bank	289	17	306	260	19	279	267	(2)	265
US Retail & Commercial	813	25	838	831	25	856	900	32	932
Markets	1,010	1,346	2,356	1,207	1,084	2,291	1,265	1,294	2,559
Central items	874	2,320	3,194	692	2,345	3,037	715	4,477	5,192

Core	6,580	4,005	10,585	6,525	3,800	10,325	7,011	6,280	13,291
Non-Core	628	144	772	453	79	532	502	350	852

Managed basis	7,208	4,149	11,357	6,978	3,879	10,857	7,513	6,630	14,143
Reconciling items
Own credit adjustments	127	-	127	249	-	249	(518)	-	(518)
Gain/(loss) on redemption of own debt	242	-	242	(51)	-	(51)	-	-	-
Asset Protection Scheme	-	-	-	-	-	-	(2)	-	(2)
Strategic disposals	6	-	6	(6)	-	(6)	160	-	160
RFS Holdings minority interest	1	-	1	101	-	101	13	-	13
Elimination of intra-group transactions	-	(4,149)	(4,149)	-	(3,879)	(3,879)	-	(6,630)	(6,630)

Statutory basis	7,584	-	7,584	7,271	-	7,271	7,166	-	7,166

(1)	Reallocation of £9 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)	Reallocation of £8 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(3)	Reallocation of £89 million between net interest income and non-interest income in respect of funding costs of rental assets, £91 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £2 million.
(4)	Comprises £1,280 million loss included in 'Income from trading activities' and £1,694 million loss included in 'Other operating income' on a statutory basis.
(5)	Included in 'Income from trading activities' on a statutory basis.

(1)	Reallocation of £1 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(2)	Reallocation of £11 million between net interest income and non-interest income in respect of funding costs of rental assets, £10 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(3)	Comprises £76 million gain included in 'Income from trading activities' and £51 million gain included in 'Other operating income' on a statutory basis.

(1)	Reallocation of £9 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)	Comprises £99 million gain included in 'Income from trading activities' and £150 million gain included in 'Other operating income' on a statutory basis.

(1)	Reallocation of £38 million between net interest income and non-interest income in respect of funding costs of rental assets, £40 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £2 million.
(2)	Comprises £271 million loss included in 'Income from trading activities' and £247 million loss included in 'Other operating income' on a statutory basis.
(3)	Included in 'Income from trading activities' on a statutory basis.

	HFT (1)	DFV (2)	AFS (3)	LAR (4)	Other financial instruments (amortised cost)	Finance leases	Non financial assets/ liabilities	Total
30 June 2013	£m	£m	£m	£m	£m	£m	£m	£m

Assets
Cash and balances at central banks	-	-	-	89,613				89,613
Loans and advances to banks
- reverse repos	36,421	-	-	1,119				37,540
- other	13,653	-	-	16,588				30,241
Loans and advances to customers
- reverse repos	61,611	-	-	132				61,743
- other	22,477	80	-	388,931		7,304		418,792
Debt securities	70,520	610	63,241	3,831				138,202
Equity shares	9,664	414	1,345					11,423
Settlement balances	-	-	-	17,966				17,966
Derivatives	373,692							373,692
Intangible assets							13,997	13,997
Property, plant and equipment							9,300	9,300
Deferred tax							3,344	3,344
Interest in associated undertakings							2,500	2,500
Prepayments, accrued income and other assets	-	-	-	-	-		6,563	6,563
Assets of disposal groups							1,313	1,313

	588,038	1,104	64,586	518,180	-	7,304	37,017	1,216,229

Liabilities
Deposits by banks
- repos	27,627	-			6,792			34,419
- other	23,132	-			22,155			45,287
Customer accounts
- repos	87,014	-			2,307			89,321
- other	11,585	6,366			419,146			437,097
Debt securities in issue	9,321	20,676			49,724			79,721
Settlement balances	-	-			17,207			17,207
Short positions	27,979	-						27,979
Derivatives	370,047							370,047
Accruals, deferred income and other liabilities	-	-			1,729	10	12,637	14,376
Retirement benefit liabilities							3,579	3,579
Deferred tax							694	694
Subordinated liabilities	-	946			25,592			26,538
Liabilities of disposal groups							306	306

	556,705	27,988			544,652	10	17,216	1,146,571

Equity								69,658

								1,216,229

(1)	Held-for-trading.
(2)	Designated as at fair value.
(3)	Available-for-sale.
(4)	Loans and receivables.

	30 June 2013	31 December 2012
	£m	£m

Credit valuation adjustments (CVA)
- monoline insurers	88	192
- credit derivative product companies (CDPC)	200	314
- other counterparties	1,969	2,308

	2,257	2,814

Other valuation reserves
- bid-offer	535	625
- funding valuation adjustment	472	475
- product and deal specific	790	763
- other	75	134

	1,872	1,997

Valuation reserves	4,129	4,811

·	The decrease in both monoline and CDPC CVA reflects a reduction in exposure as well as tightening credit spreads. The decrease in exposure reflected higher prices of monoline underlying reference assets and tighter credit spreads of CDPC underlying instruments, partially offset by the effect of Sterling weakening against US dollar.

·	The decrease in other counterparty CVA was driven by tighter credit spreads, reduction in exposure due to market movements and reserve releases on certain exposures following restructure. This was partially offset by counterparty rating downgrades and reduced recovery rate assumptions.

·	The decrease in bid-offer reserves reflects a reduction in underlying exposure in line with the Group's risk strategy.

Cumulative OCA DR/(CR)(1)	Debt securities in issue (2)			Subordinated liabilities DFV £m	Total £m	Derivatives £m	Total (3) £m
Cumulative OCA DR/(CR)(1)	HFT £m	DFV £m	Total £m	Subordinated liabilities DFV £m	Total £m	Derivatives £m	Total (3) £m

30 June 2013	(488)	244	(244)	380	136	309	445
31 December 2012	(648)	56	(592)	362	(230)	259	29

Carrying values of underlying liabilities	£bn	£bn	£bn	£bn	£bn

30 June 2013	9.3	20.7	30.0	0.9	30.9
31 December 2012	10.9	23.6	34.5	1.1	35.6

(1)	The OCA does not alter cash flows and is not used for performance management. It is disregarded for regulatory capital reporting purposes and will reverse over time as the liabilities mature.
(2)	Includes wholesale and retail note issuances.
(3)	The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserve is stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.

Interim Results - Part 3 of 7

Fair value of financial instruments not carried at fair value

Companies

UK 100

Latest directors dealings

·	The own credit adjustment increased during H1 2013 due to widening of RBS credit spreads.

·	Senior issued debt adjustments are determined with reference to secondary debt issuance spreads. At 30 June 2013, the five year spread widened by 37% to 140 basis points (31 December 2012 - 102 basis points).

	30 June 2013
					Level 3 sensitivity (1)
	Level 1	Level 2	Level 3	Total	Favourable	Unfavourable
Assets	£bn	£bn	£bn	£bn	£m	£m

Loans and advances to banks
- reverse repos	-	36.4	-	36.4	-	-
- derivative collateral	-	13.2	-	13.2	-	-
- other	-	0.1	0.4	0.5	40	(30)

	-	49.7	0.4	50.1	40	(30)

Loans and advances to customers
- reverse repos	-	61.5	-	61.5	-	-
- derivative collateral	-	20.2	-	20.2	-	-
- other	-	2.1	0.3	2.4	-	(60)

	-	83.8	0.3	84.1	-	(60)

Debt securities
- UK government	14.9	-	-	14.9	-	-
- US government	22.5	6.0	-	28.5	-	-
- other government	31.3	6.5	-	37.8	-	-
- corporate	-	1.9	0.3	2.2	10	(10)
- other financial institutions	2.0	45.0	4.0	51.0	280	(220)

	70.7	59.4	4.3	134.4	290	(230)

Equity shares	9.4	1.3	0.7	11.4	70	(130)

Derivatives
- foreign exchange	-	75.2	1.4	76.6	150	(50)
- interest rate	0.6	282.7	0.8	284.1	70	(60)
- credit	-	7.8	1.4	9.2	110	(150)
- equities and commodities	-	3.7	0.1	3.8	-	-

	0.6	369.4	3.7	373.7	330	(260)

	80.7	563.6	9.4	653.7	730	(710)

Proportion	12.3%	86.3%	1.4%	100%

Of which
Core	80.5	558.5	5.4	644.4
Non-Core	0.2	5.1	4.0	9.3

	80.7	563.6	9.4	653.7

31 December 2012

RMBS (3)	-	38.5	0.9	39.4	40	(50)
CMBS (4)	-	3.7	-	3.7	-	-
CDO (5)	-	0.2	0.5	0.7	80	(10)
CLO (6)	-	0.6	2.4	3.0	120	(50)
Other	-	2.1	0.4	2.5	50	(10)

Total	-	45.1	4.2	49.3	290	(120)

AFS debt securities	31 December 2012

- UK government	8.0	-	-	8.0	-	-
- US government	15.5	3.5	-	19.0	-	-
- other government	10.7	5.3	-	16.0	-	-
- corporate	-	0.1	0.1	0.2	10	-
- other financial institutions	0.5	27.1	2.9	30.5	170	(40)

	34.7	36.0	3.0	73.7	180	(40)

Of which ABS (7)
RMBS (3)	-	23.3	0.2	23.5	10	-
CMBS (4)	-	2.3	-	2.3	-	-
CDO (5)	-	0.1	0.5	0.6	70	(10)
CLO (6)	-	0.4	1.9	2.3	50	(10)
Other	-	1.3	0.2	1.5	20	(10)

Equity shares	0.3	0.7	0.4	1.4	30	(40)

	35.0	36.7	3.4	75.1	210	(80)

Of which
Core	34.9	35.7	0.6	71.2
Non-Core	0.1	1.0	2.8	3.9

	35.0	36.7	3.4	75.1

(1)	Level 1: valued using unadjusted quoted prices in active markets, for identical financial instruments. Examples include G10 government securities, listed equity shares, certain exchange-traded derivatives and certain US agency securities. Level 2: valued using techniques based significantly on observable market data. Instruments in this category are valued using: (a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or (b) valuation techniques where all the inputs that have a significant effect on the valuations are directly or indirectly based on observable market data. The type of instruments that trade in markets that are not considered to be active, but are based on quoted market prices, banker dealer quotations, or alternative pricing sources with reasonable levels of price transparency and those instruments valued using techniques include non-G10 government securities, most government agency securities, investment-grade corporate bonds, certain mortgage products, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most OTC derivatives. Level 3: instruments in this category have been valued using a valuation technique where at least one input which could have a significant effect on the instrument's valuation, is not based on observable market data. Where inputs can be observed from market data without undue cost and effort, the observed input is used. Otherwise, the Group determines a reasonable level for the input. Financial instruments primarily include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets instruments, unlisted equity shares, certain residual interests in securitisations, majority of CDOs, other mortgage-backed products and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.
(2)	Sensitivity represents the favourable and unfavourable effect respectively on the income statement or the statement of comprehensive income due to reasonably possible changes to valuations using reasonably possible alternative inputs in the Group's valuation techniques or models. Level 3 sensitivities are calculated at a sub-portfolio level and hence these aggregated figures do not reflect the correlation between some of the sensitivities. In particular, for some of the portfolios, the sensitivities may be negatively correlated where a downward movement in one asset would produce an upward movement in another, but due to the additive presentation above, this correlation cannot be observed.
(3)	Residential mortgage-backed securities.
(4)	Commercial mortgage-backed securities.
(5)	Collateralised debt obligations.
(6)	Collateralised loan obligations.
(7)	Asset-backed securities.
(8)	Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred.

·	Total assets carried at fair value decreased by £98.1 billion in the first half of 2013 to £653.7 billion, principally reflecting decreases in derivative assets (£68.2 billion), debt securities (£18.6 billion), reverse repos (£5.5 billion), equity shares (£3.8 billion) and derivative collateral (£1.9 billion).

·	Total liabilities carried at fair value decreased by £80.4 billion, with decreases in derivative liabilities (£64.3 billion), derivative collateral (£6.0 billion), debt securities in issue (£4.5 billion), repos (£4.0 billion) and deposits (£1.8 billion).

·	Level 3 instruments are primarily in Markets, comprising instruments held in the normal course of business, and Non-Core, relating to legacy securities and derivatives positions.

·	Level 3 assets of £9.4 billion represented 1.4% (31 December 2012 - £10.4 billion, 1.4%), a decrease of £1.0 billion. This reflected sales, maturities and amortisation of instruments, particularly securities in Non-Core.

·	Level 3 liabilities of £5.1 billion increased by £0.2 billion due to issuances offset by settlement and maturities of instruments.

·	Improvements in price discovery resulted in £0.4 billion each of assets and liabilities, principally derivatives transfers from level 3 to level 2. Transfers from level 2 to level 3 comprised: derivatives (assets £0.5 billion and liabilities £0.3 billion), debt securities in issue of £0.6 billion and debt securities £0.3 billion relating to securities, primarily ABS, in Non-Core. Market illiquidity towards the end of June was a major cause for the transfers. There were no significant transfers between level 1 and level 2.

·	The favourable and unfavourable effects of reasonably possible alternative assumptions on level 3 instruments carried at fair value were £0.7 billion (31 December 2012 - £1.0 billion) and £0.7 billion (31 December 2012 - £0.7 billion) respectively.

		(Losses)/gains		Level 3 transfers								IS on balances at period end
	At 1 January 2013	Income statement (IS) (1)	SOCi (2)	In	Out	Purchases	Issuances	Settlements	Sales	Foreign exchange and other	At 30 June 2013	Unrealised	Realised
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Assets
FVTPL (3)
Loans and advances
- banks	382	22	-	-	-	-	-	-	-	1	405	(1)	19
- customers	562	(4)	-	84	(5)	37	-	(41)	(407)	20	246	(5)	1
Debt securities	1,938	106	-	184	(39)	434	-	(80)	(712)	(4)	1,827	30	39
Equity shares	396	1	-	43	(62)	49	-	(9)	(93)	9	334	(44)	9
Derivatives	3,789	(107)	-	450	(332)	243	-	(302)	(122)	48	3,667	(107)	1

FVTPL assets	7,067	18	-	761	(438)	763	-	(432)	(1,334)	74	6,479	(127)	69

Available-for-sale (AFS)
Debt securities	2,948	50	138	139	-	-	-	(508)	(252)	(7)	2,508	37	10
Equity shares	390	14	(16)	17	-	17	-	(4)	(26)	(2)	390	(4)	2

AFS assets	3,338	64	122	156	-	17	-	(512)	(278)	(9)	2,898	33	12

	10,405	82	122	917	(438)	780	-	(944)	(1,612)	65	9,377	(94)	81

Of which ABS:							-
- FVTPL	1,350	168	-	144	(32)	398	-	(79)	(673)	15	1,291	99	31
- AFS	2,815	38	147	129	-	-	-	(490)	(238)	(12)	2,389	28	8

Liabilities
Deposits	168	(17)	-	42	(31)	-	23	-	(1)	-	184	(24)	7
Debt securities in issue	1,363	29	-	588	(140)	-	442	(391)	-	(10)	1,881	23	-
Short positions	2	(1)	-	6	-	1	-	-	-	(1)	7	-	-
Derivatives	3,317	(24)	-	306	(273)	184	-	(281)	(214)	33	3,048	52	-

	4,850	(13)	-	942	(444)	185	465	(672)	(215)	22	5,120	51	7

Net (losses)/gains	-	95	122	-	-	-	-	-	-	-	-	(145)	74

(1)	Net gains on HFT instruments of £39 million (31 December 2012 - Net loss £1,528 million) and net gains on other instruments of £56 million (31 December 2012 - £141 million were recorded in other operating income, interest income and impairment losses as appropriate.
(2)	Statement of comprehensive income.
(3)	Fair value through profit or loss.

	Level 3 (£bn)				Range
Financial instruments	Assets	Liabilities	Valuation technique	Unobservable inputs	Low	High

Loans	0.7	0.2	Price based	Price (2)	26%	100%

			Discounted cash flow model (DCF)	Credit spreads (3)	93bps	804bps
				Recovery rates (4)	0%	80%
				Discount margin (3)	90bps	110bps

Deposits		0.2	Option pricing	Volatility (5)	18%	32%

Debt securities
RMBS	0.8		Price based	Price (2)	0%	103%

			DCF	Cumulative loss rate (6)	90%	100%

CMBS	0.2		Price based	Price (2)	0%	100%

CDO and CLO	2.4		Price based	Price (2)	0%	100%

			DCF	Yield (2)	5%	25%
				Constant default rates (7)	2%	5%
				Recovery rates (4)	10%	70%
				Conditional prepayment rate (CPR) (8)	0%	30%

Other ABS	0.3		Price based	Price (2)	0%	100%

			DCF	Discount margin (3)	101bps	209bps

Other debt securities	0.6		DCF	Credit spreads (3)	97bps	105bps

Equity securities	0.7		Price based	Price (2)	0.91x	1.09x

			EBITDA multiple	EBITDA multiple (9)	0.96x	16.4x

			DCF	Discount rate (10)	20%	100%
				Recovery rates (4)	0%	70%

Derivatives
Foreign exchange	1.4	0.6	DCF	Correlation (11)	11%	100%

			Option pricing model	Volatility (5)	7%	25%

Interest rate	0.8	0.4	Option pricing model	Correlation (11)	(60%)	100%

			DCF	Discount margin (3)	90%	110%
				CPR (8)	2%	20%

Equities and commodities	0.1	0.8	Option pricing model	Volatility (5)	8%	31%

Credit	1.4	1.2	Price based	Price (2)	0%	100%

			DCF based on defaults and recoveries	Recovery rates (4)	0%	95%
				Upfront points (12)	0%	100%
				CPR (8)	1%	20%
				Credit spreads (3)	5bps	800bps

(1)	Level 3 structured issued debt securities of £1.9 billion is not included in the table above. Its is valued in the same way as the embedded derivative component.
(2)	Price and yield: There may be a range of price based information used for evaluating the value of an instrument. This may be a direct comparison of one instrument or portfolio with another or the movements in a more liquid instrument maybe used to indicate the movement in a less observably priced instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected payouts. Similarly to price, an instrument's yield may be compared to other instruments either directly or indirectly to evaluate the value of the instrument. Prices move inversely to yields.
(3)	Credit spread and discount margin: Credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
(4)	Recovery rate: Reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to move conversely to credit spreads.
(5)	Volatility: A measure of the tendency of a price to change with time.
(6)	Cumulative loss rate: This is a measure of the expected rate of losses in an underlying portfolio of mortgages or other receivables. The higher the cumulative losses the lower the value of the underlying portfolio. Cumulative losses tend to move conversely to prepayment rates and in line with constant default rates.
(7)	Constant default rate: The measure of the annualised default rate on a portfolio. The higher the rate, the higher the expected number of defaults and the expected losses. The constant default rate tend to move conversely to the conditional prepayment rate. An increase in the constant default rate likely reduces the value of an asset.
(8)	Conditional prepayment rate: The measure of the rate at which underlying mortgages or loans are prepaid. An increase in prepayment rates in a portfolio may increase or decrease its value depending upon the credit quality and payment terms of the underlying loans. For example an increase in prepayment rate of a portfolio of high credit quality underlying assets may reduce the value and size of the portfolio whereas for lower credit quality underlyings it may increase the value.
(9)	EBITDA (earnings before interest, tax, depreciation and amortisation) multiple: This is a commonly used valuation technique for equity holdings. The EBITDA of a company is used as a proxy for the future cash flows and when multiplied by an appropriate factor gives an estimate for the value of the company..
(10)	Discount rate: The rate at which future cash flows are discounted. A higher discount rate reduces the present value of future cash flows.
(11)	Correlation: Measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Correlations typically include relationships between: default probabilities of assets in a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
(12)	Upfront points: These are similar to credit spreads in that a higher figure is a measure of increased credit risk. A credit derivative price can be quoted on either credit spread or upfront points basis and the two can be considered a near equivalent from a risk perspective. As with credit spreads higher upfront points indicate that the underlying entity has a higher credit risk associated with it.
(13)	The Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.