Preliminary Interim Results 2014

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	Page

Trading update	1
Contacts	6
Preliminary summary consolidated income statement	7
Preliminary summary consolidated balance sheet	8
Analysis of results	9
Segment performance	15

●	Operating performance in the first half of 2014 was good, with all customer-facing businesses reporting improved operating profits compared with H1 2013. Operating profit⁽¹⁾ of £2,601 million included £514 million of restructuring costs (compared with £271 million in H1 2013) and £250 million of litigation and conduct costs, with £150 million added to provisions for Payment Protection Insurance and £100 million to interest rate swap redress provisions.

●	Operating profit⁽¹⁾, excluding restructuring and litigation and conduct costs ('adjusted operating profit'), improved to £3,365 million, compared with £1,599 million in H1 2013.

●	Total income declined 6% to £9,978 million. Growth of 3% in Personal & Business Banking (PBB) and 2% in Commercial & Private Banking (CPB) was more than offset by lower income, down 10%, in Corporate & Institutional Banking (CIB), reflecting its smaller balance sheet and reduced risk profile. Net interest margin improved to 2.17%, up 20 basis points compared with H1 2013, with continuing benefits from deposit repricing in PBB and CPB outweighing modest erosion of asset margins.

●	Total expenses were 8% lower at £7,108 million, including £514 million of restructuring costs and £250 million of litigation and conduct costs. Operating expenses, excluding restructuring and litigation and conduct costs ('adjusted operating expenses'), were down 8% to £6,344 million. Overall headcount has fallen by 8,000 over the past 12 months.

●	Impairment losses declined by £1,881 million to £269 million. All core businesses showed significant reductions in impairment losses as UK and Irish credit conditions continued to improve. In RBS Capital Resolution (RCR) there was a net write-back of provisions, reflecting disposals at favourable prices. At 30 June 2014, risk elements in lending represented 8.3% of gross loans to customers, compared with 9.4% at 31 December 2013.

●	Profit before tax was £2,652 million compared with £1,374 million in the first half of 2013, including a gain of £191 million from the sale of the remaining interest in Direct Line Insurance Group in Q1 2014 and a write-down of goodwill of £130 million in Q2 2014. Own credit adjustment was a charge of £51 million compared with a credit of £376 million in H1 2013 which also included a gain of £191 million on redemption of own debt compared with £20 million in H1 2014.

●	The tax charge was £733 million, representing 27.6% of profit before tax, and included a £76 million write-off of deferred tax assets.

●	The Common Equity Tier 1 capital ratio strengthened to 10.1% from 8.6% at the end of 2013, principally driven by reductions in risk-weighted assets in CIB and RCR and the retained profit for the period. RBS remains on track to achieve its medium-term capital targets.
●	After charging the initial £320 million Dividend Access Share retirement dividend, profit attributable to ordinary and B shareholders was £1,425 million. Tangible net asset value per ordinary and B share was 376p at 30 June 2014 compared with 363p at the end of 2013.

●		Adjusted operating expenses were £3,065 million, down 11% from Q2 2013 and 7% from Q1 2014.

●		Impairments amounted to a net release of £93 million compared with losses of £1,117 million in Q2 2013 and £362 million in Q1 2014, benefiting from improvements in bad debt flows and latent provision releases totalling £258 million.

●		Profit before tax totalled £1,010 million, after a write-down of goodwill of £130 million and a charge of £190 million for own credit. Profit attributable to ordinary and B shareholders was £230 million.

●	Funded assets fell to £736 billion, down £107 billion from June 2013, principally driven by the reduction in CIB's balance sheet and the run-off of RCR and Non-Core assets.
	○	In UK PBB gross new mortgage lending totalled £9.8 billion in H1 2014, a market share of 9.9%. Repayments remain high, with the low interest rate environment enabling higher levels of principal repayment.
	○	In CPB Commercial Banking, loans and advances in the growable book increased to £64.9 billion, up £2 billion from the prior year, but this was offset by a £2.8 billion decline in the non-growable book, which comprises real estate finance, businesses in restructuring and excess single-name concentrations.
	○	Overall SME applications were 11% higher in H1 2014 than in the prior year and gross new lending was up 31% at £5.0 billion.
●	Risk-weighted assets (RWAs) fell to £392 billion at the end of June 2014, down £22 billion from the end of March 2014.

●	The CET1 ratio was 10.1%⁽²⁾ at the end of June 2014, up from 8.6% at the end of 2013 and 9.4% at the end of March 2014 reflecting the attributable profit for the period and lower RWAs.

●	The bank's liquid asset buffer was £138 billion at the end of June 2014, up slightly from the first quarter but down from £146 billion at the end of 2013, leaving ample headroom to accommodate lending growth in H2 2014.

●	Over the course of H1 2014 RCR reduced funded assets by £8 billion, or 28%, to £21 billion. RWA equivalent⁽³⁾ decreased by £21 billion, or 33%, to £44 billion.

●	Operating loss in H1 2014 was £48 million, with an operating profit of £66 million recorded in the second quarter of the year, driven by net impairment releases of £128 million.

●	The combined effect of the small operating loss and RWA equivalent reduction was net CET1 capital accretion of £2 billion.

H1 2014 Preliminary interim results

25 July 2014

H1 2014 Preliminary interim results

H1 2014 Preliminary interim results

H1 2014 Preliminary interim results

H1 2014 Preliminary interim results

Companies

UK 100

Latest directors dealings

(1)	Operating profit before tax, own credit adjustments, gain on redemption of own debt, strategic disposals, write-down of goodwill and RFS Holdings minority interest ('operating profit'). Statutory operating profit before tax is expected to be £2,652 million for the half year ended 30 June 2014.
(2)	The CET1 ratio includes the benefit of the retained profit for the period. This is subject to approval by the Prudential Regulation Authority, which is expected to be obtained prior to the publication of the Interim Results on 1 August 2014.
(3)	RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in segments. RWAe converts both performing and non-performing exposures into a consistent capital measure, being the sum of the regulatory RWAs and the regulatory capital deductions, the latter converted to RWAe by applying a multiplier of 10.

	Measure	2013	H1 2014	Medium-term	Long-term

Efficiency	Cost:income ratio	95%	71%	~55%	~50%
	Adjusted cost:income ratio⁽²⁾	72%	64%
Returns	Return on tangible equity	Negative	7%	~9-11%	~12%+
Capital strength⁽³⁾	Common Equity Tier 1 ratio	8.6%	10.1%	≥12%	≥12%

(1)	This table contains forecasts with significant contingencies. Please refer to 'Forward-looking statements'.
(2)	Excluding restructuring costs and litigation and conduct costs.
(3)	CRR end-point basis.

For analyst enquiries:

Richard O'Connor	Head of Investor Relations	+44 (0) 20 7672 1758


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Group Media Centre		+44 (0) 131 523 4205

Date:		Friday 25 July 2014
Time:		9.00 am UK time
Webcast:		www.rbs.com/results
Dial in details:		International - +44 (0) 1452 568 172 UK Free Call - 0800 694 8082 US Toll Free - 1 866 966 8024

	Half year ended		Quarter ended
	30 June	30 June	30 June	31 March
	2014	2013 (1)	2014	2014 (1)
	£m	£m	£m	£m

Net interest income	5,496	5,442	2,798	2,698
Non-interest income	4,482	5,166	2,127	2,355

Total income	9,978	10,608	4,925	5,053
Staff and non-staff expenses	(6,344)	(6,859)	(3,065)	(3,279)
Restructuring costs	(514)	(271)	(385)	(129)
Litigation and conduct costs	(250)	(620)	(250)	-
Operating expenses	(7,108)	(7,750)	(3,700)	(3,408)

Operating profit before impairment losses	2,870	2,858	1,225	1,645
Impairment (losses)/recoveries	(269)	(2,150)	93	(362)

Operating profit	2,601	708	1,318	1,283
Own credit adjustments	(51)	376	(190)	139
Gain on redemption of own debt	20	191	-	20
Strategic disposals (2)	191	-	-	191
Write down of goodwill	(130)	-	(130)	-
RFS Holdings minority interest	21	99	12	9

Profit before tax	2,652	1,374	1,010	1,642
Tax charge (3)	(733)	(678)	(371)	(362)

Profit from continuing operations	1,919	696	639	1,280
Profit from discontinued operations, net of tax	35	138	26	9

Profit for the period	1,954	834	665	1,289
Non-controlling interests	(42)	(117)	(23)	(19)
Other owners' dividends	(167)	(182)	(92)	(75)
Dividend access share dividend	(320)	-	(320)	-

Profit attributable to ordinary and B shareholders	1,425	535	230	1,195

(1)	As set out in the Q2 Restatement Document dated 21 July 2014, comparative financial information has been restated to reflect: the changes to the RBS structure announced in February 2014, the allocation to reporting segments of a number of one-off and other items previously reported below the operating profit line; and revisions to the allocation of Central and Treasury costs to reflect the centralisation of services and functions and its internal reorganisation. These restatements do not affect statutory income statement, balance sheet, other primary statements or regulatory capital measures.
(2)	The gain of £191 million resulted from the sale of the bank's remaining stake in Direct Line Insurance Group in Q1 2014.
(3)	The tax charge reflects profits in high tax jurisdictions including the US and includes a £76 million write-off of deferred tax assets in Q2 2014.

	30 June	31 March	31 December
	2014	2014	2013
	£bn	£bn	£bn

Cash and balances at central banks	69	70	83
Reverse repurchase agreements and stock borrowing	82	78	76
Loans and advances (net)	414	419	418
Debt securities and equity shares	121	130	122
Other assets (1)	50	49	41

Funded assets	736	746	740
Derivatives	275	278	288

Total assets	1,011	1,024	1,028

Repurchase agreements and stock lending	83	89	85
Deposits	440	437	450
Debt securities in issue	59	62	68
Short positions	39	38	28
Subordinated liabilities	25	24	24
Other liabilities (1)	34	38	28

Liabilities excluding derivatives	680	688	683
Derivatives	270	275	286

Total liabilities	950	963	969
Equity	61	61	59

Total liabilities and equity	1,011	1,024	1,028

Memo items
Tangible equity (2)	43	43	41
Tangible net asset value per ordinary and B share (3,4)	376p	376p	363p

(1)	Includes disposal groups.
(2)	Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.
(3)	Tangible net asset value (TNAV) per ordinary and B share represents total tangible equity divided by the number of ordinary shares in issue and effect of convertible B shares.
(4)	Retained earnings and positive movements in available-for-sale financial assets were largely offset by currency translation losses, due to the strengthening of sterling, leaving TNAV flat compared with 31 March 2014.

·	Net interest income improved by 1% to £5,468 million. The increase was consistent across all businesses, with notable improvements in PBB (£97 million, 4%) and CPB (£90 million, 7%).

·	Net interest margin (NIM) increased by 20 basis points to 2.17%, driven by deposit repricing initiatives across a number of businesses. The benefit of reduced funding costs outweighed lower yields on assets.

	Half year ended		Quarter ended
	30 June	30 June	30 June	31 March
	2014	2013	2014	2014
Operating expenses	£m	£m	£m	£m

Staff expenses	3,340	3,585	1,693	1,647
Premises and equipment	1,079	1,079	485	594
Other	1,292	1,479	605	687
Restructuring costs	514	271	385	129
Litigation and conduct costs	250	620	250	-

Administrative expenses	6,475	7,034	3,418	3,057
Depreciation and amortisation	551	716	282	269
Write-down of other intangible assets	82	-	-	82

Operating expenses	7,108	7,750	3,700	3,408

Memo item
Adjusted operating expenses (1)	6,344	6,859	3,065	3,279

Performance ratios
Staff costs as a % of total income	33%	34%	34%	33%
Cost:income ratio	71%	73%	75%	67%
Cost:income ratio - adjusted (1)	64%	65%	62%	65%

	Half year ended			Quarter ended
	30 June	30 June		30 June		31 March
	2014	2013		2014		2014
Impairment losses/(recoveries)	£m	£m		£m		£m

Loans	271	2,161		(89)		360
Securities	(2)	(11)		(4)		2

Total impairment losses	269	2,150		(93)		362

Loan impairment losses
- individually assessed	113	1,472		(42)		155
- collectively assessed	348	734		221		127
- latent	(180)	(36)		(258)		78

Customer loans	281	2,170		(79)		360
Bank loans	(10)	(9)		(10)		-

Loan impairment losses/(recoveries)	271	2,161		(89)		360

RBS excluding RCR/Non-Core	290	1,258		36		254
RCR	(19)	n/a		(125)		106
Non-Core	n/a	903		n/a		n/a

RBS	271	2,161		(89)		360

Customer loan impairment charge as a % of
gross loans and advances (1)
RBS excluding RCR/Non-Core	0.2%	0.6%		-		0.3%
RCR	(0.1%)	n/a		(1.7%)		1.2%
Non-Core	n/a	3.9%		n/a		n/a

			30 June		31 March		31 December
			2014		2014		2013

Loan impairment provisions			£22.4bn		£24.2bn		£25.2bn
Risk elements in lending (REIL)			£34.1bn		£37.4bn		£39.4bn
Provision coverage (2)			66%		65%		64%


	Half year ended		Quarter ended
	30 June	30 June	30 June	31 March
	2014	2013	2014	2014
	£m	£m	£m	£m

Operating profit/(loss)⁽¹⁾ before impairment
losses by segment
UK Personal & Business Banking	1,142	944	544	598
Ulster Bank	112	122	56	56

Personal & Business Banking	1,254	1,066	600	654

Commercial Banking	666	695	305	361
Private Banking	145	95	71	74

Commercial & Private Banking	811	790	376	435

Corporate & Institutional Banking	269	26	(70)	339
Central items	79	550	73	6

	2,413	2,432	979	1,434
Citizens Financial Group	525	404	308	217
RCR	(68)	n/a	(62)	(6)
Non-Core	n/a	22	n/a	n/a

RBS operating profit⁽¹⁾ before impairment losses	2,870	2,858	1,225	1,645

Impairment losses/(recoveries) by segment
UK Personal & Business Banking	148	256	60	88
Ulster Bank	57	503	10	47

Personal & Business Banking	205	759	70	135

Commercial Banking	31	282	(9)	40
Private Banking	-	7	1	(1)

Commercial & Private Banking	31	289	(8)	39

Corporate & Institutional Banking	(39)	223	(45)	6

·	Net interest income improved by 4% to £2,784 million principally driven by improved margins and an additional day in the quarter.

·	NIM increased by 10 basis points to 2.22%, driven by lower funding costs, reflecting repricing initiatives across a number of businesses, RCR run-down and a small number of one-off recoveries.

·	Non-interest income declined by £684 million or 13%, principally reflecting a 22% reduction in income from trading activities, in line with CIB's smaller balance sheet and reduced risk profile.

·	A net gain of £170 million ($283 million) was recorded on Citizens' sale of its Illinois branch network.

·	Gains on the disposal of available-for-sale securities in Treasury were down £245 million to £215 million for H1 2014 (Q2 2014 - £15 million; Q1 2014 - £200 million).

·	Operating expenses were £642 million, 8%, lower. Adjusted operating expenses decreased by £515 million or 8% to £6,344 million. Much of the decrease was achieved in CIB through headcount reductions and tight control of discretionary expenditure. Overall operating expense trends are starting to show the benefits of the reshaping of the bank's cost base.

·	Litigation and conducts costs totalled £250 million, with an additional provision of £150 million for Payment Protection Insurance redress recorded in UK PBB and a further £100 million relating to interest rate hedging product redress booked within Commercial Banking and CIB.

·	Restructuring costs increased by £243 million to £514 million, including significant charges in relation to Williams & Glyn and to the restructuring of the property portfolio.

(1)	Excludes reverse repurchase agreements and includes disposals groups.
(2)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

·	Loan impairment losses declined sharply by £1,890 million or 87%, including £180 million of releases of latent provisions (H1 2013 - £36 million). Asset quality continued to improve in the UK and Ireland.

·	Loan impairments in RCR amounted to a net recovery of £19 million.

·	Provision coverage strengthened to 66% compared with 64% at the end of 2013. REIL were £5.3 billion lower and represented 8.3% of gross customer loans, compared with 9.4% at the end of 2013.

·	A net recovery of £89 million was recorded in Q2 2014, compared with losses of £360 million in Q1 2014.

·	Improvement in loan impairment losses was driven by the release of latent provisions in CPB and CIB and by a strong credit performance in RCR (a net recovery of £125 million compared with losses of £106 million in Q1 2014).

·	REIL fell by £3.3 billion. As a percentage of gross loans to customers, REIL declined to 8.3% from 9.0% at 31 March 2014.

(1)	Funded balance sheet represents total assets less derivatives.
(2)	Excludes reverse repurchase agreements and stock borrowing, and includes disposal groups.
(3)	Excludes repurchase agreements and stock lending, and includes disposal groups.
(4)	Net of provisions, including disposal groups and excluding repurchase agreements. Excluding disposal groups, the loan:deposit ratio for the Bank at 30 June 2014 was 96% (31 March 2014 - 97%; 31 December 2013 - 94%).

·	Funded assets decreased by £10 billion to £736 billion principally attributable to lower debt securities in CIB coupled with RCR run-down.

·	Net loans and advances to customers decreased by £5 billion to £387 billion principally driven by RCR run-down and disposals, the impact of stronger sterling on dollar denominated loans, partly offset by good mortgage balance growth in UK PBB.

·	Customer deposits decreased by £3 billion driven by lower balances in Citizens adversely impacted by foreign exchange movements, deposit repricing in Private Banking and lower balances in CIB. This was partly offset by increased deposit balances in UK PBB.

·	Funded assets decreased by £4 billion to £736 billion principally driven by RCR run-down.

·	Net loans and advances to customers decreased by £6 billion principally driven by RCR run-down and the impact of currency movements.

·	Customer deposits fell by £17 billion reflecting a managed run down of surplus liquidity. The customer funding surplus decreased to £14 billion, while the loan:deposit ratio increased by 2 percentage points to 96%.

	End-point CRR basis (1)
	30 June	31 March	31 December
	2014	2014	2013 (2)
Risk asset ratios	%	%	%

CET1 (3)	10.1	9.4	8.6
Tier 1	10.1	9.4	8.6
Total	12.4	11.4	10.6
Total RWAs	£392bn	£414bn	£429bn

(1)	Capital Requirements Regulation (CRR), as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014.
(2)	Estimated end-point CRR basis.
(3)	Common Equity Tier 1.

·	The CRR end-point CET 1 ratio improved to 10.1%⁽¹⁾ from 9.4%, principally driven by retained earnings and continuing reduction in RWAs and expected loss, after charging the initial DAS dividend of £320 million.

·	RWAs decreased by £22 billion principally reflecting the £12 billion fall in CIB driven by risk reductions and £5 billion of run-off and disposals in RCR.

·	The CRR end-point CET 1 ratio improved to 10.1%⁽¹⁾ from 8.6%, principally driven by retained earnings and continuing reduction in RWAs and expected loss.

·	RWAs decreased by £37 billion principally attributable to the risk reductions in CIB and run-off and disposals in RCR.

(1)	Excluding restructuring costs and litigation and conduct costs.
(2)	Risk-weighted assets at 31 December 2013 are on a Basel 2.5 basis.

(1)	Excluding restructuring costs.
(2)	Risk-weighted assets at 31 December 2013 are on a Basel 2.5 basis.

	Half year
	ended	Quarter ended
	30 June	30 June	31 March
	2014	2014	2014
	£m	£m	£m

Income statement
Net interest income/(expense)	11	16	(5)

Net fees and commissions	31	17	14
Income from trading activities	(53)	(69)	16
Other operating income	119	71	48

Non-interest income	97	19	78

Total income	108	35	73

Direct expenses	(121)	(65)	(56)
Indirect expenses	(55)	(32)	(23)

	(176)	(97)	(79)

Loss before impairment losses	(68)	(62)	(6)
Impairment recoveries/(losses)	20	128	(108)

Operating (loss)/profit	(48)	66	(114)

	Half year ended
	30 June 2013
	£m

Income statement
Net interest income	2
Non-interest income	364

Total income	366

Direct expenses	(213)
Indirect expenses	(108)
Restructuring costs	(23)

	(344)

Profit before impairment losses	22
Impairment losses	(831)

Operating loss	(809)