Royal Bank of Scotland Group PLC Interim Management Statement - Part 1 of 7 (1665Q)

TIDMRBS

RNS Number : 1665Q

Royal Bank of Scotland Group PLC

02 November 2012

Highlights

RBS reports a Q3 2012 operating profit(1) of GBP1,047 million

Core RBS Q3 2012 operating profit GBP1,633 million

Year-to-date Core return on tangible equity 10%

Q3 2012 net attributable loss of GBP1,384 million, after GBP1,455 million

pre-tax accounting charge for improved own credit

Core Tier 1 ratio 11.1%, loan:deposit ratio 102%, Non-Core assets down to GBP65 billion

"The RBS restructuring programme continues to make excellent progress as we take the action needed to make the bank safer and stronger. Our funding and capital position has been transformed, we have repaid all emergency loans from the Government and central banks, and we recently exited the Asset Protection Scheme without ever making a claim.

At the same time, we are working to make sure the needs of our customers are central in our decision making. Economic pressures are restraining customer activity levels and as a result banks are running hard to stand still in this environment. Nevertheless, resilient Core bank performance at RBS provides resources for customers and for our cleanup, whilst signposting shareholder value in the future."

Stephen Hester, Group Chief Executive

Highlights

Continued progress in the RBS recovery plan

 
--  Continued momentum in strengthening the Group's balance sheet: 
    --   Funded assets declined again to GBP909 billion, a reduction 
          of GBP68 billion from the start of 2012. 
    --   Core Tier 1 ratio remained strong at 11.1% whilst absorbing 
          uplifts from regulatory changes; 10.4% excluding the capital 
          relief provided by the Asset Protection Scheme (APS). 
    --   The Group's loan:deposit ratio improved further to 102%. 
    --   Usage of short-term wholesale funding has more than halved 
          since the start of 2012 to GBP49 billion. 
--  RBS's credit profile has strengthened markedly in the traded debt markets 
     reflecting the success of RBS restructuring efforts. CDS spreads have 
     halved since their 2011 peak, and secondary bond spreads on five year 
     maturity have narrowed from c.450 basis points to c.100 basis points 
     on a year-to-date basis. This strengthening has resulted in an accounting 
     charge for improved own credit of GBP4,429 million year-to-date, including 
     GBP1,455 million in Q3. 
 

Delivering against major milestones

 
--  Direct Line Group was successfully floated in October 2012, raising 
     GBP911 million from the sale of a 34.7% stake in the company. 
 
--  The exit from the UK Government's APS on 18 October 2012 provides a 
     further demonstration of the Group's progress in rebuilding a strong 
     and stable balance sheet. The exit also marks a major UK fiscal benefit, 
     with the Government's original GBP200 billion contingent exposure now 
     extinguished. 
 
--  While Santander's decision to pull out of its agreed purchase of certain 
     of the Group's UK branch-based businesses was disappointing, much of 
     the work to separate this profitable and well-funded business has already 
     been completed, and RBS has recommenced its efforts to divest the business, 
     which utilises some 2% of the Group's capital resources. 
 

Highlights (continued)

Operating performance stable in Q3 2012

 
--  Q3 2012 Group operating profit improved to GBP1,047 million from GBP650 
     million in Q2 and GBP2 million in Q3 2011, with Core operating profit 
     up 8% from Q2 and 67% from Q3 2011. There was a further reduction in 
     operating losses from Non-Core. 
 
--  Core operating profit was GBP1,633 million, with a solid performance 
     in Markets offset by lower income and a small number of single name 
     impairments in UK Corporate. 
 
--  Core return on tangible equity (ROTE) for the first nine months of 
     2012 was 10%. Markets' return on equity (ROE) over this period was 
     12.0%. 
 
--  Group net interest margin was stable at 1.94%, with Core Retail & Commercial 
     NIM also steady at 2.92%. 
 
--  Group expenses were reduced by 6% versus prior quarter to GBP3,639 
     million, with Core R&C down 3% to GBP2,389 million and Markets down 
     5% to GBP753 million. The Core cost:income ratio improved to 59%, with 
     UK Retail now at 51%. 
 
--  Staff costs were 5% lower than in Q2 at GBP1,943 million, with headcount 
     down by 9,900, 7%, from a year earlier. 
 
--  Group impairment losses totalled GBP1,176 million in Q3 2012, down 
     GBP159 million from the prior quarter. Non-Core impairments, mostly 
     in real estate finance, were GBP183 million lower. Total Ulster Bank 
     (Core and Non-Core) impairments were GBP493 million, compared with 
     GBP514 million in Q2 2012. 
 

Continuing commitment to customers in difficult times

 
--  Maintaining support for the Group's core UK retail and commercial customers 
     is a key priority. RBS has supported over 350,000 SMEs with GBP28.6 
     billion of lending, including overdrafts, so far this year. RBS has 
     also helped more than 43,000 customers buy their home, including 14,000 
     first time buyers, with GBP11 billion of gross new mortgage lending 
     in the first nine months of 2012. 
 
--  RBS continues to work hard to remedy a number of past issues. Q3 2012 
     results include an additional GBP400 million provision in relation 
     to Payment Protection Insurance, bringing the cumulative charge to 
     GBP1.7 billion. 
 
--  The Group is determined to continue to strengthen its management disciplines 
     and culture in order to ensure that serving customers well becomes 
     more deeply embedded as the Bank's core purpose. Key points of focus 
     are: 
    --   Better performance against Customer Charter targets. 
    --   Widening the scope of training programmes for front-line 
          staff. 
    --   Overhauling service offerings to align them more closely 
          to customers' needs. 
    --   Realigning incentive structures to ensure they take proper 
          account of customer interest. 
 

Note:

 
(1)  Operating profit before tax, own credit adjustments, Asset 
      Protection Scheme, Payment Protection Insurance costs, amortisation 
      of purchased intangible assets, integration and restructuring 
      costs, loss on redemption of own debt, strategic disposals 
      and RFS Holdings minority interest ('operating profit'). 
      Statutory operating loss before tax was GBP2,763 million 
      for the nine months ended 30 September 2012. 
 

Key financial data

 
                                             Quarter ended                 Nine months ended 
                                  =================================== 
                                  30 September  30 June  30 September  30 September  30 September 
                                          2012     2012          2011          2012          2011 
                                          GBPm     GBPm          GBPm          GBPm          GBPm 
================================  ============  =======  ============  ============  ============ 
 
Core 
Total income (1)                         6,408    6,437         6,028        19,707        20,522 
Operating expenses (2)                 (3,427)  (3,615)       (3,498)      (10,763)      (10,853) 
Insurance net claims                     (596)    (576)         (696)       (1,821)       (2,183) 
Operating profit before 
 impairment losses (3)                   2,385    2,246         1,834         7,123         7,486 
Impairment losses (4)                    (752)    (728)         (854)       (2,305)       (2,579) 
Core operating profit 
 (3)                                     1,633    1,518           980         4,818         4,907 
 
Non-Core operating loss 
 (3)                                     (586)    (868)         (978)       (1,937)       (2,939) 
 
Group operating profit 
 (3)                                     1,047      650             2         2,881         1,968 
 
Own credit adjustments                 (1,455)    (518)         2,622       (4,429)         2,386 
Asset Protection Scheme                      1      (2)          (60)          (44)         (697) 
Payment Protection Insurance 
 costs                                   (400)    (135)             -         (660)         (850) 
Sovereign debt impairment                    -        -         (142)             -         (875) 
Other items (5)                          (451)     (96)         (418)         (511)         (722) 
 
(Loss)/profit before tax               (1,258)    (101)         2,004       (2,763)         1,210 
 
Preference share dividends                (98)     (76)             -         (174)             - 
 
(Loss)/profit attributable 
 to ordinary and B shareholders        (1,384)    (466)         1,226       (3,374)         (199) 
================================  ============  =======  ============  ============  ============ 
 
 
                                        30 September   30 June  31 December 
                                                2012      2012         2011 
======================================  ============  ========  =========== 
 
Capital and balance sheet 
Funded balance sheet (6)                    GBP909bn  GBP929bn     GBP977bn 
Loan:deposit ratio (Group) (7)                  102%      104%         108% 
Loan:deposit ratio (Core) (7)                    91%       92%          94% 
Core Tier 1 ratio                              11.1%     11.1%        10.6% 
Tangible net asset value per ordinary 
 and B share (8)                                476p      489p         501p 
======================================  ============  ========  =========== 
 

Notes:

 
(1)  Excluding own credit adjustments, Asset Protection Scheme, (loss)/gain 
      on redemption of own debt, strategic disposals and RFS Holdings minority 
      interest. 
(2)  Excluding Payment Protection Insurance costs, amortisation of purchased 
      intangible assets, integration and restructuring costs, bonus tax and 
      RFS Holdings minority interest. 
(3)  Operating profit before tax, own credit adjustments, Asset Protection 
      Scheme, Payment Protection Insurance costs, sovereign debt impairment 
      and other items (see note 5 below). 
(4)  Excluding sovereign debt impairment and related interest rate hedge 
      adjustments. 
(5)  Other items comprise amortisation of purchased intangible assets, integration 
      and restructuring costs, (loss)/gain on redemption of own debt, strategic 
      disposals, bonus tax, interest rate hedge adjustments on impaired available-for-sale 
      sovereign debt and RFS Holdings minority interest. Refer to page 17 
      of the main announcement for further details. 
(6)  Funded balance sheet is total assets less derivatives. 
(7)  Net of provisions, including disposal groups and excluding repurchase 
      agreements. 
(8)  Tangible net asset value per ordinary and B share is total tangible 
      equity divided by the number of ordinary shares in issue and the effect 
      of convertible B shares. Data for 2011 have been adjusted for the sub-division 
      and one-for-ten consolidation of ordinary shares, which took effect 
      in June 2012. 
 

Comment

Stephen Hester, Group Chief Executive, commented:

The extraordinary challenges which RBS faced following the financial crisis are being worked through successfully. The five year restructuring Plan is now in its later stages with important work still to do, including an emphasis on dealing with reputational issues now that the Bank's safety and soundness has advanced so well. We passed two other important milestones in October with our exit from the APS and a very encouraging flotation of Direct Line Group and are within touching distance of matching every GBP1 of lending with a GBP1 of customer deposits.

Beneath these headlines our people have been working hard at supporting our customers and rebuilding the capabilities of the core business, the future RBS that is emerging from our work. In doing this we face the same strong economic and regulatory challenges as other banks and are having to work very hard to stand still in the face of these challenges. But underlying performance has already improved enough to be generally comparable to peers. We aspire to achieve much more; in short, to be running a really good RBS.

At the heart of any truly successful company is the DNA that clearly sets the company's purpose as to serve customers well and understands that good performance for shareholders and career prospects for staff come from achieving that purpose. The banking industry, including RBS, too often came to be seen as reversing that sequence, with short-term gain put ahead of long-term excellence for customers. Getting this balance right is not done through splashy announcements or sweeping actions. Rather it is a multi-faceted journey involving all our people, the tools and management direction they work with every day. We are unambiguously clear at RBS about the importance of making this journey. We have already made much progress, though clearly not enough, and our reputation will take time and facts to recover from past events which are still being accounted for. Nevertheless, this work is going with the grain at RBS. Our people want to serve customers well. Most of the time we succeed in doing precisely that. And we all understand the need to reject failings and keep improving for customers and for the institution's future success.

In tough economic times there is understandable debate about what economies need in order to achieve growth. In this debate we can be clear and unambiguous: RBS has the funding, capital and human resources to support our customers and meet their needs as the economy starts to grow again; and we have repaid the liquidity and credit support that was needed from government at the start of our restructuring journey. We have many challenges left, and much to improve. And the world still has uncertainties and risks of setback. The need to avoid repeating past credit mistakes and to make sustainable returns on a more conservative business model are also crucial aspects we need to balance in the face of many pressures.

So the goals that have been our abiding focus since 2009 are unchanged, though they will continue to be applied pragmatically as external realities evolve. They are founded in a solid and coherent strategy and a track record of focused implementation. Through these tools we seek:

   -     to serve customers well, and better 
   -     to operate with safety and soundness for all who rely on us 

- to rebuild sustainable value for all shareholders, and thereby to facilitate the sale of taxpayers' shareholding in the Bank.

Highlights

Third quarter results summary

The Royal Bank of Scotland Group (RBS) reported a Group operating profit of GBP1,047 million for the third quarter of 2012, up GBP397 million from Q2 2012 and up GBP1,045 million compared with Q3 2011. The result reflected a steady improvement in the Core bank's operating results, combined with a further reduction in operating losses from the Non-Core division.

Core operating profit totalled GBP1,633 million, up 8% from Q2 2012 and 67% from Q3 2011. For the first nine months of 2012 Core operating profit totalled GBP4,818 million, in line with the same period of 2011, delivering a return on tangible equity of 10.0%. Core income in Q3 was flat versus Q2 at GBP6,408 million, with expenses down 5% at GBP3,427 million and impairments 3% higher at GBP752 million.

 
--  Retail & Commercial (R&C) operating profits were down 10% from Q2 due 
     to a deterioration in UK Corporate, largely reflecting lower income 
     and a small number of single name impairments, partially offset by 
     good performances in UK Retail and International Banking driven primarily 
     by sound cost control. R&C return on equity in the first nine months 
     of 2012 was 9.6%, or 14.0% excluding Ulster Bank. 
 
--  Markets saw a 2% decline in revenues relative to Q2 due to continued 
     uncertainty in the Eurozone along with subdued client activity. However, 
     the ongoing focus on costs generated an 18% increase in operating profit 
     to GBP295 million. Year to date ROE is 12.0%. 
 
--  Direct Line Group Q3 2012 operating profit of GBP109 million was down 
     GBP26 million, 19% from Q2, as a stable technical result was more than 
     offset by lower investment returns. Year to date ROTE is 10.3%. 
 

Non-Core operating loss decreased by GBP282 million versus Q2 to GBP586 million as favourable market conditions led to improvements in asset prices and tightening of credit spreads over the quarter. Non-Core impairment losses fell by GBP183 million during the quarter reflecting the non-repeat of a significant provision in the Project Finance portfolio in Q2 2012.

Non-operating items and statutory results

A further provision of GBP400 million was recorded for Payment Protection Insurance claims, reflecting the Group's current experience. This brings the cumulative charge taken to GBP1.7 billion, of which GBP1.0 billion (c.60%) in redress had been paid by 30 September 2012. Integration and restructuring costs totalled GBP257 million in Q3, compared with GBP213 million in Q2. A loss of GBP123 million was recorded on the redemption of GBP4.4 billion of debt securities.

RBS's credit spreads continued to narrow in debt markets, with its five year credit default swap spread tightening over the quarter by 57 basis points, reflecting improved investor perceptions of the Group's strength. This resulted in a Q3 own credit charge of GBP1,455 million, compared with GBP518 million in the prior quarter. Excluding own credit adjustments, Group Q3 2012 pre-tax profit was GBP197 million and attributable loss GBP268 million.

Statutory pre-tax loss in Q3 was GBP1,258 million and statutory attributable loss was GBP1,384 million. Tangible net asset value per share fell by 3% to 476 pence reflecting the own credit adjustment.

Highlights (continued)

Income

Core income in Q3 2012 totalled GBP6,408 million, in line with Q2 2012 and up 6% from the prior year period. Core R&C net interest income was 1% lower than Q2 2012 at GBP2,786 million, with continuing pressure on deposit margins in the core UK Retail and Corporate franchises and in International Banking's Cash Management business. Non-interest income in R&C was down 6% at GBP1,414 million, partly reflecting the non-recurrence of a GBP47 million gain recorded in Q2 on the sale of Visa B shares as well as a decline in the fair value of a property-related investment in UK Corporate of GBP25 million. Markets non-interest income totalled GBP1,031 million, in line with Q2 and up 128% compared with Q3 2011. Realised bond gains increased by GBP325 million compared with Q2 as the Group re-positioned its liquidity portfolio, offset by higher unallocated volatility costs in Group Treasury of GBP95 million.

Efficiency

Core expenses were down 5% in the quarter to GBP3,427 million, with R&C reducing expenses by 3% to GBP2,389 million and Markets delivering a 5% reduction to GBP753 million. Provisions totalling GBP125 million recorded in Group Centre included an additional GBP50 million to cover customer redress arising from the technology incident that affected the Group's systems in June.

Core staff expenses were 4% lower at GBP1,874 million, with headcount down by 7,900 over the past 12 months to 137,000, principally in Markets and International Banking. The Core compensation ratio year-to-date was 30%, compared with 31% in the prior year, with the Markets compensation ratio 34%, compared with 41% in the prior year.

Core cost:income ratio in Q3 improved to 59% from 62% in Q2 and 66% in Q3 2011. R&C cost:income ratio was stable at 57%, with UK Retail improving to 51%.

Risk

Group impairment losses totalled GBP1,176 million in Q3 2012, down 12% from the prior quarter and 23% from Q3 2011.

Core impairments totalled GBP752 million, up 3% from Q2 2012 but 12% lower than Q3 2011, with UK Retail and US R&C losses stable but UK Corporate impairments up GBP66 million, largely reflecting a handful of single corporate cases. Non-Core impairments, mostly in real estate finance, were GBP183 million lower than in Q2 2012. Total Ulster Bank (Core and Non-Core) impairments were GBP493 million, compared with GBP514 million in Q2 2012.

Core annualised loan impairments represented 0.7% of loans and advances to customers, in line with Q2. Group risk elements in lending totalled GBP40.1 billion at 30 September 2012, compared with GBP39.7 billion at 30 June 2012 and GBP40.8 billion at 31 December 2011, with provision coverage stable at 51%.

Highlights (continued)

Balance sheet

RBS maintained good momentum in the restructuring and reduction of its balance sheet, with Group funded assets down GBP20 billion in the quarter to GBP909 billion. Non-Core funded assets fell to GBP65 billion, a reduction of GBP7 billion during the quarter and an overall reduction of 75% since its establishment. Non-Core remains on target to exit approximately 85% of its original portfolio by the end of 2013.

Since the end of 2008 the Group has reduced its funded balance sheet by GBP318 billion, with total assets reduced by GBP841 billion.

Liquidity and funding

RBS has achieved a largely deposit-funded balance sheet, with further reductions in the use of short-term wholesale funding and the maintenance of a very strong liquidity buffer. With substantial excess liquidity available to it during the quarter, the Group took advantage of improved market conditions to repurchase GBP4.4 billion of more expensive outstanding senior unsecured wholesale debt.

RBS's credit profile has strengthened markedly in traded markets, reflecting the significant improvement in the robustness and resilience of its balance sheet, as well as the substantial reduction in the Group's wholesale funding requirements and a more general improvement in financial market conditions. The Group's credit default swap spreads tightened by 121 basis points in the first nine months of 2012, with 57 basis points of the improvement coming in Q3. Secondary market prices for RBS bonds have tightened even further, with spreads on a benchmark five year issue coming in from c.450 basis points at the start to 2012 to c.100 basis points at the end of Q3.

The Group loan:deposit ratio strengthened further to 102%, compared with a worst point of 154% in October 2008. The Core loan:deposit ratio was 91%, with customer deposits stable at GBP431 billion.

The Group continued to reduce its usage of short-term wholesale funding, which fell by GBP13.8 billion during the quarter to GBP49 billion at 30 September 2012, enabling the Group to reduce the costs associated with its substantial liquid asset portfolio. Short-term wholesale funding was covered three times by the Group's liquidity buffer, which totalled GBP147 billion.

Capital

The Group's Core Tier 1 ratio remained strong at 11.1%, or 10.4% excluding the capital relief provided by the UK Government's Asset Protection Scheme, which the Group exited with effect from 18 October 2012. APS capital benefit, which amounted to 160 basis points at the end of 2009, had diminished in line with the reduction in the portfolio of covered assets, which had fallen from GBP282 billion at inception to GBP104 billion at the point of exit.

Risk-weighted assets (before APS relief) declined by GBP6.6 billion, with a substantial reduction in Non-Core offsetting the effect of regulatory uplifts in International Banking and in UK Corporate. Non-Core's RWAs fell by GBP11 billion to GBP72 billion, benefiting from lower market risk and the active reduction and restructuring of derivative exposures.

The Group's Tier 1 leverage ratio was 15.4x.

Highlights (continued)

Disposals

RBS completed the successful initial public offering of Direct Line Group in October 2012, representing another important milestone in RBS's restructuring plan.

RBS Group sold 520.8 million ordinary shares in Direct Line Group, representing 34.7% of the total share capital, generating gross proceeds of GBP911 million. This was consistent with the previously communicated plan to divest control of Direct Line Group in stages with control ceded by the end of 2013, and complete disposal by the end of 2014, in line with the European Commission's state aid requirements. The disposals of Global Merchant Services and RBS Sempra Commodities JV businesses have already been completed.

On 12 October 2012 RBS announced that it had received notification of Santander's decision to pull out of its agreed purchase of certain of the Group's UK branch-based businesses. While the decision was disappointing, much of the work to separate this profitable and well-funded business has already been completed, and RBS has recommenced its effort to divest the business and fulfil its obligations to the European Commission.

Core UK franchise

Banks cannot serve customers well without operating from a position of balance sheet safety and soundness, and that has been a key priority for RBS in the first three and a half years of its 2009-13 restructuring plan. The Group's significant achievements in this area mean that even more attention can now be focused on those elements that will make RBS a healthy and competitive bank over the long term, rather than merely ensuring survival. These elements are based on ensuring that the bank is built, first and foremost, around serving customers well and sustainably.

This focus on serving customers better has been an integral component of the Group's restructuring plan, and some major changes have already been implemented, notwithstanding the worsening economic environment:

 
--  The Retail Customer Charter was launched in 2010 and has been refreshed 
     annually since then. The focus of "Helpful Banking" has remained integral, 
     with intentionally demanding and stretching targets derived from what 
     customers said they valued the most. 
 
--  New principles for incentives within UK Retail have been designed to 
     promote superior customer service and ensure customer requirements 
     explicitly drive the product sales and offerings. This is a move away 
     from the sales-based approach of the past. 
 
--  To reach the standards of professionalism and expertise that customers 
     expect, RBS has piloted an internal retraining and accreditation programme 
     for relationship managers in Business & Commercial Banking. 
 

Highlights (continued)

Core UK franchise (continued)

These actions represent only a starting point, and while the changes will have increasing visibility as they bed in over the coming months and years there is a lot more still to do to persuade customers that the organisation has changed and that it puts their interests first. A few of the main areas management will be focusing on next are:

 
--  Better performance against Customer Charter targets. Since launch, 
     the bar has been raised on some of the Retail targets but performance 
     has fallen short on some. The use of charters will be extended into 
     other divisions and they will be made even more demanding. 
 
--  Widening the scope of internal training programmes for front-line staff. 
     A programme similar to the Business & Commercial course is now running 
     in the Wealth business and this area will continue to attract a great 
     deal of focus. 
 
--  An overhaul of service offerings across the Group's retail, corporate 
     and markets divisions to ensure they are explicitly customer-driven 
     and based on the needs and priorities of the retail, corporate and 
     institutional customers that RBS serves. 
 

RBS has maintained its lending support to UK businesses and homebuyers through difficult economic times. RBS has supported government schemes, such as the Funding for Lending Scheme (FLS), with internal initiatives to ensure that credit remained appropriately available to its customers.

RBS's performance in the mortgage market remains strong and well in excess of its historic market share. Gross new mortgage lending totalled GBP11.4 billion year-to-date, with GBP3.7 billion in Q3 2012, holding flat from Q2. Of this, 16% was to first-time buyers and Q3 gross new lending to these customers increased by 5% on the previous quarter.

Business demand for credit has remained weak, with investment intentions constrained by uncertainty over future UK growth prospects. This led to a drop of 25% in SME loan applications in Q3, compared with Q3 2011, with activity further muted by the effect of the Olympic Games. RBS continues to approve over 90% of all SME loan and overdraft applications, with over 31,000 small businesses approved for credit during the quarter.

The overall flow of business lending remained strong, with GBP62.9 billion of gross new lending to UK businesses in the first nine months of 2012, of which GBP28.6 billion was to SME customers. In Q3 2012, gross new lending increased 3% compared with Q2, which was impacted by relationship managers efforts being diverted from lending due to the Group technology incident. Loan repayments also remained strong, with many customers continuing to focus on deleveraging. SME overdraft utilisation remained below 50% in Q3, and SMEs chose to retain strong cash balances, with Business & Commercial customer deposits increasing by GBP500 million during Q3.

Highlights (continued)

Core UK franchise (continued)

Overall SME net drawn balances, excluding real estate, held steady quarter-on-quarter, with the strongest growth coming in asset finance, where balances have increased each quarter in 2012, up 6% year-to-date. Asset finance has proved particularly attractive to customers in current economic circumstances because of its cash flow benefits, with products such as hire purchase, asset-secured debt and leasing providing flexible and committed lines of funding tailored to each business's needs. RBS Invoice Finance has also seen good growth in its asset-based lending business, with net advances up 6%, compared with Q3 2011, to GBP3.2 billion.

The Funding for Lending Scheme (FLS) opened for drawings in August and RBS was quick to launch FLS-related offerings to homebuyers and businesses. RBS's own funding of UK lending is not a constraint. However, FLS does provide an opportunity to offer interest rate benefits to customers. Net figures will also give insight to the price sensitivity of lending demand at these interest rate levels relative to other business confidence issues. Over GBP500 million of mortgages had been offered under the scheme by the end of September 2012, and c.14% of applications received by UK Retail in September related to the new products launched under the scheme. UK Corporate reduced the price of SME loans and removed arrangement fees on these offerings. Over 4,300 customers benefited from this offer by the end of Q3 2012, with around GBP600 million of funds allocated. Given normal lags between approval and drawdown, these advances are not expected to feed into drawn balances until later in the year. Much of the SME lending to date is substituting for existing higher cost borrowings.

RBS has made further good progress in running down high risk and non-strategic exposures in its Non-Core division and in reducing its excessive exposures to the real estate and construction sectors. Non-Core balances are included within the scope of FLS, and FLS-eligible Non-Core exposures were reduced by GBP750 million during Q3. Within the Core UK Corporate division, property exposures also continued their managed and necessary decline, falling by GBP0.9 billion during the quarter and by GBP2.2 billion year-to-date. At a Group level, excluding Non-Core and commercial real estate lending, total RBS core FLS-eligible balances increased by around GBP300 million to 30 September 2012, while declining when these risk concentrations are included. The faster-growing Lombard and RBS Invoice Finance businesses are excluded from FLS statistics.

Highlights (continued)

Strategic Plan

 
                                                     Worst                           Medium- 
Key Measures                                         point   Q2 2012   Q3 2012   term target 
=============================================  ===========  ========  ========  ============ 
 
Value drivers                                                   Core      Core          Core 
 
    *    Return on equity (1)                     (31%)(2)      9.3%      9.7%          >12% 
 
    *    Cost:income ratio (3)                      97%(4)       62%       59%          <55% 
 
Risk measures                                                  Group     Group         Group 
 
    *    Core Tier 1 ratio                           4%(5)     11.1%     11.1%          >10% 
 
    *    Loan:deposit ratio                        154%(6)      104%      102%        c.100% 
 
    *    Short-term wholesale funding (STWF)   GBP297bn(7)   GBP62bn   GBP49bn  <10% TPAs(8) 
 
    *    Liquidity portfolio (9)                GBP90bn(7)  GBP156bn  GBP147bn    >1.5x STWF 
 
    *    Leverage ratio (10)                     28.7x(11)     15.6x     15.4x          <18x 
=============================================  ===========  ========  ========  ============ 
 

Notes:

 
(1) Based on indicative Core attributable profit taxed at standard rates 
 and Core average tangible equity per the average balance sheet (c.85% of 
 Group tangible equity based on RWAs at 30 September 2012); (2) Group return 
 on tangible equity for 2008; (3) Cost:income ratio net of insurance claims; 
 (4) Year ended 31 December 2008; (5) As at 1 January 2008; (6) As at October 
 2008; (7) As at December 2008; (8) Third party assets (TPAs); (9) Eligible 
 assets held for contingent liquidity purposes including cash, Government 
 issued securities and other eligible securities with central banks; (10) 
 Funded tangible assets divided by total Tier 1 capital; (11) As at June 
 2008. 
 

Regulatory investigations and reviews

The Group continues to cooperate fully with a number of regulatory investigations and reviews as described in the note on Litigation, investigations and reviews on page 87 of the main announcement. In some of these investigations the Group believes that the likely outcome is that it will incur financial penalties or provide redress, and these may be significant.

Outlook

The external economic, market and regulatory challenges we face are likely to continue for the rest of this year and into 2013. We will continue to focus on maintaining a strong balance sheet and capital position, as well as judicious management of our expense base.

We anticipate trends in our Core Retail & Commercial businesses to be generally consistent with the third quarter, although our Markets business is likely to exhibit normal seasonal variations in Q4. The Group's net interest margin over the second half is expected to be broadly stable compared with the first half of the year.

Non-Core continues to make good progress, achieving asset reduction targets with losses in line with our expectations. We expect to further reduce assets in Q4, although the Q4 loss is likely to be higher than in Q3. The 'below the line' itemised charges are likely to remain elevated during Q4, though the own credit adjustment should be materially lower.

Having made strong progress, RBS targets most of the restructuring actions from its 2009 strategic plan to be substantially completed in the next 15-18 months, with the Group thereby positioned to be a cleaner and better performing bank in future years.

Contacts

 
For analyst enquiries: 
 
Richard O'Connor         Head of Investor Relations   [phone] 
 
 
For media enquiries: 
 
Group Media Centre                                    [phone] 
====================================================  ==================== 
 

Results presentation

The Royal Bank of Scotland Group plc will be hosting a conference call and live audio webcast following the release of the results for the quarter ended 30 September 2012.

The details are as follows:

 
Date:             Friday 2 November 2012 
Time:             9.00 am UK time 
Webcast:          www.rbs.com/results 
Dial in details:  International - [phone] 
                   UK Free Call - 0800 694 8082 
                   US Toll Free - 1 866 966 8024 
 

Slides

Slides accompanying this document will be available on www.rbs.com/results

Financial supplement

A financial supplement will be available on www.rbs.com/results This supplement shows published income and balance sheet financial information by quarter for the last nine quarters to assist analysts for modelling purposes.

This information is provided by RNS

The company news service from the London Stock Exchange

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