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Natwest Group PLC

Annual Report • Aug 4, 2017

4644_iss_2017-08-04_2d83b2f2-060c-447c-9cf0-d685c08f6f66.pdf

Annual Report

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Interim Results 2017

The Royal Bank of Scotland Group plc

Interim Results 2017

Contents Page
Introduction 2
Highlights 3
Summary consolidated results 11
Analysis of results 13
Segment performance 20
Statutory results
Condensed consolidated income statement (unaudited) 53
Condensed consolidated statement of comprehensive income (unaudited) 54
Condensed consolidated balance sheet (unaudited) 55
Condensed consolidated statement of changes in equity (unaudited) 56
Condensed consolidated cash flow (unaudited) 58
Notes 59
Independent review report to The Royal Bank of Scotland Group plc 93
Risk factors 94
Forward-looking statements 97
Statement of directors' responsibilities 99
Additional information
Share information 100
Financial calendar 100
Appendix 1 – Capital and risk management
Appendix 2 – Segmental income statement reconciliations

Contacts

Analyst enquiries: Matt Waymark Investor Relations +44 (0) 207 672 1758
Media enquiries: RBS Press Office +44 (0) 131 523 4205
Analyst and investor presentation Fixed income Web cast and dial in details
Date: Friday 4 August 2017 Friday 4 August 2017 www.rbs.com/results
Time: 9:30 am UK time 2:30 pm UK time International – +44 1452 568 172
Conference ID: 59333436 59285614 UK Free Call – 0800 694 8082
US Toll Free – 1 866 966 8024

Available on www.rbs.com/results

  • Interim Results 2017 and background slides.
  • A financial supplement containing income statement, balance sheet and segment performance information for the nine quarters ended 30 June 2017.
  • Pillar 3 supplement at 30 June 2017.

In this document, 'RBSG plc' or the 'parent company' refers to The Royal Bank of Scotland Group plc, and 'RBS' or the 'Group' refers to RBSG plc and its subsidiaries.

Financial information contained in this document does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 ('the Act'). The statutory accounts for the year ended 31 December 2016 have been filed with the Registrar of Companies. The report of the auditor on those statutory accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Act.

In this document Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity, which continues to be reported as a separate operating segment.

Condensed consolidated financial statements

The unaudited condensed consolidated financial statements for the half year ended 30 June 2017 comprise the following sections of this document:

  • Financial information in the segmental performance section on pages 20 to 52 except for risk-weighted assets (RWAs), RWAs after capital deductions (RWAes), the related metrics, return on equity (ROE), adjusted return on equity and employee numbers.
  • Statutory results on pages 53 to 92 comprising the condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity, condensed consolidated cash flow statement and the related Notes 1 to 16.
  • Appendix 1 Capital and risk management except for those items indicated as not within the scope of the independent review.

The above sections are within the scope of the independent review performed by Ernst & Young LLP (EY). Refer to the Independent review report to The Royal Bank of Scotland Group plc on page 93 for further information.

Key operating indicators

As described in Note 1 on page 59, RBS prepares its financial statements in accordance with IFRS as issued by the IASB which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP financial measures. These measures exclude certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These measures include:

  • 'Adjusted' measures of financial performance, principally operating performance before: own credit adjustments; gain or loss on redemption of own debt; strategic disposals; restructuring costs; litigation and conduct costs and write down of goodwill (refer to Appendix 2 for reconciliations of the statutory to adjusted basis);
  • Performance, funding and credit metrics such as 'return on tangible equity', 'adjusted return on tangible equity' and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives (funded assets), net interest margin (NIM) adjusted for items designated at fair value through profit or loss (nonstatutory NIM), cost:income ratio, loan:deposit ratio and REIL/impairment provision ratios. These are internal metrics used to measure business performance;
  • Personal & Business Banking (PBB) franchise results, combining the reportable segments of UK Personal & Business Banking (UK PBB) and Ulster Bank RoI, Commercial & Private Banking (CPB) franchise results, combining the reportable segments of Commercial Banking, Private Banking and RBS International (RBSI); and
  • Cost savings progress and 2017 target calculated using operating expenses excluding litigation and conduct costs, restructuring costs, write down of goodwill and the VAT recoveries.

RBS reported an operating profit before tax of £1,951 million for H1 2017 and an attributable profit(1) of £939 million. An operating profit before tax of £1,238 million and an attributable profit of £680 million were reported in Q2 2017.

Across our Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and NatWest Markets (NWM) businesses, RBS reported an adjusted operating profit(2) of £2,678 million, an increase of £608 million, or 29%, compared with H1 2016. Adjusted return on equity across PBB, CPB and NatWest Markets was 14.1% compared with 10.9% in H1 2016.

Common Equity Tier 1 ratio increased by 70 basis points in the quarter to 14.8%, and remains ahead of our 13.0% target.

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
Key metrics and ratios 2017 2016 2017 2017 2016
Attributable profit/(loss) £939m (£2,045m) £680m £259m (£1,077m)
Operating profit/(loss) £1,951m (£274m) £1,238m £713m (£695m)
Operating profit - adjusted (2) £3,061m £1,156m £1,690m £1,371m £716m
Net interest margin 2.18% 2.18% 2.13% 2.24% 2.21%
Cost:income ratio (3) 69.8% 97.7% 64.4% 76.1% 117.2%
Cost:income ratio - adjusted (3,4,5) 53.1% 71.4% 50.7% 55.8% 66.6%
Earnings/(loss) per share
- basic 7.9p (17.6p) 5.7p 2.2p (9.3p)
- basic fully diluted 7.9p (17.6p) 5.7p 2.2p (9.3p)
- adjusted (4,5) 16.4p (5.5p) 9.2p 7.1p 2.6p
- adjusted fully diluted(4,5,8) 16.3p (5.5p) 9.2p 7.1p 2.6p
Return on tangible equity (6,7) 5.6% (10.3%) 8.0% 3.1% (11.0%)
Return on tangible equity - adjusted (4,5,7) 11.5% (3.2%) 12.9% 9.7% 3.2%
Average tangible equity (6) £33,705m £39,870m £33,974m £33,357m £39,283m
Average number of ordinary shares
outstanding during the period (millions) 11,817 11,639 11,841 11,793 11,673
Average number of ordinary shares
outstanding during the period - fully diluted (millions) (8) 11,897 11,680 11,923 11,872 11,714
PBB, CPB & NatWest Markets
Total income - adjusted (4) £6,297m £5,801m £3,143m £3,154m £2,986m
Operating profit - adjusted (2) £2,678m £2,070m £1,352m £1,326m £1,047m
Return on tangible equity - adjusted (4,5,6) 14.1% 10.9% 14.3% 13.8% 11.0%
30 June 31 March 31 December
Balance sheet related key metrics and ratios 2017 2017 2016
Tangible net asset value (TNAV) per ordinary share (7) 300p 297p 296p
Tangible net asset value (TNAV) per ordinary share - fully diluted (7) 298p 295p 294p
Liquidity coverage ratio (LCR) (9,10) 145% 129% 123%
Liquidity portfolio £178bn £160bn £164bn
Net stable funding ratio (NSFR) (11) 123% 120% 121%
Loan:deposit ratio (12,13) 91% 93% 91%
Short-term wholesale funding (12,14) £18bn £16bn £14bn
Wholesale funding (12,14) £70bn £67bn £59bn
Common Equity Tier 1 (CET1) ratio 14.8% 14.1% 13.4%
Risk-weighted assets (RWAs) £215.4bn £221.7bn £228.2bn

Tangible equity (7) £35,682m £35,186m £34,982m Number of ordinary shares in issue (millions) (17) 11,876 11,842 11,823

Number of ordinary shares in issue (millions) - fully diluted (8,17) 11,956 11,925 11,906

Notes:

(1) Attributable to ordinary shareholders. (2) Operating profit before tax excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring, litigation and conduct costs. (3) Operating lease depreciation included in income (H1 2017 - £72 million; Q2 2017 - £36 million, H1 2016 - £76 million; Q1 2017 - £36 million and Q2 2016 - £38 million). (4) Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals. (5) Excluding restructuring costs and litigation and conduct costs. (6) Calculated using profit/(loss) for the period attributable to ordinary shareholders. (7) Tangible equity is equity attributable to ordinary shareholders less intangible assets. (8) Includes the effect of dilutive share options and convertible securities. Dilutive shares on an average basis for H1 2017 were 80 million shares (Q2 2017 – 81 million; H1

CRR leverage ratio (15) 5.1% 5.0% 5.1% UK leverage ratio (16) 5.8% 5.7% 5.6%

2016 – 41 million; Q1 2017 - 79 million; Q2 2016 – 41 million) and as at 30 June 2017 were 80 million (31 March 2017 – 83 million; 31 December 2016 – 83 million). (9) On 1 October 2015 the LCR became the Prudential Regulation Authority's (PRA) primary regulatory liquidity standard; UK banks are required to meet a minimum standard of 90% from 1 January 2017, rising to 100% by 1 January 2018. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretation of the

EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other institutions. (10) The LCR of 145% at 30 June 2017 excludes the impact of the litigation settlement with the FHFA in respect of claims relating to RBS issuance and underwriting of RMBS

in the US, as announced on 12 July 2017. The estimated impact of the settlement on the LCR is a 6% reduction to 139%. (11) NSFR for all periods have been calculated using RBS's current interpretations of the revised BCBS guidance on NSFR issued in late 2014. Therefore, reported NSFR will change over time with regulatory developments. Due to differences in interpretation, RBS's ratio may not be comparable with those of other financial institutions.

(12) Excludes repurchase agreements and stock lending. (13) Includes disposal groups. (14) Excludes derivative collateral. (15) Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.

(16) Based on end-point CRR Tier 1 capital and UK leverage exposures reflecting the post EU referendum measures announced by the Bank of England in the third quarter of

  1. (17) Includes 17 million treasury shares (31 March 2017 – 28 million; 31 December 2016 - 39 million).

Key points

In H1 2017, RBS reported an attributable profit of £939 million, 5.6% return on tangible equity, and increased adjusted operating profit across its core PBB, CPB and NatWest Markets businesses by 29.4% compared with H1 2016. The CET1 ratio remains ahead of target at 14.8%, a 140 basis points increase in the first half. In addition, RBS has made good progress against its stated ambition for the year, as set out in the full year result's announcement in February 2017. Across our core businesses we committed to grow income, cut costs and use less capital, and have made substantive progress against each:

  • Core adjusted income increased by £496 million, or 8.6%, compared with H1 2016. NatWest Markets income increased by 43.9% to £980 million, navigating markets well compared to a more difficult H1 2016. Across PBB and CPB income increased by 3.8% supported by increased lending;
  • Core adjusted operating expenses reduced by £151 million, or 4.2%, compared with H1 2016. This represents 31% of our overall cost reduction in H1 2017 and we retain our expectation that around half of the full year reduction will be across the core businesses. Cost:income ratio across the core businesses improved from 61.6% to 54.3%, with operating JAWS of 12.7%; and
  • Excluding volume growth, RWAs reduced by £8.6 billion across the core businesses in H1 2017 and we remain committed to achieving a reduction of at least £20 billion by the end of 2018.

In addition, we committed to continue to make progress on resolving our legacy issues and have made significant progress in the first half:

  • Capital Resolution RWAs reduced by £7.9 billion in H1 2017 to £26.6 billion and, excluding RBS's stake in Alawwal Bank (£7.4 billion at 30 June 2017), are now in the £15-£20 billion range we guided to for the end of 2017;
  • In H1 2017, settlement was reached with the Federal Housing Finance Agency (FHFA) in the US and we also incurred a further provision in relation to settling the 2008 rights issue shareholder litigation; and
  • On 26 July, it was announced that an alternative remedies package, in respect of RBS's remaining State Aid obligation regarding Williams & Glyn, has now been agreed in principle between HM Treasury (HMT) and the EC Commissioner responsible for competition.

H1 2017 RBS Performance Summary

  • RBS reported an attributable profit of £939 million for H1 2017 compared with a loss of £2,045 million in H1 2016 which included payment of the final Dividend Access Share (DAS) dividend of £1,193 million.
  • Adjusted income of £6,843 million was £1,294 million, or 23.3%, higher than H1 2016 reflecting strong income growth across the core PBB, CPB and NatWest Markets businesses and a £154 million gain in respect of IFRS volatility compared with a loss of £668 million in H1 2016.
  • The net interest margin (NIM) was stable on H1 2016 at 2.18%. A 9 basis point reduction across PBB and CPB, associated with asset margin pressure and higher liquidity requirements, has been broadly offset by the benefit of a reduction in low yielding Capital Resolution and centrally held assets, down from 12% of total interest earning assets to 5%.
  • Excluding VAT recoveries of £51 million in H1 2017 and £227 million in H1 2016, adjusted operating expenses reduced by £494 million, or 11.7%, compared with H1 2016. The adjusted cost:income ratio for H1 2017 was 53.1% compared with 71.4% in H1 2016.
  • Restructuring costs were £790 million in H1 2017, an increase of £160 million compared with H1 2016, and included a charge of £217 million relating to the reduction of our property portfolio.
  • Litigation and conduct costs of £396 million include a £151 million charge in respect of the settlement with the FHFA and a £25 million charge relating to the settlement of the UK 2008 rights issue shareholder litigation.
  • A net impairment loss of £116 million, 7 basis points of gross customer loans, compared with a loss of £409 million in H1 2016, with the reduction principally reflecting a £264 million shipping impairment in H1 2016. REIL represented 2.8% of gross customer loans compared with 3.5% at 30 June 2016 and 2.9% at 31 March 2017.
  • A gain of £156 million was recognised in relation to the disposal of RBS's stake in Vocalink.
  • PBB and CPB net loans and advances have increased by 4.1% on an annualised basis in H1 2017 principally driven by mortgage growth within UK PBB.
  • H1 2017 lending growth has been achieved while remaining within our risk appetite. Personal mortgage lending represented 49% of net loans and advances, compared with 47% as at 31 December 2016, whilst personal unsecured and commercial real estate were flat over the first half at 4% and 8% respectively. Overall LTV across our mortgage portfolio was stable at 58%.

● Tangible net asset value (TNAV) per share of 300p increased by 4p, compared with 31 December 2016, principally reflecting the H1 2017 attributable profit.

PBB, CPB and NatWest Markets adjusted operating performance

  • Across our three customer facing businesses, PBB, CPB and NatWest Markets, adjusted operating profit of £2,678 million was £608 million, or 29.4%, higher than H1 2016.
  • UK PBB adjusted operating profit of £1,270 million was £205 million, or 19.2%, higher than H1 2016. Total income of £2,755 million was £140 million, or 5.4%, higher driven by increased lending, with net loans and advances 9.9% higher at £138.5 billion.
  • Ulster Bank RoI adjusted operating profit of £90 million was £32 million, or 26.2%, lower than H1 2016 principally reflecting a lower net impairment release and reduced income on free funds.
  • Commercial Banking adjusted operating profit of £781 million was £118 million, or 17.8%, higher than H1 2016 primarily reflecting reduced expenses associated with lower headcount and an intangible asset write-down in H1 2016. In addition income was £51 million, or 3.0%, higher at £1,750 million driven by customer deposit growth and re-pricing benefits across lending and deposits.
  • Private Banking adjusted operating profit of £96 million was £23 million, or 31.5%, higher than H1 2016 driven by a £38 million, or 14.8%, reduction in adjusted operating expenses principally reflecting cost reduction initiatives.
  • RBS International adjusted operating profit of £100 million reduced by £6 million, or 5.7%, compared with H1 2016 driven by a £22 million, or 32.4%, increase in adjusted operating expenses principally reflecting increased regulatory costs in relation to ring-fencing.
  • NatWest Markets adjusted income of £980 million was £299 million, or 43.9%, higher than H1 2016. An adjusted operating profit of £341 million compared with £41 million in H1 2016.

Capital Resolution, Williams & Glyn and Central items adjusted operating performance

  • Capital Resolution adjusted operating loss of £135 million was £848 million lower than H1 2016 principally reflecting materially lower disposal losses and impairment charges in H1 2017 and a £282 million, or 68.0%, reduction in adjusted operating expenses to £133 million. RWAs of £26.6 billion were £15.7 billion, or 37.1%, lower than H1 2016.
  • Williams & Glyn adjusted operating profit increased by £37 million, or 18.8%, to £234 million driven by a £39 million, or 19.8%, reduction in adjusted operating expenses reflecting a substantial reduction in headcount.
  • Central items adjusted operating profit of £284 million, compared with a loss of £128 million in H1 2016, included a £51 million VAT recovery (H1 2016 - £227 million) and a £154 million gain in respect of IFRS volatility (H1 2016 - £668 million loss).

Q2 2017 RBS Performance Summary

  • An attributable profit of £680 million compared with a loss of £1,077 million in Q2 2016 and a profit of £259 million in Q1 2017. The Q2 2016 loss included litigation and conduct costs of £1,284 million.
  • An adjusted operating profit of £1,690 million was £974 million higher than Q2 2016 and was £319 million above Q1 2017 principally reflecting an IFRS volatility gain of £172 million, compared with a loss of £18 million in Q1 2017.
  • Across our three customer facing businesses, PBB, CPB and NatWest Markets, adjusted operating profit of £1,352 million was £305 million, or 29.1%, higher than Q2 2016. Adjusted RoTE was 14.3% compared with 11.0% in Q2 2016.
  • Q2 2017 NIM of 2.13% was 8 basis points lower than Q2 2016 principally reflecting the impact of asset margin pressure and mix impacts across the core businesses. Compared with Q1 2017, NIM reduced by 11 basis points to 2.13%, with the majority of the reduction driven by a conscious build-up in liquidity as we manage for litigation and conduct costs, including FHFA, and accelerate MREL and other wholesale funding plans into H1 2017. In addition, conditions in the UK mortgage market have become more competitive, contributing to a 9 basis point reduction in UK PBB NIM.
  • Net loans and advances across PBB and CPB increased by £1.8 billion in the quarter to £277.7 billion driven by mortgage growth in UK PBB.

Building a stronger RBS

RBS is progressing with its plan to build a strong, simple, fair bank for customers and shareholders.

  • The CET1 ratio remains ahead of our 13% target at 14.8%, a 140 basis point increase on Q4 2016 driven by a £12.8 billion reduction in RWAs and the £939 million attributable profit.
  • RWAs decreased by £12.8 billion compared with Q4 2016 principally reflecting £7.9 billion of disposals and run-off in Capital Resolution and planned RWA reductions in the core businesses. Excluding volume growth, core RWAs reduced by £8.6 billion comprising £0.7 billion in PBB, £4.4 billion in CPB and £3.5 billion in NatWest Markets.
  • During H1 2017, RBS has issued a Sterling equivalent of £3.6 billion (€1.5 billion and \$3.0 billion) of senior holding company (RBSG) debt which it expects to be eligible to meet its 'Minimum Requirement for Own Funds and Eligible Liabilities' (MREL). Total estimated 'Loss Absorbing Capital' (LAC) is now £54.9 billion, or 25.5% of RWAs. In addition, RBS successfully completed its first covered bond issuance in over five years comprising €1.25 billion 7 year and £1.25 billion three year tranches.
  • During H1 2017, RBS successfully redeemed £4.1 billion Sterling equivalent of legacy capital securities through calls and repurchase. RBS has decided not to exercise the current call option on the non-cumulative US Dollar preference share series U and Euro Preference Shares Series 3. RBS has instead prioritised calling nine other legacy Tier 1 instruments with higher economic benefit. Further details are available in the Capital, liquidity and funding risk section on page 3.
  • Leverage ratio was stable on Q4 2016 at 5.1%.
  • Risk elements in lending (REIL) of £9.3 billion were £1.0 billion lower than 31 December 2016 and represented 2.8% of gross customer loans, compared with 3.1% at 31 December 2016 and 3.5% as at 30 June 2016. Excluding REIL in Capital Resolution and Ulster Bank RoI, REIL were £4.0 billion or 1.3% of the respective gross customer loans.
  • As at 30 June 2017, there has been no material change to the surplus ratio of assets to liabilities in the Main Scheme of The Royal Bank of Scotland Group Pension Fund which at 31 December was c.115% under IAS valuation principles.
  • RBS has continued to utilise the Bank of England's Term Funding Scheme with £9 billion drawn since 31 December 2016, taking total RBS participation to £14 billion as at 30 June 2017.
  • On 15 June 2017, Moody's announced that they had upgraded their senior debt rating of The Royal Bank of Scotland Group plc (RBS Group) by one notch to Baa3 from Ba1. As a result, all three ratings agencies have now given RBS Group an investment grade senior debt rating.

Building the number one bank for customer service, trust and advocacy in the UK

  • RBS continued to deliver strong support for both household and business customers. Within UK PBB, gross new mortgage lending was £14.5 billion, with market share of new mortgages at approximately 12% supporting growth in stock share to approximately 9.1%, up from 8.8% at 31 December 2016. Positive momentum continued across business banking lending with net balances up 4%, excluding transfers of £0.6 billion from Commercial Banking as at 30 June 2017, compared with H1 2016.
  • RBS continued to enhance the capability of its mobile app, with a corresponding increase in customer usage. We now have 5.0 million customers regularly using the app, up 19% on FY 2016. In the final month of H1 2017 customers logged into the app an average of 58 times a second and sent close to ten million payments. RBS remains the only UK bank to allow customers to use the app to withdraw money from a cash machine without needing to carry a debit card, with customers now using the 'Get Cash' service over 200,000 times a month.
  • We continued to improve our product and service delivery channels to support our lending and income growth targets. In mortgages, while in the past a mortgage renewal would have required an appointment at a branch or a phone call, Royal Bank and NatWest customers can now renew online in a matter of minutes, with close to 19,000 customers renewing online in H1 2017. In addition, for new customers we have piloted a paperless mortgage process which has cut the time taken to issue a firm offer in half, to around ten days.
  • During H1 2017, RBS launched NatWest Invest, our new digital investment service, which offers NatWest personal and private customers the opportunity to select their own investment online, from a range of five personal portfolio funds.
  • NatWest Markets has reviewed ways to minimise disruption to the business and continue to serve its customers well in the event of any loss of EU passporting. Should the outcome of the current EU separation negotiations make it necessary, NatWest Markets is ensuring our existing RBS N.V. banking licence in the Netherlands is operationally ready.

Customer

RBS remains committed to achieving its target of being number one bank for customer service, trust and advocacy by 2020.

We use independent surveys to measure our customers' experience and track our progress against our goal in each of our markets.

Net Promoter Score (NPS)

Customers are asked how likely they would be to recommend their bank to a friend or colleague, and respond based on a 0-10 scale with 10 indicating 'extremely likely' and 0 indicating 'not at all likely'. Customers scoring 0 to 6 are termed detractors and customers scoring 9 to 10 are termed promoters. NPS is established by subtracting the proportion of detractors from the proportion of promoters.

The table below lists all of the businesses for which we have an NPS. Commercial Banking NPS is up 4 points from H1 2016 at 22, statistically ahead of the rest of the Commercial Banking market. We still have significant work to do to improve customer experience across some of our other businesses and brands.

Q2 2016 Q1 2017 Q2 2017
NatWest (England & Wales)(1) 12 15 13
Royal Bank of Scotland (Scotland)(1) (7) (13) (21)
Personal Banking
Ulster Bank (Northern Ireland)(2)
Ulster Bank (Republic of Ireland)(2)
NatWest (England & Wales)(3)		 (16) (15) (8)
(11) (8) (5)
4 (3) (8)
Business Banking Royal Bank of Scotland (Scotland)(3) (4) (7) (12)
Business & Commercial Ulster Bank (Northern Ireland)(4) 3 (6) (5)
Ulster Bank (Republic of Ireland)(5) N/A
N/A		 13
Commercial Banking(6) 18
21		 22

Customer Trust

We also use independent experts to measure our customers' trust in the bank. Each quarter we ask customers to what extent they trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or somewhat) minus those that distrust their bank (a lot or somewhat).

Customer trust in NatWest in England & Wales continues to improve and has exceeded its 2017 target of 57. Trust in RBS in Scotland has improved since last year, but is behind target trajectory. This is primarily due to ongoing reputational and legacy issues that the bank continues to work to resolve.

Q2 2016 Q1 2017 Q2 2017
Customer trust(7) NatWest (England & Wales) 48 55 58
Royal Bank of Scotland (Scotland) 23 28 27

Notes:

(2) Source: Coyne Research 12 month rolling data. Latest base sizes: Ulster Bank NI (309) Ulster Bank RoI (273) Question: "Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely".

(4) Source: Charterhouse Research Business Banking Survey, YE Q2 2017. Based on interviews with businesses with an annual turnover up to £1 billion. Base size: 383. Question: "How likely would you be to recommend (bank)". Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Northern Ireland.

(5) Source: Red C SME survey based on interviews with businesses with an estimated annual turnover of €2-25m (6-monthly study only). Latest sample size: Ulster Bank (252).

(6) Source: Charterhouse Research Business Banking Survey, YE Q2 2017. Commercial £2m+ in GB (RBSG sample size, excluding don't knows: 913). Question: "How likely would you be to recommend (bank)". Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.

(7) Source: Populus. Latest quarter's data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest, England & Wales (942), RBS Scotland (206).

(1) Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest (England & Wales) (3365) Royal Bank of Scotland (Scotland) (510). Based on the question: "How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?" Base: Claimed main banked current account customers.

(3) Source: Charterhouse Research Business Banking Survey, YE Q2 2017. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes: NatWest England & Wales (1228), RBS Scotland (401). Question: "How likely would you be to recommend (bank)". Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.

Capital reorganisation

● Following a resolution at the parent company's 2017 Annual General Meeting, on 15 June 2017 we announced completion of the legal capital reduction process to cancel the share premium account and capital redemption reserve whose combined balances were £30.3 billion. As a result, the parent company's retained earnings increased by an equal amount. There has been no change in the interests of ordinary and preference shareholders.

IFRS 9 (1)

  • RBS continues to work towards the implementation of IFRS 9 on 1 January 2018. In terms of shareholders equity, RBS's current estimate of the opening balance sheet adjustment, if applied on 1 July 2017, is to increase credit impairment provisions by £0.5 billion before tax. Separately, there is an increase in asset values of £1.0 billion before tax in respect of changes on classification and measurement. This results in a net increase in shareholders equity, after tax, of £0.4 billion. As at end Q2 2017, this would have equated to an increase in tangible net asset value per share of approximately 3 pence per share
  • In terms of CET1 capital, under the current rules, the increase in credit impairment provisions is fully offset by a reduction in the regulatory expected loss deduction, so is anticipated to have no CET1 capital impact. The increase in asset values of £1.0 billion noted above is partially offset by tax and an expected additional prudential valuation deduction driving an overall increase in CET1 capital of some £0.6 billion. As at end Q2 2017, this would have equated to an increase in the CET1 ratio of approximately 30 basis points.
  • RBS will continue to calibrate and refine its models and methodologies during 2017 and 2018 which may impact IFRS 9 at adoption on 1 January 2018; changes will also follow from disposals, changes in the portfolio composition, economic or credit conditions. For further information on the implementation of IFRS 9 refer to pages 308 to 313 of the 2016 Annual Report and Accounts.

Progress on 2017 targets

RBS remains committed to achieving its priority targets for 2017.

Strategy goal 2017 target Q2 2017 Progress
Strength and Maintain bank CET1 ratio of 13% CET1 ratio of 14.8%; up 70 basis points from Q1
sustainability 2017 and 140 basis points from Q4 2016
Our Commercial Banking franchise remains a clear
Customer Significantly increase NPS or maintain No.1 in market leader. We still have significant work to do to
experience chosen customer segments improve customer experience across some of our
other businesses and brands
Simplifying the Reduce operating expenses by at least £750
million (2)		 Operating expenses down £494 million, or 11.7%,
bank excluding VAT recoveries; 66% of the total full year
target
Net customer loans in PBB and CPB are up 4.1% on
Supporting Net 3% growth on total PBB and CPB loans to an annualised basis for the year to date; 69% of the
growth customers total full year target
Employee Employee engagement improved by 4 points in H1
engagement Improve employee engagement 2017

Notes:

(2) Cost saving target and progress 2017 calculated using operating expenses excluding restructuring costs, litigation and conduct costs, write down of goodwill and VAT recoveries.

(1) The expectations and trends discussed in this section represent management's current expectations and are subject to change, including as a result of the factors described in this document and in the "Risk Factors" on pages 432 to 463 of the Annual Report and Accounts 2016. These statements constitute forward-looking statements; refer to Forward-looking statements in this announcement.

Williams & Glyn

  • On 26 July, RBS announced that it had been informed by HM Treasury (HMT) that, following the consultation process carried out by the European Commission (EC) and a market testing exercise carried out by HMT, an alternative remedies package has now been agreed in principle between HMT and the EC Commissioner responsible for competition.
  • This revised package is focused on the following two remedies to promote competition in the market for banking services to small and medium enterprises ("SMEs") in the UK.
  • A £425 million Capability and Innovation Fund, to be administered by an independent body, that will grant funding to a range of competitors in the UK banking and financial technology sectors; and
  • An Incentivised Switching Scheme which will provide £275 million of funding for eligible challenger banks to help them incentivise SME customers of the business previously described as Williams & Glyn to switch their accounts and loans from RBS paid in the form of "dowries" to the receiving bank. An additional £75 million will be made available by RBS to cover customers' costs of switching.
  • This revised package will be submitted to the EC's College of Commissioners for approval and if agreed will form the basis of a new term sheet in relation to RBS's remaining State Aid commitments. It is expected to come into effect during H2 2017, upon which RBS will no longer be obliged to achieve separation and divestment of the business previously described as Williams & Glyn by 31 December 2017.
  • A £750 million provision was recognised in RBS's 2016 Annual Results in relation to the previously proposed package of measures. An incremental charge of £50 million has been recognised in Q2 2017 in relation to the revised package and its implementation costs, taking the total provision to £800 million.
  • RBS will incur running costs for the duration of the scheme, which are estimated at around £35 million and will be substantially incurred before the end of 2019. Furthermore, under the terms of the revised package, should the uptake within the Incentivised Switching Scheme not be sufficient, RBS could be required to make a further contribution, capped at £50 million.

Outlook (1)

  • We retain the 2017 full year financial guidance and medium term financial outlook we provided in the 2016 Annual Results document. In addition, and subject to providing substantially for remaining significant legacy issues in 2017, our expectation remains that we will be profitable in 2018.
  • Excluding RBS's stake in Alawwal Bank, we now expect that Capital Resolution RWAs will be at the lower end of our previous £15-£20 billion guidance for end 2017. We anticipate that Capital Resolution disposal losses will be substantially higher in H2 2017, at around £0.7 billion.
  • In Q3 2017 we expect to recognise a debt sale gain of approximately £160 million in UK PBB.

Note:

(1) The targets, expectations and trends discussed in this section represent management's current expectations and are subject to change, including as a result of the factors described in this document and in the "Risk Factors" on pages 432 to 463 of the Annual Report and Accounts 2016. These statements constitute forward-looking statements; refer to Forward-looking statements in this announcement.

Summary consolidated income statement for the period ended 30 June 2017

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
£m £m £m £m £m
Net interest income 4,472 4,333 2,238 2,234 2,177
Own credit adjustments (73) 450 (44) (29) 194
(Loss)/gain on redemption of own debt (7) (130) (9) 2 (130)
Strategic disposals 156 195 156 - 201
Other operating income 2,371 1,216 1,366 1,005 558
Non-interest income 2,447 1,731 1,469 978 823
Total income 6,919 6,064 3,707 3,212 3,000
Restructuring costs (790) (630) (213) (577) (392)
Litigation and conduct costs (396) (1,315) (342) (54) (1,284)
Other costs (3,666) (3,984) (1,844) (1,822) (1,833)
Operating expenses (4,852) (5,929) (2,399) (2,453) (3,509)
Profit/(loss) before impairment losses 2,067 135 1,308 759 (509)
Impairment losses (116) (409) (70) (46) (186)
Operating profit/(loss) before tax 1,951 (274) 1,238 713 (695)
Tax charge (727) (340) (400) (327) (260)
Profit/(loss) for the period 1,224 (614) 838 386 (955)
Attributable to:
Non-controlling interests 29 30 18 11 8
Other owners 256 208 140 116 114
Dividend access share - 1,193 - - -
Ordinary shareholders 939 (2,045) 680 259 (1,077)
Notable items memo
Adjusted basis
Total income - adjusted (1) 6,843 5,549 3,604 3,239 2,735
Operating expenses - adjusted (2) (3,666) (3,984) (1,844) (1,822) (1,833)
Operating profit - adjusted (1,2) 3,061 1,156 1,690 1,371 716
Within adjusted total income
IFRS volatility in Central items (3) 154 (668) 172 (18) (312)
FX (losses)/gains in Central items (108) 253 (56) (52) 201
Capital Resolution disposal losses (103) (53) (53) (50) (57)
Unwind of securitisations in the property portfolio (105) - - (105) -
Within adjusted operating expenses
VAT recovery in Central items 51 227 - 51 227
Within restructuring costs
Property exit costs (217) - 18 (235) -
Williams & Glyn restructuring costs (58) (345) (46) (12) (187)
Within impairment (losses)/releases
Capital Resolution impairment releases/(losses) 78 (263) 33 45 (67)
Capital Resolution shipping portfolio impairment
releases/(losses)		 21 (264) 17 4 (38)
Ulster Bank RoI impairment releases/(losses) 11 27 (13) 24 14
Commercial Banking impairment losses (94) (103) (33) (61) (89)

Notes:

(1) Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.

(2) Excluding restructuring costs and litigation and conduct costs.

(3) IFRS volatility relates to loans which are economically hedged but for which hedge accounting is not permitted under IFRS.

Details of other comprehensive income are provided on page 54.

Summary consolidated balance sheet as at 30 June 2017

30 June 31 March 31 December
2017 2017 2016
£m £m £m
Cash and balances at central banks 86,807 83,160 74,250
Net loans and advances to banks (1) 20,685 20,513 17,278
Net loans and advances to customers (1) 326,059 326,733 323,023
Reverse repurchase agreements and stock borrowing 40,030 45,451 41,787
Debt securities and equity shares 86,687 77,347 73,225
Other assets 28,855 26,019 22,112
Funded assets 589,123 579,223 551,675
Derivatives 193,531 204,052 246,981
Total assets 782,654 783,275 798,656
Bank deposits (2) 38,965 40,276 33,317
Customer deposits (2) 359,882 351,498 353,872
Repurchase agreements and stock lending 43,038 44,966 32,335
Debt securities in issue 31,997 28,163 27,245
Subordinated liabilities 14,724 15,514 19,419
Derivatives 184,161 196,224 236,475
Provisions for liabilities and charges 11,227 11,619 12,836
Other liabilities 48,611 45,504 33,753
Total liabilities 732,605 733,764 749,252
Non-controlling interests 844 805 795
Owners' equity 49,205 48,706 48,609
Total liabilities and equity 782,654 783,275 798,656
Contingent liabilities and commitments 143,493 148,324 150,691

Notes:

(1) Excludes reverse repurchase agreements and stock borrowing.

(2) Excludes repurchase agreements and stock lending.

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Net interest income £m £m £m £m £m
Net interest income
RBS 4,472 4,333 2,238 2,234 2,177
- UK Personal & Business Banking 2,231 2,109 1,120 1,111 1,090
- Ulster Bank RoI 206 198 101 105 93
- Commercial Banking 1,141 1,067 574 567 531
- Private Banking 226 226 114 112 113
- RBS International 161 151 81 80 76
- NatWest Markets 42 43 13 29 24
- Capital Resolution 24 168 (9) 33 82
- Williams & Glyn 333 324 168 165 162
- Central items & other 108 47 76 32 6
Average interest-earning assets (IEA)
RBS 413,598 399,751 421,981 405,122 396,118
- UK Personal & Business Banking 151,659 138,192 153,714 149,581 140,591
- Ulster Bank RoI 24,858 24,233 25,288 24,424 24,288
- Commercial Banking 131,807 117,312 132,719 130,885 119,768
- Private Banking 18,068 16,441 18,533 17,597 16,622
- RBS International 23,997 21,436 25,034 22,949 21,798
- NatWest Markets 17,021 11,745 16,853 17,192 11,923
- Capital Resolution 15,959 29,962 15,156 16,771 29,157
- Williams & Glyn 25,334 23,764 25,495 25,170 24,172
- Central items & other 4,895 16,666 9,189 553 7,799
Yields, spreads and margins of the banking business
Gross yield on interest-earning assets
of the banking business (1,2) 2.63% 2.85% 2.56% 2.70% 2.87%
Cost of interest-bearing liabilities of banking business (1) (0.67%) (1.00%) (0.65%) (0.69%) (1.00%)
Interest spread of the banking business (1,3) 1.96% 1.85% 1.91% 2.01% 1.87%
Benefit from interest-free funds 0.22% 0.33% 0.22% 0.23% 0.34%
Net interest margin (4)
RBS 2.18% 2.18% 2.13% 2.24% 2.21%
- UK Personal & Business Banking 2.97% 3.07% 2.92% 3.01% 3.12%
- Ulster Bank RoI 1.67% 1.64% 1.60% 1.74% 1.54%
- Commercial Banking 1.75% 1.83% 1.73% 1.76% 1.78%
- Private Banking 2.52% 2.76% 2.47% 2.58% 2.73%
- RBS International 1.35% 1.42% 1.30% 1.41% 1.40%
- NatWest Markets 0.50% 0.74% 0.31% 0.68% 0.81%
- Capital Resolution 0.30% 1.13% (0.24%) 0.80% 1.13%
- Williams & Glyn 2.65% 2.74% 2.64% 2.66% 2.70%

For the notes to this table refer to the following page.

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
Third party customer rates (5) 2017 2016 2017 2017 2016
Third party customer asset rate
- UK Personal & Business Banking 3.54% 3.96% 3.50% 3.57% 3.96%
- Ulster Bank RoI (6) 2.37% 2.20% 2.28% 2.47% 2.07%
- Commercial Banking 2.66% 2.85% 2.65% 2.67% 2.82%
- Private Banking 2.70% 3.00% 2.68% 2.71% 2.97%
- RBS International 2.73% 3.14% 2.72% 2.75% 3.02%
Third party customer funding rate
- UK Personal & Business Banking (0.18%) (0.54%) (0.18%) (0.17%) (0.46%)
- Ulster Bank RoI (6) (0.36%) (0.56%) (0.31%) (0.40%) (0.53%)
- Commercial Banking (0.13%) (0.36%) (0.11%) (0.14%) (0.36%)
- Private Banking (0.07%) (0.22%) (0.07%) (0.07%) (0.20%)
- RBS International (0.02%) (0.18%) (0.01%) (0.03%) (0.13%)

Notes:

(1) For the purpose of calculating gross yields and interest spread, interest receivable has been decreased by £77 million (Q2 2017 - £42 million; Q1 2017 - £35 million) and interest payable has decreased by £77 million (Q2 2017 - £42 million; Q1 2017 – £35 million) in respect of negative interest relating to both financial assets and financial liabilities that attracted negative interest.

(2) Gross yield is the interest earned on average interest-earning assets as a percentage of average interest-earning assets.

(3) Interest spread is the difference between the gross yield and interest paid on average interest-bearing liabilities as a percentage of average interest-bearing liabilities.

(4) Net interest margin is net interest income as a percentage of average interest-earning assets.

(5) Net interest margin includes Treasury allocations and interest on intercompany borrowings, which are excluded from third party customer rates.

(6) Ulster Bank Ireland DAC manages its funding and liquidity requirements locally. Its liquid asset portfolios and non-customer related funding sources are included within its net interest margin, but excluded from its third party asset and liability rates.

Half year ended
30 June 2017		 Half year ended
30 June 2016
Average Average
balance Interest Rate balance Interest Rate
Average balance sheet £m £m % £m £m %
Assets
Loans and advances to banks 70,191 81 0.23 66,179 115 0.35
Loans and advances to customers 296,421 5,114 3.48 287,575 5,364 3.75
Debt securities 46,986 190 0.82 45,997 177 0.77
Interest-earning assets
- banking business (1,2) 413,598 5,385 2.63 399,751 5,656 2.85
- trading business (3) 116,600 132,839
Non-interest earning assets 235,615 338,903
Total assets 765,813 871,493
Memo: Funded assets 539,196 535,848
Liabilities
Deposits by banks 16,905 31 0.37 4,437 12 0.54
Customer accounts 227,730 290 0.26 237,126 575 0.49
Debt securities in issue 23,883 254 2.14 21,742 298 2.76
Subordinated liabilities 15,944 317 4.01 19,837 442 4.48
Internal funding of trading business (9,776) 21 (0.43) (17,508) (4) 0.05
Interest-bearing liabilities
- banking business (1,2) 274,686 913 0.67 265,634 1,323 1.00
- trading business (3) 126,164 141,714
Non-interest-bearing liabilities
- demand deposits 99,029 84,660
- other liabilities 216,181 325,071
Owner's equity 49,753 54,414
Total liabilities and owner's equity 765,813 871,493

Notes:

(1) For the purpose of calculating gross yields and interest spread, interest receivable has been decreased by £77 million (H1 2016 - £36 million) and interest payable has decreased by £77 million (H1 2016 - £36 million) in respect of negative interest relating to both financial assets and financial liabilities that attracted negative interest. (2) 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.

(3) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.

RBS – Interim results 2017

Key points

  • Net interest income of £4,472 million increased by £139 million, or 3.2%, compared with H1 2016 principally reflecting higher volumes in UK PBB, up £122 million or 5.8%, and increased deposit volumes and re-pricing benefits in Commercial Banking, up £74 million or 6.9%. Partially offsetting, Capital Resolution reduced by £144 million in line with the planned shrinkage of the balance sheet.
  • The net interest margin (NIM) was stable on H1 2016 at 2.18%. A 9 basis point reduction across PBB and CPB, associated with asset margin pressure and higher liquidity requirements, has been broadly offset by the benefit of a reduction in low yielding Capital Resolution and centrally held assets, down from 12% of total interest earning assets to 5%.
  • UK PBB declined by 10 basis points to 2.97% driven by lower mortgage margins and reduced current account hedge yield, partially offset by savings re-pricing benefits from actions taken in 2016.
  • Ulster Bank RoI NIM of 1.67% was 3 basis points higher than H1 2016 reflecting a combination of improved deposit and loan margins, one off income adjustments in H1 2017 and deleveraging measures in 2016 which have reduced the concentration of low yielding non-performing loans.
  • In Commercial Banking, active re-pricing of assets and deposits has been offset by wider asset margin pressure in a lower rate environment causing net interest margin to fall by 8 basis points to 1.75%.
  • Private Banking fell 24 basis points to 2.52% reflecting the competitive market and lower rate environment.
  • RBS International NIM of 1.35% was 7 basis points lower as margin pressures outweigh mitigating pricing actions.
  • Structural hedges of £126 billion generated a benefit of £651 million through net interest income for H1 2017.
  • Compared with Q1 2017, NIM reduced by 11 basis points to 2.13%, with the majority of the reduction driven by a conscious build-up in liquidity as we manage for litigation and conduct costs, including FHFA, and accelerate MREL and other wholesale funding plans into H1 2017. In addition, conditions in the UK mortgage market have become more competitive, contributing to a 9 basis point reduction in UK PBB NIM. Front book mortgage NIM was around 40 basis points lower than the back book. SVR balances were around 11% of total mortgage balances, broadly in line with Q1 2017.
  • NIM was 8 basis points lower than Q2 2016 principally reflecting asset margin pressure and mix impacts across the core businesses.
Half year ended Quarter ended
Non-interest income 30 June
2017
£m		 30 June
2016
£m		 30 June
2017
£m		 31 March
2017
£m		 30 June
2016
£m
Net fees and commissions 1,218 1,284 613 605 630
Income from trading activities 957 (267) 529 428 (157)
Own credit adjustments (OCA) (73) 450 (44) (29) 194
(Loss)/gain on redemption of own debt (7) (130) (9) 2 (130)
Strategic disposals 156 195 156 - 201
Other operating income 196 199 224 (28) 85
Total non-interest income 2,447 1,731 1,469 978 823
  • Non-interest income of £2,447 million increased by £716 million, or 41.4%, compared with H1 2016.
  • Across PBB and CPB, non-interest income reduced by £23 million, or 1.7%, to £1,349 million.
  • NatWest Markets non-interest income increased by £115 million, or 14.8%, to £890 million reflecting strong underlying income growth partially offset by a £185 million adverse movement in own credit adjustment.
  • Capital Resolution non-interest income was a loss of £126 million compared with £340 million in H1 2016, which included a £330 million funding valuation adjustment. An own credit adjustment loss of £22 million compared with a gain of £184 million in H1 2016.
  • Central items non-interest income was a gain of £250 million compared with a loss of £163 million largely reflecting a £154 million gain in respect of IFRS volatility compared with a £668 million loss in H1 2016.
  • Income from trading activities increased by £1,224 million compared with H1 2016 largely reflecting a £154 million IFRS volatility gain, compared with a £668 million loss in H1 2016, increased NatWest Markets income and a £330 million funding valuation adjustment in Capital Resolution in H1 2016.
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Operating expenses £m £m £m £m £m
Staff costs 2,041 2,329 1,017 1,024 1,127
Premises and equipment 602 630 292 310 315
Other administrative expenses 678 625 358 320 179
Restructuring costs (see below) 790 630 213 577 392
Litigation and conduct costs 396 1,315 342 54 1,284
Administrative expenses 4,507 5,529 2,222 2,285 3,297
Depreciation and amortisation 337 352 169 168 174
Write down of other intangible assets 8 48 8 - 38
Operating expenses 4,852 5,929 2,399 2,453 3,509
Adjusted operating expenses (1) 3,666 3,984 1,844 1,822 1,833
Restructuring costs comprise:
- staff expenses 406 366 115 291 245
- premises, equipment, depreciation and amortisation 250 24 9 241 15
- other 134 240 89 45 132
790 630 213 577 392
Staff costs as a % of total income 29.5% 38.4% 27.4% 31.9% 37.6%
Cost:income ratio (2) 69.8% 97.7% 64.4% 76.1% 117.2%
Cost:income ratio - adjusted (2,3) 53.1% 71.4% 50.7% 55.8% 66.6%
Employee numbers (FTE - thousands) 75.0 89.2 75.0 76.2 89.2

Notes:

(1) Excluding restructuring costs and litigation and conduct costs.

(2) Operating lease depreciation included in income (H1 2017 - £72 million; Q2 2017 - £36 million; H1 2016 - £76 million; Q1 2017 - £36 million and Q2 2016 - £38 million).

(3) Excluding restructuring costs, litigation and conduct costs, own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.

  • Total operating expenses of £4,852 million were £1,077 million, or 18.2%, lower than H1 2016 reflecting a £919 million reduction in litigation and conduct costs and a £318 million, or 8.0%, reduction in adjusted operating expenses, partially offset by a £160 million increase in restructuring costs.
  • Excluding VAT recoveries of £51 million in H1 2017 and £227 million in H1 2016, adjusted operating expenses reduced by £494 million, or 11.7%, compared with H1 2016 and we remain on track to achieve a £750 million reduction for the full year. The core businesses accounted for £151 million, or 31%, of the reduction with the remainder largely in Capital Resolution, down £282 million or 68.0%.
  • Staff costs of £2,041 million, were £288 million, or 12.4%, lower than H1 2016 underpinned by a 14,200, or 15.9%, reduction in headcount.
  • Restructuring costs of £790 million included an £217 million charge relating to the reduction in our property portfolio, a £134 million charge in Capital Resolution, primarily in respect of Asia-Pacific restructuring, a £73 million net settlement relating to the RBS Netherlands pension scheme and a £50 million provision in respect of the revised package of remedies regarding Williams & Glyn.
  • Litigation and conduct costs of £396 million included a £151 million charge in respect of settlement with the FHFA and a £25 million charge relating to the settlement of the UK 2008 rights issue shareholder litigation.
  • Q2 2017 adjusted operating expenses increased by £22 million compared with Q1 2017 principally reflecting the £51 million VAT release in the previous quarter. Across the core businesses, adjusted operating expenses reduced by £47 million.
Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Impairment losses/(releases) £m £m £m £m £m
Loan impairment losses/(releases)
- individually assessed 50 358 8 42 172
- collectively assessed 103 43 65 38 27
- latent (1) 11 (5) 4 (10)
Total loan impairment losses 152 412 68 84 189
Securities (36) (3) 2 (38) (3)
Total impairment losses 116 409 70 46 186
Credit metrics (1) 30 June
2017		 31 March
2017		 31 December
2016
Gross customer loans £330,004m £330,843m £327,478m
Loan impairment provisions £3,945m £4,110m £4,455m
Risk elements in lending (REIL) £9,296m £9,726m £10,310m
Provisions as a % of REIL 42% 42% 43%
REIL as a % of gross customer loans 2.8% 2.9% 3.1%
Provisions as a % of gross customer loans 1.2% 1.2% 1.4%

Note:

(1) Includes disposal groups and excludes reverse repos.

  • A net impairment loss of £116 million, 7 basis points of gross customer loans, compared with a loss of £409 million in H1 2016.
  • Capital Resolution reported a net impairment release of £78 million in H1 2017 compared with a loss of £263 million in H1 2016 which included a £264 million charge in respect of the shipping portfolio.
  • Across the core businesses, net impairment losses increased by £39 million to £168 million, 11 basis points of gross customer loans, compared with H1 2016. UK PBB net impairment losses increased by £32 million to £72 million, 10 basis points of gross customer loans, largely reflecting a reduction in impairment releases. Ulster Bank RoI reported a net impairment release of £11 million compared with £27 million in H1 2016. Commercial Banking net impairment losses of £94 million, 19 basis points of gross customer loans, compared with a loss of £103 million in H1 2016.
  • REIL reduced by £2,493 million, compared with H1 2016, to £9,296 million reflecting Capital Resolution run-down and a portfolio sale in Ulster Bank RoI, partially offset by an increase in the shipping portfolio, foreign exchange movements and the implementation of a revised mortgage methodology in Ulster Bank RoI. REIL represented 2.8% of gross customer loans compared with 3.5% at 30 June 2016 and 3.1% at 31 December 2016.
  • Excluding Capital Resolution and Ulster Bank RoI, REIL were £4.0 billion, or 1.3% of the respective gross customer loans.

Capital and leverage ratios

End-point CRR basis (1)
30 June 31 December
Risk asset ratios 2017
%		 2016
%
CET1 14.8 13.4
Tier 1 16.7 15.2
Total 20.0 19.2
Capital £m £m
Tangible equity 35,682 34,982
Expected loss less impairment provisions (1,226) (1,371)
Prudential valuation adjustment (854) (532)
Deferred tax assets (877) (906)
Own credit adjustments (142) (304)
Pension fund assets (186) (208)
Cash flow hedging reserve (575) (1,030)
Other deductions 52 (8)
Total deductions (3,808) (4,359)
CET1 capital 31,874 30,623
AT1 capital 4,041 4,041
Tier 1 capital 35,915 34,664
Tier 2 capital 7,107 9,161
Total regulatory capital 43,022 43,825
Risk-weighted assets
Credit risk
- non-counterparty 157,300 162,200
- counterparty 17,800 22,900
Market risk 16,500 17,400
Operational risk 23,800 25,700
Total RWAs 215,400 228,200
Leverage (2)
Cash and balances at central banks 86,800 74,200
Derivatives 193,500 247,000
Loans and advances 346,800 340,300
Reverse repos 40,000 41,800
Other assets 115,600 95,400
Total assets 782,700 798,700
Derivatives
- netting and variation margin (193,400) (241,700)
- potential future exposures 56,700 65,300
Securities financing transactions gross up 1,900 2,300
Undrawn commitments 53,100 58,600
Regulatory deductions and other adjustments 800 100
CRR leverage exposure 701,800 683,300
Tier 1 capital 35,915 34,664
CRR leverage ratio % 5.1 5.1
UK leverage exposure (3) 618,700 614,600
UK leverage ratio % (3) 5.8 5.6

Notes:

(1) CRR as implemented by the PRA in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full with the exception of unrealised gains on available-for-sale securities which have been included from 2015 under the PRA transitional basis.

(2) Based on end-point CRR Tier 1 capital and leverage exposure under the CRR Delegated Act.

(3) Based on end-point CRR Tier 1 capital and UK leverage exposures reflecting the post EU referendum measures announced by the Bank of England in the third quarter of 2016.

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6
To
tal
inc
om
e		 2,
75
5		 29
3		 1,
75
0		 32
1		 19
5		 93
2		 (
10
2)		 41
7		 35
8		 6,
91
9
Dir
ect
st
aff
sts
ex
pe
nse
s -
co		 (
)
32
9		 (
)
96		 (
)
24
5		 (
)
74		 (
)
23		 (
7)
29		 (
)
26		 (
)
96		 (
)
85
5		 (
1)
2,
04
the
ost
- o
r c
s		 (
12
1)		 (
24
)		 (
11
1)		 (
12
)		 (
7)		 (
99
)		 (
19
)		 (
20
)		 (
1,
21
2)		 (
1,
62
5
)
Ind
ire
ct
ex
pe
nse
s		 (
)
96
3		 (
)
97		 (
51
)
9		 (
2)
13		 (
)
60		 (
2)
24		 (
)
88		 (
)
42		 2,
14
3		 -
Op
tin
ad
jus
ted
(4)
era
g e
xp
en
se
s -		 (
)
1,
41
3		 (
7)
21		 (
)
87
5		 (
)
21
8		 (
)
90		 (
)
63
8		 (
)
13
3		 (
)
15
8		 76 (
)
3,
66
6
Re
str
uct
uri
ts
- d
ire
ct
ng
cos		 (
23
)		 (
24
)		 (
40
)		 - - (
30
)		 (
13
0
)		 - (
54
3
)		 (
79
0
)
- in
dir
ect		 (
13
7)		 (
19
)		 (
)
77		 (
14
)		 (
4)		 (
73
)		 (
4)		 - 32
8		 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 (
)
13		 (
)
33		 (
4)		 - - (
)
34		 (
2)
27		 - (
)
40		 (
)
39
6
Op
tin
era
g e
xp
en
se
s		 (
)
1,
58
6		 (
)
29
3		 (
)
99
6		 (
2)
23		 (
)
94		 (
)
77
5		 (
)
53
9		 (
)
15
8		 (
)
17
9		 (
2)
4,
85
Op
rof
it/(
s)
for
(
s)
/re
tin
los
be
e i
air
nt
los
lea
era
g p
mp
me
se
se
s		 1,
16
9		 -- 75
4		 89 10
1		 15
7		 (
1)
64		 25
9		 17
9		 2,
06
7
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
72
)		 11 (
94
)		 (
7)		 (
5
)		 (
1)		 78 (
25
)		 (
1)		 (
11
6
)
Op
tin
rof
it/(
los
s)
era
g p		 1,
09
7		 11 66
0		 82 96 15
6		 (
56
3
)		 23
4		 17
8		 1,
95
1
Op
tin
rof
it/(
los
s)
dju
ste
d (3
era
g p
- a
,4)		 1,
27
0		 90 78
1		 96 10
0		 34
1		 (
13
5
)		 23
4		 28
4		 3,
06
1
Ad
dit
ion
al
inf
ati
orm
on
Re
ity
tur
n o
n e
qu
(5)		 27
.8%		 0.8
%		 8.2
%		 %
7.7		 13
.1%		 2.3
%		 nm 22
.2%		 nm 5.6
%
Re
tur
ity
dju
ste
d (3
n o
n e
qu
- a
,4,5
)		 32
.4%		 6.8
%		 10
.1%		 9.3
%		 13
.7%		 7.2
%		 nm 22
.2%		 nm 11
.5%
Co
st:
inc
ati
om
e r
o (6
)		 57
.6%		 10
0.0
%		 55
.1%		 72
.3%		 48
.2%		 83
.2%		 nm 37
.9%		 nm 69
.8%
Co
inc
atio
dju
d (3
st:
ste
,4,6
)
om
e r
- a		 51
.3%		 73
.3%		 47
.9%		 67
.9%		 46
.2%		 65
.1%		 nm 37
.9%		 nm 53
.1%
To
tal
ets
(
£b
n)
ass		 16
1.6		 24
.9		 15
1.9		 19
.6		 24
.7		 23
0.9		 10
2.2		 26
.0		 40
.9		 78
2.7
Fu
nd
ed
set
s (
£b
n)
as
(7)		 16
1.6		 24
.8		 15
1.9		 19
.6		 24
.7		 11
7.0		 24
.7		 26
.0		 38
.8		 58
9.1
(
n)
Ne
t lo
nd
ad
s t
ust
£b
an
s a
va
nce
o c
om
ers		 13
8.5		 19
.5		 98
.1		 12
.8		 8.8 17
.7		 10
.1		 20
.4		 0.2 32
6.1
Ris
k e
lem
ts
in l
din
(
£b
n)
en
en
g		 1.8 3.5 1.6 0.1 0.1 - 1.8 0.3 0.1 9.3
Im
irm
isio
(
£b
n)
t p
pa
en
rov
ns		 (
1.2
)		 (
1.2
)		 (
0.7
)		 - - - (
0.6
)		 (
0.2
)		 - (
3.9
)
Cu
sto
r d
its
(
£b
n)
me
ep
os		 14
9.8		 16
.9		 10
0.9		 26
.1		 25
.5		 8.1 7.2 24
.9		 0.5 35
9.9
Ris
k-w
eig
hte
d a
ts
(
RW
As
)
(
£b
n)
sse		 32
.9		 18
.0		 76
.2		 9.0 9.4 31
.7		 26
.6		 9.4 2.2 21
5.4
t (
£b
n)
RW
A e
iva
len
(5)
qu		 35
.8		 19
.1		 .5
79		 9.0 9.4 33
.4		 31
.7		 9.9 2.5 23
0.3
Em
loy
mb
(
FT
Es
- t
ho
nd
s)
p
ee
nu
ers
usa
(8)		 17
.7		 2.9 5.2 1.7 0.8 5.5 0.2 4.1 36
.9		 75
.0

For the notes to this table refer to page 24. nm = not meaningful

Qu art
de
d 3
0 J
er
en		 e 2
01
7
un
PB
B		 CP
B		 Ce
ntr
al
Uls
ter		 Co
ial
mm
erc		 Pri
te
va		 RB
S		 Na
tW
t
es		 Ca
ita
l
p		 Wi
llia
ms		 ite
&
ms		 To
tal
UK
PB
B		 Ba
nk
Ro
I		 ing
Ba
nk		 ing
Ba
nk		 ati
Int
al
ern
on		 Ma
rke
ts		 ion
Re
lut
so		 & G
ly
n (
1)		 oth
er
(2)		 S
RB
£m £m £m £m £m £m £m £m £m £m
Inc
tat
t
om
e s
em
en
Ne
t in
in
ter
est
co
me		 1,
12
0		 10
1		 57
4		 11
4		 81 13 (
9
)		 16
8		 76 2,
23
8
Ot
he
-in
ter
est
in
r n
on
co
me		 25
8		 49 31
1		 47 16 45
9		 (
19
)		 43 20
2		 1,
36
6
To
tal
inc
dju
ste
d (
om
e a
3)		 1,
37
8		 15
0		 88
5		 16
1		 97 47
2		 (
28
)		 21
1		 27
8		 3,
60
4
Ow
red
it a
dju
stm
ts
n c
en		 - (
2)		 - - - (
)
28		 (
)
15		 - 1 (
)
44
Lo
de
tio
f o
de
bt
ss
on
re
mp
n o
wn		 - - - - - - - - (
)
9		 (
)
9
Str
ate
ic d
isp
als
g
os		 - - - - - - - - 15
6		 15
6
To
tal
inc
om
e		 1,
37
8		 14
8		 88
5		 16
1		 97 44
4		 (
43
)		 21
1		 42
6		 3,
70
7
Dir
ect
st
aff
sts
ex
pe
nse
s -
co		 (
)
16
6		 (
)
47		 (
)
12
0		 (
)
36		 (
)
11		 (
2)
14		 (
)
10		 (
)
43		 (
2)
44		 (
7)
1,
01
the
ost
- o
r c
s		 (
)
57		 (
)
12		 (
)
56		 (
)
5		 (
4)		 (
)
48		 (
)
10		 (
)
9		 (
)
62
6		 (
7)
82
Ind
ire
ct
ex
pe
nse
s		 (
47
4)		 (
50
)		 (
25
1)		 (
64
)		 (
32
)		 (
12
7)		 (
44
)		 (
22
)		 1,
06
4		 -
Op
tin
dju
ste
d (4
era
g e
xp
en
se
s
- a
)		 (
7)
69		 (
)
10
9		 (
7)
42		 (
)
10
5		 (
)
47		 (
7)
31		 (
)
64		 (
)
74		 (
4)		 (
4)
1,
84
Re
str
uct
uri
ts
- d
ire
ct
ng
cos		 (
)
3		 (
)
5		 (
1)		 - - (
)
10		 (
)
60		 - (
4)
13		 (
)
21
3
Re
uri
- in
dir
str
uct
ts
ect
ng
cos		 (
26
)		 (
4)		 (
17
)		 (
3
)		 (
1)		 (
25
)		 12 - 64 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 (
9
)		 (
33
)		 (
1)		 - - (
3
)		 (
26
6
)		 - (
30
)		 (
34
2)
Op
tin
era
g e
xp
en
se
s		 (
)
73
5		 (
1)
15		 (
)
44
6		 (
)
10
8		 (
)
48		 (
)
35
5		 (
)
37
8		 (
)
74		 (
4)
10		 (
)
2,
39
9
Op
rof
it/(
s)
for
(
s)
/re
tin
los
be
e i
air
nt
los
lea
era
g p
mp
me
se
se
s		 64
3		 (
)
3		 43
9		 53 49 89 (
1)
42		 13
7		 32
2		 1,
30
8
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
40
)		 (
13
)		 (
33
)		 (
4)		 2 (
1)		 33 (
14
)		 - (
70
)
Op
tin
rof
it/(
los
s)
era
g p		 60
3		 (
16
)		 40
6		 49 51 88 (
38
8
)		 12
3		 32
2		 1,
23
8
Op
rof
it/(
s)
tin
los
dju
ste
d (3
era
g p
- a
,4)		 64
1		 28 42
5		 52 52 15
4		 (
)
59		 12
3		 27
4		 1,
69
0
Ad
dit
ion
al
inf
ati
orm
on
Re
tur
ity
n o
n e
qu
(5)		 30
.8%		 (
)
2.4
%		 10
.7%		 9.6
%		 14
.0%		 2.9
%		 nm 23
.5%		 nm 8.0
%
Re
tur
ity
dju
ste
d (3
)
n o
n e
qu
- a
,4,5		 32
.8%		 4.3
%		 11
.4%		 10
.3%		 14
.3%		 6.6
%		 nm 23
.5%		 nm 12
.9%
Co
inc
ati
st:
om
e r
o (
6)		 53
.3%		 10
2.0
%		 48
.3%		 67
.1%		 49
.5%		 80
.0%		 nm 35
.1%		 nm 64
.4%
Co
st:
inc
atio
dju
ste
d (3
om
e r
- a
,4,6
)		 50
.6%		 72
.7%		 46
.1%		 65
.2%		 48
.5%		 67
.2%		 nm 35
.1%		 nm 50
.7%
To
tal
ets
(
£b
n)
ass		 16
1.6		 24
.9		 15
1.9		 19
.6		 24
.7		 23
0.9		 10
2.2		 26
.0		 40
.9		 78
2.7
Fu
nd
ed
set
s (
£b
n)
as
(7)		 16
1.6		 24
.8		 15
1.9		 19
.6		 24
.7		 11
7.0		 24
.7		 26
.0		 38
.8		 58
9.1
Ne
t lo
nd
ad
(
£b
n)
s t
ust
an
s a
va
nce
o c
om
ers		 8.5
13		 .5
19		 98
.1		 12
.8		 8.8 17
.7		 10
.1		 20
.4		 0.2 32
6.1
Ris
k e
lem
in l
din
(
£b
n)
ts
en
en
g		 1.8 3.5 1.6 0.1 0.1 - 1.8 0.3 0.1 9.3
Im
irm
t p
isio
(
£b
n)
pa
en
rov
ns		 (
1.2
)		 (
1.2
)		 (
0.7
)		 - - - (
0.6
)		 (
0.2
)		 - (
3.9
)
Cu
sto
r d
its
(
£b
n)
me
ep
os		 14
9.8		 16
.9		 10
0.9		 26
.1		 25
.5		 8.1 7.2 24
.9		 0.5 35
9.9
(
)
(
£b
n)
Ris
k-w
eig
hte
d a
ts
RW
As
sse		 32
.9		 18
.0		 76
.2		 9.0 9.4 31
.7		 26
.6		 9.4 2.2 21
5.4
RW
A e
iva
len
t (
£b
n)
(5)
qu		 35
.8		 19
.1		 .5
79		 9.0 9.4 33
.4		 31
.7		 9.9 2.5 23
0.3
Em
loy
mb
(
FT
Es
- t
ho
nd
s)
p
ee
nu
ers
usa
(8)		 17
.7		 2.9 5.2 1.7 0.8 5.5 0.2 4.1 36
.9		 75
.0

For the notes to this table refer to page 24. nm = not meaningful.

Ha lf y
nd
ed
30
ea
r e		 Ju
20
16
ne
PB
B		 CP
B		 Ce
ntr
al
Uls
ter		 Co
ial
mm
erc		 Pri
te
va		 RB
S		 Na
tW
est		 Ca
ita
l
p		 Wi
llia
ms		 ite
&
ms		 To
tal
UK
PB
B		 Ba
nk
Ro
I		 Ba
nk
ing		 Ba
nk
ing		 Int
atio
l
ern
na		 Ma
rke
ts		 Re
lut
ion
so		 & G
lyn
(1)		 oth
er
(2)		 RB
S
£m £m £m £m £m £m £m £m £m £m
Inc
tat
t
om
e s
em
en
Ne
t in
ter
est
in
co
me		 2,
109		 198 1,
06
7		 22
6		 15
1		 43 168 32
4		 47 4,
33
3
Ot
he
-in
ter
est
in
r n
on
co
me		 50
6		 92 63
2		 105 34 63
8		 (
3)
47		 87 (
5)
40		 1,
21
6
To
tal
inc
ad
jus
ted
(3)
om
e -		 2,
61
5		 29
0		 1,
69
9		 33
1		 185 68
1		 (
5)
30		 41
1		 (
8)
35		 5,
54
9
Ow
red
it a
dju
stm
ts
n c
en		 - 3 - - - 137 184 - 126 45
0
Lo
de
tio
f o
de
bt
ss
on
re
mp
n o
wn		 - - - - - - - - (
130
)		 (
130
)
Str
ic d
isp
als
ate
g
os		 - - - - - - (
51
)		 - 24
6		 195
To
tal
inc
om
e		 2,
61
5		 29
3		 1,
69
9		 33
1		 185 81
8		 (
172
)		 41
1		 (
116
)		 6,
06
4
aff
Dir
ect
st
sts
ex
pe
nse
s -
co		 (
1)
36		 (
)
97		 (
5)
26		 (
)
77		 (
)
22		 (
1)
13		 (
)
62		 (
)
125		 (
)
1,
189		 (
9)
2,
32
the
ost
- o
r c
s		 (
162
)		 (
13
)		 (
11
1)		 (
23
)		 (
8)		 (
21
)		 (
64
)		 (
33
)		 (
1,
22
0)		 (
1,
65
5)
Ind
ire
ct
ex
pe
nse
s		 (
98
7)		 (
85
)		 (
55
7)		 (
156
)		 (
38
)		 (
48
8)		 (
28
9)		 (
39
)		 2,
63
9		 -
Op
tin
ad
jus
ted
era
g e
xp
en
se
s -
(4)		 (
1,
51
0)		 (
195
)		 (
93
3)		 (
25
6)		 (
68
)		 (
64
0)		 (
41
5)		 (
197
)		 23
0		 (
3,
98
4)
Re
str
uct
uri
ts
- d
ire
ct
ng
cos		 (
51
)		 (
24
)		 (
1)		 (
1)		 (
1)		 (
10
)		 (
12
)		 (
45
)		 (
48
5)		 (
63
0)
- in
dir
ect		 (
60
)		 (
1)		 (
40
)		 (
19
)		 (
2)		 (
23
)		 (
25
)		 - 170 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 (
42
1)		 (
92
)		 (
10
)		 (
2)		 - (
56
)		 (
26
)		 - (
70
8)		 (
1,
31
5)
Op
tin
era
g e
xp
en
se
s		 (
2,
04
2)		 (
31
2)		 (
98
4)		 (
27
8)		 (
71
)		 (
72
9)		 (
47
8)		 (
24
2)		 (
79
3)		 (
5,
92
9)
Op
tin
rof
it/(
los
s)
be
for
e i
air
nt
(
los
s)
/re
lea
era
g p
mp
me
se
se
s		 57
3		 (
19
)		 71
5		 53 114 89 (
65
0)		 169 (
90
9)		 135
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
40
)		 27 (
103
)		 (
2)		 (
11
)		 - (
26
3)		 (
17
)		 - (
40
9)
Op
tin
rof
it/(
los
s)
era
g p		 53
3		 8 61
2		 51 103 89 (
91
3)		 152 (
90
9)		 (
27
4)
Op
tin
rof
it/(
los
s)
dju
ste
d (3
era
g p
- a
,4)		 1,
06
5		 122 66
3		 73 106 41 (
98
3)		 197 (
128
)		 1,
156
Ad
dit
ion
al
inf
ati
orm
on
Re
ity
tur
(5)
n o
n e
qu		 11
.9%		 0.6
%		 8.1
%		 5.1
%		 15
.4%		 0.8
%		 nm 14
.3%		 nm (
10
.3%
)
Re
tur
ity
dju
ste
d (
n o
n e
qu
- a
3,4
,5)		 25
.5%		 9.3
%		 8.9
%		 7.6
%		 15
.9%		 (
0.5
%
)		 nm 18
.6%		 nm (
3.2
%
)
Co
st:
inc
ati
om
e r
o (6
)		 78
.1%		 106
.5%		 56
.1%		 84
.0%		 38
.4%		 89
.1%		 nm 58
.9%		 nm 97
.7%
Co
inc
atio
dju
d (
st:
ste
om
e r
- a
3,4
,6)		 57
.7%		 67
.2%		 53
.0%		 77
.3%		 36
.8%		 94
.0%		 nm 47
.9%		 nm 71
.4%
To
tal
ets
(
£b
n)
ass		 15
1.2		 24
.3		 146
.3		 17
.8		 24
.6		 28
4.0		 20
8.0		 24
.9		 20
.5		 90
1.6
s (
£b
n)
Fu
nd
ed
set
(7)
as		 15
1.2		 24
.1		 146
.3		 17
.7		 24
.6		 125
.6		 44
.7		 24
.9		 16
.5		 57
5.6
Ne
t lo
nd
ad
s t
ust
(
£b
n)
an
s a
va
nce
o c
om
ers		 126
.0		 18
.9		 99
.2		 11
.8		 8.5 21
.6		 19
.9		 20
.3		 0.4 32
6.6
Ris
k e
lem
ts
in l
din
(
£b
n)
en
en
g		 2.3 4.3 2.2 0.1 0.1 - 2.4 0.4 - 11
.8
Im
irm
isio
(
£b
n)
t p
pa
en
rov
ns		 (
1.5
)		 (
2.5
)		 (
1.0
)		 - - - (
1.1
)		 (
0.3
)		 (
0.1
)		 (
6.5
)
Cu
sto
r d
its
(
£b
n)
me
ep
os		 140
.4		 14
.7		 96
.7		 25
.4		 24
.1		 8.3 18
.8		 23
.9		 3.5 35
5.8
(
)
(
£b
n)
Ris
k-w
eig
hte
d a
ts
RW
As
sse		 37
.0		 20
.9		 77
.5		 8.1 9.6 36
.7		 42
.3		 9.9 3.2 24
5.2
RW
A e
iva
len
t (
£b
n)
qu
(5)		 41
.3		 20
.8		 81
.5		 8.1 9.6 37
.2		 43
.2		 10
.4		 3.3 25
5.4
Em
loy
mb
(
FT
Es
- t
ho
nd
s)
p
ee
nu
ers
usa		 20
.0		 3.2 5.9 1.8 0.7 1.3 0.9 5.2 50
.2		 89
.2

For the notes to this table please refer to page 24. nm = not meaningful.

Qu art
de
d 3
1 M
er
en		 h 2
01
7
arc
PB
B		 CP
B		 Ce
ntr
al
Uls
ter		 Co
ial
mm
erc		 Pri
te
va		 RB
S		 Na
tW
est		 Ca
ita
l
p		 Wi
llia
ms		 ite
&
ms		 To
tal
UK
PB
B		 Ba
nk
Ro
I		 Ba
nk
ing		 Ba
nk
ing		 Int
atio
l
ern
na		 Ma
rke
ts		 Re
lut
ion
so		 & G
lyn
(
1)		 oth
(
2)
er		 RB
S
£m £m £m £m £m £m £m £m £m £m
Inc
tat
t
om
e s
em
en
Ne
t in
in
ter
est
co
me		 1,
11
1		 105 56
7		 112 80 29 33 165 32 2,
23
4
Ot
he
-in
ter
est
in
r n
on
co
me		 26
6		 41 29
8		 48 18 47
9		 (
85
)		 41 (
10
1)		 1,
00
5
To
tal
inc
ad
jus
ted
om
e -
(3)		 1,
37
7		 146 86
5		 160 98 50
8		 (
52
)		 20
6		 (
69
)		 3,
23
9
Ow
red
it a
dju
stm
ts
n c
en		 - (
1)		 - - - (
)
20		 (
7)		 - (
1)		 (
)
29
Ga
in o
ed
tio
f o
de
bt
n r
em
p
n o
wn		 - - - - - - - - 2 2
To
tal
inc
om
e		 1,
37
7		 145 86
5		 160 98 48
8		 (
59
)		 20
6		 (
68
)		 3,
21
2
taf
f c
Dir
ect
ost
ex
pe
nse
s
- s
s		 (
)
163		 (
)
49		 (
)
125		 (
)
38		 (
)
12		 (
)
155		 (
)
16		 (
)
53		 (
3)
41		 (
4)
1,
02
the
ost
- o
r c
s		 (
64
)		 (
12
)		 (
55
)		 (
7)		 (
3)		 (
51
)		 (
9)		 (
11
)		 (
58
6)		 (
79
8)
Ind
ire
ct
ex
pe
nse
s		 (
48
9)		 (
47
)		 (
26
8)		 (
68
)		 (
28
)		 (
115
)		 (
44
)		 (
20
)		 1,
07
9		 -
Op
tin
ad
jus
ted
era
g e
xp
en
se
s -
(4)		 (
71
6)		 (
108
)		 (
44
8)		 (
113
)		 (
43
)		 (
32
1)		 (
69
)		 (
84
)		 80 (
1,
82
2)
Re
uri
- d
ire
str
uct
ts
ct
ng
cos		 (
20
)		 (
19
)		 (
39
)		 - - (
20
)		 (
70
)		 - (
40
9)		 (
57
7)
Re
str
uct
uri
ts
- in
dir
ect
ng
cos		 (
11
1)		 (
15
)		 (
60
)		 (
11
)		 (
3)		 (
48
)		 (
16
)		 - 26
4		 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 (
4)		 - (
3)		 - - (
)
31		 (
6)		 - (
)
10		 (
)
54
Op
tin
era
g e
xp
en
se
s		 (
85
1)		 (
142
)		 (
0)
55		 (
124
)		 (
46
)		 (
42
0)		 (
16
1)		 (
84
)		 (
75
)		 (
2,
45
3)
Op
rof
it/(
s)
for
(
s)
/re
tin
los
be
e i
air
nt
los
lea
era
g p
mp
me
se
se
s		 52
6		 3 31
5		 36 52 68 (
0)
22		 122 (
)
143		 75
9
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
32
)		 24 (
61
)		 (
3)		 (
7)		 - 45 (
11
)		 (
1)		 (
46
)
Op
tin
rof
it/(
los
s)
era
g p		 49
4		 27 25
4		 33 45 68 (
175
)		 11
1		 (
144
)		 71
3
Op
tin
rof
it/(
los
s)
dju
d (
ste
era
g p
- a
3,4
)		 62
9		 62 35
6		 44 48 187 (
76
)		 11
1		 10 1,
37
1
Ad
dit
ion
al
inf
ati
orm
on
Re
tur
ity
n o
n e
qu
(5)		 24
.8%		 4.0
%		 5.7
%		 6.0
%		 12
.0%		 1.7
%		 nm 20
.9%		 nm 3.1
%
Re
tur
ity
dju
ste
d (
,5)
n o
n e
qu
- a
3,4		 .0%
32		 %
9.3		 %
8.9		 %
8.6		 .0%
13		 %
7.9		 nm .9%
20		 nm %
9.7
Co
inc
ati
st:
om
e r
o (
6)		 61
.8%		 97
.9%		 62
.0%		 77
.5%		 46
.9%		 86
.1%		 nm 40
.8%		 nm 76
.1%
Co
st:
inc
atio
dju
ste
d (3
om
e r
- a
,6)		 52
.0%		 74
.0%		 49
.7%		 70
.6%		 43
.9%		 63
.2%		 nm 40
.8%		 nm 55
.8%
To
tal
(
£b
n)
ets
ass		 159
.1		 24
.7		 153
.3		 18
.1		 25
.1		 22
5.3		 119
.2		 25
.8		 32
.7		 78
3.3
Fu
nd
ed
set
s (
£b
n)
as
(7)		 159
.1		 24
.6		 153
.3		 18
.1		 25
.1		 113
.9		 29
.2		 25
.8		 30
.1		 57
9.2
Ne
t lo
nd
ad
s t
ust
(
£b
n)
an
s a
va
nce
o c
om
ers		 135
.8		 19
.0		 99
.7		 12
.5		 8.9 17
.9		 12
.3		 20
.6		 - 32
6.7
Ris
k e
lem
in l
din
(
£b
n)
ts
en
en
g		 1.9 3.5 1.7 0.1 0.1 - 2.1 0.3 - 9.7
Im
irm
t p
isio
(
£b
n)
pa
en
rov
ns		 (
1.2
)		 (
1.1
)		 (
0.8
)		 - - - (
0.7
)		 (
0.2
)		 (
0.1
)		 (
4.1
)
Cu
(
£b
n)
sto
r d
its
me
ep
os		 146
.3		 16
.6		 97
.2		 25
.7		 25
.3		 8.0 7.6 24
.0		 0.8 35
1.5
Ris
k-w
eig
hte
d a
ts
(
RW
As
)
(
£b
n)
sse		 32
.7		 17
.7		 77
.8		 8.7 9.5 34
.1		 30
.5		 9.7 1.0 22
1.7
t (
£b
n)
RW
A e
iva
len
qu
(5)		 35
.7		 18
.9		 81
.8		 8.7 9.5 36
.0		 32
.7		 10
.2		 1.2 23
4.7
Em
loy
mb
(
FT
Es
ho
nd
s)
- t
(8)
p
ee
nu
ers
usa		 18
.2		 3.1 5.4 1.7 0.8 5.7 0.3 4.3 36
.7		 76
.2

For the notes to this table refer to following page 24. nm = not meaningful.

Qu de
d 3
0 J
art
er
en		 e 2
01
6
un
PB
B		 CP
B		 Ce
ntr
al
Uls
ter		 Co
ial
mm
erc		 Pri
te
va		 RB
S		 Na
tW
est		 Ca
ita
l
p		 Wi
llia
ms		 ite
&
ms		 To
tal
UK
PB
B		 Ba
nk
Ro
I		 Ba
nk
ing		 Ba
nk
ing		 Int
atio
l
ern
na		 Ma
rke
ts		 Re
lut
ion
so		 & G
lyn
(
1)		 oth
(
2)
er		 RB
S
£m £m £m £m £m £m £m £m £m £m
Inc
tat
t
om
e s
em
en
Ne
t in
ter
est
in
co
me		 1,
09
0		 93 53
1		 113 76 24 82 162 6 2,
177
Ot
he
-in
in
ter
est
r n
on
co
me		 25
0		 42 31
5		 53 19 38
0		 (
43
8)		 44 (
107
)		 8
55
(
3)
To
tal
inc
ad
jus
ted
om
e -		 1,
34
0		 135 84
6		 166 95 40
4		 (
6)
35		 20
6		 (
1)
10		 2,
73
5
Ow
red
it a
dju
stm
ts
n c
en		 - - - - - 73 76 - 45 194
Lo
de
tio
f o
de
bt
ss
on
re
mp
n o
wn		 - - - - - - - - (
130
)		 (
130
)
Str
ic d
isp
al
ate
g
os		 - - - - - - (
45
)		 - 24
6		 20
1
To
tal
inc
om
e		 1,
34
0		 135 84
6		 166 95 47
7		 (
32
5)		 20
6		 60 3,
00
0
Dir
taf
f c
ect
ost
ex
pe
nse
s
- s
s		 (
180
)		 (
46
)		 (
134
)		 (
37
)		 (
12
)		 (
64
)		 (
17
)		 (
63
)		 (
4)
57		 (
1,
127
)
the
ost
- o
r c
s		 (
99
)		 (
2)		 (
62
)		 (
9)		 (
3)		 (
7)		 (
31
)		 (
18
)		 (
47
5)		 (
70
6)
Ind
ire
ct
ex
pe
nse
s		 (
3)
50		 (
)
43		 (
1)
30		 (
)
73		 (
)
18		 (
8)
23		 (
)
135		 (
)
18		 1,
32
9		 -
Op
tin
ad
jus
ted
(
4)
era
g e
xp
en
se
s -		 (
78
2)		 (
91
)		 (
49
7)		 (
119
)		 (
33
)		 (
30
9)		 (
183
)		 (
99
)		 28
0		 (
1,
83
3)
Re
str
uct
uri
ts
- d
ire
ct
ng
cos		 (
)
38		 (
)
18		 - - (
1)		 (
)
10		 (
5)		 (
)
25		 (
5)
29		 (
2)
39
Re
uri
- in
dir
str
uct
ts
ect
ng
cos		 (
51
)		 (
1)		 (
41
)		 (
4)		 (
1)		 (
11
)		 (
16
)		 - 125 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 (
42
1)		 (
92
)		 (
8)		 (
2)		 - (
38
)		 (
16
)		 - (
70
7)		 (
1,
28
4)
Op
tin
era
g e
xp
en
se
s		 (
1,
29
2)		 (
20
2)		 (
54
6)		 (
125
)		 (
35
)		 (
36
8)		 (
22
0)		 (
124
)		 (
59
7)		 (
3,
50
9)
Op
tin
rof
it/(
los
s)
be
for
e i
air
nt
(
los
s)
/re
lea
era
g p
mp
me
se
se
s		 48 (
67
)		 30
0		 41 60 109 (
54
5)		 82 (
53
7)		 (
50
9)
t (
s)
/re
Im
irm
los
lea
pa
en
se
se
s		 (
24
)		 14 (
89
)		 - (
9)		 - (
67
)		 (
11
)		 - (
186
)
Op
tin
rof
it/(
los
s)
era
g p		 24 (
53
)		 21
1		 41 51 109 (
61
2)		 71 (
53
7)		 (
69
5)
Op
tin
rof
it/(
los
s)
dju
ste
d (
3,
4)
era
g p
- a		 53
4		 58 26
0		 47 53 95 (
60
6)		 96 179 71
6
Ad
dit
ion
al
inf
ati
orm
on
Re
tur
ity
(
5)
n o
n e
qu		 (
0.4
%
)		 (
8.2
%
)		 4.9
%		 8.6
%		 15
.0%		 4.3
%		 nm 13
.3%		 nm (
11
.0%
)
Re
ity
dju
d (
3,
4,
5)
tur
ste
n o
n e
qu
- a		 24
.2%		 9.0
%		 6.6
%		 9.9
%		 15
.7%		 3.5
%		 nm 18
.0%		 nm 3.2
%
Co
st:
inc
ati
om
e r
o (
6)		 96
.4%		 149
.6%		 63
.0%		 75
.3%		 36
.8%		 77
.1%		 nm 60
.2%		 nm 117
.2%
Co
d (
6)
st:
inc
atio
dju
ste
3,
4,
om
e r
- a		 .4%
58		 .4%
67		 .0%
57		 .7%
71		 .7%
34		 .5%
76		 nm .1%
48		 nm .6%
66
To
tal
ets
(
£b
n)
ass		 15
1.2		 24
.3		 146
.3		 17
.8		 24
.6		 28
4.0		 20
8.0		 24
.9		 20
.5		 90
1.6
Fu
nd
ed
set
s (
£b
n)
(
7)
as		 15
1.2		 24
.1		 146
.3		 17
.7		 24
.6		 125
.6		 44
.7		 24
.9		 16
.5		 57
5.6
Ne
t lo
nd
ad
(
£b
n)
s t
ust
an
s a
va
nce
o c
om
ers		 126
.0		 18
.9		 99
.2		 11
.8		 8.5 21
.6		 19
.9		 20
.3		 0.4 32
6.6
Ris
k e
lem
ts
in l
din
(
£b
n)
en
en
g		 2.3 4.3 2.2 0.1 0.1 - 2.4 0.4 - 11
.8
(
£b
n)
Im
irm
t p
isio
pa
en
rov
ns		 (
)
1.5		 (
)
2.5		 (
)
1.0		 - - - (
)
1.1		 (
)
0.3		 (
)
0.1		 (
)
6.5
Cu
r d
its
(
£b
n)
sto
me
ep
os		 140
.4		 14
.7		 96
.7		 25
.4		 24
.1		 8.3 18
.8		 23
.9		 3.5 35
5.8
Ris
k-w
eig
hte
d a
ts
(
RW
As
)
(
£b
n)
sse		 37
.0		 20
.9		 77
.5		 8.1 9.6 36
.7		 42
.3		 9.9 3.2 24
5.2
RW
A e
iva
len
t (
£b
n)
(
5)
qu		 41
.3		 20
.8		 81
.5		 8.1 9.6 37
.2		 43
.2		 10
.4		 3.3 25
5.4
Em
loy
mb
(
FT
Es
- t
ho
nd
s)
p
ee
nu
ers
usa		 20
.0		 3.2 5.9 1.8 0.7 1.3 0.9 5.2 50
.2		 89
.2

Notes:

(1) Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK. During the period presented W&G has not operated as a separate legal entity.

(2) Central items include unallocated transactions which principally comprise volatile items under IFRS and balances in relation to international private banking for Q1 2016.

(3) Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.

(4) Excluding restructuring costs and litigation and conduct costs.

(5) RBS's CET 1 target is 13% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit after tax and adjusted for preference dividends is divided by notional equity allocated at different rates of 14% (Ulster Bank RoI - 11% prior to Q1 2017), 11% (Commercial Banking), 14% (Private Banking - 15% prior to Q1 2017), 12% (RBS International) and 15% for all other segments, of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes). RBS Return on equity is calculated using profit for the period attributable to ordinary shareholders. Core business adjusted (2,3) return on equity was 14.1% (Return on equity for Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and NatWest Markets combined).

(6) Operating lease depreciation included in income (H1 2017 - £72 million; Q2 2017 - £36 million; H1 2016 - £76 million; Q1 2017 - £36 million; and Q2 2016 - £38 million).

(7) Funded assets exclude derivative assets.

(8) On 1 January 2017 4.5 thousand employees on a FTE basis were transferred from Central items to NatWest Markets in preparation for ring-fencing.

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Income statement £m £m £m £m £m
Net interest income 2,231 2,109 1,120 1,111 1,090
Net fees and commissions 493 498 246 247 243
Other non-interest income 31 8 12 19 7
Non-interest income 524 506 258 266 250
Total income 2,755 2,615 1,378 1,377 1,340
Direct expenses
- staff costs (329) (361) (166) (163) (180)
- other costs (121) (162) (57) (64) (99)
Indirect expenses (963) (987) (474) (489) (503)
Restructuring costs
- direct (23) (51) (3) (20) (38)
- indirect (137) (60) (26) (111) (51)
Litigation and conduct costs (13) (421) (9) (4) (421)
Operating expenses (1,586) (2,042) (735) (851) (1,292)
Profit before impairment losses 1,169 573 643 526 48
Impairment losses (72) (40) (40) (32) (24)
Operating profit 1,097 533 603 494 24
Operating expenses - adjusted (1) (1,413) (1,510) (697) (716) (782)
Operating profit - adjusted (1) 1,270 1,065 641 629 534
Analysis of income by product
Personal advances 452 413 227 225 209
Personal deposits 401 363 197 204 195
Mortgages 1,195 1,137 605 590 573
Cards 270 316 133 137 174
Business banking 393 370 199 194 188
Other 44 16 17 27 1
Total income 2,755 2,615 1,378 1,377 1,340
Analysis of impairments by sector
Personal advances 70 20 42 28 14
Mortgages (32) 18 (14) (18) 14
Business banking 7 1 5 2 1
Cards 27 1 7 20 (5)
Total impairment losses 72 40 40 32 24

Note:

(1) Excluding restructuring costs and litigation and conduct costs.

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
Performance ratios 2017 2016 2017 2017 2016
Return on equity (1) 27.8% 11.9% 30.8% 24.8% (0.4%)
Return on equity - adjusted (1,2) 32.4% 25.5% 32.8% 32.0% 24.2%
Net interest margin 2.97% 3.07% 2.92% 3.01% 3.12%
Cost:income ratio 57.6% 78.1% 53.3% 61.8% 96.4%
Cost:income ratio - adjusted (2) 51.3% 57.7% 50.6% 52.0% 58.4%
30 June
2017		 31 March
2017		 31 December
2016
Capital and balance sheet £bn £bn Change £bn Change
Loans and advances to customers (gross)
- personal advances 6.2 6.1 2% 6.0 3%
- mortgages 123.0 120.6 2% 117.1 5%
- business banking 6.8 6.6 3% 6.4 6%
- cards 3.7 3.7 - 3.9 (5%)
Total loans and advances to customers (gross) 139.7 137.0 2% 133.4 5%
Loan impairment provisions (1.2) (1.2) - (1.3) (8%)
Net loans and advances to customers 138.5 135.8 2% 132.1 5%
Total assets 161.6 159.1 2% 155.6 4%
Funded assets 161.6 159.1 2% 155.6 4%
Risk elements in lending 1.8 1.9 (5%) 2.0 (10%)
Provision coverage (3) 63% 64% (100bp) 65% (200bp)
Customer deposits
- personal current accounts 44.4 43.5 2% 42.1 5%
- personal savings 81.8 80.4 2% 81.4 -
- business banking 23.6 22.4 5% 22.3 6%
Total customer deposits 149.8 146.3 2% 145.8 3%
Assets under management (excluding deposits) 4.5 4.3 5% 4.2 7%
Loan:deposit ratio (excluding repos) 92% 93% (100bp) 91% 100bp
Risk-weighted assets
- credit risk (non-counterparty) 25.0 24.8 1% 24.8 1%
- operational risk 7.9 7.9 - 7.9 -
Total risk-weighted assets 32.9 32.7 1% 32.7 1%

Notes:

(1) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 15% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.

(2) Excluding restructuring costs and litigation and conduct costs.

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

Key points

UK PBB increased total income by £140 million, or 5.4%, compared with H1 2016 supported by a 9.9% increase in net loans and advances, which more than offset margin contraction. Adjusted operating expenses decreased by £97 million, or 6.4%, compared with H1 2016 reflecting reduced headcount and lower back-office operations costs. A net impairment charge of £72 million, 10 basis points of gross customer loans, reflects continued benign credit conditions. Compared with FY 2016, RWAs have reduced by £0.4 billion, excluding volume growth.

Serving our customers

  • UK PBB continues to invest in our digital channel offering and now has 4.52 million customers regularly using our mobile app, 8% higher than December 2016. Further enhancements were made during H1 2017, along with the introduction of a 'TechXpert' in every branch to support customers in the use of digital banking tools. NatWest was awarded Best Banking App at the British Bank Awards in 2017 and we continue to receive very positive customer feedback.
  • UK PBB continued to deliver strong support to personal customers with gross new mortgage lending of £14.5 billion in H1 2017, broadly in line with H1 2016. We continued to drive improvements in our customer mortgage experience with NatWest Intermediary Solutions named Best Overall Lender at the 2017 Mortgage Advice Bureau Awards. Personal unsecured loans also saw balance growth of 6% compared with H1 2016 supported by an improved customer experience, with increased mobile functionality and simplified application processing resulting in digital loan sales growth of 23% compared with H1 2016. Our overall personal unsecured risk appetite remains consistent with H1 2016, with new business quality broadly stable on H1 2016.
  • The Reward proposition continued to grow with more than 1,350,000 customer accounts, 17% higher than December 2016. We repositioned the Reward account proposition from 26 June 2017, including the introduction of minimum customer criteria, to maintain acceptable returns in a continuing lower interest rate environment.
  • Our free Financial Health Check continues to provide personal and business customers with advice on their financial position and what options are open to them, including adoption of digital banking. More than 660,000 Financial Health Checks have been completed in H1 2017.
  • Our business banking segment continues to deliver customer improvements with an enhanced digital offering and a simplified new lending process for loans up to £35,000, delivering same day loan approval and supporting ongoing productivity improvements. Our business banking risk appetite remains consistent with H1 2016 with new business quality broadly stable on H1 2016.
  • NatWest personal banking NPS was stable over the first half at 13, although we recognise that significant work is required to improve customer experience across Royal Bank of Scotland personal banking and business banking.

Financial performance

H1 2017 compared with H1 2016

  • Operating profit was £1,097 million compared with £533 million in H1 2016. The increase was driven by £140 million higher income, a £97 million reduction in adjusted operating expenses and a £408 million reduction in litigation and conduct charges, partially offset by a £49 million increase in restructuring costs and a £32 million higher impairment charge.
  • Income of £2,755 million was £140 million, or 5.4%, higher than H1 2016. Net interest income increased by £122 million, or 5.8%, principally reflecting strong balance growth and savings re-pricing benefits. Net interest margin declined by 10 basis points to 2.97% driven by lower mortgage margins, asset mix and reduced current account hedge yield, partially offset by savings re-pricing benefits from actions taken in 2016.
  • Adjusted operating expenses decreased by £97 million, or 6.4%, to £1,413 million compared with H1 2016 supported by a net FSCS levy release of £4 million compared with a £42 million charge in H1 2016. Direct staff costs were £32 million, or 8.9%, lower with headcount 12% lower. Indirect expenses were £24 million lower with ongoing customer service operations £30 million lower following process and productivity improvements, partly offset by increased technology infrastructure costs.

  • A restructuring charge of £160 million included a £92 million charge for property exits taken in Q1 2017 as we rationalised our back office property location strategy and branch distribution network.

  • The net impairment charge of £72 million, or 10 basis points of gross customer loans, reflects continued benign credit conditions and compared with a £40 million charge in H1 2016. In H1 2017 we continued to see provision releases in mortgages and business banking, however, there were minimal personal unsecured releases in H1 2017 compared with H1 2016. Defaults in H1 2017 remained at very low levels across all portfolios compared to historic levels, although a little higher than in H1 2016.

  • Net loans and advances increased by £12.5 billion, or 9.9%, to £138.5 billion as UK PBB continued to deliver support for both personal and business customers. Gross new mortgage lending in H1 2017 was £14.5 billion with market share of new mortgages at approximately 11.9% resulting in stock share of approximately 9.1% at 30 June 2017 compared with 8.8% at 31 December 2016 and 8.6% at 30 June 2016. Positive momentum continued across business banking lending with net balances up 4% compared with 30 June 2016, excluding transfers of £0.6 billion from Commercial Banking.
  • Customer deposits increased by £9.4 billion, or 6.7%, to £149.8 billion, driven by strong personal current account growth.
  • RWAs of £32.9 billion reduced by £4.1 billion, or 11.1%, compared with H1 2016 primarily due to recalibration improvements in mortgage risk parameter models and overall improved credit quality, partially offset by loan growth.

Q2 2017 compared with Q1 2017

  • Operating profit increased by £109 million compared with Q1 2017 principally driven by lower restructuring costs. Adjusted operating profit increased by £12 million to £641 million.
  • Net interest margin decreased by 9 basis points to 2.92% driven by asset mix, lower mortgage new business margins and reduced current account hedge income.
  • Compared with Q1 2017, non-interest income decreased by £8 million principally reflecting a £7 million debt sale profit in the previous quarter.
  • An impairment charge of £40 million was £8 million higher than Q1 2017 mainly due to lower portfolio provision releases. Default levels remained stable.

Q2 2017 compared with Q2 2016

  • Operating profit increased by £579 million compared with Q2 2016 primarily due to a reduction in litigation and conduct costs. Adjusted operating profit increased by £107 million, or 20.0%, to £641 million.
  • Net interest income increased by £30 million, or 2.8%, compared with Q2 2016 driven by strong balance growth partially offset by reduced net interest margin. Net interest margin decreased 20 basis points driven by reduced mortgage margins and lower deposit hedge income, partially offset by savings re-pricing benefits.

Ulster Bank RoI (£ Sterling)

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Income statement £m £m £m £m £m
Net interest income 206 198 101 105 93
Net fees and commissions 47 42 26 21 21
Other non-interest income 43 50 23 20 21
Own credit adjustment (3) 3 (2) (1) -
Non-interest income 87 95 47 40 42
Total income 293 293 148 145 135
Direct expenses
- staff costs (96) (97) (47) (49) (46)
- other costs (24) (13) (12) (12) (2)
Indirect expenses (97) (85) (50) (47) (43)
Restructuring costs
- direct (24) (24) (5) (19) (18)
- indirect (19) (1) (4) (15) (1)
Litigation and conduct costs (33) (92) (33) - (92)
Operating expenses (293) (312) (151) (142) (202)
Operating (loss)/profit before impairment
releases/(losses)		 - (19) (3) 3 (67)
Impairment releases/(losses) 11 27 (13) 24 14
Operating profit/(loss) 11 8 (16) 27 (53)
Total income - adjusted (1) 296 290 150 146 135
Operating expenses - adjusted (2) (217) (195) (109) (108) (91)
Operating profit - adjusted (1,2) 90 122 28 62 58
Average exchange rate - £/€ 1.163 1.284 1.163 1.162 1.270
Analysis of income by business
Corporate 88 99 43 45 43
Retail 204 195 104 100 95
Other 1 (1) 1 - (3)
Total income 293 293 148 145 135
Analysis of impairments by sector
Mortgages 1 (1) 15 (14) (2)
Commercial real estate
- investment 2 (5) - 2 -
- development (6) (7) (3) (3) (5)
Other lending (8) (14) 1 (9) (7)
Total impairment (releases)/losses (11) (27) 13 (24) (14)
Performance ratios
Return on equity (3) 0.8% 0.6% (2.4%) 4.0% (8.2%)
Return on equity - adjusted (1,2,3) 6.8% 9.3% 4.3% 9.3% 9.0%
Net interest margin 1.67% 1.64% 1.60% 1.74% 1.54%
Cost:income ratio 100.0% 106.5% 102.0% 97.9% 149.6%
Cost:income ratio - adjusted (1,2) 73.3% 67.2% 72.7% 74.0% 67.4%

Notes:

(1) Excluding own credit adjustments.

(2) Excluding restructuring costs and litigation and conduct costs.

(3) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 14% (11% prior to Q1 2017) of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 15% tax rate up to and including FY 2016, nil tax thereafter.

Ulster Bank RoI (£ Sterling)

30 June 31 March 31 December
Capital and balance sheet 2017
£bn		 2017
£bn		 Change 2016
£bn		 Change
Loans and advances to customers (gross)
Mortgages 15.4 15.0 3% 15.3 1%
Commercial real estate
- investment 0.8 0.8 - 0.7 14%
- development 0.2 0.2 - 0.2 -
Other lending 4.3 4.1 5% 3.9 10%
Total loans and advances to customers (gross)
Loan impairment provisions		 20.7 20.1 3% 20.1 3%
- mortgages
- commercial real estate		 (0.9) (0.9) - (0.9) -
- investment - (0.1) (100%) - -
- development - - - - -
Other lending (0.3) (0.1) 200% (0.3) -
Total loan impairment provisions (1.2) (1.1) 9% (1.2) -
Net loans and advances to customers 19.5 19.0 3% 18.9 3%
Total assets 24.9 24.7 1% 24.1 3%
Funded assets 24.8 24.6 1% 24.0 3%
Risk elements in lending
- mortgages 3.2 3.1 3% 3.1 3%
- commercial real estate
- investment - 0.1 (100%) - -
- development - - - - -
Other lending 0.3 0.3 - 0.4 (25%)
Total risk elements in lending 3.5 3.5 - 3.5 -
Provision coverage (1) 33% 33% - 34% (100bp)
Customer deposits 16.9 16.6 2% 16.1 5%
Loan:deposit ratio (excluding repos) 115% 114% 100bp 117% (200bp)
Risk-weighted assets
- credit risk
- non-counterparty 17.0 16.7 2% 16.9 1%
- counterparty 0.1 0.1 - 0.1 -
- operational risk 0.9 0.9 - 1.1 (18%)
Total risk-weighted assets 18.0 17.7 2% 18.1 (1%)
Spot exchange rate - £/€ 1.138 1.171 1.168

Note:

(1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

30 June
30 June
30 June
31 March
30 June
2017
2016
2017
2017
2016
Income statement
€m
€m
€m
€m
€m
Net interest income
240
254
118
122
118
Net fees and commissions
55
54
31
24
27
Other non-interest income
50
65
27
23
27
Own credit adjustment
(4)
4
(3)
(1)
-
Non-interest income
101
123
55
46
54
Total income
341
377
173
168
172
Direct expenses
- staff costs
(112)
(124)
(55)
(57)
(58)
- other costs
(29)
(18)
(16)
(13)
(3)
Indirect expenses
(113)
(110)
(58)
(55)
(55)
Restructuring costs
- direct
(27)
(31)
(5)
(22)
(23)
- indirect
(22)
(1)
(5)
(17)
(1)
Litigation and conduct costs
(39)
(118)
(39)
-
(118)
Operating expenses
(342)
(402)
(178)
(164)
(258)
Operating (loss)/profit before impairment
releases/(losses)
(1)
(25)
(5)
4
(86)
Impairment releases/(losses)
13
34
(15)
28
17
Operating profit/(loss)
12
9
(20)
32
(69)
Total income - adjusted (1)
345
373
176
169
172
Operating expenses - adjusted (2)
(254)
(252)
(129)
(125)
(116)
Operating profit - adjusted (1,2)
104
155
32
72
73
Analysis of income by business
Corporate
102
128
50
52
55
Retail
237
251
121
116
121
Other
2
(2)
2
-
(4)
Total income
341
377
173
168
172
Analysis of impairments by sector
Mortgages
1
(1)
17
(16)
(3)
Commercial real estate
- investment
3
(6)
-
3
-
- development
(6)
(8)
(3)
(3)
(6)
Other lending
(11)
(19)
1
(12)
(8)
Total impairment (releases)/losses
(13)
(34)
15
(28)
(17)
Performance ratios
Return on equity (3)
0.8%
0.6%
(2.4%)
4.0%
(8.2%)
Return on equity - adjusted (1,2,3)
6.8%
9.3%
4.3%
9.3%
9.0%
Net interest margin
1.67%
1.64%
1.60%
1.74%
1.54%
Cost:income ratio
100.0%
106.5%
102.0%
97.9%
149.6%
Cost:income ratio - adjusted (1,2)
73.3%
67.2%
72.7%
74.0%
67.4%		 Half year ended
Quarter ended

Notes:

(1) Excluding own credit adjustments.

(2) Excluding restructuring costs and litigation and conduct costs.

(3) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 14% (11% prior to Q1 2017) of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 15% tax rate up to and including FY 2016, nil tax thereafter.

30 June
2017		 31 March
2017		 31 December
2016
Capital and balance sheet €bn €bn Change €bn Change
Loans and advances to customers (gross)
- mortgages
- commercial real estate		 17.5 17.6 (1%) 17.9 (2%)
- investment 0.9 0.9 - 0.8 13%
- development 0.2 0.2 - 0.3 (33%)
Other lending 4.9 4.8 2% 4.5 9%
Total loans and advances to customers (gross)
Loan impairment provisions		 23.5 23.5 - 23.5 -
- mortgages
- commercial real estate		 (1.0) (1.0) - (1.1) (9%)
- investment
- development		 -
-		 (0.1)
-		 (100%)
-		 -
-		 -
-
Other lending (0.3) (0.2) 50% (0.3) -
Total loan impairment provisions (1.3) (1.3) - (1.4) (7%)
Net loans and advances to customers 22.2 22.2 - 22.1 -
Total assets 28.3 28.9 (2%) 28.2 -
Funded assets 28.2 28.8 (2%) 28.0 1%
Risk elements in lending
- mortgages
- commercial real estate		 3.6 3.7 (3%) 3.7 (3%)
- investment - 0.1 (100%) - -
- development - - - - -
Other lending 0.4 0.2 100% 0.4 -
Total risk elements in lending 4.0 4.0 - 4.1 (2%)
Provision coverage (1) 33% 33% - 34% (100bp)
Customer deposits 19.3 19.4 (1%) 18.8 3%
Loan:deposit ratio (excluding repos) 115% 114% 100bp 117% (200bp)
Risk-weighted assets
- credit risk
- non-counterparty 19.3 19.6 (2%) 19.7 (2%)
- counterparty
- operational risk		 0.1
1.1		 0.1
1.1		 -
-		 0.1
1.3		 -
(15%)
Total risk-weighted assets 20.5 20.8 (1%) 21.1 (3%)

Note:

(1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

Key points

Ulster Bank RoI (Ulster Bank) continued to support the Irish economy with an 11% increase in gross new lending compared with H1 2016. In addition, investment in technology combined with process improvements has driven further cost efficiencies. We continue to reposition capital, with RWAs in the tracker mortgage portfolio down by 22.5% and REILs down by 23.1% compared with H1 2016.

Serving our customers

  • New lending increased 11% on prior year levels supported by successful home mover advertising campaigns, competitive rates for low LTV and high value mortgage customers and an improved customer proposition for personal and commercial customers.
  • Ulster Bank has narrowed the gap to number one in the market for customer trust and advocacy as evidenced by the Retail Personal NPS score of (5) this quarter, the highest score in 5 years and 6 points improved on prior year. Since 2016, scores have improved for SME business customers too, up from 8 to 131 .
  • Investment in the digital platform has focused on providing enhancements that make it easier for customers to bank with us. Ulster Bank was amongst the first banks in Ireland to introduce Apple Pay and Android Pay in H1 2017 with registrations exceeding expectations.
  • Ulster Bank expanded it's partnership with the Strategic Banking Corporation of Ireland (SBCI) to offer working capital finance to agricultural businesses at a lower interest rate of 2.95% and over more flexible terms, contributing to the ongoing financial sustainability of farming enterprises.
  • Ulster Bank launched 'Business Achievers' in June 2017, a business portal and networking hub designed to connect business owners and entrepreneurs to industry thought leaders, generate new business opportunities and deliver solid and supportive connections.
  • The deposit rating and outlook for Ulster Bank Ireland DAC was upgraded by Moody's rating agency in June 2017, re-affirming the positive progress made in transforming the business and reducing the volume of legacy nonperforming assets.

Financial performance

H1 2017 compared with H1 2016

  • An operating profit of €12 million compared with €9 million in H1 2016. An adjusted operating profit of €104 million was €51 million lower than H1 2016 reflecting reduced income on free funds and lower net impairment releases. The core business is performing ahead of expectations, however comparisons to prior year performance are impacted by a number of one-off items in both H1 2016 and H1 2017.
  • A non-recurring profit of €37 million relating to asset disposals was recognised in H1 2016, of which €10 million was reported in income.
  • Adjusted income of €345 million was €28 million, or 7.5%, lower than H1 2016. Excluding the €10 million asset disposal gain in H1 2016, and €38 million reduction in income on free funds, income increased by €20 million primarily due to the benefit of one off income adjustments in H1 2017 of €15 million, combined with higher lending income and reduced funding costs. Partially offsetting this was a €7 million reduction in FX income associated with an interim adjustment to the pricing of FX transactions between Ulster Bank and NatWest markets, pending completion of a detailed pricing review. Net interest margin of 1.67% was 3 basis points higher than H1 2016, reflecting a combination of improved deposit and loan margins, one off income adjustments in H1 2017 and successful deleveraging measures in 2016 which have reduced the concentration of low yielding non performing loans.
  • Adjusted operating expenses of €254 million were 0.8% higher than H1 2016 primarily due to €19 million of oneoff accrual releases in H1 2016, compared with €12 million of releases in H1 2017, and a €5 million reduction in costs recharged to other business segments. This was partially offset by continued progress in the delivery of cost saving initiatives as evidenced by a 9.4% reduction in headcount and 9.7% reduction in staff costs compared with H1 2016.
  • Restructuring costs increased by €17 million, or 53.1%, primarily driven by announcements in Q1 2017 to invest in and restructure the bank, including the closure of 22 branches, 11 of which were completed in Q2 2017.

  • Ulster Bank recognised a €39 million conduct and litigation provision in Q2 2017 for remediation and project costs associated with legacy business issues where errors may have occurred. This was identified as part of a review of the wider personal and commercial loan portfolio extending from the tracker mortgage examination programme.

  • A net impairment release of €13 million compared with a €34 million release in H1 2016. The decrease was driven by a combination of material gains associated with asset disposals in H1 2016 and refinements to the mortgage provision models in H1 2017 which led to a one off impairment charge in Q2 2017. REILs were €1.2 billion, or 23.1%, lower than H1 2016 reflecting a combination of asset sales and credit quality improvements.

  • Ulster Bank added a further €1.3 billion of gross new lending in the first half of the year, up 11% compared with H1 2016.
  • Effective liquidity management contributed to a €1.8 billion, or 10.3%, increase in customer deposit balances compared to H1 2016 and supported a 14 percentage point reduction in loan:deposit ratio to 115%.
  • RWAs of €20.5 billion reduced by €4.4 billion, or 17.7%, compared with H1 2016. Q2 2017 represented the 9th consecutive quarter of decreasing RWAs supported by asset sales, refinements to the mortgage modelling approach and an improvement in the macro economic environment. RWAs on the tracker mortgage portfolio reduced by €2.2 billion, or 22.5%, compared with H1 2016, to €7.4 billion in H1 2017.

Q2 2017 compared with Q1 2017

  • An operating loss of €20 million compared with a profit of €32 million in Q1 2017.
  • An impairment charge of €15 million, compared with a release of €28 million in Q1 2017, and included a net charge associated with a model refinement on the mortgage portfolio partly offset by improvements in credit metrics.
  • Restructuring costs decreased by €29 million to €10 million in Q2 2017. The charge in Q1 reflected announcements made to invest in and restructure the bank, including the closure of 22 branches, 11 of which were completed in Q2 2017.
  • Ulster Bank recognised a €39 million conduct and litigation provision in Q2 2017 for remediation and project costs associated with legacy business issues where errors may have occurred.
  • Net interest margin reduced by 14 basis points to 1.60% primarily driven by one off releases in Q1 2017.

Q2 2017 compared with Q2 2016

  • An operating loss of €20 million decreased by €49 million compared with Q2 2016 primarily due to a €79 million reduction in litigation and conduct costs partly offset by reduced income on free funds and a net impairment charge in Q2 2017 compared with a release in Q2 2016.
  • Adjusted operating expenses increased by €13 million, or 11.2%, driven by €19 million of accrual releases in Q2 2016, compared with €4 million in Q2 2017, a reduction in costs recharged to other business segments and an increase in the RoI bank levy.

Note: (1) Source: Red C SME survey based on interviews with businesses with an estimated annual turnover of €2-25m (6-monthly study only). Latest sample size: Ulster Bank (252).

Commercial Banking

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Income statement £m £m £m £m £m
Net interest income 1,141 1,067 574 567 531
Net fees and commissions 516 523 261 255 261
Other non-interest income 93 109 50 43 54
Non-interest income 609 632 311 298 315
Total income 1,750 1,699 885 865 846
Direct expenses
- staff costs (245) (265) (120) (125) (134)
- operating lease depreciation (72) (70) (36) (36) (35)
- other costs (39) (41) (20) (19) (27)
Indirect expenses (519) (557) (251) (268) (301)
Restructuring costs
- direct (40) (1) (1) (39) -
- indirect (77) (40) (17) (60) (41)
Litigation and conduct costs (4) (10) (1) (3) (8)
Operating expenses (996) (984) (446) (550) (546)
Operating profit before impairment losses 754 715 439 315 300
Impairment losses (94) (103) (33) (61) (89)
Operating profit 660 612 406 254 211
Operating expenses - adjusted (1) (875) (933) (427) (448) (497)
Operating profit - adjusted (1) 781 663 425 356 260
Analysis of income by business
Commercial lending 961 900 493 468 464
Deposits 248 249 125 123 124
Asset and invoice finance 335 356 164 171 179
Other 206 194 103 103 79
Total income 1,750 1,699 885 865 846
Analysis of impairments by sector
Commercial real estate (1) 2 (3) 2 4
Asset and invoice finance 28 13 12 16 10
Private sector services (education, health, etc) 14 1 16 (2) -
Banks and financial institutions 1 1 - 1 1
Wholesale and retail trade repairs 11 (1) 4 7 (4)
Hotels and restaurants 2 (1) (1) 3 (1)
Manufacturing 4 2 2 2 1
Construction - 5 - - 4
Other 35 81 3 32 74
Total impairment losses 94 103 33 61 89

Note:

(1) Excluding restructuring costs and litigation and conduct costs.

Commercial Banking

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
Performance ratios 2017 2016 2017 2017 2016
Return on equity (1) 8.2% 8.1% 10.7% 5.7% 4.9%
Return on equity - adjusted (1,2) 10.1% 8.9% 11.4% 8.9% 6.6%
Net interest margin 1.75% 1.83% 1.73% 1.76% 1.78%
Cost:income ratio (3) 55.1% 56.1% 48.3% 62.0% 63.0%
Cost:income ratio - adjusted (2,3) 47.9% 53.0% 46.1% 49.7% 57.0%
30 June 31 March 31 December
2017 2017 2016
Capital and balance sheet £bn £bn Change £bn Change
Loans and advances to customers (gross)
- Commercial real estate 16.8 17.1 (2%) 16.9 (1%)
- Asset and invoice finance 15.1 14.2 6% 14.1 7%
- Private sector services (education, health etc) 7.0 6.8 3% 6.9 1%
- Banks and financial institutions 7.7 8.9 (13%) 8.9 (13%)
- Wholesale and retail trade repairs 7.9 8.3 (5%) 8.4 (6%)
- Hotels and restaurants 3.7 3.9 (5%) 3.7 -
- Manufacturing 5.9 6.3 (6%) 6.6 (11%)
- Construction 2.1 2.2 (5%) 2.1 -
- Other 32.6 32.8 (1%) 33.3 (2%)
Total loans and advances to customers (gross) 98.8 100.5 (2%) 100.9 (2%)
Loan impairment provisions (0.7) (0.8) (13%) (0.8) (13%)
Net loans and advances to customers 98.1 99.7 (2%) 100.1 (2%)
Total assets 151.9 153.3 (1%) 150.5 1%
Funded assets 151.9 153.3 (1%) 150.5 1%
Risk elements in lending 1.6 1.7 (6%) 1.9 (16%)
Provision coverage (4) 45% 43% 200bp 43% 200bp
Customer deposits 100.9 97.2 4% 97.9 3%
Loan:deposit ratio (excluding repos) 97% 103% (600bp) 102% (500bp)
Risk-weighted assets
- Credit risk (non-counterparty) 69.8 71.4 (2%) 72.0 (3%)
- Operational risk 6.4 6.4 - 6.5 (2%)
Total risk-weighted assets 76.2 77.8 (2%) 78.5 (3%)

Notes:

(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity (based on 11% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.

(2) Excluding restructuring costs and litigation and conduct costs.

(3) Operating lease depreciation included in income.

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

Commercial Banking

Key points

Commercial Banking income increased by £51 million, or 3.0%, compared with H1 2016 and adjusted operating expenses reduced by £58 million, or 6.2%, supported by a 700 reduction in front office headcount, driving an adjusted return on equity of 10.1%, an increase of 1.2% compared to H1 2016. As we manage the book for value, net loans and advances reduced by 1.1% compared with H1 2016 as growth in targeted segments has been more than offset by active reductions in those areas with lower returns. RWAs from lower returning business have reduced by a gross £4.2 billion since December 2016.

Serving our customers

  • RBS is the leading bank for Commercial and Corporate customers in the UK. Commercial Banking provides comprehensive banking and financing services to ~49,000 customers. We provide financing through a range of products including invoice finance, asset finance and leasing, risk management capability through our partnership with NatWest Markets and we help our customers monitor and move their money efficiently. We provide sector and transaction expertise through market-leading brands such as NatWest, Royal Bank of Scotland, Lombard and Mentor.
  • Our NatWest brand has the number one NPS in England and Wales(1). This reflects the positive steps we are taking to improve customer experience; making banking with us easier, less time consuming and adding real value to every interaction. Our strategy will continue to focus on end-to-end business performance aimed at improving customer service, trust and advocacy.
  • Overall net lending volumes have reduced since H1 2016, however, we have successfully achieved growth during H1 2017 in target segments, including 6% annualised growth in the core SME and Commercial book. The transformation of our lending proposition means 62% of lending decisions can be communicated in five days, and we have further simplified the new lending process for loans less than £25,000 through the launch of digital selfserve account opening for SMEs. In addition, Lombard has been named 'Best Leasing & Asset Finance Provider' at the Business Moneyfacts Awards for a ninth time.
  • Our Bankline online digital platform, now used by 90% of our active customer base and with 400,000 payments processed daily, has been independently rated as market leading for digital customer experience, and we are now launching an upgraded version. During the first half we launched the ClearSpend mobile app, helping corporate card customers exercise better control and oversight of spending on company accounts. We also continued the build out of Esme, our digital 24/7 online lending platform and progressed development of a range of new modular business solutions to expand and improve our customer offering.
  • We continue to provide enhanced support for UK entrepreneurs through our award-winning E-Spark partnership, supporting 1,736 companies to secure £151 million investment and created 3,152 jobs since inception, and now have nationwide coverage with 12 hubs in England, Scotland, Wales and Ireland.

Financial performance

H1 2017 compared with H1 2016

  • Operating profit of £660 million in H1 2017 compared with £612 million in H1 2016. Adjusted operating profit of £781 million was £118 million, or 17.8%, higher than H1 2016 reflecting lower adjusted operating expenses and higher income.
  • Total income increased by £51 million, or 3.0%, to £1,750 million driven by increased deposit volumes and repricing benefits, partially offset by margin pressure. Active re-pricing of assets and deposits has been offset by wider asset margin pressure in a lower rate environment causing net interest margin to fall by 8 basis points to 1.75%.
  • Adjusted operating expenses of £875 million were £58 million, or 6.2%, lower than H1 2016, principally reflecting the impact of a 700 reduction in headcount to 5,200 and a £25 million intangible asset write-down in H1 2016.
  • Net impairment losses of £94 million, 19 basis points of gross customer loans, were £9 million lower than H1 2016.
  • Net loans and advances decreased by £1.1 billion to £98.1 billion, compared with H1 2016. Whilst overall net lending volumes have reduced since H1 2016, we have successfully achieved growth during H1 2017 in target segments, including 6% annualised growth in the core SME and Commercial book.
  • RWAs of £76.2 billion reduced by £1.3 billion, or 1.7%, compared with H1 2016 as planned reductions in exposures with weak returns have been offset by lending growth in some segments.

Q2 2017 compared with Q1 2017

  • Operating profit of £406 million was £152 million higher than Q1 2017, principally reflecting lower restructuring costs and lower impairment losses. Adjusted operating profit of £425 million was £69 million higher than Q1 2017 reflecting lower impairment losses, lower adjusted operating expenses and higher income.
  • Total income increased by £20 million, or 2.3%, to £885 million compared with Q1 2017. Net interest margin reduced by 3 basis point to 1.73% due to continuing asset margin pressure.
  • Adjusted operating expenses decreased by £21 million, or 4.7%, to £427 million as headcount continued to be reduced and discretionary expenditure remained tightly controlled.
  • Net impairment losses of £33 million, 13 basis points of gross customer loans, were £28 million lower than Q1 2017 with one specific impairment charge of £12 million in the quarter.

Q2 2017 compared with Q2 2016

  • Adjusted operating profit of £425 million was £165 million, or 63.5%, higher than Q2 2016 due to lower adjusted expenses, lower impairment losses and higher income.
  • Total income of £885 million was £39 million, or 4.6%, higher than Q2 2016 reflecting deposit volume growth and re-pricing actions.
  • Adjusted operating expenses decreased by £70 million, or 14.1%, to £427 million reflecting reduced headcount and a £25 million intangible asset write-down in Q2 2016.

(1) Source: Charterhouse Research Business Banking Survey, YE Q2 2017. Commercial £2m+ in England & Wales (NatWest sample size, excluding don't knows: 606). Question: "How likely would you be to recommend (bank)". Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.

Private Banking

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Income statement £m £m £m £m £m
Net interest income 226 226 114 112 113
Net fees and commissions 83 94 41 42 48
Other non-interest income 12 11 6 6 5
Non-interest income 95 105 47 48 53
Total income 321 331 161 160 166
Direct expenses
- staff costs (74) (77) (36) (38) (37)
- other costs (12) (23) (5) (7) (9)
Indirect expenses (132) (156) (64) (68) (73)
Restructuring costs
- direct - (1) - - -
- indirect (14) (19) (3) (11) (4)
Litigation and conduct costs - (2) - - (2)
Operating expenses (232) (278) (108) (124) (125)
Operating profit before impairment losses 89 53 53 36 41
Impairment losses (7) (2) (4) (3) -
Operating profit 82 51 49 33 41
Operating expenses - adjusted (1) (218) (256) (105) (113) (119)
Operating profit - adjusted (1) 96 73 52 44 47
Analysis of income by business
Investments 51 50 26 25 22
Banking 270 281 135 135 144
Total income 321 331 161 160 166
Performance ratios
Return on equity (2) 7.7% 5.1% 9.6% 6.0% 8.6%
Return on equity - adjusted (1,2) 9.3% 7.6% 10.3% 8.6% 9.9%
Net interest margin 2.52% 2.76% 2.47% 2.58% 2.73%
Cost:income ratio 72.3% 84.0% 67.1% 77.5% 75.3%
Cost:income ratio - adjusted (1) 67.9% 77.3% 65.2% 70.6% 71.7%

Notes:

(1) Excluding restructuring costs and litigation and conduct costs.

(2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity (based on 14% (15% prior to Q1 2017) of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.

Private Banking

30 June 31 March 31 December
Capital and balance sheet 2017
£bn		 2017
£bn		 Change 2016
£bn		 Change
Loans and advances to customers (gross)
- Personal 2.2 2.2 - 2.3 (4%)
- Mortgages 7.7 7.4 4% 7.0 10%
- Other 2.9 2.9 - 2.9 -
Total loans and advances to customers (gross) 12.8 12.5 2% 12.2 5%
Total assets 19.6 18.1 8% 18.6 5%
Funded assets 19.6 18.1 8% 18.5 6%
Assets under management (1) 17.9 17.8 1% 17.0 5%
Risk elements in lending 0.1 0.1 - 0.1 -
Provision coverage (2) 43% 29% 1,400bp 30% 1,300bp
Customer deposits 26.1 25.7 2% 26.6 (2%)
Loan:deposit ratio (excluding repos) 49% 49% - 46% 300bp
Risk-weighted assets
- Credit risk (non-counterparty) 8.0 7.7 4% 7.5 7%
- Operational risk 1.0 1.0 - 1.1 (9%)
Total risk-weighted assets 9.0 8.7 3% 8.6 5%

Notes:

(1) Comprises assets under management, assets under custody and investment cash.

(2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

Private Banking

Key points

Private Banking adjusted operating profit increase by £23 million, or 31.5%, compared with H1 2016, driving an increase in adjusted return on equity from 7.6% to 9.3%. A £38 million, or 14.8%, decrease in adjusted operating expenses was supported by a 5.6% reduction in front office headcount. Net loans and advances increased by 8.5% to £12.8 billion and assets under management increased by 14.0% to £17.9 billion compared with H1 2016, adjusting for a change in accounting treatment of certain customer deposits.

Serving our customers

  • Our Private Banking business offers high net-worth clients private banking, wealth planning and investment management services through Coutts and Adam & Company. Significant progress has been made in re-focusing the business on deep and lasting customer relationships and we continue to drive forward with its goal of being the leading UK private bank and wealth manager.
  • Strong loan growth, driven by UK mortgages, has been supported by new products and a proactive pricing strategy to gain market share. The addition of market-leading multi-currency functionality to the Coutts Debit Card, allowing clients to access their funds globally without incurring any charges, is driving greater client engagement.
  • Our funds have achieved top quartile returns across one, three and five year time frames, and Coutts Invest was successfully rolled out to eligible clients in the first half of the year providing a cost effective, self select investment solution.

Financial performance

H1 2017 compared with H1 2016

  • Operating profit increased by £31 million, or 60.8%, to £82 million compared with H1 2016. Adjusted operating profit of £96 million was £23 million, or 31.5%, higher than H1 2016 principally reflecting lower adjusted operating expenses, partially offset by lower income. An adjusted return on equity of 9.3% compared with 7.6% in H1 2016.
  • Total income of £321 million decreased by £10 million, or 3.0%, compared with H1 2016 largely due to lower margins and lower advice fees. Net interest margin fell 24 basis points to 2.52% reflecting the competitive market and lower rate environment.
  • Adjusted operating expenses of £218 million decreased by £38 million, or 14.8%, compared with H1 2016 largely reflecting management actions to reduce costs. Staff costs reduced by £3 million, or 3.9%, reflecting a 5.6% reduction in front office headcount.
  • Net loans and advances of £12.8 billion were £1.0 billion, or 8.5%, higher than H1 2016 principally driven by growth in mortgages. Assets under management of £17.9 billion were £3.3 billion, or 22.6%, higher than H1 2016, reflecting both organic growth and favourable market conditions. Investment cash balances were included in assets under management for the first time in Q3 2016. Excluding this, growth was £2.2 billion.
  • RWAs of £9.0 billion were £0.9 billion, or 11.1%, higher than H1 2016, primarily due to increased mortgage lending.

Q2 2017 compared with Q1 2017

  • Adjusted operating profit of £52 million was £8 million, or 18.2%, higher than Q1 2017 reflecting lower operating expenses. Adjusted return on equity of 10.3% compared with 8.6% in Q1 2017.
  • Total income of £161 million increased by £1 million on Q1 2017 as higher asset volumes more than offset a reduced net interest margin, down 11 basis points to 2.47% primarily reflecting the competitive market and low rate environment.
  • Adjusted operating expenses reduced by £8 million, or 7.1%, reflecting management actions to reduce operational costs. An adjusted cost:income ratio of 65.2% compared with 70.6% in Q1 2017.

Q2 2017 compared with Q2 2016

  • Adjusted operating profit increased by £5 million, or 10.6%, to £52 million. Adjusted return on equity of 10.3% compared with 9.9% in Q2 2016.
  • Total income of £161 million was £5 million, or 3.0%, lower than Q2 2016 reflecting reduced fee income.
  • Adjusted expenses decreased £14 million, or 11.8%, to £105 million, principally reflecting the impact of a 100 reduction in headcount to 1,700.

RBS International

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Income statement £m £m £m £m £m
Net interest income 161 151 81 80 76
Net fees and commissions 22 25 10 12 14
Other non-interest income 12 9 6 6 5
Non-interest income 34 34 16 18 19
Total income 195 185 97 98 95
Direct expenses
- staff costs (23) (22) (11) (12) (12)
- other costs (7) (8) (4) (3) (3)
Indirect expenses (60) (38) (32) (28) (18)
Restructuring costs
- direct - (1) - - (1)
- indirect (4) (2) (1) (3) (1)
Operating expenses (94) (71) (48) (46) (35)
Operating profit before impairment (losses)/releases 101 114 49 52 60
Impairment (losses)/releases (5) (11) 2 (7) (9)
Operating profit 96 103 51 45 51
Operating expenses - adjusted (1) (90) (68) (47) (43) (33)
Operating profit - adjusted (1) 100 106 52 48 53
Performance ratios
Return on equity (2) 13.1% 15.4% 14.0% 12.0% 15.0%
Return on equity - adjusted (1,2) 13.7% 15.9% 14.3% 13.0% 15.7%
Net interest margin 1.35% 1.42% 1.30% 1.41% 1.40%
Cost:income ratio 48.2% 38.4% 49.5% 46.9% 36.8%
Cost:income ratio - adjusted (1) 46.2% 36.8% 48.5% 43.9% 34.7%
30 June 31 March 31 December
2017 2017 2016
Capital and balance sheet £bn £bn Change £bn Change
Loans and advances to customers (gross)
- Corporate 6.1 6.3 (3%) 6.2 (2%)
- Mortgages 2.7 2.6 4% 2.6 4%
Total loans and advances to customers (gross) 8.8 8.9 (1%) 8.8 -
Total assets 24.7 25.1 (2%) 23.4 6%
Funded assets 24.7 25.1 (2%) 23.4 6%
Risk elements in lending 0.1 0.1 - 0.1 -
Provision coverage (3) 40% 54% (1,400bp) 35% 500bp
Customer deposits 25.5 25.3 1% 25.2 1%
Loan:deposit ratio (excluding repos) 34% 35% (100bp) 35% (100bp)
Risk-weighted assets
- Credit risk (non-counterparty) 8.7 8.8 (1%) 8.8 (1%)
- Operational risk 0.7 0.7 - 0.7 -
Total risk-weighted assets 9.4 9.5 (1%) 9.5 (1%)

Notes:

(1) Excluding restructuring costs.

(2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity (based on 12% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 10% tax rate.

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

RBS International

Key points

RBS International (RBSI) income increased by £10 million, or 5.4%, compared with H1 2016 reflecting increased lending and deposit volumes. Adjusted operating expenses increased by £22 million, or 32.4%, as the business absorbs additional regulatory costs and invests for the future as RBSI prepares to be a bank outside of the ring-fence. Despite this, adjusted return on equity remained robust at 13.7%.

Serving our customers

  • RBSI continues to deliver strong support to retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man, Gibraltar and Luxembourg by leveraging a strong multi-currency banking platform combined with a comprehensive product suite.
  • We are shaping the future of the business, which will become the key hub for Funds sector customers. We have received regulatory approval for our London branch, which marks an important milestone in ensuring we are compliant with ring-fencing legislation.
  • We continue to deliver strong support to our personal customers, including gross new mortgage lending of £235 million in H1 2017, representing 9% of our total mortgage book.
  • 86% of our non-personal customers use our digital banking platform and we are investing in enhancing the digital customer experience further in 2017 and into 2018. We are expanding our product suite by launching a new notice deposit account in July 2017.

Financial performance

H1 2017 compared with H1 2016

  • Operating profit of £96 million was £7 million, or 6.8%, lower than H1 2016 due to higher operating expenses, partially offset by higher income.
  • Total income of £195 million was £10 million, or 5.4%, higher than H1 2016 principally reflecting increased volumes. Net interest margin of 1.35% was 7 basis points lower as margin pressures outweigh mitigating pricing actions.
  • Adjusted operating expenses increased by £22 million, or 32.4%, to £90 million principally reflecting increased regulatory costs related to becoming a bank outside of the ring-fence.
  • Net loans and advances increased by £0.3 billion, or 3.5%, compared with H1 2016 to £8.8 billion reflecting underlying business growth and foreign exchange movements.
  • Customer deposits increased by £1.4 billion, or 5.8%, to £25.5 billion principally reflecting increase call volumes in the Funds sector.

Q2 2017 compared with Q1 2017

● Adjusted operating profit of £52 million was £4 million, or 8.3%, higher than Q1 2017 reflecting lower impairments, partially offset by higher adjusted operating expenses.

Q2 2017 compared with Q2 2016

  • Adjusted operating profit of £52 million reduced by £1 million, or 1.9%, compared with Q2 2016, reflecting higher adjusted expenses.
  • Total income increased by £2 million, or 2.1%, to £97 million as increased lending volumes more than offset margin pressures.
  • Adjusted operating expenses of £47 million were £14 million, or 42.4%, higher than Q2 2016 reflecting increased regulatory costs related to becoming a bank outside of the ring-fence.

NatWest Markets

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Income statement £m £m £m £m £m
Net interest income from banking activities 42 43 13 29 24
Net fees and commissions 27 17 11 16 6
Income from trading activities 908 620 445 463 374
Own credit adjustments (48) 137 (28) (20) 73
Other operating income 3 1 3 - -
Non-interest income 890 775 431 459 453
Total income 932 818 444 488 477
Direct expenses
- staff costs (297) (131) (142) (155) (64)
- other costs (99) (21) (48) (51) (7)
Indirect expenses (242) (488) (127) (115) (238)
Restructuring costs
- direct (30) (10) (10) (20) (10)
- indirect (73) (23) (25) (48) (11)
Litigation and conduct costs (34) (56) (3) (31) (38)
Operating expenses (775) (729) (355) (420) (368)
Operating profit before impairment losses 157 89 89 68 109
Impairment losses (1) - (1) - -
Operating profit 156 89 88 68 109
Total income - adjusted (1) 980 681 472 508 404
Operating expenses - adjusted (2) (638) (640) (317) (321) (309)
Operating profit - adjusted (1,2) 341 41 154 187 95
Analysis of income by product
Rates 612 385 287 325 264
Currencies 256 266 128 128 122
Financing 187 91 99 88 49
Other (75) (61) (42) (33) (31)
Total excluding own credit adjustments 980 681 472 508 404
Own credit adjustments (48) 137 (28) (20) 73
Total income 932 818 444 488 477

Notes:

(1) Excluding restructuring costs and litigation and conduct costs.

(2) Excluding own credit adjustments.

NatWest Markets

Performance ratios Half year ended Quarter ended
30 June
2017		 30 June
2016		 30 June
2017		 31 March
2017		 30 June
2016
Return on equity (1) 2.3% 0.8% 2.9% 1.7% 4.3%
Return on equity - adjusted (1,2) 7.2% (0.5%) 6.6% 7.9% 3.5%
Net interest margin 0.50% 0.74% 0.31% 0.68% 0.81%
Cost:income ratio 83.2% 89.1% 80.0% 86.1% 77.1%
Cost:income ratio - adjusted (1) 65.1% 94.0% 67.2% 63.2% 76.5%
30 June 31 March 31 December
Capital and balance sheet 2017
£bn		 2017
£bn		 Change 2016
£bn		 Change
Loans and advances to customers (gross) (3) 17.7 17.9 (1%) 17.4 2%
Loans and advances to banks (4) 4.4 4.9 (10%) 3.3 33%
Reverse repos 36.8 40.8 (10%) 38.6 (5%)
Securities 28.3 25.4 11% 22.0 29%
Cash and eligible bills 17.0 15.0 13% 13.4 27%
Other 12.8 9.9 29% 6.2 106%
Total assets 230.9 225.3 2% 240.0 (4%)
Funded assets 117.0 113.9 3% 100.9 16%
Customer deposits (excluding repos) 8.1 8.0 1% 8.4 (4%)
Bank deposits (excluding repos) 7.5 7.8 (4%) 9.8 (23%)
Repos 31.6 30.7 3% 27.3 16%
Debt securities in issue 5.9 6.0 (2%) 5.4 9%
Loan:deposit ratio (excluding repos) 219% 224% (500bp) 208% 1,100bp
Risk-weighted assets
- credit risk
- non-counterparty 5.8 5.3 9% 5.5 5%
- counterparty 11.0 13.1 (16%) 14.1 (22%)
- market risk 11.4 12.2 (7%) 11.6 (2%)
- operational risk 3.5 3.5 - 4.0 (13%)
Total risk-weighted assets 31.7 34.1 (7%) 35.2 (10%)

Notes:

(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity (based on 15% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.

(2) Excluding own credit adjustments, restructuring costs and litigation and conduct costs.

(3) Excludes reverse repos.

(4) Excluding reverse repos and disposal groups.

NatWest Markets

Key points

NatWest Markets adjusted income increased by £299 million, or 43.9%, to £980 million. This reflected high levels of customer activity and an improved Q1 2017 trading environment compared to a particularly difficult Q1 2016. Although customer activity eased somewhat in Q2 2017, NatWest Markets continued to navigate the more challenging markets well. Adjusted operating expenses were stable as ongoing cost reductions have been offset by the impact of investment spend that was previously capitalised in H1 2016. RWAs of £31.7 billion were £5.0 billion lower than H1 2016 and reduced by £3.5 billion in the first half.

Serving our customers

NatWest Markets continued to focus on customers:

  • Leveraging its global hubs the business has led major capital raising transactions in the UK, Europe and the US for both corporate customers and financial institutions.
  • NatWest Markets continues to simplify processes and invest in improving the customer experience. The Agile Markets platform, for example, provides customers with both simple and complex financial markets trading, analysis and post-trade functionality.

Financial performance

H1 2017 compared with H1 2016

  • Operating profit was £156 million compared with £89 million in H1 2016, driven by higher income, partially offset by increased restructuring costs. H1 2017 adjusted operating profit was £341 million compared with £41 million in H1 2016 reflecting higher adjusted income.
  • Adjusted income increased by £299 million, or 43.9%, to £980 million. This reflected high levels of customer activity and an improved Q1 2017 trading environment compared to a particularly difficult Q1 2016. Although customer activity eased somewhat in Q2 2017, NatWest Markets continued to navigate the more challenging markets well. Income from Financing doubled to £187 million, reflecting an improved performance across all areas of the business and the impact of the difficult market conditions seen in H1 2016. Total income, which includes own credit adjustments, increased by £114 million to £932 million in H1 2017.
  • Adjusted operating expenses were stable at £638 million as the impact of investment spend previously capitalised in H1 2016 was offset by ongoing cost reductions. The majority of NatWest Markets Functions and Services staff have now been aligned directly to NatWest Markets, with employee numbers now reported within NatWest Markets and the associated costs through direct expenses.
  • Funded assets decreased by £8.6 billion, or 6.8%, to £117.0 billion. H1 2016 included a spike in funded assets due to heightened customer activity and the impact of the rapid depreciation in sterling following the EU referendum.

  • RWAs decreased by £5.0 billion to £31.7 billion compared with H1 2016. The reduction primarily reflects lower levels of counterparty and market risk, due to both a spike immediately after the EU referendum in H1 2016 as well as further counterparty and market risk reductions, through mitigation activities and business initiatives, since H1 2016.

  • Q2 2017 compared with Q1 2017 Operating profit was £88 million compared with £68 million in Q1 2017, with the increase reflecting lower expenses partially offset by lower income. Adjusted operating profit was £154 million compared with £187 million in Q1 2017.

  • Total income decreased by £44 million to £444 million. Adjusted income reduced by £36 million to £472 million as customer activity eased following a particularly strong Q1 2017.
  • Total expenses decreased by £65 million to £355 million, reflecting lower restructuring costs and lower litigation and conduct costs.
  • RWAs reduced by £2.4 billion to £31.7 billion due to a lower level of counterparty and market risk during Q2 2017 compared with Q1 2017.

Q2 2017 compared with Q2 2016

  • Operating profit was £88 million compared with £109 million in Q2 2016 principally reflecting lower income. Adjusted operating profit was £154 million compared with £95 million in Q2 2016, driven by higher adjusted income, partially offset by higher adjusted expenses.
  • Total income decreased by £33 million to £444 million. Adjusted income improved by £68 million, or 16.8%, to £472 million primarily reflecting improvements in Financing and Rates, with income up £50 million and £23 million respectively.
  • Adjusted operating expenses increased by £8 million, or 2.6%, reflecting the impact of investment spend previously capitalised in Q2 2016.

Capital Resolution

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Income statement £m £m £m £m £m
Net interest income 24 168 (9) 33 82
Net fees and commissions 14 54 7 7 24
Income from trading activities (163) (552) (87) (76) (478)
Other operating income 45 25 61 (16) 16
Own credit adjustments (22) 184 (15) (7) 76
Strategic disposals - (51) - - (45)
Non-interest income (126) (340) (34) (92) (407)
Total income (102) (172) (43) (59) (325)
Direct expenses
- staff costs (26) (62) (10) (16) (17)
- operating lease depreciation - (6) - - (3)
- other costs (19) (58) (10) (9) (28)
Indirect expenses (88) (289) (44) (44) (135)
Restructuring costs
- direct (130) (12) (60) (70) (5)
- indirect (4) (25) 12 (16) (16)
Litigation and conduct costs (272) (26) (266) (6) (16)
Operating expenses (539) (478) (378) (161) (220)
Operating loss before impairment releases/(losses) (641) (650) (421) (220) (545)
Impairment releases/(losses) 78 (263) 33 45 (67)
Operating loss (563) (913) (388) (175) (612)
Total income - adjusted (1) (80) (305) (28) (52) (356)
Operating expenses - adjusted (2) (133) (415) (64) (69) (183)
Operating loss - adjusted (1,2) (135) (983) (59) (76) (606)
Analysis of income by portfolio
Portfolio and GTS 36 75 20 16 23
Shipping 7 31 2 5 15
Markets (7) (389) (23) 16 (360)
Other (13) 31 26 (39) 23
Income excluding disposals and own credit adjustments 23 (252) 25 (2) (299)
Disposal (losses) (103) (104) (53) (50) (102)
Own credit adjustments (22) 184 (15) (7) 76
Total (102) (172) (43) (59) (325)

Notes:

(1) Excluding own credit adjustments and strategic disposals.

(2) Excluding restructuring costs and litigation and conduct costs.

Capital Resolution

30 June 31 March 31 December
Capital and balance sheet 2017
£bn		 2017
£bn		 Change 2016
£bn		 Change
Loans and advances to customers (gross) 10.7 13.0 (18%) 13.6 (21%)
Loan impairment provisions (0.6) (0.7) (14%) (0.8) (25%)
Net loans and advances to customers (1) 10.1 12.3 (18%) 12.8 (21%)
Net loans and advances to banks 4.9 5.0 (2%) 4.6 7%
Total assets 102.2 119.2 (14%) 132.5 (23%)
Funded assets 24.7 29.2 (15%) 27.6 (11%)
Risk elements in lending 1.8 2.1 (14%) 2.3 (22%)
Provision coverage (2) 33% 33% - 35% (200bp)
Risk-weighted assets
- Credit risk
- non-counterparty 15.0 17.1 (12%) 18.2 (18%)
- counterparty 6.7 7.6 (12%) 8.7 (23%)
- Market risk 3.1 4.0 (23%) 4.8 (35%)
- Operational risk 1.8 1.8 - 2.8 (36%)
Total risk-weighted assets 26.6 30.5 (13%) 34.5 (23%)
Analysis of RWAs by portfolio
Portfolio and GTS 2.3 2.8 (18%) 3.2 (28%)
Shipping 1.6 2.4 (33%) 2.8 (43%)
Markets 11.6 14.0 (17%) 15.8 (27%)
Alawwal Bank 7.4 7.8 (5%) 7.9 (6%)
Other 1.9 1.7 12% 2.0 (5%)
Total credit and market risk RWAs 24.8 28.7 (14%) 31.7 (22%)
Operational risk 1.8 1.8 - 2.8 (36%)
Total RWAs 26.6 30.5 (13%) 34.5 (23%)

Notes:

(1) Excludes disposal groups.

(2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

Capital Resolution

Capital Resolution continues to run down and dispose of non-strategic portfolios and remove risk from the balance sheet and the first half of the year saw good progress with RWAs falling by £7.9 billion to £26.6 billion. Excluding RBS's stake in Alawwal Bank (£7.4 billion at 30 June 2017), RWAs are now in the £15-£20 billion range we guided to for the end of 2017.

Financial performance

H1 2017 compared with H1 2016

  • RWAs reduced by £15.7 billion to £26.6 billion and funded assets fell to £24.7 billion, a reduction of £20.0 billion, mainly reflecting disposal activity.
  • An operating loss of £563 million in H1 2017, compared with a loss of £913 million in H1 2016, principally due to a net impairment release compared with a loss in H1 2016, and lower adjusted operating expenses. The adjusted operating loss in H1 2017 was £135 million compared with a loss of £983 million in H1 2016. H1 2016 included a £330 million incremental funding valuation adjustment and a £264 million impairment loss in respect of the shipping portfolio.
  • Income disposal losses in H1 2017 were £103 million compared with £104 million in H1 2016. Expected future losses on uncollateralised derivatives have driven £0.4 billion of the increase in the prudential valuation adjustment capital deduction in Q2 2017.
  • Adjusted operating expenses fell by 68.0% to £133 million principally reflecting the impact of a 673 reduction in headcount to 209.
  • A net impairment release of £78 million was recorded in the first half of the year. The H1 2016 charge of £263 million comprised charges relating to a number of shipping assets (£264 million).

Q2 2017 compared with Q1 2017

  • RWAs reduced by £3.9 billion to £26.6 billion reflecting disposal activity.
  • Funded assets reduced by £4.5 billion to £24.7 billion reflecting disposal activity across all portfolios.
  • Operating losses increased by £213 million to £388 million, principally reflecting increased litigation and conduct charges. An adjusted operating loss of £59 million compared with a loss of £76 million in Q1 2017.
  • Income disposal losses in Q2 2017 were £53 million compared with £50 million in Q1 2017.
  • Adjusted operating expenses reduced by £5 million to £64 million.

Q2 2017 compared with Q2 2016

  • An adjusted operating loss of £59 million compared with a loss of £606 million in Q2 2016 reflecting a £220 million funding valuation adjustment in Q2 2016, lower adjusted operating expenses and lower impairments.
  • Adjusted operating expenses fell by £119 million, or 65.0%, principally reflecting the impact of a 673 reduction in headcount.

Williams & Glyn

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
Income statement (1) £m £m £m £m £m
Net interest income 333 324 168 165 162
Net fees and commissions 75 79 39 36 39
Other non-interest income 9 8 4 5 5
Non-interest income 84 87 43 41 44
Total income 417 411 211 206 206
Direct expenses
- staff costs (96) (125) (43) (53) (63)
- other costs (20) (33) (9) (11) (18)
Indirect expenses (42) (39) (22) (20) (18)
Restructuring costs
- direct - (45) - - (25)
Operating expenses (158) (242) (74) (84) (124)
Profit before impairment losses 259 169 137 122 82
Impairment losses (25) (17) (14) (11) (11)
Operating profit 234 152 123 111 71
Operating expenses - adjusted (2) (158) (197) (74) (84) (99)
Operating profit - adjusted (2) 234 197 123 111 96
Analysis of income by product
Retail 242 231 123 119 116
Commercial 175 180 88 87 90
Total income 417 411 211 206 206
Analysis of impairments by sector
Retail 15 10 7 8 5
Commercial 10 7 7 3 6
Total impairment losses 25 17 14 11 11
Performance ratios
Return on equity (3) 22.2% 14.3% 23.5% 20.9% 13.3%
Return on equity - adjusted (2,3) 22.2% 18.6% 23.5% 20.9% 18.0%
Net interest margin 2.65% 2.74% 2.64% 2.66% 2.70%
Cost:income ratio 37.9% 58.9% 35.1% 40.8% 60.2%
Cost:income ratio - adjusted (2) 37.9% 47.9% 35.1% 40.8% 48.1%

Notes

(1) Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK. During the period presented W&G has not operated as a separate legal entity.

(2) Excluding restructuring costs.

(3) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 15% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.

Williams & Glyn

30 June
2017		 31 March
2017		 31 December
2016
Capital and balance sheet (1) £bn £bn Change £bn Change
Loans and advances to customers (gross)
- Retail 12.3 12.3 - 12.3 -
- Commercial 8.3 8.5 (2%) 8.5 (2%)
Total loans and advances to customers (gross) 20.6 20.8 (1%) 20.8 (1%)
Loan impairment provisions (0.2) (0.2) - (0.2) -
Net loans and advances to customers 20.4 20.6 (1%) 20.6 (1%)
Total assets 26.0 25.8 1% 25.8 1%
Funded assets 26.0 25.8 1% 25.8 1%
Risk elements in lending 0.3 0.3 - 0.4 (25%)
Provision coverage (2) 64% 64% - 65% (100bp)
Customer deposits (excluding repos) 24.9 24.0 4% 24.2 3%
Loan:deposit ratio (excluding repos) 82% 86% (400bp) 85% (300bp)
Risk-weighted assets
- Credit risk (non-counterparty) 8.0 8.3 (4%) 8.2 (2%)
- Operational risk 1.4 1.4 - 1.4 -
Total risk-weighted assets 9.4 9.7 (3%) 9.6 (2%)

Notes:

(1) Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK. During the period presented W&G has not operated as a separate legal entity.

(2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.

Key points

Williams and Glyn (W&G) reported an 18.8% increase in adjusted operating profits to £234 million, largely reflecting 19.8% reduction in adjusted operating expenses with net impairments remaining benign. In our full year 2017 reporting we will no longer report Williams & Glyn as a separate segment, but include within UK PBB.

Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and principally comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK.

Serving our customers

● In H1 2017 the W&G business continued to perform well. Gross lending across the portfolio was stable at £20.6 billion compared with H1 2016, with gross mortgage lending increasing by £0.3 billion, or 2.3%, to £11 billion.

Financial performance

H1 2017 compared with H1 2016

  • Operating profit increased by £82 million to £234 million compared with H1 2016. Adjusted operating profit increased by £37 million, or 18.8%, to £234 million driven by reduced adjusted operating expenses.
  • Total income increased by £6 million, or 1.5%, to £417 million largely reflecting increased lending, with net interest income increasing by £9 million, or 2.8%, to £333 million.
  • Adjusted operating expenses reduced by £39 million, or 19.8%, to £158 million driven by reduced staff costs, reflecting a substantial reduction in headcount, down by c.1,100 to 4,100 FTEs by the end of H1 2017.
  • Net impairment losses increased by £8 million, or 47.1%, to £25 million compared with H1 2016, with the prior year benefitting from releases in the retail business.

Q2 2017 compared with Q1 2017

● Adjusted operating profit increased by £12 million, or 10.8%, to £123 million compared with Q1 2017 driven by a £10 million, or 11.9%, reduction in adjusted operating expenses, principally reflecting lower staff costs.

Q2 2017 compared with Q2 2016

● Adjusted operating profit increased by £27 million, or 28.1%, compared with Q2 2016 driven by a £25 million, or 25.3%, reduction in adjusted operating expenses associated with the reduction in FTEs.

Central items

Half year ended Quarter ended
30 June 30 June 30 June 31 March 30 June
2017 2016 2017 2017 2016
£m £m £m £m £m
Central items not allocated 178 (909) 322 (144) (537)

Funding and operating costs have been allocated to operating segments based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one segment.

Residual unallocated items relate to volatile corporate items that do not naturally reside within a segment.

  • Central items not allocated represented a gain of £178 million in H1 2017, compared with a £909 million charge in H1 2016, and included litigation and conduct costs of £40 million (H1 2016 - £708 million charge). Treasury funding costs were a gain of £132 million, compared with a charge of £382 million in H1 2016 (volatile items under IFRS: H1 2017 - £154 million gain, H1 2016 - £668 million charge). In addition, we recognised a VAT recovery of £51 million (H1 2016 – £227 million) and a £156 million gain on the sale of our stake in Vocalink (H1 2016 - £246 million gain on sale of Visa Europe).
  • Central items not allocated represented a gain of £322 million in Q2 2017 and included a £172 million gain in respect of volatile items under IFRS and a £156 million gain on the sale of our stake in Vocalink.

Condensed consolidated income statement for the period ended 30 June 2017 (unaudited)

Half year ended
30 June 30 June
2017 2016
£m £m
Interest receivable 5,462 5,692
Interest payable (990) (1,359)
Net interest income (1) 4,472 4,333
Fees and commissions receivable 1,666 1,676
Fees and commissions payable (448) (392)
Income from trading activities 884 (17)
Loss on redemption of own debt (7) (130)
Other operating income 352 594
Non-interest income 2,447 1,731
Total income 6,919 6,064
Staff costs (2,447) (2,695)
Premises and equipment (678) (652)
Other administrative expenses (1,208) (2,139)
Depreciation and amortisation (511) (354)
Write down of other intangible assets (8) (89)
Operating expenses (4,852) (5,929)
Profit before impairment losses 2,067 135
Impairment losses (116) (409)
Operating profit/(loss) before tax 1,951 (274)
Tax charge (727) (340)
Profit/(loss) for the period 1,224 (614)
Attributable to:
Non-controlling interests 29 30
Preference share and other dividends 256 208
Dividend access share - 1,193
Ordinary shareholders 939 (2,045)
1,224 (614)
Earnings/(loss) per ordinary share (EPS)
Basic earnings/(loss) per ordinary share (2) 7.9p (17.6p)

Notes:

(1) Negative interest on loans and advances is classed as interest payable. Negative interest on customer deposits classed as interest receivable. HY 2016 has been re-presented accordingly.

(2) There is no dilutive impact in any period.

Condensed consolidated statement of comprehensive income for the period ended 30 June 2017 (unaudited)

Half year ended
30 June
2017
£m		 30 June
2016
£m
Profit/(loss) for the period 1,224 (614)
Items that do not qualify for reclassification
Loss on remeasurement of retirement benefit schemes (26) (995)
Loss on fair value of credit in financial liabilities designated at fair value
through profit or loss due to own credit risk (77) -
Tax (8) 273
(111) (722)
Items that do qualify for reclassification
Available-for-sale financial assets 29 (95)
Cash flow hedges (611) 1,581
Currency translation 103 1,071
Tax 161 (360)
(318) 2,197
Other comprehensive (loss)/income after tax (429) 1,475
Total comprehensive income for the period 795 861
Total comprehensive income is attributable to
Non-controlling interests 49 125
Preference shareholders 85 113
Paid-in equity holders 171 95
Dividend access share - 1,193
Ordinary shareholders 490 (665)
795 861

Condensed consolidated balance sheet as at 30 June 2017 (unaudited)

30 June 31 December
2017 2016
£m £m
Assets
Cash and balances at central banks 86,807 74,250
Net loans and advances to banks 20,685 17,278
Reverse repurchase agreements and stock borrowing 14,847 12,860
Loans and advances to banks 35,532 30,138
Net loans and advances to customers 326,059 323,023
Reverse repurchase agreements and stock borrowing 25,183 28,927
Loans and advances to customers 351,242 351,950
Debt securities 86,169 72,522
Equity shares 518 703
Settlement balances 12,091 5,526
Derivatives 193,531 246,981
Intangible assets 6,467 6,480
Property, plant and equipment 4,823 4,590
Deferred tax 1,677 1,803
Prepayments, accrued income and other assets 3,797 3,713
Total assets 782,654 798,656
Liabilities
Bank deposits 38,965 33,317
Repurchase agreements and stock lending 5,183 5,239
Deposits by banks 44,148 38,556
Customer deposits 359,882 353,872
Repurchase agreements and stock lending 37,855 27,096
Customer accounts 397,737 380,968
Debt securities in issue 31,997 27,245
Settlement balances 11,379 3,645
Short positions 29,862 22,077
Derivatives 184,161 236,475
Provisions for liabilities and charges 11,227 12,836
Accruals and other liabilities 6,603 7,006
Retirement benefit liabilities 182 363
Deferred tax 585 662
Subordinated liabilities 14,724 19,419
Total liabilities 732,605 749,252
Equity
Non-controlling interests 844 795
Owners' equity*
Called up share capital 11,876 11,823
Reserves 37,329 36,786
Total equity 50,049 49,404
Total liabilities and equity 782,654 798,656
*Owners' equity attributable to:
Ordinary shareholders 42,149 41,462
Other equity owners 7,056 7,147
49,205 48,609

The parent company distributable reserves at 30 June 2017 were £38.1 billion (31 December 2016 - £8.0 billion).

Condensed consolidated statement of changes in equity for the period ended 30 June 2017 (unaudited)

Half year ended
30 June 30 June
2017 2016
£m £m
Called-up share capital
At beginning of period 11,823 11,625
Ordinary shares issued 53 131
At end of period 11,876 11,756
Paid-in equity
At beginning of period 4,582 2,646
Redeemed/reclassified (1) (91) (110)
At end of period 4,491 2,536
Share premium account
At beginning of period 25,693 25,425
Ordinary shares issued 96 203
Capital reduction (2) (25,789) -
At end of period - 25,628
Merger reserve
At the beginning and end of period 10,881 10,881
Available-for-sale reserve
At beginning of period 238 307
Unrealised gains 100 189
Realised gains (71) (284)
Tax (8) 20
At end of period 259 232
Cash flow hedging reserve
At beginning of period 1,030 458
Amount recognised in equity (240) 2,139
Amount transferred from equity to earnings (371) (558)
Tax 156 (436)
At end of period 575 1,603
Foreign exchange reserve
At beginning of period 2,888 1,674
Retranslation of net assets 124 1,232
Foreign currency losses on hedges of net assets (8) (277)
Tax 13 56
Recycled to profit or loss on disposal of businesses (3) (33) 21
At end of period 2,984 2,706
Capital redemption reserve
At the beginning and end of period 4,542 4,542
Capital reduction (2) (4,542) -
At end of period - 4,542

For the notes to this table refer to the following page.

Condensed consolidated statement of changes in equity for the period ended 30 June 2017 (unaudited)

Half year ended
30 June 30 June
2017 2016
£m £m
Retained earnings
At beginning of period (12,936) (4,020)
Profit/(loss) attributable to ordinary shareholders and other equity owners
- continuing operations 1,195 (644)
Equity preference dividends paid (85) (113)
Paid-in equity dividends paid, net of tax (171) (95)
Capital reduction (2) 30,331 -
Dividend access share dividend - (1,193)
Loss on remeasurement of retirement benefit schemes
- gross (26) (995)
- tax (20) 273
Changes in fair value of credit in financial liabilities designated at fair value through profit
- gross (77) -
- tax 12 -
Shares issued under employee share schemes (5) (7)
Share-based payments
- gross (34) (26)
Redemption/reclassification of paid-in equity - (21)
At end of period 18,184 (6,841)
Own shares held
At beginning of period (132) (107)
Shares utilised for employee share schemes 156 34
Own shares acquired (69) (63)
At end of period (45) (136)
Owners' equity at end of period 49,205 52,907
Non-controlling interests
At beginning of period 795 716
Currency translation adjustments and other movements 20 95
Profit attributable to non-controlling interests
- continuing operations 29 30
Equity withdrawn and disposals - (21)
At end of period 844 820
Total equity at end of period 50,049 53,727
Total equity is attributable to:
Non-controlling interests 844 820
Preference shareholders 2,565 3,305
Paid-in equity holders 4,491 2,536
Ordinary shareholders 42,149 47,066
50,049 53,727

Notes:

(1) Paid-in equity reclassified to liabilities as a result of the call of RBS Capital Trust D in March 2017 (redeemed in June 2017) and the call of RBS Capital Trust C in May 2016 (redeemed in July 2016).

(2) On 15 June 2017, the Court of Session approved a reduction of the parent company's capital so that the amounts which stood to the credit of share premium account and capital redemption reserve were transferred to retained earnings.

(3) No tax impact.

Condensed consolidated cash flow statement for the period ended 30 June 2017 (unaudited)

Half year ended
30 June 30 June
2017 2016
£m £m
Operating activities
Operating profit/(loss) before tax 1,951 (274)
Adjustments for non-cash items (2,181) (9,822)
Net cash outflow from trading activities (230) (10,096)
Changes in operating assets and liabilities 30,797 987
Net cash flows from operating activities before tax 30,567 (9,109)
Income taxes paid (248) (130)
Net cash flows from operating activities 30,319 (9,239)
Net cash flows from investing activities (6,319) (2,157)
Net cash flows from financing activities (4,814) (4,194)
Effects of exchange rate changes on cash and cash equivalents (64) 6,676
Net increase/(decrease) in cash and cash equivalents 19,122 (8,914)
Cash and cash equivalents at beginning of period 98,570 103,592
Cash and cash equivalents at end of period 117,692 94,678

Notes

1. Basis of preparation

The Group's condensed consolidated financial statements (as defined on page 2) have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and IAS 34 'Interim Financial Reporting'. They should be read in conjunction with the Group's 2016 Annual Report and Accounts which were prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (EU) (together IFRS).

Accounting policies

Ahead of adopting IFRS 9 Financial Instruments from 1 January 2018 RBS has adopted the provisions in respect of the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss from 1 January 2017. Accordingly, a loss of £77 million has been reported in the consolidated statement of other comprehensive income instead of in the consolidated income statement. Comparatives have not been restated, however, in H1 2016 a gain of £200 million was included in the consolidated income statement. Own credit adjustments on financial liabilities held for trading will continue to be recognised in the consolidated income statement, a loss of £73 million was reported in H1 2017 (H1 2016 – gain of £250 million).

Apart from the above RBS's principal accounting policies are as set out on pages 297 to 306 of the 2016 Annual Report and Accounts. Other amendments to IFRS effective for 2017 have not had a material effect on RBS's H1 2017 results.

Critical accounting policies and key sources of estimation uncertainty

The judgements and assumptions that are considered to be the most important to the portrayal of RBS's financial condition are those relating to goodwill, provisions for liabilities, deferred tax, loan impairment provisions and fair value of financial instruments. These critical accounting policies and judgements are described on pages 306 to 308 of RBS's 2016 Annual Report and Accounts. The risk factors are set out on pages 432 to 463.

Going concern

The Group's business activities and financial position, and the factors likely to affect its future development and performance are discussed on pages 3 to 92. The risk factors which could materially affect the Group's future results are described on pages 94 to 96.

Having reviewed RBS's forecasts, projections and other relevant evidence, the directors have a reasonable expectation that RBS will continue in operational existence for the foreseeable future. Accordingly, the results for the half year ended 30 June 2017 have been prepared on a going concern basis.

2. Analysis of income, expenses and impairment losses

Half year ended
30 June 30 June
2017 2016
£m £m
Loans and advances to customers 5,152 5,364
Loans and advances to banks 120 151
Debt securities 190 177
Interest receivable 5,462 5,692
Customer accounts 328 575
Deposits by banks 70 48
Debt securities in issue 254 298
Subordinated liabilities 317 442
Internal funding of trading businesses 21 (4)
Interest payable 990 1,359
Net interest income 4,472 4,333
Fees and commissions receivable
- payment services 405 434
- credit and debit card fees 331 314
- lending (credit facilities) 529 516
- brokerage 88 86
- investment management 121 121
- trade finance 88 102
- other 104 103
Fees and commissions receivable 1,666 1,676
Fees and commissions payable (448) (392)
Net fees and commissions 1,218 1,284
Foreign exchange 228 570
Interest rate 652 (628)
Credit 58 (181)
Own credit adjustments (73) 250
Other 19 (28)
Income from trading activities 884 (17)
Loss on redemption of own debt (7) (130)
Operating lease and other rental income 142 139
Changes in the fair value of own debt designated as at fair value through profit or loss
attributable to own credit risk - 200
Other changes in the fair value of financial assets and liabilities designated as at fair
value through profit or loss and related derivatives 41 (90)
Changes in fair value of investment properties (10) (9)
Profit on sale of securities 33 34
Profit on sale of property plant equipment 3 18
Profit on sale of subsidiaries and associates 206 224
Loss on disposal or settlement loans and receivables (150) (14)
Share of profits of associated undertakings 60 68
Other income 27 24
Other operating income 352 594
Total non-interest income 2,447 1,731
Total income 6,919 6,064

2. Analysis of income, expenses and impairment losses

Half year ended
30 June
2017		 30 June
2016
£m £m
Staff costs (2,447) (2,695)
Premises and equipment (678) (652)
Other (1) (1,208) (2,139)
Administrative expenses (4,333) (5,486)
Depreciation and amortisation (511) (354)
Write down of other intangible assets (8) (89)
Operating expenses (4,852) (5,929)
Loan impairment losses (152) (412)
Securities 36 3
Impairment losses (116) (409)

Note:

(1) Includes costs relating to customer redress, residential mortgage back securities, litigation and other regulatory – refer to Note 3 for further details.

3. Provisions for liabilities and charges

Payment
protection
insurance
£m		 Other
customer
redress (1)
£m		 Residential
mortgage
backed securities
£m		 Litigation
and other
regulatory
£m		 Other (2)
£m		 Total
£m
At 1 January 2017 1,253 1,105 6,752 1,918 1,808 12,836
Currency translation and other movements - (1) (114) (13) 10 (118)
Charge to income statement - - - 32 204 236
Releases to income statement - (2) - (3) (39) (44)
Provisions utilised (78) (99) - (950) (164) (1,291)
At 31 March 2017 1,175 1,003 6,638 984 1,819 11,619
Currency translation and other movements - 5 (237) (17) 38 (211)
Charge to income statement - 55 222 59 371 707
Releases to income statement - (38) - (4) (96) (138)
Provisions utilised (81) (114) (44) (113) (398) (750)
At 30 June 2017 1,094 911 6,579 909 1,734 11,227

Note:

(1) Closing provision primarily relates to investment advice and packaged accounts.

(2) The Group recognised a £750 million provision in 2016 as a consequence of the announcement that HM Treasury is seeking a revised package of remedies that would conclude its remaining State Aid commitments. An additional charge of £50 million was taken in the second quarter of 2017 following further revisions to the package, taking the total provision to £800 million.

3. Provisions for liabilities and charges (continued)

Payment Protection Insurance (PPI)

The cumulative charge in respect of PPI is £4.9 billion, of which £3.8 billion (78%) in redress and expenses had been utilised by 30 June 2017. Of the £4.9 billion cumulative charge, £4.5 billion relates to redress and £0.4 billion to administrative expenses.

The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same).

Sensitivity
Change in Consequential
change in
Current assumption provision
Assumption Actual to date assumption % £m
Single premium book past business review take-up rate 58% 59% +/-5 +/-60
Uphold rate (1) 90% 91% +/-5 +/-40
Average redress £1,688 £1,679 +/-5 +/-35

Note:

(1) Uphold rate excludes claims where no PPI policy was held.

Interest payable on successful complaints has been included in the provision as has the estimated cost of administration. There are uncertainties as to the eventual cost of redress which will depend on actual complaint volumes, take-up and uphold rates and average redress costs. Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different from the amount provided. We continue to monitor the position closely and refresh the underlying assumptions. Background information in relation to PPI claims is given in Note 12.

Residential mortgage backed securities (RMBS)

RBS has reached a settlement with the Federal Housing Finance Agency (FHFA) as conservator of Fannie Mae and Freddie Mac, to resolve claims by FHFA in relation to RBS's issuance and underwriting of approximately US\$32 billion (£25 billion) of RMBS in the US. As part of the settlement, FHFA's outstanding litigation against RBS relating to those securities has been withdrawn.

Under the settlement, RBS has paid FHFA US\$5.5 billion (£4.2 billion), of which US\$754 million (£581 million) has been reimbursed to RBS under indemnification agreements with third parties. The cost to RBS (net of the indemnity mentioned above) of US\$4.75 billion (£3.65 billion) is largely covered by existing provisions. An incremental charge of US\$196 million (£151 million) was recorded in Q2 2017 in relation to the FHFA case. RBS held a provision of US\$8.5 billion (£6.6 billion) against RMBS litigations and investigations at 30 June 2017, of which \$4.75 billion (£3.7 billion) related to the FHFA case that has now been resolved. For further information refer to Note 12.

Litigation and other regulatory

RBS is party to certain legal proceedings and regulatory and governmental investigations and continues to co-operate with a number of regulators. All such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of RBS incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made.

4. Loan impairment provisions and risk elements in lending

Operating profit/(loss) is stated after net loan impairment charge of £152 million for the half year ended 30 June 2017 (H1 2016 - £412 million losses). The balance sheet loan impairment provisions decreased in the half year ended 30 June 2017 from £4,455 million to £3,945 million and the movements thereon were:

Half year ended
30 June 30 June
2017 2016
£m £m
At beginning of period 4,455 7,119
Currency translation and other adjustments 4 458
Amounts written-off (732) (1,532)
Recoveries of amounts previously written-off 112 57
Charges to income statement 152 412
Unwind of discount (recognised in interest income) (46) (58)
At end of period 3,945 6,456

As at 30 June 2017 there were no provisions for loans and advances to banks (30 June 2016 – nil).

Risk elements in lending (REIL) comprise impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected.

REIL decreased by £1,014 million in the half year ended 30 June 2017 to £9,296 million and the movements thereon were:

Half year ended
30 June 30 June
2017 2016
£m £m
At beginning of period 10,310 12,137
Currency translation and other adjustments 46 832
Additions 1,535 2,193
Transfers (1) (59) (108)
Transfer to performing book (391) (519)
Repayments and disposals (1,413) (1,214)
Amounts written-off (732) (1,532)
At end of period 9,296 11,789

Note:

(1) Represents transfers between REIL and potential problem loans.

Provision coverage of REIL was 42% at 30 June 2017 (30 June 2016 - 55%).

5. Tax

The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation tax rate of 19.25% (2016 - 20.00%), as analysed below.

Half year ended
30 June 30 June
2017 2016
£m £m
Profit/(loss) before tax 1,951 (274)
Expected tax (charge)/credit (376) 55
Losses and temporary differences in period where no
deferred tax asset recognised (156) (107)
Foreign profits taxed at other rates 72 32
Items not allowed for tax
- losses on disposals and write-downs (59) (13)
- UK bank levy (20) (24)
- regulatory and legal actions (21) (216)
- other disallowable items (34) (45)
Non-taxable items 62 59
Taxable foreign exchange movements 9 (10)
Losses brought forward and utilised 3 6
Banking surcharge (199) (86)
Adjustments in respect of prior periods (8) 9
Actual tax charge (727) (340)

At 30 June 2017, the Group has recognised a deferred tax asset of £1,677 million (31 December 2016 - £1,803 million) and a deferred tax liability of £585 million (31 December 2016 - £662 million). These include amounts recognised in respect of UK trading losses of £725 million (31 December 2016 - £801 million). Under UK tax legislation, these UK losses can be carried forward indefinitely to be utilised against profits arising in the future. The Group has considered the carrying value of this asset as at 30 June 2017 and concluded that it is recoverable based on future profit projections.

6. Profit attributable to non-controlling interests

Half year ended
30 June 30 June
2017 2016
£m £m
RFS Holdings BV Consortium Members 27 28
Other 2 2
Profit attributable to non-controlling interests 29 30

7. Dividends

In the context of macro-prudential policy discussions, the Board decided to partially neutralise any impact on CET1 capital of coupon and dividend payments for 2017 and 2016. £300 million of new ordinary shares were allotted and issued during the course of 2016 and £150 million of new ordinary shares have been allotted and issued in H1 2017. The Board intends to issue £300 million of new ordinary shares in total during 2017 to achieve this aim.

8. Earnings per ordinary share

Half year ended
30 June 30 June
2017 2016
Earnings
Profit/(loss) attributable to ordinary shareholders (£m) 939 (2,045)
Weighted average number of ordinary shares outstanding
during the period (millions) 11,817 11,639
Effect of dilutive share options and convertible securities (millions) 80 41
Diluted weighted average number of ordinary shares outstanding
during the period (millions) 11,897 11,680
Basic earnings/(loss) per ordinary share 7.9p (17.6p)
Restructuring costs 5.9p 4.0p
Litigation and conduct costs 3.4p 11.3p
Own credit adjustments 0.5p (3.0p)
Loss on redemption of own debt 0.0p 1.0p
Strategic disposals (1.3p) (1.2p)
Adjusted earnings/(loss) per ordinary share 16.4p (5.5p)
Basic earnings/(loss) per ordinary share 7.9p (17.6p)

Note:

(1) There is no dilutive impact in any period.

Notes

9. Segmental analysis

The business is organised into the following franchises and reportable segments:

  • Personal & Business Banking (PBB), comprising two reportable segments, UK Personal & Business Banking (UK PBB) and Ulster Bank RoI;
  • Commercial & Private Banking (CPB), which comprises three reportable segments: Commercial Banking, Private Banking and RBS International (RBSI);
  • NatWest Markets (NWM), which is a single reportable segment;
  • Capital Resolution which consists of non-strategic markets, portfolios and banking assets;
  • Williams & Glyn (W&G) which is a single reportable segment; and
  • Central items & other which comprises corporate functions.

Analysis of operating profit(loss)

The following tables provide a segmental analysis of operating profit/(loss) by main income statement captions.

Half year ended 30 June 2017 Net
interest
income
£m		 Non-
interest
income
£m		 Total
income
£m		 Operating
expenses
£m		 Impairment
(losses)/
releases
£m		 Operating
profit/(loss)
£m
UK Personal & Business Banking 2,231 524 2,755 (1,586) (72) 1,097
Ulster Bank RoI 206 87 293 (293) 11 11
Personal & Business Banking 2,437 611 3,048 (1,879) (61) 1,108
Commercial Banking 1,141 609 1,750 (996) (94) 660
Private Banking 226 95 321 (232) (7) 82
RBS International 161 34 195 (94) (5) 96
Commercial & Private Banking 1,528 738 2,266 (1,322) (106) 838
NatWest Markets 42 890 932 (775) (1) 156
Capital Resolution 24 (126) (102) (539) 78 (563)
Williams & Glyn 333 84 417 (158) (25) 234
Central items & other 108 250 358 (179) (1) 178
Total 4,472 2,447 6,919 (4,852) (116) 1,951
Half year ended 30 June 2016
UK Personal & Business Banking 2,109 506 2,615 (2,042) (40) 533
Ulster Bank RoI 198 95 293 (312) 27 8
Personal & Business Banking 2,307 601 2,908 (2,354) (13) 541
Commercial Banking 1,067 632 1,699 (984) (103) 612
Private Banking 226 105 331 (278) (2) 51
RBS International 151 34 185 (71) (11) 103
Commercial & Private Banking 1,444 771 2,215 (1,333) (116) 766
NatWest Markets 43 775 818 (729) - 89
Capital Resolution 168 (340) (172) (478) (263) (913)
Williams & Glyn 324 87 411 (242) (17) 152
Central items & other 47 (163) (116) (793) - (909)
Total 4,333 1,731 6,064 (5,929) (409) (274)

Notes

9. Segmental analysis (continued)

Total revenue

Half year ended
30 June 2017 30 June 2016
Inter Inter
External segment Total External segment Total
£m £m £m £m £m £m
UK Personal & Business Banking 3,154 17 3,171 3,114 27 3,141
Ulster Bank RoI 330 (1) 329 328 1 329
Personal & Business Banking 3,484 16 3,500 3,442 28 3,470
Commercial Banking 1,767 30 1,797 1,817 33 1,850
Private Banking 273 70 343 285 92 377
RBS International 156 62 218 151 79 230
Commercial & Private Banking 2,196 162 2,358 2,253 204 2,457
NatWest Markets 1,113 135 1,248 961 351 1,312
Capital Resolution (21) 322 301 (51) 644 593
Williams & Glyn 435 - 435 455 - 455
Central items & other 1,150 (635) 515 755 (1,227) (472)
Total 8,357 - 8,357 7,815 - 7,815

Total assets and liabilities

30 June 2017 31 December 2016
Assets Liabilities Assets Liabilities
£m £m £m £m
UK Personal & Business Banking 161,595 152,645 155,551 148,811
Ulster Bank RoI 24,854 19,264 24,111 19,299
Personal & Business Banking 186,449 171,909 179,662 168,110
Commercial Banking 151,939 107,794 150,453 104,441
Private Banking 19,600 26,196 18,758 26,673
RBS International 24,735 25,641 23,240 25,280
Commercial & Private Banking 196,274 159,631 192,451 156,394
NatWest Markets 230,939 211,781 239,963 222,494
Capital Resolution 102,239 88,423 132,533 117,977
Williams & Glyn 25,965 24,949 25,806 24,229
Central items & other 40,788 75,912 28,241 60,048
Total 782,654 732,605 798,656 749,252

10. Financial instruments: classification

The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown within other assets and liabilities.

Other
HFT (1,2) DFV (3) AFS (4) LAR (5) HTM (6) assets Total
Assets £m £m £m £m £m £m £m
Cash and balances at central banks - - - 86,807 - 86,807
Loans and advances to banks
- reverse repos 11,444 - - 3,403 - 14,847
- other 8,290 - - 12,395 - 20,685
Loans and advances to customers
- reverse repos 25,183 - - - - 25,183
- other 16,300 332 - 309,427 - 326,059
Debt securities 34,866 - 42,857 3,898 4,548 86,169
Equity shares 47 112 359 - - 518
Settlement balances - - 12,091 12,091
Derivatives 193,531 193,531
Other assets - - - - - 16,764 16,764
30 June 2017 289,661 444 43,216 428,021 4,548 16,764 782,654
Cash and balances at central banks - - - 74,250 - 74,250
Loans and advances to banks
- reverse repos 11,120 - - 1,740 - 12,860
- other 6,780 - - 10,498 - 17,278
Loans and advances to customers
- reverse repos 26,586 - - 2,341 - 28,927
- other 17,504 82 - 305,437 - 323,023
Debt securities 24,504 27 39,254 3,968 4,769 72,522
Equity shares 166 172 365 - - 703
Settlement balances - - 5,526 5,526
Derivatives 246,981 246,981
Other assets - - - - - 16,586 16,586

For the notes to this table refer to the following page.

10. Financial instruments: classification (continued)

Amortised Other
HFT (1,2) DFV (3) cost liabilities Total
Liabilities £m £m £m £m £m
Deposits by banks
- repos 2,841 - 2,342 5,183
- other 16,050 - 22,915 38,965
Customer accounts
- repos 28,772 - 9,083 37,855
- other 11,542 1,127 347,213 359,882
Debt securities in issue 1,354 3,919 26,724 31,997
Settlement balances - - 11,379 11,379
Short positions 29,862 - 29,862
Derivatives 184,161 184,161
Subordinated liabilities - 900 13,824 14,724
Other liabilities - - 1,938 16,659 18,597
30 June 2017 274,582 5,946 435,418 16,659 732,605
Deposits by banks
- repos 4,125 - 1,114 5,239
- other 20,756 - 12,561 33,317
Customer accounts
- repos 23,186 - 3,910 27,096
- other 12,778 1,506 339,588 353,872
Debt securities in issue 1,614 4,621 21,010 27,245
Settlement balances - - 3,645 3,645
Short positions 22,077 - 22,077
Derivatives 236,475 236,475
Subordinated liabilities - 955 18,464 19,419
Other liabilities - - 2,010 18,857 20,867
31 December 2016 321,011 7,082 402,302 18,857 749,252

Notes:

(1) Includes derivative assets held for hedging purposes (under IAS 39) of £3,621 million (31 December 2016 - £4,789 million) and derivative liabilities held for hedging purposes (under IAS 39) of £3,621 million (31 December 2016 - £4,057 million).

(2) Held-for-trading.

(3) Designated as at fair value.

(4) Available-for-sale.

(5) Loans and receivables. (6) Held-to-maturity.

There were no other reclassifications in either the half year ended 30 June 2017 or the year ended 31 December 2016.

10. Financial instruments: valuation

Own credit

The own credit adjustments (OCA) recorded on held-for-trading (HFT) and designated at fair value through profit or loss (DFV) debt securities in issue, subordinated liabilities and derivative liabilities are set out below. The cumulative adjustments below represent reductions/(increases) to the balance sheet liability amounts.

Debt securities Subordinated
in issue (2) liabilities
HFT DFV DFV Derivatives Total (3)
Own credit adjustment (1) £m £m £m £m £m
30 June 2017 (50) (22) 150 9 87
31 December 2016 (34) (6) 196 81 237
30 June 2016 1 82 283 135 501
Carrying values of underlying liabilities £bn £bn £bn
30 June 2017 1.4 3.9 0.9
31 December 2016 1.6 4.6 1.0
30 June 2016 3.4 5.4 0.9

Notes:

(1) The OCA does not alter cash flows and is not used for performance management.

(2) Includes wholesale and retail note issuances.

(3) The reserve movement between periods will not equate to the reported profit or loss or other comprehensive income related to own credit. RBS has early adopted the provisions within IFRS 9 Financial Instruments in respect of the presentation of gains and losses on financial liabilities designated at fair value through profit and loss from 1 January 2017. For further information refer to Note 1. The balance sheet reserve is stated by converting underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.

(4) The cumulative adjustment for debt securities in issue is opposite to that for subordinated liabilities: debt securities in issue were issued relatively recently at wider than current spreads, whilst many of the subordinated liabilities were issued before the financial crisis at significantly tighter spreads.

Key points

The cumulative OCA decrease during H1 2017 was mainly due to the tightening of RBS issuance spreads. The OCA on senior debt is determined by reference to secondary debt issuance spreads; the 5 year spreads tightened by 32 basis points to 30 basis points at 30 June 2017 (31 December 2016 – 62 basis points).

RBS 5 year subordinated debt spreads tightened by 68 basis points to 213 basis points at 30 June 2017 (31 December 2016 – 281 basis points).

RBS 5 year CDS credit spreads tightened by 44 basis points to 81 basis points at 30 June 2017 (31 December 2016 – 125 basis points) resulting in lower own credit reserve on derivatives.

10. Financial instruments: carried at fair value - valuation hierarchy

Disclosures relating to the control environment, valuation techniques and related aspects pertaining to financial instruments measured at fair value are included in the 2016 Annual Report and Accounts. Valuation, sensitivity methodologies and inputs are consistent with those described in the 2016 Annual Report and Accounts Note 9 – Financial instruments valuation.

The tables below show financial instruments carried at fair value on the balance sheet by valuation hierarchy - level 1, level 2 and level 3 and valuation sensitivities for level 3 balances.

Level 3 sensitivity
Level 1 Level 2 Level 3 Total Favourable Unfavourable
30 June 2017 £bn £bn £bn £bn £m £m
Assets
Loans and advances - 61.1 0.4 61.5 20 -
Debt securities 63.4 13.4 0.9 77.7 30 (20)
- of which AFS 36.1 6.6 0.2 42.9 10 (10)
Equity shares - 0.1 0.4 0.5 40 (40)
- of which AFS - 0.1 0.3 0.4 30 (30)
Derivatives - 191.4 2.2 193.6 210 (220)
63.4 266.0 3.9 333.3 300 (280)
Proportion 19.0% 79.8% 1.2% 100%
31 December 2016
Assets
Loans and advances - 61.5 0.6 62.1 50 (50)
Debt securities 53.8 9.2 0.8 63.8 70 (20)
- of which AFS 35.1 4.0 0.1 39.2 20 (10)
Equity shares 0.1 0.2 0.4 0.7 40 (50)
- of which AFS - 0.1 0.3 0.4 30 (40)
Derivatives - 244.2 2.7 246.9 200 (200)
53.9 315.1 4.5 373.5 360 (320)
Proportion 14.4% 84.4% 1.2% 100%
30 June 2017
Liabilities
Deposits - 60.2 - 60.2 10 (10)
Debt securities in issue - 4.8 0.5 5.3 30 (30)
Short positions 26.4 3.5 - 29.9 - -
Derivatives - 182.2 2.0 184.2 130 (130)
Subordinated liabilities - 0.9 - 0.9 - -
26.4 251.6 2.5 280.5 170 (170)
Proportion 9.4% 89.7% 0.9% 100%
31 December 2016
Liabilities
Deposits - 62.0 0.4 62.4 10 (20)
Debt securities in issue - 5.6 0.6 6.2 40 (40)
Short positions 19.7 2.4 - 22.1 - -
Derivatives - 234.4 2.0 236.4 120 (120)
Subordinated liabilities - 1.0 - 1.0 - -
19.7 305.4 3.0 328.1 170 (180)
Proportion 6.0% 93.1% 0.9% 100%

For the notes to this table refer to the following page.

Notes

Notes: (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.

Level 2 instruments included non-G10 government securities, most government agency securities, investment-grade corporate bonds, certain mortgage products, 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. Level 3 instruments primarily include cash instruments which trade infrequently, certain syndicated mortgage loans, certain emerging markets instruments, unlisted equity shares, certain residual interests in securitisations, asset-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) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred. There were no significant transfers between level 1 and level 2.

(3) For an analyses of debt securities and derivatives refer to Appendix 1 - Capital and risk management - Credit risk.

10. Financial instruments carried at fair value - valuation hierarchy (continued)

Movement in level 3 portfolios

Half year ended 2017 Half year ended 2016
FVTPL AFS Total Total FVTPL AFS Total Total
assets (2) assets assets liabilities assets (2) assets assets liabilities
£m £m £m £m £m £m £m £m
At 1 January 4,111 426 4,537 2,997 3,152 765 3,917 2,716
Amount recorded in the income statement (1) (410) 1 (409) (204) 332 1 333 634
Amount recorded in the statement of - - - - - - - -
comprehensive income - (15) (15) - - 47 47 -
Level 3 transfers in 255 266 521 292 705 27 732 592
Level 3 transfers out (404) - (404) (418) (369) (28) (397) (422)
Issuances - - - - 3 - 3 22
Purchases 810 1 811 269 493 11 504 406
Settlements (96) - (96) (117) (393) - (393) (362)
Sales (876) (156) (1,032) (323) (344) (204) (548) (16)
Foreign exchange and other adjustments (17) (1) (18) 9 12 7 19 43
At 30 June 3,373 522 3,895 2,505 3,591 626 4,217 3,613
Amounts recorded in the income statement in
respect of balances held at year end
- unrealised (96) - (96) 629 267 2 269 364
- realised 148 - 148 (262) 193 (188) 5 (85)

Notes:

(1) Net losses on HFT instruments of £197 million (H1 2016 - £285 million losses) were recorded in income from trading activities in continuing operations. Net losses on other instruments of £8 million (H1 2016 - £16 million losses) were recorded in other operating income and interest income as appropriate in continuing operations.

(2) Fair value through profit or loss comprises held-for-trading predominantly and designated at fair value through profit and loss.

Notes

10. Financial instruments: Fair value of financial instruments not carried at fair value

The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.

30 June 2017 31 December 2016
Carrying
value
£bn		 Fair value
£bn		 Carrying
value
£bn		 Fair value
£bn
Financial assets
Loans and advances to banks 14.7 14.7 11.4 11.5
Loans and advances to customers 309.4 306.3 307.8 306.0
Debt securities 8.4 8.6 8.7 8.8
Financial liabilities
Deposits by banks 20.5 20.2 9.4 9.5
Customer accounts 47.3 47.3 35.1 35.2
Debt securities in issue 26.7 28.0 21.0 21.6
Subordinated liabilities 13.8 14.5 18.5 18.5

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Quoted market values are used where available; otherwise, fair values have been estimated based on discounted expected future cash flows and other valuation techniques. These techniques involve uncertainties and require assumptions and judgments covering prepayments, credit risk and discount rates. Furthermore, there is a wide range of potential valuation techniques. Changes in these assumptions would affect estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement.

The table above excludes short-term financial instruments for which fair value approximates to carrying value: cash and balances at central banks, items in the course of collection from and transmission to other banks, settlement balances, demand deposits and notes in circulation. These are excluded from the table above.

11. Contingent liabilities and commitments

30 June
2017		 31 December
2016
£m £m
Guarantees and assets pledged as collateral security 7,490 7,867
Other contingent liabilities 3,398 4,179
Standby facilities, credit lines and other commitments 132,605 138,645
Contingent liabilities and commitments 143,493 150,691

Contingent liabilities arise in the normal course of RBS's business; credit exposure is subject to the bank's normal controls. The amounts shown do not, and are not intended to, provide any indication of RBS's expectation of future losses.

12. Litigation, investigations and reviews

The Royal Bank of Scotland Group plc (the "company" or RBSG) and certain members of the Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action ("Matters") in the United Kingdom (UK), the United States (US), the European Union (EU) and other jurisdictions.

RBS recognises a provision for a liability in relation to these Matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation. While the outcome of these Matters is inherently uncertain, the directors believe that, based on the information available to them, appropriate provisions have been made in respect of the Matters as at 30 June 2017 (refer to Note 3).

In many proceedings and investigations, it is not possible to determine whether any loss is probable or to estimate reliably the amount of any loss, either as a direct consequence of the relevant proceedings and investigations or as a result of adverse impacts or restrictions on RBS's reputation, businesses and operations. Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and document production exercises and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can reasonably be estimated for any claim. RBS cannot predict if, how, or when such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.

In respect of certain matters described below, we have established a provision and in certain of those matters, we have indicated that we have established a provision. RBS generally does not disclose information about the establishment or existence of a provision for a particular matter where disclosure of the information can be expected to prejudice seriously RBS's position in the matter.

There are situations where RBS may pursue an approach that in some instances leads to a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, or in order to take account of the risks inherent in defending claims or investigations even for those matters for which RBS believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities.

The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than or less than the aggregate provision that RBS has recognised. Where (and as far as) liability cannot be reasonably estimated, no provision has been recognised.

Notes

12. Litigation, investigations and reviews (continued)

Other than those discussed below, no member of the Group is or has been involved in governmental, legal or regulatory proceedings (including those which are pending or threatened) that are expected to be material, individually or in aggregate. RBS expects that in future periods additional provisions, settlement amounts, and customer redress payments will be necessary, in amounts that are expected to be substantial in some instances.

For a discussion of certain risks associated with the Group's litigation, investigations and reviews, see the Risk Factor relating to legal, regulatory and governmental actions and investigations set out in RBS's 2016 Annual Report and Accounts on page 432 and in RBS's 2016 Annual Report on Form 20-F on page 509.

Litigation

UK 2008 rights issue shareholder litigation

Between March and July 2013, claims were issued in the High Court of Justice of England and Wales by sets of current and former shareholders, against RBSG (and in one of those claims, also against certain former individual officers and directors) alleging that untrue and misleading statements and/or improper omissions, in breach of the Financial Services and Markets Act 2000, were made in connection with the rights issue announced by RBS on 22 April 2008. In July 2013 these and other similar threatened claims were consolidated by the Court via a Group Litigation Order. RBS's defence to the claims was filed on 13 December 2013. Since then, further High Court claims have been issued against RBS under the Group Litigation Order. Prior to the partial settlement described below, the aggregate value of the shares subscribed for at 200 pence per share by all of the then claimant shareholders was approximately £4 billion.

In December 2016 RBS concluded full and final settlements with four of the five shareholder groups representing 78 per cent of the claims by value. Further full and final settlements, without any admission of liability, have since been reached and RBS has now concluded the action with over 98 per cent of the claimants.

The aggregate settlement figure available is £900 million and is subject to validation of claims. RBS has increased its total provision to £900 million in relation to this matter.

The Court directed that any claimant choosing not to enter the settlement should, by 28 July 2017, issue an application to restore the proceedings. In the event that any claimant is subsequently permitted to continue with the proceedings, they would be defended by RBS on the grounds previously set out. RBS is not aware of any such application having been made.

Residential mortgage-backed securities (RMBS) litigation in the US

RBS companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the US that relate to the securitisation and securities underwriting businesses. These cases include actions by individual purchasers of securities and a purported class action suit.

In general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings of RMBS contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the securities were issued.

In September 2011, the US Federal Housing Finance Agency (FHFA) as conservator for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), filed a lawsuit against RBS in the United States District Court for the District of Connecticut, relating to approximately US\$32 billion of RMBS for which RBS entities acted as sponsor/depositor and/or lead underwriter or co-lead underwriter. On 12 July 2017, RBS announced the settlement of this matter. Pursuant to the settlement agreement, RBS has paid FHFA US\$5.5 billion, and FHFA has withdrawn its claims relating to the securities at issue in the case. Of that settlement amount, US\$754 million has been reimbursed to RBS under indemnification agreements with third parties. The net cost to RBS of the settlement was largely covered by existing provisions. An incremental charge of US\$196 million (£151 million) was recorded in relation to this matter.

Notes

12. Litigation, investigations and reviews (continued)

RBS Securities Inc. remains a defendant in a separate, unresolved FHFA lawsuit relating to RMBS issued by Nomura Holding America Inc. (Nomura) and subsidiaries, which is the subject of an appeal. On 11 May 2015, following a trial, the United States District Court for the Southern District of New York issued a written decision in favour of FHFA on its claims against Nomura and RBS Securities Inc., finding, as relevant to RBS, that the offering documents for four Nomura-issued RMBS for which RBS Securities Inc. served as an underwriter, relating to US\$1.4 billion in original principal balance, contained materially misleading statements about the mortgage loans that backed the securitisations, in violation of the Securities Act and Virginia securities law.

RBS Securities Inc. estimates that its net exposure under the Court's judgment is approximately US\$383 million, which consists of the difference between the amount of the judgment against RBS Securities Inc. (US\$636 million) and the estimated market value of the four RMBS that FHFA would return to RBS Securities Inc. pursuant to the judgment, plus the costs and attorney's fees that will be due to FHFA if the judgment is upheld. The estimated net exposure in this matter is covered by an existing provision.

The Court has stayed the judgment pending the result of the appeal that the defendants are taking to the United States Court of Appeals for the Second Circuit, though post-judgment interest on the judgment amount will accrue while the appeal is pending. RBS Securities Inc. intends to pursue a contractual claim for indemnification against Nomura with respect to any losses it suffers as a result of this matter.

RBS companies are also defendants in a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al., which remains pending in the United States District Court for the Southern District of New York. RBS has settled this matter for US\$55.3 million, which has been paid into escrow pending court approval of the settlement.

In addition to the above, the remaining RMBS lawsuits against RBS companies consist of cases filed by the Federal Home Loan Banks of Boston and Seattle and the Federal Deposit Insurance Corporation that together involve the issuance of less than US\$1 billion of RMBS issued primarily from 2005 to 2007.

As at 30 June 2017, the total aggregate of provisions in relation to certain of the RMBS litigation matters (described immediately above) and RMBS and other securitised products investigations (set out under "Investigations and reviews" on page 82) was £6.6 billion (\$8.5 billion), of which £3.7 billion (\$4.75 billion) related to the FHFA case that has now been resolved. The duration and outcome of these investigations and litigation matters remain uncertain, including in respect of whether settlements for all or any of such matters may be reached.

Further substantial provisions and costs may be recognised and, depending on the final outcome, other adverse consequences may occur.

With respect to certain of the RMBS claims described above, RBS has or will have contractual claims to indemnification from the issuers of the securities (where an RBS company is underwriter) and/or the underlying mortgage originator (where an RBS company is issuer). The amount and extent of any recovery on an indemnification claim, however, is uncertain and subject to a number of factors, including the ongoing creditworthiness of the indemnifying party, a number of whom are or may be insolvent.

London Interbank Offered Rate (LIBOR)

Certain members of the Group have been named as defendants in a number of class actions and individual claims filed in the US with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints are substantially similar and allege that certain members of the Group and other panel banks individually and collectively violated various federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means.

Most of the USD LIBOR-related actions in which RBS companies are defendants, including all purported class actions relating to USD LIBOR, were transferred to a coordinated proceeding in the United States District Court for the Southern District of New York.

In the coordinated proceeding, consolidated class action complaints were filed on behalf of (1) exchange-based purchaser plaintiffs, (2) over-the-counter purchaser plaintiffs, and (3) corporate debt purchaser plaintiffs. Over 35 other USD LIBOR-related actions naming RBS as a defendant, including purported class actions on behalf of lenders and mortgage borrowers, were also made part of the coordinated proceeding.

In a series of orders issued in 2013 and 2014, the district court overseeing the coordinated USD proceeding dismissed class plaintiffs' antitrust claims and claims under RICO (Racketeer Influenced and Corrupt Organizations Act), but declined to dismiss (a) certain Commodity Exchange Act claims on behalf of persons who transacted in Eurodollar futures contracts and options on futures contracts on the Chicago Mercantile Exchange (on the theory that defendants' alleged persistent suppression of USD LIBOR caused loss to plaintiffs), and (b) certain contract and unjust enrichment claims on behalf of over-the-counter purchaser plaintiffs who transacted directly with a defendant. On 23 May 2016, the district court's dismissal of plaintiffs' antitrust claims was vacated by the United States Court of Appeals for the Second Circuit, which held that plaintiffs have adequately pled antitrust injury and an antitrust conspiracy, but remanded to the lower court for further consideration on the question of whether plaintiffs possess the requisite antitrust standing to proceed with antitrust claims.

In a decision issued on 20 December 2016, the district court held that it lacks personal jurisdiction over RBS with respect to certain claims asserted in the coordinated proceeding. Following that decision, RBS is dismissed from each of the USD LIBOR-related class actions in the coordinated proceeding, subject to appeal, although certain non-class cases on behalf of particular plaintiffs remain pending.

On 10 March 2017, the US Federal Deposit Insurance Corporation (FDIC), on behalf of 39 failed US banks, issued a claim in the High Court of Justice of England and Wales against RBS, other LIBOR panel banks and the British Bankers' Association, alleging collusion with respect to the setting of USD LIBOR. The action alleges that the defendants breached English and European competition law as well as asserting common law claims of fraud under US law. The FDIC previously asserted many of the same US law USD LIBOR-related claims against RBS and others in a lawsuit pending in the United States District Court for the Southern District of New York, though most of the claims in that case have been dismissed as a result of a series of rulings by that court.

Certain members of the Group have also been named as defendants in two class actions relating to JPY LIBOR and Euroyen TIBOR, both pending before the same judge in the United States District Court for the Southern District of New York. In the first case, relating to Euroyen TIBOR futures contracts, the court dismissed plaintiffs' antitrust claims on 28 March 2014, but declined to dismiss their claims under the Commodity Exchange Act for price manipulation, which are proceeding in the discovery phase. In the second case, relating to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR, the court dismissed the case on 10 March 2017 on the ground that the plaintiffs lack standing. Plaintiffs have commenced an appeal of that decision.

Certain members of the Group have also been named as defendants in class actions relating to (i) Euribor, (ii) Swiss Franc LIBOR (iii) Pound sterling LIBOR, (iv) the Singapore Interbank Offered Rate and Singapore Swap Offer Rate, and (v) the Australian Bank Bill Swap Reference Rate, all of which are pending before other judges in the United States District Court for the Southern District of New York. On 21 February 2017, the court in the action relating to Euribor dismissed all claims alleged against RBS for lack of personal jurisdiction. The other matters described in this paragraph are subject to motions to dismiss that are currently pending.

Details of LIBOR investigations involving RBS are set out under ''Investigations and reviews'' on page 83.

ISDAFIX antitrust litigation

Beginning in September 2014, The Royal Bank of Scotland plc (RBS plc) and a number of other financial institutions were named as defendants in several purported class action complaints (subsequently consolidated into one complaint) in the United States District Court for the Southern District of New York alleging manipulation of USD ISDAFIX rates In 2015, RBS plc reached an agreement to settle this matter for US\$50 million, and that settlement received preliminary approval from the Court on 11 May 2016. The settlement amount has been paid into escrow pending the final court approval of the settlement.

FX antitrust litigation

In 2015, Group companies settled a consolidated antitrust class action (the "consolidated action"), pending in the United States District Court for the Southern District of New York, asserting claims on behalf of persons who entered into (a) over-the-counter foreign exchange (FX) spot transactions, forwards, swaps, futures, options or other FX transactions the trading or settlement of which is related in any way to FX rates, or (b) exchange-traded FX instruments. Following the Court's preliminary approval of the settlement on 15 December 2015, RBS paid the total settlement amount (US\$255 million) into escrow pending final court approval of the settlement.

On 24 March 2017, the court dismissed a second FX-related antitrust class action, holding that the alleged class of "consumers and end-user businesses" lacked standing to pursue antitrust claims. The plaintiffs in that case have since filed an amended complaint, which is subject to a renewed motion to dismiss.

A third FX-related class action, asserting Employee Retirement Income Security Act claims on behalf of employee benefit plans that engaged in FX transactions, including claims based on alleged non-collusive FX-related conduct, was dismissed on 20 September 2016 on the ground that the plaintiffs failed to plead that the defendants had ERISA-based fiduciary duties to the plaintiffs. The plaintiffs' appeal of this dismissal remains pending.

Beginning in September 2016, several class action complaints were filed in the United States District Court for the Southern District of New York asserting claims on behalf of "indirect purchasers" of FX instruments. The plaintiffs define "indirect purchasers" as persons who were indirectly affected by FX instruments that others entered into directly with defendant banks or on exchanges. It is alleged that certain RBS companies and other defendant banks caused damages to the "indirect purchasers" by conspiring to restrain trade in the FX spot market. The plaintiffs have asserted claims under federal and state antitrust laws. RBS and the other defendants anticipate making a motion to dismiss the claims asserted in these actions after the plaintiffs file a single, consolidated complaint.

On 12 July 2017, a class action complaint was filed against RBS companies in the United States District Court for the Southern District of New York. The complaint alleges that RBS breached contracts with counterparties by rejecting FX orders placed over electronic trading platforms through the application of a function referred to as "Last Look", and that the rejected orders were later filled at prices less favourable to putative class members. The complaint contains claims for breach of contract and unjust enrichment.

In September 2015, certain members of the Group, as well as a number of other financial institutions, were named as defendants in two purported class actions filed in Ontario and Quebec on behalf of persons in Canada who entered into foreign exchange transactions or who invested in funds that entered into foreign exchange transactions. The plaintiffs allege that the defendants violated the Canadian Competition Act by conspiring to manipulate the prices of currency trades. RBS has settled these matters for approximately CAD 13 million. The settlement amount has been paid into escrow pending court approval of the settlement.

Certain other foreign exchange transaction related claims have been or may be threatened against RBS in other jurisdictions. RBS cannot predict whether any of these claims will be pursued, but expects that several may.

US Treasury securities antitrust litigation

Beginning in July 2015, numerous class action antitrust complaints were filed in US federal courts against a number of primary dealers of US Treasury securities, including RBS Securities Inc. The complaints allege that the defendants rigged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to increase the prices at which they sold such securities to plaintiffs. The complaints assert claims under the US antitrust laws and the Commodity Exchange Act on behalf of persons who transacted in US Treasury securities or derivatives based on such instruments, including futures and options. On 8 December 2015, all pending matters were transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings. RBS anticipates making a motion to dismiss these claims.

Swaps antitrust litigation

Beginning in November 2015, RBS plc and other members of the Group, as well as a number of other interest rate swap dealers, were named as defendants in a number of class action antitrust complaints filed in the United States District Court for the Southern District of New York and the United States District Court for the Northern District of Illinois. The complaints, filed on behalf of persons who entered into interest rate swaps with the defendants, allege that the defendants violated the US antitrust laws by restraining competition in the market for interest rate swaps through various means and thereby caused inflated bid-ask spreads for interest rate swaps, to the alleged detriment of the plaintiff class.

In addition, two complaints containing similar allegations of collusion were filed in United States District Court for the Southern District of New York on behalf of TeraExchange and Javelin, who allege that they would have successfully established exchange-like trading of interest rate swaps if the defendant dealers had not unlawfully conspired to prevent that from happening through boycotts and other means, in violation of the U.S. antitrust laws. On 2 June 2016, all of these matters were transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings.

On 28 July 2017, the Court overseeing the above matters dismissed all claims against RBS companies relating to the 2008 - 2012 time period, but declined to dismiss certain antitrust and unjust enrichment claims covering the 2013 - 2016 time period, which will now proceed to the discovery phase.

On 8 June 2017, TeraExchange filed another complaint against RBS and others in the United States District Court for the Southern District of New York, this time relating to credit default swaps instead of interest rate swaps. TeraExchange alleges it would have established exchange-like trading of credit default swap if the defendant dealers had not engaged in an unlawful antitrust conspiracy. RBS anticipates making a motion to dismiss the complaint in this matter.

Madoff

In December 2010, Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC., filed a clawback claim against The Royal Bank of Scotland N.V. (RBS N.V.) in the New York bankruptcy court. In the operative complaint, filed in August 2012, the trustee seeks to recover US\$75.8 million in redemptions that RBS N.V. allegedly received from certain Madoff feeder funds and US\$162.1 million that RBS N.V. allegedly received from its swap counterparties at a time when RBS N.V. allegedly 'knew or should have known of Madoff's possible fraud'. The Trustee alleges that those transfers were preferences or fraudulent conveyances under the US bankruptcy code and New York law and he asserts the purported right to claw them back for the benefit of Madoff's estate. RBS N.V. made a motion to dismiss in this case on the ground that many of the transfers at issue were extraterritorial to the United States and therefore not subject to the fraudulent conveyance statute upon which the trustee's claim is based, but the bankruptcy court denied that motion on 22 November 2016. RBS N.V. is seeking to appeal that decision. A further claim by the trustee against RBS N.V., for clawback of an additional US\$21.8 million, was filed in October 2011. With respect to that claim, the bankruptcy court granted RBS N.V.'s motion to dismiss on extraterritorial grounds, and the trustee has commenced an appeal of that decision.

Thornburg adversary proceeding

RBS Securities Inc. and certain other RBS companies, as well as several other financial institutions, are defendants in an adversary proceeding filed in the US bankruptcy court in Maryland by the trustee for TMST, Inc. (formerly known as Thornburg Mortgage, Inc.). The trustee seeks recovery of transfers made under certain restructuring agreements as, among other things, avoidable fraudulent and preferential conveyances and transfers. On 25 September 2014, the Court largely denied the defendants' motion to dismiss this matter and, as a result, discovery is ongoing.

CPDO litigation

Claims were served on RBS N.V. in England, the Netherlands and Australia, relating to the sale of a type of structured financial product known as a constant proportion debt obligation (CPDO). The claims in England and the Netherlands have been settled and in April 2017, the court approved settlement of the remaining claim in Australia.

Interest rate hedging products litigation

RBS is dealing with a large number of active litigation claims in relation to the sale of interest rate hedging products (IRHPs). In general claimants allege that the relevant interest rate hedging products were mis-sold to them, with some also alleging RBS made misrepresentations in relation to LIBOR. Claims have been brought by customers who were considered under the UK Financial Conduct Authority (FCA) redress programme, as well as customers who were outside of the scope of that programme, which was closed to new entrants on 31 March 2015. RBS encouraged those customers that were eligible to seek redress under the FCA redress programme to participate in that programme. RBS remains exposed to potential claims from customers who were either ineligible to be considered for redress or who are dissatisfied with their redress offers.

Property Alliance Group (PAG) v The Royal Bank of Scotland plc was the leading case before the English High Court involving both IRHP mis-selling and LIBOR misconduct allegations. The amount claimed was approximately £33 million and the trial ended in October 2016. On 21 December 2016 the Court dismissed all of PAG's claims. PAG has been granted leave to appeal that decision by the Court of Appeal. The decision (subject to the appeal by PAG) may have significance to other similar LIBOR-related cases currently pending in the English courts, some of which involve substantial amounts. The case of Wall v RBS plc, which concerns certain similar allegations to those in PAG, is currently scheduled to go to trial in October 2017. The sum claimed is between £114 million and £669 million.

In addition to claims alleging that IRHPs were mis-sold, RBS has received a number of claims involving allegations that it breached a legal duty of care in its conduct of the FCA redress programme. These claims have been brought by customers who are dissatisfied with redress offers made to them through the FCA redress programme. The claims followed a preliminary decision against another UK bank. RBS has since been successful in opposing an application by a customer to amend its pleadings to include similar claims against RBS, on the basis that the bank does not owe a legal duty of care to customers in carrying out the FCA review. An appeal of that decision was dismissed in July 2017.

Tax dispute

HMRC issued a tax assessment in 2012 against RBS for approximately £86 million regarding a value-added-tax ("VAT") matter in relation to the trading of European Union Allowances ("EUAs") by an RBS joint venture subsidiary in 2009. RBS has commenced legal proceedings before the First-tier Tribunal (Tax), a specialist tax tribunal, challenging the assessment (the "Tax Dispute"). In the event that the assessment is upheld, interest and costs would be payable, and a penalty of up to 100 per cent of the VAT held to have been legitimately denied by HMRC could also be levied. Separately, RBS is a named defendant in proceedings before the High Court brought in 2015 by ten companies (all in liquidation) (the "Liquidated Companies") and their respective liquidators (together, "the Claimants"). The Liquidated Companies previously traded in EUAs in 2009 and are alleged to be defaulting traders within (or otherwise connected to) the EUA supply chains forming the subject of the Tax Dispute. The Claimants are claiming approximately £80 million plus interest and costs by alleging that RBS dishonestly assisted the directors of the Liquidated Companies in the breach of their statutory duties and/or knowingly participated in the carrying on of the business of the Liquidated Companies with intent to defraud creditors. The trial in that matter is currently scheduled to start in June 2018.

Weiss v. National Westminster Bank Plc (NatWest)

NatWest is defending a lawsuit filed by a number of US nationals (or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NatWest is liable for damages arising from those attacks pursuant to the US Anti-terrorism Act because NatWest previously maintained bank accounts and transferred funds for the Palestine Relief & Development Fund, an organisation which plaintiffs allege solicited funds for Hamas, the alleged perpetrator of the attacks. On 28 March 2013, the trial court (the United States District Court for the Eastern District of New York) granted summary judgment in favour of NatWest on the issue of scienter, but on 22 September 2014, that summary judgment ruling was vacated by the United States Court of Appeals for the Second Circuit. The appeals court returned the case to the trial court for consideration of NatWest's other asserted grounds for summary judgment and, if necessary, for trial. On 31 March 2016, the trial court denied a motion by NatWest to dismiss the case in which NatWest had argued that the court lacked personal jurisdiction over NatWest. NatWest has since asserted other grounds for summary judgment that the trial court has not previously ruled upon.

Anti-Terrorism Act litigation against RBS N.V.

RBS N.V. and certain other financial institutions (HSBC, Barclays, Standard Chartered, Credit Suisse, Bank Saderat, and Commerzbank) are defendants in an action first commenced in the United States District Court for the Eastern District of New York in November 2014 by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US military personnel, who were killed or injured in more than 90 attacks in Iraq between 2004 and 2011.

The attacks were allegedly perpetrated by Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic Republic of Iran. According to the plaintiffs' allegations, RBS N.V. and the other defendants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the Iraqi terror cells, in violation of the US Anti- terrorism Act, by agreeing to engage in "stripping" of transactions initiated by the Iranian banks so that the Iranian nexus to the transactions would not be detected. Since commencing this matter, the plaintiffs have amended the complaint twice. The second amended complaint is subject to a motion to dismiss that defendants filed on 14 September 2016.

On 2 November 2016, additional plaintiffs commenced a different action in the United States District Court for the Southern District of Illinois against the same defendants (including RBS N.V.), as well as Deutsche Bank. The allegations are substantially similar to the allegations contained in the complaint described above. The plaintiffs are a number of US military personnel (or their estates, survivors, or heirs) who were killed or injured in 21 attacks in Iraq between 2006 and 2011. In April 2017, this case was transferred to the United States District Court for the Eastern District of New York, where it has been stayed pending further order of the court.

Investigations and reviews

RBS's businesses and financial condition can be affected by the actions of various governmental and regulatory authorities in the UK, the US, the EU and elsewhere. RBS has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, business conduct, competition/anti-trust, anti-bribery, anti-money laundering and sanctions regimes.

The NatWest Markets (formerly CIB) segment in particular has been providing information regarding a variety of matters, including, for example, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange market, and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities, including structured products and government securities.

Any matters discussed or identified during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action being taken by governmental and regulatory authorities, increased costs being incurred by RBS, remediation of systems and controls, public or private censure, restriction of RBS's business activities and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a material adverse effect on RBS, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.

RBS is co-operating fully with the investigations and reviews described below.

RMBS and other securitised products investigations

In the US, RBS is involved in reviews, investigations and proceedings (both formal and informal) by federal and state governmental law enforcement and other agencies and self-regulatory organisations, including the US Department of Justice (DOJ) and various other members of the Residential Mortgage-Backed Securities Working Group (RMBS Working Group) of the Financial Fraud Enforcement Task Force (including several state attorneys general, including those mentioned below), relating to, among other things, issuance, underwriting and trading in RMBS and other mortgage-backed securities, collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and synthetic products.

In connection with these inquiries, Group companies have received requests for information and subpoenas seeking information about, among other things, the structuring of CDOs, financing to loan originators, purchase of whole loans, sponsorship and underwriting of securitisations, due diligence, representations and warranties, communications with ratings agencies, disclosure to investors, document deficiencies, trading activities and practices and repurchase requests.

These ongoing matters include, among others, active civil and criminal investigations by the DOJ, relating primarily to due diligence on and disclosure related to loans purchased for, or otherwise included in, securitisations and related disclosures.

Ongoing investigations into the same or similar issues by several state attorneys general are at various stages, with those of the New York and California attorneys general being further progressed than the others.

As at 30 June 2017, the total aggregate of provisions in relation to certain of the RMBS investigations (described immediately above) and RMBS litigation matters (set out under "Litigation" on page 75) was £6.6 billion (\$8.5 billion), of which £3.7 billion (\$4.75 billion) related to the FHFA case that has now been resolved. RBS continues to cooperate with the DOJ in its civil and criminal investigations of RMBS matters and with several state attorneys general in their investigations. The duration and outcome of these investigations and RMBS litigation matters remain uncertain, including in respect of whether settlements for all or any of such matters may be reached. Further substantial provisions and costs may be recognised and, depending on the final outcome, other adverse consequences may occur as described above and in the Risk Factor relating to legal, regulatory and governmental actions and investigations set out in RBS's 2016 Annual Report and Accounts on page 432 and in RBS's 2016 Annual Report on Form 20-F on page 509.

RBSSI has also been responding to an ongoing criminal investigation by the United States Attorney for the District of Connecticut relating to alleged misrepresentations in the trading of various forms of asset-backed securities, including RMBS, commercial mortgage-backed securities, CDOs, and CLOs. In March and December 2015, two former RBSSI traders entered guilty pleas in the United States District Court for the District of Connecticut, each to one count of conspiracy to commit securities fraud while employed at RBSSI. RBSSI is in advanced discussions to resolve the matter.

US mortgages - loan repurchase matters

RBS's NatWest Markets business in North America was a purchaser of non-agency residential mortgages in the secondary market, and an issuer and underwriter of non-agency RMBS.

In issuing RMBS, NatWest Markets in some circumstances made representations and warranties regarding the characteristics of the underlying loans. As a result, NatWest Markets may be, or may have been, contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties. Depending on the extent to which such loan repurchase related claims are pursued against and not rebutted by NatWest Markets on timeliness or other grounds, the aggregate potential impact on RBS, if any, may be material.

LIBOR and other trading rates

From February 2013 to December 2016, RBS entered into settlements with various governmental authorities in relation to investigations into submissions, communications and procedures around the setting of LIBOR and other interest rates and interest rate trading, which, among other things, required RBS to pay significant penalties. As part of these resolutions, RBS made certain undertakings regarding benchmark interest rates, including the undertakings contained in its February 2013 resolution with the Commodity Futures Trading Commission. RBS continues to co-operate with investigations and requests for information by various other governmental and regulatory authorities, including in the UK, US and APAC.

On 3 February 2017, it was announced that RBS and the CFTC entered into a civil settlement resolving the CFTC's investigation of ISDAFIX and related trading activities. As part of the settlement, RBS has paid a penalty of US\$85 million and agreed to certain undertakings.

Foreign exchange related investigations

In November 2014, RBS plc reached a settlement with the FCA and the CFTC in relation to investigations into failings in RBSG's FX businesses within its NatWest Markets segment. RBS plc agreed to pay penalties of £217 million to the FCA and US\$290 million to the CFTC to resolve the investigations. The fines were paid on 19 November 2014.

On 20 May 2015, RBS plc announced that it had reached settlements with the DOJ and the Board of Governors of the Federal Reserve System (Federal Reserve) in relation to investigations into its FX business within its NatWest Markets segment. RBS plc paid a penalty of US\$274 million to the Federal Reserve and agreed to pay a penalty of US\$395 million to the DOJ to resolve the investigations.

As part of its plea agreement with the DOJ, RBS plc pled guilty in the United States District Court for the District of Connecticut to a one-count information charging an antitrust conspiracy. RBS plc admitted that it knowingly, through one of its euro/US dollar currency traders, joined and participated in a conspiracy to eliminate competition in the purchase and sale of the euro/US dollar currency pair exchanged in the FX spot market.

The charged conspiracy occurred between as early as December 2007 to at least April 2010. On 5 January 2017, the United States District Court for the District of Connecticut imposed a sentence on RBS plc consisting of the US\$395 million criminal fine previously agreed with the DOJ and a term of probation, which among other things, prohibits RBS plc from committing another crime in violation of US law or engaging in the FX trading practices that form the basis for the charged crime and requires RBS plc to implement a compliance program designed to prevent and detect the unlawful conduct at issue and to strengthen its compliance and internal controls as required by other regulators (including the FCA and the CFTC). A violation of the terms of probation could lead to the imposition of additional penalties. Subsequent to the sentencing, RBS plc paid the criminal fine, which had been covered by an existing provision.

RBS plc and RBS Securities Inc. have also entered into a cease and desist order with the Federal Reserve relating to FX and other designated market activities (the FX Order). In the FX Order, which is publicly available and will remain in effect until terminated by the Federal Reserve, RBS plc and RBS Securities Inc. agreed to take certain remedial actions with respect to FX activities and certain other designated market activities, including the creation of an enhanced written internal controls and compliance program, an improved compliance risk management program, and an enhanced internal audit program. RBS plc and RBS Securities Inc. are obligated to implement and comply with these programs as approved by the Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance policies and procedures and a risk-focused sampling of key controls.

RBS is co-operating with investigations and responding to inquiries from other governmental and regulatory (including competition) authorities on similar issues relating to failings in its FX business within its NatWest Markets segment. The timing and amount of financial penalties with respect to any further settlements and related litigation risks and collateral consequences remain uncertain and may well be material.

Interest rate hedging products (IRHP) redress programme

Since 2013, RBS and other banks have been undertaking a redress exercise and past business review in relation to the sale of interest rate hedging products to some small and medium sized businesses classified as retail clients or private customers under FSA rules. This exercise was scrutinised by an independent reviewer, KPMG (appointed as a Skilled Person under section 166 of the Financial Services and Markets Act), and overseen by the FCA. RBS has reached agreement with KPMG in relation to redress determinations for all in scope customers, as well as the majority of the consequential loss claims received.

RBS provisions in relation to the above redress exercises total £1.5 billion to date for these matters, virtually all of which had been utilised at 30 June 2017.

Judicial Review of Skilled Person's role in IRHP review

RBS has been named as an interested party in a number of claims for judicial review of KPMG's decisions as Skilled Person in RBS's previously disclosed IRHP redress programme. This follows a similar claim from a customer of another UK bank, also against KPMG.

All of these claims were stayed pending the outcome of the other bank's case. The trial in that case was heard on 25 January 2016. The court decided in favour of KPMG, finding that (1) KPMG is not a body amenable to judicial review in respect of its role as Skilled Person in this matter; and (2) that there was no unfairness by the other bank in the procedure adopted. The claimant has been granted permission to appeal that decision, and the appeal hearing is scheduled to take place in December 2017.

The majority of the claims that name RBS as an interested party have been discontinued but there are still several cases which remain stayed pending the outcome of the appeal in the other bank's case. If the appeal court finds that a section 166-appointed Skilled Person is susceptible to judicial review, these remaining claims against RBS may then proceed to full hearing to assess the fairness of KPMG's role in the redress programme in those particular cases. If deemed unfair, this could have a consequential impact on the reasonableness of the methodology applied to reviewed and settled IRHP files generally. As there remains some uncertainty, it is not practicable reliably to estimate the impact of this matter, if any, on RBS which may be material.

Investment advice review

In February 2013, the FSA announced the results of a mystery shopping review it undertook into the investment advice offered by banks and building societies to retail clients. As a result of that review the FSA announced that firms involved were cooperative and agreed to take immediate action. RBS was one of the firms involved.

The action required included a review of the training provided to advisers, considering whether changes are necessary to both advice processes and controls for new business, and undertaking a past business review to identify any historic poor advice (and where breaches of regulatory requirements are identified, to put this right for customers).

Subsequent to the FSA announcing the results of its mystery shopping review, the FCA has required RBS to carry out a past business review and customer contact exercise on a sample of historic customers that received investment advice on certain lump sum products through the UK Financial Planning channel of the UK Personal & Business Banking (UK PBB) segment of RBS, which includes RBS plc and NatWest, during the period from March 2012 until December 2012.

This review was conducted under section 166 of the Financial Services and Markets Act, under which a Skilled Person was appointed to carry out the exercise. Redress has been paid to certain customers in this sample group. Following discussions with the FCA after issue of the draft section 166 report, RBS agreed with the FCA that it would carry out a wider review/remediation exercise relating to certain investment, insurance and pension sales from 1 January 2011 to 1 April 2015. RBS started writing to the relevant customers during 2016 and redress payments have also commenced. The project is due to finish in Q4 2017. In addition, RBS agreed with the FCA that it would carry out a remediation exercise, for a specific customer segment who were sold a particular structured product, in response to concerns raised by the FCA with regard to (a) the target market for the product and (b) how the product may have been described to customers by certain advisers. Redress has been paid to certain customers who took out the structured product.

RBS provisions in relation to investment advice total £201 million to date for these matters, of which £80 million had been utilised at 30 June 2017.

Packaged accounts

As a result of an uplift in packaged current account complaints, RBS proactively put in place dedicated resources in 2013 to investigate and resolve complaints on an individual basis. RBS has made gross provisions totalling £409 million to date for this matter.

The FCA conducted a thematic review of packaged bank accounts across the UK from October 2014 to April 2016, the results of which were published in October 2016. RBS is taking into consideration and, where relevant, addressing the findings from this review.

FCA review of RBS's treatment of SMEs

In November 2013, a report by Lawrence Tomlinson, entrepreneur in residence at the UK Government's Department for Business Innovation and Skills, was published ("Tomlinson Report"). The Tomlinson Report was critical of RBS's treatment of SMEs.

The Tomlinson Report was passed to the PRA and FCA. Shortly thereafter, the FCA appointed an independent Skilled Person under section 166 of the Financial Services and Markets Act to review the allegations in the Tomlinson Report. The Skilled Person's review was focused on RBS's UK small and medium sized business customers with credit exposures of up to £20 million whose relationship was managed within RBS's Global Restructuring Group or within similar units within RBS's Corporate Banking Division that were focused on customers in financial difficulties. In the period 2008 to 2013 RBS was one of the leading providers of credit to the UK SME sector.

Separately, in November 2013, RBS instructed the law firm Clifford Chance to conduct an independent review of the principal allegation made in the Tomlinson Report: RBS was alleged to be culpable of systematic and institutional behaviour in artificially distressing otherwise viable businesses and, through that, putting businesses into insolvency. Clifford Chance published its report on 17 April 2014 and, while it made certain recommendations to enhance customer experience and transparency of pricing, it concluded that there was no evidence to support the principal allegation.

A separate independent review of the principal allegation, led by Mason Hayes & Curran, Solicitors, was conducted in the Republic of Ireland. The report was published in December 2014 and found no evidence to support the principal allegation.

The Skilled Person review focused on the allegations made in the Tomlinson Report and certain observations made by Sir Andrew Large in his 2013 Independent Lending Review, and was broader in scope than the reviews undertaken by Clifford Chance and Mason, Hayes & Curran which are referred to above. The Skilled Person delivered the draft findings from its review to the FCA in March 2016. RBS was then given the opportunity to consider and respond to those draft findings before the Skilled Person delivered its final report to the FCA during September 2016.

On 8 November 2016, the FCA published an update on its review. In response, RBS announced steps that will impact SME customers in the UK and the Republic of Ireland that were in GRG between 2008 and 2013. These steps are (i) an automatic refund of certain complex fees; and (ii) a new complaints process, overseen by an Independent Third Party. These steps have been developed with the involvement of the FCA which agreed that they are appropriate for RBS to take.

RBS estimates the costs associated with the new complaints review process and the automatic refund of complex fees to be approximately £400 million, which was recognised as a provision in 2016. This includes operational costs together with the cost of refunded complex fees and the additional estimated redress costs arising from the new complaints process.

Notes

12. Litigation, investigations and reviews (continued)

The FCA announced in November 2016 that its review is continuing. RBS continues to cooperate fully with the review.

FCA investigation into RBS plc's compliance with the Money Laundering Regulations 2007

On 21 July 2017, the FCA notified RBS that it is undertaking an investigation into RBS plc's compliance with the Money Laundering Regulations 2007 in relation to certain customers. RBS is cooperating with the investigation.

Multilateral interchange fees

On 11 September 2014, the Court of Justice upheld earlier decisions by the EU Commission and the General Court that MasterCard's multilateral interchange fee (MIF) arrangements for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the EEA are in breach of competition law.

In April 2013, the EC announced it was opening a new investigation into interchange fees payable in respect of payments made in the EEA by MasterCard cardholders from non-EEA countries. The EC's case is ongoing.

On 8 June 2015, a regulation on interchange fees for card payments entered into force. The regulation requires the capping of both cross-border and domestic MIF rates for debit and credit consumer cards. The regulation also sets out other reforms including to the Honour All Cards Rule which require merchants to accept all cards with the same level of MIF but not cards with different MIF levels.

On 6 May 2015, the Competition & Markets Authority (CMA), announced that it had closed the investigations into domestic interchange fees on the grounds of administrative priorities.

Whilst there are no recent developments on the above to report, there remains uncertainty around the outcomes of the ongoing EC investigation, and the impact of the regulation, and they may have a material adverse effect on the structure and operation of four party card payment schemes in general and, therefore, on RBS's business in this sector.

Payment Protection Insurance (PPI)

Since 2011, RBS has been implementing a policy statement agreed with the FCA for the handling of complaints about the mis-selling of PPI. RBS is also monitoring developments following the UK Supreme Court's decision in the case of Plevin v Paragon Personal Finance Ltd in November 2014. That decision was that the sale of a single premium PPI policy could create an 'unfair relationship' under s.140A of the Consumer Credit Act 1974 (the 'Consumer Credit Act') because the premium contained a particularly high level of undisclosed commission.

The Financial Ombudsman Service (FOS) has confirmed on its website that unfair relationship provisions in the Consumer Credit Act and the Plevin judgment are 'potentially relevant considerations' in some of the PPI complaints referred to FOS.

On 26 November 2015, the FCA issued Consultation Paper 15/39, in which it set out proposed rules and guidance for how firms should handle PPI complaints fairly in light of the Plevin decision and how the FOS should consider relevant PPI complaints. The Consultation Paper also contained proposals for the introduction in 2018 on a date to be confirmed of a deadline for submission of PPI complaints. RBS submitted its response to the Consultation Paper on 26 February 2016.

The proposals in the Consultation Paper included an FCA-led communications campaign to raise awareness of the deadline and to prompt those who intend to complain to act ahead of the deadline.

Following feedback received on its Consultation Paper, on 2 August 2016, the FCA issued a further Consultation Paper (CP 16/20) on certain aspects of the proposed rules and guidance. As a result of this second Consultation Paper, it was expected that the complaint deadline would be end of June 2019 rather than 2018 as proposed in the initial Consultation Paper. The BBA and RBS submitted responses to the Consultation Paper on 11 October 2016.

Following feedback received on its second Consultation Paper (CP16/20), on 9 December 2016, the FCA issued a statement explaining that it was carefully considering the issues raised and would make a further announcement before 31 March 2017.

Notes

12. Litigation, investigations and reviews (continued)

On 2 March 2017, the FCA published Policy Statement 17/3, its final rules and guidance on PPI complaint handling. The Policy Statement made clear the FCA's intention to implement a two year PPI complaints deadline with effect from 29 August 2017, bringing an end to new PPI complaints in August 2019. New rules for the handling of Plevin complaints will also come into force on 29 August 2017. The proposals in the Policy Statement are largely as previously anticipated.

In June 2017, the claims management company 'We Fight Any Claim' issued judicial review proceedings challenging elements of the FCA's Policy Statement, including the proposed 2019 deadline.

RBS has made provisions totalling £4.9 billion to date for PPI claims, including an additional provision of £601 million in 2016, in response to the anticipated further delay in guidance. Of the £4.9 billion cumulative provision, £3.8 billion had been utilised by 30 June 2017. RBS does not currently anticipate that an additional provision for PPI will be required.

UK retail banking

In November 2014, the CMA announced its decision to proceed with a market investigation reference (MIR) into retail banking, which would cover PCA and SME banking. On 9 August 2016, the CMA published its final report. The CMA concluded that there are a number of competition concerns in the provision of PCAs, business current accounts and SME lending, particularly around low levels of customers searching and switching, resulting in banks not being put under enough competitive pressure, and new products and new banks not attracting customers quickly enough. The final report sets out remedies to address these concerns. These include remedies making it easier for customers to compare products, ensure customers benefit from technological advantages around open banking, improve the current account switching service and provide PCA overdraft customers with greater control over their charges along with additional measures targeted at SME customers.

On 2 February 2017 the CMA published the Retail Banking Market Investigation Order 2017 which is the primary legal framework setting out the obligations for the implementation of the majority of remedies, including an implementation deadline for each. Other remedies are to be delivered via undertakings signed by Bacs and recommendations to be taken forward by other regulators (including the FCA).

At this stage there remains uncertainty around the financial impact of the remedies once implemented, and so it is not practicable to estimate the potential impact on RBS, which may be material.

FCA Wholesale Sector Competition Review

In February 2015, the FCA launched a market study into investment and corporate banking. In October 2016 the FCA published its final report. It found that whilst many clients feel well served by primary capital market services there were some areas where improvements could be made to encourage competition, particularly for smaller clients. It set out a package of remedies, including prohibiting the use of restrictive contractual clauses and ending league table misrepresentation by asking league table providers to review their recognition criteria. The FCA has announced that the prohibition on restrictive contractual clauses is to take effect from 3 January 2018.

In November 2015, the FCA also announced that a market study would be undertaken into asset management. In November 2016, the FCA published the interim report which indicated that price competition is weak and expressed concerns around the lack of transparency on the objectives, and appropriate benchmarks, for reporting fund performance. On 28 June 2017, the FCA published the final report which was broadly in line with the interim report and sets out an extensive package of remedies which include providing further protection to investors and driving competitive pressure on asset managers.

Some uncertainty remains around the financial impact of the remedies once implemented and so it is not practicable reliably to estimate the potential impact on RBS. However, at this stage, this impact is not expected to be material.

FCA Mortgages Market Study

In December 2016, the FCA launched a market study into the provision of mortgages. The FCA has announced that it intends to publish an interim report in summer 2017 with the final report expected in Q1 2018.

At this stage, as there is considerable uncertainty around the outcome of this market study, it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.

FCA Strategic Review of Retail Banking Models

On 11 May 2017 the FCA announced a two phase strategic review of retail banking models, The FCA will use the review to understand how these models operate, including how 'free if in credit' banking is paid for and the impact of changes such as increased use of digital channels and reduced branch usage.

Phase 1 will allow the FCA to enhance its understanding of existing models and how these impact competition and conduct. Phase 2 will evaluate the impacts of economic, technological, social and regulatory factors on these models. A project update is expected in Q2 2018 outlining the FCA's preliminary conclusions from Phase 1.

At this early stage, as there is considerable uncertainty around the outcome of this review, it is not practicable reliably to estimate the aggregate impact, if any, on RBS, which in due course may be material.

Governance and risk management consent order

In July 2011, RBS agreed with the Board of Governors of the Federal Reserve System, the New York State Banking Department, the Connecticut Department of Banking, and the Illinois Department of Financial and Professional Regulation to enter into a consent Cease and Desist Order (Governance Order) (which is publicly available) to address deficiencies related to governance, risk management and compliance systems and controls in the US branches of RBS plc and RBS N.V. branches (the US Branches).

In the Governance Order, RBS agreed to create the following written plans or programmes:

Key points

  • a plan to strengthen board and senior management oversight of the corporate governance, management, risk management, and operations of RBS's US operations on an enterprise-wide and business line basis;
  • an enterprise-wide risk management programme for RBS's US operations;
  • a plan to oversee compliance by RBS's US operations with all applicable US laws, rules, regulations, and supervisory guidance;
  • a Bank Secrecy Act/anti-money laundering compliance programme for the US Branches on a consolidated basis;
  • a plan to improve the US Branches' compliance with all applicable provisions of the Bank Secrecy Act and its rules and regulations as well as the requirements of Regulation K of the Federal Reserve;
  • a customer due diligence programme designed to ensure reasonably the identification and timely, accurate, and complete reporting by the US Branches of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities, as required by applicable suspicious activity reporting laws and regulations; and
  • a plan designed to enhance the US Branches' compliance with Office of Foreign Assets Control (OFAC) requirements.

The Governance Order identified specific items to be addressed, considered, and included in each proposed plan or programme. RBS also agreed in the Governance Order to adopt and implement the plans and programmes after approval by the regulators, to comply fully with the plans and programmes thereafter, and to submit to the regulators periodic written progress reports regarding compliance with the Governance Order.

RBS has created, submitted, and adopted plans and/or programmes to address each of the areas identified above. In connection with RBS's efforts to implement these plans and programmes, it has, among other things, made investments in technology, hired and trained additional personnel, and revised compliance, risk management, and other policies and procedures for RBS's US operations. RBS continues to test the effectiveness of the remediation efforts it has undertaken to ensure they are sustainable and meet regulators' expectations. Furthermore, RBS continues to work closely with the regulators in its efforts to fulfil its obligations under the Governance Order, which will remain in effect until terminated by the regulators.

RBS may be subject to formal and informal supervisory actions and may be required by its US banking supervisors to take further actions and implement additional remedial measures with respect to these and additional matters. RBS's activities in the US may be subject to significant limitations and/or conditions.

US dollar processing consent order

In December 2013 RBS and RBS plc agreed a settlement with the Federal Reserve, the New York State Department of Financial Services (DFS), and the Office of Foreign Assets Control (OFAC) with respect to RBS plc's historical compliance with US economic sanction regulations outside the US. As part of the settlement, RBS and RBS plc entered into a consent Cease and Desist Order with the Federal Reserve (US Dollar Processing Order), which remains in effect until terminated by the Federal Reserve. The US Dollar Processing Order (which is publicly available) indicated, among other things, that RBS and RBS plc lacked adequate risk management and legal review policies and procedures to ensure that activities conducted outside the US comply with applicable OFAC regulations.

RBS agreed to create an OFAC compliance programme to ensure compliance with OFAC regulations by RBS's global business lines outside the US, and to adopt, implement, and comply with the programme. Prior to and in connection with the US Dollar Processing Order, RBS has made investments in technology, hired and trained personnel, and revised compliance, risk management, and other policies and procedures.

Under the US Dollar Processing Order (as part of the OFAC compliance programme) RBS was required to appoint an independent consultant to conduct an annual review of OFAC compliance policies and procedures and their implementation and an appropriate risk-focused sampling of US dollar payments. RBS appointed the independent consultant and their reports were submitted to the authorities on 14 June 2015. The independent consultant review examined a significant number of sanctions alerts and no reportable issues were identified.

Pursuant to the US Dollar Processing Order, the authorities requested a second annual review to be conducted by an independent consultant. The second review was conducted by the independent consultant and reports were submitted to the authorities on 30 September 2016. In line with the first review, and following examination of a significant number of sanctions alerts, the independent consultant did not identify any reportable issues. The authorities have requested a third annual review to be conducted and independent consultant reports are expected to be issued during Q4 2017. In addition, pursuant to requirements of the US Dollar Processing Order, RBS has provided the required written submissions, including quarterly updates, in a timely manner, and RBS continues to participate in a constructive dialogue with the authorities.

US/Swiss tax programme

In August 2013, the DOJ announced a programme for Swiss banks (the Programme) which provides Swiss banks with an opportunity to obtain resolution, through non-prosecution agreements or non-target letters, of the DOJ's investigations of the role that Swiss banks played in concealing the assets of US tax payers in offshore accounts (US related accounts). In December 2013, Coutts & Co Ltd., a member of the Group incorporated in Switzerland, notified the DOJ that it intended to participate in the Programme.

As required by the Programme, Coutts & Co Ltd. subsequently conducted a review of its US related accounts and presented the results of the review to the DOJ. On 23 December 2015, Coutts & Co Ltd. entered into a non-prosecution agreement (the NPA) in which Coutts & Co Ltd. paid a US\$78.5 million penalty and acknowledged responsibility for certain conduct set forth in a statement of facts accompanying the agreement. Under the NPA, which has a term of four years, Coutts & Co Ltd. is required, among other things, to provide certain information, cooperate with DOJ's investigations, and commit no U.S. federal offences. If Coutts & Co Ltd. abides by the NPA, the DOJ will not prosecute it for certain tax-related and monetary transaction offenses in connection with US related accounts.

Enforcement proceedings and investigations in relation to Coutts & Co Ltd

The Swiss Financial Market Supervisory Authority (FINMA) has been taking enforcement proceedings against Coutts & Co Ltd, a member of RBS incorporated in Switzerland, with regard to certain client accounts held with Coutts & Co Ltd relating to allegations in connection with the Malaysian sovereign wealth fund 1MDB. On 2 February 2017, FINMA announced that Coutts & Co Ltd had breached money laundering regulations by failing to carry out adequate background checks into business relationships and transactions associated with 1MDB. FINMA accordingly required Coutts & Co Ltd to disgorge profits of CHF 6.5 million.

Coutts & Co Ltd is also cooperating with investigations and enquiries from authorities in other jurisdictions in relation to the same subject matter. In this context, the Monetary Authority of Singapore (MAS)'s supervisory examination of Coutts & Co Ltd's Singapore branch revealed breaches of anti-money laundering requirements. MAS imposed on Coutts & Co Ltd financial penalties amounting to SGD 2.4 million in December 2016. The outcomes of other proceedings, investigations and enquiries are uncertain but may include financial consequences and/or regulatory sanctions.

Regulator requests concerning certain historic Russian transactions

Recent media coverage has highlighted an alleged money laundering scheme involving Russian entities between 2010 and 2014. Allegedly certain European banks, including RBS and 16 other UK based financial institutions, and certain US banks, were involved in processing certain transactions associated with this scheme. In common with other banks, RBS is responding to requests for information from the FCA, PRA and regulators in other jurisdictions.

Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC (formerly Ulster Bank Ireland Limited)

On 22 December 2015, the Central Bank of Ireland (CBI) announced that it had written to a number of lenders requiring them to put in place a robust plan and framework to review the treatment of customers who have been sold mortgages with a tracker interest rate or with a tracker interest rate entitlement. The CBI stated that the intended purpose of the review was to identify any cases where customers' contractual rights under the terms of their mortgage agreements were not fully honoured, or where lenders did not fully comply with various regulatory requirements and standards regarding disclosure and transparency for customers. The CBI has required Ulster Bank Ireland DAC (UBI DAC), a member of RBS, incorporated in the Republic of Ireland, to participate in this review and UBI DAC is co-operating with the CBI in this regard. RBS made a provision totalling EUR 211 million in 2016 for this matter.

Separately, on 15 April 2016, the CBI notified UBI DAC that it was also commencing an investigation under its Administrative Sanctions Procedure into suspected breaches of the Consumer Protection Code 2006 during the period 4 August 2006 to 30 June 2008 in relation to certain customers who switched from tracker mortgages to fixed rate mortgages.

13. Related party transactions

UK Government

The UK Government and bodies controlled or jointly controlled by the UK Government and bodies over which it has significant influence are related parties of the Group. The Group enters into transactions with many of these bodies on an arm's length basis.

Bank of England facilities

In the ordinary course of business, the Group may from time to time access market-wide facilities provided by the Bank of England.

The Group's other transactions with the UK Government include the payment of taxes, principally UK corporation tax and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy and FSCS levies).

Other related parties

(a) In their roles as providers of finance, Group companies provide development and other types of capital support to businesses. These investments are made in the normal course of business and on arm's length terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24.

(b) The Group recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to the Group.

Full details of the Group's related party transactions for the year ended 31 December 2016 are included in the 2016 Annual Report and Accounts.

14. Rating agencies

In January 2017 Standard and Poor's revised their assessment of Ulster Bank Ltd's group status from 'highly strategic' to 'core' and as a result. The long term rating of Ulster Bank Ltd was upgraded to BBB+ from BBB.

In June 2017, Moody's Investors Service (Moody's) updated RBS's standalone ratings (Baseline Credit Assessment) and changed the outlook for RBSG plc and all subsidiaries to 'Stable' from 'Positive'.

The resulting changes in ratings for The Royal Bank of Scotland Group plc (RBSG plc) and its subsidiaries are set out in the table below.

Moody's (1) (4) Standard and Poor's Fitch
Current rating Previous rating Current rating Previous rating Current rating Previous rating
Long Short Long Short Long Short Long Short Long Short Long Short
term term term term term term term term term term term term
The Royal Bank of
Scotland Group plc (1)		 Baa3 P-3 Ba1 NP BBB- A-3 BBB- A-3 BBB+ F2 BBB+ F2
The Royal Bank of
Scotland plc		 A3 P-2 A3 P-2 BBB+ A-2 BBB+ A-2 BBB+ F2 BBB+ F2
National Westminster
Bank Plc (3)		 A3 - A3 - BBB+ A-2 BBB+ A-2 BBB+ F2 BBB+ F2
Royal Bank of Scotland
N.V.		 A3 P-2 A3 P-2 BBB+ A-2 BBB+ A-2 BBB+ F2 BBB+ F2
RBS Securities Inc. - - - - BBB+ A-2 BBB+ A-2 BBB+ F2 BBB+ F2
Ulster Bank Ltd (3) - - - - BBB+ A-2 BBB A-2 BBB+ F2 BBB+ F2
Ulster Bank Ireland DAC (3) - - - - BBB A-2 BBB A-2 BBB F2 BBB F2

Notes:

(1) The table shows Moody's short-term and long-term debt ratings.

(2) All ratings for The Royal Bank of Scotland Group plc are now considered to be investment grade.

(3) National Westminster Bank Plc only has a long-term debt rating from Moody's, Ulster Bank Ltd and Ulster Bank Ireland DAC do not have long or short-term debt ratings from Moody's

(4) Moody's also assigns long-term and short term deposits ratings to the operating companies. These are A2 and P-1 for The Royal Bank of Scotland plc, National Westminster Bank Plc, Royal Bank of Scotland N.V. and Ulster Bank Ltd, and Baa2 and P-2 for Ulster Bank Ireland DAC.

15. Post balance sheet events

Other than matters disclosed, there have been no further significant events between 30 June 2017 and the date of approval of this announcement.

16. Date of approval

This announcement was approved by the Board of Directors on 3 August 2017.

Independent review report to The Royal Bank of Scotland Group plc

We have been engaged by The Royal Bank of Scotland Group plc ("the Company" or "the Group") to review the condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2017 which comprise the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement, related Notes 1 to 16, the financial information in the segment results on pages 20 to 52, and the Capital and risk management disclosures set out in Appendix 1 except for those indicated as not reviewed (together "the condensed consolidated financial statements"). We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed financial statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed consolidated financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2017 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP Statutory Auditor London, United Kingdom 3 August 2017

Summary risk factors

Summary of our principal risks and uncertainties (Not within the scope of EY's review report)

Set out below is a summary of certain risks which could adversely affect the Group; it should be read in conjunction with the Capital and risk management section of the 2016 Annual Report and Accounts. This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. A fuller description of these and other risk factors is included on pages 432 to 463 of the 2016 Annual Report and Accounts and on pages 509 to 578 of the Group's Form 20-F which should be read together with the Group's other public disclosures.

  • The Group is subject to a number of legal, regulatory and governmental actions and investigations. Unfavourable outcomes in such actions and investigations could have a material adverse effect on the Group's operations, operating results, reputation, financial position and future prospects.
  • The Group is subject to political risks, including economic, regulatory and political uncertainty arising from the vote to leave in the referendum on the UK's membership of the European Union (EU Referendum and more generally arising from the outcome of general elections in the UK and changes in government policies, including as a shareholder, which could adversely impact the Group's business, results of operations, financial condition and prospects.
  • Changes to the prudential regulatory framework for banks and investment banks within the EU may require additional structural changes to the Group's operations, including for example, as a result of potential changes in the prudential regulatory framework for banks and investment banks within the EU or if the Group is no longer able to rely on the passporting framework for financial services applicable in the EU, which may affect current restructuring plans and have a material adverse effect on the Group.
  • ● The Group is in the process of seeking to satisfy its commitments arising as a result of the receipt of State Aid in December 2008. The process to amend the Group's State Aid obligations in respect of Williams & Glyn may not ultimately amend such obligations or the revised obligations may be more onerous than those currently being discussed.
  • Implementation of the ring-fencing regime in the UK which began in 2015 and must be completed before 1 January 2019 will result in material structural changes to the Group's business. The steps required to implement the UK ring-fencing regime are extraordinarily complex and entail significant costs and operational, legal and execution risks, which risks may be exacerbated by the Group's other ongoing restructuring efforts. There is no certainty that the Group will be able to complete the legal restructuring and migration of customers by the 1 January 2019 deadline or in accordance with future rules and the consequences of non-compliance are currently uncertain.
  • The Group has been, and will remain, in a period of major restructuring through to 2019, which carries significant execution and operational risks, and the Group may not be a viable, competitive, customer-focused and profitable bank as a result. The Group's ability to meet the targets and expectations which accompany the Group's transformation programme, including with respect to its return to profitability and the timing thereof, are subject to various internal and external risks and are based on a number of key assumptions and judgments any of which may prove to be inaccurate.
  • Operational risks are inherent in the Group's businesses and these risks are heightened as the Group implements its transformation programme, including significant cost reductions, the UK ring-fencing regime and compliance with its State Aid obligations, against the backdrop of legal and regulatory changes.
  • The Group is exposed to cyberattacks and a failure to prevent or defend against such attacks could have a material adverse effect on the Group's operations, results of operations or reputation.
  • The Group's business performance and financial position could be adversely affected if its capital is not managed effectively or if it is unable to meet its capital targets. Effective management of the Group's capital is critical to its ability to operate its businesses, comply with its regulatory obligations, pursue its strategy of returning to standalone strength, resume dividend payments on its ordinary shares and maintain discretionary payments.
  • Failure by the Group to comply with regulatory capital and leverage requirements may result in intervention by its regulators and loss of investor confidence, and may have a material adverse effect on its results of operations, financial condition and reputation and may result in distribution restrictions and adversely impact existing shareholders.

Summary risk factors

  • Failure by the Group to comply with its capital requirements or to maintain sufficient distributable reserves may result in the application of restrictions on its ability to make discretionary distributions, including the payment of dividends to its ordinary shareholders and coupons on certain capital instruments.
  • The Group is subject to stress tests mandated by its regulators in the UK and in Europe which may result in additional capital requirements or management actions which, in turn, may impact the Group's financial condition, results of operations and investor confidence or result in restrictions on distributions.
  • As a result of extensive reforms being implemented relating to the resolution of financial institutions within the UK, the EU and globally, material additional requirements will arise to ensure that financial institutions maintain sufficient loss-absorbing capacity. Such changes to the funding and regulatory capital framework may require the Group to meet higher capital levels than the Group anticipated within its strategic plans and affect the Group's funding costs.
  • The Group's borrowing costs, its access to the debt capital markets and its liquidity depend significantly on its credit ratings and, to a lesser extent, on the rating of the UK Government.
  • The Group's ability to meet its obligations including its funding commitments depends on the Group's ability to access sources of liquidity and funding. If the Group is unable to raise funds through deposits and/or in the capital markets, its liquidity position could be adversely affected or it may result in higher funding costs which may impact the Group's margins and profitability.
  • The Group's businesses and performance can be negatively affected by actual or perceived economic conditions in the UK and globally and other global risks, including risks arising out of geopolitical events and political developments and the Group will be increasingly impacted by developments in the UK as its operations become increasingly concentrated in the UK.
  • Changes in interest rates or foreign exchange rates have significantly affected and will continue to affect the Group's business and results of operations. A continued period of low interest rates and yield curves and spreads may affect the interest rate margin realised between lending and borrowing costs, the effect of which may be heightened during periods of liquidity stress.
  • The Group's earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions.
  • The financial performance of the Group has been, and may continue to be, materially affected by customer and counterparty credit quality and deterioration in credit quality could arise due to prevailing economic and market conditions and legal and regulatory developments.
  • The Group's operations are highly dependent on its IT systems. A failure of the Group's IT systems, including as a result of the lack of, or untimely investments, could adversely affect its operations, competitive position and investor and customer confidence and expose the Group to regulatory sanctions.
  • The Group's businesses are subject to substantial regulation and oversight. Significant regulatory developments and increased scrutiny by the Group's key regulators has had and is likely to continue to increase compliance and conduct risks and could have a material adverse effect on how the Group conducts its business and on its results of operations and financial condition.
  • The Group is subject to pension risks and may be required to make additional contributions to cover pension funding deficits as a result of degraded economic conditions or as a result of the restructuring of its pension schemes in relation to the implementation of the UK ring-fencing regime.
  • Pension risk and changes to the Group's funding of its pension schemes may have a significant impact on the Group's capital position.
  • The Group relies on valuation, capital and stress test models to conduct its business, assess its risk exposure and anticipate capital and funding requirements. Failure of these models to provide accurate results or accurately reflect changes in the micro- and macroeconomic environment in which the Group operates or findings of deficiencies by the Group's regulators resulting in increased regulatory capital requirements could have a material adverse effect on the Group's business, capital and results.
  • The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Its results in future periods may be affected by changes to applicable accounting rules and standards.
  • The Group's operations entail inherent reputational risk, i.e., the risk of brand damage and/or financial loss due to a failure to meet stakeholders' expectations of the Group's conduct, performance and business profile.

Summary risk factors

  • The Group is exposed to conduct risk which may adversely impact the Group or its employees and may result in conduct having a detrimental impact on the Group's customers or counterparties.
  • The Group may be adversely impacted if its risk management is not effective and there may be significant challenges in maintaining the effectiveness of the Group's risk management framework as a result of the number of strategic and restructuring initiatives being carried out by the RBS Group simultaneously.
  • A failure by the Group to embed a strong risk culture across the organisation could adversely affect the Group's ability to achieve its strategic objective.
  • The Group's business and results of operations may be adversely affected by increasing competitive pressures and technology disruption in the markets in which it operates.
  • The Group operates in markets that are subject to intense scrutiny by the competition authorities and its business and results of operations could be materially affected by competition rulings and other government measures.
  • As a result of the commercial and regulatory environment in which it operates, the Group may be unable to attract or retain senior management (including members of the board) and other skilled personnel of the appropriate qualification and competence. The Group may also suffer if it does not maintain good employee relations.
  • HM Treasury (or UKFI on its behalf) may be able to exercise a significant degree of influence over the Group and any further offer or sale of its interests may affect the price of securities issued by the Group.
  • The Group is committed to executing the run-down and sale of certain businesses, portfolios and assets forming part of the businesses and activities being exited by the Group. Failure by the Group to do so on commercially favourable terms could have a material adverse effect on the Group's operations, operating results, financial position and reputation.
  • The value or effectiveness of any credit protection that the Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties.
  • The Group and its subsidiaries are subject to a new and evolving framework on recovery and resolution, the impact of which remains uncertain, and which may result in additional compliance challenges and costs.
  • The Group may become subject to the application of stabilisation or resolution powers in certain significant stress situations, which may result in various actions being taken in relation to the Group and any securities of the Group, including the write-off, write-down or conversion of the Group's securities.
  • In the UK and in other jurisdictions, the Group is responsible for contributing to compensation schemes in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers.
  • The Group's results could be adversely affected in the event of goodwill impairment.
  • Recent and anticipated changes in the tax legislation in the UK are likely to result in increased tax payments by the Group and may impact the recoverability of certain deferred tax assets recognised by the Group.

Forward-looking statements

Cautionary statement regarding forward-looking statements

Certain sections in this document contain 'forward-looking statements' as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words 'expect', 'estimate', 'project', 'anticipate', 'commit', 'believe', 'should', 'intend', 'plan', 'could', 'probability', 'risk', 'Value-at-Risk (VaR)', 'target', 'goal', 'objective', 'may', 'endeavour', 'outlook', 'optimistic', 'prospects' and similar expressions or variations on these expressions.

In particular, this document includes forward-looking statements relating, but not limited to: future profitability and performance, including financial performance targets such as return on tangible equity; cost savings and targets, including cost:income ratios; litigation and government and regulatory investigations, including the timing and financial and other impacts thereof; structural reform and the implementation of the UK ring-fencing regime; the implementation of RBS's transformation programme, including the further restructuring of the NatWest Markets business; the satisfaction of the Group's residual EU State Aid obligations; the continuation of RBS's balance sheet reduction programme, including the reduction of risk-weighted assets (RWAs) and the timing thereof; capital and strategic plans and targets; capital, liquidity and leverage ratios and requirements, including CET1 Ratio, RWA equivalents (RWAe), Pillar 2 and other regulatory buffer requirements, minimum requirement for own funds and eligible liabilities, and other funding plans; funding and credit risk profile; capitalisation; portfolios; net interest margin; customer loan and income growth; the level and extent of future impairments and write-downs, including with respect to goodwill; restructuring and remediation costs and charges; future pension contributions; RBS's exposure to political risks, operational risk, conduct risk, cyber and IT risk and credit rating risk and to various types of market risks, including as interest rate risk, foreign exchange rate risk and commodity and equity price risk; customer experience including our Net Promotor Score (NPS); employee engagement and gender balance in leadership positions.

Limitations inherent to forward-looking statements

These statements are based on current plans, estimates, targets and projections, and are subject to significant inherent risks, uncertainties and other factors, both external and relating to the Group's strategy or operations, which may result in the Group being unable to achieve the current targets, predictions, expectations and other anticipated outcomes expressed or implied by such forwardlooking statements. In addition certain of these disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations, including assumptions and estimates made by management. By their nature, certain of these disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Accordingly, undue reliance should not be placed on these statements. Forward-looking statements speak only as of the date we make them and we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forwardlooking statements contained herein to reflect any change in the Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Important factors that could affect the actual outcome of the forward-looking statements

We caution you that a large number of important factors could adversely affect our results or our ability to implement our strategy, cause us to fail to meet our targets, predictions, expectations and other anticipated outcomes or affect the accuracy of forward-looking statements we describe in this document, including in the risk factors and other uncertainties set out in the Group's 2016 Annual Report on Form 20-F and other materials filed with, or furnished to, the US Securities and Exchange Commission, and other risk factors and uncertainties discussed in this document. These include the significant risks for RBS presented by the outcomes of the legal, regulatory and governmental actions and investigations that RBS is or may be subject to (including active civil and criminal investigations) and any resulting material adverse effect on RBS of unfavourable outcomes and the timing thereof (including where resolved by settlement); economic, regulatory and political risks, including as may result from the uncertainty arising from the vote to leave in the EU Referendum and from the outcome of general elections in the UK and changes in government policies; RBS's ability to satisfy its residual EU State Aid obligations and the timing thereof; RBS's ability to successfully implement the significant and complex restructuring required to be undertaken in order to implement the UK ring-fencing regime and related costs; RBS's ability to successfully implement the various initiatives that are comprised in its transformation programme, particularly the proposed further restructuring of the NatWest Markets business, the balance sheet reduction programme and its significant cost-saving initiatives and whether RBS will be a viable, competitive, customer focused and profitable bank especially after its restructuring and the implementation of the UK ringfencing regime; the exposure of RBS to cyber-attacks and its ability to defend against such attacks; RBS's ability to achieve its capital and leverage requirements or targets which will depend in part on RBS's success in reducing the size of its business and future profitability as well as developments which may impact its CET1 capital including additional litigation or conduct costs, additional pension contributions, further impairments or accounting changes; ineffective management of capital or changes to regulatory requirements relating to capital adequacy and liquidity or failure to pass mandatory stress tests; RBS's ability to access sufficient sources of capital, liquidity and funding when required; changes in the credit ratings of RBS, RBS entities or the UK government; declining revenues resulting from lower customer retention and revenue generation in light of RBS's strategic refocus on the UK; as well as increasing competition from new incumbents and disruptive technologies.

Forward-looking statements

In addition, there are other risks and uncertainties that could adversely affect our results, ability to implement our strategy, cause us to fail to meet our targets or the accuracy of forward-looking statements in this document. These include operational risks that are inherent to RBS's business and will increase as a result of RBS's significant restructuring initiatives being concurrently implemented; the potential negative impact on RBS's business of global economic and financial market conditions and other global risks, including risks arising out of geopolitical events and political developments; the impact of a prolonged period of low interest rates or unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices; basis, volatility and correlation risks; the extent of future write-downs and impairment charges caused by depressed asset valuations; deteriorations in borrower and counterparty credit quality; heightened regulatory and governmental scrutiny and the increasingly regulated environment in which RBS operates as well as divergences in regulatory requirements in the jurisdictions in which RBS operates; the risks relating to RBS's IT systems or a failure to protect itself and its customers against cyber threats, reputational risks; risks relating to increased pension liabilities and the impact of pension risk on RBS's capital position; risks relating to the failure to embed and maintain a robust conduct and risk culture across the organisation or if its risk management framework is ineffective; RBS's ability to attract and retain qualified personnel; limitations on, or additional requirements imposed on, RBS's activities as a result of HM Treasury's investment in RBS; the value and effectiveness of any credit protection purchased by RBS; risks relating to the reliance on valuation, capital and stress test models and any inaccuracies resulting therefrom or failure to accurately reflect changes in the micro and macroeconomic environment in which RBS operates, risks relating to changes in applicable accounting policies or rules which may impact the preparation of RBS's financial statements or adversely impact its capital position; the impact of the recovery and resolution framework and other prudential rules to which RBS is subject; the recoverability of deferred tax assets by the Group; and the success of RBS in managing the risks involved in the foregoing.

The forward-looking statements contained in this document speak only as at the date hereof, and RBS does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicit of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.

Statement of directors' responsibilities

We, the directors listed below, confirm that to the best of our knowledge:

  • the condensed financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting';
  • the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
  • the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Howard Davies Ross McEwan Ewen Stevenson Chairman Chief Executive Chief Financial Officer

3 August 2017

Board of directors

Howard Davies Ross McEwan

Ewen Stevenson

Chairman Executive directors Non-executive directors

Sandy Crombie Frank Dangeard Alison Davis Morten Friis Robert Gillespie John Hughes Penny Hughes Yasmin Jetha Brendan Nelson Sheila Noakes Mike Rogers Mark Seligman

Additional information

Share information

30 June
2017		 31 March
2017		 31 December
2016
Ordinary share price 247.2p 242.1p 224.6p
Number of ordinary shares in issue 11,876m 11,842m 11,823m

Financial calendar

2017 third quarter interim management statement 27 October 2017
------------------------------------------------- -----------------

Appendix 1

Capital and risk management

Page
Presentation of information 1
Capital, liquidity and funding risk
Key developments 2
Management of legacy securities 3
Minimum capital requirements 3
Capital flow statement and resources 4
Loss absorbing capital 6
Risk-weighted assets 7
Key liquidity metrics 8
Liquidity portfolio 8
Funding sources 9
Credit risk
Management basis:
Portfolio summary 10
Personal portfolios 12
Mortgage lending 13
Commercial real estate 15
Shipping 17
Balance sheet analysis:
Loans, provisions and related credit metrics: segmental analysis 18
REIL and provisions: segmental analysis 19
Loans, provisions and related credit metrics: sector analysis 20
Debt securities and AFS reserves 22
Derivatives and valuation reserves 23
Market risk
Key developments 24
Non-trading portfolios 24
Value-at-risk 24
Sensitivity of projected net interest earnings 25
Structural hedging 26
Foreign exchange risk 27
Trading portfolios 28
Other risks
Operational risk 29
Conduct & regulatory risk 29

Presentation of information

Except as otherwise indicated, information in the Capital and risk management appendix is within the scope of the independent review report by Ernst & Young LLP. Unless otherwise indicated, disclosures in this section include disposal groups in the relevant exposures.

For a description of framework, governance, methodology and basis of preparation for each of the risks presented in the appendix, refer to the 2016 Annual Report and Accounts - Capital and risk management.

Capital, liquidity and funding risk

Capital risk is the risk that the Group has insufficient capital and other loss absorbing debt instruments to operate effectively including meeting minimum regulatory requirements, operating within Board approved risk appetite and supporting its strategic goals. Liquidity risk is the risk that RBS cannot meet its actual or potential obligations when they fall due. Funding risk is the risk that RBS cannot maintain a diversified, stable and cost effective funding base.

Key developments (Not within the scope of EY's review report)

  • RBS continued to align its capital and funding structure towards meeting future regulatory requirements during the first half of 2017, while supporting the lending growth of its core franchises.
  • The CET1 ratio remains ahead of the 13% target at 14.8%, a 140 basis point increase on the 2016 year end driven by £939 million attributable profit and planned RWA reductions in Capital Resolution, NatWest Markets and Commercial Banking.
  • The securities to be called in Q3 2017 (see Management of legacy securities) reduced the transitional Tier 1 and Total capital ratios by 60 and 90 basis points respectively. The end-point Tier 1 and Total ratios were unaffected by the calls as these securities are not CRR eligible.
  • CRR leverage ratio was unchanged at 5.1%. UK leverage ratio improved from 5.6% to 5.8% reflecting higher central bank balances which are excluded from the UK framework.
  • In the first half of 2017, RBS issued £7.1 billion of new securities:
  • o RBSG plc issued £3.6 billion (€1.5 billion and \$3.0 billion) of MREL-eligible senior debt, bringing the total issuance in 2016 and 2017 to date to £7.8 billion;
  • o RBS plc issued £1.25 billion and €1.25 billion covered bonds, the first such issuance for RBS since 2012. The covered bonds help diversify the funding profile of the bank; and
  • o RBS plc issued £1.1 billion of senior unsecured notes to support the future standalone operations of NatWest Markets plc.
  • RBS continued to participate in the Bank of England's Term Funding Scheme (TFS), with £9 billion drawn during Q1 2017. Total participation under the scheme was £14 billion.
  • Funding activity was supported by tightening of spreads for issuances, reflecting improving markets and recognition of RBS's strategic progress in de-risking. RBS also benefitted from Moody's upgrading RBSG plc's senior debt rating to investment grade.
  • The first half of 2017 included £4.1 billion of redemptions and maturities of capital securities. This included £3.1 billion of legacy Tier 1 and 2 securities, and £0.3 billion from the tender of certain Tier 2 securities of RBS N.V.
  • Additionally, senior unsecured debt securities of £2.6 billion were redeemed or matured in H1 2017, reflecting the continued run-off of legacy funding.
  • In May 2017, the Bank of England published indicative data on the minimum amount of loss-absorbing resources for the larger UK banks comprising MREL plus buffers. RBS is expected to require loss-absorbing resources of 24.0% of RWAs by 1 January 2020, rising to 27.8% by 1 January 2022. Total loss absorbing capital, including the benefit of legacy securities, was 25.5% of RWAs at 30 June 2017.
  • The current estimated headroom over the fully phased maximum distributable amount trigger in 2019 is 2.4%, based on the target CET1 ratio of 13.0% and minimum capital requirements of 10.6% (see below). This remains subject to change.
  • The liquidity portfolio increased by £14 billion in H1 2017 to £178 billion, mainly within primary liquidity which increased by £16 billion to £111 billion. This build up in liquidity is driven by TFS participation, increased deposits in the franchises, and Treasury issuance, offset by lending growth, funding maturities and calls of securities.
  • The rise in primary liquidity resulted in higher liquidity coverage ratio (LCR) and stressed outflow coverage (SOC) of 145%1 and 180% respectively. The increase in LCR reflected preparations for the settlement of litigation and conduct costs, including FHFA, and the rise in regulatory requirements from 90% to 100% by 1 January 2018.
  • The net stable funding ratio rose to 123%, above the minimum target of 100%. This primarily reflected growth in the customer deposit base, partially offset by lending growth.

(1) The LCR and the SOC ratio above exclude the impact of the FHFA litigation settlement announced on 12 July 2017. The estimated impact of the settlement on both the LCR and SOC ratio is a 6% reduction to 139% and 174% respectively. The settlement will also reduce the liquidity portfolio by approximately £3.65 billion. There is minimal impact on the NSFR as the settlement was broadly in line with provision.

Capital, liquidity and funding risk (Not within the scope of EY's review report)

Management of legacy securities

RBS continues to manage its capital stack for value, including considerations of regulatory value, relative funding cost and rating agency considerations.

RBS has decided not to exercise the current call option on the non-cumulative US dollar preference share series U and euro preference shares series 3. These equity accounted 'non-step' securities with combined nominal value of £0.8 billion(1) can provide transitional Tier 1 and Tier 2 benefit through to the end of the CRR grandfathering period in 2021. The CET1 impact from foreign currency translation of approximately £370 million(2) that would be realised upon redemption is not considered to be economical compared with the securities' ongoing regulatory value and relative coupon cost. RBS has instead decided to prioritise calling other legacy Tier 1 instruments which provide higher economic benefit.

RBS intends to redeem Canadian dollar and US dollar fixed/floating rate Tier 1 securities with combined nominal value of £0.4 billion(3) in October 2017, with formal notice in line with the call period which opens 6 August 2017. As these equity accounted securities contain an incentive to redeem, they are not expected to provide transitional Tier 1 or MREL value following their 'step-up' in October 2017. This redemption will lead to a CET1 reduction of approximately £260 million(2) from foreign currency translation and deferred coupon payments in Q3 2017(4).

RBS also intend to redeem seven debt accounted Tier 1 securities with nominal value of £1.5 billion(5) over the next few months in line with their relevant terms. Redemption of these securities does not involve a CET1 impact from foreign currency translation and provides coupon savings ranging up to approximately 9%.

Notes:

  • (1) US780097AU54, XS0323734961 note nominal value reflects balance sheet notional, based on exchange rate at time of issue.
  • (2) Based on exchange rates as at 30 June 2017.

(3) CA780097AT83, US780097AS09, note nominal value reflects balance sheet notional, based on exchange rate at time of issue.

(4) Reflects satisfaction of forgone coupon payments during the two year EC imposed moratorium, specific to these cumulative instruments.

(5) US780097AE13, US6385398820, US7800978790, XS0121856859, US7800977883, US7800978048 and XS0159056208.

Minimum capital requirements

The Group is subject to minimum requirements in relation to the amount of capital it must hold in relation to its RWAs. The table below summarises the minimum ratios of capital to RWAs that the Group is expected to have to meet once all currently adopted regulation is fully implemented by 1 January 2019.

Minimum requirements Type CET1 Total Tier 1 Total capital
System wide Pillar 1 minimum requirements 4.5% 6.0% 8.0%
Capital conservation buffer 2.5% 2.5% 2.5%
UK countercyclical capital buffer 0.5% 0.5% 0.5%
G-SIB buffer 1.0% 1.0% 1.0%
Bank specific Pillar 2A 2.1% 2.9% 3.8%
Total (excluding PRA buffer) 10.6% 12.9% 15.8%
Capital ratios at 30 June 2017 14.8% 16.7% 20.0%

Notes: Refer to page 173 of the 2016 Annual Report and Accounts, updated for UK countercyclical buffer change in June 2017:

(1) The Bank of England's Financial Policy Committee (FPC) increased the UK countercyclical capital buffer rate from 0.0% to 0.5%, with effect from June 2018; the rate may increase to 1.0% with effect from November 2018. The estimated own funds requirement impact for the Group, based on the countercyclical buffer rate of 0.5% and 30 June 2017 exposures, was £708 million.

(2) The FPC and PRA launched a joint consultation, to exclude claims on central banks from the UK leverage ratio framework so as not to restrict the ability to draw on central bank liquidity facilities. The proposal also increases the minimum UK leverage ratio requirement from 3.0% to 3.25%. The CRR leverage ratio requirements, which include central bank claims, are not impacted by the proposal.

Capital, liquidity and funding risk: Capital flow statement (Not within the scope of EY's review report)

Refer to Analysis of results - Capital and leverage for information on Capital, RWAs and leverage and the Pillar 3 supplement for capital and leverage relating to significant subsidiaries and also CRR templates. The table below analyses the movement in end-point CRR CET1, AT1 and Tier 2 capital for the half year ended 30 June 2017.

CET1 AT1 Tier 2 Total
Capital flow statement £m £m £m £m
At 1 January 2017 30,623 4,041 9,161 43,825
Profit for the period 939 - - 939
Own credit 162 - - 162
Share capital and reserve movements in respect of employee share schemes 117 - - 117
Ordinary shares issued 80 - - 80
Foreign exchange reserve 96 - - 96
Available-for-sale reserves 21 - - 21
Goodwill and intangibles deduction 13 - - 13
Deferred tax assets 29 - - 29
Prudential valuation adjustments (322) - - (322)
Expected loss over impairment provisions 145 - - 145
Net dated subordinated debt/grandfathered instruments - - (1,820) (1,820)
Foreign exchange movements - - (234) (234)
Other movements (29) - - (29)
At 30 June 2017 31,874 4,041 7,107 43,022

Capital, liquidity and funding risk: Capital resources

End-point CRR basis (1) PRA transitional basis (1)
30 June
2017
£m		 31 December
2016
£m		 30 June
2017
£m		 31 December
2016
£m
Shareholders' equity (excluding
non-controlling interests)
Shareholders' equity 49,205 48,609 49,205 48,609
Preference shares - equity (2,565) (2,565) (2,565) (2,565)
Other equity instruments (4,491) (4,582) (4,491) (4,582)
42,149 41,462 42,149 41,462
Regulatory adjustments and deductions
Own credit (142) (304) (142) (304)
Defined benefit pension fund adjustment (186) (208) (186) (208)
Cash flow hedging reserve (575) (1,030) (575) (1,030)
Deferred tax assets (877) (906) (877) (906)
Prudential valuation adjustments (854) (532) (854) (532)
Goodwill and other intangible assets (6,467) (6,480) (6,467) (6,480)
Expected losses less impairments (1,226) (1,371) (1,226) (1,371)
Other regulatory adjustments 52 (8) 52 (8)
(10,275) (10,839) (10,275) (10,839)
CET1 capital 31,874 30,623 31,874 30,623
Additional Tier 1 (AT1) capital
Eligible AT1 4,041 4,041 4,041 4,041
Qualifying instruments and related
share premium subject to phase out - - 3,450 5,416
Qualifying instruments issued by
subsidiaries and held by third parties - - 140 339
AT1 capital 4,041 4,041 7,631 9,796
Tier 1 capital 35,915 34,664 39,505 40,419
Qualifying Tier 2 capital
Qualifying instruments and related
share premium 6,608 6,893 6,745 7,066
Qualifying instruments issued by
subsidiaries and held by third parties 499 2,268 2,101 4,818
Tier 2 capital 7,107 9,161 8,846 11,884
Total regulatory capital 43,022 43,825 48,351 52,303
Capital metrics (Not within the scope of EY's review report)
Total risk-weighted assets (£m) 215,400 228,200 215,400 228,200
Risk asset ratios
CET1(%) 14.8 13.4 14.8 13.4

Note:

(1) Capital Requirements Regulation (CRR) as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for the end-point CRR basis with the exception of unrealised gains on AFS securities which has been included from 2015 for the PRA transitional basis.

Tier 1 (%) 16.7 15.2 18.3 17.7 Total (%) 20.0 19.2 22.4 22.9

Capital, liquidity and funding risk: Loss absorbing capital (Not within the scope of EY's review report)

The following table illustrates the components of estimated loss absorbing capital (LAC) in RBSG plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet the MREL criteria. Regulatory and LAC values exclude instruments intended to be redeemed (see Management of legacy securities) as at 30 June 2017. These securities will be derecognised from the balance sheet on the date of redemption.

30 June 2017 31 December 2016
Balance Balance
Par sheet Regulatory LAC Par sheet Regulatory LAC
value (1) value value (2) value (3) value (1) value value (2) value (3)
£bn £bn £bn £bn £bn £bn £bn £bn
CET1 capital (4) 31.9 31.9 31.9 31.9 30.6 30.6 30.6 30.6
Tier 1 capital: end-point
CRR compliant AT1
of which: RBSG (holdco)
of which: RBSG operating		 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0
subsidiaries (opcos) - - - - - - - -
4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0
Tier 1 capital: non end-point
CRR compliant
of which: holdco 5.3 5.4 3.5 2.7 5.5 5.6 5.5 4.0
of which: opcos 0.3 0.3 0.1 0.1 0.3 0.3 0.3 0.3
5.6 5.7 3.6 2.8 5.8 5.9 5.8 4.3
Tier 2 capital: end-point
CRR compliant
of which: holdco 6.7 6.8 6.6 5.1 6.9 7.0 6.9 5.3
of which: opcos 2.3 2.4 0.7 0.5 6.0 6.4 4.0 5.6
9.0 9.2 7.3 5.6 12.9 13.4 10.9 10.9
Tier 2 capital: non end-point
CRR compliant
of which: holdco 0.4 0.4 0.1 0.1 0.4 0.4 0.2 0.1
of which: opcos 2.1 2.4 1.8 2.0 2.5 2.7 2.1 2.1
2.5 2.8 1.9 2.1 2.9 3.1 2.3 2.2
Senior unsecured debt
securities issued by:
RBSG holdco 9.9 9.9 - 8.5 6.9 6.8 - 5.0
RBSG opcos 15.6 15.8 - - 14.8 15.0 - -
25.5 25.7 - 8.5 21.7 21.8 - 5.0
Total 78.5 79.3 48.7 54.9 77.9 78.8 53.6 57.0
RWAs 215.4 228.2
Leverage exposure 701.8 683.3
LAC as a ratio of RWAs (4) 25.5% 24.9%
LAC as a ratio of leverage
exposure		 7.8% 8.3%

Notes:

(1) Par value reflects the nominal value of securities issued.

(2) Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the MREL criteria.

(3) LAC value reflects RBS's interpretation of the Bank of England's policy statement on the minimum requirements for own funds and eligible liabilities (MREL), published in November 2016. MREL policy and requirements remain subject to further potential development, as such RBS estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. Includes Tier 1 and Tier 2 securities prior to incentive to redeem. (4) Corresponding shareholders' equity was £49.2 billion (31 December 2016 - £48.6 billion).

(5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering and other restrictions imposed by CRR.

● Major movements in the first half of the year included the issue of £3.6 billion equivalent senior securities from RBSG plc and the redemption of approximately £3.1 billion equivalent Tier 2 securities, primarily within RBS plc.

Capital, liquidity and funding risk: Risk-weighted assets (Not within the scope of EY's review report)

The tables below analyse the movement in RWAs on the end-point CRR basis during the half year, by key drivers.

Non-counterparty Counterparty Operational
credit risk credit risk Market risk risk Total
£bn £bn £bn £bn £bn
At 1 January 2017 162.2 22.9 17.4 25.7 228.2
Foreign exchange movement (0.5) (0.2) - - (0.7)
Business movements (2.6) (4.9) (0.9) (1.9) (10.3)
Risk parameter changes (1.8) - - - (1.8)
At 30 June 2017 157.3 17.8 16.5 23.8 215.4

The table below analyses segmental RWAs.

Ulster
Bank		 Commercial Private Capital Central
items
UK PBB RoI Banking Banking RBSI NWM Resolution W&G & other Total
£bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
At 1 January 2017 32.7 18.1 78.5 8.6 9.5 35.2 34.5 9.6 1.5 228.2
Foreign exchange movement - 0.4 (0.2) - - (0.3) (0.5) - (0.1) (0.7)
Business movements 0.8 - (1.0) 0.4 (0.1) (3.2) (7.8) (0.2) 0.8 (10.3)
Risk parameter changes (1) (0.6) (0.5) (1.1) - - - 0.4 - - (1.8)
At 30 June 2017 32.9 18.0 76.2 9.0 9.4 31.7 26.6 9.4 2.2 215.4
Credit risk
- non-counterparty 25.0 17.0 69.8 8.0 8.7 5.8 15.0 8.0 - 157.3
- counterparty - 0.1 - - - 11.0 6.7 - - 17.8
Market risk - - - - - 11.4 3.1 - 2.0 16.5
Operational risk 7.9 0.9 6.4 1.0 0.7 3.5 1.8 1.4 0.2 23.8
At 30 June 2017 32.9 18.0 76.2 9.0 9.4 31.7 26.6 9.4 2.2 215.4

Note:

(1) Risk parameter changes relate to charges in credit quality metrics of customers and counterparties such as probability of default (PD) and loss given default (LGD).

● RWAs decreased by £12.8 billion in H1 2017, of which £7.9 billion was in Capital Resolution.

● The reduction in Capital Resolution reflected continuing exit strategy with the main changes in Markets (£4.2 billion) and Shipping (£1.2 billion) portfolios.

● Risk metric improvements in Commercial Banking and planned reduction of exposures with weak returns reduced RWAs by £2.3 billion. Increased lending has led to higher RWAs in Private Banking.

● In both UK PBB and Ulster Bank RoI, the RWA decrease resulting from recalibration improvements in mortgage risk parameter models and improved credit quality, were offset by the impact of lending growth and foreign currency movements respectively.

● NatWest Markets RWAs decreased by £3.5 billion driven by business optimisations, maturities and lower exposures.

● The increase in Central items is driven by higher foreign currency forward positions held in Treasury in anticipation of conduct settlement and calling of equity instruments in Q3 2017.

● The operational risk recalculation resulted in a £1.9 billion RWA decrease.

Capital, liquidity and funding risk: Key liquidity metrics (Not within the scope of EY's review report) The table below sets out the key liquidity and related metrics monitored by RBS.

30 June
2017		 31 March
2017		 31 December
2016
Liquidity portfolio £178bn £160bn £164bn
Liquidity coverage ratio (LCR) (1) 145% 129% 123%
Stressed outflow coverage (SOC) (1) 180% 146% 139%
Net stable funding ratio (NSFR) (1) 123% 120% 121%
Loan:deposit ratio 91% 93% 91%

Note: Refer to page 189 of the 2016 Annual Report and Accounts.

(1) The metrics stated exclude the impact of the litigation settlement with FHFA, as announced on 12 July 2017. The estimated impact of the settlement on both the LCR and SOC ratio is a 6% reduction to 139% and 174% respectively. The settlement will also reduce the liquidity portfolio by approximately £3.65 billion. There is minimal impact on the NSFR as the settlement was broadly in line with provision.

Liquidity portfolio

The table below shows the liquidity portfolio by product, liquidity value and by carrying value. Liquidity value is lower than carrying value as it is stated after discounts applied by the Bank of England and other central banks to instruments, within the secondary liquidity portfolio, eligible for discounting.

Liquidity value
Period end
UK DoLSub (1) Other Total UK DoLSub Total
30 June 2017 £m £m £m £m £m
Cash and balances at central banks 79,909 2,724 82,633 71,144 74,072
Government and US agency bonds
AAA rated 3,994 1,251 5,245 4,236 5,988
AA- to AA+ 21,822 1,533 23,355 19,652 20,533
25,816 2,784 28,600 23,888 26,521
Primary liquidity 105,725 5,508 111,233 95,032 100,593
Secondary liquidity (2) 66,112 574 66,686 58,804 59,417
Total liquidity value 171,837 6,082 177,919 153,836 160,010
Total carrying value 196,786 6,243 203,029
31 December 2016 Average - FY 2016
Cash and balances at central banks 66,598 2,542 69,140 56,772 59,489
Government and US agency bonds
AAA rated 3,936 1,331 5,267 3,692 4,539
AA- to AA+ 19,348 1,244 20,592 18,757 21,106
Below AA - 237 237 - -
23,284 2,812 26,096 22,449 25,645
Primary liquidity 89,882 5,354 95,236 79,221 85,134
Secondary liquidity (2) 68,007 683 68,690 65,588 66,774
Total liquidity value 157,889 6,037 163,926 144,809 151,908
Total carrying value 184,136 6,209 190,345

Notes:

(1) The PRA regulated UK DoLSub comprising RBS's five licensed deposit-taking UK banks: The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Company and Adam & Company PLC. In addition, certain of RBS's significant operating subsidiaries - Ulster Bank Ireland DAC and RBS N.V. - hold managed portfolios that comply with local regulations that may differ from PRA rules.

(2) Comprises assets eligible for discounting at the Bank of England and other central banks.

Capital, liquidity and funding risk: Funding sources

The composition of RBS's balance sheet is a function of the broad array of product offerings and diverse markets served by its core businesses. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise the liquidity profile, while ensuring adequate coverage of all cash requirements under extreme stress conditions.

The table below shows the carrying values of the principal funding sources, based on contractual maturity.

30 June 2017 31 December 2016
Short-term Long-term Short-term Long-term
less than more than less than more than
1 year 1 year Total 1 year 1 year Total
£m £m £m £m £m £m
Deposits by banks
Derivative cash collateral 16,016 - 16,016 20,674 - 20,674
Other deposits (1) 7,045 15,904 22,949 6,130 6,513 12,643
23,061 15,904 38,965 26,804 6,513 33,317
Debt securities in issue
Certificates of deposit 4,884 - 4,884 3,205 3 3,208
Medium-term notes 2,635 18,189 20,824 3,388 15,233 18,621
Covered bonds 975 5,314 6,289 96 3,839 3,935
Securitisations - - - - 1,481 1,481
8,494 23,503 31,997 6,689 20,556 27,245
Subordinated liabilities 2,140 12,584 14,724 1,062 18,357 19,419
Notes issued 10,634 36,087 46,721 7,751 38,913 46,664
Wholesale funding 33,695 51,991 85,686 34,555 45,426 79,981
Customer deposits
Derivative cash collateral (2) 10,480 - 10,480 11,487 - 11,487
Financial institution deposits 51,130 533 51,663 52,292 668 52,960
Personal deposits 166,759 1,696 168,455 162,958 1,877 164,835
Corporate deposits 128,320 964 129,284 123,495 1,095 124,590
Total customer deposits 356,689 3,193 359,882 350,232 3,640 353,872
Total funding excluding repos 390,384 55,184 445,568 384,787 49,066 433,853
Total repos 43,038 - 43,038 32,335 - 32,335
Total funding including repos 433,422 55,184 488,606 417,122 49,066 466,188

Notes:

(1) Includes £14.0 billion (31 December 2016 - £5.0 billion) relating to TFS participation and £1.8 billion (31 December 2016 - £1.3 billion) relating to RBS's participation in central bank financing operations under the European Central Bank's Targeted Long Term Refinancing Operations.

(2) Cash collateral includes £8,995 million (31 December 2016 - £10,002 million) from financial institutions.

Credit risk

Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts.

Credit risk: Management basis: Portfolio summary (Not within the scope of EY's review report)

The table below summarises current and potential exposure, net of provisions and after risk transfer, by sector and asset quality.

Po rtfo
lio
d a
an		 ali
et
ty
ss
qu
as
a
p		 tag
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en
e
Ex
(
£m
)
p
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ure		 of
tot		 al
nt
cu
rre
ex
p
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Wh
ole
le
sa
(1)		 Wh
ole
le
sa
(1)
Ba
nk
nd
s a		 Ba
nk
nd
s a
30
Ju
20
17
ne		 Pe
l
rso
na		 oth
FIs
er		 So
rei
ve
g
n (2
)		 Ot
he
r		 To
tal		 Pe
l
rso
na		 oth
FIs
er		 So
rei
ve
g
n (2
)		 Ot
he
r		 To
tal
AQ
1-A
Q
4		 11
9,
07
9		 41
27
0
,		 13
5,
67
7		 45
72
7
,		 34
1,
75
3		 25
%		 9% 28
%		 10
%		 72
%
AQ
Q
5-A
8		 47
88
3
,		 3,
38
1		 10
7		 70
91
3
,		 12
2,
28
4		 10
%		 1% - 14
%		 25
%
AQ
9		 2,
43
7		 50
9		 2 59
4		 3,
54
2		 1% - - - 1%
AQ
10		 3,
64
4		 65 - 2,
85
1		 6,
56
0		 1% - - 1% 2%
To
tal
nt
cu
rre
ex
po
su
re		 17
3,
04
3		 45
22
5
,		 13
5,
78
6		 12
0,
08
5		 47
4,
13
9		 37
%		 10
%		 28
%		 25
%		 10
0%
To
tal
tia
l ex
ten
po
po
su
re		 35
17
9,
0		 78
60
4
,		 13
6,
69
4		 18
0,
91
0		 57
5,
55
8
Ris
k o
f C
red
it L
os
s (3
)		 - 1 2 45
6		 45
9
Flo
into
fo
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w
ara
nce
(4)		 36
7		 12 - 1,
16
5		 1,
54
4
Of
wh
ich
: P
erf
ing
orm		 172 12 - 76
3		 94
7
No
erf
ing
n-p
orm		 19
5		 - - 40
2		 59
7
Pro
vis
ion
s		 2,
12
4		 54 - 1,
76
7		 3,
94
5
31
De
mb
20
16
ce
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AQ
1-A
Q
4		 11
1,
89
9		 42
90
3
,		 118
04
9
,		 49
12
1
,		 32
1,
97
2		 24
%		 9% 26
%		 11
%		 70
%
AQ
Q
5-A
8		 47
99
2
,		 4,
39
2		 135 72
34
0
,		 124
85
9
,		 %
10		 1% - %
16		 %
27
AQ
9		 2,
62
2		 32 4 59
1		 3,
24
9		 1% - - - 1%
AQ
10		 3,
69
3		 35
5		 - 3,
46
5		 7,
51
3		 1% - - 1% 2%
To
tal
nt
cu
rre
ex
po
su
re		 166
20
6
,		 47
68
2
,		 118
188
,		 125
51
7
,		 45
7,
59
3		 36
%		 10
%		 26
%		 28
%		 100
%
To
tal
ten
tia
l ex
po
po
su
re		 172
60
7
,		 84
30
0
,		 119
05
6
,		 185
29
1
,		 56
1,
25
4
Ris
k o
f C
red
it L
s (3
)
os		 - 1 4 85
1		 85
6
Flo
into
fo
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w
ara
nce
(4)		 83
4		 5 1 3,
23
2		 4,
07
2
Of
wh
ich
: P
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orm		 44
7		 3 - 1,
782		 2,
23
2
No
erf
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n-p
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7		 2 1 1,
45
0		 1,
84
0
Pro
vis
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s		 2,
192		 58 1 2,
20
4		 4,
45
5
Pe
rio
d-o
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ts
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en
Cu
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e)
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de
rre
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po
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as		 6,
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7		 (
7)
2,
45		 17
59
8
,		 (
2)
5,
43		 16
54
6
,
Cu
ba
sis
nt
sta
nt
rre
ex
po
su
re
- c
on
cu
rre
ncy		 166
59
8
,		 47
42
8
,		 118
77
7
,		 125
137
,		 45
7,
94
0
Fo
rei
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as		 39
2		 (
25
4)		 58
9		 (
38
0)		 34
7

Notes:

(1) Includes SME customers managed in UK PBB Business Banking who are assigned a sector under RBS's sector concentration framework.

(2) Includes exposure to central governments, central banks and sub-sovereigns such as local authorities.

(3) Excludes Private Banking, Lombard and Invoice Finance exposures which are not material in context of the Risk of Credit Loss portfolio.

(4) Completed during the period.

Credit risk: Management basis: Portfolio summary (continued) (Not within the scope of EY's review report)

  • RBS's approach to lending is governed by a comprehensive credit risk appetite framework which is closely monitored and actions are taken to adapt lending criteria as appropriate. Measured by RBS's asset quality scale, as at 30 June 2017, 72% of total current exposure was rated in the AQ1-AQ4 bands, equating to an indicative investment grade rating of BBB- or above (31 December 2016 - 70%). Across the Personal lending exposure, 69% was in the AQ1-AQ4 category (31 December 2016 - 67%). The loan-to-value (LTV) ratio of the mortgage portfolio was maintained at 58%.
  • Underwriting standards are monitored on an ongoing basis to ensure that they remain adequate in the current market environment. The UK unsecured lending portfolio remained stable during the period with no material changes to asset quality.
  • The increase in current exposure in the Personal portfolio was mainly driven by growth in UK mortgage lending, which was within risk appetite. For further information, refer to page 12.
  • The marginal increase in current exposure across the Wholesale portfolio reflected increases in the Sovereign sector, resulting from liquidity management activities. This was offset by decreases in the Banks & Other FIs portfolio, which reflected fluctuations in exposure to traded products as a result of moves in market rates and by decreases in Transport - particularly Shipping - in line with the exit strategy for this sector.
  • Decreases in exposures classified as Risk of Credit Loss as well as reductions in flows into forbearance were driven by the stabilisation of sub-sector areas within the Shipping sector that had been historically weaker. For further information, refer to page 17.
  • Credit quality in both the Wholesale and Personal portfolios was largely unchanged due to relatively stable market conditions.
  • The reduction in defaulted exposure (AQ10) and provisions in the Wholesale portfolio was largely driven by writeoffs and asset disposals across a number of sectors.
  • AQ10 exposure in the Personal portfolio (including mortgages) remained broadly stable during the period.

Credit risk: Management basis: Personal portfolios

Personal portfolio (Not within the scope of EY's review report)

The table below, and all disclosures in this section are based on current exposure (net of provisions and after risk transfer).

30 June 2017 31 December 2016
Ulster Ulster
UK Bank Private UK Bank Private
Banking Banking
PBB RoI (1) RBSI W&G Total PBB RoI (1) RBSI W&G Total
£m £m £m £m £m £m £m £m £m £m £m £m
Mortgages 122,883 14,475 7,859 2,681 10,932 158,830 117,040 14,396 7,168 2,637 10,856 152,097
Period on period movement
Of which:		 5,843 79 691 44 76 6,733
Interest only variable rate 10,946 308 4,029 652 1,241 17,176 11,694 349 3,625 692 1,317 17,677
Interest only fixed rate 11,504 4 2,459 93 1,201 15,261 11,132 7 2,290 81 1,186 14,696
Mixed (capital and
interest only) 5,348 65 - 21 678 6,112 5,316 75 - 23 687 6,101
Buy-to-let 16,829 1,538 927 911 1,514 21,719 16,678 1,777 770 881 1,427 21,533
Provisions 144 917 7 32 22 1,122 151 919 2 27 23 1,122
REIL 742 3,175 16 94 95 4,122 736 3,144 23 84 101 4,088
Other lending (2) 8,956 333 1,562 64 987 11,902 8,962 291 1,730 64 958 12,005
Period on period
movement (6) 42 (168) - 29 (103)
Provisions 779 45 18 1 103 946 834 48 18 1 113 1,014
REIL 777 46 43 4 107 977 860 50 61 5 117 1,093
Total lending 131,839 14,808 9,421 2,745 11,919 170,732 126,002 14,687 8,898 2,701 11,814 164,102
Period on period movement 5,837 121 523 44 105 6,630
Mortgage LTV ratios (3)
- Total portfolio 57% 73% 54% 57% 54% 58% 56% 76% 56% 57% 54% 58%
- Performing 57% 69% 54% 56% 54% 58% 56% 72% 56% 55% 53% 57%
- Non-performing 59% 92% 56% 110% 54% 78% 60% 94% 68% 117% 56% 77%

Notes:

(1) Includes mortgages used as collateral for commercial activity.

(2) Excludes partnership equity loans and commercial real estate lending to personal customers.

(3) Weighted by current exposure gross of provisions.

  • The overall risk profile of the Personal portfolio, and its performance against credit risk appetite, remained stable during H1 2017.
  • The increase in total lending was driven by growth in mortgage lending within UK PBB.
  • Although new mortgage lending was broadly in line with 2016, the increased lending was offset by repayments in H1 2017. The portfolio is closely monitored and risk appetite is regularly reviewed to ensure it remains appropriate for market conditions. Underwriting standards were maintained during the period.
  • The majority of the mortgage growth was in the owner-occupied portfolio. In line with market trends, new mortgages in the buy-to-let portfolio decreased as tax and regulatory changes in the UK affected borrower activity.
  • The mortgage portfolio LTV ratio remained largely stable with marginal improvement in Ulster Bank RoI reflecting house price recovery and lower LTV ratios on new lending.
  • The value of mortgages subject to forbearance decreased marginally. This reflected the relatively low-interest-rate environment in the UK, as well as RBS's focus on the ability of customers to repay in a sustainable manner over the term of the facility.
  • The proportion of owner-occupied mortgages by value on interest only and mixed terms (capital and interest only) remained broadly stable.
  • Unsecured personal lending remained flat during H1 2017 despite an upward trend in the wider UK market. This reflected a continued focus on client quality and affordability. Asset quality remained broadly stable.

Credit risk: Management basis: Mortgage lending

New mortgage lending (Not within the scope of EY's review report)

The amounts below are based on a current exposure basis (net of provisions and after risk transfer).

UK
PBB		 Ulster
Bank RoI		 Private
Banking		 RBS
International		 W&G Total
As of and for six months ended 30 June 2017 £m £m £m £m £m £m
Gross new mortgage lending (1) 14,194 392 1,157 229 926 16,898
Of which:
Interest only variable rate 207 2 626 15 28 878
Interest only fixed rate 949 - 531 21 66 1,567
Mixed (capital and interest only) 402 - - - 39 441
Owner occupied 13,187 384 990 142 852 15,555
Average LTV by weighted average 70% 74% 63% 72% 70% 70%
Buy-to-let 1,008 8 167 87 74 1,344
Average LTV by weighted average 62% 57% 55% 62% 62% 61%
(1)
Excludes additional lending to existing customers.
As of and for the year ended 31 December 2016
Gross new mortgage lending
Of which:		 29,027 893 3,291 470 2,156 35,837
Interest only variable rate 912 - 1,766 37 121 2,836
Interest only fixed rate 2,705 - 917 32 184 3,838
Mixed (capital and interest only) 751 - - 3 50 804
Owner occupied 25,086 876 2,819 300 1,833 30,914
Average LTV by weighted average 71% 74% 55% 69% 70% 70%

Buy-to-let 3,941 17 472 170 323 4,923 Average LTV by weighted average 62% 59% 54% 62% 62% 61%

Personal portfolios forbearance

UK Ulster Private RBS
PBB Bank RoI Banking International W&G Total
As of and for six months ended 30 June 2017 £m £m £m £m £m £m
Forbearance flow 227 66 38 3 33 367
Forbearance stock 1,237 3,411 41 30 171 4,890
Forbearance stock: arrears
Current 716 1,802 35 18 104 2,675
1-3 months in arrears 302 461 1 1 40 805
> 3 months in arrears 219 1,148 5 11 27 1,410
Provisions against forbearance stock 46 789 - 1 9 845
Forbearance type: (1)
Long-term arrangement (2) 677 1,132 39 26 107 1,981
Short-term arrangement (3) 817 2,280 2 4 104 3,207
As of and for the year ended 31 December 2016
Forbearance flow 406 316 49 10 53 834
Forbearance stock 1,290 3,709 65 43 177 5,284
Forbearance stock: arrears
Current 790 2,077 65 29 107 3,068
1-3 months in arrears 286 473 - 2 41 802
> 3 months in arrears 214 1,159 - 12 29 1,414
Provisions against forbearance stock 51 790 - 1 8 850
Forbearance type: (1)
Long-term arrangement (2) 701 1,249 63 37 111 2,161
Short-term arrangement (3) 860 2,460 2 6 110 3,438

Notes:

(1) Can include multiple arrangements.

(2) Capitalisation term extensions, economic concessions.

(3) Payment concessions, amortising payments of outstanding balances, payment holidays and temporary interest arrangements.

Credit risk: Management basis: Mortgage lending (continued)

Mortgage LTV distribution

The amounts below are based on a current exposure basis (net of provisions and after risk transfer).

Weighted
50% 80% 100% Total with Average
LTV ratio value (1) <=50% <=80% <=100% <=150% >150% LTVs LTV Other Total
30 June 2017 £m £m £m £m £m £m % £m £m
RBSG
AQ1-AQ8 55,890 75,434 19,169 1,728 119 152,340 57% 901 153,241
AQ9 338 780 472 450 8 2,048 80% 6 2,054
AQ10 940 1,394 529 604 39 3,506 78% 29 3,535
57,168 77,608 20,170 2,782 166 157,894 58% 936 158,830
of which:
UK PBB
AQ1-AQ8 44,341 60,122 15,350 358 49 120,220 57% 722 120,942
AQ9 71 278 82 8 2 441 67% 5 446
AQ10 554 760 135 22 5 1,476 59% 19 1,495
44,966 61,160 15,567 388 56 122,137 57% 746 122,883
of which:
Ulster Bank RoI
AQ1-AQ8 3,148 4,590 2,191 1,336 15 11,280 67% - 11,280
AQ9 237 445 376 439 6 1,503 84% - 1,503
AQ10 268 474 362 564 24 1,692 92% - 1,692
3,653 5,509 2,929 2,339 45 14,475 73% - 14,475
31 December 2016
RBSG
AQ1-AQ8 54,334 71,240 17,311 2,212 92 145,189 57% 943 146,132
AQ9 335 760 492 636 13 2,236 87% 6 2,242
AQ10 904 1,461 545 728 57 3,695 77% 28 3,723
55,573 73,461 18,348 3,576 162 151,120 58% 977 152,097
of which:
UK PBB
AQ1-AQ8 43,261 56,955 13,652 391 52 114,311 56% 701 115,012
AQ9 71 265 95 10 3 444 68% 4 448
AQ10 548 819 164 25 5 1,561 60% 19 1,580
43,880 58,039 13,911 426 60 116,316 56% 724 117,040
of which:
Ulster Bank RoI
AQ1-AQ8 2,844 4,133 2,185 1,766 14 10,942 70% - 10,942
AQ9 237 417 372 614 8 1,648 88% - 1,648
AQ10 252 461 355 691 47 1,806 94% - 1,806
3,333 5,011 2,912 3,071 69 14,396 76% - 14,396

Note:

(1) LTV is calculated on a current exposure basis, gross of provisions.

Credit risk: Management basis: Commercial real estate (CRE)

Summary (Not within the scope of EY's review report)

The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders but excluding housing associations, construction and building materials).

The portfolio is tightly controlled. A dedicated CRE portfolio controls team is responsible for the oversight of portfolio strategy, credit risk appetite and policies, as well as valuations and environmental frameworks. The sector is reviewed regularly at senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks.

The table below and all the disclosures in this section provide analyses of the lending exposure in the CRE portfolio on a current exposure basis (net of provisions and after risk transfer).

30 June 2017 31 December 2016
UK RoI Other Total UK RoI Other Total
By geography and sub-sector (1) £m £m £m £m £m £m £m £m
Investment
Residential 3,854 227 40 4,121 3,762 70 37 3,869
Office 3,199 205 572 3,976 3,173 129 574 3,876
Retail 4,853 49 88 4,990 4,802 50 56 4,908
Industrial 2,602 24 54 2,680 2,657 30 53 2,740
Mixed/other 5,837 212 270 6,319 6,141 250 235 6,626
20,345 717 1,024 22,086 20,535 529 955 22,019
Development
Residential 3,194 136 15 3,345 3,127 133 44 3,304
Office 93 3 - 96 149 26 - 175
Retail 140 - - 140 168 - 2 170
Industrial 29 - 2 31 39 3 13 55
Mixed/other 120 19 2 141 11 20 - 31
3,576 158 19 3,753 3,494 182 59 3,735
Total 23,921 875 1,043 25,839 24,029 711 1,014 25,754

Note:

(1) Geography splits are based on country of collateral risk.

● The majority of CRE exposure is managed by Commercial Banking.

  • The economic outlook for the sector remained uncertain in the first half of 2017. Accordingly, tightened underwriting standards were maintained, with no loosening of risk appetite in any asset class or sub-sector.
  • CRE values fell after the result of the EU referendum in June 2016 but have since stabilised and have even staged a partial recovery in some sub-sectors. Office and Retail values remain slightly below pre-referendum levels while Industrial values have exceeded them. Rental values have risen gradually across most business space markets, although there is a broad split between the South and the rest of the UK. Rental values remain weak across much of the Retail sub-sector, notably town-centre shopping centres and retail units outside of the South. In contrast, out-of-town shopping centres and London retail units are still delivering moderate levels of rental growth.
  • The go-forward strategy for CRE is in line with the wider Ulster Bank RoI strategy to support the Irish economy, with some controlled growth of the balance sheet over the coming years.

Credit risk: Management basis: Commercial real estate (CRE) (continued)

Commercial Banking UK investment portfolio by UK region (Not within the scope of EY's review report)

30 June 2017 31 December 2016
UK region £m % £m %
Greater London 3,903 28 3,816 27
Multiple locations 3,074 22 2,976 22
South East 1,794 13 1,650 12
Midlands 1,654 12 1,767 13
North 1,590 11 1,635 12
Scotland 991 7 1,006 7
Rest of UK 929 7 915 7

Loan-to-value ratio

30 June 2017 31 December 2016
AQ1-AQ9 AQ10 Total AQ1-AQ9 AQ10 Total
LTV ratio by value £m £m £m £m £m £m
<= 50% 10,476 46 10,522 10,695 53 10,748
> 50% and <= 70% 6,828 129 6,957 6,508 120 6,628
> 70% and <= 90% 723 91 814 773 124 897
> 90% and <= 100% 152 17 169 130 41 171
> 100% and <= 110% 52 20 72 74 24 98
> 110% and <= 130% 53 347 400 136 357 493
> 130% and <= 150% 45 21 66 82 28 110
> 150% 73 48 121 108 61 169
Total with LTVs 18,402 719 19,121 18,506 808 19,314
Total portfolio average LTV (1) 48% 119% 51% 48% 113% 51%
Other (2) 2,532 431 2,963 2,358 349 2,707
Development (3) 3,603 152 3,755 3,553 180 3,733
24,537 1,302 25,839 24,417 1,337 25,754

Notes:

(1) Weighted average by current exposure gross of provisions.

(2) Relates predominantly to Business Banking and unsecured corporate lending

(3) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.

Asset quality (Not within the scope of EY's review report)

30 June 2017 31 December 2016
£m £m
AQ1-AQ4 7,927 7,671
AQ5-AQ8 16,517 16,638
AQ9 94 108
AQ10 1,301 1,337
Total 25,839 25,754
Forbearance flow 238 524
Risk of Credit Loss 49 50
Provision (including latent) 445 544

During H1 2017, the credit quality of the portfolio continued to improve as legacy issues were resolved. The majority of the provisions related to legacy assets managed in Commercial Banking and Capital Resolution.

Credit risk: Management basis: Shipping (Not within the scope of EY's review report)

Exposure to the Shipping sector, on both a current exposure and potential exposure basis, net of provisions and after risk transfer, is summarised below.

30 June 2017 31 December 2016
Current Potential Current Potential
exposure exposure exposure exposure
£m £m £m £m
AQ1-AQ4 1,321 1,731 1,504 1,910
AQ5-AQ8 1,118 1,213 2,158 2,287
AQ9 - - 24 24
AQ10 634 640 867 952
Total 3,073 3,584 4,553 5,173
Forbearance flow 19 723
Risk of Credit Loss 54 362
Provision 227 394
  • The majority of the credit exposure to Shipping is managed in Capital Resolution and relates to loans or finance leases secured by ocean-going vessels. RBS has a strategy to exit the ship finance portfolio. However, there is also exposure outside Capital Resolution. This is principally related to Ports, Shipbuilding and Inland Water Transport.
  • The key component of the AQ1-AQ4 exposure banding is a portfolio of long-dated finance leases, financing ships to investment-grade oil majors and shipping companies. These assets are generally illiquid in nature. Capital Resolution seeks to exit these positions as opportunities arise.
  • The most significant movement in exposure during H1 2017 was in the AQ5-AQ8 banding where the bulk of the ship finance debt portfolio lies. The reduction in exposure was mainly due to asset disposals resulting from the exit strategy.
  • Continued progress in managing down the defaulted portfolio resulted in lower AQ10 exposure, with very few new transfers into this banding during H1 2017.
  • The weakness in the dry bulk and container shipping markets generated a high level of forbearance activity in 2016. However, a recovery in those markets - particularly in dry bulk - during H1 2017 limited the flow into forbearance. Fewer forbearance concessions were granted and these related to smaller exposures. However, there is £413 million of forbearance in process, which has not yet reached legal completion. The market recovery - as well as clients, in general, continuing to support their shipping investments in terms of maintaining debt service and security cover covenants - allowed RBS to remove a number of transactions from Risk of Credit Loss status during the first half of the year.

Credit risk: Balance sheet analysis

Loans, provisions and related credit metrics: segmental analysis

The tables below show gross loans and advances (excluding reverse repos) and related credit metrics, movements in risk elements in lending (REIL) and impairment provisions by reportable segment.

Credit metrics
REIL as a % Provisions YTD
of gross Provisions as a % of Impairment YTD
Gross loans to loans to as a % gross loans losses/ Amounts
Banks Customers REIL Provisions customers of REIL to customers (releases) written-off
30 June 2017 £m £m £m £m % % % £m £m
UK PBB 657 139,658 1,845 1,171 1.3 63 0.8 72 264
Ulster Bank RoI 2,704 20,634 3,499 1,157 17.0 33 5.6 (11) 45
Commercial Banking 835 98,842 1,623 722 1.6 44 0.7 94 212
Private Banking 95 12,858 84 36 0.7 43 0.3 7 2
RBS International 125 8,815 106 43 1.2 41 0.5 5 1
NatWest Markets 4,408 17,744 - 2 - nm - 1 -
Capital Resolution 4,916 10,679 1,791 591 16.8 33 5.5 (42) 160
W&G - 20,656 347 222 1.7 64 1.1 25 47
Central items & other 6,957 118 1 1 0.8 100 0.8 1 1
20,697 330,004 9,296 3,945 2.8 42 1.2 152 732
31 December 2016
UK PBB 504 133,399 1,992 1,292 1.5 65 1.0 83 453
Ulster Bank RoI 2,418 20,130 3,513 1,200 17.5 34 6.0 (113) 2,057
Commercial Banking 582 100,914 1,946 845 1.9 43 0.8 206 577
Private Banking 111 12,188 105 31 0.9 30 0.3 (3) 3
RBS International 18 8,812 109 38 1.2 35 0.4 10 6
NatWest Markets 3,313 17,419 - 1 - nm - - -
Capital Resolution 4,558 13,569 2,264 802 16.7 35 5.9 312 509
W&G - 20,791 380 245 1.8 64 1.2 42 68
Central items & other 5,787 256 1 1 0.4 100 0.4 - 22
17,291 327,478 10,310 4,455 3.1 43 1.4 537 3,695

Note:

(1) REIL comprise impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) which carries an impairment provision. For collectively-assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected.

● Customer loans: Growth in UK PBB mortgages, primarily through intermediary channels, and Private Banking mortgage growth were partially offset by a Commercial Banking reduction in exposures with lower returns.

● Lower REIL, provisions and related credit metrics across all core franchises was due to improved asset-quality, with further reductions in Capital Resolution due to disposal activity.

● Loan impairment losses and write-offs in the first half of 2017 were £152 million and £732 million respectively, of which £105 million and £226 million related to Personal unsecured portfolio. There were also write-offs of £132 million in the transport and storage sector, predominantly relating to shipping.

Credit risk: Balance sheet analysis (continued)

REIL and provisions: segmental analysis

The tables below show movements in risk elements in lending (REIL) and impairment provisions.

RE
IL		 UK
PB
B
£m		 Uls
ter
Ba
nk
Ro
I
£m		 Co
ial
mm
erc
Ba
nk
ing
£m		 Pri
te
va
Ba
nk
ing
£m		 RB
S
Int
ati
al
ern
on
£m		 Na
tW
t
es
Ma
rke
ts
£m		 Ca
ita
l
p
Re
lut
ion
so
£m		 W&
G
£m		 Ce
al
ntr
ite
ms
& o
the
r
£m		 Ju
30
ne
20
17
To
tal
£m		 De
mb
31
ce
er
20
16
To
tal
£m
At
be
inn
ing
of
th
ort
ing
rio
d
g
e r
ep
pe		 1,
99
2		 3,
51
3		 1,
94
6		 10
5		 10
9		 - 2,
26
4		 38
0		 1 10
31
0
,		 12
157
,
Cu
tra
nsl
atio
nd
oth
adj
ust
nts
rre
ncy
n a
er
me		 - 89 (
2)		 - 5 - (
47
)		 - 1 46 1,
01
3
Ad
dit
ion
s		 54
7		 28
8		 44
7		 23 25 - 93 98 14 1,
53
5		 5,
30
6
Tra
nsf
be
twe
R
EIL
d p
ote
ntia
l p
rob
lem
lo
ers
en
an
an
s		 (
39
)		 - 8 (
17
)		 - - - (
11
)		 - (
59
)		 (
166
)
Tra
nsf
to
rfo
ing
bo
ok
er
pe
rm		 (
12
8
)		 (
10
5
)		 (
11
9
)		 - (
10
)		 - - (
28
)		 (
1)		 (
39
1)		 (
96
0)
Re
ts
d d
isp
als
pa
ym
en
an
os		 (
26
3
)		 (
24
1)		 (
44
5
)		 (
25
)		 (
22
)		 - (
35
9
)		 (
45
)		 (
13
)		 (
1,
41
3
)		 (
3,
34
5)
Am
nts
ritt
-of
f
ou
w
en		 (
26
4)		 (
45
)		 (
21
2)		 (
2)		 (
1)		 - (
16
0
)		 (
47
)		 (
1)		 (
73
2)		 (
3,
69
5)
At
d o
f th
ing
eri
od
ort
en
e r
ep
p		 1,
84
5		 3,
49
9		 1,
62
3		 84 10
6		 - 1,
79
1		 34
7		 1 9,
29
6		 10
31
0
,
Pro
vis
ion
s
At
be
inn
ing
of
th
ort
ing
rio
d
g
e r
ep
pe		 1,
29
2		 1,
20
0		 84
5		 31 38 1 80
2		 24
5		 1 4,
45
5		 7,
139
Int
t tr
sfe
er
se
gm
en
an
rs		 4 - (
)
3		 - - - 3 (
4)		 - - -
Cu
tra
nsl
atio
nd
oth
adj
ust
nts
rre
ncy
n a
er
me		 (
1)		 18 (
7)		 - 1 - (
)
8		 1 - 4 48
0
Am
nts
ritt
-of
f
ou
w
en		 (
4)
26		 (
)
45		 (
2)
21		 (
2)		 (
1)		 - (
)
16
0		 (
)
47		 (
1)		 (
2)
73		 (
3,
69
7)
of
-of
f
Re
eri
nts
iou
sly
ritt
cov
es
am
ou
pr
ev
w
en		 85 7 10 - - - 6 4 - 11
2		 109
Ch
es/
(re
s)
lea
to
inc
tat
t
arg
se
om
e s
em
en		 72 (
)
11		 94 7 5 1 (
)
42		 25 1 15
2		 53
7
f d
Un
win
d o
isc
nt
ou		 (
)
17		 (
)
12		 (
)
5		 - - - (
)
10		 (
2)		 - (
)
46		 (
)
113
f th
ing
eri
At
d o
ort
od
en
e r
ep
p		 1,
17
1		 1,
15
7		 72
2		 36 43 2 59
1		 22
2		 1 3,
94
5		 4,
45
5

Credit risk: Balance sheet analysis (continued)

Loans, provisions and related credit metrics: sector analysis

The tables below show gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography based on the location of lending office.

Credit metrics
REIL
as a % of Provisions Provisions Impairment
Gross gross as a % as a % of losses/ Amounts
loans REIL Provisions loans of REIL gross loans (releases) written-off
30 June 2017 £m £m £m % % % £m £m
Central and local government 5,097 1 - - - - - -
Finance 33,154 62 47 0.2 76 0.1 - 3
Personal - mortgages (1) 159,976 4,121 1,023 2.6 25 0.6 (14) 21
- unsecured 14,132 1,000 822 7.1 82 5.8 105 226
Property 34,657 1,243 399 3.6 32 1.2 (12) 83
Construction 4,168 240 130 5.8 54 3.1 9 16
of which: commercial real estate 26,252 1,208 413 4.6 34 1.6 (12) 85
Manufacturing 9,291 172 96 1.9 56 1.0 18 12
Finance leases and
instalment credit 12,667 129 80 1.0 62 0.6 9 9
Retail, wholesale and
repairs 11,960 226 153 1.9 68 1.3 29 59
Transport and storage 4,866 967 254 19.9 26 5.2 (17) 132
Health, education and
leisure 11,266 315 118 2.8 37 1.0 20 31
Hotels and restaurants 6,068 186 80 3.1 43 1.3 3 31
Utilities 3,995 72 36 1.8 50 0.9 (10) 5
Other 18,707 562 306 3.0 54 1.6 13 104
Latent - - 401 - - - (1) -
Total customers 330,004 9,296 3,945 2.8 42 1.2 152 732
Of which:
UK
Personal - mortgages 144,063 946 149 0.7 16 0.1 (23) 11
- unsecured 13,735 953 778 6.9 82 5.7 103 217
Property and construction 37,641 1,406 457 3.7 33 1.2 1 83
Other 112,265 2,386 978 2.1 41 0.9 68 366
Latent - - 328 - - - 11 -
Total 307,704 5,691 2,690 1.8 47 0.9 160 677
Europe
Personal - mortgages 15,617 3,175 874 20.3 28 5.6 7 6
- unsecured 394 47 43 11.9 91 10.9 2 6
Property and construction 1,178 73 67 6.2 92 5.7 (3) 16
Other 4,083 247 140 6.0 57 3.4 (10) 20
Latent - - 73 - - - (12) -
Total 21,272 3,542 1,197 16.7 34 5.6 (16) 48
Total banks 20,697 - - - - - - -

Note: (1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.

Credit risk: Balance sheet analysis (continued)

Loans, provisions and related credit metrics: sector analysis (continued)

Credit metrics
REIL Provisions
as a % ofProvisions as a % of Impairment
Gross gross as a % gross losses/ Amounts
loans REILProvisions loans of REIL loans (releases) written-off
31 December 2016 £m £m £m % % % £m £m
Central and local government 6,091 1 1 - 100 - 1 2
Finance 33,083 61 51 0.2 84 0.2 (2) 17
Personal - mortgages (1) 153,319 4,091 1,019 2.7 25 0.7 222 290
- unsecured 14,492 1,113 900 7.7 81 6.2 138 396
Property 34,756 1,370 489 3.9 36 1.4 (162) 1,485
Construction 4,247 264 137 6.2 52 3.2 8 153
of which: commercial real estate 26,265 1,407 511 5.4 36 1.9 (184) 1,483
Manufacturing 9,609 173 90 1.8 52 0.9 13 90
Finance leases and instalment credit 12,269 139 79 1.1 57 0.6 8 12
Retail, wholesale and repairs 12,823 283 182 2.2 64 1.4 39 169
Transport and storage 6,428 1,388 422 21.6 30 6.6 419 301
Health, education and leisure 11,526 381 129 3.3 34 1.1 8 75
Hotels and restaurants 6,079 211 107 3.5 51 1.8 13 116
Utilities 3,938 95 50 2.4 53 1.3 (20) 2
Other 18,818 740 399 3.9 54 2.1 68 587
Latent - - 400 - - - (216) -
Total customers 327,478 10,310 4,455 3.1 43 1.4 537 3,695
Of which:
UK
Personal - mortgages 137,427 943 143 0.7 15 0.1 (4) 3
- unsecured 14,198 1,060 853 7.5 80 6.0 132 362
Property and construction 37,942 1,543 537 4.1 35 1.4 (98) 676
Other 115,833 3,133 1,299 2.7 41 1.1 666 629
Latent - - 318 - - - (12) -
Total 305,400 6,679 3,150 2.2 47 1.0 684 1,670
Europe
Personal - mortgages 15,548 3,144 872 20.2 28 5.6 226 287
- unsecured 265 52 46 19.6 88 17.4 5 11
Property and construction 1,055 85 84 8.1 99 8.0 (56) 933
Other 3,920 279 165 7.1 59 4.2 (156) 665
Latent - - 83 - - - (204) -
Total 20,788 3,560 1,250 17.1 35 6.0 (185) 1,896
Total banks 17,291 - - - - - - -

Note:

(1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.

Credit risk: Balance sheet analysis (continued)

Debt securities and AFS reserves

The table below shows debt securities by issuer and IAS 39 measurement classifications. The Other Financial Institutions category includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS). Ratings are based on the lowest of Standard & Poor's, Moody's and Fitch.

Central and local government
Financial
Of which
UK
US
Other
Banks
Institutions
Corporate
Total
ABS
30 June 2017
£m
£m
£m
£m
£m
£m
£m
£m
Held-for-trading (HFT)
3,629
5,924
19,849
1,897
2,926
641
34,866
887
Designated as at fair value
-
-
-
-
-
-
-
-
Available-for-sale (AFS)
15,449
8,286
12,795
2,201
4,018
108
42,857
2,019
Loans and receivables
-
19
-
1,118
2,615
146
3,898
3,733
Held-to-maturity (HTM)
4,548
-
-
-
-
-
4,548
-
Total
23,626
14,229
32,644
5,216
9,559
895
86,169
6,639
Short positions (HFT)
(4,542)
(3,443)
(20,268)
(456)
(971)
(180)
(29,860)
-
Ratings
AAA
-
-
10,130
2,386
6,352
15
18,883
4,003
AA to AA+
23,626
14,229
5,153
593
673
60
44,334
279
A to AA-
-
-
11,387
266
1,544
236
13,433
808
BBB- to A-
-
-
5,466
1,437
437
218
7,558
1,187
Non-investment grade
-
-
508
149
300
108
1,065
233
Unrated
-
-
-
385
253
258
896
129
Available-for-sale
AFS reserves (gross of tax)
123
12
122
4
123
(1)
383
5
Gross unrealised gains
682
99
359
8
34
1
1,183
11
Gross unrealised losses
(42)
(42)
(24)
(3)
(9)
(2)
(122)
(1)
31 December 2016
Held-for-trading
2,615
4,133
14,087
821
2,299
549
24,504
886
Designated as at fair value
-
-
25
-
2
-
27
-
Available-for-sale
10,581
6,953
15,678
1,852
4,072
118
39,254
2,263
Loans and receivables
-
-
-
-
3,774
194
3,968
3,814
Held-to-maturity
4,769
-
-
-
-
-
4,769
-
Total
17,965
11,086
29,790
2,673
10,147
861
72,522
6,963
Short positions (HFT)
(2,644)
(4,989)
(13,346)
(334)
(640)
(121)
(22,074)
-
Ratings
AAA
-
-
11,478
1,610
6,024
36
19,148
3,993
AA to AA+
17,965
11,086
5,533
481
720
34
35,819
244
A to AA-
-
-
9,727
238
2,128
150
12,243
1,627
BBB- to A-
-
-
2,737
155
698
378
3,968
645
Non-investment grade
-
-
315
69
458
31
873
381
Unrated
-
-
-
120
119
232
471
73
Available-for-sale
AFS reserves (gross of tax)
79
(66)
190
5
144
(6)
346
46
Gross unrealised gains
768
56
504
8
93
2
1,431
75
Gross unrealised losses
(16)
(123)
(13)
(1)
(43)
(2)
(198)
(32)		 Other

Held-for-trading: Assets and short positions increased largely due to trading activity in NatWest Markets, including trading in Japanese government and eurozone bonds. Higher UK gilt balances reflected market-making activity and client flow trading.

Available-for-sale: The increase in UK government securities reflected liquidity portfolio management, as gilts offered higher capital adjusted returns relative to central bank cash balances. Reductions in other government securities, principally euro, reflected lower collateral requirements.

Credit risk: Balance sheet analysis (continued)

Derivatives and valuation reserves

The table below shows derivatives by type of contract. The master netting agreements and collateral shown below do not result in a net presentation on the balance sheet under IFRS.

30 June 2017 31 December 2016
Notional Assets Liabilities Notional Assets Liabilities
£bn £m £m £bn £m £m
Interest rate (5) 17,383 139,219 126,605 17,973 170,524 158,485
Exchange rate 4,146 53,586 56,938 4,451 75,442 77,148
Credit 30 475 425 42 682 557
Equity and commodity 9 251 193 25 333 285
Balance sheet 21,568 193,531 184,161 22,491 246,981 236,475
Counterparty mark-to-market netting (153,703) (153,703) (197,288) (197,288)
Cash collateral (23,249) (20,484) (28,742) (20,417)
Securities collateral (6,522) (4,312) (8,435) (11,048)
Net exposure 10,057 5,662 12,516 7,722
Banks (1) 712 831 1,260 1,339
Other financial institutions (2) 2,924 2,185 3,090 2,897
Corporate (3) 5,631 2,533 7,348 3,393
Government (4) 790 113 818 93
Net exposure 10,057 5,662 12,516 7,722
UK 5,827 2,309 7,065 3,009
Europe 2,620 2,412 3,466 3,215
US 853 535 930 673
RoW 757 406 1,055 825
Net exposure 10,057 5,662 12,516 7,722
Valuation reserves £m £m
Funding valuation adjustments (FVA) 736 936
Credit valuation adjustments (CVA) 454 618
Bid-offer reserves 327 334
Product and deal specific 554 643
Valuation reserves 2,071 2,531

Notes:

(1) Transactions with certain counterparties with whom RBS has netting arrangements but collateral is not posted on a daily basis: certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions, for example China, where the collateral arrangements are not deemed to be legally enforceable.

(2) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS's external rating.

(3) Predominantly large corporate with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting.

(4) Sovereigns and supranational entities with one way collateral arrangements in their favour.

(5) The notional amount of interest rate derivatives include £11,045 billion (31 December 2016 - £9,724 billion) in respect of contracts cleared through central clearing counterparties. The associated derivatives assets and liabilities including variation margin reflected IFRS offset of £29 billion (31 December 2016 - £51 billion) and £29 billion (31 December 2016 - £51 billion) respectively.

(6) Valuation reserves reflect adjustments to mid-market valuations to cover bid-offer spread, liquidity and credit risk.

  • The decrease in foreign exchange derivative fair values reflected the US dollar weakening against the yen, the euro and sterling during the period. The interest rate derivative decrease in fair values reflected the upward movement in euro and sterling yields.
  • Foreign exchange notional reductions were driven by maturities, buyouts and foreign exchange retranslation. Interest rate notionals also declined as participation in tear-up cycles and Capital Resolution wind-downs more than offset new trading activity in NatWest Markets.
  • Overall exposure was an asset position broadly flat from the prior year.
  • FVA reduced during H1 2017. This reflected a reduction in exposure due to market moves together with an increase in funding costs included in the discount rate applied to derivative cash flows.
  • The reduction in CVA resulted from a reduction in exposure due to market moves, together with tightening credit spreads and trade close-outs.
  • Product and deal-specific reserves decreased primarily due to trade close-outs and novations.

Market risk

Market risk is the risk of losses arising from fluctuations in interest rates, credit spreads, foreign currency rates, equity prices, commodity prices and other factors, such as market volatilities, that may lead to a reduction in earnings, economic value or both.

Key developments (Not within the scope of EY's review report)

  • During H1 2017, revised non-traded and traded market risk appetite metrics were approved by the Board and cascaded to the franchises.
  • Political events during the half-year, notably elections in the UK, France and the Netherlands, resulted in periods of market volatility. UK and European interest rates remained at historically low levels, although the US Federal Reserve began raising interest rates. Both non-traded and traded market risk remained within set appetite throughout H1 2017.
  • Non-traded market risk VaR peaked at £83.1 million, mainly driven by an increase in the proportion of bonds held within Treasury's liquidity portfolio, which was aimed at investing surplus cash, rather than meeting increased liquidity requirements. The appreciation of foreign currency bonds within this portfolio, primarily US and German sovereign debt, also contributed.
  • Traded VaR increased on an average basis compared to both H1 2016 and H2 2016. In H1 2016, traded VaR was at a reduced level as a result of concerns over the stability of the financial sector. The traded VaR level normalised in H2 2016, followed by a marginal increase in H1 2017.

Non-trading portfolios

Value-at-risk

The following table presents 1-day internal banking book VaR at a 99% confidence level, analysed by type of risk.

Half year ended
30 June 2017 30 June 2016 31 December 2016
Period Period Period
Average Max Min end Average Max Min end Average Max Min end
£m £m £m £m £m £m £m £m £m £m £m £m
Interest rate 8.6 12.6 6.3 7.6 7.5 10.1 6.1 6.2 11.8 19.3 4.7 18.0
Euro 3.2 4.1 2.3 2.3 3.0 3.5 2.1 3.1 3.1 3.8 2.1 3.8
Sterling 7.7 13.8 5.0 5.1 7.0 10.9 4.8 4.8 13.4 23.7 5.0 20.6
US dollar 3.1 4.9 2.1 4.9 2.9 4.7 1.6 1.6 2.9 4.3 1.7 2.1
Other 1.1 1.1 1.0 1.0 2.1 2.4 1.8 1.8 1.4 1.8 1.1 1.1
Credit spread 70.0 82.4 62.0 62.0 50.9 57.8 41.6 57.8 63.5 66.6 61.3 62.9
Structural FX rate 10.3 11.4 9.3 11.4 11.8 15.5 10.7 15.5 15.1 19.6 10.5 10.5
Pipeline risk 0.8 1.1 0.6 0.9 0.8 1.2 0.2 0.8 0.4 0.5 0.3 0.5
Diversification (1) (18.8) (27.0) (20.6) (20.6) (27.0) (20.2)
Total 70.9 83.1 54.9 54.9 50.4 59.7 41.5 59.7 63.8 71.7 60.0 71.7

Note:

(1) RBS benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.

● On an average basis, total non-traded VaR increased during H1 2017 compared to both H1 2016 and H2 2016 due to the increase in the proportion of bonds held within Treasury's liquidity portfolio, as explained above.

● On a period-end basis, total non-traded VaR decreased, driven by credit spread VaR, which fell due to a change in the source of the market data used for the VaR model.

Market risk: Non-trading portfolios (continued)

Sensitivity of projected net interest earnings (Not within the scope of EY's review report)

The following table shows the sensitivity of net interest earnings, over the next 12 months, to an immediate upward or downward change of 25 and 100 basis points to all interest rates. All yield curves are expected to move in parallel, except for interest rates that are assumed to floor at zero per cent or, for euro rates, at the current negative rate. The result of the scenario is compared to a base-case scenario using market-implied levels of future interest rates at 30 June 2017.

The main driver of earnings sensitivity relates to interest rate pass-through assumptions on customer products. The scenario also captures the impact of the reinvestment of maturing structural hedges at higher or lower rates than the base-case earnings sensitivity. As the forward-looking horizon is limited to one year, the impact of maturing structural hedges being reinvested at higher or lower rates is relatively low.

The scenario results should not be considered predictive of future performance. They assume no management or customer response to changes in the interest rate environment. The analysis is also limited to interest earnings rather than non-interest earnings.

30 June 2017 Euro
£m		 Sterling
£m		 US dollar
£m		 Other
£m		 Total
£m
+25 basis point shift in yield curves 16 176 15 1 208
-25 basis point shift in yield curves (4) (273) (10) (3) (290)
+100 basis point shift in yield curves 60 620 57 2 739
-100 basis point shift in yield curves (5) (480) (55) (7) (547)
30 June 2016
+25 basis point shift in yield curves - 49 16 3 68
-25 basis point shift in yield curves - (125) (16) 1 (140)
+100 basis point shift in yield curves (20) 393 65 11 449
-100 basis point shift in yield curves - (298) (46) 3 (341)
31 December 2016
+25 basis point shift in yield curves 4 79 11 2 96
-25 basis point shift in yield curves (1) (222) (11) (2) (236)
+100 basis point shift in yield curves 9 436 42 13 500
-100 basis point shift in yield curves (2) (337) (30) (9) (378)

Interest income sensitivity increased in H1 2017 across all scenarios.

Changes in assumed pass-through rates on customer products as well as the impact of Treasury activity were the main drivers of the increase in positive sensitivity to higher rates at 30 June 2017 compared with 31 December 2016.

Higher market implied levels of future interest rates at 30 June 2017 compared with 31 December 2016 were a significant driver of the more adverse sensitivity to lower interest rates at 30 June 2017. Wholesale market interest rates fell further in the downward 100 basis-point scenario before they hit an assumed zero per cent floor. As customer deposit rates are much less affected by downward interest-rate shifts, profit margins compress. Although the sensitivity was more adverse, the higher market curve also resulted in a higher base-case income forecast. Therefore the absolute level of income may be unaffected.

Market risk: Non-trading portfolios (continued)

Structural hedging (Not within the scope of EY's review report)

RBS has the benefit of a significant pool of stable, non and low interest bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed rate assets or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream.

After hedging RBS's net interest rate exposure externally, Treasury allocates income to products or equity in structural hedges by reference to the relevant interest rate swap curve. Over time, the hedging programme has built up a portfolio of interest rate swaps that provide a basis for stable income attribution. The programme aims to track a time series of medium-term swap rates, but the yield will be affected by changes in product volumes and RBS's capital composition.

The table below presents the incremental income allocation (above 3-month LIBOR), the average notional and the overall yield (including 3-month LIBOR) associated with the product and equity hedges managed by Treasury.

Half year ended
30 June 2017 30 June 2016 31 December 2016
Incremental Average Overall Incremental Average Overall Incremental Average Overall
income notional yield income notional yield income notional yield
£m £bn % £m £bn % £m £bn %
Equity structural hedging 317 28 2.48 310 35 2.35 323 32 2.41
Product structural hedging 334 98 1.04 315 87 1.28 320 93 1.13
Total 651 126 1.36 625 122 1.59 643 125 1.47

The table below presents the incremental income associated with product structural hedges at segment level. These relate to the main UK banking businesses except Private Banking and RBS International.

Half year ended
30 June 30 June 31 December
2017 2016 2016
Net interest earnings - impact of product structural hedging £m £m £m
UK Personal & Business Banking 191 170 176
Commercial Banking 116 118 117
Capital Resolution 2 6 4
Williams & Glyn 25 21 23
Total 334 315 320
  • Interest rates remained low across H1 2017, with a significant upward shift only occurring the last few days of the period. As a result, the overall yield (including 3-month LIBOR) fell compared to 31 December 2016, reflecting the combined impact of lower equity hedges and maturing hedges being reinvested at lower market rates.
  • The fall in the average notional of the equity hedge primarily reflected the decline in the equity base resulting from the provision for various investigations and litigation matters.
  • The increase in the average notional of the product hedge reflected growth in current account balances.
  • As at 30 June 2017, the 10-year and 5-year sterling swap rates were 1.27% and 0.91% respectively. The market rate matching the amortising structure of the sterling proportion of the total structural hedge was 0.83%.

Foreign exchange risk

The table below shows structural foreign currency exposures.

30 June 2017 Net
investments
in foreign
operations
£m		 NCI (1)
£m		 Net
investments
in foreign
operations
excluding NCI
£m		 Net
investment
hedges
£m		 Structural
foreign currency
exposures
pre-economic
hedges
£m		 Economic
hedges (2)
£m		 Residual
structural
foreign currency
exposures
£m
US dollar (878) - (878) 1,239 361 (361) -
Euro 6,795 114 6,681 (518) 6,163 (2,203) 3,960
Other non-sterling 3,007 668 2,339 (1,267) 1,072 (485) 587
8,924 782 8,142 (546) 7,596 (3,049) 4,547
31 December 2016
US dollar (595) - (595) (28) (623) - (623)
Euro 6,085 (4) 6,089 (582) 5,507 (2,289) 3,218
Other non-sterling 3,366 761 2,605 (1,491) 1,114 (625) 489
8,856 757 8,099 (2,101) 5,998 (2,914) 3,084

Notes:

(1) Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners equity.

(2) Economic hedges mainly represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting purposes. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.

Following the recognition of further RMBS provisions in US subsidiaries in Q1 2017, hedges of US dollar exposure to RMBS were documented as net investment hedges. This was the main driver of the increase in reported structural foreign currency exposures during H1 2017.

Changes in foreign currency exchange rates affect equity in proportion to the structural foreign currency exposures. For example, a 5% strengthening or weakening in foreign currencies against sterling would respectively result in a gain or loss of £0.4 billion in equity.

Trading portfolios

Traded internal VaR

The table below presents the internal value-at-risk (VaR) for trading portfolios split by type of market risk exposure. The internal traded 99% one-day VaR captures trading book positions for all products, locations and legal entities.

Half year ended
30 June 2017 30 June 2016 31 December 2016
Period Period Period
Average Max Min end Average Max Min end Average Max Min end
Traded VaR (1-day 99%) £m £m £m £m £m £m £m £m £m £m £m £m
General interest rate (1) 14.6 24.5 8.8 11.3 12.3 22.3 7.8 10.2 12.6 19.3 7.8 16.9
Specific interest rate (2) 11.1 14.3 8.8 9.9 8.4 12.5 5.8 9.7 10.6 13.7 8.0 9.7
Currency 4.7 7.9 2.5 5.0 4.0 9.0 1.0 4.3 5.2 14.3 2.4 5.4
Equity 1.2 1.9 0.6 1.3 0.5 2.1 0.2 0.5 0.6 2.0 0.3 1.9
Commodity 0.4 1.3 0.1 0.5 0.6 1.7 0.2 0.8 0.8 2.4 0.2 0.3
Diversification (3) (12.2) (12.5) (10.4) (9.6) (11.1) (10.4)
Total 19.8 25.2 13.9 15.5 15.4 27.3 9.9 15.9 18.7 29.3 13.2 23.8

Note:

(1) General interest rate risk arises from the impact of changes in interest rates and volatilities on cash instruments and derivatives. This includes interest rate tenor basis risk and cross-currency basis risk.

(2) Specific interest rate risk arises from the impact of changes in the credit spreads of sovereign bonds, corporate bonds, securitised products and credit derivatives.

(3) RBS benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.

● Traded VaR fluctuated throughout H1 2017, reflecting political developments, market events, customer flows and other macroeconomic factors. Throughout the period, the VaR was managed within risk appetite.

● On an average basis, traded VaR in H1 2017 increased marginally compared to H2 2016, mainly due to refinements to the VaR methodology used for certain credit products. Average traded VaR also increased more significantly compared to H1 2016 as the risk profile in the earlier period had been reduced compared to normal levels due to concerns over the stability of the financial sector.

Other risks (Not within the scope of EY's review report) Key developments Operational risk

  • A single RBS-wide Risk & Control Assessment methodology was established in 2016. By the end of H1 2017, approximately 120 assessments had been completed across RBS. These were designed to reflect the end-to-end customer journeys of the most material products, processes and services as well as to enable a consistent, holistic view of RBS's key risks and their mitigation.
  • Cyber security and associated risks remain an industry concern. In May and June 2017, organisations around the world - including a number of UK entities - were subjected to two separate high-profile cyber attacks. However, there were no associated impacts on RBS. In both cases, reviews were carried out in order to improve and develop RBS's cyber risk management and defence strategy.

Conduct & regulatory risk

  • The FCA has announced a strategic review of business models in the retail banking sector. The review is expected to consider the full range of personal banking products and services, as well as SME banking. The FCA expects to produce a project update in H1 2018, explaining its preliminary analysis and conclusions.
  • The remediation of PPI continued, with the FCA publishing its rules and guidance on the PPI complaints deadline and how firms should deal with Plevin complaints. The FCA confirmed it will implement a two-year deadline along with Plevin rules from 29 August 2017.

Appendix 2

Segmental income statement reconciliations

Segmental income statement reconciliations

PB
B		 CP
B		 Ce
al
ntr
Uls
ter		 Co
ial
mm
erc		 Pri
te
va		 RB
S		 Na
tW
t
es		 Ca
ita
l
p		 Wi
llia
ms		 ite
&
ms		 To
tal
UK
PB
B		 Ba
nk
Ro
I		 Ba
nk
ing		 Ba
nk
ing		 Int
ati
al
ern
on		 Ma
rke
ts		 Re
lut
ion
so		 & G
ly
n		 oth
er		 RB
S
Ha
lf y
nd
ed
Ju
30
20
17
ea
r e
ne		 £m £m £m £m £m £m £m £m £m £m
Inc
tat
t
om
e s
em
en
To
tal
inc
st
atu
tor
om
e -
y		 2,
75
5		 29
3		 1,
75
0		 32
1		 19
5		 93
2		 (
10
2)		 41
7		 35
8		 6,
91
9
Ow
red
it a
dju
stm
ts
n c
en		 - 3 - - - 48 22 - - 73
f o
Lo
de
tio
de
bt
ss
on
re
mp
n o
wn		 - - - - - - - - 7 7
Str
ate
ic d
isp
als
g
os		 - - - - - - - - (
15
6
)		 (
15
6
)
To
tal
inc
ad
jus
ted
om
e -		 2,
75
5		 29
6		 1,
75
0		 32
1		 19
5		 98
0		 (
80
)		 41
7		 20
9		 6,
84
3
Op
tin
st
atu
tor
era
g e
xp
en
se
s -
y		 (
58
)
1,
6		 (
)
29
3		 (
)
99
6		 (
2)
23		 (
)
94		 (
5
)
77		 (
53
)
9		 (
15
)
8		 (
)
17
9		 (
85
2)
4,
Re
uri
- d
ire
str
uct
ts
ct
ng
cos		 23 24 40 - - 30 13
0		 - 54
3		 79
0
Re
str
uct
uri
ts
- in
dir
ect
ng
cos		 13
7		 19 77 14 4 73 4 - (
)
32
8		 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 13 33 4 - - 34 27
2		 - 40 39
6
Op
tin
ad
jus
ted
era
g e
xp
en
se
s -		 (
)
1,
41
3		 (
7)
21		 (
)
87
5		 (
)
21
8		 (
)
90		 (
)
63
8		 (
)
13
3		 (
)
15
8		 76 (
)
3,
66
6
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
72
)		 11 (
94
)		 (
7)		 (
5
)		 (
1)		 78 (
25
)		 (
1)		 (
11
6
)
Op
tin
rof
it/(
los
s)
tat
uto
era
g p
- s
ry		 1,
09
7		 11 66
0		 82 96 15
6		 (
56
3
)		 23
4		 17
8		 1,
95
1
Op
tin
rof
it/(
los
s)
dju
ste
d
era
g p
- a		 1,
27
0		 90 78
1		 96 10
0		 34
1		 (
13
5
)		 23
4		 28
4		 3,
06
1
Ad
dit
ion
al
inf
ati
orm
on
Re
tur
ity
n o
n e
qu
(1)		 27
.8%		 0.8
%		 8.2
%		 7.7
%		 13
.1%		 2.3
%		 nm 22
.2%		 nm 5.6
%
Re
tur
ity
dju
ste
d (
n o
n e
qu
- a
1,2)		 32
.4%		 6.8
%		 10
.1%		 9.3
%		 13
.7%		 7.2
%		 nm 22
.2%		 nm 11
.5%
Co
st:
inc
ati
om
e r
o (
3)		 57
.6%		 10
0.0
%		 55
.1%		 72
.3%		 48
.2%		 83
.2%		 nm 37
.9%		 nm 69
.8%
Co
st:
inc
atio
dju
ste
d (
om
e r
- a
2,3
)		 51
.3%		 73
.3%		 47
.9%		 67
.9%		 46
.2%		 65
.1%		 nm 37
.9%		 nm 53
.1%
Ha
lf y
nd
ed
30
Ju
20
16
ea
r e
ne
Inc
tat
t
om
e s
em
en
To
tal
inc
st
atu
tor
om
e -
y		 2,
61
5		 29
3		 1,
69
9		 33
1		 185 81
8		 (
172
)		 41
1		 (
116
)		 6,
06
4
Ow
red
it a
dju
stm
ts
n c
en		 - (
3)		 - - - (
137
)		 (
184
)		 - (
126
)		 (
0)
45
Lo
de
tio
f o
de
bt
ss
on
re
mp
n o
wn		 - - - - - - - - 130 130
Str
ate
ic d
isp
als
g
os		 - - - - - - 51 - (
6)
24		 (
)
195
To
tal
inc
ad
jus
ted
om
e -		 2,
61
5		 29
0		 1,
69
9		 33
1		 185 68
1		 (
30
5)		 41
1		 (
35
8)		 5,
54
9
Op
tin
st
atu
tor
era
g e
xp
en
se
s -
y		 (
2,
04
2)		 (
31
2)		 (
98
4)		 (
27
8)		 (
71
)		 (
72
9)		 (
47
8)		 (
24
2)		 (
79
3)		 (
5,
92
9)
Re
str
uct
uri
ts
- d
ire
ct
ng
cos		 51 24 1 1 1 10 12 45 48
5		 63
0
Re
uri
- in
dir
str
uct
ts
ect
ng
cos		 60 1 40 19 2 23 25 - (
170
)		 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 42
1		 92 10 2 - 56 26 - 70
8		 1,
31
5
Op
tin
ad
jus
ted
era
g e
xp
en
se
s -		 (
1,
51
0)		 (
195
)		 (
93
3)		 (
25
6)		 (
68
)		 (
64
0)		 (
41
5)		 (
197
)		 23
0		 (
3,
98
4)
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
40
)		 27 (
103
)		 (
2)		 (
11
)		 - (
26
3)		 (
17
)		 - (
40
9)
Op
rof
it/(
s)
tin
los
tat
uto
era
g p
- s
ry		 53
3		 8 61
2		 51 103 89 (
3)
91		 152 (
9)
90		 (
4)
27
Op
tin
rof
it/(
los
s)
dju
ste
d
era
g p
- a		 1,
06
5		 122 66
3		 73 106 41 (
98
3)		 197 (
128
)		 1,
156
Ad
dit
ion
al
inf
ati
orm
on
Re
tur
ity
(1)
n o
n e
qu		 11
.9%		 0.6
%		 8.1
%		 5.1
%		 15
.4%		 0.8
%		 nm 14
.3%		 nm (
10
.3%
)
Re
tur
ity
dju
ste
d (
n o
n e
qu
- a
1,2)		 25
.5%		 9.3
%		 8.9
%		 7.6
%		 15
.9%		 (
0.5
%
)		 nm 18
.6%		 nm (
3.2
%
)
Co
st:
inc
ati
om
e r
o (
3)		 .1%
78		 .5%
106		 .1%
56		 .0%
84		 .4%
38		 .1%
89		 nm .9%
58		 nm .7%
97
Co
inc
atio
dju
d (
st:
ste
2,3
)
om
e r
- a		 57
.7%		 67
.2%		 53
.0%		 77
.3%		 36
.8%		 94
.0%		 nm 47
.9%		 nm 71
.4%

Segmental income statement reconciliations

PB
B		 CP
B		 Ce
al
ntr
Uls
ter		 Co
ial
mm
erc		 Pri
te
va		 RB
S		 Na
tW
t
es		 Ca
ita
l
p		 Wi
llia
ms		 ite
&
ms		 To
tal
UK
PB
B		 Ba
nk
Ro
I		 Ba
nk
ing		 Ba
nk
ing		 Int
ati
al
ern
on		 Ma
rke
ts		 Re
lut
ion
so		 & G
ly
n		 oth
er		 RB
S
Qu
art
de
d 3
0 J
e 2
01
7
er
en
un		 £m £m £m £m £m £m £m £m £m £m
Inc
tat
t
om
e s
em
en
To
tal
inc
st
atu
tor
om
e -
y		 1,
37
8		 14
8		 5
88		 16
1		 97 44
4		 (
)
43		 21
1		 42
6		 3,
70
7
Ow
red
it a
dju
stm
ts
n c
en		 - 2 - - - 28 15 - (
1)		 44
Lo
de
tio
f o
de
bt
ss
on
re
mp
n o
wn		 - - - - - - - - 9 9
Str
ic d
isp
als
ate
g
os		 - - - - - - - - (
15
6
)		 (
15
6
)
To
tal
inc
dju
ste
d
om
e
- a		 1,
37
8		 15
0		 5
88		 16
1		 97 47
2		 (
)
28		 21
1		 27
8		 3,
60
4
Op
tin
st
atu
tor
era
g e
xp
en
se
s -
y		 (
)
73
5		 (
1)
15		 (
)
44
6		 (
)
10
8		 (
)
48		 (
)
35
5		 (
)
37
8		 (
)
74		 (
4)
10		 (
)
2,
39
9
Re
uri
- d
ire
str
uct
ts
ct
ng
cos		 3 5 1 - - 10 60 - 13
4		 21
3
Re
str
uct
uri
ts
- in
dir
ect
ng
cos		 26 4 17 3 1 25 (
12
)		 - (
64
)		 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 9 33 1 - - 3 26
6		 - 30 34
2
Op
tin
ad
jus
ted
era
g e
xp
en
se
s -		 (
7)
69		 (
)
10
9		 (
7)
42		 (
)
10
5		 (
)
47		 (
7)
31		 (
)
64		 (
)
74		 (
4)		 (
4)
1,
84
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
40
)		 (
13
)		 (
33
)		 (
4)		 2 (
1)		 33 (
14
)		 - (
70
)
Op
tin
rof
it/(
los
s)
tat
uto
era
g p
- s
ry		 60
3		 (
16
)		 40
6		 49 51 88 (
38
8
)		 12
3		 32
2		 1,
23
8
Op
tin
rof
it/(
los
s)
dju
d
ste
era
g p
- a		 64
1		 28 42
5		 52 52 15
4		 (
59
)		 12
3		 27
4		 1,
69
0
dit
ion
inf
ati
Ad
al
orm
on
Re
tur
ity
n o
n e
qu
(1)		 30
.8%		 (
2.4
%
)		 10
.7%		 9.6
%		 14
.0%		 2.9
%		 nm 23
.5%		 nm 8.0
%
Re
tur
ity
dju
ste
d (
n o
n e
qu
- a
1,2)		 32
.8%		 4.3
%		 11
.4%		 10
.3%		 14
.3%		 6.6
%		 nm 23
.5%		 nm 12
.9%
Co
inc
ati
st:
o (
3)
om
e r		 53
.3%		 10
2.0
%		 48
.3%		 67
.1%		 .5%
49		 80
.0%		 nm 35
.1%		 nm 64
.4%
Co
st
:inc
atio
dju
ste
d (
om
e r
- a
2,3
)		 50
.6%		 72
.7%		 46
.1%		 65
.2%		 48
.5%		 67
.2%		 nm 35
.1%		 nm 50
.7%
Qu
art
de
d 3
1 M
h 2
01
7
er
en
arc
Inc
tat
t
om
e s
em
en
To
tal
inc
st
atu
tor
om
e -
y		 1,
37
7		 145 86
5		 160 98 48
8		 (
59
)		 20
6		 (
68
)		 3,
21
2
Ow
red
it a
dju
stm
ts
n c
en		 - 1 - - - 20 7 - 1 29
Ga
in o
ed
tio
f o
de
bt
n r
em
p
n o
wn		 - - - - - - - - (
2)		 (
2)
To
tal
inc
dju
d
ste
om
e
- a		 1,
37
7		 146 86
5		 160 98 50
8		 (
52
)		 20
6		 (
69
)		 3,
23
9
Op
tin
st
atu
tor
era
g e
xp
en
se
s -
y		 (
85
1)		 (
142
)		 (
0)
55		 (
124
)		 (
46
)		 (
42
0)		 (
16
1)		 (
84
)		 (
)
75		 (
2,
45
3)
Re
str
uct
uri
ts
- d
ire
ct
ng
cos		 20 19 39 - - 20 70 - 40
9		 57
7
Re
str
uct
uri
ts
- in
dir
ect
ng
cos		 11
1		 15 60 11 3 48 16 - (
26
4)		 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 4 - 3 - - 31 6 - 10 54
Op
tin
ad
jus
ted
era
g e
xp
en
se
s -		 (
71
6)		 (
108
)		 (
8)
44		 (
113
)		 (
43
)		 (
32
1)		 (
69
)		 (
84
)		 80 (
1,
82
2)
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
32
)		 24 (
61
)		 (
3)		 (
7)		 - 45 (
11
)		 (
1)		 (
46
)
Op
tin
rof
it/(
los
s)
tat
uto
era
g p
- s
ry		 49
4		 27 25
4		 33 45 68 (
175
)		 11
1		 (
144
)		 71
3
Op
tin
rof
it/(
los
s)
dju
ste
d
era
g p
- a		 62
9		 62 35
6		 44 48 187 (
76
)		 11
1		 10 1,
37
1
Ad
dit
ion
al
inf
ati
orm
on
Re
tur
ity
n o
n e
qu
(1)		 24
.8%		 4.0
%		 5.7
%		 6.0
%		 12
.0%		 1.7
%		 nm 20
.9%		 nm 3.1
%
Re
ity
dju
d (
tur
ste
1,2)
n o
n e
qu
- a		 32
.0%		 9.3
%		 8.9
%		 8.6
%		 13
.0%		 7.9
%		 nm 20
.9%		 nm 9.7
%
Co
st:
inc
ati
om
e r
o (
3)		 61
.8%		 97
.9%		 62
.0%		 77
.5%		 46
.9%		 86
.1%		 nm 40
.8%		 nm 76
.1%
Co
st:
inc
atio
dju
ste
d (
om
e r
- a
2,3
)		 52
.0%		 74
.0%		 49
.7%		 70
.6%		 43
.9%		 63
.2%		 nm 40
.8%		 nm 55
.8%

Segmental income statement reconciliations

PB
B		 Ce
ntr
al
Uls
ter		 Co
ial
mm
erc		 Pri
te
va		 S
RB		 Na
tW
est		 Ca
ita
l
p		 Wi
llia
ms		 &
ite
ms		 To
tal
UK
PB
B		 Ba
nk
Ro
I		 Ba
nk
ing		 Ba
nk
ing		 Int
atio
l
ern
na		 Ma
rke
ts		 Re
lut
ion
so		 & G
lyn		 oth
er		 S
RB
Qu
art
de
d 3
0 J
e 2
01
6
er
en
un		 £m £m £m £m £m £m £m £m £m £m
Inc
tat
t
om
e s
em
en
To
tal
inc
st
atu
tor
om
e -
y		 1,
34
0		 135 84
6		 166 95 47
7		 (
5)
32		 20
6		 60 3,
00
0
Ow
red
it a
dju
stm
ts
n c
en		 - - - - - (
73
)		 (
76
)		 - (
)
45		 (
194
)
f o
Lo
de
tio
de
bt
ss
on
re
mp
n o
wn		 - - - - - - - - 130 130
Str
ic d
isp
als
ate
g
os		 - - - - - - 45 - (
24
6)		 (
20
1)
To
tal
inc
dju
ste
d
om
e
- a		 1,
34
0		 135 84
6		 166 95 40
4		 (
35
6)		 20
6		 (
10
1)		 2,
73
5
Op
tin
st
atu
tor
era
g e
xp
en
se
s -
y		 (
2)
1,
29		 (
2)
20		 (
6)
54		 (
)
125		 (
)
35		 (
8)
36		 (
0)
22		 (
)
124		 (
7)
59		 (
9)
3,
50
Re
str
uct
uri
ts
- d
ire
ct
ng
cos		 38 18 - - 1 10 5 25 29
5		 39
2
Re
str
uct
uri
ts
- in
dir
ect
ng
cos		 51 1 41 4 1 11 16 - (
)
125		 -
Liti
tio
nd
nd
uct
sts
ga
n a
co
co		 42
1		 92 8 2 - 38 16 - 70
7		 1,
28
4
Op
tin
ad
jus
ted
era
g e
xp
en
se
s -		 (
78
2)		 (
91
)		 (
49
7)		 (
119
)		 (
33
)		 (
30
9)		 (
183
)		 (
99
)		 28
0		 (
1,
83
3)
Im
irm
t (
los
s)
/re
lea
pa
en
se
se
s		 (
24
)		 14 (
89
)		 - (
9)		 - (
67
)		 (
11
)		 - (
186
)
Op
tin
rof
it/(
los
s)
tat
uto
era
g p
- s
ry		 24 (
53
)		 21
1		 41 51 109 (
61
2)		 71 (
53
7)		 (
69
5)
Op
tin
rof
it/(
los
s)
dju
ste
d
era
g p
- a		 53
4		 58 26
0		 47 53 95 (
60
6)		 96 179 71
6
Ad
dit
ion
al
inf
ati
orm
on
Re
tur
ity
n o
n e
qu
(1)		 (
0.4
%
)		 (
8.2
%
)		 4.9
%		 8.6
%		 15
.0%		 4.3
%		 nm 13
.3%		 nm (
11
.0%
)
Re
tur
ity
dju
ste
d (
n o
n e
qu
- a
1,2)		 24
.2%		 9.0
%		 6.6
%		 9.9
%		 15
.7%		 3.5
%		 nm 18
.0%		 nm 3.2
%
Co
st
inc
ati
om
e r
o (
3)		 96
.4%		 149
.6%		 63
.0%		 75
.3%		 36
.8%		 77
.1%		 nm 60
.2%		 nm 117
.2%
Co
st
inc
atio
dju
ste
d (
om
e r
- a
2,3
)		 58
.4%		 67
.4%		 57
.0%		 71
.7%		 34
.7%		 76
.5%		 nm 48
.1%		 nm 66
.6%

Notes:

(1) RBS's CET1 target is 13% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit after tax and adjusted for preference dividends is divided by notional equity allocated at different rates of 14% (Ulster Bank RoI - 11% prior to Q1 2017), 11% (Commercial Banking), 14% (Private Banking - 15% prior to Q1 2017), 12% (RBS International) and 15% for all other segments, of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes). RBS Return on equity is calculated using profit for the period attributable to ordinary shareholders.

(2) Excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring costs and litigation and conduct costs.

(3) Operating lease depreciation included in income (H1 2017 - £72 million; Q2 2017 - £36 million; H1 2016 – £76 million; Q1 2017 - £36 million and Q2 2016 - £38 million).

Legal Entity Identifier: 2138005O9XJIJN4JPN90

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