Natwest Group PLC

Quarterly Report • Aug 3, 2015

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author: "patteja"
date: 2015-07-31 08:16:00+00:00
processing_status: success_python-docx_mammoth

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Central items

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Central items not allocated	(47)	91		164	(211)	86

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.

Key points

H1 2015 compared with H1 2014



Central items not allocated represented a charge of £47 million compared with a credit of £91 million in H1 2014. This includes a loss of £69 million on the disposal of available-for-sale securities in Treasury, compared with a gain of £215 million in the first half of 2014. Partially offsetting this, Treasury funding costs, including volatile items under IFRS, were a gain of £93 million in H1 2015 compared with a charge of £4 million in H1 2014.

Q2 2015 compared with Q1 2015

	Central items not allocated represented a credit of £164 million compared with a charge of £211 million in Q1 2015. This was principally driven by Treasury funding costs, including volatile items under IFRS, resulting in a £201 million gain against a £108 million charge in Q1 2015.

Q2 2015 compared with Q2 2014



Central items not allocated represented a credit of £164 million compared with a credit of £86 million in Q2 2014. Treasury funding costs, including volatile items under IFRS, resulted in a gain of £201 million compared with £46 million in Q2 2014. Partially offsetting this, restructuring charges relating to Williams & Glyn were £126 million in the quarter, £67 million higher than Q2 2014. In addition, losses on the disposal of available-for-sale securities in Treasury were £42 million compared to a gain of £13 million in Q2 2014.

Citizens Financial Group (£ Sterling)

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March		30 June
2015	2014		2015	2015		2014
	£m	£m		£m	£m		£m
Income statement
Net interest income	1,104	987		551	553		499
Net fees and commissions	371	350		191	180		181
Other non-interest income	119	270		55	64		210
Non-interest income	490	620		246	244		391
Total income	1,594	1,607		797	797		890
Direct expenses
- staff costs	(564)	(512)		(275)	(289)		(261)
- other costs	(422)	(501)		(215)	(207)		(252)
Restructuring costs	(33)	(69)		(27)	(6)		(69)
Operating expenses	(1,019)	(1,082)		(517)	(502)		(582)
Profit before impairment losses	575	525		280	295		308
Impairment losses	(89)	(104)		(51)	(38)		(31)
Operating profit	486	421		229	257		277
Operating profit - adjusted (1)	519	490		256	263		346
Average exchange rate - US$/£	1.524	1.669		1.532	1.514		1.683
Key metrics	Half year ended			Quarter ended
	30 June	30 June		30 June		31 March		30 June
2015	2014		2015		2015		2014
Performance ratios
Return on equity (2)	6.8%	6.9%		6.5%		7.2%		9.0%
Return on equity - adjusted (1,2)	7.3%	8.0%		7.2%		7.4%		11.2%
Net interest margin	2.80%	2.94%		2.78%		2.83%		2.93%
Cost:income ratio	64%	67%		65%		63%		65%
Cost:income ratio - adjusted (1)	62%	63%		62%		62%		58%

Notes:

(1)	Excluding restructuring costs.
(2)	Return on equity is based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average of segmental RWAe).

Citizens Financial Group (£ Sterling)

	30 June	31 March			31 December
2015	2015		2014
	£bn	£bn	Change		£bn	Change
Capital and balance sheet
Loans and advances to customers (gross)	61.9	64.0	(3%)		60.1	3%
Loan impairment provisions	(0.5)	(0.6)	(17%)		(0.5)	-
Net loans and advances to customers	61.4	63.4	(3%)		59.6	3%
Total assets	87.2	91.8	(5%)		84.9	3%
Funded assets	86.8	91.3	(5%)		84.5	3%
Investment securities	16.0	16.9	(5%)		15.8	1%
Risk elements in lending	1.2	1.4	(14%)		1.3	(8%)
Provision coverage (1)	43%	41%	200bp		40%	300bp
Customer deposits (excluding repos)	63.8	65.8	(3%)		60.6	5%
Bank deposits (excluding repos)	4.5	5.1	(12%)		5.1	(12%)
Loan:deposit ratio (excluding repos)	96%	96%	-		98%	(200bp)
Risk-weighted assets (2)
- Credit risk
- non-counterparty	64.0	66.1	(3%)		62.4	3%
- counterparty	0.9	1.0	(10%)		0.9	-
- Operational risk	4.9	4.9	-		5.1	(4%)
Total risk-weighted assets	69.8	72.0	(3%)		68.4	2%
Spot exchange rate - US$/£	1.572	1.485			1.562

Notes:

(1)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(2)	RWAs on an end-point CRR basis.

Key points

●	Sterling strengthened against the US Dollar during the first half of 2015, with the spot exchange rate at the 30 June 2015 increasing 1% compared with 31 December 2014.
●	Performance is described in full in the US Dollar based financial statements set out on pages 57 to 59.

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Citizens Financial Group (US dollar)

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
	$m	$m		$m	$m	$m
Income statement
Net interest income	1,682	1,647		845	837	838
Net fees and commissions	565	584		293	272	305
Other non-interest income	181	452		84	97	353
Non-interest income	746	1,036		377	369	658
Total income	2,428	2,683		1,222	1,206	1,496
Direct expenses
- staff costs	(859)	(855)		(423)	(436)	(439)
- other costs	(643)	(835)		(330)	(313)	(423)
Restructuring costs	(50)	(115)		(40)	(10)	(115)
Operating expenses	(1,552)	(1,805)		(793)	(759)	(977)
Profit before impairment losses	876	878		429	447	519
Impairment losses	(135)	(174)		(77)	(58)	(53)
Operating profit	741	704		352	389	466
Operating profit - adjusted (1)	791	819		392	399	581

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
Performance ratios
Return on equity (2)	6.8%	6.9%		6.5%	7.2%	9.0%
Return on equity - adjusted (1,2)	7.3%	8.0%		7.2%	7.4%	11.2%
Net interest margin	2.80%	2.94%		2.78%	2.83%	2.93%
Cost:income ratio	64%	67%		65%	63%	65%
Cost:income ratio - adjusted (1)	62%	63%		62%	62%	58%

Notes:

(1)	Excluding restructuring costs.
(2)	Return on equity is based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average of segmental RWAe).

Citizens Financial Group (US dollar)

	30 June	31 March			31 December
2015	2015		2014
	$bn	$bn	Change		$bn	Change
Capital and balance sheet
Loans and advances to customers (gross)	97.3	94.9	3%		93.9	4%
Loan impairment provisions	(0.8)	(0.8)	-		(0.8)	-
Net loans and advances to customers	96.5	94.1	3%		93.1	4%
Total assets	137.0	136.3	1%		132.6	3%
Funded assets	136.4	135.6	1%		132.0	3%
Investment securities	25.1	25.1	-		24.7	2%
Risk elements in lending	1.9	2.0	(5%)		2.1	(10%)
Provision coverage (1)	43%	41%	200bp		40%	300bp
Customer deposits (excluding repos)	100.3	97.7	3%		94.6	6%
Bank deposits (excluding repos)	7.0	7.6	(8%)		8.0	(13%)
Loan:deposit ratio (excluding repos)	96%	96%	-		98%	(200bp)
Risk-weighted assets (2)
- Credit risk
- non-counterparty	100.5	98.1	2%		97.4	3%
- counterparty	1.5	1.5	-		1.4	7%
- Operational risk	7.7	7.3	5%		8.0	(4%)
Total risk-weighted assets	109.7	106.9	3%		106.8	3%

Notes:

(1)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(2)	RWAs on an end-point CRR basis.

Key points

Sterling and US dollar period on period movements are not necessarily directly comparable due to the impact of exchange rate movements.

H1 2015 compared with H1 2014

	Operating profit increased £65 million ($37 million) or 15% (5%), to £486 million ($741 million) and was impacted by the weakening of sterling against the US dollar, and lower income, reflecting the Q2 2014 gain on the sale of the Illinois franchise, partially offset by lower expenses. Excluding the impact of the Illinois sale, £170 million ($283 million) net gain, restructuring costs and the depreciation and amortisation change(1), operating profit was up £102 million ($107 million), or 32% (20%) reflecting higher income and lower expenses and impairments.
	Excluding the gain on the sale of the Illinois franchise, total income was up £157 million ($28 million), or 11% (1%), despite an estimated £30 million ($50 million) reduction related to the Illinois franchise sale. The net interest income improvement was driven by the benefit of earning asset growth and a reduction in pay-fixed swap costs partially offset by continued pressure from the relatively persistent low rate environment on loan yields and mix, the impact of the Illinois franchise sale and higher borrowing costs related to the issuance of subordinated debt and senior notes. Non-interest income decline is driven by the impact from the Illinois franchise sale and lower leasing income partially offset by strength in mortgage banking fees.
	Operating expenses, excluding restructuring costs and the depreciation and amortisation change, increased by £70 million, or 7% to £1,083 million reflecting the weakening of sterling against the US dollar. On a US dollar basis operating expenses were down $40 million, or 2%, to $1,650 million due to lower regulatory costs and the impact of the Illinois franchise sale.
	Impairment losses decreased £15 million ($39 million), or 14% (22%), to £89 million ($135 million) reflecting continued improvement in asset quality, and a reduction in net charge-offs somewhat offset by loan growth.

Note:

(1)	Starting Q1 2015, as it is a disposal group, CFG will no longer charge depreciation and amortisation.

Citizens Financial Group (US dollar)

Key points (continued)

H1 2015 compared with H1 2014 (continued)

	Average loans and advances were up 18% (8% on a US dollar basis) due to commercial loan growth and retail loan growth driven by auto, residential mortgage and student loans partially offset by home equity run-off.
	Average customer deposits were up 16% (6% on a US dollar basis), driven by growth in money market, term deposits and checking accounts with interest.

Q2 2015 compared with Q1 2015

	Operating profit decreased by £28 million ($37 million), or 11% (10%), to £229 million ($352 million) reflecting on a US dollar basis, higher expenses and impairments partially offset by higher income. Adjusted operating profit was down £7 million ($7 million), or 3% (2%), to £256 million ($392 million) with an increase in impairment losses largely offset by revenue growth and expense discipline.
	Total income remained stable at £797 million. On a US dollar basis total income increased by $16 million, or 1%, to $1,222 million. Net interest income was down £2 million to £551 million. On a US dollar basis net interest income was up $8 million to $845 million, reflecting the benefit of loan growth and an additional day in the quarter, muted by the continued downward impact of the rate environment on earning asset yields. Non-interest income remained stable at £246 million. On a US dollar basis non-interest income increase of $8 million was driven by improvement across most categories partially offset by a gain on sale of mortgage loans in Q1 2015 of $10 million.
	Operating expenses, excluding restructuring costs, remained stable as the benefit of seasonally lower salary and benefits expense was offset by the effect of more normalised outside services costs.
	Impairment losses increased £13 million ($19 million), or 34% (33%), to £51 million ($77 million) reflecting a return to more normalised net charge-off levels from the prior quarter, which benefited from a large commercial real estate loan recovery.

Q2 2015 compared with Q2 2014

	Operating profit decreased by £48 million ($114 million), or 17% (24%), to £229 million ($352 million). Excluding the impact of the Illinois franchise sale, £170 million ($283 million) net gain, restructuring costs and the depreciation and amortisation change, operating profit was up £34 million ($23 million), or 19% (8%), to £210 million ($321 million).
	Total income, excluding the Q2 2014 gain on the sale of the Illinois franchise, was up £77 million ($9 million), or 11% (1%), to £797 million ($1,222 million) despite an estimated £15 million ($25 million) reduction related to the Illinois franchise sale. Drivers are consistent with H1 2015 compared with H1 2014.
	Operating expenses, excluding restructuring costs and the depreciation and amortisation change were up £23 million, or 4%, to £536 million, reflecting the weakening of sterling against the US dollar with the average exchange rate decreasing 9%. On a US dollar basis operating expenses were down $38 million, or 4%, to $824 million reflecting the decrease related to the impact of the Illinois franchise sale and lower regulatory costs.
	Impairment losses increased £20 million ($24 million), or 65% (45%), to £51 million ($77 million) as the benefit of underlying improvement in credit quality was more than offset by increases related to overall loan growth.

RBS Capital Resolution

RCR is managed and analysed in four asset management groups - Ulster Bank (RCR Ireland), Real Estate Finance, Corporate and Markets. Real Estate Finance excludes commercial real estate lending in Ulster Bank.

	Half year ended			Quarter ended
30 June	30 June		30 June	31 March	30 June
	2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Income statement
Net interest income	(20)	11		(12)	(8)	16
Net fees and commissions	8	31		5	3	17
Income from trading activities (1)	48	(53)		40	8	(69)
Other operating income (1)	129	119		12	117	71
Non-interest income	185	97		57	128	19
Total income	165	108		45	120	35
Direct expenses
- staff costs	(56)	(89)		(31)	(25)	(51)
- other costs	(13)	(32)		(7)	(6)	(14)
Indirect expenses	(32)	(55)		(15)	(17)	(32)
Operating expenses	(101)	(176)		(53)	(48)	(97)
Profit/(loss) before impairment losses	64	(68)		(8)	72	(62)
Impairment releases (1)	293	20		184	109	128
Operating profit/(loss)	357	(48)		176	181	66
Total income
Ulster Bank	(32)	1		(15)	(17)	14
Real Estate Finance	60	96		35	25	13
Corporate	75	(14)		(16)	91	(12)
Markets	62	25		41	21	20
Total income	165	108		45	120	35
	**** |		**** |	`
Impairment (releases)/losses
Ulster Bank	(172)	(15)		(33)	(139)	(67)
Real Estate Finance	(72)	(34)		(44)	(28)	(123)
Corporate	(107)	39		(117)	10	73
Markets	58	(10)		10	48	(11)
Total impairment releases	(293)	(20)		(184)	(109)	(128)
Loan impairment charge as % of gross loans
and advances (2)
Ulster Bank	(7.3%)	(0.2%)		(2.8%)	(8.6%)	(1.9%)
Real Estate Finance	(5.5%)	(0.9%)		(6.8%)	(3.2%)	(6.6%)
Corporate	(6.9%)	1.0%		(15.1%)	0.9%	3.7%
Markets	(1.3%)	(2.0%)		(0.7%)	(2.0%)	(3.6%)
Total	(6.5%)	(0.1%)		(7.1%)	(4.2%)	(1.7%)

Notes:

(1)	Asset disposals contributed £283 million in H1 2015 and £164 million in Q2 2015 (H1 2014 - £281 million; Q1 2015 - £119 million; Q2 2014 - £225 million) to RCR’s operating profit: impairment provision releases of £231 million in H1 2015 and £167 million in Q2 2015 (H1 2014 - £321 million; Q1 2015 - £64 million; Q2 2014 - £257 million); loss in income from trading activities of £25 million in H1 2015 and £6 million in Q2 2015 (H1 2014 - £1 million gain; Q1 2015 - £19 million loss; Q2 2014 - £6 million gain) and gain in other operating income of £77 million in H1 2015 and £3 million in Q2 2015 (H1 2014 - £41 million loss; Q1 2015 - £74 million gain; Q2 2014 - £38 million loss).
(2)	Includes disposal groups.

RBS Capital Resolution

	30 June	31 March	31 December
2015	2015	2014
	£bn	£bn	£bn
Capital and balance sheet
Loans and advances to customers (gross) (1)	11.0	15.1	21.9
Loan impairment provisions	(5.1)	(7.1)	(10.9)
Net loans and advances to customers	5.9	8.0	11.0
Debt securities	0.6	0.8	1.0
Total assets	16.5	22.8	29.0
Funded assets	8.4	11.1	14.9
Risk elements in lending (1)	7.4	10.2	15.4
Provision coverage (2)	69%	70%	71%
Risk-weighted assets
- Credit risk
- non-counterparty	7.8	9.7	13.6
- counterparty	3.0	3.8	4.0
- Market risk	4.0	4.1	4.4
- Operational risk	(0.4)	(0.4)	-
Total risk-weighted assets	14.4	17.2	22.0
Total RWA equivalent (3)	17.9	21.7	27.3
Gross loans and advances to customers (1)
Ulster Bank	4.7	6.5	11.0
Real Estate Finance	2.6	3.5	4.1
Corporate	3.1	4.5	6.2
Markets	0.6	0.6	0.6
	11.0	15.1	21.9
Funded assets - Ulster Bank
Commercial real estate - investment	0.6	0.7	1.2
Commercial real estate - development	0.2	0.4	0.7
Other corporate	0.2	0.4	0.7
	1.0	1.5	2.6
Funded assets - Real Estate Finance (4)
UK	1.7	2.3	2.5
Germany	0.2	0.3	0.4
Spain	0.3	0.5	0.5
Other	0.3	0.4	0.8
	2.5	3.5	4.2
Funded assets - Corporate
Structured finance	0.6	0.9	1.7
Shipping	1.1	1.5	1.8
Other	1.5	1.8	2.3
	3.2	4.2	5.8
Funded assets - Markets
Securitised products	1.3	1.5	1.8
Emerging markets	0.4	0.4	0.5
	1.7	1.9	2.3

Notes:

(1)	Includes disposal groups.
(2)	Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
(3)	RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in segments. RWAe converts both performing and non-performing exposures into a consistent capital measure, being the sum of the regulatory RWAs and the regulatory capital deductions, the latter converted to RWAe by applying a multiplier. RBS applies a CET1 ratio of 10% for RCR; this results in an end point CRR RWAe conversion multiplier of 10.
(4)	Includes investment properties.

RBS Capital Resolution

Funded assets
	Beginning					End of
	of period	Repayments	Disposals (1)	Impairments	Other	period
Half year ended 30 June 2015	£bn	£bn	£bn	£bn	£bn	£bn
Ulster Bank	2.6	-	(1.6)	0.2	(0.2)	1.0
Real Estate Finance	4.2	(0.4)	(1.2)	-	(0.1)	2.5
Corporate	5.8	(1.0)	(1.8)	0.1	0.1	3.2
Markets	2.3	(0.2)	(0.3)	-	(0.1)	1.7
Total	14.9	(1.6)	(4.9)	0.3	(0.3)	8.4
Quarter ended 30 June 2015
Ulster Bank	1.5	-	(0.5)	0.1	(0.1)	1.0
Real Estate Finance	3.5	(0.3)	(0.7)	-	-	2.5
Corporate	4.2	(0.4)	(0.6)	0.1	(0.1)	3.2
Markets	1.9	(0.1)	-	-	(0.1)	1.7
Total	11.1	(0.8)	(1.8)	0.2	(0.3)	8.4
Life to date
Ulster Bank	4.8	(0.2)	(4.4)	1.3	(0.5)	1.0
Real Estate Finance	9.5	(2.7)	(4.1)	0.1	(0.3)	2.5
Corporate	9.8	(3.3)	(3.7)	0.1	0.3	3.2
Markets	4.8	(1.3)	(1.8)	-	-	1.7
Total	28.9	(7.5)	(14.0)	1.5	(0.5)	8.4

Risk-weighted assets
	Beginning			Risk		Other (3)	End of
	of period	Repayments	Disposals (1)	parameters (2)	Impairments	period
Half year ended 30 June 2015	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Ulster Bank	1.3	-	(0.5)	(0.3)	-	-	0.5
Real Estate Finance	4.7	(0.5)	(0.8)	(0.8)	-	(0.2)	2.4
Corporate	7.2	(0.6)	(1.7)	(0.8)	-	0.1	4.2
Markets	8.8	(0.6)	(0.5)	(0.1)	-	(0.3)	7.3
Total	22.0	(1.7)	(3.5)	(2.0)	-	(0.4)	14.4
Quarter ended 30 June 2015
Ulster Bank	0.7	-	(0.1)	(0.1)	-	-	0.5
Real Estate Finance	3.7	(0.4)	(0.3)	(0.5)	-	(0.1)	2.4
Corporate	4.9	(0.3)	(0.4)	0.1	-	(0.1)	4.2
Markets	7.9	(0.4)	(0.1)	(0.1)	-	-	7.3
Total	17.2	(1.1)	(0.9)	(0.6)	-	(0.2)	14.4
Life to date
Ulster Bank	3.3	(0.5)	(1.0)	(1.2)	-	(0.1)	0.5
Real Estate Finance	13.5	(2.7)	(2.2)	(6.0)	-	(0.2)	2.4
Corporate	16.4	(2.8)	(4.7)	(4.9)	(0.4)	0.6	4.2
Markets	13.5	(3.3)	(3.2)	0.1	-	0.2	7.3
Total	46.7	(9.3)	(11.1)	(12.0)	(0.4)	0.5	14.4
For the notes to this table refer to the following page.

RBS Capital Resolution

Capital deductions
	Beginning			Risk	Impairments	Other (3)	End of
	of period	Repayments	Disposals (1)	parameters (2)	period
Half year ended 30 June 2015	£m	£m	£m	£m	£m	£m	£m
Ulster Bank	258	(1)	(156)	(14)	85	(27)	145
Real Estate Finance	111	(27)	(86)	96	1	(24)	71
Corporate	112	(47)	(43)	87	(4)	(9)	96
Markets	53	(8)	(5)	(4)	-	(3)	33
Total	534	(83)	(290)	165	82	(63)	345
Quarter ended 30 June 2015
Ulster Bank	236	(1)	(49)	(27)	-	(14)	145
Real Estate Finance	158	(7)	(87)	20	(7)	(6)	71
Corporate	15	9	24	46	15	(13)	96
Markets	37	(5)	-	1	-	-	33
Total	446	(4)	(112)	40	8	(33)	345
Life to date
Ulster Bank	559	(31)	(382)	(130)	166	(37)	145
Real Estate Finance	505	(423)	(769)	717	79	(38)	71
Corporate	477	(239)	(156)	104	(106)	16	96
Markets	291	(23)	(85)	(143)	1	(8)	33
Total	1,832	(716)	(1,392)	548	140	(67)	345

RWA equivalent (4)
	Beginning			Risk	Impairments	Other (3)	End of
	of period	Repayments	Disposals (1)	parameters (2)	period
Half year ended 30 June 2015	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Ulster Bank	3.9	-	(2.0)	(0.4)	0.8	(0.3)	2.0
Real Estate Finance	5.8	(0.8)	(1.6)	0.2	(0.1)	(0.4)	3.1
Corporate	8.3	(1.0)	(2.2)	0.1	(0.1)	0.1	5.2
Markets	9.3	(0.8)	(0.5)	(0.1)	-	(0.3)	7.6
Total	27.3	(2.6)	(6.3)	(0.2)	0.6	(0.9)	17.9
Quarter ended 30 June 2015
Ulster Bank	3.1	-	(0.6)	(0.4)	-	(0.1)	2.0
Real Estate Finance	5.3	(0.5)	(1.2)	(0.3)	(0.1)	(0.1)	3.1
Corporate	5.0	(0.1)	(0.2)	0.6	0.1	(0.2)	5.2
Markets	8.3	(0.5)	(0.1)	(0.1)	-	-	7.6
Total	21.7	(1.1)	(2.1)	(0.2)	-	(0.4)	17.9
Life to date
Ulster Bank	8.9	(0.8)	(4.7)	(2.5)	1.5	(0.4)	2.0
Real Estate Finance	18.6	(7.0)	(9.8)	1.1	0.6	(0.4)	3.1
Corporate	21.1	(5.0)	(6.2)	(3.9)	(1.5)	0.7	5.2
Markets	16.4	(3.6)	(4.0)	(1.2)	-	-	7.6
Total	65.0	(16.4)	(24.7)	(6.5)	0.6	(0.1)	17.9

Notes:

(1)	Includes all effects relating to disposals, including associated removal of deductions from regulatory capital.
(2)	Principally reflects credit migration and other technical adjustments.
(3)	Includes fair value adjustments and foreign exchange movements.
(4)	RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in segments. RWAe converts both performing and non-performing exposures into a consistent capital measure, being the sum of the regulatory RWAs and the regulatory capital deductions, the latter converted to RWAe by applying a multiplier. RBS applies a CET1 ratio of 10% for RCR; this results in an end point CRR RWAe conversion multiplier of 10.

RBS Capital Resolution

Gross loans and advances, REIL and impairments
				Credit metrics				Year-to-date
				REIL as a	Provisions	Provisions		Impairment
	Gross			% of gross	as a %	as a % of		(releases)/	Amounts
	loans	REIL	Provisions	loans	of REIL	gross loans		losses (2)	written-off
30 June 2015 (1)	£bn	£bn	£bn	%	%	%		£m	£m
By sector:
Commercial real estate
- investment	3.4	2.7	1.4	79	52	41		(114)	1,302
- development	2.7	2.6	2.3	96	88	85		(25)	2,573
Asset finance	1.2	0.4	0.2	33	50	17		7	226
Other corporate	3.7	1.7	1.2	46	71	32		(161)	871
Total	11.0	7.4	5.1	67	69	46		(293)	4,972
By donating segment
and sector
Ulster Bank
Commercial real estate
- investment	1.3	1.3	0.9	100	69	69		1	990
- development	2.4	2.4	2.2	100	92	92		(79)	2,511
Other corporate	1.0	0.9	0.8	90	89	80		(94)	605
Total Ulster Bank	4.7	4.6	3.9	98	85	83		(172)	4,106
Commercial Banking
Commercial real estate
- investment	0.9	0.5	0.1	56	20	11		(20)	118
- development	0.2	0.1	0.1	50	100	50		(8)	52
Other corporate	0.5	0.3	0.1	60	33	20		(44)	118
Total Commercial Banking	1.6	0.9	0.3	56	33	19		(72)	288
CIB
Commercial real estate
- investment	1.2	0.9	0.4	75	44	33		(95)	194
- development	0.1	0.1	-	100	-	-		62	10
Asset finance	1.2	0.4	0.2	33	50	17		7	226
Other corporate	2.2	0.5	0.3	23	60	14		(23)	148
Total CIB	4.7	1.9	0.9	40	47	19		(49)	578
Total	11.0	7.4	5.1	67	69	46		(293)	4,972
Of which:
UK	5.6	3.2	1.7	57	53	30		(57)	2,326
Europe	5.1	4.1	3.3	80	80	65		(270)	2,622
US	0.2	-	-	-	-	-		44	1
RoW	0.1	0.1	0.1	100	100	100		(10)	23
Customers	11.0	7.4	5.1	67	69	46		(293)	4,972
Banks	0.6	-	-	-	-	-		-	9
Total	11.6	7.4	5.1	64	69	44		(293)	4,981

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

RBS Capital Resolution

				Credit metrics				Year-to-date
				REIL as a	Provisions	Provisions		Impairment
	Gross			% of gross	as a %	as a % of		(releases)/	Amounts
	loans	REIL	Provisions	loans	of REIL	gross loans		losses (2)	written-off
31 December 2014 (1)	£bn	£bn	£bn	%	%	%		£m	£m
By sector:
Commercial real estate
- investment	6.2	4.9	2.8	79	57	45		(553)	1,911
- development	6.4	6.2	5.3	97	85	83		(611)	560
Asset finance	2.3	0.9	0.4	39	44	17		37	80
Other corporate	7.0	3.4	2.4	49	71	34		(169)	1,032
	21.9	15.4	10.9	70	71	50		(1,296)	3,583
By donating segment
and sector
Ulster Bank
Commercial real estate
- investment	3.0	2.9	2.0	97	69	67		(450)	445
- development	5.8	5.8	5.1	100	88	88		(608)	425
Other corporate	2.2	2.0	1.5	91	75	68		(48)	256
Total Ulster Bank	11.0	10.7	8.6	97	80	78		(1,106)	1,126
Commercial Banking
Commercial real estate
- investment	1.2	0.7	0.2	58	29	17		(5)	228
- development	0.4	0.3	0.1	75	33	25		(11)	104
Other corporate	1.0	0.5	0.3	50	60	30		-	192
Total Commercial Banking	2.6	1.5	0.6	58	40	23		(16)	524
CIB
Commercial real estate
- investment	2.0	1.3	0.6	65	46	30		(98)	1,238
- development	0.2	0.1	0.1	50	100	50		8	31
Asset finance	2.3	0.9	0.4	39	44	17		37	80
Other corporate	3.8	0.9	0.6	24	67	16		(121)	584
Total CIB	8.3	3.2	1.7	39	53	20		(174)	1,933
Total	21.9	15.4	10.9	70	71	50		(1,296)	3,583
Of which:
UK	10.0	6.2	4.1	62	66	41		(402)	2,266
Europe	10.9	8.9	6.6	82	74	61		(875)	1,267
US	0.3	0.1	-	33	-	-		(19)	26
RoW	0.7	0.2	0.2	29	100	29		-	24
Customers	21.9	15.4	10.9	70	71	50		(1,296)	3,583
Banks	0.5	-	-	-	-	-		(10)	8
Total	22.4	15.4	10.9	69	71	49		(1,306)	3,591

Notes:

(1)	Includes disposal groups.
(2)

RBS Capital Resolution

Key points

●	RCR funded assets have fallen by 78% since the initial pool of assets was identified. The commitment is to reduce funded assets by 85% by the end of 2015, a year earlier than planned.
●	RCR funded assets fell to £8 billion, a reduction of £7 billion, or 44%, since the beginning of the year. The reduction was mainly achieved through disposals and repayments. Disposal activity continues across the portfolio, with 342 deals completed during H1 2015 at an average price of 106% of book value.
●	Since the start of the year RWA equivalent has fallen by £9 billion to £18 billion reflecting the combination of disposals and repayments offset by the impact of further impairment releases and write-offs.
●	Operating profit for H1 2015 was £357 million, driven by impairment releases of £293 million reflective of an improvement in underlying collateral values, proactive debt management and favourable economic conditions.
●	The net effect of the operating profit of £357 million and RWA equivalent reduction of £9 billion (1) was CET1 accretion of £1.3 billion.

Q2 2015 compared with Q1 2015

	RCR funded assets have been reduced by £3 billion, or 24% to £8 billion from Q1 2015, driven by disposals and repayments.
	RWA equivalent decreased by £4 billion, or 18%, since Q1 2015.

Q2 2015 compared with Q2 2014

	RCR funded assets have been reduced by £13 billion, or 60%, from Q2 2014.
	RWA equivalent decreased by £26 billion, or 59%, from Q2 2014. This primarily reflects our active disposal and repayment programme.

Note:

(1)	Capital equivalent: £0.9 billion at an internal CET1 ratio of 10%.

Condensed consolidated income statement for the period ended 30 June 2015

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Interest receivable	6,107	6,544		3,031	3,076	3,279
Interest payable	(1,689)	(2,038)		(816)	(873)	(980)
Net interest income	4,418	4,506		2,215	2,203	2,299
Fees and commissions receivable	1,958	2,243		969	989	1,126
Fees and commissions payable	(363)	(475)		(186)	(177)	(244)
Income from trading activities	875	1,450		545	330	528
Gain on redemption of own debt	-	20		-	-	-
Other operating income	368	805		194	174	154
Non-interest income	2,838	4,043		1,522	1,316	1,564
Total income	7,256	8,549		3,737	3,519	3,863
Staff costs	(2,855)	(2,997)		(1,530)	(1,325)	(1,558)
Premises and equipment	(745)	(1,126)		(326)	(419)	(546)
Other administrative expenses	(2,366)	(1,357)		(1,027)	(1,339)	(780)
Depreciation and amortisation	(712)	(466)		(200)	(512)	(237)
Write down of goodwill and other intangible assets	(606)	(212)		(606)	-	(130)
Operating expenses	(7,284)	(6,158)		(3,689)	(3,595)	(3,251)
(Loss)/profit before impairment losses	(28)	2,391		48	(76)	612
Impairment releases/(losses)	321	(165)		192	129	124
Operating profit before tax	293	2,226		240	53	736
Tax charge	(293)	(592)		(100)	(193)	(278)
Profit/(loss) from continuing operations	-	1,634		140	(140)	458
Profit/(loss) from discontinued operations, net of tax
- Citizens (2)	354	285		674	(320)	181
- Other	4	35		-	4	26
Profit/(loss) from discontinued operations,
net of tax	358	320		674	(316)	207
Profit/(loss) for the period	358	1,954		814	(456)	665
Non-controlling interests	(344)	(42)		(428)	84	(23)
Preference shares	(143)	(140)		(73)	(70)	(75)
Other dividends	(24)	(27)		(20)	(4)	(17)
Dividend access share	-	(320)		-	-	(320)
(Loss)/profit attributable to ordinary and
B shareholders	(153)	1,425		293	(446)	230
(Loss)/earnings per ordinary and equivalent
B share (EPS) (3)
Basic EPS from continuing and discontinued operations	(1.3p)	12.6p		2.5p	(3.9p)	2.0p
Basic EPS from continuing operations	(1.9p)	9.9p		0.2p	(2.1p)	0.3p

Notes:

(1)	A reconciliation between the statutory income statement above and the non-statutory income statement on page 11 is given in Appendix 2 to this announcement.
(2)	Included within Citizens discontinued operations are the results of the reportable operating segment Citizens Financial Group (CFG), the fair value remeasurement of the loss on transfer to disposal groups, and certain Citizens related activities in Central items and related one-off and other items.
(3)	Diluted EPS for continuing and discontinued operations for the half year ended 30 June 2014 was 0.1p lower than basic EPS. There was no dilutive impact in any other period.

Condensed consolidated statement of comprehensive income for the period ended 30 June 2015

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Profit/(loss) for the period	358	1,954		814	(456)	665
Items that do qualify for reclassification
Available-for-sale financial assets	(45)	529		(247)	202	265
Cash flow hedges	(710)	248		(834)	124	(47)
Currency translation	(573)	(733)		(584)	11	(598)
Tax	144	(160)		246	(102)	(72)
Other comprehensive (loss)/income after tax	(1,184)	(116)		(1,419)	235	(452)
Total comprehensive (loss)/income for the period	(826)	1,838		(605)	(221)	213
Total comprehensive (loss)/income is
attributable to:
Non-controlling interests	299	30		252	47	6
Preference shareholders	143	140		73	70	75
Paid-in equity holders	24	27		20	4	17
Dividend access share	-	320		-	-	320
Ordinary and B shareholders	(1,292)	1,321		(950)	(342)	(205)
	(826)	1,838		(605)	(221)	213

Key points

●		The movement in available-for-sale financial assets during the quarter reflects unrealised losses on available-for-sale euro and US dollar securities, partially offset by realised gains on available-for-sale equity shares. During the half year, these unrealised losses are largely offset by realised losses on available-for-sale bonds.
●		Cash flow hedging losses for both the quarter and half year predominantly result from increases in the sterling swap rate across the maturity profile of the portfolio.
●		Currency translation losses for the quarter are due to the strengthening of sterling against both the euro and the US dollar. Losses for the half year are predominantly due to the strengthening of sterling against the euro.

Condensed consolidated balance sheet at 30 June 2015

	30 June	31 March	31 December
2015	2015	2014
	£m	£m	£m
Assets
Cash and balances at central banks	81,900	75,521	74,872
Net loans and advances to banks	20,714	25,002	23,027
Reverse repurchase agreements and stock borrowing	20,807	16,071	20,708
Loans and advances to banks	41,521	41,073	43,735
Net loans and advances to customers	314,993	333,173	334,251
Reverse repurchase agreements and stock borrowing	46,799	53,329	43,987
Loans and advances to customers	361,792	386,502	378,238
Debt securities	77,187	79,232	86,649
Equity shares	3,363	6,325	5,635
Settlement balances	9,630	11,341	4,667
Derivatives	281,857	390,565	353,590
Intangible assets	7,198	7,619	7,781
Property, plant and equipment	4,874	5,336	6,167
Deferred tax	1,479	1,430	1,540
Prepayments, accrued income and other assets	4,829	5,995	5,878
Assets of disposal groups	89,071	93,673	82,011
Total assets	964,701	1,104,612	1,050,763
Liabilities
Bank deposits	30,978	37,235	35,806
Repurchase agreements and stock lending	21,612	27,997	24,859
Deposits by banks	52,590	65,232	60,665
Customer deposits	342,023	349,289	354,288
Repurchase agreements and stock lending	44,750	41,386	37,351
Customer accounts	386,773	390,675	391,639
Debt securities in issue	41,819	45,855	50,280
Settlement balances	7,335	11,083	4,503
Short positions	24,561	19,716	23,029
Derivatives	273,589	386,056	349,805
Accruals, deferred income and other liabilities	13,962	14,242	13,346
Retirement benefit liabilities	1,869	1,843	2,579
Deferred tax	363	381	500
Subordinated liabilities	19,683	22,004	22,905
Liabilities of disposal groups	80,388	85,244	71,320
Total liabilities	902,932	1,042,331	990,571
Equity
Non-controlling interests	5,705	5,473	2,946
Owners’ equity*
Called up share capital	6,981	6,925	6,877
Reserves	49,083	49,883	50,369
Total equity	61,769	62,281	60,192
Total liabilities and equity	964,701	1,104,612	1,050,763
* Owners’ equity attributable to:
Ordinary and B shareholders	51,117	51,861	52,149
Other equity owners	4,947	4,947	5,097
	56,064	56,808	57,246

Average balance sheet

			Half year ended						Quarter ended
			30 June		30 June				30 June		31 March
2015		2014				2015		2015
			%		%				%		%
Average yields, spreads and margins of the
banking business
Gross yield on interest-earning assets of banking business			2.98		3.03				2.94		3.02
Cost of interest-bearing liabilities of banking business			(1.06)		(1.18)				(1.03)		(1.09)
Interest spread of banking business			1.92		1.85				1.91		1.93
Benefit from interest-free funds			0.32		0.32				0.32		0.33
Net interest margin of banking business			2.24		2.17				2.23		2.26
Average interest rates
Base rate			0.50		0.50				0.50		0.50
London inter-bank three month offered rates
- Sterling			0.57		0.53				0.57		0.56
- Eurodollar			0.27		0.23				0.28		0.26
- Euro			0.02		0.30				(0.01)		0.05
	Half year ended						Half year ended
	30 June 2015						30 June 2014
	Average						Average
	balance	Interest		Rate			balance			Interest		Rate
	£m	£m		%			£m			£m		%
Assets
Loans and advances to banks	76,736	199		0.52			69,097			178		0.52
Loans and advances to customers	366,858	6,795		3.74			382,326			7,061		3.72
Debt securities	52,132	335		1.30			55,845			383		1.38
Interest-earning assets
- banking business (1,2,3,4)	495,726	7,329		2.98			507,268			7,622		3.03
- trading business (5)	151,588						176,200
Non-interest earning assets	413,399						351,329
Total assets	1,060,713						1,034,797
Memo: Funded assets	701,616						745,611
Liabilities
Deposits by banks	13,818	46		0.67			16,877			92		1.10
Customer accounts	290,317	839		0.58			302,157			987		0.66
Debt securities in issue	35,463	431		2.45			43,954			586		2.69
Subordinated liabilities	20,963	447		4.30			23,831			432		3.66
Internal funding of trading business	(15,505)	52		(0.68)			(20,254)			57		(0.57)
Interest-bearing liabilities
- banking business (1,2,4)	345,056	1,815		1.06			366,565			2,154		1.18
- trading business (5)	159,632						185,308
Non-interest-bearing liabilities
- demand deposits	97,349						81,316
- other liabilities	397,104						341,458
Owners’ equity (6)	61,572						60,150
Total liabilities and owners’ equity	1,060,713						1,034,797

Notes:

(1)	Interest receivable has been increased by nil (H1 2014 - £1 million) and interest payable has been increased by £8 million (H1 2014 - £29 million) in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)	In H1 2014 interest payable has been decreased by £3 million to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)	Interest receivable includes amounts (unwind of discount) recognised on impaired loans and receivables. Such loans are included in average loans and advances to banks and average loans and advances to customers.
(4)	Interest receivable has been increased by £1,222 million (H1 2014 - £1,077 million) and interest payable has been increased by £118 million (H1 2014 - £90 million) to include the discontinued operations of Citizens. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(5)	Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(6)	Including equity attributable to ordinary and B shareholders of £51,174 million (H1 2014 - £53,931 million).

Average balance sheet

	Quarter ended				Quarter ended
	30 June 2015				31 March 2015
	Average				Average
	balance	Interest	Rate		balance	Interest	Rate
	£m	£m	%		£m	£m	%
Assets
Loans and advances to banks	82,842	93	0.45		70,562	106	0.61
Loans and advances to customers	361,707	3,383	3.75		372,067	3,412	3.72
Debt securities	52,286	167	1.28		51,976	168	1.31
Interest-earning assets
- banking business (1,2,3)	496,835	3,643	2.94		494,605	3,686	3.02
- trading business (4)	149,008				154,196
Non-interest earning assets	367,169				460,143
Total assets	1,013,012				1,108,944
Memo: funded assets	696,927				706,357
Liabilities
Deposits by banks	13,021	22	0.68		14,624	24	0.67
Customer accounts	290,458	411	0.57		290,175	428	0.60
Debt securities in issue	34,336	210	2.45		36,602	221	2.45
Subordinated liabilities	20,116	218	4.35		21,820	229	4.26
Internal funding of trading business	(14,836)	19	(0.51)		(16,182)	33	(0.83)
Interest-bearing liabilities
- banking business (1,3)	343,095	880	1.03		347,039	935	1.09
- trading business (4)	157,425				161,864
Non-interest-bearing liabilities
- demand deposits	97,939				96,752
- other liabilities	352,685				442,017
Owners’ equity (5)	61,868				61,272
Total liabilities and owners’ equity	1,013,012				1,108,944

Notes:

(1)	Interest payable has been increased by £3 million (Q1 2015 - £5 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-bearing liabilities have also been adjusted.
(2)	Interest receivable includes amounts (unwind of discount) recognised on impaired loans and receivables. Such loans are included in average loans and advances to banks and average loans and advances to customers.
(3)	Interest receivable has been increased by £612 million (Q1 2015 - £610 million) and interest payable has been increased by £61 million (Q1 2015 - £57 million) to include the discontinued operations of Citizens. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(4)	Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(5)	Including equity attributable to ordinary and B shareholders of £50,567 million (Q1 2015 - £51,675 million).

Condensed consolidated statement of changes in equity for the period ended 30 June 2015

		Half year ended			Quarter ended
		30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
£m	£m		£m	£m	£m
Called-up share capital
At beginning of period		6,877	6,714		6,925	6,877	6,752
Ordinary shares issued		104	97		56	48	59
At end of period		6,981	6,811		6,981	6,925	6,811
Paid-in equity
At beginning of period		784	979		634	784	979
Reclassification (1)		(150)	-		-	(150)	-
At end of period		634	979		634	634	979
Share premium account
At beginning of period		25,052	24,667		25,164	25,052	24,760
Ordinary shares issued		254	218		142	112	125
At end of period		25,306	24,885		25,306	25,164	24,885
Merger reserve
At beginning and end of period		13,222	13,222		13,222	13,222	13,222
Available-for-sale reserve
At beginning of period		299	(308)		371	299	(62)
Unrealised (losses)/gains		(114)	844		(153)	39	411
Realised losses/(gains)		63	(366)		(43)	106	(148)
Tax		39	(68)		65	(26)	(63)
Recycled to profit or loss on disposal of businesses (2)		-	36		-	-	-
Transfer to retained earnings		(43)	-		4	(47)	-
At end of period		244	138		244	371	138
Cash flow hedging reserve
At beginning of period		1,029	(84)		1,109	1,029	141
Amount recognised in equity		(26)	968		(524)	498	315
Amount transferred from equity to earnings		(705)	(720)		(319)	(386)	(362)
Tax		128	(70)		169	(41)	-
Transfer to retained earnings		9	-		-	9	-
At end of period		435	94		435	1,109	94
Foreign exchange reserve
At beginning of period		3,483	3,691		2,779	3,483	3,551
Retranslation of net assets		(548)	(872)		(1,042)	494	(702)
Foreign currency gains/(losses) on hedges of net assets		38	155		604	(566)	123
Tax		(14)	(11)		-	(14)	(9)
Transfer to retained earnings		(642)	-		(24)	(618)	-
At end of period		2,317	2,963		2,317	2,779	2,963
Capital redemption reserve
At beginning and end of period		9,131	9,131		9,131	9,131	9,131

Notes:

(1)	Paid-in equity reclassified to liabilities as a result of the call of RBS Capital Trust IV in January 2015.
(2)	Net of tax of £11 million in H1 2014.
(3)	Relating to the secondary offering of Citizens Financial Group in March 2015.

Condensed consolidated statement of changes in equity for the period ended 30 June 2015

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Retained earnings
At beginning of period	(2,518)	867		(2,416)	(2,518)	1,986
(Loss)/profit attributable to ordinary and
B shareholders and other equity owners
- continuing operations	(50)	1,610		111	(161)	446
- discontinued operations	64	302		275	(211)	196
Equity preference dividends paid	(143)	(140)		(73)	(70)	(75)
Paid-in equity dividends paid, net of tax	(24)	(27)		(20)	(4)	(17)
Dividend access share dividend	-	(320)		-	-	(320)
Transfer from available-for-sale reserve	43	-		(4)	47	-
Transfer from cash flow hedging reserve	(9)	-		-	(9)	-
Transfer from foreign exchange reserve	642	-		24	618	-
Costs of placing Citizens Financial Group equity	(29)	-		-	(29)	-
Shares issued under employee share schemes	(57)	(41)		(1)	(56)	(5)
Share-based payments
- gross	10	8		6	4	47
- tax	-	(1)		-	-	-
Reclassification of paid-in equity	(27)	-		-	(27)	-
At end of period	(2,098)	2,258		(2,098)	(2,416)	2,258
Own shares held
At beginning of period	(113)	(137)		(111)	(113)	(136)
Disposal of own shares	5	1		3	2	-
At end of period	(108)	(136)		(108)	(111)	(136)
Owners’ equity at end of period	56,064	60,345		56,064	56,808	60,345
Non-controlling interests
At beginning of period	2,946	473		5,473	2,946	612
Currency translation adjustments and other movements	(63)	(16)		(146)	83	(19)
Profit/(loss) attributable to non-controlling interests
- continuing operations	50	24		29	21	12
- discontinued operations	294	18		399	(105)	11
Dividends paid	(31)	-		(20)	(11)	-
Movements in available-for-sale securities
- unrealised gains/(losses)	12	(2)		(45)	57	(1)
- realised (gains)/losses	(6)	6		(6)	-	3
- tax	(5)	-		16	(21)	-
Movements in cash flow hedging reserve
- amount recognised in equity	21	-		9	12	-
- tax	(4)	-		(4)	-	-
Equity raised (3)	2,491	115		-	2,491	-
At end of period	5,705	618		5,705	5,473	618
Total equity at end of period	61,769	60,963		61,769	62,281	60,963
Total equity is attributable to:
Non-controlling interests	5,705	618		5,705	5,473	618
Preference shareholders	4,313	4,313		4,313	4,313	4,313
Paid-in equity holders	634	979		634	634	979
Ordinary and B shareholders	51,117	55,053		51,117	51,861	55,053
	61,769	60,963		61,769	62,281	60,963

For the notes to this table refer to page 72.

Condensed consolidated cash flow statement for the period ended 30 June 2015

	Half year ended
	30 June	30 June
	2015	2014
	£m	£m
Operating activities
Operating profit before tax on continuing operations	293	2,226
Operating profit before tax on discontinued operations	542	466
Adjustments for non-cash items	(3,690)	(897)
Net cash (outflow)/inflow from trading activities	(2,855)	1,795
Changes in operating assets and liabilities	12,312	(7,634)
Net cash flows from operating activities before tax	9,457	(5,839)
Income taxes (paid)/received	(201)	41
Net cash flows from operating activities	9,256	(5,798)
Net cash flows from investing activities	(1,461)	(641)
Net cash flows from financing activities	(426)	921
Effects of exchange rate changes on cash and cash equivalents	(1,885)	(2,391)
Net increase/(decrease) in cash and cash equivalents	5,484	(7,909)
Cash and cash equivalents at beginning of period	107,904	121,177
Cash and cash equivalents at end of period	113,388	113,268

Notes

1. Basis of preparation

The Group’s condensed consolidated financial statements 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 2014 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).

The condensed consolidated financial statements have been prepared in compliance with the British Bankers’ Association Code for Financial Reporting Disclosure published in September 2010.

Going concern

RBS’s business activities and financial position, and the factors likely to affect its future development and performance are discussed on pages 11 to 122. Its objectives and policies in managing the financial risks to which it is exposed and its regulatory capital resources, liquidity and funding management are discussed in the Capital and risk management appendix. A summary of the risk factors which could materially affect RBS’s future results are described on pages 125 to 128.

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 2015 have been prepared on a going concern basis.

Restatements

Citizens was classified as a disposal group on 31 December 2014 and its assets and liabilities from that date have been aggregated and presented as separate lines in accordance with IFRS 5. Citizens was also reclassified as a discontinued operation; comparatives for the periods ended 30 June 2014 have been re-presented.

2. Citizens Financial Group

In March 2015, RBS sold 155.25 million shares in CFG (28.4% of CFG’s common stock) for proceeds of £2.5 billion. Transaction costs of £29 million were taken to owners’ equity. In April 2015, CFG purchased 10.5 million of its shares from RBS; RBS’s shareholding at 30 June 2015 was 40.8%.

As required by IFRS 10 ‘Consolidated Financial Statements’, RBS consolidates CFG despite holding a minority of voting rights. Given the significance of its voting interest and the dispersion of other shareholdings, RBS is deemed under IFRS 10 to have ‘de facto’ control.

CFG is classified as a disposal group and measured at the lower of carrying value and fair value less costs to sell. At 30 June 2015, the carrying value of CFG was £8.4 billion.

Notes

3. Accounting policies

There have been no significant changes to the Group’s principal accounting policies as set out on pages 349 to 357 of the 2014 Annual Report and Accounts. Amendments to IFRSs effective for 2015 have not had a material effect on the results for the half year ended 30 June 2015.

Critical accounting policies and key sources of estimation uncertainty

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions that are considered to be the most important to the portrayal of the Group’s financial condition are those relating to pensions; goodwill; provisions for liabilities; deferred tax; loan impairment provisions and fair value of financial instruments. These critical accounting policies and judgments are described on pages 357 to 359 of the Group’s 2014 Annual Report and Accounts.

Notes

4. Analysis of income, expenses and impairment losses
	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Loans and advances to customers	5,771	6,144		2,869	2,902	3,081
Loans and advances to banks	197	192		92	105	97
Debt securities	139	208		70	69	101
Interest receivable	6,107	6,544		3,031	3,076	3,279
Customer accounts	758	939		368	390	449
Deposits by banks	25	58		12	13	23
Debt securities in issue	412	556		201	211	269
Subordinated liabilities	442	428		216	226	218
Internal funding of trading businesses	52	57		19	33	21
Interest payable	1,689	2,038		816	873	980
Net interest income	4,418	4,506		2,215	2,203	2,299
Fees and commissions receivable
- payment services	469	504		238	231	254
- credit and debit card fees	355	414		174	181	201
- lending (credit facilities)	559	650		290	269	339
- brokerage	161	166		71	90	81
- investment management	162	198		80	82	96
- trade finance	126	125		62	64	65
- other	126	186		54	72	90
Fees and commissions receivable	1,958	2,243		969	989	1,126
Fees and commissions payable	(363)	(475)		(186)	(177)	(244)
Net fees and commissions	1,595	1,768		783	812	882
Foreign exchange	378	810		163	215	347
Interest rate	81	435		23	58	284
Credit	220	76		200	20	(71)
Own credit adjustments	210	11		115	95	(84)
Other	(14)	118		44	(58)	52
Income from trading activities (1)	875	1,450		545	330	528
Gain on redemption of own debt	-	20		-	-	-
Operating lease and other rental income	143	178		71	72	87
Own credit adjustments	78	(62)		53	25	(106)
Changes in the fair value of FVTPL financial assets
and liabilities and related derivatives (2)	215	29		135	80	9
Changes in fair value of investment properties	(30)	(43)		(26)	(4)	(31)
Profit on sale of:
- securities	(11)	328		18	(29)	132
- property, plant and equipment	47	40		34	13	16
- subsidiaries, networks and associates	(48)	193		14	(62)	1
Dividend income	50	19		8	42	11
Share of profits less losses of associated undertakings	73	55		39	34	28
Other income	(149)	68		(152)	3	7
Other operating income	368	805		194	174	154
Total non-interest income	2,838	4,043		1,522	1,316	1,564
Total income	7,256	8,549		3,737	3,519	3,863

Notes:

(1)	The analysis of income from trading activities is based on how the business is organised and the underlying risks managed. Income from trading activities comprises gains and losses on financial instruments held for trading, both realised and unrealised, interest income, dividends and the related hedging and funding costs in the trading book. Other includes equities & commodities. Comparative figures have been restated.
(2)	Fair value through profit and loss.

Notes

4. Analysis of income, expenses and impairment losses (continued)

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Staff costs	(2,855)	(2,997)		(1,530)	(1,325)	(1,558)
Premises and equipment	(745)	(1,126)		(326)	(419)	(546)
Other (1)	(2,366)	(1,357)		(1,027)	(1,339)	(780)
Administrative expenses	(5,966)	(5,480)		(2,883)	(3,083)	(2,884)
Depreciation and amortisation	(712)	(466)		(200)	(512)	(237)
Write down of goodwill	-	(130)		-	-	(130)
Write down of other intangible assets	(606)	(82)		(606)	-	-
Operating expenses	(7,284)	(6,158)		(3,689)	(3,595)	(3,251)
Loan impairment releases/(losses)	431	(169)		203	228	113
Securities	(110)	4		(11)	(99)	11
Impairment releases/(losses)	321	(165)		192	129	124

Note:

(1)	Includes PPI costs, Interest Rate Hedging Products redress and related costs and litigation and conduct costs - see Note 5 for further details.

5. Provisions for liabilities and charges

			Regulatory and legal actions
			Other	FX	Other
			customer	investigations/	regulatory		Property
	PPI	IRHP	redress	litigation	provisions	Litigation	and other	Total
	£m	£m	£m (1)	£m	£m	£m	£m	£m
At 1 January 2015	799	424	580	320	183	1,805	663	4,774
Transfer	-	-	-	50	(50)	-	-	-
Currency translation and other
movements	-	-	2	-	3	86	7	98
Charge to income statement (2)	100	-	257	334	-	176	76	943
Releases to income statement (2)	-	-	-	-	-	(4)	(56)	(60)
Provisions utilised	(110)	(103)	(50)	-	-	(11)	(87)	(361)
At 31 March 2015	789	321	789	704	136	2,052	603	5,394
Currency translation and other
movements	-	-	(2)	(12)	(2)	(120)	87	(49)
Charge to income statement (2)	-	81	22	-	27	341	314	785
Releases to income statement (2)	-	(12)	(14)	-	-	(2)	(82)	(110)
Provisions utilised	(92)	(107)	(96)	(178)	(1)	(30)	(94)	(598)
At 30 June 2015	697	283	699	514	160	2,241	828	5,422

Notes:

(1)	Closing provision primarily relates to investment advice and packaged accounts.
(2)	Relates to continuing operations.

Notes

5. Provisions for liabilities and charges (continued)

Payment Protection Insurance (PPI)

No additional charge for PPI has been recognised in Q2 2015. A charge of £100 million was recognised in Q1 2015 as a result of a revision to expected customer complaint volumes. The cumulative charge in respect of PPI is £3.8 billion, of which £3.1 billion (82%) in redress and expenses had been utilised by 30 June 2015. Of the £3.8 billion cumulative charge, £3.5 billion relates to redress and £0.3 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
	Actual to date	Current assumption	Change in assumption	Consequential change in provision
Assumption	%	£m
Single premium book past business review take-up rate	53%	55%	+/-5	+/-55
Uphold rate (1)	91%	90%	+/-5	+/-15
Average redress	£1,689	£1,659	+/-5	+/-15

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. RBS expects the majority of the cash outflows associated with the remaining provision to have occurred by Q2 2016. 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.

Interest Rate Hedging Products (IRHP) redress and related costs

Following an industry-wide review conducted in conjunction with the Financial Services Authority (now being dealt with by the Financial Conduct Authority (FCA)), RBS agreed to provide redress to customers in relation to certain interest rate hedging products sold to small and medium-sized businesses classified as retail clients under FSA rules. An additional net charge of £69 million has been recognised in Q2 2015, principally reflecting a marginal increase in our redress experience compared to expectations and the cost of a small number of consequential loss claims over and above interest offered as part of basic redress. We have now agreed outcomes with the independent reviewer on all cases. A cumulative charge of £1.5 billion has been recognised of which £1.2 billion relates to redress and £0.3 billion relates to administrative expenses. We continue to monitor the level of provision given the remaining uncertainties over the eventual cost of redress, including the cost of consequential loss claims.

Notes

5. Provisions for liabilities and charges (continued)

Regulatory and legal actions

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. Additional charges of £1.2 billion in H1 2015 include anticipated costs following investigations into the foreign exchange market (£334 million), provisions in respect of mortgage-backed securities related litigation (£506 million), provisions relating to packaged accounts (£157 million) and other conduct provisions (£160 million).

6. Pensions

Pension costs for H1 2015 amounted to £286 million (H1 2014 - £279 million; Q2 2015 - £138 million; Q1 2015 - £148 million; Q2 2014 - £137 million). Defined benefit schemes’ charges are based on the actuarially determined pension cost rates at 31 December 2014.

In May 2014, the triennial funding valuation of The Royal Bank of Scotland Group Pension Fund was agreed which showed that the value of the liabilities exceeded the value of assets by £5.6 billion at 31 March 2013, a ratio of 82%. To eliminate this deficit, RBS will pay annual contributions of £650 million from 2014 to 2016 and £450 million (indexed in line with inflation) from 2017 to 2023. These contributions are in addition to regular annual contributions of approximately £270 million in respect of the ongoing accrual of benefits as well as contributions to meet the expenses of running the scheme.

Full details of RBS’s pension arrangements are set out in Note 4 on pages 367 to 372 of the 2014 Annual Report and Accounts.

Notes

1. Loan impairment provisions and risk elements in lending

Operating profit is stated after net loan impairment releases from continuing operations of £431 million for the half year ended 30 June 2015 (H1 2014 - £169 million losses). The balance sheet loan impairment provisions decreased in the half year ended 30 June 2015 from £17,500 million to £10,751 million and the movements thereon were:

	Half year ended
	30 June 2015				30 June 2014
	RBS				RBS
excl. RCR	RCR	Total	excl. RCR	RCR	Total
	£m	£m	£m		£m	£m	£m
At beginning of period	6,554	10,946	17,500		8,716	16,500	25,216
Transfers to disposal groups	(20)	-	(20)
Currency translation and other adjustments	(212)	(466)	(678)		(118)	(395)	(513)
Amounts written-off	(634)	(4,981)	(5,615)		(868)	(1,619)	(2,487)
Recoveries of amounts previously written-off	57	22	79		84	14	98
(Releases)/charges to income statement
- continuing operations	(76)	(355)	(431)		188	(19)	169
- discontinued operations	-	-	-		102	-	102
Unwind of discount (recognised in interest income)	(59)	(25)	(84)		(63)	(76)	(139)
At end of period	5,610	5,141	10,751		8,041	14,405	22,446

	Quarter ended
	30 June 2015				31 March 2015				30 June 2014
	RBS				RBS				RBS
excl. RCR	RCR	Total	excl. RCR	RCR	Total	excl. RCR	RCR	Total
	£m	£m	£m		£m	£m	£m		£m	£m	£m
At beginning of period	6,031	7,170	13,201		6,554	10,946	17,500		8,516	15,719	24,235
Transfers to disposal groups	-	-	-		(20)	-	(20)		-	-	-
Currency translation and other
adjustments	(49)	(59)	(108)		(163)	(407)	(570)		(75)	(333)	(408)
Amounts written-off	(353)	(1,776)	(2,129)		(281)	(3,205)	(3,486)		(447)	(827)	(1,274)
Recoveries of amounts previously
written-off	18	11	29		39	11	50		43	3	46
(Releases)/charges to income statement
- continuing operations	(8)	(195)	(203)		(68)	(160)	(228)		7	(125)	(118)
- discontinued operations	-	-	-		-	-	-		29	-	29
Unwind of discount
(recognised in interest income)	(29)	(10)	(39)		(30)	(15)	(45)		(32)	(32)	(64)
At end of period	5,610	5,141	10,751		6,031	7,170	13,201		8,041	14,405	22,446

Provisions at 30 June 2015 include £26 million in respect of loans and advances to banks (31 March 2015 - £38 million; 31 December 2014 - £40 million; 30 June 2014 - £50 million).

Notes

1. Loan impairment provisions and risk elements in lending (continued)

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 £9,430 million in the half year ended 30 June 2015 to £17,454 million and the movements thereon were:

	Half year ended
	30 June 2015				30 June 2014
	RBS				RBS
excl. RCR	RCR	Total	excl. RCR	RCR	Total
	£m	£m	£m		£m	£m	£m
At beginning of period	11,484	15,400	26,884		15,276	24,116	39,392
Transfer to disposals groups	(22)	-	(22)		-	-	-
Currency translation and other adjustments	(407)	(784)	(1,191)		(167)	(658)	(825)
Additions	1,478	692	2,170		2,273	1,887	4,160
Transfers (1)	(116)	(5)	(121)		(121)	52	(69)
Transfer to performing book	(296)	(28)	(324)		(111)	(74)	(185)
Repayments and disposals	(1,429)	(2,898)	(4,327)		(2,629)	(3,276)	(5,905)
Amounts written-off	(634)	(4,981)	(5,615)		(868)	(1,619)	(2,487)
At end of period	10,058	7,396	17,454		13,653	20,428	34,081

	Quarter ended
	30 June 2015				31 March 2015				30 June 2014
	RBS				RBS				RBS
excl. RCR	RCR	Total	excl. RCR	RCR	Total	excl. RCR	RCR	Total
	£m	£m	£m		£m	£m	£m		£m	£m	£m
At beginning of period	10,658	10,225	20,883		11,484	15,400	26,884		14,351	23,002	37,353
Transfer to disposal groups	-	-	-		(22)	-	(22)		-	-	-
Currency translation and
other adjustments	(88)	(191)	(279)		(319)	(593)	(912)		(102)	(560)	(662)
Additions	766	320	1,086		712	372	1,084		810	564	1,374
Transfers (1)	(64)	(5)	(69)		(52)	-	(52)		(65)	36	(29)
Transfer to performing book	(152)	(12)	(164)		(144)	(16)	(160)		(8)	(71)	(79)
Repayments and disposals	(709)	(1,165)	(1,874)		(720)	(1,733)	(2,453)		(886)	(1,716)	(2,602)
Amounts written-off	(353)	(1,776)	(2,129)		(281)	(3,205)	(3,486)		(447)	(827)	(1,274)
At end of period	10,058	7,396	17,454		10,658	10,225	20,883		13,653	20,428	34,081

Note:

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

Provision coverage of REIL was 62% at 30 June 2015 (31 March 2015 - 63%; 31 December 2014 - 65%; 30 June 2014 - 66%).

Notes

8. Tax

The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation tax rate of 20.25% (2014 - 21.5%), as analysed below.

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Profit before tax	293	2,226		240	53	736
Expected tax charge	(59)	(478)		(48)	(11)	(158)
Losses and temporary differences in period where no
deferred tax asset recognised	(369)	(9)		(182)	(187)	-
Foreign profits taxed at other rates	165	(38)		84	81	(2)
Non-deductible goodwill impairment	(25)	(28)		-	(25)	(28)
Items not allowed for tax
- losses on disposals and write-downs	(9)	(5)		(2)	(7)	(5)
- UK bank levy	(28)	(30)		(14)	(14)	(11)
- regulatory and legal actions	(72)	-		(5)	(67)	-
- other disallowable items	(51)	(69)		(24)	(27)	(41)
Non-taxable items
- gain on sale of Direct Line Insurance Group	-	41		-	-	-
- other non-taxable items	37	13		16	21	5
Taxable foreign exchange movements	12	4		7	5	3
Losses brought forward and utilised	57	45		14	43	9
Reduction in carrying value of deferred tax asset
in respect of US losses and temporary differences	-	(76)		-	-	(76)
Adjustments in respect of prior periods	49	38		54	(5)	26
Actual tax charge	(293)	(592)		(100)	(193)	(278)

At 30 June 2015, the Group has recognised a deferred tax asset of £1,479 million (31 March 2015 - £1,430 million; 31 December 2014 - £1,540 million) and a deferred tax liability of £363 million (31 March 2015 - £381 million; 31 December 2014 - £500 million). These include amounts recognised in respect of UK trading losses of £1,229 million (31 March 2015 - £1,170 million; 31 December 2014 - £1,257 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 2015 and concluded that it is recoverable based on future profit projections (see also Recent developments on page 122).

9. Profit/(loss) attributable to non-controlling interests
	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
RFS Holdings BV Consortium Members	53	38		28	25	21
Citizens Financial Group	290	-		399	(109)	-
Other	1	4		1	-	2
Profit/(loss) attributable to non-controlling interests	344	42		428	(84)	23

10. 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 2014 and 2015. £300 million of new equity was issued during the course of 2014 and £150 million of new equity has been issued in the first half of 2015. The Board intends to issue £300 million of new equity in total during 2015 to achieve this aim.

Notes

11. Earnings per ordinary and equivalent B share

Following agreement between RBS and HM Treasury in 2014 for the retirement of the Dividend Access Share (DAS), earnings per share for periods ended after 25 June 2014 only reflect DAS dividends recognised before the end of a reporting period: £320 million was recognised in the quarter ended 30 June 2014.

	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
2015	2014		2015	2015	2014
Earnings
(Loss)/profit from continuing operations attributable
to ordinary and B shareholders (£m)	(217)	1,123		18	(235)	34
Profit/(loss) from discontinued operations attributable to
ordinary and B shareholders (£m)	64	302		275	(211)	196
(Loss)/profit attributable to ordinary and B
shareholders (£m)	(153)	1,425		293	(446)	230
Ordinary shares outstanding during the period (millions)	6,381	6,208		6,411	6,351	6,235
Equivalent B shares in issue during the period (millions)	5,100	5,100		5,100	5,100	5,100
Weighted average number of ordinary
shares and equivalent B shares outstanding
during the period (millions)	11,481	11,308		11,511	11,451	11,335
Effect of dilutive share options and convertible
securities (millions)	59	97		48	71	89
Diluted weighted average number of ordinary
shares and equivalent B shares outstanding
during the period (millions)	11,540	11,405		11,559	11,522	11,424
Basic (loss)/earnings per ordinary and
equivalent B share (EPS)
Basic EPS from continuing operations	(1.9p)	9.9p		0.2p	(2.1p)	0.3p
Basic EPS from discontinued operations	0.6p	2.7p		2.3p	(1.8p)	1.7p
Basic EPS from continuing and discontinued
operations	(1.3p)	12.6p		2.5p	(3.9p)	2.0p
Basic EPS from continuing operations	(1.9p)	9.9p		0.2p	(2.1p)	0.3p
Own credit adjustments	(2.0p)	0.4p		(1.1p)	(0.8p)	1.3p
Gain on redemption of own debt	-	(0.2p)		-	-	-
Write down of goodwill	-	1.1p		-	-	1.1p
Strategic disposals	1.2p	(1.7p)		-	1.2p	-
Adjusted EPS from continuing operations	(2.7p)	9.5p		(0.9p)	(1.7p)	2.7p

Note:

(1)	Diluted EPS for continuing and discontinued operations for the half year ended 30 June 2014 was 0.1p lower than basic EPS. There was no dilutive impact in any other period.

Notes

12. Segmental analysis

The business is organised into three franchises:

●	Personal & Business Banking (PBB), comprising two reportable segments, UK Personal & Business Banking, including Williams & Glyn, (UK PBB) and Ulster Bank.
●	Commercial & Private Banking (CPB), comprising two reportable segments, Commercial Banking and Private Banking.
●	Corporate & Institutional Banking (CIB), which is a single reportable segment.

In addition, RBS will continue to manage and report Citizens Financial Group and RBS Capital Resolution (RCR) separately until disposal or wind-down.

Analysis of operating profit

The following tables provide a segmental analysis of operating profit/(loss) by main income statement captions. The segmental income statements on pages 26 to 66 reflect certain presentational reallocations as described in the notes below each table. These do not affect the overall operating profit.

	Net	Non-			Impairment
interest	interest	Total	Operating	releases	Operating
income	income	income	expenses	(losses)/	profit/(loss)
Half year ended 30 June 2015	£m	£m	£m	£m	£m	£m
UK Personal & Business Banking	2,290	631	2,921	(1,923)	17	1,015
Ulster Bank	265	103	368	(289)	52	131
Personal & Business Banking	2,555	734	3,289	(2,212)	69	1,146
Commercial Banking	1,108	606	1,714	(875)	(27)	812
Private Banking	254	167	421	(474)	3	(50)
Commercial & Private Banking	1,362	773	2,135	(1,349)	(24)	762
Corporate & Institutional Banking	376	948	1,324	(3,430)	31	(2,075)
Central items	150	43	193	(192)	(48)	(47)
Citizens Financial Group	1,104	490	1,594	(1,019)	(89)	486
RCR (1)	(25)	190	165	(101)	293	357
Non-statutory basis	5,522	3,178	8,700	(8,303)	232	629
Reconciling items:
Own credit adjustments (2)	-	288	288	-	-	288
Strategic disposals	-	(135)	(135)	-	-	(135)
Citizens discontinued operations (3)	(1,104)	(493)	(1,597)	1,019	89	(489)
Statutory basis	4,418	2,838	7,256	(7,284)	321	293

Notes:

(1)	Reallocation of £5 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)	Comprises £210 million gain included in 'Income from trading activities' and £78 million gain included in 'Other operating income' on a statutory basis.
(3)	Included within Citizens discontinued operations are the results of the reportable operating segment of Citizens Financial Group (CFG) and certain CFG related activities in Central items and related one-off and other items. Analysis provided in Note 13.

Notes

12. Segmental analysis (continued)

Analysis of operating profit (continued)

	Net	Non-			Impairment
interest	interest	Total	Operating	(losses)/	Operating
income	income	income	expenses	releases	profit/(loss)
Half year ended 30 June 2014	£m	£m	£m	£m	£m	£m
UK Personal & Business Banking	2,276	686	2,962	(1,820)	(148)	994
Ulster Bank	323	89	412	(300)	(57)	55
Personal & Business Banking	2,599	775	3,374	(2,120)	(205)	1,049
Commercial Banking	999	569	1,568	(902)	(31)	635
Private Banking	344	201	545	(400)	-	145
Commercial & Private Banking	1,343	770	2,113	(1,302)	(31)	780
Corporate & Institutional Banking	365	2,062	2,427	(2,158)	39	308
Central items	203	146	349	(270)	12	91
Citizens Financial Group	987	620	1,607	(1,082)	(104)	421
RCR (1)	(1)	109	108	(176)	20	(48)
Non-statutory basis	5,496	4,482	9,978	(7,108)	(269)	2,601
Reconciling items:
Own credit adjustments (2)	-	(51)	(51)	-	-	(51)
Gain on redemption of own debt	-	20	20	-	-	20
Write down of goodwill	-	-	-	(130)	-	(130)
Strategic disposals	-	191	191	-	-	191
Citizens discontinued operations (3)	(987)	(624)	(1,611)	1,081	104	(426)
RFS Holdings minority interest	(3)	25	22	(1)	-	21
Statutory basis	4,506	4,043	8,549	(6,158)	(165)	2,226

Notes:

(1)	Reallocation of £12 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)	Comprises £11 million gain included in 'Income from trading activities' and £62 million loss included in 'Other operating income' on a statutory basis.
(3)	Included within Citizens discontinued operations are the results of the reportable operating segment of Citizens Financial Group (CFG) and certain CFG related activities in Central items and related one-off and other items. Analysis provided in Note 13.

Notes

12. Segmental analysis (continued)

Analysis of operating profit (continued)

	Net	Non-			Impairment
interest	interest	Total	Operating	(losses)/	Operating
income	income	income	expenses	releases	profit/(loss)
Quarter ended 30 June 2015	£m	£m	£m	£m	£m	£m
UK Personal & Business Banking	1,147	322	1,469	(793)	(9)	667
Ulster Bank	132	46	178	(150)	52	80
Personal & Business Banking	1,279	368	1,647	(943)	43	747
Commercial Banking	562	330	892	(466)	(26)	400
Private Banking	126	81	207	(287)	2	(78)
Commercial & Private Banking	688	411	1,099	(753)	(24)	322
Corporate & Institutional Banking	174	346	520	(1,841)	(13)	(1,334)
Central items	88	173	261	(99)	2	164
Citizens Financial Group	551	246	797	(517)	(51)	229
RCR (1)	(14)	59	45	(53)	184	176
Non-statutory basis	2,766	1,603	4,369	(4,206)	141	304
Reconciling items:
Own credit adjustments (2)	-	168	168	-	-	168
Citizens discontinued operations (3)	(551)	(249)	(800)	517	51	(232)
Statutory basis	2,215	1,522	3,737	(3,689)	192	240

Notes:

(1)	Reallocation of £2 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)	Comprises £115 million gain included in 'Income from trading activities' and £53 million gain included in 'Other operating income' on a statutory basis.
(3)	Included within Citizens discontinued operations are the results of the reportable operating segment of Citizens Financial Group (CFG) and certain CFG related activities in Central items and related one-off and other items. Analysis provided in Note 13.

Notes

12. Segmental analysis (continued)

Analysis of operating profit (continued)

	Net	Non-			Impairment
interest	interest	Total	Operating	releases/	Operating
income	income	income	expenses	(losses)	profit/(loss)
Quarter ended 31 March 2015	£m	£m	£m	£m	£m	£m
UK Personal & Business Banking	1,143	309	1,452	(1,130)	26	348
Ulster Bank	133	57	190	(139)	-	51
Personal & Business Banking	1,276	366	1,642	(1,269)	26	399
Commercial Banking	546	276	822	(409)	(1)	412
Private Banking	128	86	214	(187)	1	28
Commercial & Private Banking	674	362	1,036	(596)	-	440
Corporate & Institutional Banking	202	602	804	(1,589)	44	(741)
Central items	62	(130)	(68)	(93)	(50)	(211)
Citizens Financial Group	553	244	797	(502)	(38)	257
RCR (1)	(11)	131	120	(48)	109	181
Non-statutory basis	2,756	1,575	4,331	(4,097)	91	325
Reconciling items:
Own credit adjustments (2)	-	120	120	-	-	120
Strategic disposals	-	(135)	(135)	-	-	(135)
Citizens discontinued operations (3)	(553)	(244)	(797)	502	38	(257)
Statutory basis	2,203	1,316	3,519	(3,595)	129	53

Notes:

(1)	Reallocation of £3 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)	Comprises £95 million gain included in ‘Income from trading activities’ and £25 million gain included in ‘Other operating income’ on a statutory basis.
(3)	Included within Citizens discontinued operations are the results of the reportable operating segment of Citizens Financial Group (CFG) and certain CFG related activities in Central items and related one-off and other items. Analysis provided in Note 13.

Notes

12. Segmental analysis (continued)

Analysis of operating profit (continued)

	Net	Non-			Impairment
interest	interest	Total	Operating	(losses)/	Operating
income	income	income	expenses	releases	profit/(loss)
Quarter ended 30 June 2014	£m	£m	£m	£m	£m	£m
UK Personal & Business Banking	1,152	347	1,499	(955)	(60)	484
Ulster Bank	169	42	211	(155)	(10)	46
Personal & Business Banking	1,321	389	1,710	(1,110)	(70)	530
Commercial Banking	511	287	798	(493)	9	314
Private Banking	174	98	272	(201)	(1)	70
Commercial & Private Banking	685	385	1,070	(694)	8	384
Corporate & Institutional Banking	186	890	1,076	(1,146)	45	(25)
Central items	100	44	144	(71)	13	86
Citizens Financial Group	499	391	890	(582)	(31)	277
RCR (1)	7	28	35	(97)	128	66
Non-statutory basis	2,798	2,127	4,925	(3,700)	93	1,318
Reconciling items:
Own credit adjustments (2)	-	(190)	(190)	-	-	(190)
Write-down of goodwill	-	-	-	(130)	-	(130)
Citizens discontinued operations (3)	(499)	(385)	(884)	579	31	(274)
RFS Holdings minority interest	-	12	12	-	-	12
Statutory basis	2,299	1,564	3,863	(3,251)	124	736

Notes:

(1)	Reallocation of £9 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)	Comprises £84 million loss included in 'Income from trading activities' and £106 million loss included in 'Other operating income' on a statutory basis.
(3)

Total revenue
	Half year ended
	30 June 2015				30 June 2014
		Inter				Inter
	External	segment	Total		External	segment	Total
	£m	£m	£m		£m	£m	£m
UK Personal & Business Banking	3,483	2	3,485		3,583	7	3,590
Ulster Bank	388	31	419		408	40	448
Personal & Business Banking	3,871	33	3,904		3,991	47	4,038
Commercial Banking	1,782	102	1,884		1,729	13	1,742
Private Banking	397	122	519		470	258	728
Commercial & Private Banking	2,179	224	2,403		2,199	271	2,470
Corporate & Institutional Banking	1,715	1,585	3,300		3,033	2,028	5,061
Central items	1,049	1,665	2,714		1,200	2,051	3,251
Citizens Financial Group	1,754	5	1,759		1,724	5	1,729
RCR	321	100	421		443	254	697
Non-statutory basis	10,889	3,612	14,501		12,590	4,656	17,246
Reconciling items:
Own credit adjustments	288	-	288		(51)	-	(51)
Gain on redemption of own debt	-	-	-		20	-	20
Strategic disposals	(135)	-	(135)		191	-	191
Citizens discontinued operations	(1,733)	-	(1,733)		(1,713)	-	(1,713)
RFS Holdings minority interest	-	-	-		25	-	25
Elimination of intra-group transactions	-	(3,612)	(3,612)		-	(4,656)	(4,656)
Statutory basis	9,309	-	9,309		11,062	-	11,062

Notes

12. Segmental analysis (continued)

Total revenue (continued)

	Quarter ended
	30 June 2015				31 March 2015				30 June 2014
		Inter				Inter				Inter
	External	segment	Total		External	segment	Total		External	segment	Total
	£m	£m	£m		£m	£m	£m		£m	£m	£m
UK Personal & Business Banking	1,754	-	1,754		1,729	2	1,731		1,806	3	1,809
Ulster Bank	191	13	204		197	18	215		210	20	230
Personal & Business Banking	1,945	13	1,958		1,926	20	1,946		2,016	23	2,039
Commercial Banking	925	49	974		857	53	910		875	(18)	857
Private Banking	196	58	254		201	64	265		234	127	361
Commercial & Private Banking	1,121	107	1,228		1,058	117	1,175		1,109	109	1,218
Corporate & Institutional Banking	699	749	1,448		1,016	836	1,852		1,383	1,128	2,511
Central items	683	787	1,470		366	878	1,244		552	1,019	1,571
Citizens Financial Group	877	3	880		877	2	879		947	2	949
RCR	117	40	157		204	60	264		193	97	290
Non-statutory basis	5,442	1,699	7,141		5,447	1,913	7,360		6,200	2,378	8,578
Reconciling items:
Own credit adjustments	168	-	168		120	-	120		(190)	-	(190)
Strategic disposals	-	-	-		(135)	-	(135)		-	-	-
Citizens discontinued operations	(870)	-	(870)		(863)	-	(863)		(934)	-	(934)
RFS Holdings minority interest	-	-	-		-	-	-		11	-	11
Elimination of intra-group transactions	-	(1,699)	(1,699)		-	(1,913)	(1,913)		-	(2,378)	(2,378)
Statutory basis	4,740	-	4,740		4,569	-	4,569		5,087	-	5,087

Total assets and liabilities

	30 June 2015			31 March 2015			31 December 2014
Assets	Liabilities		Assets	Liabilities		Assets	Liabilities
	£m	£m		£m	£m		£m	£m
UK Personal & Business Banking	135,368	153,125		134,630	150,406		134,257	150,481
Ulster Bank	26,547	22,404		26,641	23,044		27,596	24,657
Personal & Business Banking	161,915	175,529		161,271	173,450		161,853	175,138
Commercial Banking	94,519	99,242		93,296	101,278		89,382	88,987
Private Banking	16,977	30,290		17,873	30,161		20,480	36,793
Commercial & Private Banking	111,496	129,532		111,169	131,439		109,862	125,780
Corporate & Institutional Banking	482,448	451,801		623,771	583,766		577,230	536,243
Central items	105,130	65,431		93,803	66,381		86,947	69,394
Citizens Financial Group	87,176	73,475		91,798	77,300		84,932	71,258
RCR	16,536	7,164		22,800	9,995		29,030	12,683
RFS Holdings minority interest	-	-		-	-		909	75
Statutory basis	964,701	902,932		1,104,612	1,042,331		1,050,763	990,571

Notes

1. Discontinued operations and assets and liabilities of disposal groups

In accordance with a commitment to the European Commission to sell Citizens Financial Group, Inc. (Citizens) by 31 December 2016, RBS disposed of 29.5% of its interest in Citizens during the second half of 2014 primarily through an initial public offering in the USA and a further 28.4% in March 2015. RBS plans to cede control by the end of 2015 and therefore, in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, Citizens is presented with effect from 31 December 2014 as a discontinued operation, with comparatives re-presented, and as a disposal group.

Other discontinued operations represents the results of RFS Holdings attributable to the State of the Netherlands and Santander following the legal separation of ABN AMRO Bank N.V. on 1 April 2010.

(a) Profit/(loss) from discontinued operations, net of tax
	Half year ended			Quarter ended
	30 June	30 June		30 June	31 March	30 June
	2015	2014		2015	2015	2014
	£m	£m		£m	£m	£m
Citizens
Interest income	1,222	1,077		612	610	542
Interest expense	(118)	(90)		(61)	(57)	(43)
Net interest income	1,104	987		551	553	499
Other income	527	624		249	278	385
Total income	1,631	1,611		800	831	884
Operating expenses	(1,019)	(1,081)		(517)	(502)	(579)
Profit before impairment losses	612	530		283	329	305
Impairment losses	(89)	(104)		(51)	(38)	(31)
Operating profit before tax	523	426		232	291	274
Tax charge	(179)	(141)		(75)	(104)	(93)
Profit after tax	344	285		157	187	181
Reversal/(provision) for loss on disposal (1,2)	10	-		517	(507)	-
Profit/(loss) from Citizens discontinued operations,
net of tax	354	285		674	(320)	181
Other
Total income	11	12		4	7	6
Operating expenses	(2)	(1)		(2)	-	-
Operating profit before tax	9	11		2	7	6
Tax charge	(5)	(5)		(2)	(3)	(3)
Profit after tax	4	6		-	4	3
Businesses acquired exclusively with a view to disposal
Profit after tax	-	29		-	-	23
Profit from other discontinued operations, net of tax	4	35		-	4	26

Notes:

(1)	Gains in H1 2015 and Q2 2015 on remeasurement to fair value less costs to sell (fair value hierarchy 2: based on the quoted price of Citizens' shares) have been restricted: reversal of goodwill impairment (£368 million) have not been recognised.
(2)	Of which attributable to owners equity £146 million loss (Q2 2015 - £211 million gain, Q1 2015 - £357 million loss).

Notes

1. Discontinued operations and assets and liabilities of disposal groups (continued)

(b) Assets and liabilities of disposal groups
	30 June 2015			31 December
	Citizens	Other	Total	2014
	£m	£m	£m	£m
Assets of disposal groups
Cash and balances at central banks	523	319	842	622
Loans and advances to banks	1,438	1,290	2,728	1,745
Loans and advances to customers	61,428	3,083	64,511	60,550
Debt securities and equity shares	16,027	741	16,768	15,865
Derivatives	399	29	428	402
Intangible assets	657	95	752	583
Settlement balances	598	-	598	-
Property, plant and equipment	527	82	609	549
Other assets	1,774	61	1,835	1,695
Discontinued operations and other disposal groups	83,371	5,700	89,071	82,011
Liabilities of disposal groups
Deposits by banks	6,399	17	6,416	6,794
Customer accounts	64,258	6,700	70,958	61,289
Debt securities in issue	1,178	-	1,178	1,625
Derivatives	163	28	191	144
Subordinated liabilities	226	-	226	226
Other liabilities	1,292	127	1,419	1,242
Discontinued operations and other disposal groups	73,516	6,872	80,388	71,320

Other disposal groups at 30 June 2015 includes and the international private banking business (fair value less costs to sell reflects the agreed sale to Union Bancaire Priveé: fair value hierarchy 3) along with some remaining elements of the RBS N.V. business.

Disposal groups at 31 December 2014 includes Citizens along with some remaining elements of the RBS N.V. business.

(c) Financial instruments: Classification and valuation hierarchy

At 30 June 2015 and 31 December 2014 the fair values of disposal group financial instruments not measured at fair value aggregated at the level of balance sheet caption were not materially different from their carrying values; fair value measurements for those financial instruments of disposal groups measured at fair value were categorised as level 2.

Notes

1. Financial instruments

Classification

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

								Non
Financial instruments							financial
					Amortised	Finance	assets/
HFT (1)	DFV (2)	AFS (3)	LAR (4)	HTM (5)	cost	leases	liabilities	Total
30 June 2015	£m	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Cash and balances at central banks	-	-	-	81,900	-				81,900
Loans and advances to banks
- reverse repos	15,076	-	-	5,731	-				20,807
- other	10,149	-	-	10,565	-				20,714
Loans and advances to customers
- reverse repos	45,767	-	-	1,032	-				46,799
- other	18,706	61	-	292,377	-		3,849		314,993
Debt securities	39,476	110	29,757	2,912	4,932				77,187
Equity shares	2,730	285	348						3,363
Settlement balances	-	-	-	9,630	-				9,630
Derivatives	281,857								281,857
Intangible assets								7,198	7,198
Property, plant and equipment								4,874	4,874
Deferred tax								1,479	1,479
Prepayments, accrued income and
other assets	-	-	-	-	-	-	-	4,829	4,829
Assets of disposal groups								89,071	89,071
	413,761	456	30,105	404,147	4,932		3,849	107,451	964,701
Liabilities
Deposits by banks
- repos	18,021	-				3,591			21,612
- other	22,262	-				8,716			30,978
Customer accounts
- repos	42,296	-				2,454			44,750
- other	12,887	3,936				325,200			342,023
Debt securities in issue	4,272	7,763				29,784			41,819
Settlement balances	-	-				7,335			7,335
Short positions	24,561	-							24,561
Derivatives	273,589								273,589
Accruals, deferred income and						1,867	-	12,095	13,962
other liabilities
Retirement benefit liabilities								1,869	1,869
Deferred tax	-							363	363
Subordinated liabilities	-	771				18,912			19,683
Liabilities of disposal groups								80,388	80,388
	397,888	12,470				397,859		94,715	902,932
Equity									61,769
									964,701

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

Notes

1. Financial instruments: Classification (continued)

							Non
Financial instruments							financial
					Amortised	Finance	assets/
HFT (1)	DFV (2)	AFS (3)	LAR (4)	HTM (5)	cost	leases	liabilities	Total
31 December 2014	£m	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Cash and balances at central banks	-	-	-	74,872	-				74,872
Loans and advances to banks
- reverse repos	18,129	-	-	2,579	-				20,708
- other	11,773	-	-	11,254	-				23,027
Loans and advances to customers
- reverse repos	43,018	-	-	969	-				43,987
- other	23,038	61	-	307,002	-		4,150		334,251
Debt securities	49,226	117	29,673	3,096	4,537				86,649
Equity shares	4,821	301	513	-	-				5,635
Settlement balances	-	-	-	4,667	-				4,667
Derivatives	353,590								353,590
Intangible assets								7,781	7,781
Property, plant and equipment								6,167	6,167
Deferred tax								1,540	1,540
Prepayments, accrued income and
other assets	-	-	-	-	-	-		5,878	5,878
Assets of disposal groups								82,011	82,011
	503,595	479	30,186	404,439	4,537		4,150	103,377	1,050,763
Liabilities
Deposits by banks
- repos	23,990	-				869			24,859
- other	26,118	-				9,688			35,806
Customer accounts
- repos	35,985	-				1,366			37,351
- other	15,308	4,731				334,249			354,288
Debt securities in issue	6,490	10,216				33,574			50,280
Settlement balances	-	-				4,503			4,503
Short positions	23,029	-							23,029
Derivatives	349,805								349,805
Accruals, deferred income and
other liabilities						1,801	-	11,545	13,346
Retirement benefit liabilities	-							2,579	2,579
Deferred tax								500	500
Subordinated liabilities	-	863				22,042			22,905
Liabilities of disposal groups								71,320	71,320
	480,725	15,810				408,092		85,944	990,571
Equity									60,192
									1,050,763

Notes:

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

Apart from the reclassification of £3.6 billion of Treasury debt securities from AFS to HTM in Q1 2014, there were no other reclassifications in either the half year ended 30 June 2015 or the year ended 31 December 2014.

Notes

1. Financial instruments (continued)

Valuation reserves

When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. The table below shows credit valuation adjustments (CVA) and other valuation reserves. CVA represents an estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in derivative exposures.

	30 June	31 December
2015	2014
	£m	£m
Credit valuation adjustments	998	1,414
Other valuation reserves
- bid-offer	326	398
- funding valuation adjustment	716	718
- product and deal specific	639	657
	1,681	1,773
Valuation reserves	2,679	3,187

Own credit

The cumulative own credit adjustment (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss (DFV) debt securities in issue, subordinated liabilities and derivative liabilities are set out below.

Cumulative OCA (CR)/DR (1)				Subordinated
Debt securities in issue (2)			liabilities
HFT	DFV	Total	DFV	Total	Derivatives	Total (3)
£m	£m	£m	£m	£m	£m	£m
30 June 2015	(223)	(23)	(246)	182	(64)	57	(7)
31 December 2014	(397)	(123)	(520)	221	(299)	12	(287)
30 June 2014	(395)	(87)	(482)	237	(245)	54	(191)
Carrying values of underlying liabilities	£bn	£bn	£bn	£bn	£bn
30 June 2015	4.3	7.8	12.1	0.8	12.9
31 December 2014	6.5	10.4	16.9	0.9	17.8
30 June 2014	7.3	13.0	20.3	0.8	21.1

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 for own credit. The balance sheet reserve is stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.

Key points

	The decrease in CVA was driven by the tightening of credit spreads in the period, as well as the balance sheet reduction in RCR. The bid-offer reserve decrease was largely related to risk reduction in CIB Rates.
	The cumulative OCA increase during H1 2015 was mainly due to the widening of spreads on RBS senior issuance, partially offset by a reduction due to the subordinate debt curve tightening. The OCA on senior issued debt OCA is determined by reference to secondary debt issuance spreads, the five year spread widened from 32 basis points at year end 2014 to 77 basis points at 30 June 2015.

Notes

1. Financial instruments (continued)

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 2014 Annual Report and Accounts. There have been no material changes to valuation or levelling approaches in the half year ended 30 June 2015.

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 2015	£bn	£bn	£bn	£bn		£m	£m
Assets
Loans and advances	-	89.2	0.6	89.8		40	(40)
Debt securities	52.0	15.7	1.6	69.3		110	(50)
Equity shares	2.5	0.4	0.5	3.4		90	(80)
Derivatives	-	279.6	2.2	281.8		200	(210)
	54.5	384.9	4.9	444.3		440	(380)
Proportion	12.3%	86.6%	1.1%	100%
31 December 2014
Assets
Loans and advances	-	95.4	0.6	96.0		30	(30)
Debt securities	55.5	22.3	1.2	79.0		50	(40)
Equity shares	4.6	0.5	0.5	5.6		90	(80)
Derivatives	-	350.7	3.0	353.7		290	(290)
	60.1	468.9	5.3	534.3		460	(440)
Proportion	11.2%	87.8%	1.0%	100%
30 June 2015
Liabilities
Deposits	-	99.0	0.4	99.4		10	(20)
Debt securities in issue	-	11.3	0.7	12.0		20	(30)
Short positions	21.3	3.3	-	24.6		-	-
Derivatives	-	271.6	2.0	273.6		190	(190)
Subordinated liabilities	-	0.8	-	0.8		-	-
	21.3	386.0	3.1	410.4		220	(240)
Proportion	5.2%	94.1%	0.7%	100%
31 December 2014
Liabilities
Deposits	-	105.9	0.2	106.1		-	(10)
Debt securities in issue	-	15.5	1.2	16.7		40	(40)
Short positions	19.9	3.1	-	23.0		-	-
Derivatives	0.1	346.5	3.2	349.8		220	(240)
Subordinated liabilities	-	0.9	-	0.9		-	-
	20.0	471.9	4.6	496.5		260	(290)
Proportion	4.1%	95.0%	0.9%	100%

Notes

1. Financial instruments (continued)

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, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most OTC derivatives. Level 3: instruments in this category have been valued using a valuation technique where at least one input which could have a significant effect on the instrument’s valuation, is not based on observable market data. Level 3 instruments primarily include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets instruments, unlisted equity shares, certain residual interests in securitisations, CDOs, other mortgage-backed products and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.
(2)	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 analysis of derivatives by type of contract refer to Appendix 1 - Capital and risk management - Credit risk – Derivatives.

Valuation techniques

The table below shows a breakdown of valuation techniques and the ranges for those unobservable inputs used in valuation models and techniques that have a material impact on the valuation of Level 3 financial instruments.

	Level 3 (£bn)				Range
Financial instruments	Assets	Liabilities	Valuation technique	Unobservable inputs	Low	High
Loans and advances	0.6
			DFC based on recoveries	Loss severity (3)	2	80%
				Recovery rates (4)	26	85%
				Credit spreads(5)	110	1115bp
Debt securities	1.6
			Price	Price (6)	0	129%
			DCF	Yield (6)	10	30%
Equity Securities	0.5
			Fund valuation statement	Discount factor (7)	(10)	35%
			DCF based on recoveries	Recovery rates (4)	0	30%
Derivatives
Credit	0.3	0.4	DCF based on recoveries	Recovery rates (4)	0	100%
				Credit spreads (5)	42	1010bps
Interest and foreign exchange contracts	1.9	1.6	Option pricing model	Correlation (8)	(46)	95%
				Volatility (9)	21	111%
				Price (6)	1	100%

Notes:

(1)	The table excludes unobservable inputs where the impact on valuation is less significant. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example, an increase in the credit spread of a bond would be favourable for the issuer and unfavourable for the note holder. Whilst RBS indicates where it considers that there are significant relationships between the inputs, these inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.
(2)	Level 3 structured notes issued of £0.7 billion are not included in the table above as valuation is consistent with the valuation of the embedded derivative component.
(3)	Loss severity : the loss severity rate of a defaulted instrument is the present value of its lifetime losses (both interest and principal losses) as a percentage of principal balance, measured at either the origination date or the default date
(4)	Recovery rate: Reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to move conversely to credit spreads.
(5)	Credit spreads and discount margins: Credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows
(6)	Price and yield: There may be a range of prices used to value an instrument that may be a direct comparison of one instrument or portfolio with another or, movements in a more liquid instrument may be used to indicate the movement in the value of a less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected pay-outs. Similarly to price, an instrument’s yield may be compared with other instruments’ yields either directly or indirectly. Prices move inversely to yields
(7)	Discount factor: as used in risk and return models which presume that the marginal investors in the company are diversified. Such is not usually the case for private equity investments. This risk is measured with a beta or betas, usually estimated by looking at past prices or returns from valuation statements.
(8)	Correlation: Measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Correlations typically include relationships between: default probabilities of assets in a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
(9)	Volatility: A measure of the tendency of a price to change with time.
(10)	RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.

Notes

14. Financial instruments: Movement in level 3 portfolios

													Amounts recorded in
													the income statement
	At	Amount recorded in					Purchases	Settlements	Sales	Foreign	At		in respect of balances
1 January	Income	SOCI	Level 3 transfers		and	exchange	30 June	held at period end
2015	statement (1)	(2)	In	Out	issuances (3)	and other	2015	Unrealised	Realised
	£m	£m	£m		£m	£m	£m	£m	£m	£m	£m		£m	£m
Assets
FVTPL assets (3)	4,673	(88)	-		489	(430)	296	(586)	(485)	(2)	3,867		(308)	4
AFS assets	634	(6)	(94)		628	(18)	3	(26)	(48)	(1)	1,072		(6)	3
	5,307	(94)	(94)		1,117	(448)	299	(612)	(533)	(3)	4,939		(314)	7
Liabilities	4,595	(621)	-		392	(637)	5	(647)	(4)	(7)	3,076		(460)	(13)
Net gains/(losses)		527	(94)										146	20

Notes:

(1)	Net gains on HFT instruments of £375 million (year ended 31 December 2014 - £100 million losses) were recorded in income from trading activities in continuing operations. Net gains on other instruments of £152 million (year ended 31 December 2014 - £205 million) were recorded in other operating income and interest income as appropriate in continuing operations. There were no losses in discontinued operations.
(2)	Consolidated statement of comprehensive income.
(3)	Fair value through profit or loss comprises held-for-trading predominantly and designated at fair value through profit and loss.

Notes

1. Financial instruments (continued)

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 2015			31 December 2014
	Carrying			Carrying
	value	Fair value		value	Fair value
	£bn	£bn		£bn	£bn
Financial assets
Loans and advances to banks	15.0	15.0		12.8	12.8
Loans and advances to customers	297.3	291.5		312.1	303.5
Debt securities	7.8	7.8		7.6	7.5
Financial liabilities
Deposits by banks	7.4	7.4		6.4	6.4
Customer accounts	81.5	81.6		100.7	100.7
Debt securities in issue	29.8	31.0		33.6	35.0
Subordinated liabilities	18.9	19.0		22.0	22.5

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.

For the following short-term financial instruments 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.

15. Contingent liabilities and commitments
	30 June	31 March	31 December
	2015	2015	2014
	£m	£m	£m
Contingent liabilities
Guarantees and assets pledged as collateral security	14,452	16,161	16,721
Other	8,686	9,589	9,581
	23,138	25,750	26,302
Commitments
Undrawn formal standby facilities, credit lines and other
commitments to lend	186,202	209,813	212,777
Other	1,339	1,524	2,107
	187,541	211,337	214,884
Contingent liabilities and commitments	210,679	237,087	241,186

Additional contingent liabilities arise in the normal course of RBS’s business. It is not anticipated that any material loss will arise from these transactions.

Notes

16. Litigation, investigations and reviews

Litigation, investigations and reviews

The Royal Bank of Scotland Group plc (the company or RBSG plc) and certain members of the Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action in the United Kingdom, the European Union, the United States 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 the legal proceedings, investigations and regulatory and governmental matters in which RBS is involved is inherently uncertain, the directors believe that, based on the information available to them, appropriate provisions have been made in respect of legal proceedings, investigations and regulatory and governmental matters as at 30 June 2015 (see Note 5). The aggregate provisions for regulatory and legal actions of £1.2 billion recognised during the six months ended 30 June 2015, included anticipated costs following investigations into the foreign exchange market (£334 million), provisions in respect of mortgage-backed-securities related litigation (£506 million), provisions relating to packaged accounts (£157 million) and other conduct provisions (£160 million).

In many proceedings and investigations, it is not possible to determine whether any loss is probable or to estimate 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.

There are also situations where RBS may enter into 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) it is indicated that liability cannot be reasonably estimated, no provision has been recognised.

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 material in some instances.

Notes

16. Litigation, investigations and reviews (continued)

Litigation

Unless we have indicated that we have established a provision with respect to the matters described below or reached a settlement, or, although we have established a provision the matter is continuing which could affect the overall level of provisions, the matters remain at a stage where there remains considerable uncertainty around the final outcome of the claims and it is not practicable reliably to estimate the aggregate potential impact on RBS, if any, which impact, individually or in the aggregate, may be material.

Shareholder litigation (US)

RBS and certain of its subsidiaries, together with certain current and former officers and directors were named as defendants in a purported class action filed in the United States District Court for the Southern District of New York involving holders of American Depositary Receipts (the ADR claims).

A consolidated amended complaint asserting claims under Sections 10 and 20 of the US Securities Exchange Act of 1934 and Sections 11, 12 and 15 of the US Securities Act of 1933, as amended (the “Securities Act”) was filed in November 2011 on behalf of all persons who purchased or otherwise acquired the Group's American Depositary Receipts (ADRs) from issuance through 20 January 2009. In September 2012, the Court dismissed the ADR claims with prejudice. In August 2013, the Court denied the plaintiffs’ motions for reconsideration and for leave to re-plead their case. The plaintiffs appealed, and on 15 April 2015 the United States Court of Appeals for the Second Circuit affirmed the Court’s dismissal of the plaintiffs’ claims. The plaintiffs requested that the appellate court reconsider its decision, but that request was denied on 9 July 2015 and this matter is now closed.

Shareholder litigation (UK)

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 RBS (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 which is now closed to further claimants. The aggregate value of the shares subscribed for at 200 pence per share by the claimant shareholders is approximately £4 billion although their damages claims are not yet quantified. At a case management conference in December 2014 the judge ordered that a trial of the preliminary issue of whether the rights issue prospectus contained untrue and misleading statements and/or improper omissions commence in December 2016. In the event that the Court makes such a finding, further trial(s) will be required to consider whether any such statements and/or omissions caused loss and, if so, the quantum of that loss.

Notes

16. Litigation, investigations and reviews (continued)

Other securitisation and securities related litigation in the United States

RBS companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the United States that relate to the securitisation and securities underwriting businesses. These cases include actions by individual purchasers of securities and purported class action suits. Together, the pending individual and class action cases (including those claims specifically described in this note) involve the issuance of approximately US$45 billion of mortgage-backed securities (MBS) issued primarily from 2005 to 2007. In general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the securities were issued.

RBS companies remain as defendants in more than 25 lawsuits brought by or on behalf of purchasers of MBS, including the purported class action identified below.

In the event of an adverse judgment in any of these cases, the amount of RBS’s liability will depend on numerous factors that are relevant to the calculation of damages, which may include the recognised loss of principal value in the securities at the time of judgment (write-downs); the value of the remaining unpaid principal balance of the securities at the time the case began, at the time of judgment (if the plaintiff still owns the securities at the time of judgment), or at the time when the plaintiff disposed of the securities (if plaintiff sold the securities); and a calculation of pre and post judgment interest that the plaintiff could be awarded, which could be a material amount.

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 MBS-related lawsuits against RBS and a number of other financial institutions, all of which, except for the two cases described below, have since settled for amounts that were publicly disclosed. The primary FHFA lawsuit against RBS remains pending in the United States District Court for the District of Connecticut, and it relates to approximately US$32 billion of MBS for which RBS entities acted as sponsor/depositor and/or lead underwriter or co-lead underwriter. Of these US$32 billion, approximately US$9.1 billion were outstanding at 30 June 2015 with cumulative write downs to date on the securities of approximately US$1.09 billion (being the recognised loss of principal value suffered by security holders). In September 2013, the Court denied the defendants’ motion to dismiss FHFA’s amended complaint in this case. The preliminary phases of this matter, including discovery, are expected to continue into 2016.

Notes

16. Litigation, investigations and reviews (continued)

The other remaining FHFA lawsuit that involves RBS relates to MBS issued by Nomura Holding America Inc. (Nomura) and subsidiaries, and is now 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 MBS 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 of 15 May 2015 is approximately US$350 million, which is the difference between the amount of the judgment against RBS Securities Inc. (US$636 million) and the current estimated market value of the four MBS that FHFA would return to RBS Securities Inc. pursuant to the judgment. 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.

The National Credit Union Administration Board (NCUA) is litigating three MBS cases against RBS companies (on behalf of US Central Federal Credit Union, Western Corporate Federal Credit Union, Southwest Corporate Federal Credit Union, and Members United Corporate Federal Credit Union). The original principal balance of the MBS at issue in the NCUA cases is US$3.56 billion.

Other remaining MBS lawsuits against RBS companies include, among others, cases filed by the Federal Home Loan Banks of Boston, Chicago, Seattle and San Francisco, and a case filed by the Commonwealth of Virginia on behalf of the Virginia Retirement System.

RBS companies are also defendants in a purported MBS 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. Another MBS class action (Luther v. Countrywide Financial Corp. et al. and related class action cases) was settled in 2013 without any contribution from RBS, but several members of the settlement class are appealing the court-approved settlement to the United States Court of Appeals for the Ninth Circuit.

Certain other claims on behalf of public and private institutional investors have been threatened against RBS in connection with various mortgage-related offerings. RBS cannot predict whether any of these threatened claims will be pursued, but expects that several may.

RBS has made provisions to date totalling £2,080 million for all MBS related litigation claims and investigations (including those specifically described in this note), including £506 million for the six months ending 30 June 2015.

In many of the securitisation and securities related cases in the US, 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.

Notes

16. Litigation, investigations and reviews (continued)

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, have been 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. In orders dated 29 March 2013 and 23 June 2014, the Court dismissed plaintiffs' antitrust claims and claims under RICO (Racketeer Influenced and Corrupt Organizations Act), but declined to dismiss (a) certain Commodities 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.

The Court’s dismissal of plaintiffs’ antitrust claims is currently on appeal to the United States Court of Appeals for the Second Circuit. Over 35 other USD LIBOR-related actions involving RBS, including purported class actions on behalf of lenders and mortgage borrowers, are subject to motions to dismiss that are being litigated. Discovery has been stayed in all cases in the coordinated proceeding pending further order from the Court.

Certain members of the Group have also been named as defendants in class actions relating to (i) JPY LIBOR and Euroyen TIBOR, (ii) Euribor, (iii) Swiss Franc LIBOR, and (iv) Pound sterling LIBOR, all of which are pending in the United States District Court for the Southern District of New York. On 28 March 2014, the Court in the action relating to Euroyen TIBOR futures contracts dismissed the plaintiffs’ antitrust claims, but refused to dismiss their claims under the Commodity Exchange Act for price manipulation.

Details of LIBOR investigations and their outcomes affecting RBS are set out under ‘Investigations and reviews’ on page 108.

ISDAFIX antitrust litigation

Beginning in September 2014, RBS plc and a number of other financial institutions were named as defendants in several purported class action complaints (now consolidated into one complaint) alleging manipulation of USD ISDAFIX rates, to the detriment of persons who entered into transactions that referenced those rates. The complaints were filed in the United States District Court for the Southern District of New York and have been consolidated. The consolidated complaint contains claims for violations of the US antitrust laws, contract claims, and claims for tortious interference with contract. This matter is subject to pre-discovery motions to dismiss some or all of the claims against the defendants.

Notes

16. Litigation, investigations and reviews (continued)

Credit default swap antitrust litigation

Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated antitrust class action pending in the United States District Court for the Southern District of New York. The plaintiffs allege that defendants violated the US antitrust laws by restraining competition in the market for credit default swaps through various means and thereby causing inflated bid-ask spreads for credit default swaps. In September 2014, the Court denied the defendants' motion to dismiss this matter. The RBS defendants have reached an agreement to settle this matter, subject to documentation and approval of the Court. The settlement amount is covered by existing provisions.

FX antitrust litigation

RBS and RBS Securities Inc., as well as a number of other financial institutions, are defendants in a consolidated antitrust class action on behalf of US based plaintiffs that is pending in the United States District Court for the Southern District of New York. On 28 January 2015, the court denied the defendants’ motion to dismiss this action, holding that plaintiffs who entered into Foreign Exchange (FX) transactions with RBS or other defendant banks could proceed with their claims that defendants violated the US antitrust laws by conspiring to manipulate the foreign exchange market by manipulating benchmark foreign exchange rates. RBS and RBS Securities Inc. have reached an agreement to settle the claims that are or could be asserted by these plaintiffs in relation to this matter, subject to execution of a final settlement agreement and approval of the Court. The settlement amount is covered by existing provisions.

Certain members of the Group are also defendants in additional foreign-exchange related class action complaints, including several complaints filed in the United States District Court for the Southern District of New York on behalf of investors that transacted in exchange-traded foreign exchange futures contracts and/or options on foreign exchange futures contracts, and a complaint on behalf of employee benefit plans that entered into FX transactions, which was also filed in the United States District Court for the Southern District of New York. These complaints contain allegations that are substantially similar to those contained in the consolidated antitrust class action described above, and in addition to antitrust claims, also assert claims under the Commodities Exchange Act, and claims under the Employee Retirement Income Security Act. The claims in these cases are, in some instances, duplicative of the claims that would be released as part of the agreement to settle reached in the above consolidated antitrust action.

US Treasury securities antitrust litigation

In July 2015, several class action antitrust complaints were filed in the United States District Court for the Southern District of New York 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 Commodities Exchange Act on behalf of persons who transacted in US Treasury securities or derivatives based on such instruments, including futures and options.

Notes

16. Litigation, investigations and reviews (continued)

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. 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. A further claim, for US$21.8 million, was filed in October 2011. This matter is subject to pre-discovery motions to dismiss the claims against RBS N.V..

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

CPDO claims have been served on RBS N.V. in England, the Netherlands and Australia, and on RBS in England, relating to the sale of a type of structured financial product known as a constant proportion debt obligation (CPDO). In November 2012, the Federal Court of Australia issued a judgment against RBS N.V. and others in one such case holding that RBS N.V. and others committed certain wrongful acts in connection with the rating and sale of the CPDO. In March 2013, RBS N.V. was ordered to pay A$19.7 million. RBS N.V. appealed this decision and the appeal court found against RBS N.V. in May 2014. The decision is not being further appealed. RBS N.V. made the required payments totalling A$19.7 million in March and April 2013. The judgment may potentially have significance to the other claims served and to any future similar claims.

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. 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 are being considered under the UK Financial Conduct Authority (FCA) redress programme, as well as customers who are outside of the scope of that programme. 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.

Notes

16. Litigation, investigations and reviews (continued)

Weiss v. National Westminster Bank PLC

NatWest is defending a lawsuit filed by a number of United States 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 Antiterrorism 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.

Freeman v. HSBC Holdings PLC

On 10 November 2014, RBS N.V. and certain other financial institutions (HSBC, Barclays, Standard Chartered, Credit Suisse, and Bank Saderat) were named as defendants in a complaint filed by a number of United States nationals (or their estates, survivors, or heirs), most of whom are or were United States military personnel, who were killed or injured in more than 70 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 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 Antiterrorism 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. On 2 April 2015, the plaintiffs filed an amended complaint adding Commerzbank as an additional defendant. On 29 May 2015, the defendants filed a motion to dismiss the amended complaint in this matter.

Investigations and reviews

RBS’s businesses and financial condition can be affected by the fiscal or other policies and actions of various governmental and regulatory authorities in the United Kingdom, the European Union (EU), the United States and elsewhere. RBS has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the United Kingdom, the EU, the United States and elsewhere, on an ongoing and regular basis 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. It is possible that any matters discussed or identified may result in investigatory or 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 or fines. Any of the events or circumstances mentioned 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.

Notes

16. Litigation, investigations and reviews (continued)

LIBOR and other trading rates

In February 2013, RBS announced settlements with the Financial Services Authority (FSA) in the United Kingdom, the United States Commodity Futures Trading Commission (CFTC) and the United States Department of Justice (DOJ) in relation to investigations into submissions, communications and procedures around the setting of LIBOR. RBS agreed to pay penalties of £87.5 million, US$325 million and US$150 million to these authorities respectively to resolve the investigations. As part of the agreement with the DOJ, RBS plc entered into a Deferred Prosecution Agreement (DPA) in relation to one count of wire fraud relating to Swiss Franc LIBOR and one count for an antitrust violation relating to Yen LIBOR.

In addition, on 12 April 2013, RBS Securities Japan Limited entered a plea of guilty to one count of wire fraud relating to Yen LIBOR and on 6 January 2014, the US District Court for the District of Connecticut entered a final judgment in relation to the conviction of RBS Securities Japan Limited pursuant to the plea agreement.

On 17 April 2015, following expiry of the DPA, the DOJ filed a motion seeking dismissal of the criminal information underlying the DPA. On 21 April 2015, the US District Court in Connecticut granted the motion and ordered the charges dismissed; as a result, the DPA is no longer in effect.

In February 2014, RBS paid settlement penalties of approximately EUR 260 million and EUR 131 million to resolve investigations by the European Commission (EC) into Yen LIBOR competition infringements and EURIBOR competition infringements respectively. This matter is now concluded.

In July 2014, RBS entered into an Enforceable Undertaking with the Australian Securities and Investments Commission (ASIC) in relation to potential misconduct involving the Australian Bank Bill Swap Rate. RBS undertakes in the Enforceable Undertaking to (a) comply with its existing undertakings arising out of the February 2013 settlement with the United States Commodity Futures Trading Commission as they relate to Australian Benchmark Interest Rates, (b) implement remedial measures with respect to its trading in Australian reference bank bills and (c) appoint an independent compliance expert to review and report on RBS’s implementation of such remedial measures. The remediation measures include ensuring appropriate records retention, training, communications surveillance and trading reviews are in place. As part of the Enforceable Undertaking, RBS also agreed to make a voluntary contribution of A$1.6 million to fund independent financial literacy projects in Australia.

On 21 October 2014, the EC announced its findings that RBS and one other financial institution had participated in a bilateral cartel aimed at influencing the Swiss franc LIBOR benchmark interest rate between March 2008 and July 2009. RBS agreed to settle the case with the EC and received full immunity from fines for revealing the existence of the cartel to the EC and co-operating closely with the EC’s ongoing investigation. Also on 21 October 2014, the EC announced its findings that RBS and three other financial institutions had participated in a related cartel on bid-ask spreads of Swiss franc interest rate derivatives in the European Economic Area (EEA). Again, RBS received full immunity from fines for revealing the existence of the cartel to the EC and co-operating closely with the EC’s ongoing investigation.

Notes

16. Litigation, investigations and reviews (continued)

RBS is co-operating with investigations and new and ongoing requests for information by various other governmental and regulatory authorities, including in the UK, US and Asia, into its submissions, communications and procedures relating to a number of trading rates, including LIBOR and other interest rate settings, and non-deliverable forwards. RBS is providing information and documents to the CFTC as part of its investigation into the setting of USD, EUR and GBP ISDAFIX and related trading activities. RBS understands the CFTC investigation is at an advanced stage. RBS is also under investigation by competition authorities in a number of jurisdictions stemming from the actions of certain individuals in the setting of LIBOR and other trading rates, as well as interest rate-related trading. At this stage, as there remains considerable uncertainty around the outcome of these investigations, it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.

Foreign exchange related investigations

In November 2014, RBS plc reached a settlement with the FCA in the United Kingdom and the United States Commodity Futures Trading Commission (CFTC) in relation to investigations into failings in RBSG plc’s FX businesses within its Corporate & Institutional Banking (CIB) 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 CIB segment. RBS plc has agreed to pay penalties of US$395 million to the DOJ and US$274 million to the Federal Reserve to resolve the investigations. The fines are fully covered by existing provisions.

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 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. Pursuant to the plea agreement (which is publicly available), the DOJ and RBS plc have agreed jointly to recommend to the Court that it impose a sentence consisting of a US$395 million criminal fine and a term of probation, which among other things, would prohibit 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 require 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). If RBS is sentenced to a term of probation, a violation of the terms of probation could lead to the imposition of additional penalties.

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 after they are 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.

Notes

16. Litigation, investigations and reviews (continued)

RBS is responding to investigations and inquiries from other governmental and regulatory authorities on similar issues relating to failings in its FX business within its CIB segment, including with respect to potential collateral consequences of the RBS plc guilty plea described above. The timing and amount of financial penalties with respect to any further settlements and related litigation risks and collateral consequences remain uncertain and could be material.

On 21 July 2014, the Serious Fraud Office in the UK announced that it was launching a criminal investigation into allegations of fraudulent conduct in the foreign exchange market, apparently involving multiple financial institutions. At this stage, as there remains considerable uncertainty around the outcome of this investigation it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.

Interest rate hedging products (IRHP) redress programme

In June 2012, following an industry wide review, the FSA announced that RBS and other UK banks had agreed to 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. In January 2013 the FSA issued a report outlining the principles to which it wished RBS and other UK banks to adhere in conducting the review and redress exercise. This exercise is being scrutinised by an independent reviewer, KPMG (appointed as a Skilled Person under section 166 of the Financial Services and Markets Act), who is reviewing and approving all redress outcomes, and the FCA is overseeing this. RBS has reached agreement with KPMG in relation to redress outcomes for almost all in scope customers. RBS and KPMG are now focussing on customer responses to review outcomes, securing acceptance of offers and assessing ancillary issues such as consequential loss claims. The review and redress exercise was closed to new entrants on 31 March 2015.

The Central Bank of Ireland also requested Ulster Bank Ireland Limited (UBIL), along with a number of Irish banks, to undertake a similar exercise and past business review in relation to the sale of IRHP to retail designated small and medium sized businesses in the Republic of Ireland. RBS also agreed to undertake a similar exercise and past business review in respect of relevant customers of RBS International. The review undertaken in respect of RBS International customers is complete, and the review in respect of UBIL customers is expected to be completed in Q3 2015.

RBS provisions in relation to the above redress exercises total £1.5 billion to date for these matters, of which £1.2 billion had been utilised at 30 June 2015.

Judicial Review of Skilled Person’s role in IRHP review

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

Notes

16. Litigation, investigations and reviews (continued)

The Administrative Court is still to determine whether to allow the latest three claims by RBS customers to proceed to a full hearing, and they are both likely to be stayed pending the outcome of the other bank’s case, in which the customer has already received permission to proceed. That case will decide whether a section 166-appointed Skilled Person is susceptible to judicial review. If so, the additional claims which seek to open the decisions of KPMG as Skilled Person on RBS's IRHP redress programme are likely to then proceed to full hearing and assess the fairness of KPMG’s redress programme decisions 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 considerable uncertainty and the judicial review is at an early stage, it is not practicable reliably to estimate the impact of such matters, if any, on RBS which may be material.

FSA mystery shopping 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 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 Personal & Business Banking (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 is currently being paid/offered to certain customers in this sample group. Following discussions with the FCA after issue of the draft section 166 report, RBS has agreed with the FCA that it will carry out a wider review/remediation exercise – the precise scope of this has yet to be finalised. In addition, RBS has agreed with the FCA that it will 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. A pilot customer communications exercise to certain cohorts of customers was undertaken between November 2014 and January 2015 with a further communication exercise to the remaining cohorts due to be completed during the second half of 2015.

RBS provisions in relation to investment advice total £150 million to date for these matters including for the six months ended 30 June 2015 (of which £59 million had been utilised at 30 June 2015).

Notes

16. Litigation, investigations and reviews (continued)

Card Protection Plan Limited

In August 2013, the FCA announced that Card Protection Plan Limited and 13 banks and credit card issuers, including RBS, had agreed to a compensation scheme in relation to the sale of card and/or identity protection insurance to certain retail customers. The closing date before which any claims under the compensation scheme must have been submitted has now passed. RBS has made appropriate provision based on its estimate of exposure arising from this scheme.

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 provisions totalling £307 million to date for this matter.

FCA review of RBS’ 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’ treatment of SMEs. The Tomlinson Report was passed to the PRA and FCA. Shortly thereafter, the FCA announced that an independent Skilled Person would be appointed under Section 166 of the Financial Services and Markets Act to review the allegations in the Tomlinson Report. The Skilled Person’s review is focused on RBS’ UK small and medium sized business customers with credit exposures of up to £20 million whose relationship was managed within RBS’ Global Restructuring Group or within similar units within RBS’ 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 they made certain recommendations to enhance customer experience and transparency of pricing, they 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.

On 17 January 2014, a Skilled Person was appointed. RBS is fully cooperating with the FCA in its review. The Skilled Person review focuses on the allegations made by Lawrence Tomlinson in the Tomlinson Report and certain observations made by Sir Andrew Large in his 2013 Independent Lending Review, and is broader in scope than the reviews undertaken by Clifford Chance and Mason, Hayes & Curran which are referred to above. The timing for the delivery of the initial findings of such review by the Skilled Person to RBS and the FCA is not finally determined but may be during the fourth quarter of 2015. RBS will have an opportunity to respond to any findings of such review before the Skilled Person delivers its final report. In the event that the Skilled Person’s review concludes that there were material failings in RBS’ treatment of SME customers those conclusions could, depending on their nature, scale and type, result in the commencement of regulatory enforcement action by the FCA, the imposition of redress requirements and the commencement of litigation claims against RBS, as well as potentially wider investigations and litigation related to RBS’s treatment of customers in financial difficulty. At this stage, as there remains considerable uncertainty around the final conclusions of the Skilled Person’s review and any collateral consequences thereof, it is not practicable reliably to estimate the potential impact on RBS.

Notes

16. Litigation, investigations and reviews (continued)

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.

In May 2013, the EC announced it had reached an agreement with Visa regarding immediate cross border credit card MIF rates. This agreement has now been market tested and was made legally binding on 26 February 2014. The agreement is to last for four years.

In addition, 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.

In the UK, the Office of Fair Trading (OFT) had previously opened investigations into domestic interchange fees applicable in respect of Visa and MasterCard consumer and commercial credit and debit card transactions. On 6 May 2015, the successor body to the OFT, the Competition & Markets Authority (CMA), announced that it had closed these investigations on the grounds of administrative priorities.

There remains considerable uncertainty around the outcomes of the ongoing EC investigation, proceedings and regulation are not yet fully known, but 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

Since 2011, RBS has been implementing a policy statement agreed with the FCA for the handling of complaints about the mis-selling of Payment Protection Insurance (PPI). RBS has made provisions totalling £3.8 billion to date for this matter, including £0.1 billion in the six months ending 30 June 2015, of which £3.1 billion had been utilised by that date.

RBS is monitoring developments following the UK Supreme Court’s decision in the case of Plevin v Paragon in November 2014 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 cases referred to FOS. On 27 May 2015, the FCA announced that it was considering whether additional rules and/or guidance are required to deal with the impact of the Plevin decision on complaints about PPI generally. RBS is in active dialogue with FOS and the FCA on this issue. At this stage, as there remains considerable uncertainty regarding the application of the Plevin decision (including to previously settled cases), it is not practicable reliably to estimate the potential impact on RBS, which may be material.

Notes

16. Litigation, investigations and reviews (continued)

UK personal current accounts/retail banking

Following the OFT’s publication of a market study report into the Personal Current Account (PCA) market in July 2008, the OFT launched a follow up review of the PCA market in July 2012. This review was intended to consider whether certain initiatives agreed by the OFT with banks in light of the July 2008 report, primarily around transparency, unarranged overdrafts and customers in financial difficulty, had been successful and whether the market should be referred to the Competition Commission (CC) for a fuller market investigation.

The OFT’s PCA report following this July 2012 launch was published in January 2013. The OFT acknowledged some specific improvements in the market since its last review but concluded that further changes were required to tackle ongoing concerns, including a lack of switching, the ability of consumers to compare products and the complexity of overdraft charges. The OFT decided not to refer the market to the CC but said that it expected to return to the question of a referral to the CC in 2015, or earlier. The OFT also announced that it would be carrying out behavioural economic research on the way consumers make decisions and engage with retail banking service, and would study the operation of payment systems as well as the SME banking market.

On 11 March 2014, the CMA announced that in addition to its pending SME review (see below), it would be undertaking an update of the OFT’s 2013 PCA review. On 18 July 2014 the CMA published its preliminary findings in respect of both the PCA and SME market studies. The CMA provisionally decided to make a market investigation reference (MIR) for both the PCA and SME market studies. The provisional decision on both PCAs and SMEs was then subject to a consultation period until 17 September 2014. Following this period of consultation, on 6 November 2014, the CMA made its final decision to proceed with a MIR. The MIR will be a wide-ranging 18-24 month Phase 2 inquiry. At this stage as there remains considerable uncertainty around the outcome of these reviews it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.

SME banking market study

The OFT announced its market study on competition in banking for SMEs in England and Wales, Scotland and Northern Ireland on 19 June 2013. Following a consultation on the scope of the market study, the OFT published an update paper on 27 September 2013 setting out its proposed scope. On 11 March 2014, the OFT set out some competition concerns on SME banking and also announced that the CMA would continue the review. As discussed above, the CMA has decided to make a MIR for the SME market study in addition to the PCA study. As regards SMEs, the CMA concluded that it would be more appropriate to make a MIR than accept a set of undertakings in lieu put forward by RBS, Barclays, HSBC and Lloyds. Alongside the MIR, the CMA will also be reviewing the previous undertakings given following the CC’s investigation into SME banking in 2002 and whether these undertakings need to be varied. At this stage as there remains considerable uncertainty around the outcome of these reviews it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.

Williams & Glyn

On 28 May 2015 HM Treasury asked the CMA to assess the likely impact of the latest proposals for the divestment of Williams & Glyn for competition in the UK banking sector. On 24 July 2015 HM Treasury announced that it had asked the CMA to delay finalising its advice until later in the year. At this stage the outcome of the review cannot be predicted. As a result there is a risk that the CMA might recommend changes to the current Williams & Glyn divestment plan.

Notes

16. Litigation, investigations and reviews (continued)

FCA Wholesale Sector Competition Review

On 9 July 2014, the FCA launched a review of competition in the wholesale sector to identify any areas which may merit further investigation through an in-depth market study.

The initial review was an exploratory exercise and focused primarily on competition in wholesale securities and investment markets, and related activities such as corporate banking. It commenced with a three month consultation exercise, including a call for inputs from stakeholders. Following this consultation period, the FCA published its feedback statement on 19 February 2015 which announced that the FCA is to undertake a market study into investment and corporate banking and potentially into asset management (the latter to launch late 2015 if undertaken). The terms of reference for the investment and corporate banking market study were published on 22 May 2015. The FCA is intending to publish an interim report towards the end of 2015/early 2016 with a final report in Spring 2016. At this stage, as there remains considerable uncertainty around the outcome of these reviews it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.

Credit default swaps (CDS) investigation

RBS is a party to the EC’s antitrust investigation into the CDS information market. RBS has received and responded to a Statement of Objections from the EC and continues to co-operate fully with the EC's ongoing investigation. In general terms, the EC has raised concerns that a number of banks, Markit and ISDA may have jointly prevented exchanges from entering the CDS market. At this stage, as there remains considerable uncertainty around the outcome of these reviews it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.

Loan securitisation business investigations

In the United States, 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 DOJ and various other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force (including several state attorneys general), relating to, among other things, issuance, underwriting and trading in 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.

Notes

16. Litigation, investigations and reviews (continued)

These ongoing matters include, among others, active investigations by the civil and criminal divisions of the DOJ and the office of the attorney general of Connecticut, relating primarily to due diligence on loans purchased for, or otherwise included in, securitisations and related disclosures. RBS Securities Inc. was recently informed that the Connecticut Department of Banking has authorised the attorney general of Connecticut to issue notices concerning a possible administrative proceeding against RBS Securities Inc., which proceeding could seek civil monetary penalties and restitution for alleged violations of Connecticut law, among other remedies. RBS Securities Inc. will have the opportunity to respond setting out its position as to why the Department of Banking should not commence legal proceedings against it. The investigations also include civil and criminal investigations relating to alleged misrepresentations in the trading of various forms of asset-backed securities, including residential mortgage-backed securities, commercial mortgage-backed securities, CDOs, and CLOs. In March 2015, a former RBS Securities Inc. trader pled guilty in the United States District Court for the District of Connecticut to one count of conspiracy to commit securities fraud while employed at RBS Securities Inc.

In 2007, the New York State Attorney General issued subpoenas to a wide array of participants in the securitisation and securities industry, focusing on the information underwriters obtained from the independent firms hired to perform due diligence on mortgages. RBS completed its production of documents requested by the New York State Attorney General in 2008, principally producing documents related to loans that were pooled into one securitisation transaction. In May 2011, the New York State Attorney General requested additional information about RBS’s mortgage securitisation business and, following the formation of the RMBS Working Group, has focused on the same or similar issues as the other state and federal RMBS Working Group investigations described above. The investigation is ongoing and RBS continues to respond to requests for information.

At this stage, as there remains considerable uncertainty around the outcome of RMBS related regulatory and governmental investigations it is not practicable reliably to estimate the aggregate potential impact on RBS which is expected to be material.

US mortgages - loan repurchase matters

RBS’s CIB business in North America has been a purchaser of non-agency US residential mortgages in the secondary market, and an issuer and underwriter of non-agency residential mortgage-backed securities (RMBS). CIB did not originate or service any US residential mortgages and it was not a significant seller of mortgage loans to government sponsored enterprises (GSEs) (e.g. the Federal National Mortgage Association and the Federal Home Loan Mortgage Association).

In issuing RMBS, CIB generally assigned certain representations and warranties regarding the characteristics of the underlying loans made by the originator of the residential mortgages; however, in some circumstances, CIB made such representations and warranties itself. Where CIB has given those or other representations and warranties (whether relating to underlying loans or otherwise), CIB may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties. In certain instances where it is required to repurchase loans or related securities, CIB may be able to assert claims against third parties who provided representations or warranties to CIB when selling loans to it, although the ability to recover against such parties is uncertain. Between the start of 2009 and 30 June 2015, CIB received approximately US$753 million in repurchase demands in respect of loans made primarily from 2005 to 2008 and related securities sold where obligations in respect of contractual representations or warranties were undertaken by CIB. However, repurchase demands presented to CIB are subject to challenge and rebuttal by CIB.

Notes

16. Litigation, investigations and reviews (continued)

Citizens Financial Group, Inc (Citizens) has not been an issuer or underwriter of non-agency RMBS. However, Citizens is an originator and servicer of residential mortgages, and it routinely sells such mortgage loans in the secondary market and to GSEs. In the context of such sales, Citizens makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of the representations and warranties concerning the underlying loans. Between the start of 2009 and 30 June 2015, Citizens received US$265 million in repurchase demands and indemnification payment requests in respect of loans originated primarily since 2003. However, repurchase demands presented to Citizens are subject to challenge and rebuttal by Citizens.

Although there has in recent times been disruption in the ability of certain financial institutions operating in the United States to complete foreclosure proceedings in respect of US mortgage loans in a timely manner or at all (including as a result of interventions by certain states and local governments), to date, Citizens has not been materially impacted by such disruptions and RBS has not ceased making foreclosures.

At this stage, as there remains considerable uncertainty around the outcome of loan repurchase related claims it is not practicable reliably to estimate the aggregate potential impact, if any, on RBS which may be material.

Citizens consent orders

The activities of Citizens' two US bank subsidiaries - Citizens Bank, N.A. and Citizens Bank of Pennsylvania - are subject to extensive US laws and regulations concerning unfair or deceptive acts or practices in connection with customer products. Certain of the bank subsidiaries’ practices with respect to overdraft protection and other consumer products have not met applicable standards. The bank subsidiaries have implemented and are continuing to implement changes to improve and bring their practices into compliance with regulatory guidance. In April 2013, the bank subsidiaries consented to the issuance of orders by their respective primary federal banking regulators, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (Consent Orders). In the Consent Orders (which are publicly available and will remain in effect until terminated by the regulators), the bank subsidiaries neither admitted nor denied the regulators’ findings that they had engaged in deceptive marketing and implementation of the bank's overdraft protection programme, checking rewards programmes, and stop-payment process for pre-authorised recurring electronic fund transfers.

In connection with the Consent Orders, the bank subsidiaries paid a total of US$10 million in civil monetary penalties. The Consent Orders also require the bank subsidiaries to develop plans to provide restitution to affected customers (the amount of which is anticipated to be approximately US$8 million), to cease and desist any operations in violation of Section 5 of the Federal Trade Commission Act, and to submit to the regulators periodic written progress reports regarding compliance with the Consent Orders.

Notes

16. Litigation, investigations and reviews (continued)

In addition, Citizens Bank, N.A. agreed to take certain remedial actions to improve its compliance risk management systems and to create a comprehensive action plan designed to achieve compliance with the relevant Consent Order. Restitution plans have been prepared and submitted for approval, and Citizens Bank, N.A. has submitted for approval and is in the process of implementing its action plan for compliance with the Consent Order, as well as updated policies, procedures and programmes related to its compliance risk management systems. In addition to the above, the bank subsidiaries could face further formal administrative enforcement actions from their federal supervisory agencies, including the assessment of civil monetary penalties and restitution, relating to issues identified by Citizens arising from other consumer products and related practices and policies, and they could face potential civil litigation.

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 RBS plc and RBS N.V. branches. In the Governance Order, RBS agreed to create the following written plans or programmes:

●	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 RBS plc and RBS N.V. branches in the US (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.

Notes

16. Litigation, investigations and reviews (continued)

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 United States 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 Board of Governors of the Federal Reserve System (Fed), 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 Fed (US Dollar Processing Order), which remains in effect until terminated by the Fed. 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 United States 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 of the United States, 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.

One of the requirements RBS agreed in the US Dollar Processing Order (as part of the OFAC compliance programme) was to hire an independent consultant to conduct an annual OFAC compliance review of compliance policies and their implementation and an appropriate risk-focused sampling of US dollar payments. RBS appointed the independent consultant and their review was submitted to the authorities on 14 June 2015. 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.

US/Swiss tax programme

In August 2013, the DOJ announced a programme for Swiss banks (the Programme), to settle the long-running dispute between the US tax authorities and Switzerland regarding the role of Swiss banks in concealing the assets of US tax payers in offshore accounts. The Programme provides Swiss banks with an opportunity to obtain resolution, through non-prosecution agreements or non-target letters, concerning their status in connection with the DOJ’s investigations.

Coutts & Co Ltd, a member of the Group incorporated in Switzerland, notified the DOJ that it intended to participate in the Programme based on the possibility that some of its clients may not have declared their assets in compliance with US tax laws. The Programme required a detailed review of all US related accounts. The results of Coutts & Co Ltd’s review were presented to the DOJ in June 2014. Coutts & Co Ltd has now completed the collection of evidence of the tax status of all US related account holders, including those US account holders participating in an offshore voluntary disclosure programme.

Notes

16. Litigation, investigations and reviews (continued)

The results of the review were presented by Coutts to the DOJ on 5 November 2014. Coutts continues to cooperate with the DOJ pursuant to the terms of the Programme. Coutts expects to reach resolution with the DOJ in 2015 under the terms of the Programme. RBS has made appropriate provision based on its estimate of exposure arising from this programme/review.

German prosecutor investigation into Coutts & Co Ltd

A prosecuting authority in Germany is undertaking an investigation into Coutts & Co Ltd in Switzerland, and current and former employees, for alleged aiding and abetting of tax evasion by certain Coutts & Co Ltd clients. Coutts & Co Ltd is cooperating with the relevant authorities. RBS has made appropriate provision based on its estimate of exposure arising from this investigation.

Review of suitability of advice provided by Coutts & Co

In 2013 the FCA conducted a thematic review of the advice processes across the UK wealth management industry. As a result of this review, Coutts & Co undertook a past business review into the suitability of investment advice provided to its clients. This review is ongoing. Coutts & Co is in the process of contacting clients and redress is being offered in appropriate cases. RBS has made appropriate provision based on its estimate of exposure arising from this review.

Enterprise Finance Guarantee Scheme

The Enterprise Finance Guarantee (EFG) scheme is a government lending initiative for small businesses with viable business proposals that lack security for conventional lending. From 2009 until March 2015, RBS provided over £955 million of lending under the EFG scheme. RBS has identified a number of instances where it has not properly explained to customers how borrower and guarantor liabilities work under the EFG scheme. There are also concerns around the eligibility of some customers to participate in the EFG scheme and around potential over or under-payment of quarterly premiums paid by customers. In January 2015, RBS announced a review of all EFG loans where there is a possibility that the customer may have been disadvantaged. The review is ongoing but has been completed for a small number of customers and RBS is in the process of advising these customers of their review outcome, which in some cases involves payment of redress. At this stage, as there remains considerable uncertainty around the outcome of this review, it is not practicable reliably to estimate the aggregate potential impact on RBS which may be material.

17. 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).

Notes

17. Related party (continued)

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 2014 are included in the 2014 Annual Report and Accounts.

18. Rating agencies

During the first half of 2015, Moody’s Investors Service (‘Moody’s’), Fitch Ratings (‘Fitch’) and Standard & Poor’s Rating Services (‘S&P’s’) concluded their review of RBS and certain other UK and international banks in response to changes in banking regulation. As a consequence of these reviews, the rating agencies:

●	Noted a reduced likelihood of sovereign support for banks operating in countries with well-advanced and effective resolution regimes; and
●	Implemented new methodologies that take into consideration additional loss-absorbing capital which the new regulation requires banks to build.

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						Standards and poor’s						Fitch
	Current rating			Previous rating			Current rating			Previous rating			Current rating			Previous rating
	Long term	Short term		Long term	Short term		Long term	Short term		Long term	Short term		Long term	Short term		Long term	Short term
The Royal Bank of Scotland Group plc (1)	Ba1	NP		Baa2	P-2		BBB-	A-3		BBB-	A-3		BBB+	F2		A	F1
The Royal Bank of Scotland plc	A3	P-2		Baa1	P-2		BBB+	A-2		A-	A-2		BBB+	F2		A	F1
National Westminster Bank Plc	A3	P-2		Baa1	P-2		BBB+	A-2		A-	A-2		BBB+	F2		A	F1
Royal Bank of Scotland N.V.	A3	P-2		Baa1	P-2		BBB+	A-2		A-	A-2		BBB+	F2		A	F1
Citizens Bank, N.A. (2)	Baa1	P-2		A3	P-2		A-	A-2		A-	A-2		BBB+	F2		BBB+	F2
RBS Securities Inc.	-	-		-	-		BBB+	A-2		A-	A-2		BBB+	F2		A-	F1
Ulster Bank Ltd	A3	P-2		Baa3	P-3		BBB	A-2		BBB+	A-2		BBB+	F2		A-	F1
Ulster Bank Ireland Ltd (3)	Ba1	P-3		Baa3	P-3		BBB	A-2		BBB+	A-2		BBB	F2		BBB+	F2

Notes:

(1)	Moody’s ratings for The Royal Bank of Scotland Group plc are considered to be below investment grade.
(2)	The table shows Moody’s short-term and long-term senior unsecured debt ratings (Baa1/P-2). Moody’s short-term and long-term deposit ratings are A1 and P-1 respectively.
(3)	The table shows Moody’s short-term and long-term senior unsecured debt ratings (Ba1 and p-3, below investment grade). Moody’s short-term and long-term deposit ratings are Baa3 and P-3 respectively (investment grade).

Following these changes Moody’s, Fitch and S&P’s have changed their outlook for RBSG plc and its subsidiaries to ‘Stable’.

Notes

19. Recent developments

July Budget

On 8 July 2015 a number of proposed changes to the UK corporate tax system were announced. In accordance with IFRS these changes will be accounted for when they are substantively enacted which is expected to be in October 2015.

The most relevant proposed measures include:

●	Cuts in the rate of corporation tax from 20% to 19% from 1 April 2017 and to 18% from 1 April 2020. Existing temporary differences on which deferred tax has been provided may reverse at these reduced rates;
●	A corporation tax surcharge of 8% on UK banking entities from 1 January 2016. This is expected to increase RBS’s corporation tax liabilities and vary the carrying value of its deferred tax balances;
●	A reduction in the bank levy rate from 0.21% to 0.18% from 1 January 2016 and subsequent annual reductions to 0.1% from 1 January 2021; and
●	Making compensation in relation to misconduct non-deductible for corporation tax.

It is expected that these measures will increase the normalised tax rate to around 27% in the medium term and trending lower thereafter.

Citizens

On 29 July 2015, RBS announced the final pricing for a further offering of 86 million shares in Citizens and the grant of a 15% over-allotment option to underwriters giving them a 30-day option to purchase an additional 12.9 million shares. Gross proceeds will be US$2.2 billion (£1.4 billion), ($2.6 billion (£1.6 billion) assuming exercise in full of the over-allotment option). Concurrently, Citizens intends to repurchase 9.6 million shares (US$250 million) from RBS. Once these transactions have completed and assuming the over-allotment option is exercised in full, RBS will own 110.5 million shares - 20.9% of Citizens’ common stock and will record an estimated £1.1 billion profit (including £0.9 billion reclassified from equity).

Following this significant reduction in its voting interest, RBS will no longer control Citizens for accounting purposes and will cease to consolidate it; reducing total assets by approximately £78 billion. RBS’s remaining investment in Citizens will be an associate classified as held for sale.

Citizens will however continue to be consolidated for the purposes of regulatory capital as RBS will retain certain veto rights notwithstanding the reduction in its interest in CFG.

Capital

AT1 securities

As part of our commitment to continue building our capital ratios, we plan to launch our inaugural Additional Tier 1 securities offering over the next few days, subject to market conditions.

Preference shares

RBS intends to redeem US$1.9 billion of its outstanding Series M, N, P and Q non-cumulative dollar preference shares, represented by American depositary shares, on 1 September 2015.

1. Date of approval

This announcement was approved by the Board of directors on 29 July 2015.

1. Post balance sheet events

There have been no significant events between 30 June 2015 and the date of approval of this announcement which would require a change to or additional disclosure in the announcement.

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”) to review the condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2015 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 21, the financial information in the segment results on pages 26 to 66, 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. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review 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.

Independent review report to The Royal Bank of Scotland Group plc

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 2015 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.

Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

29 July 2015

Summary risk factors

Summary of our Principal risks and uncertainties

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 2014 Annual Report and Accounts (2014 R&A). 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 474 to 492 of the 2014 R&A and on pages 466 to 484 of the Group’s Form 20-F as filed with the Securities and Exchange Commission in the US on 31 March 2015.

●	The Group is implementing a large number of existing and new programmes and initiatives intended to improve the Group’s capital position, meet legal and regulatory requirements and result in the Group becoming a safer and more competitive, customer focused and profitable bank. These initiatives include, among other things, the execution of the Group’s strategic plan announced in 2013 and 2014 and which includes the implementation of its new divisional and functional structure (the “2013/2014 Strategic Plan”) as well as a major investment programme to upgrade and rationalise the Group’s information technology (“IT”) and operational infrastructure (the “IT and Operational Investment Plan”), further initiatives designed to reduce the size of the Group’s balance sheet and de-risk its business, in particular through the divestments of the Group’s interest in Williams & Glyn, its remaining stake in Citizens and the “higher risk and capital intensive assets” in RCR as well as a significant restructuring of the Group’s Corporate and Institutional Banking (“CIB”) segments and of the Group’s business as a result of the implementation of the regulatory ring-fencing of retail banking operations (the “ring-fence”). Together, these initiatives are referred to as the “Transformation Plan” and present significant risks for the Group, including the following:
	○	The Transformation Plan, and in particular the restructuring of the Group’s CIB business and the divestment of certain of the Group’s portfolios and businesses, including its remaining stake in Citizens, are designed to allow the Group to achieve its capital targets. There is no assurance that the Group will be able to successfully implement these initiatives on which its capital plan depends or that it will achieve its goals within the time frames contemplated;
	○	The implementation of the ring-fence will likely result in considerable operational and legal difficulties as it will require significant restructuring of the Group and its businesses with the possible transfer of a large number of customers between new or existing legal entities. This implementation exercise will be complex, costly, will result in significant changes for the Group’s customers and there is no certainty that the Group will be able to implement the ring-fence successfully or in time to meet the regulatory deadline of 2019;
	○	The changes to the Group resulting from the implementation of the Transformation Plan will result in major changes to the Group’s corporate structure, the delivery of its business activities in the UK and other jurisdictions as well as the Group’s business model. Although the goals of the Transformation Plan are for the Group to emerge as a less complex and safer bank, there can be no assurance that the final results will be successful and that the Group will be a viable, competitive, customer focused and profitable bank at the end of this long period of restructuring;
	○	The level of structural change required to implement the Group’s Transformation Plan is likely to be disruptive and increase operational and people risks for the Group. In addition, the Group will incur significant costs in implementing the Transformation Plan and its revenues may also be impacted by lower levels of customer retention and revenue generation following the restructuring of its business and activities. Further, the competitive landscape in which the Group operates is constantly evolving and recent regulatory and legal changes, including ring-fencing, are likely to result in new market participants. These changes, combined with the changes to the Group’s structure and business as a result of the implementation of the Transformation Plan, may result in increased competitive pressures on the Group;

Summary risk factors

	○	Substantial investments are being made in the Group’s IT and operational structure through targeted investment and rationalisation programmes as part of the IT and Operational Investment Plan. Any failure by the Group to realise the benefits of this IT and Operational Investment Plan, whether on time or at all, could have a material adverse effect on the Group’s business and its ability to retain or grow its customer business and remain competitive.
●	The Group’s ability to implement its Transformation Plan and its future success depends on its ability to attract and retain qualified personnel. The Group could fail to attract or retain senior management, which may include members of the Group Board, or other key employees. The Group’s changing strategy has led to the departure of many talented staff. Implementation of the Group’s Transformation Plan, and in particular of the ring-fence and restructuring of the Group’s CIB business, as well as increased legal and regulatory supervision, including the implementation of the new responsibility regime introduced under the Financial Services (Banking Reform) Act 2013 in the UK, (the “Banking Reform Act 2013”) including the new Senior Persons Regime, may further hinder the Group’s ability to attract or retain senior management and other skilled personnel. Following the implementation of CRD IV and the Government’s views on variable compensation, there is now a restriction on the Group’s ability to pay individual bonuses greater than fixed remuneration, as well as extended deferral and clawback periods, which may put the Group at a competitive disadvantage. An inability to attract and retain qualified personnel could have an adverse impact on the implementation of the Group’s strategy and regulatory commitments.
●	The Group has been, and continues to be, subject to litigation and regulatory and governmental investigations (including active civil and criminal investigations) that may impact its business, reputation, results of operations and financial condition. Although the Group settled a number of legal proceedings and regulatory and governmental investigations during 2014 and the six months ended 30 June, 2015, the Group is expected to continue to have material exposure to litigation, regulatory and governmental proceedings in the short to medium term. Adverse regulatory, governmental or law enforcement proceedings or adverse judgments in litigation (including settlements of any such proceedings) could result in restrictions or limitations on the Group’s operations, give rise to additional legal claims, or have a material adverse effect on the Group’s reputation, results of operations and capital position. The Group also expects greater regulatory and governmental scrutiny for the foreseeable future particularly as it relates to compliance with historical, existing and new laws and regulations.
●	Following the election in May 2015 in the UK, there is uncertainty around how the policies of the recently elected Conservative government may impact the Group, including the referendum on the UK’s membership of the EU currently proposed to be held by the end of 2017. The implementation of these policies, including the outcome of the EU referendum and consequences for the UK and its constituent countries arising from it, could significantly impact the environment in which the Group operates and the fiscal, monetary, legal and regulatory requirements to which it is subject.
●	Operational and reputational risks are inherent in the Group’s businesses, but are heightened as a result of the implementation of the Transformation Plan. Employee misconduct may also result in regulatory sanctions and serious reputational or financial harm to the Group.

Summary risk factors

●	Despite the improved outlook for the global and UK economy over the near to medium-term, actual or perceived difficult global economic conditions, potential volatility in the UK housing market as well as increased competition, particularly in the UK, may create challenging economic and market conditions and a difficult operating environment for the Group’s businesses, as it continues to refocus its operations on the UK. These factors, together with continuing uncertainty relating to the recovery of the Eurozone economy and volatile financial markets, in part due to the monetary and fiscal policies and measures carried out by central banks, the continued prolonged periods of low interest rates, the impact of any Greek sovereign default or exit from the Eurozone and slowing growth in China, have adversely affected and may continue to adversely affect the Group’s businesses, earnings, financial condition and prospects.
●	The Group’s business performance, financial condition and capital and liquidity ratios could be adversely affected if its capital is not managed effectively or as a result of increasingly stringent regulatory requirements relating to capital adequacy, including those arising out of the implementation of Basel III or future proposals and the uncertainty arising from the consistent implementation of such rules in the various jurisdictions in which the Group operates. Maintaining adequate capital resources and meeting the requisite capital adequacy requirements may prove increasingly difficult and costly and will depend on the Group’s continued access to funding sources, including following the implementation of the ring-fence, as well as the effective management of its balance sheet and capital resources.
●	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. The inability to access liquidity and funding due to market conditions or otherwise or to do so at a reasonable cost, could adversely affect the Group’s financial condition and results of operations. Furthermore, the Group’s borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and, to a lesser extent the UK’s credit ratings.
●	The Group is subject to substantial regulation and oversight and although it is difficult to predict with certainty the effect that the recent regulatory changes, developments and heightened levels of public and regulatory scrutiny will have on the Group, the enactment of legislation and regulations in the UK, the EU and the US has resulted in increased capital, funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and increased operating costs and has impacted, and will continue to impact, product offerings and business models as well as the risks that the Group may be subject to an increased number of regulatory investigations and legal proceedings and may be unable to comply with such requirements in the manner or within the timeframes required. A number of reviews and investigations are currently ongoing in the UK and other jurisdictions in which the Group operates which may result in further legislative changes.
●	The Group or any of its UK bank subsidiaries may face the risk of full nationalisation or other resolution procedures, including recapitalisation of the Group or any of its UK bank subsidiaries, through the exercise of the bail-in tool which was introduced in the UK by the Banking Reform Act 2013 and implemented in line with the provisions of the Bank Recovery and Resolution Directive. In the event of the failure of the Group, various actions could be taken by or on behalf of the UK Government, including actions in relation to any securities issued, new or existing contractual arrangements and transfers of part or all of the Group’s businesses.
●	The Group is highly dependent on its IT systems, which are currently subject to a significant investment and rationalisation programme. The Group has been and expects to continue to be subject to cyber-attacks which expose the Group to loss of customer data or other sensitive information and which, combined with other failures of the Group’s information technology systems, may hinder its ability to service its customers which could result in long-term damage to the Group’s reputation, businesses and brands.

Summary risk factors

●	As a result of the UK Government’s majority shareholding in the Group it is able to exercise a significant degree of influence over the Group including on dividend policy, the election of directors or appointment of senior management, remuneration policy and/or limiting the Group’s operations. The offer or sale by the UK Government of all or a portion of its shareholding in the company could affect the market price of the company’s shares and other securities and acquisitions of ordinary shares by the UK Government (including through conversions of other securities or further purchases of shares) may result in the delisting of the company from the Official List.
●	The Group is required to make planned contributions to its pension schemes and to compensation schemes in respect of certain financial institutions (such as the UK Financial Services Compensation Scheme). Pension contributions may be increased to meet pension deficits or to address additional funding requirements, including those which may arise in connection with the restructuring of the Group’s pension plan as a result of the implementation of the ring-fence. The Group may also be required to make further contributions under resolution financing arrangements applicable to banks and investment firms. Additional or increased contributions may have an adverse impact on the Group’s results of operations, cash flow and financial condition.
●	The deterioration of the prevailing economic and market conditions and the actual or perceived failure or worsening credit of the Group’s counterparties or borrowers and depressed asset valuations resulting from poor market conditions, have adversely affected the Group and could continue to adversely affect the Group if, due to a deterioration in economic and financial market conditions or continuing weak economic growth, it were to recognise or realise further write-downs or impairment charges. Changes in interest rates, foreign exchange rates, oil and other commodity prices also impact the value of the Group’s investment and trading portfolios and may have a material adverse effect on the Group’s financial performance and business operations.
●	The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate. The Group’s valuation, capital and stress test models and the parameters and assumptions on which they are based rely on market data inputs and need to be constantly updated to ensure their accuracy. Failure of these models to accurately reflect changes in the environment in which the Group operates or the failure to properly input any such changes could have an adverse impact on the modeled results.
●	Developments in regulatory or tax legislation could have an effect on how the Group conducts its business and on its results of operations and financial condition, and the recoverability of certain deferred tax assets recognised by the Group is subject to uncertainty.

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

Philip Hampton	Ross McEwan	Ewen Stevenson
Chairman	Chief Executive	Chief Financial Officer

29 July 2015

Board of directors

Chairman	Executive directors	Non-executive directors
Philip Hampton	Ross McEwan Ewen Stevenson	Sandy Crombie Howard Davies Alison Davis Morten Friis Robert Gillespie Penny Hughes Brendan Nelson Baroness Noakes

Additional information

Share information

	30 June 2015	31 March 2015	31 December 2014
Ordinary share price	351.5p	340.0p	394.4p
Number of ordinary shares in issue	6,470m	6,414m	6,366m
Number of equivalent B shares in issue	5,100m	5,100m	5,100m
Total number of ordinary and equivalent B shares in issue	11,570m	11,514m	11,466m

Financial calendar

2015 third quarter interim management statement	30 October 2015

Exchange rates

The following table shows the principal exchange rates.

£1 = €	Half year average	Quarter average	Period end
30 June 2015	1.365	1.385	1.411
31 March 2015		1.345	1.382
31 December 2014		1.268	1.285
30 June 2014	1.218	1.228	1.249
£1 = US$	Half year average	Quarter average	Period end
30 June 2015	1.524	1.532	1.572
31 March 2015		1.514	1.485
31 December 2014		1.582	1.562
30 June 2014	1.669	1.683	1.711

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’, ‘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: The Royal Bank of Scotland Group plc’s (RBS) transformation plan (which includes RBS’s 2013/2014 strategic plan relating to the implementation of its new divisional and functional structure and the continuation of its balance sheet reduction programme including its proposed divestments of CFG and Williams & Glyn, RBS’s information technology and operational investment plan, the proposed restructuring of RBS’s CIB business and the restructuring of RBS as a result of the implementation of the regulatory ring-fencing regime, together the “Transformation Plan”), as well as restructuring, capital and strategic plans, divestments, capitalisation, portfolios, net interest margin, capital and leverage ratios, liquidity, risk-weighted assets (RWAs), RWA equivalents (RWAe), Pillar 2A, Maximum Distributable Amount (MDA), total loss absorbing capacity (TLAC), minimum requirements for eligible liabilities (MREL), return on equity (ROE), profitability, cost:income ratios, loan:deposit ratios, anticipated AT1 and other capital raising plans, funding and risk profile; litigation, government and regulatory investigations including investigations relating to the setting of interest rates and foreign exchange trading and rate setting activities; costs or exposures borne by RBS arising out of the origination or sale of mortgages or mortgage-backed securities in the US; investigations relating to business conduct and the costs of resulting customers redress and legal proceedings; RBS’s future financial performance; the level and extent of future impairments and write-downs; and RBS’s exposure to political risks, credit rating risk and to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates, targets and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain market risk and other disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

Other factors that could adversely affect our results and the accuracy of forward-looking statements in this document include the risk factors and other uncertainties discussed in the 2014 Annual Report and Accounts and this document. These include the significant risks for RBS presented by the execution of the Transformation Plan; RBS’s ability to successfully implement the various initiatives that are comprised in the Transformation Plan, particularly the balance sheet reduction programme including the divestment of Williams & Glyn and its remaining stake in CFG, the proposed restructuring of its CIB business and the significant restructuring undertaken by RBS as a result of the implementation of the ring fence; whether RBS will emerge from implementing the Transformation Plan as a viable, competitive, customer focused and profitable bank; RBS’s ability to achieve its capital targets which depend on RBS’s success in reducing the size of its business; the cost and complexity of the implementation of the ring-fence and the extent to which it will have a material adverse effect on RBS; the risk of failure to realise the benefit of RBS’s substantial investments in its information technology and operational infrastructure and systems, the significant changes, complexity and costs relating to the implementation of the Transformation Plan, the risks of lower revenues resulting from lower customer retention and revenue generation as RBS refocuses on the UK as well as increasing competition. In addition, there are other risks and uncertainties. These include RBS’s ability to attract and retain qualified personnel; uncertainties regarding the outcomes of legal, regulatory and governmental actions and investigations that RBS is subject to (including active civil and criminal investigations) and any resulting material adverse effect on RBS of unfavourable outcomes; heightened regulatory and governmental scrutiny and the increasingly regulated environment in which RBS operates; uncertainty relating to the referendum on the UK’s membership of the EU and the consequences arising from it; operational risks that are inherent in RBS’s business and that could increase as RBS implements its Transformation Plan; the potential negative impact on RBS’s business of actual or perceived global economic and financial market conditions and other global risks; how RBS will be increasingly impacted by UK developments as its operations become gradually more focused on the UK; uncertainties regarding RBS exposure to any weakening of economies within the EU and renewed threat of default or exit by certain countries in the Eurozone; the risks resulting from RBS implementing the State Aid restructuring plan including with respect to the disposal of certain assets and businesses as announced or required as part of the State Aid restructuring plan; the achievement of capital and costs reduction targets; ineffective management of capital or changes to regulatory requirements relating to capital adequacy and liquidity; the ability to access sufficient sources of capital, liquidity and funding when required; deteriorations in borrower and counterparty credit quality; the extent of future write-downs and impairment charges caused by depressed asset valuations; the value and effectiveness of any credit protection purchased by RBS; the impact of unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices; basis, volatility and correlation risks; changes in the credit ratings of RBS; changes to the valuation of financial instruments recorded at fair value; competition and consolidation in the banking sector; regulatory or legal changes (including those requiring any restructuring of RBS’s operations); changes to the monetary and interest rate policies of central banks and other governmental and regulatory bodies and continued prolonged periods of low interest rates; changes in UK and foreign laws, regulations, accounting standards and taxes; impairments of goodwill; the high dependence of RBS’s operations on its information technology systems and its increasing exposure to cyber security threats; the reputational risks inherent in RBS’s operations; the risk that RBS may suffer losses due to employee misconduct; pension fund shortfalls; the recoverability of deferred tax assets; HM Treasury exercising influence over the operations of RBS; limitations on, or additional requirements imposed on, RBS’s activities as a result of HM Treasury’s investment in RBS; and the success of RBS in managing the risks involved in the foregoing.

The forward-looking statements contained in this document speak only as of the date of this announcement, and RBS does not undertake 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 solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.